<PAGE> 1
Filed pursuant to Rule 424(b)(2)
Registration No. 333-9045
NATIONAL ENERGY GROUP, INC.
4925 GREENVILLE AVE., STE. 1400
DALLAS, TX 75206
August 9, 1996
Dear Shareholder,
You are cordially invited to attend the Annual Meeting of Shareholders (the
"NEG Meeting") of National Energy Group, Inc. ("NEG") to be held on Thursday,
August 29, 1996, at 10:00 a.m., Central Time, at the Senator's Lecture Hall,
Wyndham Anatole Hotel, 2201 Stemmons Freeway, Dallas, Texas 75207.
At the NEG Meeting, you will be asked to consider and vote upon (i) a
proposal to issue shares of NEG's Common Stock in connection with the merger
(the "Merger") of Alexander Energy Corporation ("Alexander"), with and into
NEG-OK, Inc., a wholly owned subsidiary of NEG ("NEG-OK"), and to approve the
Merger and the related Agreement and Plan of Merger dated as of June 6, 1996, as
amended as of June 20, 1996, among NEG, Alexander and NEG-OK (the "Merger
Agreement"); (ii) a proposal to elect five nominees as directors of NEG to serve
until the next annual meeting of shareholders of NEG to be held in 1997; (iii) a
proposal to amend the Certificate of Incorporation of NEG to eliminate the
authorization of the Class B Common Stock, to change the name of the Class A
Common Stock to "Common Stock," to increase the authorized number of shares of
Common Stock from 50 million to 100 million shares, to clarify the powers of the
Board of Directors to issue NEG Preferred Stock without shareholder approval,
and to extend from June 14, 1997 to June 14, 1999, the period during which NEG
may not redeem the NEG Series B Preferred Stock and the NEG Series C Preferred
Stock; (iv) a proposal to ratify the selection of Ernst & Young LLP as NEG's
independent auditors for the current fiscal year ended December 31, 1996; and
(v) any other business as may properly come before the meeting.
In the Merger, each share of Alexander Common Stock outstanding immediately
prior to the consummation of the Merger (other than dissenting shares) and all
associated rights for such share will be converted into the right to receive 1.7
shares of NEG Common Stock (the "Exchange Ratio"). The Merger Agreement also
sets forth certain circumstances in which the Merger may be terminated by
Alexander or NEG if the average closing price of the NEG Common Stock for the
ten trading days immediately prior to the date of the closing of the Merger is
less than $2.40 or is more than $3.60 per share, respectively.
After the Merger and consummation of the related transactions described in
the Joint Proxy Statement and Prospectus accompanying this letter, including
completion of the $15.0 million private placement by NEG of equity securities
with certain of its existing shareholders, NEG shareholders and former Alexander
shareholders will hold (i) approximately 27.8 million and 21.7 million shares of
NEG Common Stock, respectively, representing approximately 56.1% and 43.9%,
respectively, of the number of shares of NEG Common Stock on a fully diluted
basis (assuming conversion of the NEG Preferred Stock and exercise of all NEG
stock options and warrants), and (ii) approximately 12.3 million and 21.1
million shares of NEG Common Stock, respectively, representing approximately
36.9% and 63.1%, respectively, of the number of outstanding shares of NEG Common
Stock.
As more fully described in the accompanying Joint Proxy Statement and
Prospectus, Oppenheimer & Co., Inc., the investment banking firm retained by the
NEG Board of Directors to act as its financial advisor in connection with the
Merger, has rendered its opinion that, as of June 6, 1996, the consideration to
be paid to the Alexander shareholders in the Merger is fair from a financial
point of view to NEG shareholders.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE ISSUANCE OF NEG COMMON
STOCK IN THE MERGER, THE MERGER, THE MERGER AGREEMENT AND THE TRANSACTIONS
RELATED THERETO AND HAS DETERMINED THAT THEY ARE FAIR AND IN THE BEST INTERESTS
OF NEG AND ITS SHAREHOLDERS. AFTER CAREFUL CONSIDERATION, YOUR BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE ISSUANCE OF NEG
COMMON STOCK IN THE MERGER, THE MERGER AND THE MERGER AGREEMENT, AND YOUR BOARD
OF DIRECTORS ALSO RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE ELECTION OF THE FIVE
DIRECTORS NAMED IN THE JOINT PROXY STATEMENT AND PROSPECTUS AND FOR THE
PROPOSALS TO AMEND THE NEG CERTIFICATE OF INCORPORATION (WITH MESSRS. SINNOTT
AND SCHAFER ABSTAINING) AND TO RATIFY THE SELECTION OF ERNST & YOUNG LLP AS
NEG'S INDEPENDENT AUDITORS.
In the material accompanying this letter, you will find a Notice of Annual
Meeting of Shareholders, a Joint Proxy Statement and Prospectus relating to the
actions to be taken by NEG shareholders at the annual meeting and a proxy card.
The Joint Proxy Statement and Prospectus more fully describes the proposed
Merger and related transactions, including the circumstances under which the
Merger may be terminated, and includes information about NEG and Alexander. I
urge you to carefully review the Joint Proxy Statement and Prospectus.
It is important that your shares be voted at the NEG Meeting. Whether or
not you plan to attend in person, please complete, date and sign the enclosed
proxy card and return it as promptly as possible in the accompanying envelope.
If you do attend the meeting and wish to vote your shares in person, even after
returning your proxy, you still may do so.
Respectfully,
NATIONAL ENERGY GROUP, INC.
Miles D. Bender
President and Chief Executive Officer
<PAGE> 2
NATIONAL ENERGY GROUP, INC.
4925 GREENVILLE AVE., STE. 1400
DALLAS, TX 75206
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD AUGUST 29, 1996
To the Shareholders:
Notice is hereby given that the Annual Meeting of Shareholders of National
Energy Group, Inc., a Delaware corporation ("NEG"), will be held at the
Senator's Lecture Hall, Wyndham Anatole Hotel, 2201 Stemmons Freeway, Dallas,
Texas 75207, at 10:00 a.m., Central Time, on Thursday, August 29, 1996, for the
following purposes:
1. To consider and vote upon a proposal to issue shares of NEG Common Stock
in connection with the merger (the "Merger") of Alexander Energy Corporation
("Alexander") with and into NEG-OK, Inc., a wholly-owned subsidiary of NEG
("NEG-OK"), and to approve the Merger and the related Agreement and Plan of
Merger dated as of June 6, 1996, as amended as of June 20, 1996, among NEG,
Alexander and NEG-OK (the "Merger Agreement"), pursuant to which each share of
Alexander Common Stock outstanding immediately prior to the Merger (other than
dissenting shares) and all associated rights for such share will be converted
into the right to receive 1.7 shares of NEG Common Stock;
2. To elect five members of the Board of Directors of NEG to hold office
until the next annual meeting of shareholders or until their successors have
been duly elected and qualified;
3. To consider and vote upon a proposal to amend the NEG Certificate of
Incorporation (i) to eliminate the authorization of Class B Common Stock, (ii)
to change the name of the Class A Common Stock to "Common Stock," (iii) to
increase the number of authorized shares of Common Stock from 50 million to 100
million shares, (iv) to clarify the powers of the Board of Directors to issue
NEG Preferred Stock without shareholder approval, and (v) to extend from June
14, 1997 to June 14, 1999, the period during which NEG may not redeem the NEG
Series B Preferred Stock and the NEG Series C Preferred Stock.
4. To consider and vote upon a proposal to ratify the selection of Ernst &
Young LLP as NEG's independent auditors for the current fiscal year ended
December 31, 1996; and
5. To transact such other business as may properly come before the meeting
or any adjournment thereof.
A form of proxy and a Joint Proxy Statement and Prospectus containing
detailed information with respect to the matters to be considered at the meeting
accompany this notice.
In the Merger, each share of Alexander Common Stock outstanding immediately
prior to the consummation of the Merger (other than dissenting shares) and all
associated rights for such share will be converted into the right to receive 1.7
shares of NEG Common Stock (the "Exchange Ratio"). The Merger Agreement also
sets forth certain circumstances in which the Merger may be terminated by
Alexander or NEG if the average closing price of the NEG Common Stock for the
ten trading days immediately prior to the date of the closing of the Merger is
less than $2.40 or is more than $3.60 per share, respectively.
After the Merger and consummation of the related transactions described in
the attached Joint Proxy Statement and Prospectus, including completion of the
$15.0 million private placement by NEG of equity securities with certain of its
existing shareholders, NEG shareholders and former Alexander shareholders will
hold (i) approximately 27.8 million and 21.7 million shares of NEG Common Stock,
respectively, representing approximately 56.1% and 43.9%, respectively, of the
number of shares of NEG Common Stock on a fully diluted basis (assuming
conversion of the NEG Preferred Stock and exercise of all NEG stock options and
warrants), and (ii) approximately 12.3 million and 21.1 million shares of NEG
Common Stock, respectively, representing approximately 36.9% and 63.1%,
respectively, of the number of outstanding shares of NEG Common Stock.
Only shareholders of record on the books of NEG at the close of business on
July 19, 1996 will be entitled to notice of and to vote at the meeting or any
adjournments thereof. A list of shareholders entitled to vote at the meeting
will be available for inspection at the principal executive offices of NEG, 4925
Greenville Ave., Ste. 1400, Dallas, Texas 75206.
By Order of the Board of Directors
Randall A. Carter
General Counsel and Secretary
Dallas, Texas
August 9, 1996
SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING. YOUR VOTE IS
IMPORTANT. THEREFORE, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE SIGN
AND RETURN YOUR PROXY PROMPTLY IN THE ENCLOSED POSTAGE PAID ENVELOPE. EVEN AFTER
RETURNING YOUR PROXY, IF YOU ATTEND THE MEETING AND WISH TO VOTE YOUR SHARES IN
PERSON, YOU MAY STILL DO SO.
<PAGE> 3
ALEXANDER ENERGY CORPORATION
701 CEDAR LAKE BOULEVARD
OKLAHOMA CITY, OKLAHOMA 73114
August 9, 1996
Dear Shareholder,
You are cordially invited to attend the Special Meeting of Shareholders
(the "Alexander Meeting") of Alexander Energy Corporation ("Alexander") to be
held on Thursday, August 29, 1996, at 10:00 a.m., Central Time, at the
Governor's Lecture Hall, Wyndham Anatole Hotel, 2201 Stemmons Freeway, Dallas,
Texas 75207.
At the Alexander Meeting, you will be asked to consider and vote upon the
adoption of an Agreement and Plan of Merger dated as of June 6, 1996, as amended
as of June 20, 1996 (the "Merger Agreement"), by and among Alexander, National
Energy Group, Inc. ("NEG") and NEG-OK, Inc., a wholly-owned subsidiary of NEG
("NEG-OK"), pursuant to which Alexander will merge with and into NEG-OK (the
"Merger").
In the Merger, each share of Alexander Common Stock outstanding immediately
prior to the consummation of the Merger (other than dissenting shares) and all
associated rights for such share will be converted into the right to receive 1.7
shares of NEG Common Stock. The Merger Agreement also sets forth certain
circumstances in which the Merger may be terminated by Alexander or NEG if the
average closing price of the NEG Common Stock for the ten trading days
immediately prior to the date of the closing of the Merger is less than $2.40 or
is more than $3.60 per share, respectively.
Prudential Securities Incorporated, the investment banking firm retained by
the Alexander Board of Directors to act as its financial advisor in connection
with the Merger, has rendered its opinion that, as of June 6, 1996, the
consideration to be received by Alexander shareholders in the Merger is fair
from a financial point of view.
After the Merger and consummation of the related transactions described in
the Joint Proxy Statement and Prospectus accompanying this letter, including
completion of the $15.0 million private placement by NEG of equity securities
with certain of its existing shareholders, NEG shareholders and former Alexander
shareholders will hold (i) approximately 27.8 million and 21.7 million shares of
NEG Common Stock, respectively, representing approximately 56.1% and 43.9%,
respectively, of the number of shares of NEG Common Stock on a fully diluted
basis (assuming conversion of the NEG Preferred Stock and exercise of all NEG
stock options and warrants), and (ii) approximately 12.3 million and 21.1
million shares of NEG Common Stock, respectively, representing approximately
36.9% and 63.1%, respectively, of the number of outstanding shares of NEG Common
Stock.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER, THE MERGER
AGREEMENT AND THE TRANSACTIONS RELATED THERETO AND HAS DETERMINED THAT THEY ARE
FAIR AND IN THE BEST INTERESTS OF ALEXANDER AND ITS SHAREHOLDERS. AFTER CAREFUL
CONSIDERATION, YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS
VOTE FOR APPROVAL OF THE MERGER AND THE MERGER AGREEMENT.
In the material accompanying this letter, you will find a Notice of Special
Meeting of Shareholders, a Joint Proxy Statement and Prospectus relating to the
actions to be taken by Alexander shareholders at the special meeting and a proxy
card. The Joint Proxy Statement and Prospectus more fully describes the proposed
Merger and related transactions, including the circumstances under which the
Merger may be terminated, and includes information about NEG and Alexander.
It is important that your shares be voted at the Alexander Meeting. Whether
or not you plan to attend in person, please complete, date and sign the enclosed
proxy card and return it as promptly as possible in the accompanying envelope.
If you do attend the meeting and wish to vote your shares in person, even after
returning your proxy, you still may do so.
Respectfully,
ALEXANDER ENERGY CORPORATION
Bob G. Alexander
President and Chief Executive Officer
<PAGE> 4
ALEXANDER ENERGY CORPORATION
701 CEDAR LAKE BOULEVARD
OKLAHOMA CITY, OKLAHOMA 73114
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD AUGUST 29, 1996
To the Shareholders:
Notice is hereby given that a Special Meeting of Shareholders of Alexander
Energy Corporation, an Oklahoma corporation ("Alexander"), will be held at the
Governor's Lecture Hall, Wyndham Anatole Hotel, 2201 Stemmons Freeway, Dallas,
Texas 75207, at 10:00 a.m., Central Time, on Thursday, August 29, 1996, for the
purpose of considering and voting upon the following matters:
1. The adoption of an Agreement and Plan of Merger dated as of June 6,
1996, as amended as of June 20, 1996 (the "Merger Agreement"), by and among
Alexander, National Energy Group Inc. ("NEG") and NEG-OK, Inc., a wholly-owned
subsidiary of NEG ("NEG-OK"), and the approval of the merger (the "Merger") and
the transactions contemplated thereby, as described in the attached Joint Proxy
Statement and Prospectus; and
2. Such other matters as may properly come before the meeting or any
adjournment thereof.
Pursuant to the Merger Agreement, Alexander will be merged with and into
NEG-OK, and each share of Alexander Common Stock outstanding immediately prior
to the effective time of the Merger (other than shares held by shareholders who
have validly perfected their appraisal rights under Oklahoma law) and all
associated rights for such share will be converted into the right to receive 1.7
shares of NEG Common Stock.
Shareholders of record on July 19, 1996, are entitled to notice of and to
vote at the meeting. For a period of ten days prior to the meeting, a complete
list of shareholders entitled to vote at the meeting will be available for
examination by any shareholder for any purpose germane to the meeting, during
normal business hours, at the offices of Alexander and at the principal
executive offices of NEG, 4925 Greenville Ave., Ste. 1400, Dallas, Texas 75206.
In the Merger, each share of Alexander Common Stock outstanding immediately
prior to the consummation of the Merger (other than dissenting shares) and all
associated rights for such share will be converted into the right to receive 1.7
shares of NEG Common Stock (the "Exchange Ratio"). The Merger Agreement also
sets forth certain circumstances in which the Merger may be terminated by
Alexander or NEG if the average closing price of the NEG Common Stock for the
ten trading days immediately prior to the date of the closing of the Merger is
less than $2.40 or is more than $3.60 per share, respectively.
After the Merger and consummation of the related transactions described in
the attached Joint Proxy Statement and Prospectus, including completion of the
$15.0 million private placement by NEG of equity securities with certain of its
existing shareholders, NEG shareholders and former Alexander shareholders will
hold (i) approximately 27.8 million and 21.7 million shares of NEG Common Stock,
respectively, representing approximately 56.1% and 43.9%, respectively, of the
number of shares of NEG Common Stock on a fully diluted basis (assuming
conversion of the NEG Preferred Stock and exercise of all NEG stock options and
warrants), and (ii) approximately 12.3 million and 21.1 million shares of NEG
Common Stock, respectively, representing approximately 36.9% and 63.1%,
respectively, of the number of outstanding shares of NEG Common Stock.
You are cordially invited to attend the meeting. Even if you plan to
attend, you are respectfully requested to date, sign and return the enclosed
proxy at your earliest convenience in the enclosed return envelope. You may
revoke your proxy at any time prior to its exercise.
By Order of the Board of Directors
Sue Barnard
Secretary
Oklahoma City, Oklahoma
August 9, 1996
YOUR VOTE IS IMPORTANT. PLEASE EXECUTE AND RETURN THE ENCLOSED PROXY PROMPTLY,
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING.
<PAGE> 5
<TABLE>
<S> <C>
NATIONAL ENERGY GROUP, INC. ALEXANDER ENERGY CORPORATION
Annual Meeting of Shareholders Special Meeting of Shareholders
to be held August 29, 1996 to be held August 29, 1996
</TABLE>
---------------------
PROSPECTUS
NATIONAL ENERGY GROUP, INC.
21,767,653
SHARES OF COMMON STOCK
$.01 PAR VALUE
This Joint Proxy Statement and Prospectus of National Energy Group, Inc., a
Delaware corporation ("NEG"), and Alexander Energy Corporation, an Oklahoma
corporation ("Alexander"), is being used to solicit proxies on behalf of the
Board of Directors of NEG from holders of the outstanding capital stock of NEG
in connection with an Annual Meeting of Shareholders of NEG to be held on August
29, 1996 (the "NEG Meeting") and to solicit proxies on behalf of the Board of
Directors of Alexander from holders of the outstanding common stock of Alexander
in connection with a Special Meeting of Shareholders of Alexander to be held on
August 29, 1996 (the "Alexander Meeting"). The Joint Proxy Statement and
Prospectus and the accompanying proxies are first being mailed to shareholders
of NEG and shareholders of Alexander on or about August 9, 1996.
At the NEG Meeting, shareholders of NEG will be asked to consider and vote
upon a proposal (the "NEG Merger Proposal") to issue shares of common stock,
$.01 par value per share, of NEG ("NEG Common Stock"), to shareholders of
Alexander in connection with an Agreement and Plan of Merger, dated as of June
6, 1996, and an amendment as of June 20, 1996, copies of which are attached to
this Joint Proxy Statement and Prospectus as Addendum A-1 and Addendum A-2,
together with the related Certificate of Merger attached as an exhibit thereto
(collectively, the "Merger Agreement"), which provides for the merger (the
"Merger") of Alexander with and into NEG-OK, Inc., a wholly-owned subsidiary of
NEG ("NEG-OK"), and to approve the Merger and the Merger Agreement. Shareholders
of NEG will also be asked at the NEG Meeting to consider and vote upon (i) the
election of five directors to the NEG Board of Directors (the "NEG Director
Election Proposal"); (ii) a proposal to amend the Certificate of Incorporation
of NEG to eliminate the authorization of the Class B Common Stock, to change the
name of the Class A Common Stock to "Common Stock," to increase the number of
authorized shares of Common Stock from 50 million to 100 million shares, to
clarify the powers of the Board of Directors to issue NEG Preferred Stock
without shareholder approval, and to extend from June 14, 1997 to June 14, 1999,
the period during which NEG may not redeem the NEG Series B Preferred Stock and
the NEG Series C Preferred Stock (the "NEG Certificate of Incorporation
Amendment Proposal"); and (iii) a proposal to ratify the appointment of Ernst &
Young LLP as NEG's independent auditors for the current fiscal year ended
December 31, 1996 (the "NEG Auditor Ratification Proposal").
At the Alexander Meeting, shareholders of Alexander will be asked to
consider and vote upon a proposal (the "Alexander Merger Proposal") to approve
and adopt the Merger and the Merger Agreement. Upon consummation of the Merger,
among other things, (i) the identity and separate existence of Alexander will
terminate and NEG-OK will remain a wholly-owned subsidiary of NEG with the
combined assets and liabilities of Alexander and NEG-OK, (ii) each of the shares
of Alexander common stock, par value $.03 per share ("Alexander Common Stock"),
together with all rights associated with such Alexander Common Stock
("Associated Rights") pursuant to the Rights Agreement dated December 15, 1994
(the "Rights Agreement"), between Alexander and Liberty Bank and Trust Company
of Oklahoma City, N.A. (the "Rights Agent"), and all related documents,
outstanding immediately before the Merger (other than dissenting shares), will
be converted into 1.7 shares of NEG Common Stock (the "Exchange Ratio"), and
(iii) all outstanding options and warrants to purchase Alexander Common Stock
will be assumed by NEG and converted into options and warrants to purchase NEG
Common Stock.
The Merger Agreement sets forth certain circumstances under which the Merger
Agreement may be terminated by Alexander or NEG. It is a condition to
Alexander's obligation to close the Merger that the average closing sales price
for the NEG Common Stock for the ten trading days immediately prior to the
closing date of the Merger (the "NEG Average Price") exceed $2.40 per share, and
it is a condition to NEG's obligation to close the Merger that the NEG Average
Price not exceed $3.60 per share (the range of stock prices between $2.40 and
$3.60, collectively, the "Range"). Those conditions to closing, however, may be
waived by the parties. At the time of executing a proxy with respect to the
Merger proposals shareholders will not know the value of the consideration to be
received by Alexander shareholders in the Merger. By approving the Merger
proposals, shareholders will permit the NEG or Alexander Board of Directors, as
the case may be, to decide whether to proceed with the Merger or to terminate
the Merger Agreement if the NEG Average Price is outside the Range at the time
of closing of the Merger.
After the Merger and consummation of the related transactions described
herein, including completion of the $15.0 million private placement by NEG of
equity securities with certain of its existing shareholders, NEG shareholders
and former Alexander shareholders will hold (i) approximately 27.8 million and
21.7 million shares of NEG Common Stock, respectively, representing
approximately 56.1% and 43.9%, respectively, of the number of shares of NEG
Common Stock on a fully diluted basis (assuming conversion of the NEG Preferred
Stock and exercise of all NEG stock options and warrants), and (ii)
approximately 12.3 million and 21.1 million shares of NEG Common Stock,
respectively, representing approximately 36.9% and 63.1%, respectively, of the
number of outstanding shares of NEG Common Stock.
Following the approval and consummation of the Merger and related
transactions, the NEG Board of Directors intends to increase the size of the
Board to be elected by the holders of NEG Common Stock from five to eight
directors, and to appoint Bob G. Alexander and Jim L. David, executive officers
and directors of Alexander, and Robert A. West, a director of Alexander, to fill
the three vacancies created by such action until the next annual meeting of the
shareholders of NEG.
This Joint Proxy Statement and Prospectus also constitutes the prospectus of
NEG under the Securities Act of 1933, as amended (the "Securities Act"), for the
offering of an aggregate of up to 21,767,653 shares of NEG Common Stock in
connection with the Merger.
The information set forth in this Joint Proxy Statement and Prospectus
concerning NEG and NEG-OK has been furnished by NEG and the information set
forth in this Joint Proxy Statement and Prospectus concerning Alexander has been
furnished by Alexander.
The NEG Common Stock and the Alexander Common Stock are quoted on the Nasdaq
National Market. On August 5, 1996, the closing sales prices were $3 1/2 and
$5 9/16 per share for NEG and Alexander, respectively.
SEE "RISK FACTORS," PAGE 17, FOR A DISCUSSION OF CERTAIN FACTORS WHICH
SHOULD BE CONSIDERED IN EVALUATING THE MERGER AND THE ACQUISITION OF THE
SECURITIES OFFERED HEREBY.
---------------------
THE SHARES OF NEG COMMON STOCK TO BE ISSUED IN CONNECTION WITH THE MERGER HAVE
NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
JOINT PROXY STATEMENT AND PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
THE DATE OF THIS JOINT PROXY STATEMENT AND PROSPECTUS IS AUGUST 9, 1996.
<PAGE> 6
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
"Safe Harbor" Statement under the Private Securities Litigation Reform Act
of 1995: The forward-looking statements provided below and in other locations
throughout this document (collectively, "Forward-Looking Statements") are based
on NEG's and Alexander's historical operating trends, their proved reserves as
of December 31, 1995 and other information available to the management of NEG.
These statements assume that market conditions for NEG's oil and gas production
are comparable to those experienced in 1995 as modified for changes in the
prices for oil and gas through June 1996. These statements also assume that no
significant changes will occur in the operating environment for NEG's and
Alexander's oil and gas properties following the Merger. Finally, the
Forward-Looking Statements assume no material changes in the composition of
NEG's property base as the result of any material acquisitions or divestitures
and that no material changes will occur in NEG's financial facilities, except as
disclosed herein. NEG cautions that the Forward-Looking Statements are subject
to all the risks and uncertainties discussed under the captions "Summary Pro
Forma Combined Condensed Financial Information and Operating Data;" "Risk
Factors;" "Selected Pro Forma Combined Condensed Financial Information and
Operating Data;" "NEG Management's Discussion and Analysis of Financial
Condition and Results of Operations;" "Alexander Management's Discussion and
Analysis of Financial Condition and Results of Operations;" "NEG Management's
Discussion and Analysis of the Effects of the Merger on the Future Financial
Condition and Results of Operations of NEG;" "Business and Properties;" and "Pro
Forma Combined Condensed Financial Statements." Moreover, NEG may make material
acquisitions, execute new contracts or terminate existing contracts, or enter
into new financing transactions that may affect the accuracy of the
Forward-Looking Statements. None of these events can be predicted with certainty
and, accordingly, are not taken into consideration in the Forward-Looking
Statements made herein. For all of the foregoing reasons, actual results may
vary materially from the Forward-Looking Statements and there is no assurance
that the assumptions used are necessarily the most likely to occur.
---------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS JOINT PROXY STATEMENT AND PROSPECTUS. IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY EITHER NEG OR ALEXANDER. THIS JOINT PROXY STATEMENT
AND PROSPECTUS NEITHER CONSTITUTES AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY SHARES OF NEG COMMON STOCK, NOR DOES IT CONSTITUTE THE SOLICITATION
OF A PROXY, BY ANY PERSON IN ANY JURISDICTION OR IN ANY CIRCUMSTANCES IN WHICH
SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS JOINT
PROXY STATEMENT AND PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
AVAILABLE INFORMATION
NEG and Alexander are each subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Securities and Exchange Commission (the "SEC"). Reports, proxy statements
and other information filed by NEG and Alexander with the SEC can be inspected
and copied at the public reference facilities maintained by the SEC at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the regional offices of the SEC at Seven World Trade Center, 13th Floor, New
York, New York 10048 and at Citicorp Center, 14th Floor, 500 West Madison
Street, Chicago, Illinois 60661, and copies of such material can be obtained
from the Public Reference Section of the SEC in Washington, D.C. at prescribed
rates.
i
<PAGE> 7
The NEG Common Stock and the Alexander Common Stock are traded on the
Nasdaq National Market. Reports and other information can be inspected at the
office of the National Association of Securities Dealers, Inc., 1735 K Street,
N.W. Washington, D.C. 20006.
This Joint Proxy Statement and Prospectus forms a part of a Registration
Statement filed with the SEC and does not contain all the information set forth
therein. Reference to the Registration Statement is hereby made for further
information with respect to NEG and Alexander and the securities offered hereby.
Any statements made herein concerning the provisions of any documents are not
necessarily complete, and in each instance reference is made to the copy of such
document filed as an exhibit to the Registration Statement or otherwise filed
with the SEC. Each statement is qualified entirely by such reference.
NEG hereby undertakes to provide without charge to each NEG shareholder on
the July 19, 1996 record date, upon the written request of any such person, a
copy of NEG's annual report on Form 10-KSB, including financial statements,
required to be filed with the SEC pursuant to Rule 13a-1 under the Securities
Act for NEG's most recent fiscal year. Requests for such information should be
directed to the Controller and Chief Accounting Officer of NEG at 4925
Greenville Avenue, Suite 1400, Dallas, Texas 75206.
ii
<PAGE> 8
TABLE OF CONTENTS
<TABLE>
<CAPTION>
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS..................................... i
AVAILABLE INFORMATION................................................................. i
SUMMARY............................................................................... 1
Introduction........................................................................ 1
The Parties......................................................................... 2
The Meetings........................................................................ 2
Reasons for the Merger.............................................................. 3
Fairness Opinions................................................................... 3
Board Recommendations............................................................... 4
The Merger.......................................................................... 4
Market Prices of Securities......................................................... 9
Summary NEG Historical Financial Information and Operating Data..................... 10
Summary Alexander Historical Financial Information and Operating Data............... 12
Summary Pro Forma Combined Condensed Financial Information and Operating Data....... 14
Comparative Per Share Data.......................................................... 16
RISK FACTORS.......................................................................... 17
GENERAL INFORMATION................................................................... 26
Date, Time and Place of NEG Meeting and Alexander Meeting........................... 26
Record Date and Outstanding Shares.................................................. 26
Voting Proxies...................................................................... 27
Quorum and Required Vote............................................................ 27
Proxy Solicitation; Expenses........................................................ 29
THE MERGER PROPOSALS.................................................................. 29
NEG -- Background of and Reasons for the Merger..................................... 29
Factors Considered by the NEG Board of Directors; Benefits and Detriments of the
Merger........................................................................... 30
Opinion of Oppenheimer.............................................................. 31
Recommendation of NEG Board of Directors............................................ 34
Alexander -- Background of and Reasons for the Merger............................... 34
Factors Considered by the Alexander Board of Directors; Benefits and Detriments
of the Merger.................................................................... 36
Opinion of Prudential Securities.................................................... 36
Recommendation of Alexander Board of Directors...................................... 41
Effective Time...................................................................... 41
Manner and Basis of Converting Alexander Common Stock............................... 41
Assumption of Alexander Options and Warrants........................................ 42
Conduct of the Business Prior to the Merger......................................... 43
Other Acquisition Offers............................................................ 43
Treatment of Alexander Employment and Severance Agreements; NEG New Employment
Agreements....................................................................... 44
Conduct of Business Following the Merger; Board of Directors and Management......... 44
Conditions to the Merger; Waiver.................................................... 45
Transactions Related to the Merger.................................................. 46
The Commitment................................................................. 46
NEG Equity Private Placement................................................... 47
Termination or Amendment of the Merger Agreement.................................... 49
Accounting Treatment................................................................ 50
Resale of NEG Common Stock; Agreements with Alexander Affiliates.................... 50
Interests of Certain Persons in the Merger.......................................... 50
Fees and Expenses................................................................... 52
Governmental and Regulatory Approvals............................................... 52
Material Federal Income Tax Consequences............................................ 52
Appraisal Rights.................................................................... 54
MARKET PRICES AND DIVIDENDS........................................................... 56
CAPITALIZATION........................................................................ 58
NEG SELECTED HISTORICAL FINANCIAL INFORMATION AND
OPERATING DATA...................................................................... 59
</TABLE>
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<TABLE>
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ALEXANDER SELECTED HISTORICAL FINANCIAL INFORMATION AND OPERATING DATA................ 61
SELECTED PRO FORMA COMBINED FINANCIAL INFORMATION AND
OPERATING DATA...................................................................... 64
NEG MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 66
ALEXANDER MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 73
NEG MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE EFFECTS OF THE MERGER ON THE FUTURE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF NEG................................ 82
NEG DIRECTOR ELECTION PROPOSAL........................................................ 85
NEG CERTIFICATE OF INCORPORATION AMENDMENT PROPOSAL................................... 86
NEG AUDITOR RATIFICATION PROPOSAL..................................................... 88
BUSINESS AND PROPERTIES............................................................... 89
NEG................................................................................. 89
ALEXANDER........................................................................... 97
MANAGEMENT............................................................................ 108
NEG................................................................................. 108
ALEXANDER........................................................................... 118
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................ 123
NEG................................................................................. 123
ALEXANDER........................................................................... 130
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................ 131
NEG................................................................................. 131
ALEXANDER........................................................................... 132
DESCRIPTION OF CAPITAL STOCK.......................................................... 132
NEG................................................................................. 132
ALEXANDER........................................................................... 136
COMPARISON OF RIGHTS OF HOLDERS OF NEG SECURITIES AND
ALEXANDER SECURITIES................................................................ 139
OTHER MATTERS......................................................................... 139
ALEXANDER 1996 ANNUAL MEETING......................................................... 140
LEGAL OPINIONS........................................................................ 140
EXPERTS............................................................................... 140
NEG SHAREHOLDER PROPOSALS FOR 1997 ANNUAL MEETING..................................... 141
GLOSSARY.............................................................................. 142
INDEX TO FINANCIAL STATEMENTS......................................................... F-1
Addendum A-1 -- Agreement and Plan of Merger
Addendum A-2 -- First Amendment to Agreement and Plan of Merger
Addendum B -- Opinion of Oppenheimer & Co., Inc.
Addendum C -- Opinion of Prudential Securities Incorporated
Addendum D -- Section 1091 of Oklahoma General Corporation Act
Addendum E -- NEG 1995 Reserve Report prepared by Netherland, Sewell & Associates
Addendum F -- Alexander 1995 Reserve Report prepared by Netherland, Sewell &
Associates
</TABLE>
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SUMMARY
The following is a summary of certain information contained elsewhere in
this Joint Proxy Statement and Prospectus (collectively, the "Proxy Statement"),
and does not purport to be complete and is qualified in its entirety by
reference to the full text hereof or to documents incorporated herein by
reference. As used in this Proxy Statement, "NEG," "NEG-OK" and "Alexander"
refer to National Energy Group, Inc., NEG-OK, Inc. and Alexander Energy
Corporation, respectively, and, unless the context otherwise requires, such
entities and their respective subsidiaries. Before the effectiveness of the NEG
Certificate of Incorporation Amendment Proposal described below (which changes
the name of the Class A Common Stock of NEG to "Common Stock" immediately prior
to the Merger described below), references to "NEG Common Stock" refer to the
"Class A Common Stock" of NEG. Thereafter, references to the "NEG Common Stock"
refer to the "Common Stock" of NEG. Before the consummation of the NEG Equity
Private Placement described below (which contemplates the issuance of two new
series of Preferred Stock of NEG immediately after the Merger), references to
"NEG Preferred Stock" refer to the NEG Series B Preferred and the NEG Series C
Preferred (as defined below). Thereafter, references to the "NEG Preferred
Stock" refer to the NEG Series B Preferred, the NEG Series C Preferred, the NEG
Series D Preferred and the NEG Series E Preferred (as defined below).
Unless the context indicates otherwise, this Proxy Statement assumes the
NEG Equity Private Placement occurs immediately after the Effective Time of the
Merger, and that the NEG New Credit Facility (described below) closes
immediately after the NEG Equity Private Placement. Pro forma financial
disclosures and disclosures with respect to periods after the Merger assume that
the Merger and the related transactions described in this Proxy Statement,
including the NEG Equity Private Placement and the NEG New Credit Facility
transactions, have been consummated as described in this Proxy Statement.
See the Glossary included elsewhere in this Proxy Statement for the
definition of certain oil and gas terms used herein.
INTRODUCTION
This Proxy Statement is for the Annual Meeting of Shareholders of NEG (the
"NEG Meeting") and the Special Meeting of Shareholders of Alexander (the
"Alexander Meeting"), each to be held August 29, 1996 (collectively, the
"Meetings") relating (i) to the proposed issuance by NEG of shares of NEG Common
Stock, par value $.01 per share ("NEG Common Stock"), in connection with the
merger (the "Merger") of Alexander with and into NEG-OK, a wholly-owned
subsidiary of NEG, and the approval of the Merger and related Agreement and Plan
of Merger dated June 6, 1996, among NEG, Alexander and NEG-OK, as amended as of
June 20, 1996 (the "Merger Agreement") to be submitted to the shareholders of
NEG and Alexander and (ii) to certain other proposals to be submitted to the
shareholders of NEG.
At the NEG Meeting, the shareholders of NEG will consider and vote upon (i)
a proposal to approve the Merger and the Merger Agreement and to issue shares of
NEG Common Stock to shareholders of Alexander in connection with the Merger (the
"NEG Merger Proposal"); (ii) a proposal to elect five nominees as members of the
Board of Directors of NEG (the "NEG Director Election Proposal"); (iii) a
proposal to amend NEG's Certificate of Incorporation to eliminate the
authorization of the Class B Common Stock, to change the name of the Class A
Common Stock to "Common Stock," to increase the number of authorized shares of
Common Stock from 50 million to 100 million shares, to clarify the powers of the
Board of Directors to issue NEG Preferred Stock without shareholder approval and
to extend from June 14, 1997 to June 14, 1999, the period during which NEG may
not redeem the NEG Series B Preferred and the NEG Series C Preferred (the "NEG
Certificate of Incorporation Amendment Proposal"); and (iv) a proposal to ratify
the selection of Ernst & Young LLP as NEG's independent auditors for the current
fiscal year ended December 31, 1996 (the "NEG Auditor Ratification Proposal;"
such NEG proposals collectively, the "NEG Proposals"). At the Alexander Meeting,
the shareholders of Alexander will consider and vote upon the approval and
adoption of the Merger and the Merger Agreement (the "Alexander Merger
Proposal"). The NEG Merger Proposal and the Alexander Merger Proposal are
sometimes referred to herein as the "Merger Proposals."
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Pursuant to the Merger Agreement, Alexander will be merged with and into
NEG-OK, and NEG-OK will remain a wholly-owned subsidiary of NEG. Each
outstanding share of Alexander Common Stock, together with all rights associated
with such Alexander Common Stock (the "Associated Rights") pursuant to the
Rights Agreement dated December 15, 1994 (the "Rights Agreement"), between
Alexander and Liberty Bank and Trust Company of Oklahoma City, N.A. ("Rights
Agent") and all related documents, outstanding immediately prior to the Merger
(other than dissenting shares) will be converted into 1.7 shares of NEG Common
Stock. See "The Merger Proposals."
THE PARTIES
NEG
NEG, a Delaware corporation, is a Dallas, Texas based independent oil and
gas company with exploration and production operations primarily in Oklahoma,
Texas, New Mexico and offshore Nueces County, Texas. See "Business and
Properties -- NEG." NEG's principal executive office is located at 4925
Greenville Avenue, Ste. 1400, Dallas, Texas 75206, and its telephone number is
(214) 692-9211.
Alexander
Alexander, an Oklahoma corporation, is an Oklahoma City, Oklahoma based
independent oil and gas company with exploration and production operations
primarily in Oklahoma, Texas and Arkansas. See "Business and
Properties -- Alexander." Alexander's principal executive office is located at
701 Cedar Lake Boulevard, Oklahoma City, Oklahoma 73114, and its telephone
number is (405) 478-8686.
NEG-OK
NEG-OK, a Delaware corporation, is a wholly-owned subsidiary of NEG, newly
organized for the purpose of the Merger. NEG-OK has conducted no operations,
except in connection with the Merger, and has no material assets. NEG-OK's
principal executive office is located at 4925 Greenville Avenue, Ste. 1400,
Dallas, Texas 75206, and its telephone number is (214) 692-9211.
THE MEETINGS
NEG Meeting
The NEG Meeting will be held on Thursday, August 29, 1996, at 10:00 a.m.,
Central Time, at the Senator's Lecture Hall, Wyndham Anatole Hotel, 2201
Stemmons Freeway, Dallas, Texas 75207. The purpose of the meeting is to vote
upon (i) the NEG Merger Proposal; (ii) the NEG Director Election Proposal; (iii)
the NEG Certificate of Incorporation Amendment Proposal; (iv) the NEG Auditor
Ratification Proposal; and (v) any other business as may properly come before
the NEG Meeting. The record date for shareholders of NEG entitled to notice of
and to vote at the NEG Meeting is as of the close of business on July 19, 1996
(the "NEG Record Date").
As of the NEG Record Date, voting rights for NEG are vested in the holders
of the NEG Common Stock, the holders of the NEG 10% Cumulative Convertible
Preferred Stock, Series B (the "NEG Series B Preferred"), and the holders of the
NEG 10 1/2% Cumulative Convertible Preferred Stock, Series C (the "NEG Series C
Preferred"). Each share of the NEG Common Stock and the NEG Preferred Stock is
entitled to one vote on each matter as to which such class or series has voting
rights.
Adoption by NEG of the NEG Merger Proposal requires (i) the favorable vote
of the holders of a majority of the outstanding shares of NEG Common Stock
present in person or represented by proxy at the NEG Meeting, (ii) the favorable
vote of the holders of a majority of the outstanding shares of NEG Series B
Preferred, voting separately as a class, and (iii) the favorable vote of the
holders of a majority of the outstanding shares of NEG Series C Preferred,
voting separately as a class. Adoption by NEG of the NEG Certificate of
Incorporation Amendment Proposal requires the favorable vote of the holders of a
majority of the outstanding shares of (i) NEG Common Stock, (ii) NEG Series B
Preferred, voting separately as a class, and (iii) NEG Series C Preferred,
voting separately as a class. The favorable vote of the holders of a majority
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of the outstanding shares of NEG Common Stock present in person or represented
by proxy at the NEG Meeting is required for adoption by NEG of the NEG Auditor
Ratification Proposal. The five NEG directors to be elected at the NEG Meeting
will be elected by a plurality of votes of the NEG Common Stock present in
person or represented by proxy at the NEG Meeting.
At the NEG Record Date, the directors, officers and affiliates of NEG had
the right to vote a total of 2,619,716 shares of NEG Common Stock, or
approximately 21.5% of the number of shares of NEG Common Stock entitled to vote
on the NEG Proposals. All of such holders have indicated their intention to vote
their shares in favor of the NEG Proposals. In addition, each of the holders of
the NEG Series B Preferred and NEG Series C Preferred have indicated their
intention to vote their shares in favor of the NEG Merger Proposal and the NEG
Certificate of Incorporation Amendment Proposal, the only NEG Proposals on which
such holders are entitled to vote at the NEG Meeting.
Alexander Meeting
The Alexander Meeting will be held on Thursday, August 29, 1996 at 10:00
a.m., Central Time, at the Governor's Lecture Hall, Wyndham Anatole Hotel, 2201
Stemmons Freeway, Dallas, Texas 75207. The record date for shareholders of
Alexander entitled to notice of and to vote at the Alexander Meeting is as of
the close of business on July 19, 1996 (the "Alexander Record Date").
Voting rights for Alexander are vested in the holders of Alexander Common
Stock, with each share entitled to one vote on each matter coming before the
Alexander shareholders. The favorable vote of the holders of a majority of the
outstanding shares of Alexander Common Stock is required for the approval and
adoption by Alexander of the Alexander Merger Proposal.
At the Alexander Record Date, the directors, officers and affiliates of
Alexander had the right to vote a total of 675,453 shares of Alexander Common
Stock, or approximately 5.42% of the total number of shares of Alexander Common
Stock entitled to vote. All of such holders have indicated their intention to
vote their shares in favor of the Alexander Merger Proposal.
REASONS FOR THE MERGER
NEG and Alexander believe that the Merger is in the best interests of their
respective shareholders. The combined companies provide a critical mass which
the two companies believe will provide NEG, following the Merger, with access to
financing opportunities to permit future growth and accelerated reserve
development that were not available to either of the companies separately.
Further, the increased market capitalization and liquidity of shares are
expected to be beneficial to shareholders of NEG after the Merger. See "The
Merger Proposals -- NEG -- Background of and Reasons for the Merger;" and "The
Merger Proposals -- Alexander -- Background of and Reasons for the Merger." NEG
and Alexander also considered possible disadvantages resulting from the Merger,
which, after careful consideration, were determined to be outweighed by the
benefits provided by the Merger. Possible disadvantages considered by NEG and
Alexander include the risk of inadequate future cash flows or insufficient
credit for planned capital expenditures, the risk of failure to efficiently
manage the combined business and the impact of possible control of the NEG Board
of Directors by certain shareholders, as well as other possible disadvantages.
See "Risk Factors -- Future Capital Requirements;" "Risk Factors -- Shares
Eligible for Public Sale;" "Risk Factors -- Related Parties Involved and No
Assurance of Fair Market Value Received in NEG Equity Private Placement;" "Risk
Factors -- Control by Principal Shareholders;" and "Risk Factors -- No Market
for Shares if NEG Series D Preferred Contingent Voting Rights Exercised."
FAIRNESS OPINIONS
Oppenheimer & Co., Inc. ("Oppenheimer") has delivered an opinion to the
Board of Directors of NEG to the effect that the consideration to be paid to the
holders of Alexander Common Stock pursuant to the Merger is fair from a
financial point of view, as of June 6, 1996, to the holders of NEG Common Stock.
A copy of the written opinion of Oppenheimer, dated June 6, 1996, setting forth
the assumptions made, the matters considered, the scope and limitations on the
review undertaken and the procedures followed by
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<PAGE> 13
Oppenheimer in rendering such opinion is attached to this Proxy Statement as
Addendum B. Such opinion should be carefully read in its entirety by
shareholders of NEG. For a more particular description of this opinion and
information regarding fees and expenses payable to Oppenheimer by NEG, see "The
Merger Proposals -- Opinion of Oppenheimer."
Alexander engaged Prudential Securities Incorporated ("Prudential
Securities") to act as financial advisor in connection with the Merger and to
render its opinion as to the fairness, from a financial point of view, of the
Merger consideration to be received by the shareholders of Alexander. A copy of
the full text of the written opinion of Prudential Securities dated June 6,
1996, which sets forth the assumptions made, procedures followed, matters
considered and limitations on the review undertaken in rendering its opinion, is
attached as Addendum C to this Proxy Statement. Shareholders of Alexander are
urged to read carefully the opinion in its entirety. For a more particular
description of this opinion and information regarding fees and expenses payable
to Prudential Securities by Alexander or NEG upon consummation of the Merger,
see "The Merger Proposals -- Opinion of Prudential Securities."
BOARD RECOMMENDATIONS
The Boards of Directors of NEG and of Alexander have each unanimously
approved the Merger and the Merger Agreement and recommend the adoption of the
Merger Proposals by their respective shareholders. In evaluating the Merger
Proposals, the Boards of Directors of NEG and Alexander considered many factors,
including financial information relating to the two companies. See "The Merger
Proposals -- NEG -- Background of and Reasons for the Merger;" "The Merger
Proposals -- Alexander -- Background of and Reasons for the Merger;" "The Merger
Proposals -- Recommendation of NEG Board of Directors;" and "The Merger
Proposals -- Recommendation of Alexander Board of Directors."
THE MERGER
Effective Time
The Merger is expected to be consummated immediately after the Meetings,
but no later than October 1, 1996, the date the Merger Agreement may be
terminated by either party if the conditions to the closing of the Merger have
not been satisfied. The Merger will become effective on the date of filing of
the Certificate of Merger with the Secretary of State of Oklahoma and the
Secretary of State of Delaware or such later date and time as is specified in
the Certificate of Merger (the "Effective Time"). The Certificate of Merger will
be filed as soon as practicable after all conditions to the obligations of NEG
and Alexander to consummate the Merger have been satisfied or waived and the
transactions contemplated by the Merger Agreement are closed, which is expected
to be on the date of the Meetings (the "Closing"). See "The Merger
Proposals -- Effective Time;" and "The Merger Proposals -- Conditions to the
Merger; Waiver."
Conversion of Stock; Fractional Shares
Upon the consummation of the Merger, Alexander will merge with and into
NEG-OK. The separate identity of Alexander will cease to exist, NEG-OK will
continue to be a wholly-owned subsidiary of NEG and each share of Alexander
Common Stock outstanding immediately prior to the Merger (other than dissenting
shares) and all Associated Rights for such share will be converted into 1.7
shares of NEG Common Stock (the "Exchange Ratio"). No fractional shares of NEG
Common Stock will be issued as a result of the Merger. In lieu of fractional
shares, cash will be paid based on the closing sales price of the NEG Common
Stock on the last trading day preceding the Effective Time of the Merger. The
Exchange Ratio will not be adjusted for any fluctuations in the market prices of
NEG Common Stock or Alexander Common Stock occurring prior to the Effective Time
of the Merger. See "The Merger Proposals -- Manner and Basis of Converting
Alexander Common Stock -- Exchange Ratio;" "The Merger Proposals -- Manner and
Basis of Converting Alexander Common Stock -- Fractional Shares;" and "Risk
Factors -- Volatility of Share Prices."
Exchange of Certificates
Following the Effective Time, each holder of Alexander Common Stock will be
instructed to surrender to Liberty Bank and Trust Company of Oklahoma City,
N.A., or such other bank as may be selected by NEG as
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the exchange agent (the "Exchange Agent"), certificate(s) representing such
holder's shares of Alexander Common Stock and all Associated Rights immediately
prior to the Merger (the "Certificates"), together with a properly completed and
duly executed letter of transmittal and any other required documents, and will
receive in exchange a certificate registered in the holder's name representing
the number of full shares of NEG Common Stock to which the holder is entitled
pursuant to the Merger Agreement. See "The Merger Proposals -- Manner and Basis
of Converting Alexander Common Stock -- Exchange of Certificates."
Fully Diluted and Outstanding Shares of NEG after the Merger
Based on the number of shares of NEG Common Stock and Alexander Common
Stock outstanding on the respective Record Dates for the Meetings, after the
Merger and the NEG Equity Private Placement, NEG shareholders and former
Alexander shareholders will hold (i) approximately 27.8 million and 21.7 million
shares of NEG Common Stock, respectively, representing approximately 56.1% and
43.9%, respectively, of the fully diluted number of shares of NEG Common Stock
(assuming conversion of the NEG Preferred Stock and the exercise of all NEG
stock options and warrants), and (ii) approximately 12.3 million and 21.1
million shares of NEG Common Stock, respectively, representing approximately
36.9% and 63.1%, respectively, of the outstanding shares of NEG Common Stock. If
securities to be issued in the NEG Equity Private Placement are excluded from
these calculations, NEG shareholders and former Alexander shareholders will hold
approximately 19.8 million and 21.7 million shares of NEG Common Stock,
respectively, representing approximately 47.7% and 52.3%, respectively, of the
fully diluted shares of NEG Common Stock.
Alexander Options and Warrants
All options and warrants for Alexander Common Stock outstanding at the
Effective Time will be converted into options and warrants to receive NEG Common
Stock. See "The Merger Proposals -- Assumption of Alexander Options and
Warrants."
Conduct of the Business Pending Closing
Pending the Closing of the Merger, NEG and Alexander agreed to certain
restrictions with respect to the conduct of their respective businesses,
including limitations on capital expenditures. See "The Merger
Proposals -- Conduct of Business Prior to the Merger."
Directors of NEG after the Merger
Upon consummation of the Merger, the NEG Board of Directors will increase
the number of NEG directors to be elected by the holders of the NEG Common Stock
from five to eight, and Bob G. Alexander and Jim L. David, executive officers
and directors of Alexander, and Robert A. West, a director of Alexander, will be
appointed to the NEG Board of Directors to fill the vacancies created by the
increase in the size of the Board of Directors until the next annual meeting of
the shareholders of NEG. Messrs. Robert V. Sinnott, Elwood W. Schafer and Robert
J. Mitchell as appointees of the holders of the NEG Series B Preferred, NEG
Series C Preferred and NEG Series D Preferred, respectively, will also be
members of the Board of Directors of NEG after the Merger, bringing the total
number of NEG directors to 11. See "The Merger Proposals -- Conduct of Business
Following the Merger; Board of Directors and Management;" and "NEG Director
Election Proposal."
Conditions to the Closing of the Merger
It is a condition to Alexander's obligation to close the Merger that the
average closing sales price for the NEG Common Stock for the ten trading days
immediately prior to the closing date of the Merger (the "NEG Average Price")
exceed $2.40 per share, and it is a condition to NEG's obligation to close the
Merger that the NEG Average Price not exceed $3.60 per share (the range of stock
prices between $2.40 and $3.60, the "Range"). Those conditions to closing,
however, may be waived by the parties. At the time of executing a proxy with
respect to the Merger Proposals shareholders will not know the value of the
consideration to be received by Alexander shareholders in the Merger. By
approving the Merger Proposals, shareholders will permit the NEG or Alexander
Board of Directors, as the case may be, to determine to proceed with the Merger
even if the NEG Average Price is outside the Range. Shareholders may, however,
revoke their proxies at any time before their shares are voted. See "General
Information -- Voting Proxies."
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At present, neither the NEG nor the Alexander Board of Directors intends to
terminate the Merger Agreement if the NEG Average Price is not within the Range.
Those decisions could later change if circumstances are different at the time of
Closing, but the Boards of Directors do not expect to resolicit the shareholders
based on such changed circumstances unless the parties agree to change the
Exchange Ratio. Neither party expects, however, that it will renegotiate the
Exchange Ratio. In determining later whether to elect to terminate the Merger
Agreement or to complete the Merger if the NEG Average Price is outside the
Range, the Board of Directors of the entity with the right to so terminate the
Merger Agreement will take into account, consistent with its fiduciary duties,
all relevant facts and circumstances existing at the time, including, without
limitation, the market for oil and gas exploration and development stocks in
general, the relative values of the NEG and Alexander Common Stock in the
market, whether the parties are prepared to change the Exchange Ratio, and the
advice of its financial advisors and legal counsel. See "Risk Factors --
Volatility of Share Prices;" and "The Merger Proposals -- Conditions to the
Merger; Waiver."
Consummation of the Merger is subject to a number of other conditions,
including (i) approval of the Merger Proposals by the shareholders of NEG and
Alexander; (ii) no more than 12,850,000 shares of Alexander Common Stock being
outstanding immediately prior to the Merger on a fully diluted basis; (iii) no
material adverse change shall have occurred to either NEG or Alexander; (iv) the
payment on or before the Closing of the Merger of certain fees and expenses to
Prudential Securities and to McAfee & Taft A Professional Corporation ("McAfee &
Taft"), lawyers for Alexander; (v) the delivery of a tax opinion; (vi) the
delivery by affiliates of Alexander of letters to NEG recognizing the
restrictions on transfer of the NEG Common Stock imposed upon them by Rule 145
of the Securities Act of 1933, as amended (the "Securities Act"); and (vii) NEG
obtaining financing for not less than $65 million after the Merger (the
"Financing Condition") so long as the aggregate cost of refinancing the NEG and
Alexander existing debt and the cash costs of the Merger (including dissenting
shares) shall not exceed $80.0 million. See "-- Financing Condition to the
Merger;" and "-- NEG Equity Private Placement." Except for matters required by
law, each of the parties to the Merger Agreement may, at its option, waive
compliance with any condition to its obligation to consummate the Merger. As a
result, all of the conditions to the Merger, except the shareholder approval
condition, may be waived by the parties. See "The Merger Proposals -- Conditions
to the Merger; Waiver."
Financing Condition to the Merger
To satisfy the Financing Condition to the Closing of the Merger, NEG has
received a commitment letter dated June 6, 1996, which expires August 31, 1996
(the "Commitment"), from BankOne, Texas, N.A. and Credit Lyonnais New York
Branch (collectively, the "Banks") that would fund up to $65 million upon the
Closing of the Merger (the "NEG New Credit Facility"). See "The Merger
Proposals -- Transactions Related to the Merger -- The Commitment." Among other
conditions to funding the NEG New Credit Facility, the Commitment requires that
NEG raise an additional $12.5 million in equity. Under the Merger Agreement, NEG
is not obligated to consummate the Merger if the sum of the amount necessary to
refinance the existing debt of NEG and Alexander and the costs of closing the
transactions contemplated by the Merger (including payments for dissenting
shares) exceed $80.0 million. Currently the sum of the amount required to
refinance the NEG and Alexander existing debt and the cash costs of the Merger
is expected to be approximately $72.1 million (excluding payments for dissenting
shares, if any). See "NEG Management's Discussion and Analysis of the Effects of
the Merger on the Future Financial Condition and Results of Operations of NEG."
NEG Equity Private Placement
NEG has obtained commitments to raise $15.0 million in equity in two
private placement transactions with certain of its shareholders that will close
immediately after the Effective Time of the Merger (collectively, the "NEG
Equity Private Placement"). See "The Merger Proposals -- Transactions Related to
the Merger -- NEG Equity Private Placement;" "The Merger Proposals -- Interests
of Certain Persons in the Merger;" and "Risk Factors -- Related Parties Involved
and No Assurance Fair Market Value Received in NEG Equity Private Placement."
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On August 7, 1996, NEG entered into a definitive agreement (the "High River
Agreement") with High River Limited Partnership, a Delaware limited partnership
("High River"), whose general partner, Riverdale Investors Corp., Inc.
("Riverdale"), is owned by Carl C. Icahn ("Icahn"). High River is obligated to
purchase 100,000 shares of Series D Convertible Preferred Stock, $1.00 par value
per share, of NEG (the "NEG Series D Preferred") at $100 a share for $10.0
million if the Merger occurs on or before September 30, 1996. The NEG Series D
Preferred has the rights and preferences described under "Description of Capital
Stock -- NEG -- NEG Series D Preferred," which include the immediate right to
convert all of the shares of the NEG Series D Preferred into 4,444,444 shares of
NEG Common Stock, based upon the initial conversion price of $2.25 per share. In
addition, High River will receive warrants to purchase 700,000 shares of NEG
Common Stock exercisable immediately at $2.50 per share, which warrants will
expire five years after the date of the issuance of the warrants.
The holders of the NEG Series D Preferred will have the right to appoint
one director to the NEG Board of Directors. The holders of the NEG Series D
Preferred or the director appointed by them will also have certain other voting
rights that are contingent upon the occurrence of certain events that indicate
NEG is experiencing significant financial difficulties (collectively, the "NEG
Series D Preferred Contingent Voting Rights"). NEG may not, without the consent
of the director appointed by the holders of the NEG Series D Preferred,
voluntarily file for protection under federal or other bankruptcy laws. In
addition, the holders of the NEG Series D Preferred will have the right to
choose to appoint one-half of the members of the NEG Board of Directors plus one
member (including the member to be appointed by the holders of NEG Series D
Preferred) if involuntary bankruptcy or similar proceedings are brought against
NEG or if NEG defaults on indebtedness in excess of $10.0 million, and NEG does
not cause such proceedings to be dismissed or does not cure the default within
certain time periods. See "Description of Capital Stock -- NEG -- NEG Series D
Preferred." As a result, if the NEG Series D Preferred Contingent Voting Rights
are triggered and the holders of the NEG Series D Preferred exercise their
rights, such holders will control the NEG Board of Directors. See "Risk
Factors -- Control by Principal Shareholders." In addition, the Nasdaq has
advised NEG that it may seek to terminate the inclusion of the NEG Common Stock
on the Nasdaq National Market if such rights are ever exercised. See "Risk
Factors -- No Market for Shares if NEG Series D Preferred Contingent Voting
Rights Exercised."
Under the High River Agreement, High River has the right to receive certain
fees from NEG including if the Merger does not close by September 30, 1996 or if
the NEG Certificate of Incorporation Amendment Proposal is not approved by the
NEG shareholders and High River elects not to purchase securities in the NEG
Equity Private Placement, to purchase a portion of the securities even if the
Merger is not consummated, and to exercise certain rights of first refusal if
NEG determines to raise additional equity in connection with the Merger, if NEG
later completes a business combination with Alexander after termination of the
Merger Agreement, or if NEG raises additional equity in private placement
transactions within five years of July 19, 1996. See "The Merger
Proposals -- Transactions Related to the Merger -- NEG Equity Private
Placement;" and "Risk Factors -- Merger Dependent Upon Completion of Related
Transactions."
On July 25, 1996, NEG entered into a term sheet (the "Kayne Anderson Term
Sheet") with Kayne, Anderson Investment Management, Inc. ("KAIM"), a registered
investment adviser, pursuant to which KAIM expressed the intention, on behalf of
certain investment partnerships or accounts managed by KAIM (the "Kayne Anderson
Investors"), to purchase 50,000 shares of Series E Convertible Preferred Stock,
$1.00 par value per share, of NEG (the "NEG Series E Preferred") at $100 a share
for $5.0 million. The transaction with the Kayne Anderson Investors is subject
to certain conditions, including execution of a definitive agreement. The NEG
Series E Preferred has the rights and preferences described under "Description
of Capital Stock -- NEG -- NEG Series E Preferred," which include the immediate
right to convert all of the shares of the NEG Series E Preferred into 2,222,222
shares of NEG Common Stock, based upon the initial conversion price of $2.25 per
share. In addition, the Kayne Anderson Investors will receive warrants to
purchase 350,000 shares of NEG Common Stock exercisable immediately at $2.50 per
share, which warrants will expire five years after the issuance. In the Kayne
Anderson Term Sheet NEG also agreed to amend the Certificate of Incorporation
with respect to the NEG Series B Preferred and the NEG Series C Preferred to
extend the period during which such series cannot be redeemed by NEG from June
14, 1997 to June 14, 1999.
7
<PAGE> 17
See "NEG Certificate of Incorporation Amendment Proposal;" and "The Merger
Proposals -- Interests of Certain Persons in the Merger."
NEG has agreed to pay certain expenses of High River and the Kayne Anderson
Investors in connection with the NEG Equity Private Placement and has granted to
such investors certain registration rights, including the right to demand
registration of the securities sold in the NEG Equity Private Placement
commencing nine months after closing.
Both High River and affiliates of the Kayne Anderson Investors are more
than five percent holders of NEG Common Stock (assuming in the case of the Kayne
Anderson Investors, conversion of the NEG Preferred Stock). In addition, High
River owns more than five percent of the outstanding shares of Alexander Common
Stock. See "Security Ownership of Certain Beneficial Owners and Management;"
"The Merger Proposal -- Interests of Certain Persons in the Merger" and "Risk
Factors -- Control by Principal Shareholders."
Termination or Amendment of the Merger Agreement
Either party may terminate the Merger Agreement if the Closing does not
occur by October 1, 1996. The Merger Agreement also may be terminated by mutual
consent of the Boards of Directors of NEG and Alexander at any time prior to
consummation of the Merger. The Merger Agreement may be amended by the mutual
consent of the parties at any time before or after approval of the Merger
Proposals by the shareholders of NEG and Alexander and prior to the Effective
Time, except that after approval by the shareholders of NEG and Alexander of the
Merger Proposals, no amendment with respect to the Exchange Ratio (or any other
amendment which by law requires the approval of the shareholders of NEG or
Alexander) may be made without further approval by the shareholders of NEG and
Alexander, respectively. See "The Merger Proposals -- Termination or Amendment
of the Merger Agreement."
Risk Factors
The consummation of the Merger and an investment in shares of NEG Common
Stock each involve certain risks. Before voting on the Alexander Merger Proposal
and acquiring the securities offered by NEG, the shareholders of Alexander
should carefully consider the information set forth in "Risk Factors," which
immediately follows this Summary. Similarly, before voting on the NEG Merger
Proposal, shareholders of NEG should carefully consider such information.
Interests of Certain Persons in the Merger and in the NEG Certificate of
Incorporation Amendment Proposal
In considering the recommendations of the Boards of Directors of Alexander
and NEG, shareholders should be aware that certain officers, directors and
shareholders of NEG and Alexander have interests in the Merger Proposals and in
the NEG Certificate of Incorporation Amendment Proposal. These interests with
respect to the Merger include (i) the execution of employment or other
agreements by Alexander executive officers with NEG or NEG-OK; (ii) the
appointment of certain Alexander directors to the NEG Board of Directors; (iii)
the ownership of NEG Common Stock and NEG options and warrants by Alexander
officers and directors following the Merger; (iv) the acceleration of the
vesting of the outstanding options of certain officers of Alexander as a result
of the Merger; (v) the purchase of securities of NEG by NEG shareholders in the
NEG Equity Private Placement; (vi) the ownership of both NEG Common Stock and
Alexander Common Stock by certain shareholders of NEG and Alexander; and (vii)
the payment of certain financial consultants' fees with NEG Common Stock and
warrants to purchase NEG Common Stock. See "The Merger Proposals -- Interests of
Certain Persons in the Merger;" "Risk Factors -- Related Parties Involved and No
Assurance Fair Market Value Received in NEG Equity Private Placement;" and "Risk
Factors -- Control by Principal Shareholders." In addition, certain shareholders
of NEG have an interest in the NEG Certificate of Incorporation Amendment
Proposal. See "NEG Certificate of Incorporation Amendment Proposal."
8
<PAGE> 18
Accounting Treatment
The Merger will be accounted for as a purchase of Alexander by NEG
utilizing the purchase method of accounting. As a result, after the Effective
Time, Alexander's consolidated results of operations will be included in NEG's
consolidated results of operations. See "The Merger Proposals -- Accounting
Treatment."
Federal Income Tax Consequences
An Alexander shareholder will recognize no gain or loss upon the conversion
or exchange of the Common Stock of Alexander into NEG Common Stock pursuant to
the Merger Agreement, and an Alexander shareholder's tax basis in the shares of
NEG Common Stock will be the same as that shareholder's tax basis in such Common
Stock of Alexander. A shareholder's holding period in the shares of NEG Common
Stock will include the period during which the shareholder's shares of Alexander
Common Stock being converted or exchanged were held, provided that such shares
of Alexander Common Stock were held as capital assets at the time of the Merger.
See "The Merger Proposals -- Material Federal Income Tax Consequences."
Appraisal Rights
Under applicable Oklahoma law, holders of Alexander Common Stock who
deliver to Alexander a proper written demand for appraisal prior to the
Alexander Meeting, and who do not vote in favor of the Merger, will be entitled
to appraisal rights under the Oklahoma General Corporation Act (the "Oklahoma
Act"). See "The Merger Proposals -- Appraisal Rights." A copy of Section 1091 of
the Oklahoma Act describing such appraisal rights and the procedures to be
followed to perfect such rights is attached to this Proxy Statement as Addendum
D. Failure to follow the procedures established by Section 1091 may result in
the loss of appraisal rights.
MARKET PRICES OF SECURITIES
Since September 1, 1995 NEG Common Stock has been traded on the Nasdaq
National Market under the symbol "NEGX," and prior to that time NEG Common Stock
was traded in the Nasdaq SmallCap Market under the symbol "NRGIA." Alexander
Common Stock is traded on the Nasdaq National Market under the symbol "AEOK."
The following table sets forth the closing sales price per share of NEG
Common Stock and Alexander Common Stock, as reported on the Nasdaq National
Market on (i) December 29, 1995, the last full trading day before the public
announcement of the signing of the letter of intent between NEG and Alexander,
and (ii) August 5, 1996, the latest practicable trading day before printing this
Proxy Statement, and the equivalent pro forma per share value of Alexander
Common Stock based on NEG Common Stock prices on such dates. It is a condition
to Alexander's obligation to close the Merger that the NEG Average Price exceed
$2.40 and it is a condition to NEG's obligation to close the Merger that the NEG
Average Price not exceed $3.60 per share. The following table also sets forth
the equivalent pro forma per share value of Alexander Common Stock based on the
NEG Average Prices that define the Range. See "Risk Factors -- Volatility of
Share Prices;" and "The Merger Proposals -- Conditions to the Merger; Waiver."
Shareholders of NEG and shareholders of Alexander are encouraged to obtain
current market information for shares of NEG Common Stock and Alexander Common
Stock. See "Market Prices and Dividends."
<TABLE>
<CAPTION>
NEG ALEXANDER ALEXANDER
COMMON STOCK COMMON STOCK PRO FORMA
PRICE PRICE EQUIVALENT(1)
------------ ------------ -------------
<S> <C> <C> <C>
Closing Sales Prices
December 29, 1995.......................... $3 1/2 $4 9/16 $5.95
August 5, 1996............................. $3 1/2 $5 9/16 $5.95
NEG Average Price
Low Value of Range......................... $ 2.40 -- $4.08
High Value of Range........................ $ 3.60 -- $6.12
</TABLE>
- ---------------
(1) Represents the equivalent pro forma value of one share of Alexander Common
Stock calculated by multiplying the closing sales price of one share of NEG
Common Stock on the dates listed above, or the NEG Average Price, as the
case may be, by the Exchange Ratio.
9
<PAGE> 19
SUMMARY NEG HISTORICAL FINANCIAL INFORMATION
AND OPERATING DATA
SUMMARY NEG HISTORICAL FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The summary financial information presented below has been derived from the
financial statements of NEG for each of the three years in the period ended
December 31, 1995 and from unaudited financial statements for the three months
ended March 31, 1995 and 1996. The data should be read in conjunction with the
financial statements and the related notes thereto of NEG included elsewhere in
this Proxy Statement.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
----------------------------- -----------------
1993 1994 1995 1995 1996
------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:(1)
Oil and gas sales........................... $ 1,803 $ 3,159 $ 7,858 $1,091 $ 3,795
Other income................................ 27 109 91 31 23
Net income (loss)........................... (299) (611)(2) (226)(2) 105 433
Net income (loss) per common and common
equivalent share......................... (0.05) (0.10) (0.09) 0.00 0.02
Weighted average common and common
equivalent shares outstanding............ 6,121 8,477 10,702 9,268 12,043
STATEMENT OF CASH FLOWS DATA(1), (3):
Net cash provided by operating activities... $ 519 $ 373 $ 3,077 $ 258 $ 860
Additions to oil and gas properties......... 3,335 2,850 16,913 1,539 5,399
Net cash provided by (used in) financing
activities............................... 2,647 5,871 17,352 -- (429)
OTHER DATA(1), (4):
EBITDA...................................... 568 1,058 4,387 593 2,560
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- MARCH 31,
1993 1994 1995 1996
------- ------- ------- -----------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).................... $(1,213) $ 3,561 $(2,315) $(4,692)
Current assets............................... 1,014 4,956 9,907 5,300
Total assets................................. 12,710 18,746 43,491 43,585
Note payable and current portion of long-term
debt...................................... 862 -- 6,500 4,709
Long-term debt, less current portion......... 3,799 6,000 13,475 14,779
Stockholders' equity......................... 6,320 11,328 17,775 18,797
Book value per common share(5)............... 0.78 0.58 0.72 0.79
</TABLE>
SUMMARY NEG HISTORICAL OPERATING DATA
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
----------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Production:
Oil (Mbbls).................................. 49 116 283 41 111
Gas (Mmcf)................................... 483 621 1,753 174 833
Oil Equivalent (MBoe)........................ 129 219 576 70 249
Average sales prices:
Oil (per Bbl)................................ $ 16.46 $ 16.01 $ 17.22 $ 17.20 $ 18.73
Gas (per Mcf)................................ 2.07 2.11 1.70 2.19 2.07
Lease operating expense per Boe................ 4.45 5.51 3.01 4.22 2.43
</TABLE>
10
<PAGE> 20
SUMMARY NEG HISTORICAL OIL AND GAS RESERVE INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Proved reserves(6):
Oil (Mbbls)................................................. 3,721 5,156 3,921
Gas (Mmcf).................................................. 11,047 13,380 30,869
Total proved reserves (MBoe)................................ 5,562 7,386 9,066
Proved developed reserves (MBoe)............................ 3,105 3,067 3,850
PV10% (in thousands)(7)....................................... $14,374 $27,445 $36,279
Standardized Measure (in thousands)(7)........................ 11,679 20,840 32,127
</TABLE>
- ---------------
(1) Reflects the revenues and results of operations subsequent to the dates of
acquisitions of various oil and gas properties that affect the comparability
of the data presented. NEG acquired a 63.8% working interest in the
Goldsmith Adobe Unit located in Ector County, Texas ("GAU") in December 1993
and an additional interest of 17% in the GAU during 1994. In addition,
during 1995, NEG acquired interests in producing oil and gas properties in
the Mustang Island area, the Oak Hill Field, and in Eddy County, New Mexico.
See Note 2 of Notes to the historical financial statements of NEG.
(2) Includes extraordinary losses on early extinguishments of debt of $121,917
and $431,762 in 1994 and 1995, respectively.
(3) In addition to cash flows provided by operating activities, provided by or
used in financing activities and used by oil and gas acquisition,
exploration, and development expenditures, NEG also has significant cash
flows which are provided by or used by other investing activities. See "NEG
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and the historical financial
statements of NEG.
(4) See the Glossary included elsewhere in this Proxy Statement for the
definition of EBITDA. EBITDA is not a measure of cash flow as determined by
generally accepted accounting principles. NEG has included information
concerning EBITDA because EBITDA is a measure used by certain investors in
determining NEG's historical ability to service its indebtedness; however,
this measure may not be comparable to similarly titled measures of other
companies. EBITDA should not be considered as an alternative to, or more
meaningful than, net income or cash flows as determined in accordance with
generally accepted accounting principles as an indicator of NEG's operating
performance or liquidity.
(5) Book value per common share is computed as total stockholders' equity less
the aggregate liquidation preference of the NEG Series B Preferred and the
NEG Series C Preferred, where applicable, divided by the number of shares of
NEG Common Stock outstanding (including shares issuable under an asset
acquisition agreement and upon conversion of the NEG Class B Common Stock)
at the dates indicated.
(6) Represents proved reserves based on estimates prepared by Netherland, Sewell
& Associates, independent petroleum engineers ("Netherland & Sewell"), for
1995 and estimates prepared by other independent petroleum engineers for
1993 and 1994. See "Business and Properties -- NEG -- Oil and Natural Gas
Reserves."
(7) Discounted at an annual rate of 10%. See the Glossary included elsewhere in
this Proxy Statement for the definitions of "PV10%" and "Standardized
Measure." NEG believes that PV10%, while not determined in accordance with
generally accepted accounting principles, is an important financial measure
used by investors in independent oil and natural gas producing companies for
evaluating the relative significance of oil and natural gas properties and
acquisitions. PV10% should not be construed as an alternative to the
Standardized Measure, as determined in accordance with generally accepted
accounting principles.
11
<PAGE> 21
SUMMARY ALEXANDER HISTORICAL FINANCIAL INFORMATION
AND OPERATING DATA
SUMMARY ALEXANDER HISTORICAL FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The summary financial information presented below has been derived from the
consolidated financial statements of Alexander for each of the three years in
the period ended December 31, 1995 and from unaudited consolidated financial
statements for the three months ended March 31, 1995 and 1996. The data should
be read in conjunction with the consolidated financial statements and the
related notes thereto of Alexander included elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
----------------------------- ------------------
1993 1994(1) 1995 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Oil and gas sales.......................... $17,708 $17,390 $16,599 $ 4,524 $ 4,511
Management fees and other income........... 4,201 3,293 3,013 733 599
Net income (loss)(2)....................... 2,490 (1,242) (4,459) (441) 200
Net income (loss) per common and common
equivalent share........................ 0.24 (0.10) (0.36) (0.04) 0.02
Weighted average common and common
equivalent shares outstanding........... 10,149 12,168 12,345 12,273 12,505
STATEMENT OF CASH FLOWS DATA(3):
Net cash provided by operating
activities.............................. $12,065 $ 1,465 $ 3,382 $ 1,625 $ 861
Additions to oil and gas properties........ 17,940 36,010 5,881 2,181 1,348
Net cash provided by financing
activities.............................. 5,345 30,320 1,441 1,999 24
OTHER DATA(4):
EBITDA..................................... 12,730 7,348 9,310 2,527 3,305
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- MARCH 31,
1993 1994(1) 1995 1996
------- ------- ------- -----------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).................. $(7,100) $(5,581) $(6,495) $(6,303)
Current assets............................. 8,104 6,647 6,173 6,492
Total assets............................... 75,769 99,814 91,867 90,274
Long-term debt due within one year......... 1,037 1,016 4,162 5,962
Long-term debt due after one year.......... 16,764 46,514 44,351 42,512
Stockholders' equity....................... 34,351 34,225 30,628 30,921
Book value per common share................ 2.93 2.79 2.46 2.48
</TABLE>
SUMMARY ALEXANDER HISTORICAL OPERATING DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------- ------------------
1993 1994(1) 1995 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Production:
Oil (Mbbls)................................ 283 224 181 54 32
Gas (Mmcf)................................. 6,332 8,051 9,068 2,503 1,989
Gas Equivalent (Mmcfe)..................... 8,031 9,396 10,154 2,829 2,183
Average sales prices:
Oil (per Bbl).............................. $ 16.99 $ 15.44 $ 16.57 $ 16.88 $ 17.96
Gas (per Mcf).............................. 2.04 1.73 1.50 1.44 1.98
Production cost per Mcfe(5).................. .66 .65 .60 .60 .56
</TABLE>
12
<PAGE> 22
SUMMARY ALEXANDER HISTORICAL OIL AND GAS RESERVE INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1993 1994(1) 1995
-------- -------- -------
<S> <C> <C> <C>
Proved reserves(6):
Oil (Mbbls)............................................... 3,940 3,932 2,308
Gas (Mmcf)................................................ 121,921 145,203 99,070
Total proved reserves (Mmcfe)............................. 145,560 168,794 112,918
Proved developed reserves (Mmcfe)......................... 75,851 96,615 73,993
PV10% (in thousands)(7)..................................... $116,892 $108,189 $85,448
Standardized Measure (in thousands)(7)...................... 94,665 98,893 84,048
</TABLE>
- ---------------
(1) Includes the JMC Exploration, Inc. producing property acquisition which
occurred in November 1994, as discussed in Note 2 of Notes to Consolidated
Financial Statements of Alexander.
(2) Includes (a) in 1993, a loss from an extraordinary item of $510,000
associated with the early extinguishment of debt and the cumulative effect
of adopting SFAS 109 "Accounting for Income Taxes," the effect of which was
to increase net income by $425,000 as discussed in Note 12 of Notes to
Consolidated Financial Statements of Alexander, (b) in 1994, $2.4 million
and $734,000 of costs, before the effect of income taxes, related to the
Merger with American Natural Energy Corporation ("ANEC") and costs to
settle litigation against ANEC, respectively, as discussed in Notes 2 and
10 of Notes to Consolidated Financial Statements of Alexander, and (c) in
1995, $300,00 and $452,000 of abandoned merger costs and terminated Senior
Subordinated Note offering expenses, before the effect of income taxes,
respectively, as discussed in Note 10 of Notes to Consolidated Financial
Statements of Alexander.
(3) In addition to cash flows provided by operating and financing activities
and used by oil and gas acquisition, exploration, and development
expenditures, Alexander also has significant cash flows which are provided
by or used by other investing activities. See "Alexander Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" and the consolidated historical financial
statements of Alexander.
(4) See the Glossary included elsewhere in this Proxy Statement for the
definition of EBITDA. EBITDA is not a measure of cash flow as determined by
generally accepted accounting principles. Alexander has included
information concerning EBITDA because EBITDA is a measure used by certain
investors in determining Alexander's historical ability to service its
indebtedness; however, this measure may not be comparable to similarly
titled measures of other companies. EBITDA should not be considered as an
alternative to, or more meaningful than, net income or cash flows as
determined in accordance with generally accepted accounting principles as
an indicator of Alexander's operating performance or liquidity.
(5) Includes direct lifting costs and gross production and severance taxes.
(6) Includes proved reserves which are based on estimates prepared by Nether-
land & Sewell for 1995, proved producing reserves which are based on
estimates by other independent petroleum engineers for 1993 and 1994, and
proved non-producing and proved undeveloped reserves, which are based on
estimates prepared by Alexander's in-house reservoir engineers for 1993 and
1994. See "Business and Properties -- Alexander -- Oil and Natural Gas
Reserves."
(7) Discounted at an annual rate of 10%. See the Glossary included elsewhere in
this Proxy Statement for the definitions of "PV10%" and "Standardized
Measure." Alexander believes that PV10%, while not determined in accordance
with generally accepted accounting principles, is an important financial
measure used by investors in independent oil and natural gas producing
companies for evaluating the relative significance of oil and natural gas
properties and acquisitions. PV10% should not be construed as an
alternative to the Standardized Measure, as determined in accordance with
generally accepted accounting principles.
13
<PAGE> 23
SUMMARY PRO FORMA COMBINED CONDENSED
FINANCIAL INFORMATION AND OPERATING DATA
SUMMARY PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table presents summary pro forma financial and operating data
and oil and gas reserve information which reflects the Merger and certain
historical acquisitions of NEG using the purchase method of accounting. The pro
forma statement of operations data, the operating data and reserve information
has been prepared as if the Merger and related transactions described in this
Proxy Statement and the other acquisitions of NEG had been consummated on
January 1, 1995. The pro forma balance sheet data has been prepared as if the
Merger and related transactions described in this Proxy Statement had been
consummated on March 31, 1996. The summary pro forma combined condensed
financial information should be read in conjunction with the Pro Forma Combined
Condensed Financial Statements and the separate historical financial statements
of NEG and Alexander and the related notes thereto included elsewhere in this
Proxy Statement. The pro forma combined condensed financial and operating data
are not necessarily indicative of the operating results or financial position
that would have been achieved had the Merger and related transactions been
effective at the date or during the periods presented or the results that may be
obtained in the future.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1995 MARCH 31, 1996
----------------- --------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Oil and gas sales............................... $26,011 $ 8,306
Operating income (loss)......................... (2,192) 2,170
Net income (loss) per common and common
equivalent share before extraordinary item... (0.19) 0.02
Weighted average common and common equivalent
shares outstanding........................... 32,814 40,171
OTHER DATA(2)(3):
Net cash provided by operating activities....... 6,511 1,883
Additions to oil and gas properties............. 22,794 6,747
Net cash provided by (used in) financing
activities................................... 18,792 (406)
EBITDA.......................................... 14,890 5,891
<CAPTION> MARCH 31,
1996
---------
<S> <C>
BALANCE SHEET DATA(1):
Working capital (deficit)....................... $ (7,340)
Total assets.................................... 143,169
Note payable and current portion of long-term
debt......................................... 17,012
Long-term debt, less current portion............ 49,462
Stockholders' equity............................ 61,483
Book value per common share(4).................. 1.12
SUMMARY PRO FORMA COMBINED OPERATING DATA
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1995 MARCH 31, 1996
----------------- --------------
<S> <C> <C>
Production:
Oil (Mbbls)..................................... 475 143
Gas (Mmcf)...................................... 11,830 2,823
Gas Equivalent (Mmcfe).......................... 14,680 3,681
Average sales prices:
Oil (per Bbl)................................... $ 16.61 $ 18.56
Gas (per Mcf)................................... 1.41 2.01
Lease operating expense per Mcfe.................. 0.49 0.42
</TABLE>
14
<PAGE> 24
SUMMARY PRO FORMA COMBINED OIL AND GAS RESERVE INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
<S> <C>
Proved reserves(5):
Oil (Mbbls)..................................................... 6,229
Gas (Mmcf)...................................................... 128,207
Total proved reserves (Mmcfe)................................... 165,581
Proved developed reserves (Mmcfe)............................... 95,358
PV10% (in thousands)(6)......................................... $ 121,727
Standardized Measure (in thousands)(6).......................... 114,190
</TABLE>
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(1) The Merger will be accounted for as a purchase of Alexander by NEG utilizing
the purchase method of accounting. The purchase price has been allocated to
the consolidated assets and liabilities of Alexander based on preliminary
estimates of fair values with the remaining purchase price allocated to
proved oil and gas properties. No goodwill has been recorded in this
transaction. Substantial costs are expected to occur as a result of the
combination of the two companies, including transaction costs, costs with
respect to the elimination of duplicate facilities, severance and related
benefits and other costs related to the combination of the two companies.
Such costs are expected to total approximately $5.4 million and are included
in the aggregate cost of the Merger. The pro forma results of operations
exclude a noncash writedown of oil and gas properties which is estimated as
of March 31, 1996 to be approximately $37.2 million in accordance with the
full cost method of accounting. Such writedown will be charged to expense in
the period the Merger is consummated.
(2) In addition to cash flows provided by operating activities, provided by or
used in financing activities and used by oil and gas acquisition,
exploration, and development expenditures, NEG and Alexander also have
significant cash flows which are provided or used by other investing
activities. Pro forma cash flows from operating activities have been
computed by adjusting the combined cash flows by pro forma adjustments for
the operating revenues and direct operating expenses of the NEG acquisitions
in 1995 and the pro forma adjustments for interest expense. Pro forma net
cash flows provided by (used in) financing activities represent the combined
cash flows from financing activities of NEG and Alexander. See "NEG
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources;" "Alexander Management's
Discussion and Analysis of Financial Condition and Results of Operations
-Liquidity and Capital Resources;" "NEG Management's Discussion and Analysis
of the Effects of the Merger on the Future Financial Condition and Results
of Operations of NEG;" the historical financial statements of NEG and
Alexander; and the pro forma combined condensed financial statements
included elsewhere in this Proxy Statement.
(3) See the Glossary included elsewhere in this Proxy Statement for the
definition of EBITDA. EBITDA is not a measure of cash flow as determined by
generally accepted accounting principles. NEG has included information
concerning EBITDA because EBITDA is a measure used by certain investors in
determining a company's historical ability to service indebtedness; however,
this measure may not be comparable to similarly titled measures of other
companies. EBITDA should not be considered as an alternative to, or more
meaningful than, net income or cash flows as determined in accordance with
generally accepted accounting principles as an indicator of operating
performance or liquidity.
(4) Book value per common share is computed as total stockholders' equity less
the aggregate liquidation preference of outstanding NEG Preferred Stock,
divided by the number of shares of NEG Common Stock outstanding.
(5) Includes proved reserves of NEG and Alexander based on estimates prepared by
Netherland & Sewell for 1995. Alexander's proved reserves have been adjusted
to conform Alexander's method of accounting for natural gas imbalances to
the method utilized by NEG. See "Business and Properties -- NEG -- Oil and
Natural Gas Reserves;" and "Business and Properties -- Alexander -- Oil and
Natural Gas Reserves."
(6) Discounted at an annual rate of 10%. See the Glossary included elsewhere in
this Proxy Statement for the definitions of "PV10%" and "Standardized
Measure." NEG believes that PV10%, while not determined in accordance with
generally accepted accounting principles, is an important financial measure
used by investors in independent oil and natural gas producing companies for
evaluating the relative significance of oil and natural gas properties and
acquisitions. PV10% should not be construed as an alternative to the
Standardized Measure, as determined in accordance with generally accepted
accounting principles.
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<PAGE> 25
COMPARATIVE PER SHARE DATA
The following table sets forth per share data for NEG and Alexander on an
historical and on a pro forma basis giving effect to the Merger and related
transactions described in this Proxy Statement and certain historical
acquisitions of NEG on the basis described in the Pro Forma Combined Condensed
Financial Statements included elsewhere herein. This table should be read in
conjunction with the historical financial statements and the related notes
thereto of NEG and Alexander, and in conjunction with the Pro Forma Combined
Condensed Financial Statements appearing elsewhere in this Proxy Statement. The
pro forma combined per share data are not necessarily indicative of actual
results had the Merger occurred on the dates indicated or of future results.
There were no common stock dividends paid by NEG or Alexander in the three year
period ended December 31, 1995 or in the first quarter ended March 31, 1996.
<TABLE>
<CAPTION>
PRO EQUIVALENT
FORMA PRO FORMA
COMBINED COMBINED
HISTORICAL (PER (PER SHARE
------------------- SHARE OF
NEG ALEXANDER OF NEG) ALEXANDER)(1)
------ --------- -------- -------------
<S> <C> <C> <C> <C>
Net income (loss) per common and common equivalent
share before extraordinary item:
Year ended December 31, 1995..................... $(0.05) $ (0.36) $(0.19) $ (0.32)
Three months ended March 31, 1996................ 0.02 0.02 0.02 0.03
Book value per common share as of March 31,
1996(2).......................................... 0.79 2.48 1.12 1.90
</TABLE>
- ---------------
(1) Equivalent pro forma combined per share information for Alexander is
presented on an equivalent per share basis assuming the Exchange Ratio of
1.7 shares of NEG Common Stock for each share of Alexander Common Stock. See
"The Merger Proposals -- Manner and Basis of Converting Alexander Common
Stock -- Exchange Ratio."
(2) Historical and pro forma book value per common share of NEG is computed as
total stockholders' equity less the aggregate liquidation preference of
outstanding NEG Preferred Stock, divided by the number of shares of NEG
Common Stock outstanding.
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<PAGE> 26
RISK FACTORS
In addition to the other information contained in this Proxy Statement, the
following factors should be considered carefully in evaluating the Merger
Proposals and the NEG Common Stock to be issued if the Merger is consummated.
VOLATILITY OF OIL AND GAS PRICES AND MARKETS
NEG profitability will be substantially dependent on prevailing prices for
oil and natural gas. The amounts of and prices obtainable for NEG's oil and gas
production will be affected by market factors beyond NEG's control. Such factors
include the extent of domestic production, the level of imports of foreign oil
and gas, the general level of market demand on a regional, national and
worldwide basis, domestic and foreign economic conditions that determine levels
of industrial production, political events in foreign oil producing regions, and
variations in governmental regulations and tax laws or the imposition of new
governmental requirements upon the oil and gas industry. Prices for oil and gas
are subject to wide fluctuation in response to relatively minor changes in
supply of and demand for oil and gas, market uncertainty and a variety of
additional factors that are beyond the control of NEG. A substantial and
prolonged decline in oil and gas prices could have a material adverse effect
upon NEG, including the inability of NEG to fund planned operations and capital
expenditures, writedowns of the carrying value of its oil and gas properties,
and NEG's inability to meet debt service requirements resulting in defaults
under bank loans. See "The Merger Proposals -- Certain Transactions Related to
the Merger -- The Commitment." In addition, the marketability of NEG's
production will depend in part upon the availability, proximity and capacity of
gathering systems, pipelines and processing facilities.
FUTURE CAPITAL REQUIREMENTS
NEG and Alexander have made, and will continue to make, substantial capital
expenditures for acquisition, development and production of oil and natural gas
reserves, particularly since a substantial portion of the proved reserves of NEG
and Alexander consist of proved undeveloped reserves, which require substantial
capital expenditures to prove and develop. Following the Merger, NEG has
budgeted capital expenditures of $15 million and $19 million for the four months
ended December 31, 1996 and for the year ended 1997, respectively. NEG is not
contractually committed to expend these funds. Additionally, initial scheduled
principal payments under the NEG New Credit Facility are $3 million and $17
million for the 1996 period after the Merger and 1997, respectively. Future cash
flows and the availability of credit are subject to a number of variables,
including the level of production from existing wells, prices of oil and natural
gas and NEG's success in drilling and acquiring additional producing reserves.
NEG currently expects that cash flows from operations and proceeds from the NEG
Equity Private Placement will be sufficient to fund budgeted capital
expenditures and debt service requirements under the NEG New Credit Facility for
the 1996 period after the Merger and for 1997; however, if oil and gas prices
decline significantly from prevailing market prices experienced in the second
quarter of 1996, if principal payments under the NEG New Credit Facility are
accelerated from those initially scheduled, or if interest rates or the rate of
drilling success change adversely from expected rates, cash flows from
operations will be adversely affected and NEG may be required to delay or reduce
capital expenditures from its budgeted amounts.
Following the Merger, NEG expects to seek additional capital from
traditional reserve base borrowing, equity and debt offerings or joint ventures
to further develop and explore its properties and to acquire additional
properties. Presently NEG is discussing with several underwriters the
feasibility of making a high yield debt offering of medium term notes to be
completed before the end of the first quarter of 1997, to raise between $75 and
$125 million for those purposes. NEG's ability to access additional capital,
including in the proposed high yield debt offering, will depend on its continued
success in exploring for and developing its oil and gas reserves and the status
of the capital markets at the time such capital is sought. Accordingly, there
can be no assurance that capital will be available to NEG from any source or
that, if available, it will be at prices or on terms acceptable to NEG.
Moreover, the rights granted to the holders of the NEG Series D Preferred, such
as the NEG Series D Contingent Voting Rights and rights of first refusal, may
adversely impact NEG's ability to access capital markets and the terms of such
offerings, including a high yield debt offering. Should
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<PAGE> 27
NEG be unable to access the capital markets or should sufficient capital not be
available, the development and exploration of NEG's properties could be delayed
or reduced and, accordingly, NEG oil and gas revenues and operating results may
be adversely affected. See "NEG Management's Discussion and Analysis of the
Effects of the Merger on the Future Financial Condition and Results of
Operations of NEG."
UNCERTAINTY OF ESTIMATES OF RESERVES AND FUTURE NET REVENUES
There are numerous uncertainties inherent in estimating quantities of
proved reserves, including many factors beyond the control of NEG. The reserve
information set forth in this Proxy Statement represents estimates based on
reports prepared by NEG's and Alexander's independent petroleum engineers, as
well as internally generated reports. Petroleum engineering is not an exact
science. Information relating to NEG's and Alexander's proved oil and gas
reserves is based upon engineering estimates. Estimates of economically
recoverable oil and gas reserves and of future net cash flows necessarily depend
upon a number of variable factors and assumptions, such as historical production
from the area compared with production from other producing areas, the assumed
effects of regulations by governmental agencies and assumptions concerning
future oil and gas prices, future operating costs, severance and excise taxes,
capital expenditures and workover and remedial costs, all of which may in fact
vary considerably from actual results. For these reasons, estimates of the
economically recoverable quantities of oil and gas attributable to any
particular group of properties, classifications of such reserves based on risk
of recovery and estimates of the future net cash flows expected therefrom
prepared by different engineers or by the same engineers at different times may
vary substantially. Actual production, revenues and expenditures with respect to
NEG's and Alexander's reserves will likely vary from estimates, and such
variances may be material. Either inaccuracies in estimates of proved
undeveloped reserves or the inability to fund development could result in
substantially reduced reserves. See "Business and Properties -- NEG -- Oil and
Natural Gas Reserves;" and "Business and Properties -- Alexander -- Oil and
Natural Gas Reserves."
EXPLORATION AND DEVELOPMENT RISKS
Exploration and development of oil and gas resources involve a high degree
of risk that no commercial production will be obtained or that the production
will be insufficient to recover drilling and completion costs. The cost of
drilling, completing and operating wells is often uncertain. NEG's drilling
operations may be curtailed, delayed or canceled as a result of numerous
factors, including title problems, weather conditions, compliance with
governmental requirements and shortages or delays in the delivery of equipment.
Furthermore, completion of a well does not assure a profit on the investment or
a recovery of drilling, completion and operating costs. See "Business and
Properties -- NEG -- Drilling Activity."
OPERATING HAZARDS AND UNINSURED RISKS
In addition to the substantial risk that wells drilled will not be
productive, hazards such as unusual or unexpected geologic formations,
pressures, downhole fires, mechanical failures, blowouts, cratering, explosions,
uncontrollable flows of oil, gas or well fluids, pollution and other physical
and environmental risks are inherent in oil and gas exploration and production.
These hazards could result in substantial losses to NEG due to injury and loss
of life, severe damage to and destruction of property and equipment, pollution
and other environmental damage and suspension of operations. NEG carries
insurance which it believes is in accordance with customary industry practices,
but, as is common in the oil and gas industry, NEG does not fully insure against
all risks associated with its business either because such insurance is not
available or because the cost thereof is considered prohibitive. See "Business
and Properties -- NEG -- Operational Hazards and Insurance."
REPLACEMENT OF RESERVES
NEG's success will be largely dependent on its ability to replace and
expand its oil and gas reserves through the acquisition of producing properties
and the exploration for and development of oil and gas reserves, both of which
involve substantial risks. Without successful acquisition or drilling ventures,
NEG will be unable to replace the reserves being depleted by production, and its
assets and revenues, including the
18
<PAGE> 28
reserves, will decline. There can be no assurance that NEG's acquisition and
exploration and development activities will result in the replacement of, or
additions to, NEG's reserves. Similarly, there can be no assurance that NEG will
have sufficient capital to engage in its acquisition, exploration or development
activities. Successful acquisition of producing properties generally requires
accurate assessments of recoverable reserves, future oil and gas prices and
operating costs, potential environmental and other liabilities and other
factors. Such assessments are necessarily inexact, and as estimates their
accuracy is inherently uncertain.
RISKS OF PURCHASING INTERESTS IN PRODUCING PROPERTIES
Acquisitions of producing oil and gas properties have been a key element of
NEG's and Alexander's operations, and NEG expects to continue to make
acquisitions of producing properties in the future. NEG generally focuses most
of its time and valuation efforts on the more significant properties. It is
generally not feasible for NEG to review in-depth every property it purchases
and all records with respect to such properties. However, even an in-depth
review of properties and records may not necessarily reveal existing or
potential problems, nor will it permit NEG to become familiar enough with the
properties to assess fully their deficiencies and capabilities. Evaluation of
future recoverable reserves of oil, gas and natural gas liquids, which is an
integral part of the property selection process, is a process that depends upon
evaluation of existing geological, engineering and production data, some or all
of which may prove to be unreliable or not indicative of future performance. To
the extent the seller does not operate the properties, obtaining access to
properties and records may be more difficult. Even when problems are identified,
the seller may not be willing or financially able to give contractual protection
against such problems, and NEG may decide to assume environmental and other
liabilities in connection with acquired properties.
EFFECT OF PRICE RISK HEDGING
Currently NEG has various swap agreements to fix the selling price of a
portion of its oil and gas. See "NEG Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Changes in Price and
Inflation." Pursuant to the NEG New Credit Facility, which is expected to
contain the same terms as the Commitment, NEG may not engage in hedging, forward
sales or swaps of crude oil, natural gas or other commodities unless approval is
received from the Banks. In addition, NEG may be required, under certain
circumstances, to hedge pricing risks under the NEG New Credit Facility. See
"The Merger Proposals -- Transactions Related to the Merger -- The Commitment."
While the use of hedging arrangements limits the downside of adverse price
movements, it may also limit future gains from favorable price movements.
GOVERNMENTAL REGULATION
NEG's operations are affected by extensive regulation pursuant to various
federal, state and local laws and regulations relating to the exploration for
and development, production, gathering and marketing of oil and gas. Although
NEG and Alexander believe that they are in material compliance with all such
laws and regulations, there can be no assurance that new laws or regulations or
new interpretations of existing laws and regulations will not increase
substantially the cost of compliance or otherwise adversely affect NEG's
exploration for and development, production, gathering and marketing of oil and
gas. See "Business and Properties -- NEG -- Regulation;" and "Business and
Properties -- Alexander -- Regulation."
ENVIRONMENTAL REGULATION
The activities of NEG are subject to various federal, state and local laws
and regulations covering the discharge of material into the environment or
otherwise relating to protection of the environment. In particular, NEG's oil
and gas exploration, development and production, and its activities in
connection with storage and transportation of liquid hydrocarbons are subject to
stringent environmental regulation by governmental authorities in the United
States and in foreign jurisdictions. Such regulations have increased the costs
of planning, designing, drilling, installing, operating and abandoning oil and
gas wells and other related facilities.
19
<PAGE> 29
NEG and Alexander have each expended significant resources, both financial
and managerial, to comply with environmental regulations and permitting
requirements and each anticipates that it will continue to do so in the future.
Although NEG and Alexander believe that their respective operations are in
general compliance with applicable environmental laws and regulations, risks of
substantial costs and liabilities are inherent in oil and gas operations, and
there can be no assurance that significant costs and liabilities will not be
incurred in the future. Moreover, it is possible that other developments, such
as increasingly strict environmental laws, regulations and enforcement policies
thereunder, and claims for damages to property, employees, other persons and the
environment resulting from NEG's operations, could result in substantial costs
and liabilities in the future. See "Business and
Properties -- NEG -- Regulation -- Environmental and Occupational;" and
"Business and Properties -- Alexander -- Regulation -- Environmental and
Occupational."
COMPETITION
The oil and gas industry is highly competitive. NEG will compete in
acquisitions and the development, production and marketing of oil and gas with
major oil companies, other independent oil and gas concerns, and individual
producers and operators. Many of these competitors have substantially greater
financial and other resources than NEG. Furthermore, the oil and gas industry
competes with other industries in supplying the energy and fuel needs of
industrial, commercial and other consumers. See "Business and Properties --
NEG -- Competition;" and "Business and Properties -- Alexander -- Competition."
FINANCIAL REPORTING IMPACT OF FULL COST METHOD OF ACCOUNTING
NEG and Alexander follow the full cost method of accounting for oil and gas
properties. Under such method, the net book value of such properties, less
related deferred income taxes, may not exceed a calculated "ceiling." The
ceiling is the estimated after-tax future net revenues from proved oil and gas
properties, discounted at 10% per year. In calculating future net revenues,
prices and costs in effect at the time of the calculation are held constant
indefinitely, except for changes which are fixed and determinable by existing
contracts. The net book value is compared to the ceiling on a quarterly and
yearly basis. The excess, if any, of the net book value above the ceiling is
required to be written off as a noncash expense. With the exception of
Alexander's writedown of $2.3 million in 1995, neither NEG nor Alexander has
recognized such an expense over the last three years of operation. However, as a
result of allocating additional cost, under the purchase method of accounting,
to the oil and gas properties in connection with the Merger, as of March 31,
1996 it is estimated that NEG will be required under such method of accounting
to writedown oil and gas properties by approximately $37.2 million upon
completion of the Merger. The actual amount of the writedown may change when the
purchase price allocation is finalized and changes in estimated reserves are
determined at the Effective Time. Thereafter, NEG will be at or near the ceiling
and there can be no assurances that there will not be any future writedowns
under the full cost method of accounting. Any decrease in oil and gas prices
could result in additional writedowns. See Note 16 of Notes to the Pro Forma
Combined Condensed Financial Statements. Under SEC full cost accounting rules,
any expense recorded as the result of the full cost ceiling calculation may not
be reversed even though higher oil and gas prices may increase the ceiling
applicable to future periods.
LOSSES FROM OPERATIONS OF NEG AND ALEXANDER
NEG reported net losses for the fiscal years ended December 31, 1994 and
1995 of $611,286 and $225,969, respectively. However, for 1995 NEG reported
income before extraordinary item of $205,793, compared with a loss before
extraordinary item of $489,369 for 1994. The income before extraordinary item
for 1995 includes a $220,582 gain on the sale of marketable securities. The
extraordinary losses reported for 1995 and 1994 of $431,762 and $121,917,
respectively, were due to early extinguishment of long-term debt which resulted
in the write-off of unamortized loan costs of such debt. Alexander reported net
losses for the fiscal years ended December 31, 1994 and 1995 of $1.2 million and
$4.5 million, respectively. The $4.5 million loss in fiscal year 1995 included
$2.3 million resulting from a writedown required under the full cost method of
accounting. See "-- Financial Reporting Impact of Full Cost Method of
Accounting." Both NEG and Alexander reported net income in the first quarter of
1996. However, there can be no assurance that, following
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<PAGE> 30
the Merger, NEG will have profitable operations and therefore generate
sufficient cash flow to fund future working capital requirements and budgeted
capital expenditures.
INCREASE IN SCOPE OF OPERATIONS
NEG and Alexander believe that the Merger will offer opportunities for
long-term efficiencies in operations that should positively affect future
operating results of NEG. However, after the Merger, the increased scope of
operations will present difficult changes to NEG due to the increased time and
resources required in the management effort. While the managements and Boards of
Directors of both NEG and Alexander believe that the combination can be effected
in a manner that will realize the value of the two companies, NEG does not have
experience in combinations of this size. Accordingly, there can be no assurance
that the process of effecting the business combination can be effectively
managed to realize the operational efficiencies anticipated to result from the
Merger.
Following the Merger, in order to maintain and increase profitability, NEG
and Alexander will need to successfully integrate and streamline overlapping
functions. NEG and Alexander have different systems and procedures in many
operational areas which must be integrated. There can be no assurance that
integration will be accomplished smoothly or successfully. The difficulties of
such integration may be increased by the necessity of coordinating
geographically separated organizations. The integration of certain operations
following the Merger will require the dedication of management resources which
may temporarily distract attention from the day-to-day business of NEG after the
Merger. Failure to effectively accomplish the integration of operations could
have an adverse effect on NEG's results of operations and financial condition.
See "The Merger Proposals -- Conduct of Business Following the Merger; Board of
Directors and Management."
RELIANCE ON KEY PERSONNEL; DEMANDS OF RAPID GROWTH
NEG will be dependent upon its executive officers and key employees which,
following the Merger, will include Alexander personnel. The unexpected loss of
services of one or more of these individuals could have a detrimental effect on
NEG. NEG does not have, and currently does not plan to purchase, key employee
insurance to compensate it for any loss of such key employees. In addition, the
continued growth and expansion of NEG will depend, among other factors, on the
ability to recruit and retain skilled and experienced management and technical
personnel, especially in connection with expanding development programs,
exploration efforts and any future acquisitions. There can be no assurance that
NEG will be successful in such efforts. See "Management -- NEG" and
"Management -- Alexander."
SHARES ELIGIBLE FOR PUBLIC SALE
Sales of substantial amounts of NEG Common Stock in the public market after
the consummation of the Merger could adversely affect prevailing market prices.
Following the Merger, of the approximately 49.5 million shares of NEG Common
Stock outstanding on a fully-diluted basis, approximately 41,163,276 shares of
NEG Common Stock will be eligible for immediate sale in the public market,
subject to certain limitations under the Securities Act applicable to affiliates
of Alexander. In addition, should the investors in the NEG Equity Private
Placement convert the NEG Series D Preferred and the NEG Series E Preferred,
exercise their warrants and exercise their demand registration rights when such
rights first become available nine months after the closing of the NEG Equity
Private Placement, an additional 7,716,666 shares of NEG Common Stock on a fully
diluted basis may be eligible for immediate resale nine months after the closing
of the NEG Equity Private Placement, and the availability of such shares for
sale in the public market could adversely affect prevailing market prices. See
"The Merger Proposals -- Resale of NEG Common Stock; Agreements with Alexander
Affiliates;" "The Merger Proposals -- Assumption of Alexander Options and
Warrants;" "The Merger Proposals -- Transactions Related to the Merger -- NEG
Equity Private Placement;" and "The Merger Proposals -- Interests of Certain
Persons in the Merger."
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<PAGE> 31
ABSENCE OF DIVIDENDS
Although NEG has paid cash dividends to holders of the NEG Preferred Stock,
neither NEG nor Alexander has paid any cash dividends to holders of NEG or
Alexander Common Stock and, after the Merger, NEG does not anticipate paying
cash dividends to holders of NEG Common Stock for the foreseeable future. See
"Market Prices and Dividends."
It is anticipated that the NEG New Credit Facility will prohibit NEG from
making any cash dividends on its Common Stock or Preferred Stock while the Term
Loan (as later defined) is outstanding. Cash dividends on NEG Preferred Stock
will be allowed only after the Term Loan (including principal and interest) is
repaid in full and only if no event of default exists or would exist as a result
of the payment thereof. Until payment of the Term Loan, NEG intends to pay
dividends to the holders of NEG Series B Preferred and NEG Series C Preferred in
additional shares of NEG Series B Preferred and NEG Series C Preferred,
respectively, which will be dilutive to the holders of NEG Common Stock on a
fully diluted basis. See "The Merger Proposals -- Transactions Related to the
Merger -- The Commitment."
VOLATILITY OF SHARE PRICES
The market price for shares of NEG Common Stock and Alexander Common Stock
may change between the time of the printing of this Proxy Statement and the time
shareholders vote on the Merger Proposals and from the time shareholders vote on
the Merger Proposals to the Effective Time of the Merger depending on various
factors, including, but not limited to, factors that relate to NEG and Alexander
but also due to factors that are unrelated to either of them, such as the state
of the national economy, stock market conditions, industry reports, actions by
governmental agencies, actions by their competitors and general world economic
conditions. See "Market Prices and Dividends." As a result, at the time of
executing a proxy with respect to the Merger Proposals, shareholders will not
know the value of the consideration to be received by Alexander shareholders in
Merger.
If, as a result of changes in the market price of the NEG Common Stock or
volatility in the market, the NEG Average Price is outside of the Range, one of
the parties will have the right to terminate the Merger Agreement, even if
shareholder approval of the Merger Proposals is obtained. The Board of Directors
of the entity having the right to terminate may elect to close the Merger even
if the NEG Average Price is outside the Range. As a result, a vote for the
Merger Proposals will authorize the Boards of Directors of NEG or of Alexander
to decide whether to proceed with the Merger even if the NEG Average Price is
outside the Range. Shareholders may, however, later revoke their proxy. See
"General Information -- Voting Proxies." Based on the average closing price of
the NEG Common Stock for the ten trading days immediately prior to the NEG
Record Date, the NEG Average Price was $3.6625, which is outside the Range. At
present, although the Oppenheimer Opinion does not address an NEG Average Price
outside the Range, the NEG Board of Directors does not intend to terminate the
Merger Agreement and does not intend to resolicit holders of NEG capital stock
if the NEG Average Price were to remain above the Range. However, the NEG Board
of Directors may decide to reevaluate that decision if circumstances change. See
"The Merger Proposals -- Conditions to the Closing of the Merger; Waiver."
MERGER DEPENDENT UPON COMPLETION OF RELATED TRANSACTIONS
NEG's obligation to close the Merger is dependent upon obtaining funding
simultaneous with or immediately after the Closing of the Merger to refinance
the existing indebtedness of NEG and Alexander. The NEG New Credit Facility is
for the purpose of providing that funding, and requires NEG to raise $12.5
million in equity. As a result, even if shareholders approve the Merger
Proposals, the Merger may not close if the closings of the NEG New Credit
Facility and the NEG Equity Private Placement are not timely consummated. The
Commitment for the NEG New Credit Facility expires August 31, 1996. The
obligation of High River under the High River Agreement terminates if the Merger
has not been consummated by September 30, 1996 and may terminate at the option
of High River if the NEG Certificate of Incorporation Amendment Proposal is not
approved by the NEG shareholders. A definitive agreement has not yet been
reached with the Kayne Anderson Investors. At present, NEG intends to close all
transactions on either August 29, 1996 or August 30, 1996, the date of or date
after the Meetings. No assurances can be made,
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<PAGE> 32
however, that NEG will reach definitive agreements with parties to letters of
intent, that such definitive agreements will contain terms identical to those in
the letters of intent or that such transactions will close on a timely basis.
See "The Merger Proposals -- Transactions Related to the Merger -- NEG Equity
Private Placement."
RELATED PARTIES INVOLVED AND NO ASSURANCE FAIR MARKET VALUE RECEIVED IN NEG
EQUITY PRIVATE PLACEMENT
Both High River and affiliates of the Kayne Anderson Investors are more
than five percent holders of NEG Common Stock (assuming, in the case of the
Kayne Anderson Investors, conversion of the NEG Preferred Stock). In addition,
High River owns more than five percent of the outstanding shares of Alexander
Common Stock. See "Security Ownership of Certain Beneficial Owners and
Management;" and "The Merger Proposals -- Interests of Certain Persons in the
Merger."
When management of NEG commenced discussions with the investors in the NEG
Equity Private Placement, and when the initial understanding regarding the price
term was reached, the closing price of the NEG Common Stock on the Nasdaq
National Market was $2 5/8. On June 6, 1996 the NEG Board of Directors approved
in principle the offering of $12.5 million of equity securities at $2.25 a share
to the purchasers in the NEG Equity Private Placement. On such date, the NEG
Common Stock closed at $3 1/8 on the Nasdaq National Market. Based on that
price, the $2.25 conversion price for the NEG Series D Preferred and for the NEG
Series E Preferred issued in the NEG Equity Private Placement represents a
discount of 28%. Based on the closing price of the NEG Common Stock on the
Nasdaq National Market of $3 1/2 on August 5, 1996, the latest practicable
trading date before printing this Proxy Statement, such conversion price
represents a 36% discount. The respective discounts on the warrant exercise
price of $2.50 per share are 20% (based on the closing price for the NEG Common
Stock on June 6, 1996) and 29% (based on the closing price for the NEG Common
Stock on August 5, 1996).
There can be no assurance that the purchase price received by NEG in the
NEG Equity Private Placement represents the fair market value of the securities
sold by NEG since no market for the NEG Series D Preferred or the NEG Series E
Preferred exists and all securities issued, including the NEG Common Stock to be
received upon conversion of the NEG Series D Preferred or NEG Series E Preferred
and upon exercise of the warrants, will be restricted from resale for a period
of two years unless the holders exercise their registration rights. Nonetheless,
the Board of Directors of NEG (with Messrs. Sinnott and Schafer abstaining with
respect to the purchase by the Kayne Anderson Investors) believes that the
purchase price agreed upon for the securities in the NEG Equity Private
Placement is similar to that which would have been reached with independent
third parties, the discount is within the range of discounts typical to private
placements of securities and of those given to other purchasers of NEG Common
Stock that were not NEG related parties, the transactions are fair to NEG, and
provide the equity needed to satisfy the condition to funding contained in the
Commitment to raise additional equity. All of the members of the NEG Board of
Directors who are not affiliated with the investors in the NEG Equity Private
Placement approved the terms of the NEG Equity Private Placement. See "The
Merger Proposals -- Transactions Related to the Merger -- NEG Equity Private
Placement."
CONTROL BY PRINCIPAL SHAREHOLDERS
Upon completion of the Merger, Richard A. Kayne, as the President and a
director of KAIM ("Kayne"), the general partner of KAIM Non-Traditional L.P.
("L.P."), and investment adviser to the Kayne Anderson Investors and the other
investment partnerships holding the NEG Series B Preferred and NEG Series C
Preferred, and KAIM, as general partner of L.P., will be deemed beneficially to
own approximately 7,802,991 shares, or 15.8%, of the NEG Common Stock on a fully
diluted basis. Due primarily to the class vote that each of the NEG Series B
Preferred and NEG Series C Preferred has with respect to certain extraordinary
transactions, such as mergers, the KAIM affiliates may be able, either by
themselves or in concert with others, to delay or prevent a change in control of
NEG. In addition, the KAIM affiliates, as the owners of the NEG B Preferred and
NEG Series C Preferred, beneficially share the right to elect one-third of the
NEG Board of Directors if, with respect to four dividend payments, NEG does not
pay dividends or pays them in shares of NEG Series B Preferred or NEG Series C
Preferred, as the case may be. If the holders of the NEG Series B Preferred and
NEG Series C Preferred are each entitled to exercise this right, however, the
holders of NEG
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Series C Preferred may not exercise their rights until the rights of the holders
of the NEG Series B Preferred terminate. One payment on the NEG Series B
Preferred has been paid in NEG Series B Preferred. In addition, until the Term
Loan under the NEG New Credit Facility is paid, which is scheduled to occur in
February 1997, NEG is prohibited from making cash dividend payments. As a
result, unless such condition is waived or NEG prepays the Term Loan, any
payment of dividends on the NEG Series B Preferred and the NEG Series C
Preferred due in December 1996 will have to be made in shares of preferred
stock. If such payment is made in shares, holders of the NEG Series B Preferred
will have received two of the four payments triggering the right to appoint
one-third of the NEG Board of Directors and holders of the NEG Series C
Preferred will have received one such payment. See "Description of Capital
Stock -- NEG."
Upon completion of the Merger, under the Exchange Act, High River,
Riverdale and Icahn will be deemed beneficially to own approximately 8,212,544
shares, or 16.6%, of the NEG Common Stock on a fully diluted basis. The member
of the NEG Board of Directors appointed by High River has the right to veto any
voluntary bankruptcy filing by NEG, which filing might be in the best interests
of NEG or its shareholders. In addition, High River will have the right to elect
one-half of the members of the Board of Directors of NEG plus one member
(including the member appointed by the holders of NEG Series D Preferred) if
certain events occur and High River chooses to exercise the NEG Series D
Preferred Contingent Voting Rights. See "Description of Capital Stock -- NEG."
If such NEG Series D Preferred Contingent Voting Rights are exercised, Icahn
affiliates will control the Board and may be able to delay, prevent or cause a
change in control of NEG and such exercise may cause the exclusion of the NEG
Common Stock from the Nasdaq National Market. See "-- No Market for Shares if
NEG Series D Preferred Contingent Voting Rights Exercised."
If NEG experiences financial difficulties for a prolonged period of time so
that the NEG Series D Preferred Contingent Voting Rights are triggered and
exercised and if NEG fails to make four dividend payments, or makes such
payments in stock, with respect to the NEG Series B Preferred or the NEG Series
C Preferred, High River and KAIM affiliates will have the right to elect at
least 83% of the NEG Board of Directors.
Due to their respective ownership positions and the lack of other holders
of significant blocks of NEG Common Stock, even without exercise of the
additional voting rights they may acquire if NEG experiences certain financial
difficulties, either or all of the Icahn affiliates, on the one hand, and the
KAIM affiliates, on the other hand, may be able, in concert with others, to
direct the election of the entire Board of Directors of NEG and, in general, to
determine the outcome of other matters submitted to NEG shareholders for
approval, including mergers, consolidations or the sale of all or substantially
all of NEG's assets or to delay or prevent a change in control of NEG. See
"Security Ownership of Certain Beneficial Owners and Management -- NEG."
NO MARKET FOR SHARES IF NEG SERIES D PREFERRED CONTINGENT VOTING RIGHTS
EXERCISED
The NEG Common Stock currently is listed for trading on the Nasdaq National
Market. The Nasdaq has a voting rights policy that prohibits continued listing
of securities of issuers that disenfranchise public common stockholders by any
corporate action or issuance that disparately reduces or restricts the voting
rights of existing common stock shareholders (the "Voting Rights Policy").
Holders of the NEG Series D Preferred have the right to exercise the NEG
Series D Preferred Contingent Voting Rights. See "Description of Capital
Stock -- NEG -- NEG Series D Preferred." If rights similar to the NEG Series D
Preferred Contingent Voting Rights were to be granted to holders of common stock
of an issuer and such holders had not paid for their proportionate share of the
vote, the Nasdaq would deem the exercise of such rights a violation of the
Voting Rights Policy.
The Voting Rights Policy does not apply, however, to any class of security
having a preference or priority over the issuer's common stock as to dividends,
interest payments, redemption or payments on liquidation, if the voting rights
of such securities only become effective as a result of specified events which
reasonably can be expected to jeopardize the issuer's financial ability to meet
its payment obligations to that class of securities. NEG believes that the NEG
Series D Preferred falls within this exclusion from the Voting Rights Policy, as
it has a liquidation preference over NEG Common Stock and the events triggering
the NEG
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Series D Preferred Contingent Voting Rights reasonably can be expected to
jeopardize NEG's ability to pay the liquidation preference. The Nasdaq has
advised NEG, however, that while it does not consider the grant of the NEG
Series D Preferred Contingent Voting Rights a violation of the Voting Rights
Policy which would cause the Nasdaq to take any action, any exercise of those
rights would constitute a violation of the Voting Rights Policy as currently
interpreted by the Nasdaq. As a result, the Nasdaq may exclude the NEG Common
Stock from trading on the Nasdaq National Market. If that happens, no market may
exist for the NEG Common Stock.
The Nasdaq may suspend or terminate inclusion of an otherwise qualified
security on the Nasdaq National Market and may halt trading if an issuer files
for protection under any provision of the federal bankruptcy laws and under
certain other circumstances that indicate a listed issuer is experiencing
financial difficulties. Thus, the Nasdaq already has discretion to suspend the
listing of the NEG Common Stock under some of the circumstances under which NEG
Series D Preferred Contingent Voting Rights may be exercised. Nonetheless, there
are other circumstances under which such rights may be exercised, such as loan
agreement defaults, where no other Nasdaq policy would expressly exclude the NEG
Common Stock from trading on the Nasdaq National Market.
If the Nasdaq excluded the NEG Common Stock from the Nasdaq National
Market, NEG would explore other options to provide a means to trade shares of
NEG Common Stock, including trading the NEG Common Stock in the over the counter
market or in the pink sheets or providing other means by which potential sellers
and buyers of NEG Common Stock may contact each other for purposes of trading in
the NEG Common Stock. There can be no assurance these means will provide a
market for, or not adversely affect the price of, the NEG Common Stock.
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GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Boards of Directors of NEG and Alexander for use in connection
with, respectively, the NEG Meeting and the Alexander Meeting, each of which is
to be held on August 29, 1996, and any adjournment of either Meeting. This Proxy
Statement is first being sent to the shareholders of NEG and Alexander on or
about August 9, 1996.
THE NEG PROXY IS SOLICITED ON BEHALF
OF THE BOARD OF DIRECTORS OF NEG,
AND THE ALEXANDER PROXY IS
SOLICITED ON BEHALF OF THE BOARD
OF DIRECTORS OF ALEXANDER
At the Meetings, the shareholders of each of NEG and Alexander will
consider and vote upon the approval and adoption of its Merger Proposal relating
to the Merger Agreement among NEG, NEG-OK and Alexander pursuant to which
Alexander would be merged with and into NEG-OK. Upon consummation of the Merger,
each outstanding share of Alexander Common Stock, together with all Associated
Rights, will be converted into 1.7 shares of NEG Common Stock. See "The Merger
Proposals." The NEG shareholders will also consider the NEG Director Election
Proposal, the NEG Certificate of Incorporation Amendment Proposal and the NEG
Auditor Ratification Proposal. See "NEG Director Election Proposal;" "NEG
Certification of Incorporation Amendment Proposal;" and "NEG Auditor
Ratification Proposal." The shareholders of NEG and Alexander also will consider
and vote upon such other business as may properly come before the Meetings or
any adjournment thereof.
The Board of Directors of NEG has unanimously determined that the issuance
of NEG Common Stock in the Merger, the Merger, the Merger Agreement, and the
transactions contemplated thereby are fair to and in the best interests of NEG
and its shareholders and unanimously recommends that the shareholders of NEG
approve the NEG Merger Proposal. The Board of Directions of NEG also unanimously
recommends that its shareholders vote for the NEG Director Election Proposal,
the NEG Certificate of Incorporation Amendment Proposal and the NEG Auditor
Ratification Proposal.
The Board of Directors of Alexander has unanimously determined that the
Merger Agreement and the transactions contemplated thereby are fair to and in
the best interests of Alexander and its shareholders and unanimously recommends
that the shareholders of Alexander approve the Alexander Merger Proposal.
DATE, TIME AND PLACE OF NEG MEETING AND ALEXANDER MEETING
The NEG Meeting will be held at the Senator's Lecture Hall, Wyndham Anatole
Hotel, 2201 Stemmons Freeway, Dallas, Texas 75207, on August 29, 1996, at 10:00
a.m., Central Time. The Alexander Meeting will be held at the Governor's Lecture
Hall, Wyndham Anatole Hotel, 2201 Stemmons Freeway, Dallas, Texas 75207, August
29, 1996, at 10:00 a.m., Central Time.
RECORD DATE AND OUTSTANDING SHARES
NEG
NEG shareholders of record at the NEG Record Date are entitled to notice of
and to vote at the NEG Meeting. On the NEG Record Date there were 12,170,682
issued and outstanding shares of NEG Common Stock, 52,500 issued and outstanding
shares of NEG Series B Preferred and 40,000 issued and outstanding shares of NEG
Series C Preferred held by NEG shareholders entitled to vote at the NEG Meeting.
Alexander
Alexander shareholders of record at the Alexander Record Date are entitled
to notice of and to vote at the Alexander Meeting. On the Alexander Record Date
there were 12,466,262 shares of Alexander Common Stock issued and outstanding.
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VOTING PROXIES
A proxy card accompanies this Proxy Statement. All properly executed
proxies that are not revoked will be voted at the NEG Meeting or the Alexander
Meeting, as the case may be, and at any postponements or adjournments thereof in
accordance with the instructions contained therein. Proxies containing no
instructions regarding the proposals specified in the form of proxy will be
voted, in the case of the NEG Meeting, in favor of the NEG Proposals and, in the
case of the Alexander Meeting, in favor of the Alexander Merger Proposal. If any
other matters are properly brought before either the NEG Meeting or the
Alexander Meeting, all proxies will be voted in accordance with the judgment of
the persons voting the proxies. Either Meeting may be adjourned, and additional
proxies solicited, if the vote necessary to approve a proposal has not been
obtained. Any adjournment of either Meeting will require the affirmative vote of
the holders of at least a majority of the shares represented, whether in person
or by proxy, at such Meeting (regardless of whether those shares constitute a
quorum).
An NEG shareholder or an Alexander shareholder who has executed and
returned a proxy may revoke such proxy at any time before it is voted at the NEG
Meeting or the Alexander Meeting, respectively, by executing and returning a
proxy bearing a later date, by filing written notice of such revocation with the
Secretary of NEG or the Secretary of Alexander, as appropriate, stating that
such proxy is revoked, or by attending the NEG Meeting or the Alexander Meeting,
as the case may be, and voting in person.
QUORUM AND REQUIRED VOTE
NEG
Quorum. The presence, in person or proxy, of holders of NEG Common Stock,
NEG Series B Preferred and NEG Series C Preferred, representing not less than a
majority of the outstanding shares of each of such class or series on the NEG
Record Date, will constitute a quorum for the NEG Meeting.
Required Vote. At the NEG Meeting, the holders of NEG Common Stock on the
NEG Record Date will be entitled to one vote per share on each matter of
business properly brought before the NEG Meeting including one vote per share on
each of the NEG Proposals. Holders of the NEG Preferred Stock are entitled to
one vote for each share of NEG Preferred Stock held on the NEG Record Date, but
only as to matters upon which by law they are entitled to vote or as specified
in the NEG Certificate of Incorporation. Under the NEG Certificate of
Incorporation, approval of the holders of a majority of the shares of the NEG
Series B Preferred and the NEG Series C Preferred, each series voting separately
as a class, is required for adoption by the NEG shareholders of the NEG Merger
Proposal and the NEG Certificate of Incorporation Amendment Proposal.
The Delaware General Corporation Law ("DGCL") does not require the
shareholders of NEG to approve the Merger since Alexander is being merged into
NEG-OK, and not into NEG. Nonetheless, criteria relating to the trading of the
NEG Common Stock on the Nasdaq National Market require NEG to submit the
issuance of shares of NEG Common Stock to Alexander shareholders pursuant to the
Merger to a vote of the NEG shareholders because (i) the number of shares of NEG
Common Stock to be issued in the Merger exceeds 20% of the number of shares of
NEG Common Stock outstanding prior to the Merger and (ii) a greater than five
percent shareholder of NEG, High River, also has more than a five percent
interest in Alexander. Adoption by NEG of the NEG Merger Proposal requires (i)
the favorable vote of the holders of a majority of the outstanding shares of NEG
Common Stock present in person or represented by proxy at the NEG Meeting, (ii)
the favorable vote of the holders of a majority of the outstanding shares of NEG
Series B Preferred, voting separately as a class, and (iii) the favorable vote
of the holders of a majority of the outstanding shares of NEG Series C
Preferred, voting separately as a class.
Adoption by NEG of the NEG Certificate of Incorporation Amendment Proposal
requires the favorable vote of the holders of a majority of the outstanding
shares of (i) NEG Common Stock, (ii) NEG Series B Preferred, voting separately
as a class, and (iii) NEG Series C Preferred, voting separately as a class. The
favorable vote of the holders of a majority of the outstanding shares of NEG
Common Stock present in person
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or represented by proxy at the NEG Meeting is required for adoption by NEG of
the NEG Auditor Ratification Proposal.
Holders of NEG Common Stock have the right to elect five members of the NEG
Board of Directors, as proposed in the NEG Director Election Proposal. Every
holder of NEG Common Stock on the NEG Record Date shall have the right to vote,
in person or by proxy, the number of shares owned by such holder for as many
persons as there are directors to be elected at that time. Cumulative voting in
the election of directors is not permitted. Directors are elected by a plurality
of the votes cast by the shares entitled to vote in the election.
Abstentions and broker non-votes will not be counted as votes either "for"
or "against" any matters coming before the NEG Meeting, nor will such
abstentions and broker non-votes be counted toward determining a quorum. With
respect to the NEG Certificate of Incorporation Amendment Proposal, abstentions
and broker non-votes will have the effect of a "no" vote since those proposals
must be authorized and approved by the affirmative vote of not less than a
majority of the votes of each class entitled to be cast at the NEG Meeting.
FAILURE TO RETURN THE ENCLOSED PROXY OR TO VOTE AT THE NEG MEETING WILL HAVE THE
SAME EFFECT AS A VOTE AGAINST THE NEG CERTIFICATE OF INCORPORATION AMENDMENT
PROPOSAL.
Vote by NEG Directors, Officers and Affiliates. At the NEG Record Date,
directors, officers and affiliates of NEG had the right to vote, through proxy,
beneficial ownership or otherwise, 2,619,716 shares of NEG Common Stock, or
21.5% of the issued and outstanding NEG Common Stock. NEG has been advised that
the directors, officers and affiliates of NEG intend to vote FOR all NEG
Proposals described in this Proxy Statement and that the holders of the NEG
Series B Preferred and the NEG Series C Preferred intend to vote for the NEG
Merger Proposal and the NEG Certificate of Incorporation Amendment Proposal. See
"Security Ownership of Certain Beneficial Owners and Management -- NEG."
Alexander
Quorum. The presence, in person or proxy, of holders of Alexander Common
Stock representing not less than a majority of the outstanding shares of
Alexander Common Stock on the Alexander Record Date will constitute a quorum at
the Alexander Meeting.
Required Vote. Voting rights for Alexander are vested in the holders of
Alexander Common Stock, with each share entitled to one vote on each matter to
be voted upon by the Alexander shareholders. The favorable vote of the holders
of a majority of the outstanding shares of Alexander Common Stock is required
for adoption by Alexander of the Alexander Merger Proposal.
Abstentions and broker non-votes will not be counted as votes either "for"
or "against" any matters coming before the Alexander Meeting, nor will such
abstentions and broker non-votes be counted toward determining a quorum. With
respect to the Alexander Merger Proposal, abstentions and broker non-votes will
have the effect of a "no" vote since the Alexander Merger Proposal must be
authorized and approved by the affirmative vote of not less than a majority of
the votes entitled to be cast at the Alexander Meeting. FAILURE TO RETURN THE
ENCLOSED PROXY OR TO VOTE AT THE ALEXANDER MEETING WILL HAVE THE SAME EFFECT AS
A VOTE AGAINST THE ALEXANDER MERGER PROPOSAL.
Vote by Alexander Directors, Officers and Affiliates and by NEG. At the
Alexander Record Date, directors, officers and affiliates of Alexander
beneficially owned 675,453 of the outstanding shares of Alexander Common Stock,
representing 5.4% of the outstanding shares of Alexander Common Stock entitled
to vote, and have indicated their intent to vote all of such shares for adoption
of the Alexander Merger Proposal. See "Security Ownership of Certain Beneficial
Owners and Management -- Alexander." In addition, on the Alexander Record Date
NEG beneficially owned 62,200 shares of Alexander Common Stock. NEG has
indicated its intent to vote all of such shares for adoption of the Alexander
Merger Proposal.
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PROXY SOLICITATION; EXPENSES
Solicitation of proxies may be made by mail by directors, officers and
employees of NEG and Alexander. In addition to the use of the mails, proxies may
be solicited by personal interview, telephone, fax and telegraph, and by
directors, officers and regular employees of NEG and Alexander, without special
compensation therefor, except that directors, officers and employees of NEG and
Alexander may be reimbursed for out-of-pocket expenses in connection with any
solicitation of proxies. NEG and Alexander will request banking institutions,
brokerage firms, custodians, trustees, nominees and fiduciaries to forward
solicitation material to the beneficial owners of capital stock held of record
by such persons, and NEG and Alexander will reimburse reasonable forwarding
expenses upon the request of such record holders.
Although neither NEG nor Alexander presently anticipates doing so, either
or both may retain a proxy solicitation firm to aid in the solicitation of
proxies from its shareholders. If such a firm is retained by either NEG or
Alexander, it would be paid customary fees (which are not expected to exceed
$10,000) and would be reimbursed for out-of-pocket expenses.
THE MERGER PROPOSALS
The following description of the Merger contains, among other information,
summaries of certain provisions of the Merger Agreement, a copy of which and the
amendment thereto are attached to this Proxy Statement as Addendum A-1 and
Addendum A-2 and incorporated herein by reference. The Merger Agreement sets
forth the representations, warranties and covenants of NEG and Alexander, the
conditions to consummation of the Merger and the manner and basis of converting
shares of Alexander Common Stock and all Associated Rights into shares of NEG
Common Stock. The information in this Proxy Statement with respect to the Merger
Agreement is qualified in its entirety by reference to the complete text
thereof.
NEG -- BACKGROUND OF AND REASONS FOR THE MERGER
The Board of Directors of NEG has long held the strategic goal of building
a large base of oil and gas reserves through the acquisition of oil and gas
properties and companies with oil and gas producing properties and the
exploration and exploitation of the properties, and has encouraged management to
explore possible merger opportunities with NEG being the surviving company to
accomplish that goal. After investigating a limited number of possible merger
prospects, NEG management determined that Alexander represented the best current
prospect for a merger consistent with its strategic goal although such goal is
an ongoing goal, and NEG will from time to time consider and initiate
discussions with other companies for the acquisition of oil and gas companies
and properties. In addition, Alexander would provide the critical mass to enable
NEG to be attractive to financial institutions and underwriters, thereby giving
it financing sources that could enhance NEG's operating income from continued
operations.
In November 1994, NEG's Chief Executive Officer was authorized to submit a
letter of intent to Alexander which proposed a merger of the two companies.
Alexander issued a press release on November 30, 1994, announcing that it was
receiving and considering proposals. All interested parties were required to
sign confidentiality and standstill agreements in order to obtain access to
information concerning Alexander. NEG declined to sign such agreements at that
time.
In early fall 1995 NEG again had contact with Alexander as a result of a
reintroduction to Alexander by Gaines Berland, Inc., a financial consultant to
NEG ("Gaines Berland"). See "The Merger Proposals -- Interest of Certain Persons
in the Merger." In December 1995, NEG submitted another letter of intent to
Alexander. At that time, Alexander indicated an interest in opening discussions
with NEG concerning the possibility of a merger between the two companies.
Following this contact, further discussions ensued to determine the seriousness
of the possibility of the potential transaction. Such discussions resulted in a
signed letter of intent between the two companies dated as of December 29, 1995
calling for the merger of Alexander with NEG and the receipt by the Alexander
shareholders of 1.8 shares of NEG Common Stock in exchange for one share of
Alexander Common Stock. The exchange ratio was determined in negotiations
between Messrs. Bender and Bob Alexander and other representatives of NEG and
Alexander largely based upon the
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relative net asset values per share of the outstanding shares of NEG Common
Stock and Alexander Common Stock, with the relative net asset values being
determined to be roughly 35% for NEG and 65% for Alexander based on the then
outstanding number of shares of NEG Common Stock and Alexander Common Stock. A
subsequent amendment to the letter of intent dated March 25, 1996, changed the
exchange ratio of NEG Common Stock from 1.8 to 1.7 for each share of Alexander,
as a result of the need for additional working capital primarily due to downward
revisions in estimates of Alexander's reserves and cash flows. From January 1996
through June 6, 1996 NEG conducted extensive investigation of all aspects of
Alexander's financial condition, personnel and operations. Although essentially
complete at the date of signing the Merger Agreement, that investigation will
continue until the Closing of the Merger.
At a special meeting of the Board of Directors of NEG held on June 6, 1996,
the Board of Directors of NEG considered the Merger with Alexander. The Board
had previously been provided with a draft of the Merger Agreement, a draft of
Oppenheimer's fairness opinion and written presentation, a draft of the tax
opinion of Strasburger & Price, L.L.P. and a draft of the Commitment. The
meeting was attended in person or by telephone by all of the directors of NEG.
Also in attendance were Randy Carter, General Counsel and Corporate Secretary of
NEG, and representatives of the law firm of Strasburger & Price, L.L.P. After
hearing the oral presentations from management and Oppenheimer personnel, the
Board of Directors of NEG authorized the issuance of NEG Common Stock in the
Merger, the Merger and the execution and delivery of the Merger Agreement in
substantially the form as was presented to the Board of Directors.
FACTORS CONSIDERED BY THE NEG BOARD OF DIRECTORS; BENEFITS AND DETRIMENTS OF THE
MERGER
In reaching its determination that the issuance of NEG Common Stock in the
Merger, the Merger, the Merger Agreement and the transactions contemplated
thereby are fair to and in the best interests of the NEG shareholders, the NEG
Board of Directors considered, among other significant factors and
considerations, the following: (i) the inability of NEG to achieve a critical
mass in size by internal growth, which, in the opinion of the NEG Board of
Directors, was necessary in order to attract and secure financing opportunities
for the further growth and expansion of NEG, including debt or equity financing
to pursue property or business acquisitions, if available, on terms that would
be favorable to the shareholders; (ii) the ability to obtain significant
technical and administrative staffing from Alexander, particularly in geology,
exploration and gas marketing; (iii) the ability to obtain through the Merger a
balanced oil and gas company, since NEG's reserves are primarily oil, while
Alexander's are primarily gas; (iv) an increase in the liquidity of the NEG
shares when combined with Alexander shares; (v) the opportunities for operating
efficiencies that could result from the Merger, particularly through the
integration of office facilities and support functions of the two companies;
(vi) Alexander's operating losses; (vii) the reasonableness of achieving
prospective future revenues from the combined operation; (viii) Alexander's
acquisitions during the past several years; (ix) the development opportunities
with respect to Alexander's properties; (x) the recent and prior market prices
of NEG Common Stock and Alexander Common Stock; (xi) the structure of the Merger
and the terms of the Merger Agreement, which were the result of arms-length
negotiations between NEG and Alexander; (xii) the opinion of Oppenheimer
described below; and (xiii) the expectation that the Merger will be accomplished
as a non-taxable transaction for federal income tax purposes. Possible
detriments to the Merger and the related transactions described in this Proxy
Statement are discussed under "Risk Factors." However, many of those risks apply
with respect to NEG continuing as an independent company and do not relate
specifically to the Merger. Those factors specific to NEG after the Merger are
"Future Capital Requirements" (but only as to the magnitude of capital
required); "Financial Reporting Impact of Full Cost Method of Accounting;"
"Increase in Scope of Operations;" "Shares Eligible for Public Sale;" "Related
Parties Involved and No Assurance of Fair Market Value Received in NEG Equity
Private Placement;" "Control by Principal Shareholders" and "No Market for
Shares if NEG Series D Preferred Contingent Voting Rights Exercised." In
determining whether the Merger is fair to and in the best interests of its
shareholders, the NEG Board of Directors considered the factors above as a whole
and did not assign specific or relative weights to such factors other than the
NEG Board of Directors determined that the benefits of the Merger outweighed its
disadvantages.
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OPINION OF OPPENHEIMER
Oppenheimer initially delivered a draft opinion and orally reported its
findings to NEG's Board of Directors on June 6, 1996, which was confirmed in
writing as of June 6, 1996 (the "Oppenheimer Opinion") to the effect that the
consideration paid to Alexander shareholders is fair from a financial point of
view to the holders of NEG Common Stock. The Oppenheimer Opinion, which was
directed to the Board of Directors of NEG, relates only to an assessment of the
financial terms of the Merger Agreement which were determined by NEG and
Alexander (and which were not recommended with respect to the amount or form of
consideration by Oppenheimer) and does not constitute a recommendation to any
shareholder of NEG as to how such shareholder should vote on any particular
matter presented in this Proxy Statement.
The Oppenheimer Opinion is reproduced in full as Addendum B to this Proxy
Statement. NEG shareholders are urged to read the Oppenheimer Opinion carefully
and in its entirety for a description of the procedures followed, the factors
considered, the assumptions and qualifications made by Oppenheimer of its
opinion and other factors relating to Oppenheimer's engagement by NEG's Board of
Directors. The Oppenheimer Opinion contemplates facts and conditions existing as
of June 6, 1996. Events and conditions subsequent to such date have not been
considered and may materially alter the assumptions relied upon and the
conclusions stated by Oppenheimer in the Oppenheimer Opinion. Oppenheimer has no
obligation to update, revise, or reaffirm the fairness opinion rendered in the
Oppenheimer Opinion, and NEG does not intend to seek any such updating,
revisions or reaffirmation by Oppenheimer.
In arriving at its opinion, Oppenheimer reviewed the Merger Agreement and
held discussions with certain senior officers, directors and other
representatives and advisors of NEG and of Alexander concerning the business,
operations and prospects of NEG and of Alexander. Oppenheimer examined certain
publicly available business and financial information relating to NEG and
Alexander as well as certain financial forecasts and other data which were
provided to Oppenheimer by the senior managements of NEG and of Alexander.
Oppenheimer reviewed the financial terms set forth in the Merger Agreement in
relation to, among other things: current and historical market prices and
trading volumes of the NEG and Alexander Common Stock; NEG's and Alexander's
historical and projected earnings and cash flow; and the capitalization and
financial condition of NEG and of Alexander. Oppenheimer also considered, to the
extent publicly available, the financial terms of certain other similar
transactions recently effected which Oppenheimer considered comparable to the
transaction set forth in the Merger Agreement and analyzed certain financial,
stock market and other publicly available information relating to the businesses
of other companies whose operations it considered comparable to those of NEG and
Alexander. In addition to the foregoing, Oppenheimer conducted such other
analyses and examinations and considered such other financial, economic and
market criteria as Oppenheimer deemed necessary to arrive at its opinion.
In rendering its opinion, Oppenheimer assumed and relied, without
independent verification, upon the accuracy and completeness of all financial
and other information publicly available, including such information furnished
to Oppenheimer or otherwise discussed with Oppenheimer by management of NEG and
of Alexander. With respect to financial forecasts and other information so
provided or otherwise discussed with Oppenheimer, Oppenheimer assumed, with the
consent of the Board of Directors of NEG, that such forecasts and other
information were reasonably prepared to reflect the best currently available
estimates and judgments of the management of NEG and of Alexander as to the
expected future financial performance of NEG and Alexander. Other than reserve
reports prepared by Netherland & Sewell as of December 31, 1995 for NEG and as
of January 1, 1996 for Alexander, which are attached hereto as Addendum E and
Addendum F, respectively (the "Reserve Reports"), Oppenheimer did not make and
was not provided with an independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of NEG or of Alexander nor has Oppenheimer
made physical inspection of all of the properties or assets of NEG or of
Alexander.
The following is a summary of the material factors considered and principal
financial analyses performed by Oppenheimer to arrive at the Oppenheimer
Opinion. Oppenheimer performed certain procedures, including each of the
financial analyses described below, and reviewed with the management of NEG the
assumptions on which such analyses were based and other factors, including the
historical financial results and the estimated financial results for NEG and
Alexander.
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The Oppenheimer Opinion was necessarily based on economic, market,
financial and other conditions as they existed on June 3, 1996, and on the
information made available to Oppenheimer as of such date and on the review and
analyses conducted by Oppenheimer as of such date. Oppenheimer's analysis of the
Merger indicated, as of June 3, 1996, an implied price pursuant to terms of the
Merger for each share of Alexander Common Stock of $4.68 (the "Consideration"),
based on an exchange ratio of 1.7 shares of NEG Common Stock per one share of
Alexander Common Stock and a $2.75 per share price for NEG Common Stock.
Although the Consideration is used as a point of comparison in some of the
analyses described below, the Oppenheimer Opinion does not depend upon the price
of the NEG Common Stock as long as it is between $2.40 and $3.60 per share.
Analysis of Certain Publicly Traded Companies
To provide contextual data and comparative market information, Oppenheimer
compared selected historical and projected operating and financial ratios for
Alexander to the corresponding data and ratios of certain publicly traded oil
and natural gas companies considered by Oppenheimer to be reasonably comparable
to Alexander, including Abraxas Petroleum Corporation, Bellwether Exploration
Company, Cairn Energy USA, Inc., Chieftain International, Inc., Coho Energy,
Inc., Comstock Resources, Inc., Flores & Rucks, Inc., Lomak Petroleum, Inc.,
McFarland Energy, Inc., Panaco, Inc., PetroCorp, Inc., Plains Resources, Inc.,
Stone Energy Corporation, Swift Energy Company, Texas Meridian Resources
Corporation and Wiser Oil Company (the "Comparable Companies").
Such analysis included, among other things, consideration of the ratios of
the market capitalization of the common stock as of June 3, 1996 (the "Market
Capitalization") and operating cash flow ("OCF") for the latest twelve month
period ("LTM") applicable. OCF is defined as net income before extraordinary
items plus deferred taxes, depreciation, depletion and amortization and any
other non-cash charges excluding changes to working capital. Such analysis also
compared the ratios of the Market Capitalization to estimated fiscal years 1996
and 1997 OCF (as derived principally from Oppenheimer research analysts'
estimates and, in certain cases, estimates compiled by Institutional Brokers
Estimating Service (I.B.E.S.)). In addition, such analysis included
consideration of the ratios of the Market Capitalization plus total debt and
preferred stock less cash and cash equivalents ("Aggregate Value") to LTM
EBITDA. Such analysis also included consideration of the ratio of Aggregate
Value to PV10%.
Although Oppenheimer used the information with respect to these companies
for comparison purposes, none of such companies are identical to Alexander. Such
analysis indicated that the average values excluding highest and lowest values
(the "adjusted average values") of Market Capitalization as a multiple of LTM
OCF and estimated fiscal years 1996 and 1997 OCF, were 9.1x, 6.0x and 4.3x,
respectively, as compared to the implied multiples for Alexander, based on the
Consideration, of 9.0x, 6.6x and 6.7x, respectively. The adjusted average values
of Aggregate Value to LTM EBITDA and Aggregate Value to PV10% indicated by the
analysis were 9.4x and 131%, respectively, as compared to the implied multiples
for Alexander, based on the Consideration, of 9.9x and 122%, respectively.
Transaction Analysis
Oppenheimer reviewed publicly available information relating to certain
acquisition transactions of oil and natural gas companies which were announced
from January 1994 through May 1996. These transactions include Apache
Corporation and Phoenix Resource Companies, Inc.; HS Resources, Inc. and Tide
West Oil Co.; Enron Oil & Gas Company and Coda Energy, Inc.; Hugoton Energy
Corporation and Consolidated Oil & Gas, Inc.; YPF Sociedad Anonima and Maxus
Energy Corporation; Lomak Petroleum, Inc. and Red Eagle Resources Corporation;
United Meridian Corporation and General Atlantic Resources, Inc.; Alexander
Energy Corporation and American Natural Energy Corporation; and Devon Energy
Corporation and Alta Energy Corporation. The selected transactions were not
intended to represent the complete list of oil and natural gas transactions
which have occurred or been announced, rather such transactions included only
selected recent transactions involving publicly traded oil and natural gas
companies engaged in oil and gas exploration and production activities. Such
companies were used in this analysis because they were deemed by Oppenheimer to
operate in similar producing basins or have similar financial and operating
characteristics to NEG and Alexander.
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Oppenheimer reviewed the consideration paid in such transactions in terms
of the price paid for the common stock ("Equity Purchase Price") as a multiple
of LTM OCF. In addition, Oppenheimer reviewed the Equity Purchase Price plus
total debt, preferred stock and transaction costs less cash and cash equivalents
("Total Transaction Value") of such transactions as a multiple of LTM EBITDA,
PV10% and total proved reserves.
The analysis of Equity Purchase Price as a multiple of LTM OCF indicated a
range of these transaction values of 6.0x to 24.7x and an adjusted average value
of 9.9x compared to the implied value for Alexander, based on the Consideration,
of 10.0x. The analysis of Total Transaction Value to LTM EBITDA, PV10% and total
proved reserves indicated a range of these transaction values of 4.5x to 19.1x
and an adjusted average value of 9.6x, 50% to 188% and an adjusted average value
of 112% and $2.19 to $13.18 per Boe and an adjusted average value of $4.83 per
Boe, respectively, as compared to the implied value for Alexander, based on the
Consideration, of 10.6x, 125% and $5.66 per Boe.
No company or transaction used in the analysis described above was directly
comparable to NEG, Alexander or the proposed transaction. Accordingly, analysis
of the results of the foregoing was not simply mathematical nor necessarily
precise; rather, it involved complex consideration and judgments concerning
differences in financial and operating characteristics of companies and other
factors that could affect public trading values.
Pro Forma Merger Analysis
Oppenheimer analyzed certain pro forma financial effects resulting from the
Merger. In conducting its analysis, Oppenheimer relied upon certain assumptions
described above and financial projections and tax and accounting assumptions
provided by the management of NEG. Oppenheimer analyzed the pro forma financial
effect of combining NEG and Alexander, based on the Consideration; and the
analysis indicated, among other things, that the estimated fiscal year 1996 and
1997 OCF per share for the pro forma combined company would be modestly less and
greater, respectively, as compared to estimated fiscal year 1996 and 1997 OCF
per share for NEG alone.
Net Asset Appraisal
Oppenheimer determined a net asset appraisal value for Alexander by
calculating a gross asset value net of long-term debt and other non-current
liabilities outstanding as estimated at the time of the Merger. Alexander's
gross asset value was based on (i) the PV10% of Alexander's proved reserves,
(ii) the net working capital estimated at the time of the Merger, and (iii)
certain other assets deemed appropriate by Oppenheimer. As a result, Oppenheimer
calculated a net asset appraisal value for Alexander of $51 million. In
addition, Oppenheimer reviewed the Equity Purchase Price as a multiple of the
net asset appraisal value for the Comparable Companies. The analysis of Market
Capitalization as a multiple of net asset value for the Comparable Companies
indicated an adjusted average value of 176% as compared to the implied value for
Alexander, based on the Consideration, of 117%.
The summary set forth above does not purport to be a complete description
of the analyses performed by Oppenheimer. The preparation of a fairness opinion
involves various determinations as to the most appropriate and relevant methods
of financial analysis and the application of these methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. The preparation of a fairness opinion does not involve a
mathematical evaluation or weighing of the results of the individual analyses
performed, but requires Oppenheimer to exercise its professional judgment based
on its experience and expertise in considering a wide variety of analyses taken
as a whole. Each of the analyses conducted by Oppenheimer was carried out in
order to provide a different perspective on the transaction and add to the total
mix of information available. Oppenheimer did not form a conclusion as to
whether any individual analysis, considered in isolation, supported or failed to
support an opinion as to fairness. Rather, in reaching its conclusion,
Oppenheimer considered the results of the analyses in light of each other and
ultimately reached its opinion based on the results of all analyses taken as a
whole. Oppenheimer did not place particular reliance or weight on any individual
analysis, but instead concluded that its analyses, taken as a whole, supported
its
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determination. Accordingly, notwithstanding the separate factors summarized
above, Oppenheimer believes that its analyses must be considered as a whole and
that selecting portions of its analyses and the factors considered by it,
without considering all analyses and factors, may create an incomplete view of
the evaluation process underlying its opinion. In performing its analyses,
Oppenheimer made numerous assumptions with respect to industry performances,
business and economic conditions and other matters. The analyses performed by
Oppenheimer are not necessarily indicative of actual values or future results,
which may be significantly more or less favorable than suggested by such
analyses.
NEG Financial Advisor Fee
The Board of Directors of NEG selected Oppenheimer as its financial advisor
because it is a nationally recognized investment banking firm that has
substantial experience in transactions similar to the Merger and is familiar
with NEG, its operations and the oil and natural gas industry. Pursuant to the
terms of an engagement letter dated April 15, 1996, NEG paid Oppenheimer $50,000
upon signing the engagement letter and $125,000 upon delivery of the Oppenheimer
Opinion. NEG also agreed to reimburse Oppenheimer promptly for all out-of-pocket
expenses (including the reasonable fees and out-of-pocket expenses of counsel)
incurred by Oppenheimer in connection with its engagement, and to indemnify
Oppenheimer and certain related persons against certain liabilities in
connection with its engagement, including liabilities under the federal
securities laws. In addition, if the transaction is not consummated within six
months of the engagement letter or if the consideration to be offered is
materially changed, Oppenheimer's continuation of its engagement letter would be
subject to NEG's and Oppenheimer's agreement to pay additional compensation to
Oppenheimer. The terms of the fee arrangement with Oppenheimer, which
Oppenheimer and NEG believe are customary in transactions of this nature, were
negotiated at arms' length between NEG and Oppenheimer, and the Board of
Directors of NEG was aware of such arrangement. Oppenheimer is currently
assisting NEG in evaluating post-Merger financing options and may provide
investment banking services to NEG in the future for which Oppenheimer will
receive customary fees. In the ordinary course of its business, Oppenheimer and
its affiliates may actively trade the securities of NEG, for its own account or
for the account of its customers and, accordingly, may at any time hold a long
or short position in such securities. Oppenheimer has informed NEG that certain
of its employees have, prior to their employment by Oppenheimer, performed
investment banking services for Alexander. NEG has acknowledged this fact and
has agreed to waive any potential conflicts relating to those prior services.
RECOMMENDATION OF NEG BOARD OF DIRECTORS
The Board of Directors of NEG believes that the terms of the Merger are
fair to, and in the best interests of, NEG and its shareholders. Accordingly,
the Board has unanimously approved the issuance of NEG Common Stock in the
Merger, the Merger and the Merger Agreement and unanimously recommends that NEG
shareholders vote FOR adoption of the NEG Merger Proposal.
ALEXANDER -- BACKGROUND OF AND REASONS FOR THE MERGER
In November 1994, Alexander received two acquisition proposals, including
one from NEG proposing to acquire all outstanding shares of Alexander Common
Stock for $7.00 per share in cash. On November 14, 1994, Alexander's board of
directors met to consider the proposals and the retention of an investment
banking firm as advisors. On November 15, 1994, Alexander issued a press release
concerning the proposals and announcing the retention of Prudential Securities
as its investment banker for the purpose of soliciting and considering proposals
and determining the best course of action for Alexander's shareholders. On
November 29, 1994, NEG revised its proposal to acquire Alexander's stock for
$5.00 in cash and $2.50 in "NEG 8% Subordinated Convertible Notes."
Alexander issued a press release on November 30, 1994, announcing that it
was receiving and considering proposals. All interested parties were required to
sign confidentiality and standstill agreements in order to obtain access to
information concerning Alexander. NEG declined to sign such agreements at that
time.
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After the execution of confidentiality agreements, representatives of
several companies visited the data room established by Alexander at its offices
in Oklahoma City, Oklahoma, containing material information about Alexander.
Such interested parties were also given complete access to the management and
other personnel of Alexander for the purpose of making additional inquiries and
obtaining other available information.
At a special meeting held on February 20, 1995, the Alexander Board of
Directors reviewed and discussed, among other things, the status of acquisition
inquiries and proposals. The discussion included a letter of intent from Abraxas
Petroleum Corporation ("Abraxas") that was deemed at that time to be
unacceptable by the Alexander Board of Directors. At a special meeting held on
March 13, 1995, that was also attended by Prudential Securities and McAfee &
Taft representatives, Prudential Securities advised Alexander that 55 companies
had been contacted and four acquisition proposals had been made. The Alexander
Board of Directors reviewed the proposal process to date and determined that it
was in the best interest of its shareholders to enter an exclusive 45-day
agreement with Abraxas to negotiate a possible merger and conduct due diligence.
On March 14, 1995, a press release was issued announcing the Abraxas agreement.
On May 10, 1995, Alexander announced that negotiations with Abraxas had been
terminated.
On May 18, 1995, the Alexander Board of Directors met to discuss other
options available to Alexander. At that meeting it was determined that no viable
offers were available to acquire Alexander and that Alexander should pursue a
proposed debt offering of $100 million of Senior Subordinated Notes (the "Senior
Subordinated Notes"). On June 29, 1995, the Alexander Board of Directors met to
discuss a letter of intent from Gothic Energy Corporation and a written
indication of interest from Paladin Energy Corp. After a lengthy discussion, it
was determined that Alexander could not pursue both merger negotiations and the
offering of the Senior Subordinated Notes. The Board of Directors, by
resolution, reiterated its support of the debt offering to the exclusion of all
other activities. On July 27, 1995, Alexander announced that a shareholders'
derivative suit had been filed against Alexander and its Board of Directors on
July 25, 1995, alleging breach of fiduciary duties for adoption of the Rights
Agreement, the Severance Agreements (as hereinafter defined), and the offering
of the Senior Subordinated Notes. On August 4, 1995, Alexander announced that it
had deferred the offering of the Senior Subordinated Notes.
On November 10, 1995, the Alexander Board of Directors met to discuss,
among other things, the renewed interest shown by four of its former merger
suitors, one of which was NEG. Alexander and NEG subsequently negotiated an
agreement in principle for the combination of the two companies and, thereafter,
Alexander and NEG executed a letter of intent to merge dated December 29, 1995.
Pursuant to the NEG letter of intent, the Alexander shareholders would receive
1.8 shares of NEG Common Stock in exchange for each share of Alexander Common
Stock. On February 15, 1996, the Alexander Board of Directors held a special
meeting to discuss, among other things, the extension of the NEG letter of
intent. Alexander announced on February 15, 1996 that the deadline was extended
to April 10, 1996. On March 25, 1996, the original letter of intent was modified
to reduce the exchange ratio from 1.8 to 1.7 shares of NEG Common Stock for each
share of Alexander Common Stock. The exchange ratio was determined in
negotiations between Messrs. Bender and Bob Alexander and other representatives
of NEG and Alexander largely based upon the relative net asset values per share
of the outstanding shares of NEG Common Stock and Alexander Common Stock, with
the relative net asset values being determined to be roughly 35% for NEG and 65%
for Alexander based on the then outstanding number of shares of NEG Common Stock
and Alexander Common Stock. The exchange ratio was reduced after reviewing
Alexander's expected reduction in cash flow resulting from a reduction in
production volumes. On May 6, 1996, Alexander announced that the standstill
provision of its agreement in principle with NEG expired April 30, 1996.
Alexander's Board of Directors decided that although exclusive negotiations with
NEG were not in the best interests of the Alexander shareholders, Alexander
would continue to negotiate a definitive agreement with NEG. Thereafter,
representatives of Prudential Securities met with representatives of NEG and
Alexander for the purpose of discussing their respective financial conditions,
reserves, development programs, strategies and other pertinent information for
the purpose of preparing its opinion on the Merger. From January 1996 through
June 6, 1996, Alexander conducted an extensive due diligence investigation of
NEG and negotiated the terms of the Merger Agreement.
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At a special meeting of the Board of Directors of Alexander held on June 6,
1996, the Alexander Board of Directors considered the definitive Merger
Agreement. The meeting was attended in person or by telephone by Bob G.
Alexander, Jim L. David, Robert A. West, David E. Grose, Roger G. Alexander and
Brian F. Egolf. Also in attendance were representatives of Prudential Securities
and McAfee & Taft. Representatives of Prudential Securities discussed the
matters considered, the limitations on and scope of Prudential Securities'
fairness analysis and delivered Prudential Securities' written opinion that the
consideration to be received in the Merger by the holders of Alexander Common
Stock was fair to such holders from a financial point of view. See "- Opinion of
Prudential Securities." After discussion, the Alexander Board of Directors
unanimously authorized Alexander's president and chief executive officer to
execute and deliver to NEG the Merger Agreement in substantially the form
presented to the Alexander Board of Directors.
FACTORS CONSIDERED BY THE ALEXANDER BOARD OF DIRECTORS; BENEFITS AND DETRIMENTS
OF THE MERGER
Among the factors considered by the Alexander Board of Directors in
evaluating the Merger were that the shareholders of Alexander would benefit
financially from the consolidation of NEG and Alexander through, among other
things, the premium provided to Alexander shareholders based on the Exchange
Ratio and the market prices of the Alexander and NEG Common Stock, increased
market capitalization, liquidity of shares, reserves, operating cash flows,
profitability, and development activities. The increased size and cash flow of
the combined companies could, among other things, allow for participation in
larger and potentially more rewarding exploration programs and might also
facilitate larger borrowings on better terms with lenders to finance further
expansion. Possible detriments to the Merger are discussed under "Risk Factors."
However, many of those risks apply with respect to Alexander continuing as an
independent company and do not relate specifically to the Merger. Those factors
specific to NEG after the Merger are "Future Capital Requirements" (but only as
to the magnitude of capital required and the negative impact of certain rights
of NEG preferred shareholders); "Shares Eligible for Public Sale;" "Related
Parties Involved and No Assurance of Fair Market Value Received in NEG Equity
Private Placement;" "Control by Principal Shareholders" and "No Market for
Shares if NEG Series D Preferred Contingent Voting Rights Exercised." In
addition, there is no assurance that the management of NEG after the Merger will
operate the combined companies in the same manner as Alexander, e.g., as to
allocation of available capital to drilling (including exploration or
development allocations), acquisitions or other operations. After considering
the various factors, without assigning specific or relative weight to any
factors, the Alexander Board of Directors concluded that the best interests of
Alexander shareholders would be well served by the Merger.
OPINION OF PRUDENTIAL SECURITIES
Alexander engaged Prudential Securities to act as financial advisor in
connection with the Merger and to render its opinion as to the fairness, from a
financial point of view, of the Merger consideration to be received by the
shareholders of Alexander.
On June 6, 1996, in connection with the evaluation of the Merger Agreement,
Prudential Securities delivered its written opinion that, as of such date and
subject to certain assumptions, factors and limitations, the Merger
consideration to be received by the shareholders of Alexander was fair to such
holders, from a financial point of view. A copy of the full text of the opinion
of Prudential Securities, dated June 6, 1996, which sets forth the assumptions
made, procedures followed, matters considered and limitations on the review
undertaken in rendering its opinion, is attached as Addendum C to this Proxy
Statement and is incorporated herein by reference. Although the following
discussion summarizes the material terms of the opinion of Prudential
Securities, shareholders of Alexander are urged to read carefully the opinion in
its entirety.
Prudential Securities' opinion is directed only to the fairness from a
financial point of view of the consideration to be received by the shareholders
of Alexander at any NEG Average Price which is $2.40 or higher. The opinion is
for the use and benefit of the Alexander Board of Directors in connection with
its consideration of the Merger and does not constitute a recommendation to any
shareholder as to how such shareholder should vote at the Alexander Meeting. The
consideration to be received by the shareholders of Alexander was determined
through negotiations between Alexander and NEG and was unanimously approved by
the Alexander Board of Directors. Prudential Securities provided advice during
the course of such
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negotiations, but did not make a recommendation with respect to the amount or
form of the consideration to be received by the shareholders of Alexander.
Prudential Securities was not requested to render an opinion as to, and the
opinion does not in any manner address, Alexander's underlying business decision
to proceed with or effect the Merger.
In arriving at its opinion, Prudential Securities reviewed and analyzed,
among other things: (a) the Merger Agreement and the specific terms of the
Merger; (b) publicly available information concerning Alexander and NEG which
Prudential believed to be relevant to its inquiry; (c) financial and operating
information with respect to the business, operations, assets, financial
condition and prospects (including financial projections) of Alexander and NEG
furnished to Prudential Securities by Alexander and NEG; (d) the trading
histories of the Alexander Common Stock and the NEG Common Stock from January 1,
1994 to June 6, 1996 and a comparison of the trading histories with those of
other companies which Prudential Securities deemed relevant; (e) the Reserve
Reports; (f) a comparison of the historical financial results and present
financial condition of Alexander and NEG with those of other companies that
Prudential Securities deemed relevant; and (g) a comparison of the financial
terms of the Merger with the terms of certain other transactions which
Prudential Securities deemed relevant. In addition, Prudential Securities had
discussions with the managements of Alexander and NEG concerning their
respective businesses, operations, assets, financial condition and prospects
(including financial projections) and undertook such other studies, analyses and
investigations as Prudential Securities deemed appropriate, including Prudential
Securities' assessment of general economic, market and monetary conditions.
In arriving at its opinion, Prudential Securities relied on the accuracy
and completeness of all information supplied or otherwise made available to it
by Alexander and NEG, and Prudential Securities did not independently verify
such information or undertake an independent appraisal of the assets or
liabilities of Alexander or NEG and further relied upon the assurances of the
managements of Alexander and NEG that they were not aware of any facts that
would make such information inaccurate or misleading. With respect to the
reserve related information furnished by Alexander and NEG, Prudential
Securities assumed that they were reasonably prepared and reflected the best
currently available estimates and judgment of the managements of Alexander and
NEG as to the reserves of Alexander or NEG, as the case may be. With respect to
the financial forecasts furnished by Alexander and NEG, Prudential Securities
assumed that they were reasonably prepared and reflected the best currently
available estimates and judgment of Alexander's or NEG's management as to the
expected future financial performance of Alexander and NEG, as the case may be.
In addition, Prudential Securities assumed that the NEG New Credit Facility and
the NEG Equity Private Placement, as contemplated in the projections of the pro
forma combined company, will occur at or prior to consummation of the Merger.
Prudential Securities' opinion was based upon market, economic, financial
and other conditions as they existed and could be evaluated as of the date of
such opinion. Events and conditions subsequent to such date have not been
considered and may materially alter the assumptions relied upon and the
conclusions stated by Prudential Securities in its opinion. Prudential
Securities has no obligation to update, revise or reaffirm its fairness opinion
rendered on June 6, 1996, and Alexander does not intend to seek any such
updating, revisions or reaffirmation by Prudential Securities.
In developing its opinion, Prudential Securities assumed that the Merger
will be treated for federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Code.
The following is a brief summary of the analyses performed by Prudential
Securities in connection with its opinion dated June 6, 1996, which it discussed
with the Alexander Board of Directors at its meeting held on June 6, 1996.
Purchase Price Analysis and Stock Price Performance
Prudential Securities performed an analysis of the Merger which indicated
an implied purchase price pursuant to terms of the Merger for each share of
Alexander Common Stock of $4.68, based on an exchange ratio of 1.7 shares of NEG
Common Stock per share of Alexander Common Stock and a $2.75 per share price for
NEG Common Stock. This analysis indicated that the pro forma ownership
percentage of the shareholders
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of Alexander of the pro forma combined company would be approximately 55%
following the Merger, but before consummation of the NEG Equity Private
Placement, issuance of NEG Common Stock to Prudential Securities as part of its
fees for issuing its fairness opinion and issuance of warrants to Gaines Berland
for services rendered in connection with the Merger and the NEG Equity Private
Placement, on a fully diluted basis. See "-- Alexander Financial Advisor Fee"
and "-- Interests of Certain Persons in the Merger." Prudential Securities also
examined the trading history of the Alexander Common Stock and NEG Common Stock
in terms of both price and volume during the period from January 1, 1994 through
June 6, 1996.
Discounted Cash Flow Analysis of Alexander
Using a discounted cash flow analysis, Prudential Securities estimated the
present value of the future cash flows that Alexander could be expected to
generate from January 1, 1996 and beyond based upon a reserve report prepared by
Netherland & Sewell (containing proved, probable and possible reserve estimates
and the production profile relating to such reserves) for Alexander and
Prudential Securities' oil and gas price and inflation forecasts. Projected
production volumes were risked by reserve category. The natural gas price
forecast was based on forecasts for natural gas at Henry Hub and on a standard
heating value of 1,000 British Thermal Units per cubic foot of gas. Adjustments
were made to the natural gas price forecast to reflect transportation charges
and quality differentials. Henry Hub gas prices were assumed to be $2.35 per Mcf
and $2.15 per Mcf for 1996 and 1997, respectively, and were assumed to escalate
at 3% per annum thereafter. The oil price forecast was based on West Texas
Intermediate ("WTI") equivalent crude oil on the spot market and was then
adjusted for the transportation and quality of Alexander's crude oil. For 1996
and 1997, WTI oil prices were assumed to be $19.30 per barrel and $18.00 per
barrel, respectively, and were assumed to escalate to 3% per annum thereafter.
Operating expenses and maintenance capital expenditures necessary to lift
and produce the proved, probable and possible reserves estimated in the
Netherland & Sewell engineering report, were assumed to escalate at a rate of 2%
per annum. The cash flows were discounted at rates ranging from 8% to 15%.
By discounting the projected cash flows generated by Alexander, adding
assessed values for other assets, deducting the present value of estimated
general and administrative expenses and deducting net liabilities, Prudential
Securities arrived at a net asset reference value range per share of Alexander
Common Stock of $1.27 to $3.40. Per share amounts were determined using 12.5
million shares of Alexander Common Stock outstanding.
Analysis of Selected Publicly Traded Comparable Companies
Using publicly available information, Prudential Securities compared
selected financial data of Alexander with similar data of selected
publicly-traded companies engaged in the exploration and development business
considered by Prudential Securities to be comparable to those of Alexander and
NEG. Specifically, Prudential Securities included in its review: Abraxas
Petroleum Corporation, Comstock Resources, Inc., Cross Timbers Oil Company, DLB
Oil & Gas, Inc., Hugoton Energy Corporation, Lomak Petroleum, Inc., PetroCorp
Incorporated, St. Mary Land & Exploration Corporation, Unit Corporation and
Wiser Oil Company. An analysis of the ratio of total market capitalization
(defined as market value of equity plus debt and preferred stock less available
cash) at June 3, 1996 to EBITDA for the 12 months ended March 31, 1996 yielded a
multiple range of 6.0 times to 10.6 times and a median value of 7.5 times. The
application of these values to Alexander's EBITDA for the 12 months ended March
31, 1996, less net long-term debt and working capital, yielded a net asset
reference value range per share of $1.33 to $5.22 and a median value of $2.60.
An analysis of the ratio of equity market value at June 3, 1996 to estimated
1996 after-tax, after leverage cash flow from operations before changes in
working capital (defined as CFFO) yielded a multiple range of 4.3 times to 7.2
times and a median value of 5.0 times. The application of these values to
Alexander's estimated 1996 CFFO yielded a net asset reference value range per
share of $3.21 to $5.38 and a median value of $3.74. The ratio of equity market
value at June 3, 1996 to estimated 1997 CFFO yielded a multiple range of 3.6
times to 6.8 times and a median value of 4.5 times. The application of these
values to Alexander's estimated 1997 CFFO yielded a net asset reference value
range per share of $2.07 to $3.91 and a median value of $2.59. The ratio of
estimated total market capital of reserves (defined as TMCR and calculated as
total market capitalization plus
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other long-term liabilities less non-cash working capital, net other tangible
assets and undeveloped acreage) to Mcfe of proved reserves as of January 1, 1996
yielded a multiple range of $0.55 to $1.34 and a median value of $0.93. The
application of these values to Alexander's proved reserves as of such date, plus
other long-term liabilities less non-cash working capital, net other tangible
assets and undeveloped acreage, yielded a net asset reference value range per
share of $1.60 to $8.75 and a median value of $5.04. The ratio of TMCR to PV10%
value as of January 1, 1996 yielded a range of 69% to 143% and a median value of
111%. The application of these values to Alexander's PV10% value as of such
date, plus other long-term liabilities less non-cash working capital, net other
tangible assets and undeveloped acreage, yielded a net asset reference value
range per share of $1.34 to $6.41 and a median value of $4.24.
Prudential Securities also compared selected financial data of NEG with
similar data of the same selected publicly-traded companies referenced above. An
analysis of the ratio of total market capitalization at June 3, 1996 to EBITDA
for the 12 months ended March 31, 1996 yielded a multiple range of 6.0 times to
10.6 times and a median value of 7.5 times. The application of these values to
NEG's EBITDA for the 12 months ended March 31, 1996, less net long-term debt and
working capital, yielded a net asset reference value range per share of $1.14 to
$2.75 and a median value of $2.60. An analysis of the ratio of equity market
value at June 3, 1996 to estimated 1996 CFFO yielded a multiple range of 4.3
times to 7.2 times and a median value of 5.0 times. The application of these
values to NEG's estimated 1996 CFFO yielded a net asset reference value range
per share of $2.42 to $4.06 and a median value of $2.82. The ratio of equity
market value at June 3, 1996 to estimated 1997 CFFO yielded a multiple range of
3.6 times to 6.8 times and a median value of 4.5 times. The application of these
values to NEG's estimated 1997 CFFO yielded a net asset reference value range
per share of $1.75 to $3.31 and a median value of $2.19. The ratio of estimated
TMCR to Mcfe of proved reserves as of January 1, 1996 yielded a multiple range
of $0.55 to $1.34 and a median value of $0.93. The application of these values
to NEG's proved reserves as of such date, plus other long-term liabilities less
non-cash working capital, net other tangible assets and undeveloped acreage,
yielded a net asset reference value range per share of $.71 to $3.13 and a
median value of $1.88. The ratio of TMCR to PV10% value as of January 1, 1996
yielded a range of 69% to 143% and a median value of 111%. The application of
these values to NEG's PV10% value as of such date, plus other long-term
liabilities less non-cash working capital, net other tangible assets and
undeveloped acreage, yielded a net asset reference value range per share of
$0.43 to $1.94 and a median value of $1.30.
Because of the inherent differences between the businesses, operations and
prospects of Alexander, NEG and the companies included in the comparable group,
Prudential Securities believes that it would be inappropriate to, and therefore
did not, rely solely on the quantitative results of the analysis, and
accordingly, also made qualitative judgments concerning differences between the
financial and operating characteristics of Alexander, NEG and the companies in
the comparable group that would affect the public trading values of Alexander,
NEG and such other companies.
Analysis of Selected Comparable Acquisition Transactions
Prudential Securities reviewed the prices paid, to the extent publicly
available, of selected acquisition transactions which involved certain oil and
gas companies similar to Alexander's operations which took place between January
1994 and June 1996. Transactions reviewed by Prudential Securities include HS
Resources, Inc./Tide West Oil Company, Enron Corp./Coda Energy, Inc. and Barrett
Resources, Inc./Plains Petroleum, Inc.
Prudential Securities examined multiples based on the total consideration
for each of the transactions to, among other things, such acquired companies'
respective proved reserves. In particular, Prudential Securities calculated
offer value expressed in terms of dollars per Mcfe of proved reserves. The
calculations yielded a range of offer values, calculated on a six Mcfe to one
barrel basis, of $0.71 per Mcfe to $0.93 per Mcfe and a median value of $0.80
per Mcfe. Prudential Securities then calculated the aggregate and per share
(assuming 12.5 million shares of Alexander Common Stock outstanding) imputed
equity values for Alexander by applying Alexander's proved reserves to the
multiples derived from its analysis of the comparable acquisition transactions.
These imputed equity values per share for Alexander ranged from $3.05 to $5.04
and a median value of $3.87.
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Because the market conditions, rationale and circumstances surrounding each
of the transactions analyzed were specific to each transaction and because of
the inherent differences between the businesses, operations and prospects of
Alexander and the acquired businesses analyzed, Prudential Securities believes
that it would be inappropriate to, and therefore did not, rely solely on the
quantitative results of the analysis, and accordingly, also made qualitative
judgments concerning differences between the characteristics of these
transactions and the Merger that would affect the acquisition values of
Alexander and such acquired companies.
Pro Forma Merger Analysis
Prudential Securities analyzed certain pro forma effects which could result
from the Merger. In connection with such analyses, Prudential Securities
reviewed the projections provided by the managements of Alexander and NEG with
respect to the future financial performance of Alexander, NEG and the pro forma
combined company for the years 1996 and 1997. This analysis indicated that the
CFFO per share would be accretive to NEG in 1996 and 1997. For the purposes of
such analysis, Prudential Securities defined CFFO per share as (a) net income to
common stock plus depreciation, depletion, amortization and exploration expenses
plus deferred taxes and other non-cash charges, but not including changes in
working capital, divided by (b) the pro forma shares outstanding.
The summary set forth above does not purport to be a complete description
of the analyses conducted by Prudential Securities or Prudential Securities'
presentation to the Alexander Board. Prudential Securities believes that its
analyses must be considered as a whole and that selecting portions of its
analyses and the factors considered by it, without considering all factors and
analyses, could create an incomplete view of the process underlying its opinion.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. In
performing its analysis, Prudential Securities made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Alexander or NEG. Any
estimates contained in the analyses performed by Prudential Securities are not
necessarily indicative of actual values or actual future results, which may be
significantly more or less favorable than suggested by such analyses. In
addition, analyses relating to the value of the business do not purport to be
appraisals or to reflect the prices at which businesses may actually be sold.
Because such estimates are inherently subject to uncertainty, neither Alexander,
NEG, Prudential Securities nor any other person assumes responsibility for their
accuracy.
Prudential Securities is an internationally recognized investment banking
firm engaged in the valuation of businesses and their securities in connection
with mergers and acquisitions, negotiated underwritings, competitive bids,
secondary distributions of listed and unlisted securities, private placements
and valuations for corporate or other purposes.
Alexander Financial Advisor Fee
On November 14, 1994 the Board of Directors of Alexander entered into an
agreement with Prudential Securities which provided for Prudential Securities to
act as the Alexander financial advisor in connection with any transaction in
which the control of or material interest in Alexander or its businesses, assets
or properties is sold. Such agreement provided for Prudential Securities to
receive a fee of one percent of the total consideration received by Alexander
shareholders in such a transaction. NEG, in connection with the Merger, has
negotiated an arrangement with Prudential Securities, which provides for
Prudential Securities to receive, in lieu of the one percent provided in its
agreement with Alexander, $500,000 in cash at the Closing, $500,000 of NEG
Common Stock at the NEG Average Price, a warrant for 100,000 shares of NEG
Common Stock at an exercise price equal to the NEG Average Price, and
out-of-pocket expenses estimated at $75,000. Such agreement also provided for
the registration for immediate sale of the NEG Common Stock received by
Prudential Securities (including that received upon exercise of the warrants).
In the ordinary course of Prudential Securities' business, it may actively
trade the securities of Alexander and NEG for its own account and for the
accounts of its customers and, accordingly, may at any time hold a long or short
position in such securities.
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RECOMMENDATION OF ALEXANDER BOARD OF DIRECTORS
The Board of Directors of Alexander believes that the terms of the Merger
are fair to, and in the best interests of, Alexander and its shareholders and
unanimously approved the Merger and the Merger Agreement and recommends that
holders of Alexander Common Stock vote FOR adoption and approval of the
Alexander Merger Proposal.
EFFECTIVE TIME
Under the Merger Agreement, the Merger will become effective when (i) the
Alexander Merger Proposal has been approved by the shareholders of Alexander and
the NEG Merger Proposal has been approved by the shareholders of NEG; (ii) the
various other conditions described in the Merger Agreement have been satisfied
and the Closing has occurred under the terms of the Merger Agreement; (iii)
Certificates of Merger substantially in the form of Exhibit B to the Merger
Agreement have been filed in the Offices of the Secretary of State of the States
of Delaware and Oklahoma; and (iv) the time and date for the effectiveness of
the Merger set forth in the Certificates of Merger shall have passed. It is
anticipated that if the necessary approvals of the Merger Proposals are obtained
at the Meetings and all other conditions have been satisfied or waived, the
Closing and the Effective Time of the Merger will occur as soon as practicable
following the conclusion of such Meetings.
At the Effective Time of the Merger, Alexander will cease to exist and
NEG-OK will continue as a wholly-owned subsidiary of NEG. NEG-OK, as the
surviving corporation in the Merger, will possess all the assets, rights,
privileges, powers and franchises and be subject to all of the restrictions,
liabilities and duties of Alexander and NEG-OK.
MANNER AND BASIS OF CONVERTING ALEXANDER COMMON STOCK
Exchange Ratio
At the Effective Time, each outstanding share of Alexander Common Stock,
except for shares of Alexander Common Stock and Associated Rights as to which
appraisal rights have been perfected (see "-- Appraisal Rights"), will
automatically and without any action on the part of the holder thereof, cease to
be outstanding and be converted into the right to receive 1.7 shares of NEG
Common Stock. Shares of Alexander Common Stock held by NEG at the Effective Time
of the Merger will be converted into NEG treasury shares.
Fractional Shares
No fractional shares of NEG Common Stock will be issued in connection with
the Merger. All shares of NEG Common Stock to which a holder of shares of
Alexander Common Stock is entitled will be aggregated. If a fractional share of
NEG Common Stock results from such aggregation, in lieu of such fractional
share, such holder will be entitled to receive a cash payment equal to such
fraction multiplied by the closing price on the Nasdaq National Market of NEG
Common Stock on the last business day prior to the Effective Time.
Exchange of Certificates
As soon as practicable following the Merger, there will be mailed to all
holders of record of Alexander Common Stock at the Effective Time a form letter
of transmittal and instructions (the "Letter of Transmittal") to be used by such
holders in surrendering Certificates to the Exchange Agent. Alexander
shareholders should not surrender their Certificates until they have received
the Letter of Transmittal after completion of the Merger.
Each holder of Alexander Common Stock will be entitled to receive, upon
surrender to the Exchange Agent of the holder's Certificates, together with a
properly completed and duly executed Letter of Transmittal and any other
required documents, a certificate representing the number of full shares of NEG
Common Stock to which such holder is entitled pursuant to the Merger Agreement.
If cash for a fractional share is to be paid to, or a certificate representing
NEG Common Stock is to be issued in the name of, a person other than
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the person in whose name a surrendered Certificate is registered, the
Certificate so surrendered must be endorsed and otherwise be in proper form for
transfer and the person requesting such issuance must pay to the Exchange Agent
any transfer taxes required by reason of such issuance in a name other than that
of the holder of record or must establish to the satisfaction of the Exchange
Agent that such taxes either have been paid or are not payable. The Exchange
Agent will pay cash for a fractional share and issue the NEG Common Stock
attributable to any Certificate which has been lost or destroyed only upon
receipt of satisfactory evidence of ownership of the shares of Alexander Common
Stock represented thereby and after appropriate indemnification.
Following the Merger, holders of Certificates formerly representing shares
of Alexander Common Stock and the Associated Rights will cease to have any
rights with respect to the shares and rights formerly represented thereby,
except the right to receive the NEG Common Stock, plus cash in lieu of any
fractional share, into which it has been converted as a result of the Merger. In
addition, holders of such Certificates will not be entitled to receive
dividends, if any, payable to holders of record of NEG Common Stock after the
Effective Time until surrender of the Certificates to the Exchange Agent. Upon
surrender of such Certificates, holders will receive, subject to applicable
escheat laws, the amount of dividends (without interest) which have become
payable subsequent to the Effective Time of the Merger with respect to the full
shares of NEG Common Stock into which the shares of Alexander Common Stock
previously represented by such Certificates have been converted pursuant to the
Merger. NEG has no present plan to declare dividends with respect to the NEG
Common Stock.
Fully Diluted and Outstanding Shares of NEG after the Merger
Based on the number of shares of NEG Common Stock and Alexander Common
Stock outstanding on the respective Record Dates for the Meetings, immediately
after the Merger and the NEG Equity Private Placement, NEG shareholders and
former Alexander shareholders will hold (i) approximately 27.8 million and 21.7
million shares of NEG Common Stock, respectively, representing approximately
56.1% and 43.9%, respectively, of the fully diluted number of shares of NEG
Common Stock (assuming conversion of the NEG Preferred Stock and the exercise of
all NEG stock options and warrants), and (ii) approximately 12.3 million and
21.1 million shares of NEG Common Stock, respectively, representing
approximately 36.9% and 63.1%, respectively, of the outstanding shares of NEG
Common Stock. If securities to be issued in the NEG Equity Private Placement are
excluded from these calculations, NEG shareholders and former Alexander
shareholders will hold approximately 19.8 million and 21.7 million shares of NEG
Common Stock, respectively, representing approximately 47.7% and 52.3%,
respectively, of the fully diluted shares of NEG Common Stock.
ASSUMPTION OF ALEXANDER OPTIONS AND WARRANTS
The Merger Agreement provides that NEG and Alexander will take such action
as may be necessary to permit NEG to assume, at the Effective Time, each
Alexander option and warrant that remains unexercised in whole or in part and to
substitute shares of NEG Common Stock for shares of Alexander Common Stock. The
assumed option or warrant will not give the holder any additional benefits, and
shall be assumed on substantially the same terms and conditions as exist under
the Alexander option or warrant except as described below.
The number of shares of NEG Common Stock purchasable under any Alexander
option or warrant assumed by NEG will be equal to the number of whole shares of
NEG Common Stock that the holder of the Alexander option or warrant would have
received upon consummation of the Merger had such Alexander option or warrant
been exercised (without regard to any vesting schedule) in full immediately
prior to the Effective Time. The option or warrant exercise price per share of
NEG Common Stock will be equal to the previous option or warrant exercise price
per share under the Alexander option or warrant divided by 1.7. Each holder of
such Alexander option and warrant will be issued a written instrument evidencing
the assumption and specifying the adjusted number of shares of NEG Common Stock
subject thereto and the adjusted exercise price, if any.
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Alexander has adopted a 1981 Nonqualified Stock Option Plan, pursuant to
which 1,999 shares of Alexander Common Stock remain reserved for issuance, a
1986 Incentive Stock Option Plan pursuant to which 133,333 shares of Alexander
Common Stock remain reserved for issuance, and a 1993 Stock Option Plan pursuant
to which 250,000 shares of Alexander Common Stock have been reserved for
issuance. The 1981 Nonqualified Stock Option Plan, the 1986 Incentive Stock
Option Plan and the 1993 Stock Option Plan are hereinafter collectively referred
to as the "Alexander Plans." For a description of the Alexander Plans, see the
notes to the Alexander Financial Statements.
As of the Alexander Record Date there were outstanding options to purchase
105,290 shares of Alexander Common Stock under the Alexander Plans, at exercise
prices ranging from $1.50 to $5.00. In addition, there were warrants outstanding
on such date to purchase 232,950 shares of Alexander Common Stock with exercise
prices ranging from $3.52 to $5.10.
All recipients of Alexander stock options under the Alexander Plans will
receive fully vested options to purchase NEG Common Stock regardless of the
vesting status of such options as consummation of the Merger constitutes a
change in control under the Alexander Plans, automatically accelerating the
vesting schedule of the Alexander options. As a result, options for 19,574
shares of Alexander Common Stock will be accelerated upon consummation of the
Merger.
Under the terms of the Merger Agreement, NEG is obligated to file a
registration statement on Form S-8 under the Securities Act covering the shares
of NEG Common Stock issuable upon the exercise of the NEG stock options and
warrants created by the assumption by NEG of the Alexander stock options and
warrants and to cause such registration statement to become effective at the
Effective Time or as soon thereafter as practicable.
On June 5, 1996, the Compensation Committee of the Board of Directors of
Alexander approved an amendment to the Alexander 1993 Restricted Stock Award
Plan (the "Stock Award Plan") to permit the acceleration of a total of 35,125
forfeitable awards issued under the Stock Award Plan. Immediately thereafter,
the Compensation Committee of the Board of Directors of Alexander accelerated
all forfeitable awards under the Stock Award Plan, and all shares subject to the
Stock Award Plan were distributed to award holders free of any restrictions.
CONDUCT OF THE BUSINESS PRIOR TO THE MERGER
Pending consummation of the Merger, unless otherwise permitted by the
Merger Agreement, each party has agreed, among other things, to conduct its
business only in the ordinary course. Neither party may engage in certain
transactions or take certain corporate actions without the consent of the other
as more fully set forth in Article IV of the Merger Agreement. Pending
consummation of the Merger, neither party may make, in addition to capital
expenditures agreed upon by NEG and Alexander in the Merger Agreement, capital
expenditures exceeding $100,000 in any one case or $150,000 in the aggregate.
None of the parties shall, through the Effective Time, knowingly take or fail to
take any action which would jeopardize the treatment of the Merger as a tax free
reorganization under the Internal Revenue Code of 1986, as amended (the "Code").
Each has also agreed to permit the other party to have access to its offices,
properties, books and records and to furnish the other party with information
reasonably necessary to evaluate its business, operations and condition,
financial and otherwise pending the closing of the Merger.
OTHER ACQUISITION OFFERS
Pending the Closing of the Merger, Alexander has agreed that it will not
directly or indirectly solicit, initiate or participate in negotiations relating
to any disposition of any of the equity securities of Alexander or any options
with respect thereto, any merger of Alexander with another corporation, or any
disposition of all or any significant portion of the assets of Alexander not in
the ordinary course of business, or similar transaction (an "Alexander
Acquisition Proposal"), or disclose any non-public information relating to
Alexander to any person or entity that may be considering making or has made an
Alexander Acquisition Proposal, and will notify NEG with respect to certain
events concerning Alexander Acquisition Proposals and requests for information,
unless the Board of Directors of Alexander has been advised by counsel that
participation in such
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negotiations or the provision of such information in response to any unsolicited
offer is required by the fiduciary duties of Alexander's Board of Directors
under applicable law. Pending the Closing of the Merger, NEG has agreed to
similar provisions with respect to "NEG Acquisition Proposals" for the benefit
of Alexander.
TREATMENT OF ALEXANDER EMPLOYMENT AND SEVERANCE AGREEMENTS; NEG NEW EMPLOYMENT
AGREEMENTS
Alexander has adopted certain employment and severance agreements for
certain of its executive officers, special severance agreements for certain of
its technical staff and a separation policy for its remaining employees
(collectively, the "Severance Agreements"). The Severance Agreements provide
benefits if the officer or employee is terminated without cause within a two or
three year period after a change in control and the benefit does not decrease
based on any period of employment after a change in control. See
"Management -- Alexander -- Executive Compensation -- Termination of Employment
and Change-in-Control Arrangements." If these Severance Agreements were to
remain in effect after the Merger, and if NEG were to terminate the Alexander
employees entitled to benefits under the Severance Agreements during the
applicable severance period after the Merger, NEG would be obligated to pay to
Alexander employees approximately $4.1 million in severance benefits under the
Severance Agreements.
As of June 6, 1996, NEG and NEG-OK had entered into new employment
agreements with 28 Alexander officers and employees to be effective as of the
Effective Time (the "NEG New Employment Agreements"), all of which provide that
the employment agreements are in lieu of the benefits under the Severance
Agreements and that employees are not entitled to any payments under the
Severance Agreements. See "Management -- NEG -- Executive Compensation -- NEG
New Employment Agreements" for the terms of the NEG New Employment Agreements
with the officers of Alexander who will become officers of NEG after the Merger
and with Messrs. Bob Alexander and Roger Alexander. The NEG New Employment
Agreements generally are for a term ranging between six months and 30 months,
and, with the exception of agreements with three of the executive officers of
Alexander who will become officers of NEG, do not contain change in control
provisions. However, if NEG terminates any employee under the NEG New Employment
Agreements without cause before its term expires, NEG will be obligated to pay
the remaining amount due under the contract. NEG has guaranteed NEG-OK's
obligations under the NEG New Employment Agreements. The Severance Agreements
for the employees of Alexander who have not signed NEG New Employment Agreements
would obligate NEG to pay such employees approximately $230,000 if NEG were to
terminate such employees during the term of the Severance Agreements.
CONDUCT OF BUSINESS FOLLOWING THE MERGER; BOARD OF DIRECTORS AND MANAGEMENT
Currently, the Board of Directors of NEG consists of seven members. Five of
those members will be elected at the NEG Meeting by the holders of the NEG
Common Stock pursuant to the NEG Director Election Proposal. Two of the members
will be appointed, to be effective as of the election of the directors elected
by the NEG Common Stock, by the holders of the NEG Series B Preferred and NEG
Series C Preferred. Mr. Robert V. Sinnott will be appointed by the holders of
the NEG Series B Preferred and Mr. Elwood W. Schafer will be appointed by the
holders of the NEG Series C Preferred.
Immediately after the effectiveness of the Merger, the Board of Directors
of NEG will increase the number of members of the Board of Directors to eleven,
and will increase the number of members to be elected by the NEG Common Stock
from five to eight commencing with the 1997 NEG annual meeting of shareholders.
Thereafter, the Board of Directors will appoint to the Board of Directors Bob G.
Alexander and Jim L. David, executive officers and directors of Alexander, and
Robert A. West, a director of Alexander, to fill the three vacant positions on
the Board of NEG that are to be designated by Alexander as provided in the
Merger Agreement. The Merger Agreement does not contain any agreements with
respect to the election of directors after the Effective Time of the Merger
except as described in this paragraph.
Immediately after completion of the NEG Equity Private Placement, the
holders of the NEG Series D Preferred will appoint one member to the NEG Board
of Directors. High River has indicated that it intends to
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appoint Robert J. Mitchell to fill such position. See "Management -- NEG --
Directors and Executive Officers" for certain biographical information regarding
Mr. Mitchell.
After the consummation of the Merger, the Certificate of Incorporation and
bylaws of NEG-OK will be those of the company surviving the Merger. Until his
successor is duly elected or appointed and qualified in accordance with
applicable law, Miles D. Bender, the sole director of NEG-OK at the time of the
Merger, will remain the sole director of NEG-OK. After the Merger, Miles D.
Bender, as President and Treasurer, and Sue Barnard as Secretary, will be the
officers of NEG-OK.
Upon consummation of the Merger, NEG has agreed to appoint David E. Grose,
Jim L. David and Sue Barnard as the Vice President -- Finance and Treasurer,
Vice President -- Exploration (Mid-Continent) and Vice
President -- Administration and Human Resources and Secretary of NEG,
respectively, and have entered into NEG New Employment Agreements with such
individuals to such effect. In addition, NEG has entered into NEG New Employment
Agreements with Messrs. Bob Alexander and Roger Alexander. See
"Management -- Alexander;" and "Management -- NEG."
Following the Merger, NEG intends to conduct Oklahoma and Arkansas
exploration activity out of Oklahoma City. Geology, land activities and support
staff will office in Oklahoma City. NEG expects that all accounting functions
and administrative activities previously associated with Alexander will be moved
to Dallas prior to year end 1996.
NEG is exploring issuing additional debt and/or equity securities to raise
capital for working capital, capital expenditures, repayment of the Term Loan
and repayment of all or a portion of the remaining NEG New Credit Facility. The
terms and conditions of any such offering, as well as any impact on NEG
shareholders, are as of yet not known, although NEG is focusing on, and is
currently talking to several underwriters, about the feasibility of conducting a
high yield debt offering, most likely in the range of $75 to $125 million, to be
commenced sometime after the Merger, and most likely before the end of the first
quarter of 1997 for such purposes.
CONDITIONS TO THE MERGER; WAIVER
The respective obligations of NEG, Alexander and NEG-OK are subject to the
fulfillment or satisfaction, on and as of the Closing under the Merger
Agreement, among other things, of each of the following conditions:
(i) NEG's shareholders shall have duly approved the NEG Merger
Proposal and Alexander's shareholders shall have duly approved the
Alexander Merger Proposal;
(ii) Alexander shall have no more than 12,850,000 shares of Alexander
Common Stock outstanding, on a fully diluted basis, immediately prior to
the Effective Time;
(iii) Since December 31, 1995, no material adverse change in the
business, properties, results of operations or financial condition of the
other party has occurred and no loss or damage to property of the other
party will have a material adverse effect on such other party;
(iv) Alexander, and if Alexander is financially unable, NEG, shall pay
all fees and expenses due to Prudential Securities and to McAfee & Taft at
or immediately prior to the Closing;
(v) NEG and Alexander shall have received from counsel an opinion to
the effect that the Merger will constitute a reorganization within the
meaning of Section 368 of the Code;
(vi) NEG shall have received from each person or entity who may be
deemed to be an affiliate of Alexander a duly executed Alexander Affiliate
Agreement in the form attached as Exhibit C to the Merger Agreement (see
"-- Resale of NEG Common Stock; Agreements with Alexander Affiliates"); and
(vii) The Commitment shall not have been amended or terminated on or
before the Effective Time and funding must occur under the terms described
in the Commitment simultaneously with or immediately after the Closing of
the Merger; provided, however, that NEG is not obligated to close the
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Merger if the sum of the refinancing of the existing debt of NEG and
Alexander and the costs of closing the Merger transaction (including
estimated costs under Section 1091 of the Oklahoma Act) exceeds $80.0
million (see "-- Transactions Related to the Merger -- The Commitment").
If the NEG Average Price exceeds $3.60, NEG will have the right to
terminate the Merger Agreement or to waive the condition to closing that the NEG
Average Price not exceed that amount. At the time of executing a proxy with
respect to the NEG Merger Proposal NEG shareholders will not know the value of
the consideration to be received by Alexander shareholders in the Merger. By
approving the NEG Merger Proposal, the NEG shareholders will permit the NEG
Board of Directors to determine, in the exercise of its fiduciary duties, to
proceed with the Merger even if the NEG Average Price is greater than $3.60.
Currently, NEG does not intend to terminate the Merger Agreement or to resolicit
shareholders if the NEG Average Price is outside the Range. If the NEG Average
Price is outside the Range and circumstances have changed, in determining later
whether to elect to terminate the Merger Agreement, the NEG Board of Directors
will take into account, consistent with its fiduciary duties, all relevant facts
and circumstances existing at the time, including, without limitation, the
market for oil and gas exploration and development stocks in general, the
relative value of the Alexander Common Stock in the market, whether Alexander is
prepared to decrease the Exchange Ratio, and the advice of its financial
advisors and legal counsel. See "Risk Factors -- Volatility of Share Prices."
Alternatively, if the NEG Average Price falls below $2.40, Alexander will
have the right to terminate the Merger Agreement on the grounds that not all
conditions to the Merger have been satisfied. By approving the Alexander Merger
Proposal, the Alexander shareholders will permit the Alexander Board of
Directors to close the Merger even if the NEG Average Price is below $2.40 or to
terminate the Merger Agreement even if the Alexander shareholders approve the
Alexander Merger Proposal. At present, the Alexander Board of Directors
currently does not intend to terminate the Merger Agreement or to resolicit if
the NEG Average Price were to fall below $2.40. If the NEG Average Price is
outside the Range and circumstances have changed, in determining later whether
to elect to terminate the Merger Agreement the Alexander Board of Directors will
take into account, consistent with its fiduciary duties, all relevant facts and
circumstances existing at the time, including, without limitation, the market
for oil and gas exploration and development stocks in general, the relative
value of the NEG Common Stock in the market, whether NEG is prepared to increase
the Exchange Ratio, and the advice of its financial advisors and legal counsel.
See "Risk Factors -- Volatility of Share Prices."
For a complete list of the conditions to consummation of the Merger, see
Article V of the Merger Agreement. The Merger Agreement authorizes NEG or
Alexander to waive any condition to be satisfied by the other, other than
requisite shareholder approval, and to proceed with the Merger.
TRANSACTIONS RELATED TO THE MERGER
The Commitment
With respect to the Financing Condition, on May 29, 1996, NEG received the
Commitment from the Banks for the NEG New Credit Facility to provide funds to
refinance the existing debt of NEG and Alexander and for general corporate
purposes. The NEG New Credit Facility will consist of up to a $100.0 million
reducing revolving line of credit (the "Reducing Revolver"), with an initial
borrowing base of $60.0 million, and a $5.0 million term loan (the "Term Loan").
The Borrowing Base will be determined at least semi-annually and will be reduced
monthly by an amount determined by the Banks ("Monthly Commitment Reduction"),
which amount shall initially be $1 million per month. The principal under the
Reducing Revolver will be due at maturity, four years from the date of closing.
Interest will be payable monthly and will be calculated at the BankOne Base
Rate, as determined from time to time by BankOne (which increases by .25% if the
outstanding loan balance is greater than 75% of the Borrowing Base). After the
Term Loan is repaid in full, NEG may elect to calculate interest under the
Eurodollar Rate, as defined in the Commitment.
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The Term Loan provides funds to bridge the issuance of a debt and/or equity
offering by NEG. Interest on the Term Loan will be payable monthly at a rate of
the BankOne Base Rate plus 2%, and the principal of the Term Loan is payable six
months after the date of closing.
NEG will be required to pay an unused commitment fee on the Reducing
Revolver equal to 3/8ths of 1% per annum and will also pay a facility fee equal
to 3/4% of the initial Borrowing Base on the Reducing Revolver and 2% on the
Term Loan.
NEG will grant to the Banks liens on a minimum of 90% of the present worth
of NEG's and Alexander's oil and gas properties, whether currently owned or
hereafter acquired, and a negative pledge on all other oil and gas properties.
The facility will require semi-annual engineering reports covering oil and gas
properties, a ratio of current assets to current liabilities, excluding amounts
due within one year under the NEG New Credit Facility, of at least 1.0 to 1.0, a
debt service coverage ratio of at least 1.1 to 1.0 determined quarterly, and a
minimum tangible net worth of $49 million. Following the Merger, NEG should have
a net worth significantly in excess of the bank covenant; however, a decline in
product prices of approximately $.10 to $.15 on an Mcfe basis could cause net
worth to decline below that required. Should this occur, NEG would attempt to
amend the covenant.
Presently, NEG is discussing with several underwriters the feasibility of
making a high yield debt offering of medium term notes to be completed in
September or October 1996 to raise between $75 and $125 million. The closing and
funding under the NEG New Credit Facility will be subject to normal and
customary conditions precedent, including the Banks' satisfactory review of
title information covering the oil and gas properties to be mortgaged, a
satisfactory environmental Phase I study of Alexander's assets, the closing of
the Merger on or before August 31, 1996, and the raising by NEG of an additional
$12.5 million of equity or "quasi" equity prior to the funding. The NEG New
Credit Facility will also include covenants prohibiting cash dividends,
distributions, loans or advances to third parties, except that cash dividends on
NEG Preferred Stock will be allowed only after the Term Loan is repaid in full
and if no event of default exists or would exist as a result of the payment
thereof. NEG intends to pay holders of NEG Series B Preferred and NEG Series C
Preferred dividends in additional shares of such NEG Series B Preferred or NEG
Series C Preferred, as the case may be, until such time as cash dividends are
permitted and available to be paid. If either the NEG Series B Preferred or the
NEG Series C Preferred receive four such dividend payments in additional shares,
the holders thereof will have the right to elect one-third of the NEG Board of
Directors. See "Risk Factors -- Control by Principal Shareholders."
NEG Equity Private Placement
The Commitment from the Banks requires NEG to have raised $12.5 million of
equity or "quasi" equity at or prior to the closing of the NEG New Credit
Facility. In addition, NEG desires to obtain additional working capital for use
after the Merger. NEG has obtained commitments from certain of its existing
shareholders to raise $15.0 million in equity in the NEG Equity Private
Placement. NEG anticipates that the NEG Equity Private Placement will close
immediately after the Effective Time of the Merger and immediately before the
closing of the NEG New Credit Facility transaction.
On August 7, 1996, the High River Agreement was executed which obligates
High River, subject to certain conditions, to purchase 100,000 shares of NEG
Series D Preferred at $100 a share for $10.0 million if the Merger occurs on or
before September 30, 1996. The NEG Series D Preferred has the rights and
preferences described under "Description of Capital Stock -- NEG -- NEG Series D
Preferred," which include the right immediately to convert the NEG Series D
Preferred into 4,444,444 shares of NEG Common Stock based on the initial
conversion price of $2.25 per share. In addition, NEG will issue to High River
warrants to purchase 700,000 shares of NEG Common Stock immediately exercisable
at $2.50 per share, which warrants will expire five years after the date of the
issuance of the warrants.
If the Merger does not close on or before September 30, 1996, for 30 days
thereafter High River has the right, but not the obligation, to purchase 50,000
shares of NEG Series D Preferred and warrants to purchase 350,000 shares of NEG
Common Stock for $5.0 million and to receive a fee of $150,000 from NEG on
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October 31, 1996. If High River does not purchase such securities in that
period, or if the NEG Certificate of Incorporation Amendment Proposal is not
approved by the NEG shareholders, NEG must pay a fee of $300,000 to High River
on October 31, 1996.
If NEG is obligated to pay a fee to High River for any reason, High River
will have the right to purchase the NEG Series D Preferred and warrants on the
terms set forth in the definitive agreement if NEG merges with Alexander at any
time within five years after July 19, 1996. So long as the High River Agreement
is in effect, NEG may not raise equity in connection with the Merger in addition
to that raised in the NEG Equity Private Placement without first offering the
right to acquire such additional equity to High River. In addition, if High
River purchases securities, until July 19, 2001 High River will have a right of
first refusal with respect to equity sold by NEG for cash in private placement
transactions.
The holders of the NEG Series D Preferred have the right to appoint one
director to the NEG Board of Directors. NEG may not, without the consent of the
director designated by the NEG Series D Preferred, file a voluntary petition in
bankruptcy. In addition, if certain events occur, the holders of the NEG Series
D Preferred will have the right to choose to exercise the NEG Series D Preferred
Contingent Voting Rights, which rights permit the holders to choose to elect
one-half of the members of the NEG Board of Directors plus one member (including
the member to be appointed by holders of NEG Series D Preferred). See
"Description of Capital Stock -- NEG -- NEG Series D Preferred."
On July 25, 1996, NEG entered into the Kayne Anderson Term Sheet under
which KAIM evidenced the intent of the Kayne Anderson Investors to purchase
50,000 shares of NEG Series E Preferred at $100 a share for $5.0 million. The
transaction with the Kayne Anderson Investors is subject to certain conditions,
including execution of a definitive agreement. The NEG Series E Preferred has
the rights and preferences described under "Description of Capital
Stock -- NEG -- NEG Series E Preferred," which include the immediate right to
convert all of the shares of the NEG Series E Preferred into 2,222,222 shares of
NEG Common Stock based upon the initial conversion price of $2.25 per share. In
addition, the Kayne Anderson Investors will receive warrants to purchase 350,000
shares of NEG Common Stock immediately exercisable at $2.50 per share, which
warrants will expire five years after the issuance. The NEG Series E Preferred
will vote together with the NEG Common Stock on all matters submitted to the
holders of NEG Common Stock, and shall have that number of votes per share equal
to the number of shares of NEG Common Stock into which such share is convertible
as of the record date for the vote.
In consideration of the purchase by the Kayne Anderson Investors of the
shares in the NEG Equity Private Placement, NEG agreed to extend the period
during which the NEG Series B Preferred and the NEG Series C Preferred cannot be
redeemed by NEG from June 14, 1997 to June 14, 1999, and to amend the NEG
Certificate of Incorporation to so prohibit such redemption, which amendment is
a part of the NEG Certificate of Incorporation Amendment Proposal. See "NEG
Certificate of Incorporation Amendment Proposal;" "Description of Capital
Stock -- NEG -- NEG Series B Preferred;" and "Description of Capital
Stock -- NEG -- NEG Series C Preferred."
The securities will be issued to High River and the Kayne Anderson
Investors pursuant to an exemption from registration of such securities under
Regulation D or Section 4(2) of the Securities Act, and certificates evidencing
such securities will bear appropriate restrictive legends. Such holders will
have the right but not the obligation to demand registration of the securities
commencing nine months after the closing of the NEG Equity Private Placement.
Such holders also will have piggyback registration rights with respect to any
registration statements filed by NEG or selling shareholders except for those
relating to the Merger or to other merger or employee benefit plans
registrations. NEG will incur costs and will pay certain expenses of such
investors if the investors exercise their registration rights. In addition, NEG
has agreed to pay the expenses of the investors in connection with the NEG
Equity Private Placement, which NEG reimbursed expenses are capped at $45,000
and $25,000 for High River and the Kayne Anderson Investors, respectively. NEG
also has agreed to approve the transactions under Section 203 of the DGCL. See
"Description of Capital Stock -- NEG -- Section 203 of the DGCL."
Shareholder approval of the NEG Equity Private Placement is not required
under Delaware law since NEG's certificate of incorporation authorizes the
issuance by the NEG Board of Directors of series of preferred stock of NEG so
long as a sufficient number of shares of NEG Preferred Stock are authorized for
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issuance. NEG has authorized 1.0 million shares of Preferred Stock, of which a
total of 180,000 shares are reserved for issuance as NEG Series B Preferred and
NEG Series C Preferred. See the "NEG Certificate of Incorporation Amendment
Proposal" for an amendment to the Certificate of Incorporation that clarifies
the powers of the NEG Board of Directors to issue NEG Preferred Stock without
shareholder approval.
The NEG Board of Directors unanimously has approved the terms of the NEG
Equity Private Placement, with Messrs. Sinnott and Schafer abstaining with
respect to the sale of securities to the Kayne Anderson Investors. This approval
occurred after due consideration of the appropriate fair market value of the
shares sold in the NEG Equity Private Placement, taking into account the
restrictions on resale or transfer of the shares and the difficulty of selling
large blocks of shares in a short period of time. After disclosure of the
material facts as to the interests of the parties in the transactions, the NEG
Board of Directors believes that the purchase price to be received for the
securities issued in the NEG Equity Private Placement is similar to that which
would have been received from independent third parties, the discount is within
the range of discounts typical to private placements of securities even when
securities of the same class or series are traded on a public market and is
within the range of discounts given to other unrelated purchasers of NEG Common
Stock, the transactions are fair to NEG and provide the equity needed to satisfy
the condition to funding contained in the Commitment to raise additional equity.
When management of NEG commenced discussions with the investors in the NEG
Equity Private Placement, and when the initial understanding regarding the price
term was reached, the closing price for the NEG Common Stock on the Nasdaq
National Market was $2 5/8. The NEG Board of Directors approved in principle the
offering of $12.5 million of NEG securities in the NEG Equity Private Placement
at $2.25 per share on June 6, 1996, when the closing price of the NEG Common
Stock on the Nasdaq National Market was $3 1/8 per share. Based on such closing
price, the conversion price on the NEG Series D Preferred and the NEG Series E
Preferred represents a 28% discount from such closing price. Based on the
closing price of $3 1/2 of the NEG Common Stock on the Nasdaq National Market on
August 5, 1996, the latest practicable trading date before printing this Proxy
Statement, such conversion price represents a 36% discount. The respective
discounts from the warrant exercise price of $2.50 per share are 20% (based on
the closing price for the NEG Common Stock on June 6, 1996) and 29% (based on
the closing price for the NEG Common Stock on August 5, 1996). See "Risk
Factors -- Related Parties Involved and No Assurance Fair Market Value Received
in NEG Equity Private Placement."
TERMINATION OR AMENDMENT OF THE MERGER AGREEMENT
The Merger Agreement provides that, subject to applicable law, the Merger
Agreement may be amended by the Board of Directors of the parties thereto,
either before or after the Meetings, but prior to consummation of the Merger,
except that no amendment after the Meetings can affect the Exchange Ratio
provided for in the Merger Agreement.
The Oklahoma Act provides that the boards of directors of the constituent
corporations in a merger may amend the merger agreement after shareholder
approval has been obtained by a constituent corporation, provided the amendment
does not (i) alter the amount or kind of shares, securities, cash, property or
rights to be received in exchange for or on conversion of shares of such
constituent corporation, (ii) alter the certificate of incorporation of the
surviving corporation or (iii) alter the terms of the agreement if such
alteration would adversely affect the holders of shares of such constituent
corporation. The DGCL provides that any agreement of merger may contain a
provision substantially similar to that provided by the Oklahoma Act.
Any amendment to the Merger Agreement, which under the Oklahoma Act, the
DGCL or applicable securities laws requires shareholder approval, including any
change in the Exchange Ratio, would only be made after appropriate filings with
the SEC and after notice to NEG and Alexander shareholders and opportunity to
submit new proxies and rescind previously granted proxies. Other amendments to
the Merger Agreement which, under the Oklahoma Act or the DGCL, may be done by
the Board of Directors without additional shareholder approval may be made
without further notice to the shareholders of either company. Waivers of
conditions, if such waiver would not constitute an amendment which is
impermissible under the
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Oklahoma Act or the DGCL, may be made without further notice to shareholders.
See "-- Conditions to the Merger; Waiver."
The Merger Agreement may be terminated by the mutual consent of the Boards
of Directors of NEG and Alexander or by either party if the conditions to such
party's obligations to effect the Merger have not been satisfied or waived by
October 1, 1996.
ACCOUNTING TREATMENT
The Merger will be accounted for as a purchase of Alexander by NEG
utilizing the purchase method of accounting. Accordingly, from and after the
Effective Time, Alexander's results of operations will be included in NEG's
consolidated results of operations.
Under the purchase method of accounting, the purchase price paid by NEG for
the Alexander Common Stock will be allocated to the consolidated assets and
liabilities of Alexander based on fair value with the remaining purchase price
allocated to proved oil and gas properties. No goodwill will be recorded in this
transaction. As a result of allocating additional cost, under the purchase
method of accounting, to the oil and gas properties in connection with the
Merger, a noncash writedown of oil and gas properties will be made. As of March
31, 1996 such write down is estimated to be approximately $37.2 million, and
will be charged to expense in the period the Merger is consummated. See the Pro
Forma Combined Condensed Financial Statements.
RESALE OF NEG COMMON STOCK; AGREEMENTS WITH ALEXANDER AFFILIATES
The shares of NEG Common Stock to be issued to shareholders of Alexander in
the Merger have been registered under the Securities Act and will be freely
transferable by shareholders of Alexander not deemed to be "affiliates" of
Alexander at the time the Alexander Merger Proposal is submitted to a vote of
the Alexander shareholders. Transfers by such affiliates will, under existing
law, require (i) the further registration under the Securities Act of the NEG
Common Stock to be sold, (ii) compliance with Rule 145 promulgated under the
Securities Act (permitting limited sales under certain circumstances) or (iii)
the availability of another exemption from such registration requirement. An
"affiliate" of Alexander, as defined in the rules under the Securities Act, is a
person who, directly or indirectly, controls, or is controlled by, or is under
common control with, Alexander. Prior to the Effective Time of the Merger,
Alexander is obligated to provide to NEG a list of all persons who are or may be
deemed to be affiliates of Alexander.
Alexander affiliates are currently limited under the Securities Act as to
the number of shares of Alexander Common Stock which they can sell during any
three-month period, and following the Merger their ability to sell shares of NEG
Common Stock received in the Merger will be similarly restricted. However,
because of the larger number of shares of NEG Common Stock to be outstanding
following consummation of the Merger, the affiliates of Alexander may be
provided with a degree of liquidity not available to them if the Merger is not
consummated. Persons who are affiliates of Alexander at the time the Alexander
shareholders vote on the Merger will be able to publicly sell after the Merger,
in any three-month period, a number of shares of NEG Common Stock equal to the
greater of (i) one percent of the outstanding shares of NEG Common Stock, or
(ii) the average weekly trading volume during the four preceding weeks.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Directors and Officers
In considering the recommendation of the Board of Directors of Alexander
with respect to the Alexander Merger Proposal, shareholders should be aware that
certain directors and officers of Alexander have interests in connection with
the Merger.
As of the Alexander Record Date, members of the Board of Directors and
executive officers of Alexander beneficially owned 730,658 shares of Alexander
Common Stock, which number includes 55,205 shares issuable upon the exercise of
stock options. Following the consummation of the Merger and assuming they will
own the same number of shares of Alexander Common Stock at the time of the
Merger as they did at the
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Alexander Record Date, the officers and members of the Board of Directors of
Alexander will beneficially own 1,287,199 shares of NEG Common Stock
representing 2.6 percent of the NEG Common Stock on a fully diluted basis
immediately after the Merger. See "Security Ownership of Certain Beneficial
Owners and Management -- Alexander."
NEG has entered into NEG New Employment Agreements with all five of
Alexander's executive officers and with 23 employees which are effective upon
consummation of the Merger. See "-- Treatment of Alexander Employment and
Severance Agreements; NEG New Employment Agreements."
Upon consummation of the Merger, the NEG Board of Directors will increase
the size of the NEG Board of Directors from seven to eleven directors and will
appoint Bob G. Alexander and Jim L. David, executive officers and directors of
Alexander, and Robert A. West, a director of Alexander, to fill the vacancies
created by such action except for the vacancy to be filled by the appointment of
the holders of the NEG Series D Preferred. See "-- Conduct of Business Following
the Merger; Board of Directors and Management."
Pursuant to the Merger Agreement, all outstanding options and warrants with
respect to Alexander Common Stock will be assumed by NEG and converted into
options or warrants to purchase NEG Common Stock. All holders of non-vested
stock options under the Alexander Plans (a total of 19,574 shares) will receive
fully vested options to purchase NEG Common Stock, as a result of the
acceleration of vesting triggered by the change in control provisions of the
Alexander Plans. See "-- Assumption of Alexander Options and Warrants."
On June 5, 1996, the Compensation Committee of the Board of Directors of
Alexander approved an amendment of the Stock Award Plan to permit the
acceleration of forfeitable awards issued under the Stock Award Plan. The
Compensation Committee of the Board of Directors of Alexander accelerated all
awards under the Stock Award Plan and thereafter all shares subject to the Stock
Award Plan were distributed to award holders free of any restrictions.
The Certificate of Incorporation and bylaws of Alexander provide for
indemnification of its directors and officers against liabilities arising in the
course of performance of their duties to Alexander, subject to certain
limitations imposed by law. In the Merger Agreement, NEG agreed to provide
indemnification to the officers and directors of Alexander that is similar to
the indemnification provided under Alexander's Certificate of Incorporation and
bylaws.
Shareholders
Investors in NEG Equity Private Placement are Shareholders of NEG and
Alexander. In connection with the Merger, NEG will issue securities and will
enter into certain other agreements with the investors in the NEG Equity Private
Placement. See "The Merger Proposals -- Transactions Related to the
Merger -- NEG Equity Private Placement." Both the investors or affiliates of the
investors in the NEG Equity Private Placement beneficially own more than five
percent of the NEG Common Stock (assuming, in the case of Kayne Anderson
Investors, conversion of the NEG Preferred Stock). In addition, High River owns
more than five percent of the outstanding shares of Alexander Common Stock. See
"Security Ownership of Certain Beneficial Ownership and Management;" "Risk
Factors -- Related Parties Involved and No Assurance Fair Market Value Received
in NEG Equity Private Placement;" and "Risk Factors -- Control by Principal
Shareholders."
As of the NEG Record Date, High River owned 1,040,000 shares of NEG Common
Stock, representing 5.5% of the shares of NEG Common Stock on a fully diluted
basis, and, as of the Alexander Record Date, High River owned 1,193,000 shares
of Alexander Common Stock, representing 9.3% of the shares of Alexander Common
Stock on a fully diluted basis. After the Merger, the Icahn affiliates will be
deemed under the Exchange Act to beneficially own 8,212,544 shares, or 16.6%, of
the NEG Common Stock on a fully diluted basis.
All shares of the issued and outstanding NEG Series B Preferred and NEG
Series C Preferred are owned by investment partnerships that, like the Kayne
Anderson Investors, are managed by L.P., of which KAIM is the general partner.
KAIM has shared voting power with respect to such shares with each of the
investment
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partnerships, L.P. and Kayne. As of the NEG Record Date, the KAIM affiliates
beneficially owned 5,230,769 shares, or 27.8%, of the NEG Common Stock on a
fully diluted basis. After the Merger, the KAIM affiliates will be deemed under
the Exchange Act to beneficially own 7,802,991 shares, or approximately 15.8%,
of the NEG Common Stock on a fully diluted basis.
NEG has agreed to extend the period during which the NEG Series B Preferred
and the NEG Series C Preferred cannot be redeemed by NEG from June 14, 1997 to
June 14, 1999 and to amend the NEG Certificate of Incorporation to so prohibit
such redemption, which amendment is a part of the NEG Certificate of
Incorporation Amendment Proposal. As a result, dividends at a rate of 10% and
10 1/2% per annum, respectively, or $525,000 and $420,000 per year,
respectively, will accrue and be payable to holders of such NEG Preferred Stock.
Such holders are KAIM affiliates. See "NEG Certificate of Incorporation
Amendment Proposal;" "Description of Capital Stock -- NEG -- NEG Series B
Preferred;" and "Description of Capital Stock -- NEG -- NEG Series C Preferred."
NEG Owns Shares in Alexander. As of the Alexander Record Date, NEG owned
62,200 shares of Alexander Common Stock. NEG intends to vote its shares of
Alexander Common Stock in favor of the Alexander Merger Proposal.
Financial Advisors
Gaines Berland has acted as investment advisor to NEG for the past one and
one-half years. Gaines Berland presently holds warrants to purchase 300,000
shares of NEG Common Stock, representing 1.6% of the outstanding NEG Common
Stock on a fully diluted basis. Gaines Berland also presently holds warrants to
purchase 157,950 shares of Alexander Common Stock, representing 1.2% of the
outstanding Alexander Common Stock on a fully diluted basis, as a result of
services rendered to ANEC and the assumption by Alexander of ANEC's obligations.
Gaines Berland was responsible for re-introducing NEG to Alexander in connection
with the Merger, and for locating purchasers for the NEG Equity Private
Placement. NEG entered into agreements with Gaines Berland providing for Gaines
Berland to receive warrants for the purchase of 700,000 shares and 300,000
shares, respectively, of NEG Common Stock at a price of $2.875 per share for its
services rendered in connection with the Merger and the NEG Equity Private
Placement. These warrants are exercisable for a period of five years after their
issuance and provide registration rights for Gaines Berland. As a result of
these transactions, Gaines Berland will own warrants which, if exercised, will
represent 3.2% of the NEG Common Stock on a fully diluted basis after the
Effective Time of the Merger.
See also "The Merger Proposals -- Opinion of Prudential
Securities -- Alexander Financial Advisor Fee" for a discussion of fees payable
to Prudential Securities, as financial advisor to Alexander and "The Merger
Proposals -- Opinion of Oppenheimer -- NEG Financial Advisor Fee" for a
discussion of fees payable to Oppenheimer, as financial advisor to NEG.
FEES AND EXPENSES
All fees and expenses, including attorneys fees, will be borne by the
respective party who has incurred such fee or expense, except that all or a
portion of the fees due Prudential Securities will be paid by NEG. See "The
Merger Proposals -- Opinion of Prudential Securities -- Alexander Financial
Advisor Fee."
GOVERNMENTAL AND REGULATORY APPROVALS
To the knowledge of NEG and Alexander, no federal or state governmental or
regulatory approvals are required for consummation of the Merger, other than
compliance with the provisions of applicable securities and "blue sky" laws of
various jurisdictions.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material federal income tax
consequences of the Merger under the Code. It is not feasible to describe all of
the tax consequences associated with the Merger. CONSEQUENTLY, EACH SHAREHOLDER
SHOULD CONSULT HIS OR HER OWN TAX ADVISOR
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WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO HIM OR HER OF THE MERGER
APPLICABLE TO HIS OR HER SPECIFIC CIRCUMSTANCES, INCLUDING THE APPLICABILITY AND
EFFECT OF FOREIGN, STATE, LOCAL OR OTHER TAX LAWS.
In particular, the following discussion does not address the potential tax
consequences applicable to Alexander shareholders who are not citizens or
residents of the United States, who are dealers in securities, who acquired
their Alexander Common Stock through stock option or stock purchase programs or
other employee plans, or who are subject to special treatment under the Code
(such as insurance companies or tax-exempt organizations), nor any potential tax
consequences applicable to the holders of Alexander stock options and warrants.
The following summary is based on the Code, applicable Treasury Regulations,
judicial authority and administrative rulings and practice, all as of the date
hereof. There can be no assurance that future legislative, judicial or
administrative changes or interpretations will not adversely affect the
statements and conclusions set forth herein. Any such changes or interpretations
could be applied retroactively and could affect the tax consequences of the
Merger to NEG, Alexander and their respective shareholders. Furthermore, the
following discussion addresses only certain federal income tax matters and does
not consider any state, local or foreign tax consequences of the Merger or other
transactions described in this Proxy Statement.
Opinion of Tax Counsel
Neither NEG nor Alexander has requested a ruling from the Internal Revenue
Service as to the federal income tax consequences of the Merger. However, the
Merger has been structured with the intention that it qualify as a
reorganization under Section 368(a) of the Code by reason of meeting the
requirements for qualification under Sections 368(a)(1)(A) and 368(a)(2)(D) of
the Code. The respective obligations of NEG and Alexander to consummate the
Merger are conditioned upon receiving an opinion of counsel to the effect that
the Merger will qualify as a reorganization under Section 368(a) of the Code.
Strasburger & Price, L.L.P. has rendered such an opinion to NEG and Alexander.
Such opinion is subject to certain assumptions and qualifications and is based
on (i) various representations of the management of NEG and Alexander and
certain Alexander shareholders, including representations from Alexander and
certain of Alexander's shareholders that they are not aware of any plan or
intention on the part of Alexander's shareholders to sell or otherwise dispose
of a number of shares of NEG Common Stock received in the Merger so as to
jeopardize the qualification of the Merger as a reorganization for federal
income tax purposes, and (ii) the assumption that the Merger will be consummated
as described in the Merger Agreement and this Proxy Statement. Such opinion of
counsel is not binding on the Internal Revenue Service or the courts, and will
not preclude either from adopting a contrary position.
As provided in above-described opinion received from Strasburger & Price,
L.L.P., the material federal income tax consequences of the Merger will be as
follows, assuming that holders of Alexander Common Stock hold such shares as
capital assets within the meaning of Section 1221 of the Code:
(i) The Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code, and Alexander, NEG and NEG-OK will each be a
party to that reorganization within the meaning of Section 368(b) of the
Code.
(ii) No gain or loss will be recognized by NEG, NEG-OK or Alexander as
a result of the Merger.
(iii) No gain or loss will be recognized by holders of Alexander
Common Stock who are United States persons (within the meaning of the Code)
upon the exchange of their shares of Alexander Common Stock for shares of
NEG Common Stock pursuant to the conversion of shares that will occur in
the Merger, except that gain or loss will be recognized on the receipt of
cash, if any, received in lieu of fractional shares of NEG Common Stock.
Any cash received by a holder of Alexander Common Stock in lieu of a
fractional share of NEG Common Stock will be treated as received in
exchange for such fractional share and not as a dividend, and any gain or
loss recognized as a result of the receipt of such cash will constitute
capital gain or loss equal to the difference between the cash received and
the portion of the holder's basis in Alexander Common Stock allocable to
such fractional share interest.
53
<PAGE> 63
(iv) The basis of the shares of NEG Common Stock received in exchange
for shares of Alexander Common Stock pursuant to the Merger will be the
same as the basis of the Alexander Common Stock surrendered in exchange
therefor.
(v) The holding period of the shares of NEG Common Stock received in
exchange for shares of Alexander Common Stock will include the holding
period of such shares of Alexander Common Stock.
State and Local Tax Consequences
Although it is not anticipated that state or local income tax consequences
to shareholders exchanging shares of Alexander Common Stock for NEG Common Stock
will vary substantially from the federal income tax consequences described
above, holders of Alexander Common Stock are urged to consult with their own tax
advisors with respect thereto, as well as with respect to any foreign taxes
applicable to foreign shareholders.
Net Operating Loss and Other Tax Attribute Carryforwards
As of December 31, 1995, NEG and its subsidiaries had net operating loss
carryforwards available for federal income tax purposes of approximately $2.4
million, which expire beginning in the year 2003. As a result of an asset
acquisition in April 1992, utilization of approximately $1.4 million of the net
operating loss carryforwards for income tax purposes is restricted to
approximately $160,000 per year because of a change in ownership, as defined by
the Code. The Merger is expected to result in another change in ownership with
respect to NEG.
As of December 31, 1995, Alexander and its subsidiaries had net operating
loss carryforwards available for federal income tax purposes of approximately
$33.3 million, which begin to expire in 1996. As of December 31, 1995, for
federal income tax purposes, Alexander and its subsidiaries also had investment
tax credit and statutory depletion carryforwards of approximately $201,000 and
$3.8 million, respectively. The sale by Alexander of a new issue of Alexander
Common Stock in March 1993 resulted in a change in ownership, as defined by the
Code. As a result, utilization of approximately $26 million of the net operating
loss and other carryforwards for income tax purposes is restricted to the
equivalent of approximately $2 million per year. Alexander has established a
valuation allowance on such deferred tax assets as of December 31, 1995 of
approximately $3.7 million due principally to the 1993 change in ownership and
the uncertainty of future taxable income. The Merger is expected to result in
another change in ownership with respect to Alexander and its subsidiaries.
The utilization of the pre-merger net operating loss and other
carryforwards of Alexander and subsidiaries is expected to be further restricted
under the Separate Return Limitation Year ("SRLY") rules set forth in the
Treasury Regulations governing consolidated federal income tax returns. Under
the SRLY rules, the pre-merger net operating loss and other carryforwards of
Alexander and its subsidiaries will become SRLY carryforwards and will be
available only to reduce taxable profits earned by Alexander and its
subsidiaries.
Even though the Merger is expected to result in (i) an ownership change of
both NEG and Alexander, and (ii) Alexander's carryforwards becoming SRLY
carryforwards, NEG does not expect that the Merger will have any significant
impact on the utilization of the respective carryforwards of NEG and Alexander.
APPRAISAL RIGHTS
If the proposed Merger Agreement is adopted, dissenting shareholders of
Alexander who perfect their rights in accordance with Section 1091 of the
Oklahoma Act, a complete copy of which is attached hereto as Addendum D, will be
entitled to an appraisal by an appropriate Oklahoma district court of the fair
value of their stock exclusive of any element of value arising from the
accomplishment or expectation of the Merger, together with a fair rate of
interest, if any, to be paid thereon. An appropriate Oklahoma district court
includes the Oklahoma district court in Oklahoma City.
Each holder of record of Alexander Common Stock who intends to perfect his
or her appraisal rights (a "Dissenting Shareholder"), and thereby receive the
value of the Alexander Common Stock owned by the holder as determined by the
district court, must satisfy all of the following conditions:
1. The Dissenting Shareholder must submit a written demand for appraisal of
the Dissenting Shareholder's Alexander Common Stock prior to the taking of the
vote on the Merger Agreement at the Alexander
54
<PAGE> 64
Meeting. The Dissenting Shareholder must not have voted any of his or her shares
in favor of adoption of the Merger Agreement; however, a shareholder who
complies with the procedure to dissent will not waive his or her appraisal
rights by abstaining from voting, failing to vote, or voting against the
adoption of the Merger Agreement. Merely voting or delivering a proxy directing
a vote against the adoption of the Merger Agreement will not satisfy this
condition. A written demand of the shareholder of record for appraisal is
essential. Demand can only be made by the record owner. Consequently, a
beneficial owner who is not a record owner must instruct a record owner to make
an appropriate demand on his or her behalf. The written demand must be signed
exactly as the Dissenting Shareholder's name appears on the certificate
representing these shares or on the form of proxy accompanying the Proxy
Statement. A demand for the appraisal of shares owned jointly by more than one
person must identify and be signed by all such persons. Any person signing a
demand for appraisal on behalf of a partnership or corporation or in any other
representative capacity (as such attorney-in-fact, executor, administrator,
trustee or guardian) must indicate his or her title and, if Alexander so
requests, must furnish written proof of capacity and authority to sign the
demand. Demands for appraisal should be sent to Alexander Energy Corporation, at
701 Cedar Lake Boulevard, Oklahoma City, Oklahoma 74115-7800, Attention: Chief
Financial Officer. Alexander will notify each Dissenting Shareholder of the
Effective Time of the Merger within 10 days thereafter.
2. Within 120 days after the Effective Time of the Merger, the Dissenting
Shareholder (or NEG) may file a petition in the district court demanding a
determination of the value of the Alexander Common Stock held by all Dissenting
Shareholders. If a Dissenting Shareholder files such a petition, NEG must file
with the court a list of the names and addresses of all Dissenting Shareholders
within 20 days after receiving service of a copy of the petition. The court may
order NEG to notify all Dissenting Shareholders on the list of the hearing set
to consider the petition. If an action is not filed within 120 days after the
Effective Time, the shareholder's right to dissent will be deemed waived. If no
such petition is filed, appraisal rights will be lost for all shareholders who
had previously demanded appraisal for their Alexander Common Stock. Shareholders
of Alexander seeking to exercise appraisal rights should not assume that NEG
will file a petition, and it is not NEG's intent to file a petition, with
respect to the appraisal of the value of the Alexander Common Stock or to
initiate any negotiations with respect to the "fair value" of such Alexander
Common Stock. Accordingly, such shareholders should regard it as their
responsibility to take all steps necessary to perfect their appraisal rights in
the manner prescribed in Section 1091.
3. At any time within 60 days after the Effective Time, any Dissenting
Shareholder has the right to withdraw the demand for appraisal and receive the
NEG Common Stock into which the Alexander Common Stock would have been converted
but for the appraisal proceedings; at any time after such 60 day period, a
Dissenting Shareholder may withdraw his or her demand for appraisal and accept
the NEG Common Stock into which the Alexander Common Stock would have been
converted but for the appraisal proceedings only with the consent of NEG.
4. Within 120 days after the Effective Time, a Dissenting Shareholder shall
be entitled upon written request to receive from NEG a statement setting forth
the aggregate number of shares not voted in favor of the Merger Agreement and
with respect to which demands for appraisal have been received and the aggregate
number of holders of such shares.
5. The court may appoint one or more appraisers to determine the fair value
of the Alexander Common Stock and to make a recommendation to the court. The
costs of the proceeding may be determined by the court and taxed upon the
parties as the court deems equitable. Upon application of a Dissenting
Shareholder, the court may order all or a portion of the expenses incurred by
any Dissenting Shareholder in connection with the appraisal proceeding,
including, without limitation, reasonable attorney's fees and the fees and
expenses of experts, to be charged pro rata against the value of all of the
shares entitled to an appraisal.
The right of any Dissenting Shareholder to be paid the fair value of his or
her Alexander Common Stock will cease if (a) the Merger is not consummated; (b)
the demand for appraisal is timely withdrawn by the Dissenting Shareholder; (c)
no demand or petition for appraisal is made or filed within the required time
period; or (d) a court of competent jurisdiction determines that the shareholder
is not entitled to exercise dissenters' rights.
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<PAGE> 65
From the time a Dissenting Shareholder demands appraisal rights until the
termination of the rights arising from the demand for the payment of appraisal
value, all rights accruing to Alexander Common Stock, including dividend and
voting rights, will be suspended. After consummation of the Merger, if the right
of the shareholder to be paid the appraisal value of the shares of Alexander
Common Stock owned by the shareholder has ceased, the shareholder's only such
right will be to receive the NEG Common Stock pursuant to the terms of the
Merger Agreement.
Although Alexander believes that the consideration to be received in the
Merger is fair, no representation is made as to the outcome of an appraisal of
fair value as determined by a court, and shareholders should recognize that such
appraisal could result in a determination of value higher or lower than, or the
same as, the value of the NEG Common Stock to be issued pursuant to the Merger.
A VOTE AGAINST ADOPTION OF THE ALEXANDER MERGER PROPOSAL ALONE WILL NOT
SATISFY THE REQUIREMENTS OF THE SEPARATE WRITTEN DEMAND FOR APPRAISAL REFERRED
TO IN THE STATUTORY PROCEDURE SUMMARIZED ABOVE.
Under the Merger Agreement, NEG is not obligated to consummate the Merger
if the sum of the amount necessary to refinance the existing debt of NEG and
Alexander and the costs of closing the transactions contemplated by the Merger
(including payments for dissenting shares) exceed $80.0 million. Currently the
sum of the amount required to refinance the NEG and Alexander existing debt and
the cash costs of the Merger is expected to be approximately $72.1 million
(excluding payments for dissenting shares, if any). As a result, if Dissenting
Shareholders have provided notice of intent to exercise appraisal rights which
are expected to exceed approximately $7.9 million, NEG may elect not to close
the Merger transaction.
MARKET PRICES AND DIVIDENDS
NEG
Since September 1995, NEG Common Stock has traded on the Nasdaq National
Market (symbol "NEGX") and prior to such time NEG Common Stock traded on the
Nasdaq SmallCap Market (symbol "NRGIA"). The following sets forth the high and
low closing sales prices for NEG Common Stock as reported by the Nasdaq National
Market for each quarterly period indicated.
<TABLE>
<CAPTION>
HIGH LOW
---- -----
<S> <C> <C>
1994
First Quarter...................................................... $1 3/8 $1 1/16
Second Quarter..................................................... 1 9/16 15/16
Third Quarter...................................................... 2 5/16 1 7/16
Fourth Quarter..................................................... 2 7/16 1 3/4
1995
First Quarter...................................................... $2 3/8 $1 19/32
Second Quarter..................................................... 3 3/8 2 11/32
Third Quarter...................................................... 4 1/8 3
Fourth Quarter..................................................... 4 1/8 2 13/16
1996
First Quarter...................................................... $3 1/2 $2 5/8
Second Quarter..................................................... 3 7/8 2 1/2
Third Quarter (through August 5)................................... 4 1/16 3 1/16
</TABLE>
56
<PAGE> 66
ALEXANDER
The following sets forth the high and low closing sales prices for
Alexander Common Stock as reported by the Nasdaq National Market (symbol "AEOK")
for each quarterly period indicated.
<TABLE>
<CAPTION>
HIGH LOW
----- ----
<S> <C> <C>
1994
First Quarter...................................................... $5 7/8 $4 7/8
Second Quarter..................................................... 5 1/4 4 3/8
Third Quarter...................................................... 5 1/2 4 1/2
Fourth Quarter..................................................... 6 7/8 4 1/2
1995
First Quarter...................................................... $6 3/44 $4 3/8
Second Quarter..................................................... 5 5/16 3 5/8
Third Quarter...................................................... 5 4
Fourth Quarter..................................................... 4 5/8 3 3/8
1996
First Quarter...................................................... $4 13/16 $3 3/8
Second Quarter..................................................... 5 3 1/2
Third Quarter (through August 5)................................... 5 7/8 4 13/16
</TABLE>
On December 29, 1995, the last full trading day prior to the announcement
of the letter of intent between NEG and Alexander, the reported high and low
sales prices of NEG Common Stock were $3 5/8 and $3 1/4 per share, respectively,
and the reported high and low sales prices of Alexander Common Stock were
$4 9/16 and $4 7/16 per share, respectively, and $6.16 and $5.53 per share,
respectively, for Alexander Common Stock on an equivalent basis assuming an
exchange ratio of 1.7 shares of NEG Common Stock per share of Alexander Common
Stock. On June 6, 1996, the last full trading day prior to the announcement of
the signing of the Merger Agreement between NEG and Alexander, the reported high
and low sales prices of NEG Common Stock were $3 3/8 and $2 15/16 per share,
respectively, and the reported high and low sales prices of Alexander Common
Stock were $3 7/8 and $3 5/8 per share, respectively, and $6.59 and $6.16 per
share, respectively, for Alexander Common Stock on an equivalent basis assuming
an exchange ratio of 1.7 shares of NEG Common Stock per share of Alexander
Common Stock. On August 5, 1996, the latest practicable trading day prior to
printing this Proxy Statement, the reported high and low sales prices for NEG
Common Stock and Alexander Common Stock were $3 5/8 and $3 3/8 per share,
respectively, and $6.16 and $5.74 per share, respectively, for Alexander Common
Stock on an equivalent basis assuming an exchange ratio of 1.7 shares of NEG
Common Stock per share of Alexander Common Stock.
As of the NEG Record Date, there were 2,525 record owners and approximately
3,350 beneficial owners of NEG Common Stock. As of the Alexander Record Date,
there were 1,923 record owners and approximately 3,420 beneficial owners of
Alexander Common Stock.
DIVIDENDS
Neither NEG nor Alexander have paid any dividends on NEG or Alexander
Common Stock since their respective formations, and the NEG Board of Directors
has no present plans to declare dividends on NEG Common Stock. Pursuant to the
terms of certain loan agreements, NEG and Alexander are prohibited from
declaring or paying any dividends on their respective Common Stock until their
respective indebtedness to the lenders is paid in full or the lender otherwise
consents thereto.
Without the consent of the other party, the Merger Agreement prohibits NEG
and Alexander from paying any dividends (other than the $5.00 and $5.25
semi-annual dividends owed by NEG with respect to the NEG Series B Preferred and
NEG Series C Preferred, respectively) until the Closing of the Merger.
The NEG New Credit Facility will prohibit NEG from making any cash
dividends on the NEG Common Stock or NEG Preferred Stock while the Term Loan is
outstanding. Cash dividends on the NEG Series B Preferred and the NEG Series C
Preferred will be allowed only after the Term Loan, including principal and
interest, is repaid in full and if no event of default exists or would exist as
a result of the payment thereof.
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<PAGE> 67
CAPITALIZATION
The following table sets forth the capitalization of NEG at March 31, 1996,
on an historical basis, and as adjusted to give effect to the Merger and related
transactions described in this Proxy Statement, on the basis described in the
Pro Forma Combined Condensed Financial Statements included elsewhere herein. The
data should be read in conjunction with the historical financial statements of
NEG included elsewhere herein. All amounts in the table are in thousands.
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------------
NEG
HISTORICAL AS ADJUSTED(1)
---------- --------------
<S> <C> <C>
Note payable and current portion of long-term debt................ $ 4,709 $ 17,012
Long-term debt, less current portion:
NEG Existing Facility(2)........................................ 14,779 --
NEG New Credit Facility(2)...................................... -- 48,000
Other long-term debt............................................ -- 1,462
-------- --------
Total long-term debt............................................ 14,779 49,462
-------- --------
Stockholders' equity:
Convertible preferred stock..................................... 93 243
Common stock.................................................... 121 333
Additional paid-in capital...................................... 22,037 101,778
Unrealized loss on marketable securities, net................... (213) (173)
Deficit......................................................... (3,241) (40,698)
-------- --------
Total stockholders' equity.............................. 18,797 61,483
-------- --------
Total capitalization............................................ $ 38,285 $127,957
======== ========
Shares authorized:
Preferred stock................................................. 1,000 1,000
Common stock.................................................... 50,000 100,000
Shares issued and outstanding:
Preferred stock:
Series B..................................................... 53 53
Series C..................................................... 40 40
Series D..................................................... -- 100
Series E..................................................... -- 50
Common stock.................................................... 12,057 33,294(3)
</TABLE>
- ---------------
(1) Assumes passage of the NEG Certificate of Incorporation Amendment Proposal,
funding of the NEG New Credit Facility, the issuance of 100,000 shares of
NEG Series D Preferred convertible into 4,444,444 shares of NEG Common Stock
and the issuance of 50,000 shares of NEG Series E Preferred convertible into
2,222,222 shares of NEG Common Stock pursuant to the NEG Equity Private
Placement, the issuance of approximately 21.1 million shares of NEG Common
Stock to the shareholders of Alexander pursuant to the Merger, and the
issuance of 166,667 shares of NEG Common Stock to certain investment
advisors in connection with the Merger.
(2) For further discussion, see "The Merger Proposals -- Transactions Related to
the Merger -- The Commitment;" and Note 5 of the historical financial
statements of NEG, contained elsewhere herein.
(3) Excludes outstanding stock options and warrants to purchase NEG Common
Stock, including warrants to purchase 1,050,000 shares of NEG Common Stock
issued in connection with the NEG Equity Private Placement and an aggregate
of 800,000 and 300,000 warrants, respectively, to purchase NEG Common Stock
issued to financial advisors in connection with the Merger and the NEG
Equity Private Placement.
58
<PAGE> 68
NEG SELECTED HISTORICAL FINANCIAL INFORMATION
AND OPERATING DATA
SELECTED NEG HISTORICAL FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth selected historical financial and operating
data with respect to NEG as of and for each of the five years in the period
ended December 31, 1995, and as of and for the three-month periods ended March
31, 1995 and 1996. NEG acquired significant producing oil and natural gas
properties in all the periods presented which affects the comparability of the
historical financial and operating data for the periods presented. The financial
data was derived from the historical financial statements of NEG. This
information is not necessarily indicative of NEG's future performance. NEG has
never declared or paid dividends on the NEG Common Stock. The financial data set
forth below should be read in conjunction with "NEG Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and the related notes thereto of NEG included elsewhere in this Proxy
Statement.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:(1)
Oil and gas sales................... $ 996 $1,626 $1,803 $3,159 $ 7,858 $1,091 $ 3,795
Cost and expenses:
Lease operating costs............ 316 670 576 1,207 1,732 296 607
Oil and gas production taxes..... 60 109 110 176 416 61 188
Depreciation, depletion, and
amortization................... 249 466 679 1,030 3,149 334 1,651
General and administrative
costs.......................... 355 427 567 826 1,634 237 455
Operating income (loss)............. 64 (46) (129) (81) 926 163 894
Interest expense.................... (88) 174 (188) (517) (1,032) (154) (476)
Net income (loss) before income
taxes and extraordinary item..... (26) (221) (299) (489) 206 105 433
Net income (loss)(2)................ (26) (221) (299) (611) (226) 105 433
Income (loss) per common share
before extraordinary item........ (0.01) (0.05) (0.05) (0.09) (0.05) 0.00 0.02
Loss per common share............... (0.01) (0.05) (0.05) (0.10) (0.09) 0.00 0.02
Weighted average number of common
and common equivalent shares
outstanding...................... 2,248 4,456 6,121 8,477 10,702 9,268 12,043
STATEMENT OF CASH FLOWS DATA(1),(3):
Net cash provided by operating
activities....................... $ 17 $ 642 $ 519 $ 373 $ 3,077 $ 258 $ 860
Oil and gas acquisition,
exploration, and development
expenditures..................... 18 254 3,335 2,850 16,913 1,539 5,399
Net cash provided by (used in)
financing activities............. 358 802 2,647 5,871 17,352 -- (429)
OTHER DATA(1),(4):
EBITDA.............................. 311 419 568 1,058 4,387 593 2,560
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:(1)
Working capital (deficit)......... $(1,066) $(2,155) $(1,213) $ 3,561 $(2,315) $(4,692)
Net property and equipment........ 3,146 6,400 10,734 13,113 32,971 37,670
Total assets...................... 4,413 8,742 12,710 18,746 43,491 43,585
Note payable and current portion
of long-term debt.............. 1,200 2,165 862 -- 6,500 4,709
Long-term debt, less current
portion........................ -- 120 3,799 6,000 13,475 14,779
Stockholders' equity.............. 2,692 4,864 6,320 11,328 17,775 18,797
Book value per common share(5).... 0.87 0.86 0.78 0.58 0.72 0.79
</TABLE>
59
<PAGE> 69
SELECTED NEG HISTORICAL OPERATING DATA
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Production:
Oil (Mbbls).................... 27 40 49 116 283 41 111
Gas (Mmcf)..................... 280 420 483 621 1,753 174 833
Oil Equivalent (Mboe).......... 74 110 129 219 576 70 249
Average sales prices:
Oil (per Bbl).................. $20.16 $20.43 $16.46 $16.01 $17.22 $17.20 $18.73
Gas (per Mcf).................. 1.59 1.92 2.07 2.11 1.70 2.19 2.07
Lease operating expense per
Boe............................ 4.25 5.39 4.45 5.51 3.01 4.22 2.43
Depreciation, depletion and
amortization per Boe........... 2.89 3.12 4.08 4.20 5.97 4.74 6.62
General and administrative costs
per Boe........................ 4.80 3.87 4.38 3.77 2.84 3.37 1.83
</TABLE>
SELECTED NEG HISTORICAL OIL AND GAS RESERVE INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1991 1992 1993 1994 1995
------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Proved reserves(6):
Oil (Mbbls)................................. 305 956 3,721 5,156 3,921
Gas (Mmcf).................................. 4,946 7,785 11,047 13,380 30,869
Total proved reserves (Mboe)................ 1,129 2,253 5,562 7,386 9,066
Proved developed reserves (Mboe)............ 1,022 1,881 3,105 3,067 3,850
PV10% (in thousands)(7)..................... $8,682 $10,894 $14,374 $27,445 $36,279
Standardized Measure (in thousands)(7)........ 5,015 8,713 11,679 20,840 32,127
</TABLE>
- ---------------
(1) Reflects the revenues and results of operations subsequent to the dates of
acquisitions of various oil and gas properties that affect the comparability
of the data presented. In April 1992, NEG acquired substantially all of the
assets of TriSearch, Inc. NEG acquired a 63.8% working interest in the GAU
in December 1993 and an additional interest of 17% in the GAU during 1994.
In addition, during 1995, NEG acquired interests in producing oil and gas
properties in the Mustang Island area, the Oak Hill Field, and in Eddy
County, New Mexico. See Note 2 of Notes to the historical financial
statements of NEG.
(2) Includes extraordinary losses on early extinguishments of debt of $121,917
and $431,762 in 1994 and 1995, respectively.
(3) In addition to cash flows provided by operating activities, provided by or
used in financing activities and used by oil and gas acquisition,
exploration, and development expenditures, NEG also has significant cash
flows which are provided by or used by other investing activities. See "NEG
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and the historical financial
statements of NEG.
(4) See the Glossary included elsewhere in this Proxy Statement for the
definition of EBITDA. EBITDA is not a measure of cash flow as determined by
generally accepted accounting principles. NEG has included information
concerning EBITDA because EBITDA is a measure used by certain investors in
determining a company's historical ability to service its indebtedness;
however, this measure may not be comparable to similarly titled measures of
other companies. EBITDA should not be considered as an alternative to, or
more meaningful than, net income or cash flows as determined in accordance
with generally accepted accounting principles as an indicator of NEG's
operating performance or liquidity.
(5) Book value per share is computed as total stockholders' equity less the
aggregate liquidation preference of the NEG Series B Preferred and NEG
Series C Preferred, when applicable, divided by the number of shares of
common stock outstanding (including shares issuable under an asset
acquisition agreement and upon the conversion of Class B Common Stock) at
the dates indicated.
(6) Represents proved reserves based on estimates prepared by Netherland &
Sewell for 1995 and estimates prepared by other independent petroleum
engineers for 1991 through 1994. See "Business and Properties -- NEG -- Oil
and Natural Gas Reserves."
(7) Discounted at an annual rate of 10%. See the Glossary included elsewhere in
this Proxy Statement for the definitions of "PV10%" and "Standardized
Measure." NEG believes that PV10%, while not determined in accordance with
generally accepted accounting principles, is an important financial measure
used by investors in independent oil and natural gas producing companies for
evaluating the relative significance of oil and natural gas properties and
acquisitions. PV10% should not be construed as an alternative to the
Standardized Measure, as determined in accordance with generally accepted
accounting principles.
60
<PAGE> 70
ALEXANDER SELECTED HISTORICAL FINANCIAL
INFORMATION AND OPERATING DATA
SELECTED ALEXANDER HISTORICAL FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth selected historical financial and operating
data with respect to Alexander as of and for each of the five years in the
period ended December 31, 1995, and as of and for the three-month periods ended
March 31, 1995 and 1996. The financial data was derived from the consolidated
financial statements of Alexander. This information is not necessarily
indicative of Alexander's future performance. Alexander has never declared or
paid dividends on the Alexander Common Stock. The financial data set forth below
should be read in conjunction with "Alexander Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and the notes thereto of Alexander included elsewhere in
this Proxy Statement. The information reflects the accounts of Alexander and its
wholly-owned subsidiaries, and their proportionate share of the assets,
liabilities, revenues and costs and expenses of oil and gas limited partnerships
in which they act as general partner.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------- -------------------
1991 1992(1) 1993 1994(2) 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Oil and gas sales..................... $ 8,942 $13,107 $17,708 $17,390 $16,599 $ 4,524 $ 4,511
Well operator and management fees..... 2,116 2,663 2,668 2,615 2,642 698 493
Marketing fees, interest and other.... 554 247 1,533 678 371 35 106
Total revenues........................ 11,612 16,017 21,909 20,683 19,612 5,257 5,110
Costs and expenses:
Direct lifting costs.................. 2,888 3,610 4,129 4,959 5,031 1,406 944
Gross production and severance tax.... 605 1,007 1,170 1,176 1,077 277 276
Amortization and depreciation......... 3,557 4,583 5,762 7,246 9,252 2,257 2,083
Provisions for impairment of oil and
gas properties...................... -- -- -- -- 2,300 -- --
General and administrative............ 2,779 3,241 3,879 4,034 3,442 747 585
Interest expense...................... 2,388 3,029 2,063 2,396 3,961 971 920
Nonrecurring expenses(3).............. -- -- -- 3,166 752 300 --
Income (loss) before provision for
income taxes, discontinued operations
extraordinary items and cumulative
effect of change in accounting for
income taxes.......................... (605) 547 4,906 (2,294) (6,203) (701) 302
Income (loss) before discontinued
operations, extraordinary items and
cumulative effect of change in
accounting for income taxes........... (880) 542 2,575 (2,294) (4,459) (441) 200
Net income (loss)(4).................... (880) (139) 2,490 (1,242) (4,459) (441) 200
Net income (loss) applicable to common
stock................................. (1,006) (300) 2,453 (1,242) (4,459) (441) 200
Net income (loss) per common share
before discontinued operations,
extraordinary items and cumulative
effect of change in accounting for
income taxes.......................... (0.22) 0.07 0.25 (0.19) (0.36) (0.04) 0.02
Net income (loss) per common share...... (0.22) (0.06) 0.24 (0.10) (0.36) (0.04) 0.02
Weighted average common and common
equivalent shares outstanding......... 4,701 5,434 10,149 12,168 12,345 12,273 12,505
</TABLE>
61
<PAGE> 71
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- ----------------
1992(1) 1993 1994(2) 1995 1995 1996
------- ------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF CASH FLOWS DATA:(5)
Net cash provided by operating
activities......................... $4,717 $12,065 $ 1,465 $3,382 $1,625 $ 861
Additions to oil and gas properties... 3,462 17,940 36,010 5,881 2,181 1,348
Net cash provided by (used in)
financing activities............... (25) 5,345 30,320 1,441 1,999 24
OTHER DATA(6):
EBITDA................................ 8,159 12,730 7,348 9,310 2,527 3,305
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------- MARCH 31,
1991 1992(1) 1993 1994(2) 1995 1996
------- ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)......... $(4,588) $(7,912) $(7,100) $(5,581) $(6,495) $(6,303)
Net properties and equipment...... 43,639 56,332 66,504 91,545 84,156 82,277
Total assets...................... 52,024 65,832 75,769 99,814 91,867 90,274
Long-term debt due within one
year........................... 1,607 3,654 1,037 1,016 4,162 5,962
Long-term debt due after one
year........................... 23,034 24,194 16,764 46,514 44,351 42,512
Shareholders' equity.............. 14,397 17,644 34,351 34,225 30,628 30,921
Book value per common share....... 3.06 3.25 2.93 2.79 2.46 2.48
</TABLE>
SELECTED ALEXANDER HISTORICAL OPERATING DATA
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- ----------------
1992(1) 1993 1994(2) 1995 1995 1996
------ ------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Production:
Oil (Mbbls)............................ 215 283 224 181 54 32
Gas (Mmcf)............................. 5,257 6,332 8,051 9,068 2,503 1,989
Gas Equivalent (Mmcfe)................. 6,547 8,031 9,396 10,154 2,829 2,183
Average sales prices:
Oil (per Bbl).......................... $18.70 $16.99 $15.44 $ 16.57 $16.88 $17.96
Gas (per Mcf).......................... 1.73 2.04 1.73 1.50 1.44 1.98
Production costs per Mcfe(7)............. .71 .66 .65 .60 .60 .56
Depreciation, depletion and amortization
per Mcfe(8)............................ .70 .72 .77 .91 .80 .95
General and administrative costs per
Mcfe................................... .50 .48 .43 .34 .26 .27
</TABLE>
SELECTED ALEXANDER HISTORICAL OIL AND GAS RESERVE INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1991 1992(1) 1993 1994(2) 1995
------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Proved reserves(9):
Oil (Mbbls).............................. 3,390 3,968 3,940 3,932 2,308
Gas (Mmcf)............................... 71,168 101,511 121,921 145,203 99,070
Total proved reserves (Mmcfe)............ 91,506 125,319 145,560 168,794 112,918
Proved developed reserves (Mmcfe)........ 43,158 58,209 75,851 96,615 73,993
PV10% (in thousands)(10)................... N/A $97,420 $116,892 $108,189 $85,448
Standardized Measure (in thousands)(10).... $54,091 84,879 94,665 98,893 84,048
</TABLE>
62
<PAGE> 72
- ---------------
N/A Not Available
(1) Includes the acquisition of Bradmar, which was consummated on March 18,
1992.
(2) Includes the JMC acquisition which occurred in November 1994. See Note 2 of
Notes to Consolidated Financial Statements of Alexander.
(3) Includes $2.4 million and $734,000 in 1994 of costs related to the merger
with ANEC and costs to settle litigation against ANEC, respectively, as
discussed in Notes 2 and 10 of Notes to Consolidated Financial Statements
of Alexander. Includes $300,000 and $452,000 in 1995 of abandoned merger
costs and terminated Senior Subordinated Note offering expenses,
respectively, as discussed in Note 10 of Notes to Consolidated Financial
Statements of Alexander.
(4) Includes (a) loss from discontinued operations of $681,000 in 1992, (b) a
loss from an extraordinary item of $510,000, net of income taxes associated
with the early extinguishment of debt in 1993, and (c) a gain from an
extraordinary item of $1.1 million associated with the extinguishment of a
long-term obligation in 1994. Also includes the cumulative effect of
adopting SFAS 109, "Accounting for Income Taxes," the effect of which was
to increase net income by $425,000 in 1993. See Notes 1 and 12 of Notes to
Consolidated Financial Statements of Alexander.
(5) In addition to cash flows provided by operating activities, provided by or
used in financing activities and used by oil and gas acquisition,
exploration, and development expenditures, Alexander also has significant
cash flows which are provided by or used by other investing activities. See
"Alexander Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and the
consolidated historical financial statements of Alexander.
(6) See the Glossary included elsewhere in this Proxy Statement for the
definition of EBITDA. EBITDA is not a measure of cash flow as determined by
generally accepted accounting principles. Alexander has included
information concerning EBITDA because EBITDA is a measure used by certain
investors in determining a company's historical ability to service its
indebtedness; however, this measure may not be comparable to similarly
titled measures of other companies. EBITDA should not be considered as an
alternative to, or more meaningful than, net income or cash flows as
determined in accordance with generally accepted accounting principles as
an indicator of Alexander's operating performance or liquidity.
(7) Includes direct lifting costs and gross production and severance tax.
(8) Excludes the $2.3 million provision for impairment of oil and gas
properties in 1995.
(9) Includes proved reserves which are based on estimates prepared by
Netherland & Sewell for 1995, proved producing reserves which are based on
estimates by other independent petroleum engineers for 1991 through 1994,
and proved non-producing and proved undeveloped reserves which are based on
estimates prepared by Alexander's in-house reservoir engineers for 1991
through 1994. See "Business and Properties -- Alexander -- Oil and Natural
Gas Reserves."
(10) Discounted at an annual rate of 10%. See the Glossary included elsewhere in
this Proxy Statement for the definitions of "PV10%" and "Standardized
Measure." Alexander believes that the PV10%, while not determined in
accordance with generally accepted accounting principles, is an important
financial measure used by investors in independent oil and natural gas
producing companies for evaluating the relative significance of oil and
natural gas properties and acquisitions. PV10% should not be construed as
an alternative to the Standardized Measure, as determined in accordance
with generally accepted accounting principles.
63
<PAGE> 73
SELECTED PRO FORMA COMBINED
FINANCIAL INFORMATION AND OPERATING DATA
SELECTED PRO FORMA COMBINED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following summary pro forma combined financial information should be
read in conjunction with the Pro Forma Combined Condensed Financial Statements
and the separate historical financial statements of NEG and Alexander and notes
thereto included elsewhere in this Proxy Statement. The pro forma combined
financial data are not necessarily indicative of the operating results or
financial position that would have been achieved had the Merger and related
transactions described in this Proxy Statement been effective at the date or
during the periods presented or the results that may be obtained in the future.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1995 MARCH 31, 1996
----------------- --------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Revenues:
Oil and gas sales........................................ $26,011 $ 8,306
Well operator and management fees........................ 2,779 546
Costs and expenses:
Lease operating.......................................... 7,177 1,551
Oil and gas production taxes............................. 1,544 464
Depreciation, depletion, and amortization................ 14,100 3,600
Provision for impairment of oil and gas properties....... 2,300 --
Abandoned merger and note offering expenses.............. 752 --
General and administrative............................... 5,109 1,067
Operating income (loss)..................................... (2,192) 2,170
Interest expense............................................ 6,160 1,234
Income (loss) before income taxes and extraordinary item.... (7,670) 1,057
Income (loss) before extraordinary item..................... (5,413) 842
Income (loss) per common share before extraordinary item.... (0.19) 0.02
Weighted average number of common and common equivalent
shares outstanding....................................... 32,814 40,171
OTHER DATA(2)(3):
Net cash provided by operating activities................... $ 6,511 $ 1,883
Additions to oil and gas properties......................... 22,794 6,747
Net cash provided by (used in) financing activities......... 18,792 (406)
EBITDA...................................................... 14,890 5,891
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
1996
--------------
<S> <C>
BALANCE SHEET DATA(1):
Working capital (deficit).................................................. $ (7,340)
Net property and equipment................................................. 121,551
Total assets............................................................... 143,169
Note payable and current portion of long-term debt......................... 17,012
Long-term debt, less current portion....................................... 49,462
Stockholders' equity....................................................... 61,483
Book value per common share(4)............................................. 1.12
</TABLE>
64
<PAGE> 74
SELECTED PRO FORMA COMBINED OPERATING DATA
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1995 MARCH 31, 1996
----------------- --------------
<S> <C> <C>
Production:
Oil (Mbbls)......................................... 475 143
Gas (Mmcf).......................................... 11,830 2,823
Gas Equivalent (Mmcfe).............................. 14,680 3,681
Average sales prices:
Oil (per Bbl)....................................... $ 16.61 $18.56
Gas (per Mcf)....................................... 1.41 2.01
Lease operating expenses per Mcfe..................... 0.49 0.42
Depreciation, depletion and amortization per Mcfe..... 0.97 0.97
General and administrative costs per Mcfe............. 0.35 0.29
</TABLE>
SELECTED PRO FORMA COMBINED OIL AND GAS RESERVE INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
1995
--------------
<S> <C>
Proved reserves(5):
Oil (Mbbls)........................................................ 6,229
Gas (Mmcf)......................................................... 128,207
Total proved reserves (Mmcfe)...................................... 165,581
Proved developed reserves (Mmcfe).................................. 95,358
PV10% (in thousands)(6).............................................. $121,727
Standardized Measure (in thousands)(6)............................... 114,190
</TABLE>
- ---------------
(1) The Merger is expected to be accounted for as a purchase of Alexander by NEG
utilizing the purchase method of accounting. The purchase price has been
allocated to the consolidated assets and liabilities of Alexander based on
preliminary estimates of fair values with the remaining purchase price
allocated to proved oil and gas properties. No goodwill has been recorded in
this transaction. Substantial costs are expected to occur as a result of the
combination of the two companies, including transaction costs, costs with
respect to the elimination of duplicate facilities, severance and related
benefits and other costs related to the combination of the two companies.
Such costs are expected to total approximately $5.4 million and are included
in the aggregate cost of the Merger. The pro forma results of operations
exclude a noncash writedown of oil and gas properties which is estimated as
of March 31, 1996 to be approximately $37.2 million in accordance with the
full cost method of accounting. Such writedown will be charged to expense in
the period the Merger is consummated.
(2) In addition to cash flows provided by operating activities, provided by or
used in financing activities and used by oil and gas acquisition,
exploration, and development expenditures, NEG and Alexander also have
significant cash flows which are provided or used by other investing
activities. Pro forma cash flow from operating activities has been computed
by adjusting the combined cash flows by pro forma adjustments for the
operating revenues and direct operating expenses of the NEG acquisitions in
1995 and the pro forma adjustments for interest expense. Pro forma net cash
flows provided by (used in) financing activities represent the combined cash
flows from financing activities of NEG and Alexander. See "Alexander
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources;" "NEG Management's Discussion
and Analysis of Financial Condition and Results of Operations -Liquidity and
Capital Resources;" and "NEG Management's Discussion and Analysis of the
Effects of the Merger on the Future Financial Condition and Results of
Operations of NEG."
(3) See the Glossary included elsewhere in this Proxy Statement for the
definition of EBITDA. EBITDA is not a measure of cash flow as determined by
generally accepted accounting principles. NEG has included information
concerning EBITDA because EBITDA is a measure used by certain investors in
determining a company's historical ability to service indebtedness; however,
this measure may not be comparable to similarly titled measures of other
companies. EBITDA should not be considered as an alternative to, or more
meaningful than, net income or cash flows as determined in accordance with
generally accepted accounting principles as an indicator of operating
performance or liquidity.
(4) Book value per common share is computed as total stockholder's equity less
the aggregate liquidation value of the outstanding NEG Preferred Stock
divided by number of shares of NEG Common Stock outstanding.
(5) Includes proved reserves based on estimates prepared by Netherland & Sewell
for 1995. See "Business and Properties -- NEG -- Oil and Natural Gas
Reserves" and "Business and Properties -- Alexander -- Oil and Natural Gas
Reserves."
(6) Discounted at an annual rate of 10%. See the Glossary included elsewhere in
this Proxy Statement for the definitions of "PV10%" and "Standardized
Measure." NEG and Alexander believe that PV10%, while not determined in
accordance with generally accepted accounting principles, is an important
financial measure used by investors in independent oil and natural gas
producing companies for evaluating the relative significance of oil and
natural gas properties and acquisitions. PV10% should not be construed as an
alternative to the Standardized Measure, as determined in accordance with
generally accepted accounting principles.
65
<PAGE> 75
NEG MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
During 1995, NEG acquired an estimated 4,487,639 Boe in proved reserves
(based on reserve estimates at the date of acquisition). As a result of
acquisitions and efforts to increase production from the GAU, proved reserves,
as estimated by Netherland & Sewell increased to 9,065,928 Boe at December 31,
1995. Production increased to 575,605 Boe in 1995 from 219,116 Boe in 1994, and
increased to 249,456 Boe for the first quarter of 1996 compared to 70,304 for
the same period in 1995.
During 1995, oil and gas sales, net of lease operating expenses and
production taxes, increased more rapidly than general and administrative
expenses and depreciation, depletion and amortization. As a consequence, NEG was
able to recognize net income of $433,291 for the first quarter of 1996 and was
able to recognize income from operations of $926,432 for 1995 after recording
losses from operations in each year from 1992 through 1994.
RESULTS OF OPERATIONS
The following table sets forth certain information regarding the production
volumes, oil and gas sales, average sales prices, average lease operating
expenses and general and administrative expenses associated with NEG's oil and
gas sales for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
-------------------------------------- ----------------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Production:
Oil (Bbls)..................... 48,819 115,642 283,440 41,284 110,541
Gas (Mcf)...................... 483,241 620,843 1,752,990 174,152 833,490
---------- ---------- ---------- ---------- ----------
Boe............................ 129,359 219,116 575,605 70,304 249,456
========== ========== ========== ========== ==========
Oil and Gas Sales:
Oil............................ $ 803,561 $1,851,443 $4,880,313 $ 710,058 $2,070,746
Gas............................ 999,723 1,307,273 2,978,003 380,690 1,724,457
---------- ---------- ---------- ---------- ----------
Total.................. $1,803,284 $3,158,716 $7,858,316 $1,090,748 $3,795,203
========== ========== ========== ========== ==========
Average Sales Price:
Oil (Bbls)..................... $ 16.46 $ 16.01 $ 17.22 $ 17.20 $ 18.73
Gas (Mcf)...................... $ 2.07 $ 2.11 $ 1.70 $ 2.19 $ 2.07
Average Lease Operating Expenses:
Per Boe........................ $ 4.45 $ 5.51 $ 3.01 $ 4.22 $ 2.43
General and Administrative
Expenses:
Per Boe........................ $ 4.38 $ 3.77 $ 2.84 $ 3.37 $ 1.83
</TABLE>
Three months ended March 31, 1996 compared with three months ended March 31,
1995
Revenues. Total revenues increased by $2,704,455 (247.9%) to $3,795,203 for
1996 from $1,090,748 for 1995. The increase in revenues is due to the increase
in production from the development of the GAU, acquisitions completed during
1995, and the acquisition of two oil and gas wells on one offshore block and
interests in five other offshore blocks in the Mustang Island area in offshore
Nueces County, Texas from UMC Petroleum Corporation (the "UMC Acquisition") and
the acquisition of oil and gas properties, including interests in five wells, in
the Mustang Island area from C/A Limited, Charter Petroleum and Petrotex
Engineering Company (the "CA Acquisition"), both completed during the first
quarter of 1996. In 1996, NEG produced 110,541 barrels of oil, an increase of
167.8% over 41,284 barrels in 1995, and 833,490 Mcf of gas, an increase of
378.6% over 174,152 Mcf in 1995. The increase in oil production from
66
<PAGE> 76
development of the GAU accounted for 64,771 barrels (93.5%) of such increase in
oil production. The increase in gas production from the 1995 and 1996
acquisitions accounted for 666,475 Mcf (108.8%) of such increase in gas
production offset in part by declines in gas production from some of NEG's other
properties. Also contributing to the increase in revenues was the increase in
average oil prices of $1.53 per barrel to $18.73 for 1996 from $17.20 for 1995.
The slight decline in average gas prices of $.12 per Mcf to $2.07 for 1996 down
from $2.19 for 1995 was offset by the aforementioned 378.6% increase in gas
production. Also, in 1996, NEG recognized $112,875 in hedging gains from
commodity swap agreements (see "-- Changes in Prices and Inflation" below).
Costs and Expenses. Total costs and expenses increased $1,973,165 (212.7%)
to $2,900,759 for 1996 from $927,694 for 1995. Lease operating expenses and
production taxes increased $437,335 (122.3%) to $794,850 for 1996 from $357,515
for 1995 primarily due to the development of GAU and acquisitions completed
during 1995 and 1996. Lease operating expenses and production taxes attributable
to the GAU increased $102,935 from 1995 to 1996 representing 23.5% of the total
increase for NEG. Lease operating expenses and production taxes attributable to
the 1995 and 1996 acquisitions totalled $203,961 for 1996, which accounts for
46.6% of the total increase for NEG since these acquisitions were made after the
first quarter of 1995. Lease operating expenses as a percent of oil and gas
sales decreased to 16.0% for 1996 from 27.2% for 1995. This decrease is a result
of the lower operating costs of the acquired properties combined with reductions
in costs at the GAU obtained through economies of scale resulting from the
additional wells drilled since August 1994.
Depreciation, depletion and amortization increased $1,317,146 (394.9%) to
$1,650,654 for 1996 compared to $333,508 for 1995. This increase is due to the
increased production from the GAU and the acquisitions noted above. The
depletion rate per Boe was $6.62 for 1996 compared to $4.74 for 1995. This
increase in the depletion rate is primarily due to downward revisions in
estimated proved reserves at December 31, 1995.
Although general and administrative expenses ("G & A") increased $218,684
to $455,355 for 1996, G & A per Boe decreased to $1.83 (45.7%) for 1996 from
$3.37 for 1995. This decrease is attributable to the increase in production from
the GAU and the acquisitions made during 1995 and 1996, without a proportionate
increase in the G & A costs to NEG.
Other Income and Expenses. The increase of $321,696 (208.7%) in interest
expense to $475,821 for 1996 from $154,125 for 1995, was due to the increase in
the amount of outstanding debt as a result of borrowings under the $33.0 million
reducing revolving line of credit facility with BankOne, Texas, N.A. (the "NEG
Existing Facility") during 1996 and was partially offset by the decline in
weighted average interest rates. The average debt outstanding for 1996 was
$15,612,667 as compared to only $6,000,000 for 1995. The weighted average
interest rate for 1996 was 9.44% as compared to 10.16% for 1995. See
"-- Liquidity and Capital Resources -- NEG Existing Facility."
Net Income. Net income of $433,291 was generated for 1996, compared with
net income of $104,986 for 1995. This increase is primarily the result of the
increased production on the GAU and the increase in production resulting from
acquisitions completed during 1995 and the UMC Acquisition and the CA
Acquisition completed during the first quarter of 1996. This increase was
offset, in part, by higher costs and expenses.
Year ended December 31, 1995 compared with year ended December 31, 1994
Revenues. Total revenues increased by $4,699,600 (148.8%) to $7,858,316 for
1995 from $3,158,716 for 1994. The increase in revenues is principally due to
the continued development of the GAU and the increase in production due to the
acquisition of a producing oil and gas property in the Mustang Island area in
offshore Nueces County, Texas from Sierra Mineral Development and LLOG
Production Company (the Company assumed Sierra Mineral Development, L.C.'s
contractual rights and obligations with LLOG) (the "Sierra Acquisition") and
acquisitions of producing gas properties in the Oak Hill Field in Rush County,
Texas (the "Oak Hill Acquisition") from Sierra 1994 I Limited Partnership and
producing oil and gas properties in Eddy County, New Mexico from Enron Oil and
Gas Company (the "Enron Properties Acquisition"). The Sierra
67
<PAGE> 77
Acquisition, the Oak Hill Acquisition and the Enron Properties Acquisition are
collectively referred to herein as the "1995 Acquisitions." In 1995, NEG
produced 283,440 barrels of oil, an increase of 145.1% over 115,642 barrels in
1994, and 1,752,990 Mcf of gas, an increase of 182.4% over 620,843 Mcf in 1994.
The increase in oil production is almost entirely a result of the GAU's
increased oil production resulting from the development since August 1994. The
1995 Acquisitions accounted for the increased gas production. Also contributing
to the increase in revenues was the increase in average oil prices of $1.21 per
barrel to $17.22 for 1995 from $16.01 for 1994. The decline in average gas
prices of $.41 per Mcf to $1.70 for 1995 down from $2.11 for 1994 was offset by
the 182.4% increase in gas production.
Costs and Expenses. Total costs and expenses increased $3,691,868 (114.0%)
to $6,931,884 for 1995 from $3,240,016 for 1994. Lease operating expenses and
production taxes increased $764,420 (55.3%) to $2,147,991 for 1995 from
$1,383,571 for 1994 primarily due to the development of the GAU and the 1995
Acquisitions. Lease operating expenses and production taxes attributable to the
GAU increased $487,706 from 1994 to 1995, representing 63.8% of the total
increase for NEG. Lease operating expenses and production taxes attributable to
the 1995 Acquisitions totalled $256,059 for 1995, representing 33.5% of the
total increase for NEG since those properties were not purchased until 1995.
Lease operating expenses as a percent of oil and gas sales decreased to 22.0%
for 1995 from 38.2% for 1994. This decrease is a result of the lower operating
costs of the acquired properties, reductions in costs at the GAU obtained
through economies of scale resulting from the additional wells drilled since
August 1994 and fewer workovers performed during 1995 than during 1994.
Depreciation, depletion and amortization increased $2,119,478 (205.8%) to
$3,149,464 for 1995 compared to $1,029,986 for 1994. This increase was, in part,
related to the increased production from the GAU and the 1995 Acquisitions. In
addition, the depletion rate increased to $6.31 per Boe for the fourth quarter
from $4.71 per Boe due to downward revisions in estimated proved reserves at
December 31, 1995.
Although G & A increased $807,970 to $1,634,429 for 1995, G & A per Boe
decreased to $2.84 (24.7%) for 1995 from $3.77 for 1994. This decrease is
attributable to the increase in production from the GAU and the 1995
Acquisitions, without a proportionate increase in G & A costs to NEG.
Other Income and Expenses. The increase of $515,010 (99.6%) in interest
expense to $1,032,096 for 1995 from $517,086 for 1994, was due to the increase
in the amount of outstanding debt as a result of borrowings under the NEG
Existing Facility during 1995 and was partially offset by a decline in weighted
average interest rates. The average debt outstanding for 1995 was $10,590,598 as
compared to only $5,183,333 for 1994. The weighted average interest rate for
1995 was 9.66% as compared to 10.44% for 1994. During 1995, NEG realized a gain
of $220,582 on the sale of marketable securities.
Net Loss. Income before extraordinary item of $205,793 was generated for
1995, compared with a loss before extraordinary item of $489,369 for 1994. This
increase is directly the result of the increased production on the GAU and the
increase in production resulting from the 1995 Acquisitions. Also contributing
to this increase was a realized gain of $220,582 on the sale of marketable
securities in 1995.
A net loss of $225,969, after an extraordinary charge of $431,762, was
generated for 1995, compared with a net loss of $611,286, after an extraordinary
charge of $121,917, in 1994. The extraordinary charge in 1995 resulting from the
write-off of unamortized loan costs attributable to the Texas Gas Fund I
facility which was paid off out of proceeds from the NEG Existing Facility. The
extraordinary charge in 1994 was in connection with the write-off of unamortized
loan costs attributable to NEG's prior credit facility with BankOne, which was
paid off in 1994 with proceeds from the Texas Gas Fund I facility.
Year ended December 31, 1994 compared with year ended December 31, 1993
Revenues. Total revenues increased by $1,355,432 (75.2%) to $3,158,716 for
1994 from $1,803,284 for 1993. The increase in revenues is entirely due to the
increase in production from the GAU working interests acquired from Bligh
Petroleum, Inc. in December 1993 (the "Bligh Acquisition"). In 1994, NEG
produced 115,642 barrels of oil, an increase of 136.9% over 48,819 barrels in
1993, and 620,843 Mcf of gas, an increase of 28.5% over 483,241 Mcf in 1993. As
previously stated, the increase in oil and gas production is due to the
68
<PAGE> 78
Bligh Acquisition. The decline in average oil prices of $.45 per barrel to
$16.01 for 1994 down from $16.46 for 1993 partially offset the increase in
revenues. The slight increase in average gas prices of $.04 per Mcf to $2.11 for
1994 from $2.07 for 1993 did not significantly impact 1994 revenues.
Costs and Expenses. Total costs and expenses increased $1,327,292 (68.7%)
to $3,259,130 for 1994 from $1,931,838 for 1993. Lease operating expenses and
production taxes increased $697,998 (101.8%) to $1,383,571 for 1994 from
$685,573 for 1993 almost entirely due to the acquisition of working interests in
the GAU during 1993 and 1994. Lease operating expenses as a percent of oil and
gas sales increased to 38.2% for 1994 from 31.9% for 1993, primarily from
workovers performed during 1994.
Depreciation, depletion and amortization increased $369,941 (54.5%) to
$1,049,100 for 1994 compared to $679,159 for 1993. This increase is due to the
increased production from the additional GAU working interest purchased in the
Bligh Acquisition.
Although G & A expenses increased $259,353 to $826,459 for 1994 from
$567,106 for 1993, G & A per Boe decreased to $3.77 (13.9%) for 1994 from $4.38
for 1993. This decrease is attributable to the increase in production from the
Bligh Acquisition without a proportionate increase in G & A costs to NEG.
Other Income and Expenses. The increase of $328,946 (174.8%) in interest
expense to $517,086 for 1994 from $188,140 for 1993, was due to the increase in
the amount of outstanding debt as a result of borrowings under the Texas Gas
Fund I Facility during 1994 and the increase in the weighted average interest
rates. The average debt outstanding for 1994 was $5,183,333 as compared to
$2,763,150 for 1993. The weighted average interest rate was 10.44% as compared
to 8.86% for 1993.
Net Income. A loss before extraordinary item of $489,369 was generated for
1994, compared with a net loss of $299,493 for 1993. The increase in net loss
before extraordinary item was primarily the result of an increase in interest
expense due to the Bligh Acquisition and the Texas Gas Fund I Facility, which
was partially offset by investment income and improved operating results. In
1994, NEG recorded on extraordinary charge for early extinguishment of debt of
$121,917, as the BankOne loan was paid off out of proceeds from the Texas Gas
Fund I Facility.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Three months ended March 31, 1996 compared with three months ended March 31,
1995
Net cash provided by operating activities was $859,747 for the three months
ended March 31, 1996, compared to $258,286 for the same period in 1995. The
increase in cash flow from operating activities is primary due to the
significant increase in income from operations before depreciation, depletion
and amortization as discussed above.
Net cash used in investing activities was $5,501,394 for 1996 compared with
$1,955,431 for 1995. This increase was principally due to expenditures for
development of the GAU and the cash used in the UMC Acquisition and the CA
Acquisition.
Net cash used by financing activities was $429,434 for 1996 compared with
$164 for 1995. The cash used by financing activities during 1996 primarily
consisted of repayments under the NEG Existing Facility of $3,737,000 offset by
borrowings under the NEG Existing Facility of $3,250,000. Borrowings under the
NEG Existing Facility were used to fund acquisitions, development of GAU and
working capital.
The Company's working capital deficit at March 31, 1996 was $4,692,018.
This deficit is primarily attributable to the inclusion of the current portion
of the NEG Existing Facility which totals $4,709,000, of this amount, $3.0
million is not due until March 31, 1997.
Current cash flows from NEG's properties are adequate for NEG's general
requirements and are sufficient to meet its debt service requirements under the
NEG Existing Facility. Excluding the impact of the Merger, anticipated cash
flows from operations, however, are not sufficient to fund the planned capital
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<PAGE> 79
expenditures for development and enhancement of the GAU and NEG's other existing
properties, which capital expenditures will require additional advances under
the NEG Existing Facility.
Because NEG's oil and gas reserves are depleted by production, the success
of its business strategy depends on a continuous development and/or exploration
program. Thus, NEG's capital requirements relate primarily to the further
development of the GAU and certain other properties, acquisitions of producing
oil and gas properties and/or companies with oil and gas production and
exploratory drilling. Excluding the impact of the Merger and subject to
sufficient funding, NEG expects to incur approximately $18.9 million in capital
expenditures over the next twelve months. NEG anticipates funding the
development of the GAU primarily from working capital and advances under the NEG
Existing Facility pursuant to anticipated increases to the borrowing base under
the NEG Existing Facility. Acquisitions may be funded from advances under the
NEG Existing Facility, proceeds from the issuance of debt or equity securities,
currently available cash and/or internally generated funds. However, there can
be no assurances that such sources of funds will actually be available to fund
future development and acquisition activities.
Year ended December 31, 1995 compared with year ended December 31, 1994
At December 31, 1995, NEG had existing cash and cash equivalents of
$6,076,199. Net cash provided by operating activities was $3,077,082 for 1995,
compared to $373,292 for 1994. The increase in cash flow from operating
activities is primarily due to the significant increase in income from
operations before depreciation, depletion and amortization.
Net cash used in investing activities was $16,946,221 for 1995 compared
with $3,826,739 for 1994. This increase was principally due to expenditures for
development of the GAU and the cash used in the 1995 Acquisitions.
Net cash provided by financing activities was $17,351,693 for 1995 compared
with $5,885,628 for 1994. The cash provided by financing activities during 1995
primarily consisted of increased borrowings under the NEG Existing Facility of
$20,514,077 and the net proceeds from the issuance of the NEG Series C Preferred
of $3,980,343. Borrowings under the NEG Existing Facility were used to repay
outstanding borrowings under the Texas Gas Fund I facility of $6.0 million and
to fund acquisitions, development of GAU and working capital.
NEG's working capital deficit at December 31, 1995 was $2,315,854. This
deficit is primarily attributable to the inclusion of the current portion of the
NEG Existing Facility which totals $6.5 million, which was offset in part, by an
increased cash and accounts receivable position. Also contributing to the
working capital deficit was the increase in accounts payable resulting from
increased development activities during 1995.
NEG Existing Facility
In June 1995, NEG consummated the NEG Existing Facility which consisted of
a $33.0 million reducing revolving line of credit Facility with BankOne, Texas,
N.A. The initial advance of $12.5 million was used to pay off NEG's credit
facility with Texas Gas Fund I, to make the Oak Hill Acquisition and the Enron
Properties Acquisition and for closing fees. Subsequent advances have been used
for development of the GAU, other acquisitions of oil and gas properties and
exploration activities.
The NEG Existing Facility consists of a Revolving Note of up to $30.0
million, subject to a borrowing base, and an Advance Note of up to $3.0 million
(primarily for the development of GAU). Interest on the Revolving Note is at a
rate of prime plus 1% (subject to reduction in certain circumstances) or LIBOR
plus 3.75% (subject to reduction in certain circumstances), at NEG's option.
Interest on the Advance Note is at a rate of prime plus 4%. Payments of interest
and principal are made monthly. The NEG Existing Facility is secured by all of
NEG's principal oil and gas properties and related equipment, oil and gas
inventory, and related receivables. Prepayments are allowed at any time. At May
31, 1996, NEG had $20.5 million outstanding under the Revolving Note and $1.8
million outstanding under the Advance Note.
The Revolving Note has a maturity date of June 30, 1999. In April 1996, a
new Advance Note of up to $3.0 million was issued to NEG with a maturity date of
March 31, 1997. The Advance Note is to be used for
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<PAGE> 80
specific development of the GAU and Oak Hill. NEG's ability to borrow under the
Revolving Note is dependent upon the reserve value of its oil and gas
properties. At December 31, 1995, the borrowing base was $17.0 million and in
April 1996, the borrowing base was increased to $21.5 million. The borrowing
base is subject to adjustment quarterly based on the reserve value. BankOne has
substantial discretion in determining the reserve value and borrowing base. In
addition, the borrowing base is reduced monthly by an amount redetermined
semiannually by BankOne. The amount of such automatic reduction was $175,000 per
month for the period July 31, 1995 through January 31, 1996. Effective February
1, 1996 the amount of the monthly reduction was adjusted to $256,000, and
effective May 1, 1996 the amount of the monthly reduction was further adjusted
to $315,000. If the amount outstanding under the Revolving Note exceeds the
borrowing base, NEG is required to repay such excess.
The NEG Existing Facility contains restrictive and affirmative covenants,
and maintenance of required financial ratios. In addition, NEG cannot pay any
dividends on or redeem Common Stock. However, cash dividends on and redemptions
of NEG Preferred Stock are allowed, so long as no event of default, as defined,
has occurred and is continuing or would occur as a result of such payment. At
March 31, 1996, NEG was not in violation of any covenants of the NEG Existing
Facility.
It is anticipated that the NEG Existing Facility will be repaid in full
from the proceeds from the NEG New Credit Facility. See "NEG Management's
Discussion and Analysis of the Effects of the Merger on the Future Financial
Condition and Results of Operation of NEG -- NEG New Credit Facility."
Preferred Stock
In June 1994, NEG consummated the sale of $5.0 million of NEG Series B
Preferred. Fifty thousand shares of NEG Series B Preferred were sold by NEG at
$100.00 per share. The NEG Series B Preferred is convertible into shares of
Common Stock at a conversion price of $1.625 per share.
In June 1995, NEG consummated the sale of $4.0 million of NEG Series C
Preferred. Forty thousand shares of Series C Preferred were sold by NEG at
$100.00 per share. The Series C Preferred is convertible into shares of Common
Stock at a conversion price of $2.00 per share. The NEG Series B Preferred and
NEG Series C Preferred require that dividends be paid on the NEG Series B
Preferred and NEG Series C Preferred before any dividends are paid on NEG Common
Stock. See Note 5 of Notes to Financial Statements of NEG.
CHANGES IN PRICES AND INFLATION
NEG's revenues and the value of its oil and gas properties have been and
will continue to be affected by changes in oil and gas prices. Oil and gas
prices are subject to seasonal and other fluctuations that are beyond NEG's
ability to control or predict.
NEG hedges crude oil and natural gas prices through the use of commodity
swap agreements in an effort to reduce the effects of the volatility of the
price of crude oil and natural gas on NEG's operations. These agreements involve
the receipt of fixed-price amounts in exchange for variable payments based on
NYMEX prices and specific volumes. In connection with the commodity swap
agreements, NEG may also enter into basis swap agreements to reduce the effects
of unusual fluctuations between prices actually received at the well head and
NYMEX prices. Through the use of commodity price and basis swap agreements, NEG
can fix the price to be received for specified volumes of production to the
commodity swap price less the basis swap price. The differential to be paid or
received, under the swap agreement, is accrued in the month of the related
production and recognized as a component of crude oil and natural gas sales. NEG
does not hold or issue financial instruments for trading purposes.
While the use of hedging arrangements limits the downside risk of adverse
price movements, it may also limit future gains from favorable movements. All
hedging is accomplished pursuant to swap agreements based upon standard forms.
NEG addresses market risk by selecting instruments whose value fluctuations
correlate strongly with the underlying commodity being hedged. Credit risk
related to hedging activities is managed by requiring minimum credit standards
for counterparties, periodic settlements, and mark to market valuations. NEG has
not been required to provide collateral relating to its hedging activities.
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<PAGE> 81
At March 31, 1996, NEG has entered into various swap agreements to fix the
selling prices for natural gas at a weighted average NYMEX price of $2.064 per
Mcf for 1,000,000 Mcf of natural gas to be produced during 1996. NEG has also
entered into swap agreements to fix the selling price of crude at a weighted
average NYMEX price of $19.75 per barrel for 15,000 barrels of oil to be
produced during 1996. In addition, NEG entered into a basis swap agreement with
a basis differential of $.205 covering 900,000 Mcf of natural gas to be produced
during 1996.
NEG had closed positions prior to March 31, 1996, resulting in a deferred
loss of $76,400 which was recognized in the second quarter of 1996. During the
first quarter of 1996, NEG recognized a gain of $112,875 related to hedging
transactions.
Although certain of NEG's costs and expenses are affected by the level of
inflation, inflation has not had a significant effect on NEG's results of
operations during the years ended 1995, 1994 or 1993, or on results of
operations for the quarter ended March 31, 1996.
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ALEXANDER MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Alexander follows the full cost method of accounting for its oil and
natural gas properties. Under such method, the net book value of such
properties, less related deferred income taxes, may not exceed a calculated
"ceiling." The ceiling is the estimated after-tax future net revenues from
proved oil and natural gas properties, discounted at 10% per annum plus the
lower of cost or fair market value of unproved properties. In calculating future
net revenues, prices and costs in effect at the time of the calculation are held
constant indefinitely, except for changes which are fixed and determinable by
existing contracts. The net book value is compared to the ceiling on a quarterly
basis. The excess, if any, of the net book value above the ceiling is required
to be written off as an expense. In the fourth quarter of 1995, Alexander
recognized a writedown of its net book value of oil and gas properties in excess
of the ceiling of $2.3 million ($2.0 million, net of the deferred tax credit).
See Notes 1, 11 and 14 of Notes to Consolidated Financial Statements of
Alexander. Under the SEC's full cost accounting rules, any write-off recorded
may not be reversed even though higher oil and natural gas prices may increase
the ceiling applicable to future periods. There is no assurance that future oil
and gas reserve volume or product price decreases will not result in additional
reductions in the net book value of the oil and gas properties of Alexander.
Alexander records natural gas sales on the entitlement method, recognizing
only its net share of production as revenues. Any amount received in excess of
Alexander's revenue interest is recorded as a natural gas balancing liability
and conversely any deficiency is recorded as a natural gas balancing asset.
Alexander has also received non-interest bearing prepayments on future natural
gas production which provide for recoupment, most of which are refundable upon
the earlier of the end of the productive life of the respective well or
expiration of the natural gas purchase contract. The natural gas prepayments
will be recognized as revenue when, and if, the natural gas is delivered.
Amortization of oil and natural gas properties is computed using a unit of
revenue method based on current gross revenues from production in relation to
estimated future gross revenues from production of proved oil and natural gas
reserves. The amortization rates for future periods will increase or decrease
corresponding with the fluctuations in oil and natural gas prices, reserve
volumes and production.
To manage its acquisition, exploitation and drilling activities, Alexander
maintains a professional staff of geologists, engineers, landmen and others.
Although maintaining such staff increases general and administrative expenses on
an absolute basis, Alexander's experienced technical staff has been a key to its
ability to generate sufficient drilling prospects and exploitation opportunities
to replace produced reserves. By managing operations for a substantial number of
its wells, Alexander has been able to maintain efficiencies in operations as
well as obtain operator and management fees which offset the majority of its
general and administrative expenses.
In 1996 and 1995, Alexander sold numerous nonstrategic oil and gas
properties, the cash proceeds of which amounted to approximately $800,000 and
$1.8 million, respectively. As discussed in further detail below in Oil and Gas
Sales, Well Operator and Management Fees and Oil and Gas Operating Expenses, the
1996 and 1995 oil and gas property sales are expected to reduce Alexander's
annual 1996 operating income before amortization and depreciation by
approximately $500,000 and $300,000, respectively, from the amount reported in
1995.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1996 and 1995
Total Revenues; Oil and Gas Sales. Total revenues decreased for the three
months ended March 31, 1996 compared to the three months ended March 31, 1995.
The decrease in total revenues was comprised of decreased oil and natural gas
sales and decreased well operator reimbursements due to the sale of certain
properties during 1995 and the first quarter of 1996. The decreased oil and
natural gas sales are attributable to
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lower production volumes for both oil and natural gas as a result of certain
wells sold during 1995 and January 1996, offset by higher product prices for
both oil and natural gas. The annual 1996 and 1995 oil and gas property sales
are expected to reduce 1996 oil and gas sales by approximately $900,000 and
$300,000, respectively, from the amount reported in 1995.
The decrease in oil and gas sales consisted of decreased production for
both oil and natural gas. Oil revenues decreased by 37% due to a 40% decrease in
production quantities and a 6% increase in the average price per Bbl of
production for the three months ended March 31, 1996 as compared to 1995.
Natural gas revenues increased by 9% due to a 38% increase in the average price
per Mcf of natural gas produced, offset by a 21% decrease in product quantities
for the three months ended March 31, 1996 as compared to 1995.
Well Operator and Management Fees. Well operator and management fees
decreased 29% for the three months ended March 31, 1996 compared to the same
period in 1995. This decrease is attributable to a reduction in the number of
operated producing properties, due to the sale of certain properties during 1995
and the first quarter of 1996. The 1996 and 1995 oil and gas property sales are
expected to reduce annual 1996 well operator fees by approximately $500,000 and
$100,000, respectively, from the amount reported in 1995. Included in the
management fees were reimbursements of overhead expense of $5,000 per month from
the AEJH 1987 Limited Partnership and $10,000 per month from the AEJH 1989
Limited Partnership. In May 1996, Alexander agreed to liquidate and terminate
the AEJH 1985, AEJH 1987 and AEJH 1989 Limited Partnerships in the second
quarter of 1996, the net income effect of which was not significant.
Interest and Other Revenues. The increase in interest and other revenue for
the three months ended March 31, 1996 compared to 1995 resulted from interest
income on invested cash and marketing fees for both oil and natural gas.
Oil and Gas Prices. Oil prices received by Alexander increased 6% during
the three months ended March 31, 1996, resulting in an average price of $17.96
per Bbl compared to the average price per Bbl of $16.88 for the same period in
1995. Revenues and operating results for future periods will continue to be
impacted by price fluctuations which are largely influenced by market conditions
and the quantity of the oil sold by OPEC.
During the three months ended March 31, 1996, Alexander experienced an
increase in natural gas prices. In recent years, Alexander has sold much of its
natural gas under short-term (typically month-to-month) contracts. Natural gas
prices received by Alexander increased 38% during the three months ended March
31, 1996, resulting in an average price of $1.98 per Mcf compared to an average
price per Mcf of $1.44 for the same period in 1995. Future sales prices will be
dependent upon the future supply and demand of natural gas in the market and the
quantities of gas sold under short-term contracts as opposed to quantities sold
under long-term contracts, which currently command higher prices.
Oil and Gas Production. Production and average prices received per Bbl and
Mcf are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1995 1996
---------- ----------
<S> <C> <C>
Crude oil:
Production (Bbls)......................................... 54,369 32,397
Average price received per barrel......................... $16.88 $17.96
Natural gas:
Production (Mcf).......................................... 2,502,863 1,989,022
Average price received per Mcf............................ $1.44 $1.98
</TABLE>
Oil and natural gas production volumes for the three months ended March 31,
1996 on an Mcfe basis decreased from such volumes for the same period in 1995 by
23%. This decrease in production was due to the sale of certain producing
properties during the three months ended March 31, 1996 and during the year
ended 1995. Although Alexander experienced some curtailments of gas production,
these curtailments have not been
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material. The curtailments were primarily attributable to excess supply and
price competitiveness with oil. There can be no assurance that Alexander will
not experience future curtailments.
Oil and natural gas production volumes for the year ended December 31, 1996
are expected to be lower than 1995. This expected decrease is primarily
attributable to a decrease in development activities in 1995 and 1996 due to the
sale of certain properties during 1995 and the three months ended March 1996.
Total Expenses; Oil and Gas Operating Expenses. Total costs and expenses
decreased for the three months ended March 31, 1996 compared to the same period
in 1995. Oil and gas operating expenses decreased for the three months ended
March 31, 1996 compared to the same period in 1995, due to reduced operating
expenses attributable to a lesser number of producing wells, which were sold
during 1995 and the three months ended March 1996. The 1996 and 1995 oil and gas
property sales are expected to reduce annual 1996 oil and gas operating expenses
by approximately $900,000 and $100,000, respectively, from the amount reported
in 1995. Oil and gas operating expenses decreased on an Mcfe basis to $.56 for
the three months ended March 31, 1996 compared to $.60 for the same period in
1995.
Amortization and Depreciation. The amortization and depreciation rate per
dollar of oil and gas sales for the three months ended March 31, 1996 decreased
to $.46 compared to $.50 for the same period in 1995. The decreased rate for the
three months ended March 31, 1996 was primarily due to the increased estimated
future gross revenues resulting from the higher product price for both oil and
natural gas for the three months ended March 31, 1996. The amortization and
depreciation rates for future periods will increase or decrease corresponding
with the fluctuations in oil and gas prices, reserve volumes and production.
General and Administrative Expenses. General and administrative expenses
decreased for the three months ended March 31, 1996 compared to the same period
in 1995. This decrease was primarily related to a lesser number of personnel
comprising general and administrative expenses for the three months ended March
31, 1996 compared to the same period in 1995. Well operator and management fees
offset 84% of net general and administrative expenses during the three months
ended March 31, 1996 compared to 94% during the same period in 1995.
Interest Expense. Interest expense decreased for the three months ended
March 31, 1996 compared to the same period in 1995 due to the decrease in the
outstanding borrowings and interest rate. The weighted average outstanding
borrowings decreased to $48.5 million for the three months ended March 31, 1996,
a 4% decrease from $50.5 million for the three months ended March 31, 1995. The
weighted average interest rate decreased to 7.6% for the three months ended
March 31, 1996 compared to 7.7% for the three months ended March 31, 1995.
Alexander's credit facility bears interest at LIBOR plus 1.5% (a rate of 6.9375%
at March 31, 1996). Alexander's outstanding borrowings under certain long-term
debt agreements will bear interest at rates higher than the 1995 rates or the
rates for the three months ended March 31, 1996 due to modifications to certain
debt agreements in May 1996.
Nonrecurring Abandoned Merger Costs. Alexander had no such expenses for the
three months ended March 31, 1996. On May 10, 1995, Alexander announced the
termination of discussions regarding the possible outstanding merger with
Abraxas and, accordingly, expensed $300,000 of related costs.
Taxes. As a result of the public offerings in 1993, Alexander had an
ownership change pursuant to Section 382 of the Code. Accordingly, in 1996 and
1995, Alexander's provision or benefit for income taxes approximated the
statutory federal rate.
Years Ended December 31, 1995, 1994 and 1993
Total Revenues; Oil and Gas Sales. Total revenues decreased for 1995
compared to 1994. The decrease in total revenues was comprised of decreased oil
and natural gas sales, a slight increase in well operator reimbursements and
decreased other revenues. The decreased oil and natural gas sales are
attributable to lower oil production and a decrease in product price for natural
gas offset by increased oil prices and higher production volumes for natural gas
as a result of the wells drilled during 1994 and 1995 and the producing gas
properties acquired from JMC Exploration, Inc. ("JMC") in November 1994 (the
"JMC Acquisition"). See "Business and Properties -- Alexander -- Business
Strategy."
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Oil revenues decreased by 13% due to a 19% decrease in production
quantities partially offset by a 7% increase in the average price per Bbl of
production for the year ended December 31, 1995 as compared to 1994. Natural gas
revenues decreased by 2% due to a 13% decrease in the average price per Mcf of
natural gas produced for the year ended December 31, 1995 as compared to 1994,
offset by a 13% increase in production quantities.
Total revenues decreased for 1994 compared to 1993. The decrease in total
revenues consisted of decreased oil and natural gas sales and a nonrecurring
item in other revenues in 1993 of approximately $1.25 million from the proceeds
of settlement of a lawsuit. The decrease in oil and natural gas sales was due to
lower product prices, partially offset by higher production volumes of natural
gas attributable to wells drilled in 1994.
Oil revenues decreased by 28% due to a 21% decrease in production
quantities and an 9% decrease in the average price per Bbl of production for the
year ended December 31, 1994 as compared to 1993. Natural gas revenues increased
by 8% due to a 27% increase in production quantities, offset by a 15% decrease
in the average price per Mcf of natural gas produced for the year ended December
31, 1994 as compared to 1993.
Well Operator and Management Fees. Well operator and management fees
reflect a slight increase for the year ended December 31, 1995 compared to the
same period in 1994. This slight increase is attributable to the inclusion of
the JMC Acquisition operated properties for a full year in 1995, as the JMC
Acquisition closed in mid November 1994, offset by the sale of certain operated
properties in the latter half of 1995. Included in the 1995 management fees were
reimbursements of overhead expense of $10,000 per month from each of the AEJH
1987 and AEJH 1989 Limited Partnerships.
Well operator and management fees remained fairly constant for the year
ended December 31, 1994 compared to the same period in 1993. Included in the
management fees were reimbursements of overhead expense of $10,000 per month
from each of the AEJH 1987 and AEJH 1989 Limited Partnerships and an average of
$4,750 per month for six months from the AEJH 1987-A Limited Partnership, which
ceased operations during mid 1994.
Marketing Fees, Interest and Other Revenues. The 19% increase in interest
and other revenue (excluding the gains from Alexander's sale of other property
and equipment of approximately $130,000 and the finalization and termination of
a take-or-pay contract of approximately $235,000 in 1994) during the year ended
December 31, 1995 compared to 1994 resulted from additional interest income on
invested cash and increased marketing fees for both oil and natural gas.
The increase in interest and other revenue (excluding the settlement of a
lawsuit of approximately $1.25 million in 1993) during the year December 31,
1994 compared to 1993 resulted from gains on the sale of real estate and the
settlement of a take-or-pay contract recorded as deferred revenue in 1993.
Oil and Gas Prices. Oil prices received by Alexander increased 7% during
1995, resulting in an average price of $16.57 per Bbl compared to the average
price per Bbl of $15.44 for 1994. Revenues and operating results for future
periods will continue to be impacted by price fluctuations which are largely
influenced by market conditions and the quantity of the oil sold by OPEC.
During 1995, Alexander experienced a decrease in natural gas prices. In
recent years, Alexander has sold much of its natural gas under short-term
(typically month-to-month) contracts. Natural gas prices received by Alexander
decreased 13% during 1995, resulting in an average price of $1.50 per Mcf
compared to an average price per Mcf of $1.73 for 1994. Future sales prices will
be dependent upon the future supply and demand of natural gas in the market and
the quantities of gas sold under short-term contracts as opposed to quantities
sold under long-term contracts, which currently command higher prices.
Oil prices received by Alexander decreased 9% during 1994, resulting in an
average price of $15.44 per Bbl compared to the average price per Bbl of $16.99
for 1993. Average gas price received by Alexander during 1994 was $1.73 per Mcf,
a decrease of 15% compared to an average gas price received in 1993 of $2.04 per
Mcf.
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Oil and Gas Production. Production and average prices received per Bbl and
Mcf for each of the last three years are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Crude Oil:
Production (Bbls)................................. 283,190 224,230 181,022
Average price per Bbl............................. $16.99 $15.44 $16.57
Natural Gas
Production (Mcf).................................. 6,332,015 8,050,688 9,067,588
Average price per Mcf............................. $2.04 $1.73 $1.50
</TABLE>
Oil and natural gas production volumes for 1995 on an Mcfe basis exceeded
such volumes for the same period in 1994 by 8% and oil and natural gas
production volumes for 1994 on an Mcfe basis exceeded such volumes for 1993 by
17%. These increases in production were from participation in new wells drilled
over the past three years through Alexander and the AEJH 1985 and AEJH 1989
Limited Partnerships, from recompletions in the Cotton Valley properties in 1994
by Alexander and from production on properties acquired in the JMC Acquisition
after closing in mid November 1994. Although Alexander experienced some
curtailments of gas production, these curtailments have not been material. The
curtailments were primarily attributable to excess supply and price
competitiveness with oil. There can be no assurance that Alexander will not
experience future curtailments.
Oil and natural gas production volumes for the year ended December 31, 1996
are expected to be lower than 1995. This expected decrease is primarily
attributable to a decrease in development activities in 1995 compared to such
activities in 1993 and 1994.
Total Expenses; Oil and Gas Operating Expenses. Total costs and expenses
increased for 1995 compared to 1994 due in part to nonrecurring expenses, an
increase in interest expense, depreciation and amortization expense and a
provision for impairment of oil and gas properties. Oil and gas operating
expenses remained fairly constant for 1995 compared to 1994. Alexander
recognized additional operating expenses attributable to a greater number of
producing wells and workovers in the first half of 1995, offset by reduced
operating expenses attributable to the sale of certain producing properties
during the third quarter of 1995 and reduced remedial workovers performed during
the latter half of the year. Oil and gas operating expenses continue to decrease
on an Mcfe basis to $.60 for 1995, compared to $.65 per Mcfe for 1994 and $.66
per Mcfe for 1993.
Oil and gas operating expenses increased for 1994 compared to 1993, due to
additional operating expenses attributable to a greater number of producing
wells, which were drilled and completed during 1994 and the latter part of 1993
and due to workover costs performed on certain properties in 1994.
Amortization and Depreciation. The oil and gas property amortization and
depreciation rate per dollar of oil and gas sales for 1995 increased to $.55
compared to $.41 for 1994. The increased rate for 1995 was due principally to
the decreased estimated future gross revenues resulting from the decreased oil
and gas reserve volumes in 1995 as a result of downward revisions to previous
reserve estimates. The amortization and depreciation rates for future periods
will increase or decrease corresponding with the fluctuations in oil and gas
prices, reserve volumes and production.
The oil and gas property amortization and depreciation rate per dollar of
oil and gas sales for 1994 increased to $.41 compared to $.32 for 1993. The
increased rate for 1994 was due to the decreased estimated future gross revenues
resulting from lower product prices in 1994.
Impairment of Oil and Gas Properties. As of December 31, 1995, Alexander's
net book value of oil and gas properties exceeded the ceiling limitations
prescribed under the full cost method of accounting for oil and gas properties.
Accordingly, a provision was recognized in the fourth quarter of 1995 of $2.3
million ($2.0 million, net of the deferred tax credit). The provision for
impairment is primarily attributable to declines in estimated reserves due to
downward revisions to reserve estimates (see Note 14 of Notes to Consolidated
Financial Statements of Alexander).
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<PAGE> 87
General and Administrative Expenses. General and administrative expenses
decreased 15% for 1995 compared to 1994. This decrease was primarily related to
fewer personnel for 1995 compared to 1994, as 1994 included personnel and other
general and administrative expenses of ANEC, most of which were not retained
following the merger in July 1994. Well operator and management fees offset 77%
of general and administrative expenses during 1995 compared to 65% during 1994.
General and administrative expenses increased for 1994 compared to 1993.
This increase was primarily related to management bonuses and increased
personnel costs associated with Alexander's growth. Well operator and management
fees offset 65% of general and administrative expenses during 1994 compared to
69% during 1993.
Interest Expense. Interest expense increased for 1995 compared to 1994 due
to the amount of outstanding borrowings for the twelve-month period ended
December 31, 1995, as compared to 1994 due principally to the JMC Acquisition,
which closed mid November 1994. The weighted average outstanding borrowings
increased to $49.8 million in 1995, a 90.0% increase from $26.3 million in 1994.
The weighted average interest rate decreased to 8.0% in 1995 compared to 9.1% in
1994. At December 31, 1995, Alexander's credit facility bore interest at LIBOR
plus 1.5% (a rate of 7.3125%). As discussed under Liquidity and Capital
Resources -- Existing Long-term Debt, Alexander's outstanding borrowings under
certain long-term debt agreements will bear interest at rates higher than the
1995 rates due to modifications to such agreements in May 1996.
Interest expense increased for 1994 compared to 1993 due to an increase in
the outstanding borrowings associated with property development and the JMC
Acquisition. The weighted average outstanding borrowings increased to $26.3
million in 1994, a 47.5% increase from $17.8 million in 1993. The weighted
average interest rate decreased to 9.1% in 1994 compared to 11.6% in 1993.
Nonrecurring Expenses. On May 10, 1995, Alexander announced the termination
of discussions regarding the possible outstanding merger with Abraxas and,
accordingly, expensed $300,000 of related costs. In August 1995, Alexander
postponed the offering of its Senior Subordinated Notes and subsequent thereto
expensed $452,000 of related costs.
In connection with the merger between Alexander and ANEC, Alexander
incurred nonrecurring charges to operations in 1994 of $2.4 million. These costs
include legal, accounting, investment banking, printing and other costs.
Litigation Settlement. In the fourth quarter of 1994, in an effort to
resolve ANEC's litigation with various parties which had been ongoing since
1992, Alexander acquired certain creditor claims against the operator of a well
in which ANEC had an interest and agreed to mediation with the primary
plaintiffs of the outstanding litigation. Although management believed its
actions against the well operator were meritorious and believed the
counterclaims of this party were without merit, after having mediated this
matter in December 1994, management of Alexander believed it was in Alexander's
best interest to resolve such litigation and terminate the costs associated
therewith. Accordingly, in late December 1994, Alexander agreed to a negotiated
settlement, the effect of which resulted in a charge to 1994 operations,
including legal fees, of approximately $734,000.
Taxes. As a result of Alexander's and ANEC's secondary public offerings in
1993, both entities had an ownership change pursuant to Section 382 of the Code.
In 1995, Alexander recorded a tax credit of $1.7 million on pretax loss of $6.2
million, an effective rate of 28%. This credit was less than the combined
statutory federal and state rates due to the estimated timing of future taxable
temporary differences and limitations on the utilization of Alexander's net
operating loss and statutory depletion carryforwards as discussed below. In
1994, Alexander's provision for income taxes approximated statutory rates after
considering permanent differences. In 1993, Alexander sustained a nonrecurring
non-cash charge to operations of $1.2 million due to an increase in the
valuation allowance associated with the change in ownership in the first quarter
of 1993 discussed above. Alexander also recorded a deferred tax provision of
approximately $1.1 million on pretax income of $4.9 million, representing an
effective rate of 23%. The lower tax rate for 1993 was primarily attributable to
the reduction of a valuation allowance previously established on pre-acquisition
net operating loss carryforwards of ANEC.
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<PAGE> 88
In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 109, "Accounting for Income Taxes" ("SFAS
109"). Alexander adopted SFAS 109 on January 1, 1993. Among other changes, SFAS
109 relaxed the recognition and measurement criteria for deferred tax assets and
alternative minimum tax from that provided for under its previous method of
accounting for income taxes under Statement of Financial Accounting Standards
No. 96 ("SFAS 96"). Adoption of this standard resulted in the elimination of
deferred income taxes payable of $425,000, related entirely to alternative
minimum tax, which is reflected in the 1993 statement of operations as the
cumulative effect of a change in accounting principle.
LIQUIDITY AND CAPITAL RESOURCES
Years Ended December 31, 1995 and 1994
General. Alexander's capital requirements relate primarily to exploitation,
development, exploration and acquisition activities. In general, because
Alexander's oil and gas reserves are depleted by production, the success of its
business strategy is dependent upon a continuous exploitation, development,
exploration and acquisition program.
Historically, Alexander has funded its capital requirements through cash
flow from operations, bank borrowings, various carried interest arrangements
(whereby other parties paid a portion of Alexander's share of costs) and equity
sales. Alexander's capital resources available to fund capital requirements
consist primarily of cash flow from operations, not otherwise used to retire
outstanding long-term debt. As of December 1995, Alexander has capital
expenditure commitments of approximately $1.6 million, which Alexander believes
can be funded through cash flow from operations. Alexander's capital expenditure
budget for 1996 is approximately $13 million, substantially all of which
represents the development of Alexander proved undeveloped locations. If the
Merger with NEG is not consummated, substantially all of the budget amount in
excess of that expected to be available from operations, after debt service,
will have to be funded through various financing alternatives, including equity
sales, debt offerings, and/or non-key property sales. Proceeds from the
financing alternatives will have to be sufficient in amount to also retire
Alexander's outstanding term note with a bank, which had a balance at December
31, 1995 of $11.0 million. See Note 4 of Notes to Consolidated Financial
Statements of Alexander. If the Merger with NEG is not consummated, Alexander
believes it has the capability of executing such financing alternatives on a
timely basis; however, there are no assurances of that. Alexander may defer
budgeted expenditures to future periods. Deferral of the budgeted capital
expenditures may cause a delay in the realization of undeveloped oil and gas
reserves.
Cash Flows. In 1995, Alexander's net cash provided by operating activities
was $3.4 million, compared to $1.5 million for the year ended December 31, 1994.
This increase was primarily attributable to the decrease in nonrecurring and
litigation expenses of $2.4 million, reduced general and administrative expenses
of $592,000, an increase of $1.1 million due to net changes in operating assets
and liabilities, partially offset by reduced oil and gas sales of $791,000 and
increased interest expense of $1.6 million. The changes in operating assets and
liabilities were primarily attributable to the reduced oil and gas property
development at December 31, 1995 compared with 1994 and events in 1994,
explained below, which did not recur in 1995. At December 31, 1995, Alexander
had a $3.5 million net gas balancing and gas prepayment liability attributable
to 2.5 Bcf of natural gas production in excess of Alexander's entitled natural
gas volumes. The majority of the excess sales are from properties that have gas
balancing agreements which provide for recoupments by the underproduced owners
from 25% of volumes attributable to Alexander's interest. Additionally, most gas
prepayments are refundable upon the end of the productive life of the respective
wells. At December 31, 1995, approximately $1.6 million are classified as due
within one year.
Net cash used by investing activities in 1995 decreased by $28.1 million to
$4.2 million due primarily to reduced oil and gas property acquisitions and
development offset by reduced proceeds from property sales.
Net cash provided by financing activities in 1995 decreased by $28.9
million to $1.4 million due primarily to reduced long-term debt borrowings in
1995 compared to 1994.
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<PAGE> 89
In 1994, Alexander's cash provided by operating activities was $1.5 million
compared to $12.1 million for the year ended December 31, 1993. This decrease
was primarily attributable to $3.2 million of nonrecurring expenses associated
with the ANEC merger and the settlement of ANEC litigation, the nonrecurrence of
the 1993 $1.25 million gas contract settlement proceeds and the net change in
assets and liabilities resulting from operating activities of $4.8 million. The
$4.8 million net change in assets and liabilities resulting from operating
activities in 1994 is the result of reduced drilling activities, the
availability of additional borrowing capacity associated with the new credit
facility and the nonrecurrence of a natural gas prepayment agreement at December
31, 1994, compared with December 31, 1993, all of which caused a reduction in
accounts payable, oil and gas proceeds due others and other liabilities at
December 31, 1994 compared with the related balances at December 31, 1993.
Net cash used by investing activities in 1994 increased approximately $15.3
million to $32.3 million from $17.0 million in 1993. Additions to oil and gas
properties increased by approximately $18.1 million to $36.0 million due to the
JMC acquisition of $18.2 million and the continued redirection of activities
toward exploration and development of reserves after completing the secondary
public offering in 1993. The acquisition added 25 billion cubic feet of natural
gas reserves to Alexander's asset base. The properties acquired are located in
the Arkoma Basin in Oklahoma and Arkansas. During 1994, Alexander also sold its
interest in the MFS Properties for approximately $3.2 million which were
acquired in 1990 for $3.0 million.
At December 31, 1995, Alexander had a working capital deficit of $6.5
million and had no availability under its revolving line of credit. See
"-- General" above and "-- Existing Long-term Debt" below.
Three Months Ended March 31, 1996 and 1995
Cash Flows. For the three months ended March 31, 1996, Alexander's cash
provided by operating activities was approximately $.9 million, a decrease of
47% compared to $1.6 for the same period in 1995. The $1.6 million net change in
assets and liabilities resulting from operating activities is primarily the
result of reduced drilling activities and reduced oil and gas production volumes
which caused a reduction in accounts payable and accounts receivable,
respectively, for the three months ended March 31, 1996 compared with the same
period in 1995. Alexander has a $2.9 million net gas balancing liability
attributable to 2.1 Bcf of natural gas production in excess of Alexander's
entitled natural gas volumes. The majority of these excess sales are from
properties that have gas balancing agreements which provide for recoupments by
the underproduced owners from 25% of volumes attributable to Alexander's
interest. At March 31, 1996, approximately $1.5 million was included in current
liabilities associated with such net excess sales liability.
Net cash used by investing activities for the three months ended March 31,
1996 decreased approximately $1.9 million from the same period in 1995.
Additions to oil and gas properties decreased by approximately $.8 million due
primarily to reduced oil and gas property acquisitions and development. Proceeds
from the sale of properties and equipment increased by approximately $756,000 in
1996 to approximately $802,000, resulting from the sale of oil and gas
properties in January 1996.
Net cash provided by financing activities was approximately $24,000 for the
three months ended March 31, 1996 compared to $2.0 million for the corresponding
period in 1995. Net cash provided for the three months ended March 31, 1996
resulted from proceeds from the exercise of employee stock options, offset
partially by payments on long-term debt. At March 31, 1996, Alexander had a
working capital deficit of $6.3 million and had no availability under its
revolving line of credit. See "-- Existing Long-term Debt."
Existing Long-term Debt. At March 31, 1996, Alexander had $44.0 million
outstanding under its revolving credit facility with a bank. Subsequent to
December 31, 1995, the lender reduced the borrowing base to $33.0 million,
effective to December 31, 1995, requiring the $11.0 million excess borrowings to
be converted to a term note. In May 1996, Alexander amended the credit agreement
(the "Amended Agreement"). Under the Amended Agreement, the term note requires,
among other things, application of $750,000 of proceeds from property sales and
monthly payments of principal of $350,000 plus interest, beginning effective
April 1996, through its maturity date of April 1, 1997 at which time the
remaining unpaid principal and interest become due. The term note will bear
interest at the prime rate plus 3% (an aggregate rate of 11.25% at March 31,
1996) through October 15, 1996 and the prime rate plus 4% thereafter.
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<PAGE> 90
The borrowings associated with the revolving credit facility cannot exceed
the borrowing base, which relates to Alexander's oil and gas reserve base. The
borrowing base is subject to semi-annual redeterminations each April and October
until April 1, 1997, at which time the borrowing base is reduced quarterly by
1/16th through December 31, 2000. The revolving credit facility interest rate
(6.9375% at March 31, 1996) was increased to LIBOR plus 2.0%, under the Amended
Agreement, beginning effective April 1996. All of the borrowings outstanding
with this lender, under the Amended Agreement, are secured by a first and prior
lien on substantially all of Alexander's assets.
In connection with the Amended Agreement, the lender also reduced the
minimum requirements related to certain financial covenants. Alexander expects
to be able to comply with the amended financial requirements in future periods.
At March 31, 1996, Alexander also had $3.0 million outstanding under a term
note with a shareholder which contains various financial covenants. In May 1996,
Alexander obtained a waiver through April 1, 1997 from the shareholder for
noncompliance with certain covenants. Under the waiver, Alexander is required to
make its scheduled principal payment of $1.0 million in June 1996. The
shareholder may, at its sole discretion, require the remaining $2 million of
unpaid principal and accumulated interest due any time after April 1, 1997.
Alexander also secured the shareholder loan on an equal basis with the bank debt
discussed above and agreed to liquidate and distribute the assets of the AEJH
1985, AEJH 1987 and AEJH 1989 Limited Partnerships.
If the Merger with NEG is consummated, the revolving credit facility and
term note with a bank and the balance outstanding under the term note with a
shareholder will be paid in connection with the NEG bank refinancing. See "NEG
Management's Discussion and Analysis of the Effects of the Merger on the Future
Financial Condition and Results of Operations of NEG."
NEG Merger. On June 6, 1996, the Board of Directors approved the Merger
Agreement and related transactions. If the Merger is not consummated, Alexander
believes its development program may be accomplished, subject to obtaining
financing on a timely basis, sometime during the first or second quarter of
1997.
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<PAGE> 91
NEG MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
EFFECTS OF THE MERGER ON THE FUTURE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF NEG
THE MERGER
The Merger will be accounted for as a purchase of Alexander by NEG
utilizing the purchase method of accounting. As such, NEG's costs of acquiring
Alexander will be allocated to the assets and liabilities acquired using
estimated fair values with the remainder of the purchase price allocated to
proved oil and gas properties. No goodwill will be recorded in this transaction.
The anticipated sources and uses of funds related to financing the Merger
are as follows:
SOURCES OF FUNDS (IN MILLIONS)
<TABLE>
<S> <C>
NEG New Credit Facility, net................................................. $64.3
NEG Equity Private Placement................................................. 15.0
-----
$79.3
=====
</TABLE>
USES OF FUNDS (IN MILLIONS)
<TABLE>
<S> <C>
Repayment of former credit facilities........................................ $68.1
Transaction costs and other merger related expenses.......................... 4.0
Working capital.............................................................. 7.2
-----
$79.3
=====
</TABLE>
Following the Merger, NEG expects to have a working capital deficit of
approximately $7.2 million. This working capital deficit will include
approximately $17.0 million of long-term debt due within one year from the NEG
New Credit Facility. As discussed below, while future cash flows are subject to
a number of variables, NEG currently expects net cash flows from operations to
be sufficient to fund these debt service requirements and other liabilities as
they come due. NEG also expects to have a working capital deficit in future
periods, consistent with many of its peers in the industry. NEG believes such a
working capital deficit is manageable and will not adversely impact its future
operations, particularly given its intent to limit capital expenditures to its
cash availability and its intent to actively pursue the feasibility of issuing
high yield medium term notes in September or October 1996.
Following the Merger, NEG has budgeted capital expenditures of $15 million
and $19 million for the four months ended December 31, 1996 and for the year
ended 1997, respectively. NEG is not contractually committed to expend these
funds. Additionally, initial scheduled principal payments under the NEG New
Credit Facility are $3 million and $17 million for the 1996 period and 1997,
respectively. Future cash flows and the availability of credit are subject to a
number of variables, including the level of production from existing wells,
prices of oil and natural gas and NEG's success in drilling and acquiring
additional producing reserves. NEG currently expects that cash flows from
operations and proceeds from the NEG Equity Private Placement will be sufficient
to fund budgeted capital expenditures and debt service requirements under the
NEG New Credit Facility for the 1996 period after the Merger and for 1997;
however, if oil and gas prices decline significantly from prevailing market
prices experienced in the second quarter of 1996, if principal payments under
the NEG New Credit Facility are accelerated from those initially scheduled, or
if interest rates or the rate of drilling success change adversely from expected
rates, cash flows from operations will be adversely affected and NEG may be
required to delay or reduce capital expenditures from its budgeted amounts.
Following the Merger, NEG expects to seek additional capital from
traditional reserve base borrowing, equity and debt offerings or joint ventures
to further develop and explore its properties and to acquire additional
properties. Presently NEG is discussing with underwriters the feasibility of
making a high yield debt
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<PAGE> 92
offering of medium term notes to be completed before the end of the first
quarter of 1997, with the object of raising between $75 -- $125 million for
these purposes. NEG's ability to access additional capital, including in
connection with any such proposed high yield debt offering, will depend on its
continued success in exploring for and developing its oil and gas reserves and
the status of the capital markets at the time such capital is sought.
Accordingly, there can be no assurance that capital will be available to NEG
from any source or that, if available, it will be at prices or on terms
acceptable to NEG. Moreover, the rights granted to the holders of the NEG Series
D Preferred, such as the NEG Series D Contingent Voting Rights and the rights of
first refusal, may adversely impact NEG's ability to access capital markets and
the terms of such offerings. Should sufficient capital not be available, the
development and exploration of NEG's properties could be delayed or reduced and,
accordingly, NEG oil and gas revenues and operating results may be adversely
affected.
NEG NEW CREDIT FACILITY
On May 29, 1996, NEG received a commitment letter from the Banks for a
credit facility to provide funds to refinance existing debt of NEG and Alexander
and for general corporate purposes. The NEG New Credit Facility consists of up
to a $100.0 million Reducing Revolver, with an initial borrowing base of $60.0
million and a $5.0 million Term Loan. The Borrowing Base will be redetermined at
least semi-annually and will be reduced monthly by an amount determined by the
Banks on each Borrowing Base determination date. The Monthly Commitment
Reduction initially will be $1 million per month. The principal under the
Reducing Revolver will be due at maturity, four years from the date of closing.
Interest will be payable monthly and will be calculated at the BankOne Base
Rate, as determined from time to time by BankOne (which increases by .25% if the
outstanding loan balance is greater than 75% of the Borrowing Base). After the
Term Loan is repaid in full, NEG may elect to calculate interest under the
Eurodollar Rate, as defined in the Commitment.
The Commitment provides for a $5.0 million Term Loan to provide funds to
bridge the issuance of a debt and/or equity offering by NEG. Interest on the
Term Loan will be payable monthly at a rate of the BankOne Base Rate plus 2%,
and the principal of the Term Loan is payable at maturity, which is six months
after the date of closing.
The NEG New Credit Facility prohibits cash dividends on NEG Common Stock or
NEG Preferred Stock. Cash dividends on NEG Common Stock or Preferred Stock will
be allowed only after the principal and interest on the Term Loan is paid in
full, and as long as no event of default exists or would exist as a result of
the payment thereof.
For further discussion of the NEG New Credit Facility, see "The Merger
Proposals -- Transactions Related to the Merger -- The Commitment."
NEG expects that cash flows provided by the NEG Equity Private Placement
and from the combined operations will be sufficient to service its indebtedness.
However, NEG may be required to issue additional debt and equity securities to
service such indebtedness and make necessary capital expenditures, and currently
is considering the feasibility of a high yield debt offering in the range of $75
to $125 million. There can be no assurance such funds will be available to NEG.
NEG EQUITY PRIVATE PLACEMENT
The Commitment for the Banks requires NEG to have raised equity or "quasi"
equity in an amount of $12.5 million at or prior to the closing of the NEG New
Credit Facility.
On August 7, 1996, NEG executed the High River Agreement with High River,
pursuant to which High River agreed to purchase 100,000 shares of NEG Series D
Preferred at $100 a share and warrants to purchase 700,000 shares of NEG Common
Stock exercisable at $2.50 per share for $10.0 million.
On July 25, 1996, NEG entered into the Kayne Anderson Term Sheet under
which KAIM expressed the intent of the Kayne Anderson Investors, subject to
certain conditions, to purchase 50,000 shares of NEG Series E Preferred at $100
a share and warrants to purchase 350,000 shares of NEG Common Stock exercisable
at $2.50 per share for $5.0 million. In consideration of the purchase by the
Kayne Anderson
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<PAGE> 93
Investors of the shares in the NEG Equity Private Placement, NEG agreed to
extend the period during which the NEG Series B Preferred and the NEG Series C
Preferred cannot be redeemed by NEG from June 14, 1997 to June 14, 1999. As a
result, dividends on the NEG Series B Preferred and NEG Series C Preferred will
continue to accrue and be payable at rates of 10% and 10.5% per annum,
respectively. See "Description of Capital Stock -- NEG -- NEG Series B
Preferred;" and "Description of Capital Stock -- NEG -- NEG Series C Preferred."
For further discussion of the NEG Equity Private Placement, see "The Merger
Proposals -- Transactions Related to the Merger -- NEG Equity Private
Placement."
RESULTS OF OPERATIONS
On a pro forma basis reflecting the Merger, the NEG Equity Private
Placement and NEG's other acquisitions, as if such transactions had occurred on
January 1, 1995, the pro forma loss before extraordinary item for the year ended
1995 was $5.4 million and the pro forma net income for the first quarter of 1996
was $842,000. The pro forma results of operations exclude a writedown of oil and
gas properties of approximately $37.2 million, net of related deferred taxes, in
accordance with the full cost method of accounting, resulting from allocating
additional cost, under the purchase method of accounting, to the oil and gas
properties in connection with the Merger. Such writedown, which will increase or
decrease at the Effective Time of the Merger based on increase or decrease in
NEG's stock price from $3.00 per share and the increase or decrease in NEG's and
Alexander's oil and gas reserve value, will be charged to expense in the period
the Merger is consummated.
Pro forma oil and gas revenues were $26.0 million for 1995 and $8.3 million
for three months ended March 31, 1996. Absent significant declines in the prices
for oil and natural gas, NEG expects combined oil and gas revenues and operating
income to increase during the remainder of 1996 and during 1997 as a result of
the current drilling program and budgeted capital expenditures. However, if NEG
is unable to generate sufficient cash flows from operations or other sources of
liquidity to make the necessary capital expenditures, development of oil and gas
properties will be delayed. As a result, oil and gas revenues and operating
results may be adversely affected.
G & A expenses are not expected to change significantly from the combined
historical G & A expenses as a result of the Merger. Pro forma interest expense
was $6.2 million for 1995 compared to $5.0 million for the combined companies on
a historical basis as a result of expected borrowings under the NEG New Credit
Facility to fund the cash requirements of the Merger and to provide working
capital requirements for capital expenditures. Pro forma interest expense was
$1.2 million for the three months ended March 31, 1996. NEG will also continue
to pay an annual cumulative dividend of $945,000 on the outstanding NEG Series B
Preferred and NEG Series C Preferred.
At December 31, 1995, NEG and Alexander had approximately $2.4 million and
$33.3 million, respectively, in available net operating loss carryforwards
("NOLs"). While the Merger is expected to result in a change in ownership of
both NEG and Alexander pursuant to Section 382 of the Code, NEG does not expect
such change to have any significant impact on its ability to utilize the NOLs.
See "The Merger Proposals -- Certain Federal Income Tax Consequences."
For additional information of the pro forma effects of the Merger on the
NEG's results of operations, see the Pro Forma Combined Condensed Financial
Statements included elsewhere herein.
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<PAGE> 94
NEG DIRECTOR ELECTION PROPOSAL
NEG's by-laws provide that the Board of Directors of NEG will consist of
one or more members, the number of which is to be determined from time to time
by the NEG Board of Directors. The Board of Directors of NEG presently consists
of seven members, one of whom is appointed by the holders of NEG Series B
Preferred and one of whom is appointed by the holders of NEG Series C Preferred,
each voting separately as a class, and five of whom are elected by the holders
of NEG Common Stock. Directors of NEG generally serve for a term of one year
(until the next annual meeting of shareholders) and until their successors are
duly elected or appointed and qualified, or until their death, resignation or
removal. Each of the persons nominated to hold office as provided below is
currently a member of the Board of Directors.
Unless authority to vote in the election of Directors is withheld, it is
the intention of the persons named in the proxy to nominate and vote for the
five persons named in the table below, each of whom has consented to serve if
elected. If any of the nominees becomes unavailable for election as a Director,
which event is not expected to occur, the proxies will be voted for such
substitute as shall be designated by the NEG Board of Directors. In
contemplating the enclosed proxy card, if a shareholder desires to withhold
authority to vote for any of the director nominees, such shareholder should mark
the WITHHOLD AUTHORITY box and line through such nominee(s) name in Item 2 on
the proxy card.
Directors are elected by a plurality of the votes cast by the shares
entitled to vote in the election at a meeting at which a quorum is present.
There are no family relationships between or among any of the Directors of
NEG.
NOMINEES FOR ELECTION AT THE NEG MEETING
<TABLE>
<CAPTION>
NAME AGE PRESENT POSITION WITH NEG(1)
---- --- -------------------------------------
<S> <C> <C>
George B. McCullough.................... 71 Chairman of the Board of Directors
Norman C. Miller........................ 76 Director and Chairman of the
Executive Committee
Miles D. Bender......................... 59 President, Chief Executive Officer,
Treasurer and Director
Robert H. Kite.......................... 41 Director
George N. McDonald...................... 62 Director
</TABLE>
- ---------------
(1) Messrs. McCullough, Miller, Bender, Kite, and McDonald have been Directors
of NEG since December 17, 1990.
For certain biographical information regarding the directors of NEG and
information regarding committees of the Board of Directors and director
compensation, see "Management -- NEG."
APPOINTMENTS OF NEG SERIES B PREFERRED AND NEG SERIES C PREFERRED DIRECTORS
Pursuant to the terms of the NEG Series B Preferred and NEG Series C
Preferred, the holders of a majority of the outstanding shares of NEG Series B
Preferred and NEG Series C Preferred, respectively, each have the right to
appoint one member to NEG's Board of Directors at all times, and to collectively
appoint one-third of the members of NEG's Board of Directors if NEG fails to
make four dividend payments or if NEG makes four dividend payments on the NEG
Series B Preferred or NEG Series C Preferred in shares of NEG Series B Preferred
or NEG Series C Preferred, as the case may be (as opposed to cash dividends).
Effective immediately following the election of five members of the Board of
Directors at the NEG Meeting, a majority of the holders of the NEG Series B
Preferred will appoint Robert V. Sinnott as the director of NEG representing the
NEG Series B Preferred and a majority of the holders of the NEG Series C
Preferred will appoint Elwood W. Schafer as a director of NEG representing the
NEG Series C Preferred. For certain biographical information regarding Messrs.
Sinnott and Schafer, See "Management -- NEG."
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<PAGE> 95
INCREASE IN SIZE OF NEG BOARD, APPOINTMENT OF THREE DIRECTORS BY ALEXANDER AND
APPOINTMENT OF ONE DIRECTOR BY HOLDERS OF THE NEG SERIES D PREFERRED
In accordance with the Merger Agreement, immediately after the Effective
Time of the Merger, the NEG Board of Directors will increase the size of the
Board from seven to eleven directors and appoint Bob G. Alexander, Jim L. David
and Robert A. West to fill three of the vacancies created by such action. For
certain biographical information regarding Messrs. Alexander, David and West,
see "Management -- Alexander -- Directors and Executive Officers."
Immediately after completion of the NEG Equity Private Placement, the
holders of the NEG Series D Preferred will appoint one member to the NEG Board
of Directors. High River has indicated that it intends to appoint Robert J.
Mitchell to fill such position. See "Management -- NEG -- Directors and
Executive Officers" for certain biographical information regarding Mr. Mitchell.
NEG CERTIFICATE OF INCORPORATION AMENDMENT PROPOSAL
The NEG Board of Directors has unanimously (with Messrs. Sinnott and
Schafer abstaining with respect to the amendments to the NEG Certificate of
Incorporation prohibiting redemption of the NEG Series B Preferred and NEG
Series C Preferred until June 14, 1999) approved and recommended to its
shareholders amendments to its Certificate of Incorporation eliminating the
authorization of Class B Common Stock, of which no shares are issued or
outstanding, changing the name of Class A Common Stock to "Common Stock,"
increasing the number of shares of Common Stock which NEG has the authority to
issue from 50 million to 100 million shares, clarifying the powers of the Board
of Directors to issue NEG Preferred Stock without Shareholder approval and
amending the Certificates of Designation relating to the NEG Series B Preferred
and the NEG Series C Preferred by extending from June 14, 1997 to June 14, 1999,
the period during which NEG may not redeem the NEG Series B Preferred and the
NEG Series C Preferred. The NEG Certificate of Incorporation Amendment Proposal
will become effective upon the filing of a Certificate of Amendment to the
Certificate of Incorporation with the Secretary of State of the State of
Delaware, which is expected to occur immediately after the NEG Meeting but
before the Effective Time of the Merger. Upon the effectiveness of the proposed
amendments, the following revisions will be made to the NEG Certificate of
Incorporation:
1. Article Fourth of NEG's Certificate of Incorporation will be amended to
read in its entirety as follows:
"The total number of shares of stock which the Corporation shall have
authority to issue is 101,000,000 shares, consisting of 100,000,000 shares
of Common Stock, $.01 par value per share, and 1,000,000 shares of
Preferred Stock, $1.00 par value per share issuable in series.
The Board of Directors of the Corporation is expressly authorized to
cause the Preferred Stock to be issued from time to time, in one or more
series, and in connection with each such series to determine and fix by the
resolution or resolutions providing for the creation and issuance of such
shares of Preferred Stock the number and designation thereof, the powers
(including without limitation any type of voting powers -- special, no or
otherwise), designations, preferences, conversion rights, cumulative,
relative, participating, optional or other rights, if any, and the
qualifications, limitations or restrictions thereof, if any, to the full
extent permitted by the General Corporation Law of Delaware. The
Certificate of Designations of National Energy Group, Inc. of 10%
Cumulative Convertible Preferred Stock, Series B and the Certificate of
Designations of National Energy Group, Inc. of 10 1/2% Cumulative
Convertible Preferred Stock, Series C, filed with the Delaware Secretary of
State on June 2, 1994 and June 14, 1995, respectively, are each
incorporated herein by reference."
2. The first paragraph of Section 2(vi), Redemption Rights, of the
Certificate of Designation of 10% Cumulative Convertible Preferred Stock, Series
B will be amended to read in its entirety as follows:
"(vi) Redemption Rights. The Series B may not be redeemed before June
14, 1999. Thereafter, the Company, at the option of the Board of Directors,
may redeem, in cash, the whole or any part of the shares of Series B at the
time outstanding, upon notice given as hereinafter specified, at the
following
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<PAGE> 96
redemption prices: from June 14, 1999, to June 14, 2000, $110 per share of
Series B and, thereafter, $100 per share of Series B, together with all
accrued and unpaid dividends to the redemption date."
3. The first paragraph of Section 2(vi), Redemption Rights, of the
Certificate of Designation of 10 1/2% Cumulative Convertible Preferred Stock,
Series C will be amended to read in its entirety as follows:
"(vi) Redemption Rights. The Series C may not be redeemed before June
14, 1999. Thereafter, the Company, at the option of the Board of Directors,
may redeem, in cash, the whole or any part of the shares of Series C at the
time outstanding, upon notice given as hereinafter specified, at the
following redemption prices: from June 14, 1999, to June 14, 2000, $110 per
share of Series C and, thereafter, $100 per share of Series C, together
with all accrued and unpaid dividends to the redemption date. 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."
4. All references in the Certificate of Incorporation of NEG to "Class A
Common Stock," including references in the Certificates of Designations for the
NEG Series B Preferred and NEG Series C Preferred, will be deemed to be
references to the "Common Stock."
After the Merger, approximately 49.5 million of the 50.0 million authorized
shares of NEG Common Stock will be outstanding or reserved for issuance.
Management of NEG believes that it is important for NEG to have a sufficient
reserve of shares of NEG Common Stock available for the future needs of NEG, and
that less than 500,000 shares is not sufficient. Increasing the number of
authorized shares of NEG Common Stock will facilitate the acquisition of other
companies and properties and make shares available for other corporate purposes,
including any future issuances of NEG Common Stock in public or private
financings, payment of stock dividends, or upon subdivision of outstanding
shares through stock splits, or upon conversion of or exercise of any
convertible securities, options, warrants or rights which may hereafter be
issued in one or more of such acquisitions. At this time, except as otherwise
described in this Proxy Statement, there are no agreements, arrangements,
commitments, or understandings with respect to the issuance of additional shares
of NEG Common Stock or NEG Preferred Stock involving acquisitions of companies
or properties, although part of NEG's strategic plan is to acquire additional
reserves and NEG periodically engages in discussions with third parties about
the acquisition of oil and gas properties or companies and such discussions may
involve discussions about the issuance of NEG Common Stock. Except as discussed
in this Proxy Statement, there is no present intent to issue shares in public or
private offerings, stock dividends, stock splits, options, warrants, or any
other issuances involving the NEG Common Stock or NEG Preferred Stock. Having
additional authorized shares of NEG Common Stock available for issuance in the
future will give NEG greater flexibility and may result in future acquisitions
or issuances of NEG Common Stock being effected without shareholder approval by
means of a special meeting. Issuance of such shares, however, could dilute
existing shareholders.
Under certain circumstances, the shares available for additional issuance
could be used to create voting impediments and make it more difficult for
persons seeking to effect a merger or otherwise gain control of NEG. Such action
could have an adverse impact on the market price and liquidity of the NEG Common
Stock. Also, any of such additional shares of NEG Common Stock could be
privately placed with purchasers who might side with management of NEG in
opposing a tender offer by a third party. The NEG Certificate of Incorporation
Amendment Proposal, however, is not being sought in order to delay any attempt
to acquire control of NEG, and NEG is not aware of any such attempt.
Since the formation of NEG, the NEG Certificate of Incorporation has
granted to the NEG Board of Directors the authority to issue "blank check"
preferred stock. The term "blank check" preferred stock refers to preferred
stock where the designations, preferences, conversion rights, cumulative,
relative, participation, optional or other rights are determined by the board of
directors without shareholder approval. Since Article Fourth was otherwise being
amended (to eliminate authorization of the Class B Common Stock, to change the
name of the Class A Common Stock to "Common Stock" and to increase the number of
authorized shares of NEG Common Stock from 50 million to 100 million), a
determination was made to clarify the NEG Board of Directors' powers with
respect to its authority to issue "blank check" preferred stock. The current
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<PAGE> 97
Certificate of Incorporation states that the Board of Directors has the right to
set forth the relative rights and preferences of series of NEG Preferred Stock
to the extent permitted by the DGCL. The amendments to "blank check" preferred
stock authority contained in Article Fourth enumerate in greater detail what
powers the Board of Directors has and specifies that the NEG Board of Directors
is authorized to fix the powers (including without limitation any type of voting
powers -- special, no or otherwise), designations, preferences, conversion
rights, cumulative, relative, participating, optional or other rights, if any,
and the qualifications, limitations or restrictions thereof, if any, to the full
extent permitted by the DGCL. This language makes it expressly clear that among
the powers that the NEG Board of Directors has with respect to "blank check"
preferred stock is the power to grant special voting powers, such as those to be
granted to the holders of the NEG Series D Preferred.
As a result of the amendments to the Certificate of Designations of the
rights and preferences of the NEG Series B Preferred and the NEG Series C
Preferred, dividends at a rate of 10% and 10 1/2% per annum, respectively, or
$525,000 and $420,000 per year, respectively, will continue to accrue and be
payable to holders of such NEG Preferred Stock. Such holders are KAIM
affiliates. The Kayne Anderson Investors in the NEG Equity Private Placement are
also KAIM affiliates. See "The Merger Proposals -- Interests of Certain Persons
in the Merger."
The approval of the NEG Certificate of Incorporation Amendment Proposal
requires the affirmative vote of the holders of a majority of the outstanding
shares of (i) NEG Common Stock, (ii) NEG Series B Preferred voting separately as
a class and (iii) NEG Series C Preferred voting separately as a class.
THE BOARD OF DIRECTORS (WITH MESSRS. SINNOTT AND SCHAFER ABSTAINING WITH
RESPECT TO THE AMENDMENTS TO THE CERTIFICATE OF INCORPORATION PROHIBITING
REDEMPTION OF THE NEG SERIES B PREFERRED AND NEG SERIES C PREFERRED UNTIL JUNE
14, 1999) RECOMMENDS A VOTE FOR APPROVAL OF THE NEG CERTIFICATE OF INCORPORATION
AMENDMENT PROPOSAL.
NEG AUDITOR RATIFICATION PROPOSAL
Ernst & Young LLP is being recommended to shareholders for ratification as
NEG's independent public auditors for the current fiscal year ended December 31,
1996. Ernst & Young LLP was NEG's independent public accounting firm for the
fiscal year ended December 31, 1995.
Representatives of Ernst & Young LLP are expected to be (i) present at the
NEG Meeting, (ii) have the opportunity to make a statement if they so desire and
(iii) be available to respond to appropriate questions at the NEG Meeting.
The approval of the NEG Auditor Ratification Proposal requires the
affirmative vote of the holders of a majority of the shares of NEG Common Stock
present, or represented by proxy, at the NEG Meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE NEG AUDITOR
RATIFICATION PROPOSAL.
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<PAGE> 98
BUSINESS AND PROPERTIES
NEG
GENERAL
NEG was incorporated under the laws of the State of Delaware on November
20, 1990. Effective June 11, 1991, Big Piney Oil and Gas Company ("Big Piney")
and VP Oil, Inc. ("VP") merged with and into NEG. NEG's administrative offices
are located at 4925 Greenville Ave., Ste. 1400, Dallas, Texas 75206, and its
telephone number is (214) 692-9211.
NEG is engaged in oil and natural gas exploration, production and
development, and as of March 31, 1996 owns an interest in 221 producing
properties, of which 157 are operated by NEG. NEG's principal properties include
an approximate 95% working interest in the GAU located in Ector County, Texas,
producing oil and gas properties in Oak Hill Field located in Rusk County,
Texas, and the Mustang Island area located in offshore Nueces County, Texas
("Mustang Island"). NEG does not refine or otherwise process any of its
products. NEG primarily sells its oil at the lease to various oil companies and
sells its natural gas to gas companies through pipelines located near its gas
producing properties.
At December 31, 1995, NEG's proved reserves, as estimated by Netherland &
Sewell, were estimated to be 9,065,928 Boe, consisting of 3,921,076 barrels of
oil and 30,869,112 Mcf of natural gas. Also, at December 31, 1995, PV10% of
NEG's proved reserves was $36,278,600, with approximately 49.6% attributable to
the GAU, 31.9% attributable to Oak Hill and 7.2% attributable to Mustang Island.
At the same date, the Standardized Measure was $32,127,101, as estimated by NEG.
BUSINESS STRATEGY
Management intends to pursue various strategies for increasing NEG's oil
and gas reserves and production, obtaining higher prices for its production and
reducing its costs of production. The strategies for increasing reserves and
production include additional development of the GAU, Oak Hill and Mustang
Island and certain other properties, the enhancement and exploitation of NEG's
other existing properties, acquisitions of producing oil and gas properties, and
acquisitions of companies with oil and gas production and exploratory drilling.
NEG anticipates funding additional development of the GAU, Oak Hill, Mustang
Island and certain other properties primarily from advances under the NEG
Existing Facility. Acquisitions may be funded through borrowings under the NEG
Existing Facility, the issuance of new debt and/or equity securities, currently
available cash and/or internally generated funds. However, there can be no
assurances that such sources of funds will actually be available to fund future
acquisitions. Also, in January 1996, NEG entered into an agreement with Sandefer
Oil and Gas, Inc., a Texas corporation ("SOG"), whereby SOG generates prospects
in Louisiana, Texas and Mississippi for NEG's review and participates with NEG
in the evaluation of such prospects. If the prospects are deemed favorable and
NEG acquires an interest, SOG participates in the acquisition of oil and gas
interests therein.
In an effort to reduce the effects of the volatility of the price of gas on
NEG's operations, NEG began hedging crude oil and natural gas prices through the
use of commodity price and basis swap agreements. The use of these agreements
allows NEG to fix the price to be received for specified volumes of products to
the commodity swap price less the basis swap price. NEG does not hold or issue
financial instruments for trading purposes.
During 1995 and the first two quarters of 1996, NEG expanded its areas of
concentration to include offshore oil and gas properties and exploratory
drilling. In particular, NEG has recently purchased interests in eight wells and
three leases in Mustang Island. In early April 1996 NEG won exploration rights
on 16 offshore tracts (covering 7,765 acres) in the Mustang Island area through
bids with the State of Texas. NEG now has 13,815 total exploration and
production acres in the Mustang Island area. NEG expects to engage in
development and exploratory drilling in Mustang Island. In addition, during
1996, NEG has participated in the drilling of five exploratory wells in Texas
and Louisiana, three of which were dry and the fourth resulted in a junked hole
after logging a productive interval, which will be redrilled during 1996. The
fifth well, the Schwing #1 at East Bayou Sorrell in Iberville Parish, Louisiana
showed successful production test results. The Schwing #1 flowed at a sustained
rate of 1,026 barrels of oil per day and 980 Mcf per day. NEG has an
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<PAGE> 99
approximate 17% working interest in the Schwing #1 and will operate the well
after the drilling and completion phases are completed. NEG expects offshore and
exploratory prospects to become a more important part of its business in the
future.
NEG entered into a letter of intent in June 1996 to purchase 100% of the
interests in properties located in Lafourche Parish, Louisiana for $8.25 million
payable in shares of NEG Common Stock based upon the average closing price per
share during the ten trading days prior to closing, but not to exceed $3.25 per
share. Although the parties continue to discuss the possibility of entering into
a definitive agreement with respect to the transaction, the letter of intent has
expired and NEG has no contractual obligation to complete the transaction.
Completion of any acquisition also is contingent upon other factors beyond the
control of NEG. A third party owns 50% of the interest in the properties. The
acquisition of the fifty percent interest owned by the seller is dependent upon
NEG either obtaining the remaining fifty percent of the interest which is owned
by such third party or obtaining operatorship of any wells on the property. In
addition, execution of the definitive agreement and closing of any transaction
contemplated by a definitive agreement will be subject to a number of other
conditions, including the completion of a due diligence review, which
investigation has not yet commenced. While the letter of intent sets forth a
$8.25 million purchase price for the properties, that price is for 100% of the
properties. The seller that executed the letter of intent owns only fifty
percent of the properties and the letter of intent specifies that the purchase
price is to be reduced proportionately to the seller's interest, or to $4.125
million.
Periodically, management of NEG will review NEG's properties and attempt to
dispose of its lower value and marginal properties. In July 1996, NEG sold 33
oil and gas properties of which three were operated. The proceeds from this sale
were less than $100,000. As a result of this sale, as of July 19, 1996, NEG owns
an interest in 188 producing properties, of which 154 are operated by NEG. In
the event that major changes occur in hydrocarbon pricing or any other
unforeseen event occurs, or if NEG's financial condition changes materially,
management of NEG will reevaluate its business strategy.
OIL AND NATURAL GAS RESERVES
The estimated reserves and related future net revenues are based on reports
prepared by the following independent petroleum engineers: Netherland & Sewell
for the year ended December 31, 1995, and by other independent petroleum
engineers for the years ended December 31, 1994 and 1993. All such reserves are
located in the United States. These reserve reports have been prepared using
constant prices and costs in accordance with the guidelines of the SEC. All of
NEG's oil and gas reserves are pledged to Bank One Texas, N.A. pursuant to the
NEG Existing Facility and will also be pledged pursuant to the NEG New Credit
Facility.
NEG has not filed any estimates of proved oil and gas reserves with any
federal authority or agency other than with the SEC.
The net weighted average prices used in NEG's reserve reports at December
31, 1995, 1994 and 1993 were $18.71, $16.59 and $13.03 Bbl, respectively and
$1.91, $1.62 and $1.86 per Mcf of natural gas, respectively.
The following table sets forth certain information on NEG's total proved
oil and gas reserves and the PV10% of estimated future net revenues from such
reserves, at December 31, 1995, as prepared by Netherland & Sewell. Also
presented is the Standardized Measure of NEG's total proved oil and gas
reserves:
TOTAL PROVED RESERVES
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------
OIL GAS
(BBLS) (MCF) PV10%
--------- ---------- -----------
<S> <C> <C> <C>
Proved developed reserves...................... 1,632,404 13,304,031 $21,338,900
Proved undeveloped reserves.................... 2,288,672 17,565,081 14,939,700
--------- ---------- -----------
Total proved reserves................ 3,921,076 30,869,112 $36,278,600
========= ========== ===========
Standardized Measure........................... $32,127,101
===========
</TABLE>
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PRINCIPAL AREAS OF OPERATIONS
The following table sets forth for NEG's principal areas of operation NEG's
proved oil and gas reserves and PV10% of the estimated future net revenues from
such reserves at December 31, 1995:
LOCATIONS OF PROVED RESERVES
<TABLE>
<CAPTION>
OIL AND NATURAL % OF
CONDENSATE GAS TOTAL
FIELDS (BBLS) (MCF) PV10% PV10%
---------------------------------------- ---------- ---------- ----------- ------
<S> <C> <C> <C> <C>
ONSHORE:
Goldsmith Adobe Unit.................. 3,613,605 3,318,754 $17,978,200 49.6%
Oak Hill.............................. 43,306 19,795,956 11,579,800 31.9%
Bishop................................ 10,626 756,012 861,800 2.4%
Malaga................................ 906 897,331 797,400 2.2%
Other Onshore......................... 132,987 2,491,056 2,446,600 6.7%
---------- ---------- ----------- ------
Total Onshore................. 3,801,430 27,259,109 33,663,800 92.8%
---------- ---------- ----------- ------
OFFSHORE:
Mustang Island.......................... 119,646 3,610,003 2,614,800 7.2%
---------- ---------- ----------- ------
TOTAL......................... 3,921,076 30,869,112 $36,278,600 100.0%
========== ========== =========== ======
</TABLE>
The GAU, NEG's largest single property, is operated by NEG and consists of
96 producing wells. Due to acquisitions in 1993 and 1994 NEG now holds
approximately a 95% working interest in the GAU. During 1995, the GAU produced
$4,568,146 in oil and gas sales, or 58.1% of NEG's total oil and gas sales. For
the first quarter of 1996, the GAU produced $1,654,485 in oil and gas sales, or
43.6% of NEG's total oil and gas sales. The GAU is a 7,880 acre unit which was
originally drilled on 40 acre spacing. Previous operators drilled several wells
on 20 acre spacing and based on the results of this drilling and 20 acre
development on adjoining leases, NEG began a drilling program in July, 1994 to
develop the unit on 20 acre spacing. NEG drilled 28 wells during 1994 and 1995
and during 1996 continues to drill wells at the rate of two per month. Gross
production has stabilized at over 40,000 Bbls and over 42,000 Mcf of natural gas
per month. Prior to the commencement of drilling, the GAU had approximately 150
infill locations if the lease were fully developed on 20 acre spacing. Data
gained from the drilling and coring of new wells suggest that the reservoir has
significant secondary recovery potential from a waterflood.
Oak Hill consists of nine productive wells and is operated by NEG. NEG owns
approximately a 99% working interest in Oak Hill. From June to December 1995,
Oak Hill produced $1,062,138 in oil and gas sales, or 13.5% of NEG's total oil
and gas sales, and for the first quarter of 1996, Oak Hill produced $1,164,455
in oil and gas sales, or 30.7% of NEG's total oil and gas sales. NEG has
initiated a major development program for Oak Hill involving workovers,
recompletion and/or completion of existing wells and additional development
drilling. NEG has performed three workovers and one completion and has drilled
one development well, and expects to drill eight more development wells during
1996. Gross daily production is 7,500 Mcf per day.
Mustang Island consists of a 100% interest in one producing well and 770
acres of leases, an approximate 72% working interest in five additional wells
and 1,440 acres of leases, a 100% interest in approximately 10 miles of pipeline
and a shore tank facility, and a 50% interest in three wells and 3,840 acres of
leases. In April 1996 NEG purchased from the State of Texas 16 tracts totaling
7,765 acres in the Mustang Island area. The total acreage controlled by NEG at
Mustang Island is now 13,815 gross acres.
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OIL AND GAS PRODUCTION
The following table shows the approximate net production attributable to
NEG's oil and gas interests for the periods indicated:
OIL AND GAS PRODUCTION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- ------------------
1993 1994 1995 1995 1996
------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
Oil (Bbls).......................... 48,819 115,642 283,440 41,284 110,541
Gas (Mcf)........................... 483,241 620,843 1,752,990 174,152 833,490
</TABLE>
PRODUCTIVE WELL SUMMARY
NEG's production of oil and gas is primarily derived from wells located in
Texas, Oklahoma and New Mexico. The following table sets forth NEG's interests
in productive wells, by state, as of March 31, 1996:
PRODUCTIVE WELLS
<TABLE>
<CAPTION>
OIL GAS TOTAL
---------------- --------------- ----------------
GROSS NET GROSS NET GROSS NET
----- ------ ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Texas.............................. 117 104.99 23 12.58 140 117.57
Oklahoma........................... 12 4.18 39 13.24 51 17.42
New Mexico......................... 9 2.18 9 3.56 18 5.70
Wyoming............................ -- -- 9 2.33 9 2.33
Other.............................. 3 .17 -- -- 3 .17
--
--- ------ ----- --- ------
Total.................... 141 111.52 80 31.67 221 143.19
=== ====== == ===== === ======
</TABLE>
PRODUCTION ECONOMICS
The following table sets forth the average sales price per barrel of oil
and Mcf of natural gas produced, the average lease operating expenses and
depletion, depreciation and amortization rates attributable to NEG's oil and gas
production for the periods indicated. For purposes of calculating production
cost per equivalent barrel of oil, Mcfs of gas have been converted to barrels of
oil at a ratio of six Mcf of gas for each barrel of oil.
PRODUCTION ECONOMICS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------ ---------------
1993 1994 1995 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Average Sales Price(1)
Oil (Bbl)................................... $16.46 $16.01 $17.22 $17.22 $18.73
Gas (Mcf)................................... $ 2.07 $ 2.11 $ 1.70 $ 2.19 $ 2.07
Average Lease Operating Expense
Per Boe..................................... $ 4.45 $ 5.51 $ 3.01 $ 4.22 $ 2.43
Depletion, Depreciation and Amortization
Per Boe..................................... $ 4.08 $ 4.20 $ 5.29 $ 4.74 $ 6.62
</TABLE>
- ---------------
(1) Prices shown are before deduction of production taxes.
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ACREAGE
The following table shows the approximate gross and net acres in which NEG
had a leasehold interest as of March 31, 1996:
LEASEHOLD ACREAGE
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED
----------------- ---------------
GROSS NET GROSS NET
------ ------ ----- -----
<S> <C> <C> <C> <C>
Texas............................................. 17,597 13,332 2,402 1,108
Oklahoma.......................................... 14,074 4,181 -- --
New Mexico........................................ 3,414 1,290 -- --
Wyoming........................................... 1,800 429 1,400 200
Other............................................. 960 52 320 80
------ ------ ----- -----
Total................................... 37,925 19,284 4,122 1,388
====== ====== ===== =====
</TABLE>
In addition, in April 1996 NEG purchased 16 tracts totalling 7,765 acres in
the Mustang Island area.
Substantially all of NEG's producing oil and gas properties are located on
leases held by NEG for an indeterminate number of years for so long as
production is maintained. All of NEG's non-producing acreage is held under
leases from mineral owners or a government entity which expire at varying dates.
NEG is obligated to pay annual delay rentals to the lessors of certain
properties in order to prevent the leases from terminating. Because
substantially all of NEG's undeveloped acreage is held by production, annual
delay rentals for fiscal 1995 and the first quarter of 1996 were nominal.
DRILLING ACTIVITY
The following table sets forth the drilling results of NEG for the periods
indicated:
DRILLING RESULTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
-------------------------------------- ENDED
1994 1995 MARCH 31, 1996
--------------- ---------------- ---------------
PRODUCT GROSS NET GROSS NET GROSS NET
------- ----- --- ----- ---- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Exploratory
Louisiana Dry 1 .5 1 .4 1 .2
Texas Dry 1 .5 1 .4 2 .7
--- --- -- ---- --- ---
Total 2 1.0 2 .8 3 .9
=== === == ==== === ===
Development
Texas Oil 6 5.6 22 20.2 6 5.7
Texas Gas 3 .8 2 .5 1 1.0
Wyoming Dry -- -- 1 .6 -- --
--- --- -- ---- --- ---
Total 9 6.4 25 21.3 7 6.7
=== === == ==== === ===
</TABLE>
NEG did not drill any development or exploratory wells during 1993. The oil
developmental wells drilled in Texas during 1996, 1995 and 1994 represent wells
drilled on the GAU and are the primary cause of the increase in production. See
"-- NEG -- Business Strategy" above for recent drilling activities.
TITLE TO OIL AND GAS PROPERTIES
NEG has acquired interests in producing and nonproducing acreage in the
form of working interests, royalty interests and overriding royalty interests.
To reduce NEG's financial exposure in any one prospect, NEG often acquires less
than 100% of the working interest in a prospect. Working interests held by NEG
may, from time to time, become subject to minor liens. Furthermore, updated
title opinions may not be
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received prior to the acquisition of a producing oil and gas property. It is
contemplated, however, that investigations will be made in accordance with
standard practices in the industry before the acquisition of such properties and
before drilling.
PRODUCTION AND SALES PRICES
NEG's production of oil and gas is derived solely from the United States.
NEG is not obligated to provide a fixed and determinable quantity of oil and/or
gas in the future under existing contracts or agreements. NEG does not plan to
refine or process the oil and natural gas it produces, but plans to sell the
production to unaffiliated oil and gas purchasing companies in the area in which
it is produced. NEG expects to sell crude oil on a market price basis and to
sell natural gas under contracts to both interstate and intrastate gas pipeline
companies. NEG currently sells a significant portion of its oil pursuant to a
contract with Plains Marketing and Transportation, Inc. ("Plains"). See
"-- Markets and Customers" below.
LEASE INTERESTS
NEG generally acquires a leasehold interest in the properties to be
explored. The leases grant the lessee the right to explore for and extract oil
and gas from a specified area. Rentals usually consist of fixed annual charges
prior to production and, once production has been established, a royalty based
upon the gross proceeds from the sale of oil and gas. Once wells are drilled, a
lease generally continues as long as production of oil and gas continues. In
some cases, leases may be acquired in exchange for a commitment to drill or
finance the drilling of a specified number of wells to predetermined depth.
CONTROL OVER PRODUCTION ACTIVITIES
NEG operates 157 of the 221 wells in which it owns an interest as of March
31, 1996. The non-operated properties are being operated by unrelated third
parties pursuant to operating agreements which are, for the most part, standard
to the industry. Decisions about operations regarding non-operated properties
may be determined by the outside operator rather than NEG. If NEG declines to
participate in additional activities proposed by the outside operator, under
certain operating agreements, NEG will not receive revenues from, and/or lose
its interest in, the activity in which it declined to participate.
FACTORS BEYOND NEG'S CONTROL
Although the demand for oil is steady, there are seasonal variations in the
demand for natural gas; that is, demand typically decreases in warmer months.
NEG's oil and gas business is also affected by factors which are beyond its
control and the exact effects of which cannot be accurately predicted. These
factors include war, the extent of domestic production, imports of crude oil,
production by and agreements among OPEC members, the availability of adequate
pipeline and other transportation facilities, the marketing of competitive fuel,
government regulation of prices, production, transportation and marketing of
energy, fluctuating supply and demand, and other matters affecting the
availability of a ready market.
MARKETS AND CUSTOMERS
The availability of a ready market for any oil and gas produced by NEG and
the price obtained for such oil and gas depends upon numerous factors beyond its
control, including the demand for and supply of oil and gas, fluctuations in
production and seasonal demand, proximity of the wells to adequate transmission
facilities, weather conditions, economic conditions, and the effects of state
and federal governmental regulations on the import, production, transportation
and sale of oil and gas. The occurrence of any factor which affects a ready
market for NEG's oil and gas or reduces the price obtained for such oil and gas
may adversely affect NEG.
A large percentage of NEG's oil and gas sales are made to a small number of
purchasers. During the year ended December 31, 1995, two customers, Plains and
Energy Source, Inc., accounted for 59% and 11%, respectively, of NEG's oil and
gas sales. During the quarter ended March 31, 1996, Plains and Energy Source,
Inc. accounted for 58.9% and 21.9%, respectively, of NEG's oil and gas sales.
Since that time ComStock National Gas Inc. has accounted for approximately 25%
of NEG's oil and gas sales. NEG, in 1993, entered
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into agreements with Plains, pursuant to which Plains purchases the oil produced
from the major oil-producing properties that NEG operates at West Texas
Intermediate posted prices plus a small premium. Such agreements with Plains
expire mid 1997. NEG does not believe that the loss of any customer would have a
material and adverse effect on its business because, under prevailing market
conditions, such customer could be replaced.
OFFICE SPACE AND OTHER
NEG leases approximately 11,934 square feet of office space in Dallas,
Texas. Minimum lease payments under future operating lease commitments are as
follows: 1996 -- $160,522; 1997 -- $172,326 and 1998 -- $58,749. Other than oil
and gas properties and securities of oil and gas companies, NEG does not intend
to invest in real estate, real estate mortgages or securities of, or interests
in, persons primarily engaged in real estate activities for the foreseeable
future.
REGULATION
General
NEG's oil and gas exploration, production and related operations are
subject to extensive rules and regulations promulgated by federal and state
agencies. Failure to comply with such rules and regulations can result in
substantial penalties. The regulatory burden on the oil and gas industry
increases NEG's cost of doing business and affects its profitability. Because
such rules and regulations are frequently amended or interpreted, NEG is unable
to predict the future cost or impact of complying with such laws.
Exploration and Production
Many state authorities require permits for drilling operations, drilling
bonds and reports concerning operations and impose other requirements relating
to the exploration and production of oil and gas. Such states also have statutes
or regulations addressing conservation matters, including provisions for the
unitization or pooling of oil and gas properties, the establishment of maximum
rates of production from oil and gas wells and the regulation of spacing,
plugging and abandonment of such wells. The statutes and regulations of the
federal authorities, as well as many state authorities, limit the rates at which
oil and gas can be produced from NEG's properties.
Environmental and Occupational
NEG is subject to numerous laws and regulations governing the discharge of
materials into the environment or otherwise relating to environmental
protection. These laws and regulations may require the acquisition of a permit
before drilling commences, restrict the types, quantities and concentration of
various substances that can be released into the environment in connection with
drilling and production activities, limit or prohibit drilling activities on
certain lands lying within wilderness, wetlands and other protected areas and
impose substantial liabilities for pollution resulting from operations.
Moreover, the recent trend toward stricter standards in environmental
legislation and regulation is likely to continue. For instance, legislation has
been proposed in Congress from time to time that would reclassify certain oil
and gas production wastes as "hazardous wastes", which reclassification would
make such wastes subject to much more stringent handling, disposal and clean-up
requirements. If such legislation were to be enacted, it could have a
significant impact on the operating costs of NEG, as well as the oil and gas
industry in general. It is not anticipated that NEG will be required in the near
future to expend amounts that are material in relation to its total capital
expenditure program by reason of environmental laws and regulations, but because
such laws and regulations are frequently changed, NEG is unable to predict the
ultimate cost and effects of such compliance.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without regard
to fault or the legality of the original conduct, on certain classes of persons
who are considered to have contributed to the release of a "hazardous substance"
into the environment. These persons include the owner or operator of the
disposal site or sites where the release occurred and companies that disposed or
arranged for the disposal of the hazardous substances and
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under CERCLA such persons or companies would be subject to joint and several
liability for the costs of cleaning up the hazardous substances that have been
released into the environment and for damages to natural resources. It is not
uncommon for neighboring landowners and other third parties to file claims for
personal injury and property damage allegedly caused by the hazardous substance
released into the environment.
NEG is also subject to laws and regulations concerning occupational safety
and health. While it is not anticipated that NEG will be required in the near
future to expend amounts that are material in the aggregate to NEG's overall
operations by reason of occupational safety and health laws and regulations, NEG
is unable to predict the ultimate cost of compliance.
Marketing and Transportation
The Natural Gas Wellhead Decontrol Act of 1989 eliminated, effective
January 1, 1993, most price controls set out in the Natural Gas Policy Act of
1978 ("NGPA"). Neither law has a material impact on the prices received by NEG
for its natural gas. The sale of oil and gas is not currently subject to
governmental price controls.
Several major regulatory changes have been implemented by the Federal
Energy Regulatory Commission ("FERC") from 1985 to the present that affect the
economics of natural gas production, transportation and sales. In addition, the
FERC continues to promulgate revisions to various aspects of the rules and
regulations affecting those segments of the natural gas industry that remain
subject to the FERC's jurisdiction. The stated purpose of many of these
regulatory changes is to promote competition among the various sectors of the
gas industry. The ultimate impact of the complex and overlapping rules and
regulations issued by the FERC since 1985 cannot be predicted. In addition, many
aspects of these regulatory developments have not become final but are still
pending judicial and FERC final decisions.
OPERATIONAL HAZARDS AND INSURANCE
NEG's operations are subject to all of the risks inherent in oil and gas
exploration, drilling and production, including blowouts, extreme weather
conditions, pollution, cratering and fires. Any of these occurrences could
result in damage to or destruction of oil and gas wells or production facilities
or harm to persons and property. NEG believes it is insured prudently against
certain of these risks. Ultimate limits provided under NEG's insurance policies
are $15.0 million. In addition, NEG maintains operator's extra expense coverage
that provides for care, custody and control of wells drilled by NEG. The
occurrence of an event not fully insured against may have a material and adverse
effect on NEG's financial position. NEG believes that it operates in compliance
with government regulations and in accordance with safety standards which meet
or exceed industry standards.
COMPETITION
The oil and gas industry is intensely competitive in all of its phases,
particularly with respect to the acquisition of desirable producing oil and gas
leases and oil and gas companies with production. NEG, which is a minor
competitive factor in the industry, encounters strong competition from major oil
companies, independent oil and gas concerns, and individual producers and
operators, many of which have financial resources, staffs, facilities and
experience substantially greater than those of NEG. Furthermore, in times of
high drilling activity, exploration for and production of oil and gas may be
affected by the availability of equipment, labor, supplies and by competition
for drilling rigs. NEG cannot predict the effect these factors will have on its
operations. NEG owns no drilling rigs, and it is anticipated that its drilling
will be conducted by third parties. Furthermore, the oil and gas industry also
competes with other industries in supplying the energy and fuel requirements of
industrial, commercial and individual consumers.
EMPLOYEES
At July 19, 1996, NEG had 19 employees, all but one of whom were full-time.
Of the 19 employees, four are field related personnel. NEG does not have any
collective bargaining agreements with employees and believes that relations with
its employees are generally good.
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LEGAL PROCEEDINGS
On August 30, 1995, NEG filed a lawsuit against R.E. Steakley in which NEG
seeks to enjoin Mr. Steakley from interfering with its operations on the surface
property controlled by Mr. Steakley. The lawsuit alleges that Mr. Steakley is
interfering with NEG's access to its operations and is also harassing NEG's
personnel.
On August 31, 1995, in a matter involving the same property described
above, 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, NEG 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.
NEG believes that it is operating in compliance with applicable
environmental laws and regulations and believes, based on advice from legal
counsel, that the ultimate resolution of the lawsuit will not have a material
effect on NEG's financial condition or results of operations.
ALEXANDER
GENERAL
Alexander, an independent energy company engaged in the acquisition,
exploration, development, production and marketing of natural gas and crude oil,
was organized as an Oklahoma corporation in 1980 by a group of executive,
professional and technical personnel who had previously been employees of
Reserve Oil and Gas Company prior to its acquisition by Getty Petroleum.
Alexander was initially organized to provide technical and operating services to
another independent oil and natural gas company, but it commenced independent
operations after its initial public offering in 1981. Beginning in 1985,
Alexander participated in two drilling partnerships with John Hancock Mutual
Life Insurance Company and Midwest Capital Group, Inc., a wholly-owned
subsidiary of an Iowa-based public utility holding company. These partnerships
invested over $37.6 million to acquire and develop properties, drilling a total
of 176 wells. The partnerships were dissolved prior to June 15, 1996. See
"Alexander Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources -- Existing Long-term
Debt." In March 1993, Alexander completed a second offering of its common stock.
Proceeds of such offering, along with Alexander's cash flow and a bank credit
facility, were used to finance its drilling, exploitation and acquisition
program. Since completion of the 1993 offering of common stock, Alexander has
drilled 64 wells, with an average working interest of 38%, resulting in 53
completions for a successful completion rate of 83%. Unless the context
otherwise requires, all information herein has been restated to give effect to
Alexander's merger with ANEC in July 1994.
In June 1995, Alexander merged ANEC, Bradmar and Edwards & Leach Oil
Company, former subsidiaries, into itself. The merger was accomplished in order
to attain accounting and other efficiencies. After giving effect to this merger,
none of Alexander's remaining subsidiaries, individually or in the aggregate,
has significant assets, indebtedness, revenues or cash flow.
Alexander's properties are located primarily in the Anadarko Basin in
Oklahoma, the Cotton Valley Trend of eastern Texas and in the Arkoma Basin in
eastern Oklahoma and western Arkansas. The remainder of Alexander's holdings and
operations are located in the Austin Chalk Trend of central Texas, the Golden
Trend of south central Oklahoma, and in Colorado, Kansas, Nebraska and Wyoming.
Alexander's estimated proved reserves as of December 31, 1995 consisted of
approximately 99 Bcf of natural gas and 2,308 Mbbls of crude oil with an
aggregate PV10% of approximately $85 million based on average prices of $1.96
per Mcf and $18.40 per Bbl. Net daily production averaged 24,843 Mcf and 496
Bbls, or a total of 27,818 Mcfe in 1995, up 8% from 1994. Approximately 88% of
Alexander's reserves are natural gas.
In 1995, Alexander's proved reserves were estimated by Netherland & Sewell.
Approximately 31 Bcfe was reclassified from proved undeveloped to probable and
possible at December 31, 1995. Alexander believes this is the result of a more
conservative application of engineering assumptions than used previously.
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Additionally, in 1995 Alexander experienced approximately 11 Bcfe of additional
downward reserve revisions. A significant portion of these revisions relates to
certain undeveloped locations which Alexander now believes is being depleted
through existing proved producing properties, previously thought to be
accessible only through recompletions and/or additional development drilling. As
a result of these reclassifications and reserve adjustments, approximately 66%
of Alexander's proved reserves are classified as proved developed, an increase
of 8% from 1994. See Note 14 of Notes to Consolidated Financial Statements of
Alexander.
BUSINESS STRATEGY
Since 1984, Alexander has increased its proved reserves, production and
operating cash flow by executing its strategy of (i) acquiring mid-continent
reserves that are predominantly natural gas and have significant development
potential; (ii) increasing reserves and production by enhancing and exploiting
its reserves through low risk development drilling and improved operating
practices and recovery techniques including workovers, redrills, compression
adjustments and renegotiating natural gas sales contracts; (iii) controlling
operating costs and obtaining reimbursement for overhead expenses; and (iv)
engaging in controlled exploratory drilling.
Acquisitions
In the past ten years, Alexander has made acquisitions directly or
indirectly through limited partnerships formed with institutional partners.
During this period, Alexander has completed six acquisitions of approximately
128.6 Bcfe of proved reserves with an aggregate cost of approximately $99.4
million or $0.77 per Mcfe. Two significant acquisitions in Alexander's core
areas of operations were consummated in 1994.
Alexander actively pursues property acquisitions. Since 1984, Alexander has
continually evaluated potential acquisitions of producing and nonproducing
properties, with an emphasis on producing properties with the following
objectives: (i) established production histories, (ii) existing reserve
estimates, (iii) potential opportunities to increase reserves through additional
recovery or enhancement techniques, (iv) close proximity to Alexander's existing
operations, (v) the possibility of reducing expenses associated with the
properties, and (vi) control of operations. Alexander relies upon advanced
technology, as well as its trained and experienced personnel, to determine
whether a property meets Alexander's acquisition objectives.
In July 1994, Alexander acquired ANEC in a transaction accounted for as a
pooling of interests. The ANEC merger added approximately 400 gross wells, 200
of which are now operated by Alexander, and nearly doubled Alexander's reserves.
The ANEC properties are concentrated in the central Oklahoma portion of the
Anadarko Basin and in the Cotton Valley Trend in eastern Texas where ANEC
experienced success drilling infill wells since 1985. Subsequent to the merger,
Alexander conducted workovers on the Cotton Valley Trend properties.
In November 1994, Alexander acquired 78 natural gas properties located in
the Arkoma Basin in Oklahoma and Arkansas from JMC for total consideration of
$18.2 million. The 78 properties, one-half of which are operated by Alexander,
initially contributed an estimated 21.4 Bcf of natural gas to Alexander's
reserves. The JMC properties reestablished Alexander in the Arkoma Basin, a
significant area of development for Alexander in its early years, with a strong
position of proved reserves, 26% of which remain to be developed. Planned
exploitation efforts and expected development of PUDs are expected to add to the
ultimate value of the acquisition.
The acquisitions of ANEC and the JMC properties greatly increased
Alexander's proved reserves, production and cash flow. As a result of these
acquisitions, Alexander's proved reserves increased 38% from 81.7 Bcfe at
December 31, 1993 to 112.9 Bcfe at December 31, 1995. The natural gas component
of Alexander's reserves increased from 77% at December 31, 1993 to 88% at
December 31, 1995. In addition, approximately 34% of Alexander's reserves are
proved undeveloped, providing Alexander with an inventory of low risk
development drilling opportunities. These transactions increased Alexander's
production from 13.4 Mmcfe per day in 1993 to 27.8 Mmcfe per day in 1995.
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In addition to the acquisitions of ANEC and JMC properties, since its
inception Alexander has increased its producing capabilities through the
acquisitions of (i) Bradmar in 1992; (ii) producing oil and gas properties in
Oklahoma in 1990 (the "MFS Properties"); (iii) leasehold interests in Oklahoma
and Texas through a joint venture in 1990 (the "Zilkha Properties"); and (iv)
oil and gas wells formerly owned by Brooks Hall Energy Corporation in 1984 (the
"Brooks Hall Properties").
Development of Acquisitions
When evaluating possible acquisitions, Alexander's geologists and engineers
analyze various means by which production may be increased or related operating
expenses may be decreased. In addition, Alexander's personnel will attempt to
identify the existence of any previously unreported proved undeveloped reserves.
For example, Bradmar did not report proved undeveloped reserves with respect to
its properties primarily because it lacked sufficient capital to identify and
develop these reserves; accordingly, proved undeveloped reserves were not
included in the estimated proved reserves identified at the time of execution of
the Bradmar acquisition agreement. However, Alexander's familiarity with the
areas in which Bradmar operated allowed Alexander to assume in its acquisition
analysis that an unspecified quantity of proved undeveloped reserves existed.
Drilling and Development Program
Alexander's development program includes (i) identifying and drilling
development prospects, (ii) drilling increased density locations, (iii) adding
production equipment, and (iv) renegotiating natural gas contracts. The impact
of these programs on Alexander's six major acquisitions completed since 1984 has
been significant. Approximately 34% of Alexander's reserves were classified as
proved undeveloped at December 31, 1995. At that date, Alexander had identified
80 proved undeveloped locations on its properties with estimated proved
undeveloped reserves of 38.9 Bcfe, which will require approximately $21.7
million of capital costs to develop. Subject to further study and drilling
results, Alexander believes that there are numerous potential drilling locations
on Alexander's existing properties that should result in additional proved
reserves.
Alexander has tentatively budgeted approximately $13 million for its 1996
drilling and development program, substantially all of which relates to proved
undeveloped locations. The actual capital expenditures will be subject to cash
flow from operations, after required debt service, Alexander's ability to
complete one or a combination of financing alternatives, and consummation of the
Merger. Proceeds from the financing alternatives will have to be sufficient in
amount to also retire Alexander's term note with a bank. See Note 4 of Notes to
Consolidated Financial Statements of Alexander. As of March 1996, Alexander has
commitments to drill $1.0 million of such properties. Subject to consummation of
the Merger, any properties not drilled in 1996 may be deferred until future
periods; however, if these properties are not drilled in 1996 and Alexander does
not complete a significant acquisition, there is no assurance that Alexander
will be successful in replacing reserves expected to be produced in 1996. See
"Alexander Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
Controlled Exploration Opportunities
Alexander conducts a controlled exploration program which is designed to
provide exposure to selected higher risk, higher potential rate of return
prospects. Alexander manages its exploration risks by limiting its exploration
expenditures to approximately 5% to 15% of its overall capital budget and
applying advanced technology to identifying prospects. Since completion of the
1993 public offering of common stock, Alexander has drilled four exploratory
wells with one successful completion at an aggregate cost of $1.3 million. In
addition, in May 1996, Alexander participated in an exploratory well at an
estimated completion cost to Alexander of approximately $400,000, resulting in
no commercial production quantities from the targeted payzone, however, several
upper payzones are undergoing completion and testing.
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Operating and Administrative Expenses
As of March 31, 1996, Alexander owns working interests in 552 wells, of
which it operates 297 wells representing approximately 80% of PV10% as of March
31, 1996. By serving as operator, Alexander is able to maintain efficiencies in
operations and obtain operator and management fees which offset the majority of
its general and administrative expenses. Operator and management fees offset
69%, 65%, 77% and 84% of general and administrative expenses in 1993, 1994 and
1995, and for the first quarter ended March 31, 1996, respectively. Also,
Alexander has pursued a strategy of selling marginal and non-strategic
properties to reduce well operating expenses, both on an absolute and on a
per-unit-of-production basis.
OIL AND NATURAL GAS RESERVES
The following table sets forth estimated proved reserves, the estimated
future net revenues therefrom and the present value thereof as of December 31,
1995. The proved reserves are based upon the Estimate of Reserves and Future
Revenue to the Alexander Interest in Certain Oil and Gas Properties as of
December 31, 1995 of Netherland & Sewell. The calculations used in preparation
of such report were prepared using standard geological and engineering methods
generally accepted by the petroleum industry and in accordance with SEC
guidelines (as described in the notes below). These correspond with the method
used in presenting the supplemental information on oil and gas operations in the
Notes to the Consolidated Financial Statements of Alexander, except that income
taxes otherwise attributable to such future net revenues have been disregarded
in the presentation below. For supplemental disclosure of the estimated net
quantities of oil and natural gas reserves, see Note 14 of Notes to Consolidated
Financial Statements of Alexander.
<TABLE>
<CAPTION>
NATURAL
NATURAL GAS PRETAX
OIL GAS EQUIVALENT FUTURE NET
(MBBL) (MMCF) (MMCFE) REVENUE(1) PV10%
------ ------- ---------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Proved Reserves...................... 2,308 99,070 112,918 $142,983 $85,448
Proved Developed Reserves............ 1,216 66,698 73,993 97,630 61,374
</TABLE>
- ---------------
(1) Estimated future net revenue represents estimated future gross revenues to
be generated from the production of proved reserves, net of estimated
production and future development costs, using costs and prices in effect as
of December 31, 1995. In certain circumstances, the actual natural gas price
received was less than the December 31, 1995 contract price, in which case
the lower actual price was used. These prices were not changed except where
different prices were fixed and determinable from applicable contracts.
These assumptions yield average prices of $1.96 per Mcf of natural gas and
$18.40 per Bbl of oil over the life of the properties. The amounts shown do
not give effect to non-property related expenses such as general and
administrative expenses, debt service and future income tax expense or to
depreciation, depletion and amortization.
No estimates of Alexander's proved reserves have been included in reports
to any federal agency other than the SEC.
The prices used in calculating the estimated future net revenues
attributable to proved reserves do not necessarily reflect market prices for oil
and natural gas production subsequent to December 31, 1995. See "Alexander
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations." There can be no assurance that all of the
proved reserves will be produced and sold within the periods indicated, that the
assumed prices will be realized or that existing contracts will be honored or
judicially enforced.
The process of estimating oil and natural gas reserves contains numerous
inherent uncertainties and requires significant subjective decisions in the
evaluation of available geological, engineering and economic data for each
reservoir. The data for a given reservoir may change substantially over time as
a result of, among other things, additional development activity, production
history and viability of production under varying economic conditions.
Consequently, reserve estimates are often materially different from the
quantities of oil
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and natural gas that are ultimately recovered, and material revisions to
existing reserve estimates may occur in the future. See Note 14 of Notes to
Consolidated Financial Statements of Alexander.
PRINCIPAL AREAS OF OPERATIONS
Proved reserves within Alexander's principal areas of operation at December
31, 1995 are summarized as follows:
<TABLE>
<CAPTION>
NATURAL PERCENT NUMBER
NATURAL GAS OF OF PDNP
OIL GAS EQUIVALENT PROVED AND PUD
FIELD (MBBL) (MMCF) (MMCFE) RESERVES LOCATIONS
--------------------------------------- ------ ------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
Anadarko Basin......................... 1,556 59,514 68,850 61% 73
Cotton Valley Trend.................... 215 18,863 20,153 18% 14
Arkoma Basin........................... -- 16,807 16,807 15% 18
Other(1)............................... 537 3,886 7,108 6% 16
</TABLE>
- ---------------
(1) Consists of proved reserves of 4.0 Bcfe located in the Austin Chalk Trend of
central Texas, 2.8 Bcfe located in the Golden Trend Field in south central
Oklahoma and 0.3 Bcfe located throughout Alexander's other holdings.
The table above and all other discussion of reserves contained herein
excludes those reserves that are based on geologic and/or engineering data
similar to that used in estimating proved reserves, but technical, contractual,
economic or regulatory uncertainties preclude such reserves from being
classified as proved ("probable and possible"). As of December 31, 1995,
Alexander had identified probable and possible locations that add another 31
Bcfe to Alexander's reserve base.
Anadarko Basin
Approximately 61% (68.9 Bcfe) of Alexander's proved reserves are located in
the Anadarko Basin primarily in Canadian, Kingfisher, Major and Logan counties
of Oklahoma. Alexander has been operating in the Anadarko Basin since its
inception. The Anadarko Basin is considered a mature natural gas producing area
that is characterized by multiple producing horizons. Wells in the Anadarko
Basin are completed in rocks varying in age from Pennsylvania through
CambroOrdovician at depths ranging from 2,000 to 25,000 feet. Alexander's
Anadarko properties are generally spaced across 640 acres and Alexander has been
actively engaged in increased density drilling in the area. As of December 31,
1995, Alexander had identified 31 PDNP and 42 PUD locations in the Anadarko
Basin with estimated proved reserves of 23.3 Bcfe. The typical well in the
Anadarko Basin inventory is expected to range from 7,500 to 15,000 feet and cost
approximately $680,000 (gross) to drill and complete and have approximately 1.9
Bcfe of recoverable reserves.
Cotton Valley Trend
Approximately 18% (20.2 Bcfe) of Alexander's proved reserves are located in
the Cotton Valley Trend in Harrison and Rusk counties in eastern Texas.
Alexander acquired its properties in the Cotton Valley as a result of the merger
with ANEC, which had been operating in the area since 1985. The Cotton Valley
producing formation is 1,500 to 2,000 feet thick, is located at depths of 8,500
to 10,500 feet and consists of interbedded sandstones and shales. Although the
Cotton Valley consists of low permeability sandstones, numerous wells have been
successfully completed with the use of hydraulic fracture stimulation. Original
development in the Cotton Valley was drilled on 640 acre spacing, but production
performance has revealed that wells drilled on this spacing are insufficient to
adequately drain the reservoir. New studies show developing these tight sands on
80 acre spacing is necessary to recover all commercially producible reserves.
The lowermost zone of the Cotton Valley sands, known as the Taylor Sand,
was initially considered the best producing interval, having crossplot porosity
from 2% to in excess of 6% and a thickness of over 100 feet. Recent completions
of the upper and middle sections of the Cotton Valley formation have proved to
be as
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productive as the Taylor Sand. Intervals to be completed are determined from a
combination of electric log analysis and natural gas shows from mud logs.
As of December 31, 1995, Alexander had identified two PDNP and 12 PUD
locations in the Cotton Valley. The typical well in this inventory is expected
to cost approximately $900,000 (gross) to drill and complete and to have
approximately 1.6 Bcfe of recoverable reserves.
Arkoma Basin
Approximately 15% (16.8 Bcfe) of Alexander's proved reserves are located in
the Arkoma Basin in eastern Oklahoma and western Arkansas. This east-west
trending basin consists of complexly faulted anticlinal and synclinal folds with
parallel complex fault systems, crisscrossed by shallow Pennsylvanian age
sandstone reservoirs. North-south trending reservoir sands trapped against these
faults and folds result in commercial natural gas accumulations. Deep structures
within the confines of the producing "fairway" produce natural gas from massive
carbonates, highly fractured by structural movement.
Natural gas is produced from several sandstone reservoirs and deep massive
carbonates along the south flank of the Arkoma Basin. Most of these channel
sands follow structural grain and are prolific natural gas producers when
trapped by faulting. Drilling ranges from 1,000 feet for shallow Pennsylvanian
age sands to over 15,000 feet for massive Arbuckle carbonates. Most of
Alexander's production is from the Red Oak, Cromwell, Spiro and Wapanucka sands
with depths of 7,000 to 8,000 feet.
As of December 31, 1995, Alexander had identified 3 PDNP and 15 PUD
locations in the Arkoma Basin. Alexander has recently started to fully evaluate
the Arkoma properties acquired from JMC and anticipates that numerous additional
drill sites will be developed. The typical Arkoma Basin well in this inventory
is expected to cost approximately $350,000 (gross) to drill and complete and
have approximately 2.0 Bcfe of ultimate recoverable reserves.
PRODUCTION, PRICE AND COST HISTORY
The following table sets forth for the periods indicated certain historical
information concerning Alexander's oil and natural gas production and prices,
net of all royalties, overriding royalties, and other third party interests.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------- -----------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Average net daily production:
Oil (Bbls)............................. 776 614 496 604 356
Natural gas (Mcf)...................... 17,348 22,057 24,843 27,810 21,857
Natural gas equivalent (Mcfe).......... 22,004 25,741 27,818 31,434 23,993
Average sales price:
Oil (Per Bbl).......................... $ 16.99 $ 15.44 $ 16.57 $ 16.88 $ 17.96
Natural gas (Per Mcf).................. 2.04 1.73 1.50 1.44 1.98
Natural gas equivalent (Per Mcfe)...... 2.20 1.85 1.64 1.60 2.07
Average net production cost per
Mcfe(1)................................ $ .66 $ .65 $ .60 $ .60 $ .56
</TABLE>
- ---------------
(1) Production cost consists of lease operating expenses and production
taxes.
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DRILLING ACTIVITIES
In each of the years ended December 31, 1993, 1994 and 1995, and the first
quarter ended March 31, 1996, Alexander incurred net exploration and development
costs of $11.3 million, $12.3 million, $3.3 million, and $.5 million,
respectively. The following table sets forth Alexander's historical drilling
activities for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
---------------------------------------------------- ENDED MARCH
1993 1994 1995 31, 1996
--------------- --------------- -------------- -------------
GROSS NET GROSS NET GROSS NET GROSS NET
----- ------ ----- ------ ----- ----- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Development
Oil...................... 12 3.431 7 .998 3 .714 0 .000
Gas...................... 17 5.967 22 7.320 2 1.520 3 .197
Non-productive........... 1 1.000 4 2.155 3 1.823 1 .146
-- ------ -- ------ - ----- - ----
Total............ 30 10.398 33 10.473 8 4.057 4 .343
== ====== == ====== = ===== = ====
Exploratory
Oil...................... 1 .247 0 .000 0 .000 0 .000
Gas...................... 0 .000 0 .000 0 .000 0 .000
Non-productive........... 0 .000 2 1.495 1 .978 0 .000
-- ------ -- ------ - ----- - ----
Total............ 1 .247 2 1.495 1 .978 0 .000
== ====== == ====== = ===== = ====
</TABLE>
The table above only reflects those interests attributable to Alexander
either through direct working interests or through Alexander's proportionate
share of its partnership's participation; i.e., the interests shown do not
include overriding royalty interests, carried working interests, reversionary
interests or partners' proportionate share of participation.
PRODUCTIVE WELLS AND ACREAGE
The following table reflects the wells and acreage in which Alexander owned
a working interest, directly or indirectly, as of March 31, 1996. The table
shows producing oil (including casinghead natural gas) and natural gas wells,
including shut-in oil and natural gas wells capable of producing natural gas
which are (i) awaiting the construction or completion of natural gas plants or
gathering facilities, (ii) shut-in until sufficient reserves of natural gas are
established to justify construction of such facilities, or (iii) shut-in due to
the absence of a market. The table does not include 64 gross wells that
Alexander has a revenue interest other than as a working interest owner.
Alexander additionally owns overriding royalty interests or other revenue
interests in approximately 173 of the gross wells reflected below.
<TABLE>
<CAPTION>
PRODUCING WELLS SHUT-IN WELLS
------------------------------------- ----------------------------------
OIL GAS OIL GAS
---------------- ----------------- --------------- ---------------
STATE GROSS NET GROSS NET GROSS NET GROSS NET
--------------------- ----- ------- ----- -------- ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arkansas............. 0 .0000 35 11.0586 0 .0000 8 2.3044
Colorado............. 8 .0094 0 .0000 0 .0000 0 .0000
Kansas............... 5 2.7655 0 .0000 0 .0000 0 .0000
Nebraska............. 3 .0116 0 .0000 0 .0000 0 .0000
Oklahoma............. 160 64.1514 272 120.7342 3 1.5556 10 1.8098
Texas................ 14 4.4437 22 12.2349 2 .1354 3 .2518
Wyoming.............. 2 .0020 4 .0004 0 .000 1 .0001
--- ------- --- -------- - ------ -- ------
Totals..... 192 71.3836 333 144.0281 5 1.6910 22 4.3661
=== ======= === ======== = ====== == ======
</TABLE>
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<PAGE> 113
<TABLE>
<CAPTION>
UNDEVELOPED
DEVELOPED ACREAGE ACREAGE
------------------ -----------------
STATE GROSS NET GROSS NET
----------------------------------------------- ------- ------ ----- -----
<S> <C> <C> <C> <C>
Arkansas....................................... 19,071 6,410 1,144 68
Colorado....................................... 440 1 -- --
Kansas......................................... 320 190 -- --
Nebraska....................................... 360 1 -- --
Oklahoma....................................... 125,970 51,374 7,349 4,588
Texas.......................................... 12,346 5,119 1,286 733
Wyoming........................................ 440 1 -- --
------- ------ ----- -----
Totals............................... 158,947 63,096 9,779 5,389
======= ====== ===== =====
</TABLE>
Undeveloped acres are those on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of oil and natural gas, regardless of whether or not such acreage contains
proved reserves. The amount of acreage held by Alexander increases or decreases
in the normal course of business as interests in new acreage are acquired
(including acreage by pooling), as interests are sold or contributed to others,
as wells are drilled, as properties are abandoned (if determined not to warrant
exploration or development) or as leases expire. It is Alexander's policy to
formulate drilling plans for the orderly development of undeveloped acreage
within the primary terms of the leases involved.
TITLE TO PROPERTIES
Substantially all of Alexander's property interests are held pursuant to
leases from third parties. Title to properties is subject to royalty, overriding
royalty, carried, net profits, working and other similar interests and
contractual arrangements customary in the oil and natural gas industry, liens
incident to operating agreements, liens relating to amounts owed to the
operator, liens for current taxes not yet due and other encumbrances. Alexander
believes that such burdens neither materially detract from the value of such
properties nor from the respective interests therein, or materially interfere
with their use in the operation of the business.
OFFICE FACILITIES
Alexander owns a 19,000 square foot office building located at 701 Cedar
Lake Boulevard, Oklahoma City, Oklahoma where it maintains its corporate
headquarters. In August 1994, Alexander purchased approximately 1.5 acres
adjacent to its corporate headquarters for $216,000.
MARKETS AND CUSTOMERS
Alexander operates exclusively in the oil and gas industry. Its revenues
are derived from its proportionate interest in domestic oil and gas producing
properties. Alexander does not consider its business seasonal; however, market
demand (and the resulting prices received for crude oil and natural gas) can be
affected by weather conditions, economic conditions, import quotas, the
availability and cost of alternative fuels, the proximity to, and capacity of,
natural gas pipelines and other systems of transportation, the effect of state
regulation of production, and federal regulation of oil and gas sold in
intrastate and interstate commerce. All of these factors are beyond the control
of Alexander.
Alexander sells its crude oil at posted field prices in effect in the
producing fields within which its operations are conducted. During the years
ended December 31, 1994 and 1995, the price for Alexander's oil ranged from
$10.65 per Bbl to $20.59 per Bbl and from $15.25 per Bbl to $18.58 per Bbl,
respectively. Because of restrictions on flaring natural gas, wells which
produce both oil and gas may be shut-in when there is not a market for the gas,
even though a market is otherwise available for the oil.
Natural gas production of Alexander is sold under long-term and spot market
contracts to intrastate and interstate pipeline companies and natural gas
marketing companies. Prices received by Alexander for natural gas production
during the years ended December 31, 1994 and 1995 varied from $0.65 per Mcf to
$4.90 per Mcf and from $0.60 per Mcf to $4.37 per Mcf, respectively.
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<PAGE> 114
For the year ended December 31, 1995, approximately 46% of Alexander's
natural gas is sold on the spot market or under short-term contracts (one year
or less) providing for variable or "market-sensitive" prices. Approximately 54%
of Alexander's natural gas is marketed under various long-term contracts which
dedicate the natural gas to a purchaser for an extended period of time, but
which still involve variable or market-sensitive pricing of Alexander's natural
gas.
Alexander's natural gas production is sold under contracts with various
purchasers. Natural gas sales to GPM Gas Corporation ("GPM") and Cowboy Pipeline
Service Company ("Cowboy") individually accounted for 12% and 13% of total
revenues for the years ended December 31, 1993 and 1994. During 1995, natural
gas sales to GPM accounted for 13% of total revenues.
Alexander does not believe that the loss of any of its existing customers
would have a material adverse effect on the results of operations of Alexander.
REGULATION
General
The oil and natural gas industry is extensively regulated by federal, state
and local authorities. Legislation affecting the oil and natural gas industry is
under constant review for amendment or expansion. In October 1992, comprehensive
national energy legislation was enacted which focuses on electric power,
renewable energy sources and conservation. The legislation, among other things,
guarantees equal treatment of domestic and imported natural gas supplies,
mandates expanded use of natural gas and other alternative fuel vehicles, funds
natural gas research and development, permits continued offshore drilling and
use of natural gas for electric generation and adopts various conservation
measures designed to reduce consumption of imported oil.
Numerous governmental departments and agencies, both federal and state,
have issued rules and regulations binding on the oil and natural gas industry
and its individual members, some of which carry substantial penalties for the
failure to comply. The regulatory burden on the oil and natural gas industry
increases its cost of doing business and, consequently, affects its
profitability. Inasmuch as such laws and regulations are frequently amended or
reinterpreted, Alexander is unable to predict the future cost or impact of
complying with such regulations.
Exploration and Production
Alexander's exploration and development operations are subject to various
types of regulation at the federal, state and local levels. Such regulation
includes requiring permits for the drilling of wells; maintaining bonding
requirements in order to drill or operate wells; and regulating the location of
wells, the method of drilling and casing wells, the surface use and restoration
of properties upon which wells are drilled and the plugging and abandoning of
wells. Alexander's operations are also subject to various conservation matters
and rules to protect the correlative rights of subsurface owners. These include
the regulation of the size of drilling and spacing units or proration units and
the density of wells which may be drilled and the unitization or pooling of oil
and natural gas properties. In this regard, some states allow the forced pooling
or integration of tracts to facilitate exploration while other states rely on
voluntary pooling of land and leases. In addition, state conservation laws
establish maximum rates of production from oil and natural gas wells, generally
prohibit the venting or flaring of natural gas and impose certain requirements
regarding the ratability of production. The effect of these regulations is to
limit the amounts of oil and natural gas Alexander can produce from its wells
and to limit the number of wells or the locations at which Alexander can drill.
Recently enacted legislation in Oklahoma and regulatory action in Texas modifies
the methodology by which the regulatory agencies establish permissible monthly
production allowables. Such action has generated substantial controversy,
especially at the federal level, and has been labeled as being intended to
reduce the total production of natural gas in order to increase natural gas
prices. A recent attempt to enact a federal prohibition of these recent state
proration rule initiatives was defeated, but various members of Congress and
some federal regulators have declared an intent to monitor the states' actions
very carefully. Alexander cannot predict what effect these new prorationing
regulations will have on its production and sales of natural gas.
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<PAGE> 115
Certain of Alexander's oil and natural gas leases are granted by the
federal government and administered by various federal agencies. Such leases
require compliance with detailed federal regulations and orders which regulate,
among other matters, drilling and operations on these leases and calculation and
disbursement of royalty payments to the federal government. The Mineral Lands
Leasing Act of 1920 (the "MLLA") places limitations on the number of acres under
federal leases that may be owned in any one state. Additionally, the MLLA and
related regulations also may restrict a corporation from holding federal onshore
oil and natural gas leases if stock of such corporation is owned by citizens of
foreign countries which are not deemed reciprocal under the MLLA. Reciprocity
depends, in large part, on whether the laws of the foreign jurisdiction
discriminate against a United States citizen's ownership of rights to minerals
in such jurisdiction. The purchase of shares in Alexander by citizens of foreign
countries with laws which are not deemed to be reciprocal under the MLLA could
have an impact on Alexander's ownership of federal leases.
Environmental and Occupational
Alexander has an engineer who also serves as an environmental compliance
officer with the responsibility to implement an environmental compliance program
and to monitor environmental compliance and potential environmental liabilities
of Alexander. Operations of Alexander are subject to numerous laws and
regulations governing the discharge of materials into the environment or
otherwise relating to environmental protection. These laws and regulations may
require the acquisition of a permit before drilling commences, limit or prohibit
drilling activities on certain lands lying within wilderness or wetlands and
other protected areas and impose substantial liabilities for pollution resulting
from drilling operations. Such laws and regulations may also restrict air or
other pollution resulting from Alexander's operations. Moreover, many
commentators believe that the state and federal environmental laws and
regulations will become more stringent in the future. For instance, legislation
has been proposed in Congress in connection with the pending reauthorization of
the federal Resource Conservation and Recovery Act ("RCRA"), which would amend
RCRA to reclassify oil and natural gas production wastes as "hazardous waste."
If such legislation were to be enacted, it could have a significant impact on
the operating costs of Alexander, as well as the oil and natural gas industry in
general. State initiatives to further regulate the disposal of oil and natural
gas wastes are also pending in certain states and these various initiatives
could have a similar impact on Alexander. Management believes that compliance
with current applicable environmental laws and regulations will not have a
material adverse impact on Alexander. However, many of these laws and
regulations increase Alexander's overall operating expenses, and future changes
to environmental laws and regulations could have a material adverse impact on
Alexander.
Alexander is also subject to laws and regulations concerning occupational
safety and health. While it is not anticipated that Alexander will be required
in the near future to expend amounts that are material in the aggregate to
Alexander's overall operations by reason of occupational safety and health laws
and regulations, Alexander is unable to predict the ultimate cost of compliance.
Marketing and Transportation
Historically, the transportation and sale for resale of natural gas in
interstate commerce have been regulated pursuant to the Natural Gas Act of 1938,
the NGPA, and the regulations promulgated thereunder by the FERC. From 1978
until January 1, 1993, maximum selling prices of certain categories of natural
gas sold in "first sales," whether sold in interstate or intrastate commerce,
were regulated pursuant to the NGPA. The NGPA established various categories of
natural gas and provided for graduated deregulation of price controls of several
categories of natural gas and the deregulation of sales of certain categories of
natural gas.
Several major regulatory changes have been implemented by FERC from 1985 to
the present that affect the economics of natural gas production, transportation
and sales. In addition, FERC continues to promulgate revisions to various
aspects of the rules and regulations affecting those segments of the natural gas
industry, most notably interstate natural gas transmission companies, which
remain subject to FERC's jurisdiction. These initiatives may also affect the
intrastate transportation of natural gas under certain circumstances. The stated
purposes of many of these regulatory changes is to promote competition among the
various sectors of the natural gas industry. The ultimate impact of these
complex and overlapping rules and regulations, many of which are repeatedly
subjected to judicial challenge and interpretation, cannot be predicted.
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<PAGE> 116
Various rules, regulations and orders, as well as statutory provisions, may
affect the price of natural gas production and the transportation and marketing
of natural gas.
No Price Controls on Liquid Hydrocarbons
In the past there have been regulations of the sales price of liquid
hydrocarbons, however, there are currently no price controls on crude oil,
condensate or natural gas liquids.
OPERATIONAL HAZARDS AND INSURANCE
Alexander's operations are subject to the usual hazards incident to the
exploration for and production of oil and natural gas, such as blowouts,
cratering, abnormally pressured formations, explosions, uncontrollable flows of
oil, natural gas or well fluids into the environment, fires, pollution, releases
of toxic gas and other environmental hazards and risks. These hazards can result
in substantial losses to Alexander due to personal injury and loss of life,
severe damage to and destruction of property and equipment, pollution or
environmental damage or suspension of operations.
Alexander maintains insurance of various types customary in the industry to
cover its operations. Alexander's insurance does not cover every potential risk
associated with the drilling and production of oil and natural gas. In
particular, coverage is not obtainable for certain types of environmental
hazards. The occurrence of a significant adverse event, the risks of which are
not fully covered by insurance, could have a material adverse effect on
Alexander's financial condition and results of operations. Moreover, no
assurance can be given that Alexander will be able to maintain adequate
insurance in the future at rates it considers reasonable.
Alexander maintains levels of insurance customary in the industry to limit
its financial exposure in the event of a substantial environmental claim
resulting from sudden and accidental discharges; however, 100% coverage is not
maintained. Unreimbursed expenditures in 1993, 1994, 1995 and the first quarter
of 1996 were immaterial.
COMPETITION
Alexander operates in a highly competitive environment, particularly with
respect to the acquisition of producing properties and proved undeveloped
acreage. Many of Alexander's competitors have financial resources and
exploration and development budgets that substantially exceed those of
Alexander, and have the ability to pay more for desirable leases and to
evaluate, bid for and purchase a greater number of properties or prospects than
the financial or personnel resources of Alexander permit.
EMPLOYEES
As of July 19, 1996, Alexander employed 34 full-time employees, none of
which was subject to a collective bargaining agreement. Alexander's professional
staff includes two landmen, four geologists, two engineers, five accountants,
one division order analysts and a marketing specialist. Alexander considers
relations with its employees to be good.
LEGAL PROCEEDINGS
A petition was filed in Oklahoma County District Court on July 25, 1995,
against Alexander and its directors by Bill V. Dean and Elliott Associates, L.P.
("Elliott"). The suit purported to be a derivative action on behalf of Alexander
against the Board of Directors of Alexander for breach of fiduciary duties in
enacting the Rights Agreement, approving the Severance Agreements, and proposing
the offer of the Senior Subordinated Notes. No damages are being sought against
Alexander. The suit asks that the Rights Agreement and Severance Agreements be
invalidated, seeks an injunction against the offer of Alexander's Senior
Subordinated Notes and requests damages to Alexander from the directors in
excess of $10,000. In August 1995, Alexander elected to defer its proposed offer
of the Senior Subordinated Notes. Alexander filed a motion to dismiss which was
granted by the court in 1995 dismissing Elliott as plaintiff. The court granted
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Elliott leave to file an amended petition. Elliott declined to file an amended
petition and is appealing its dismissal to the Oklahoma Court of Appeals.
Alexander and its directors have filed their answer denying all allegations. The
suit is currently in discovery. Alexander believes the derivative action is
without merit and will vigorously defend against this action.
Alexander and its subsidiaries are named defendants in lawsuits and are
involved from time to time in governmental proceedings, all arising in the
ordinary course of business. Although the outcome of these lawsuits and
proceedings cannot be predicted with certainty, management does not expect these
matters will have a material adverse effect on the financial position of
Alexander.
MANAGEMENT
NEG
DIRECTORS AND EXECUTIVE OFFICERS
The following table lists the names, ages and present position with NEG for
all of NEG's Directors and executive officers:
<TABLE>
<CAPTION>
NAME AGE PRESENT POSITION WITH NEG(1)
--------------------------------------- --- ---------------------------------------
<S> <C> <C>
George B. McCullough(2)................ 71 Chairman of the Board of Directors
Norman C. Miller(2).................... 76 Director and Chairman of the Executive
Committee
Miles D. Bender(2)..................... 59 President, Chief Executive Officer,
Treasurer and Director
Robert H. Kite(2)...................... 41 Director
George N. McDonald(2).................. 63 Director
Robert V. Sinnott...................... 47 Director
Elwood W. Schafer...................... 68 Director
R. Thomas Fetters, Jr.................. 56 Senior Vice President -- Offshore
Operations and Exploration
William T. Jones....................... 50 Vice President -- Production and
Engineering
Randall A. Carter...................... 35 General Counsel and Secretary
Robert A. Imel......................... 38 Chief Financial Officer
Melissa H. Rutledge.................... 30 Controller and Chief Accounting Officer
</TABLE>
- ---------------
(1) Messrs. McCullough, Miller, Bender, Kite, and McDonald have been Directors
of NEG since December 17, 1990. Mr. Sinnott was appointed to the Board on
June 3, 1994 and Mr. Schafer was appointed to the Board effective September
26, 1995. Pursuant to the terms of the NEG Series B Preferred and the NEG
Series C Preferred, the holders of a majority of the outstanding shares of
each of the NEG Series B Preferred and NEG Series C Preferred have the right
to appoint one member to NEG's Board of Directors at all times while such
series are outstanding. After consummation of the NEG Equity Private
Placement, the holders of a majority of the NEG Series D Preferred will have
the right to appoint one member to NEG's Board of Directors at all times
while such series is outstanding. Directors of NEG generally serve for a
term of one year (until the next annual meeting of shareholders) and until
their successors are duly elected and qualified, or until their death,
resignation or removal.
(2) See "NEG Director Election Proposal" for the proposal to elect at the NEG
Meeting Messrs. McCullough, Miller, Bender, Kite and McDonald for new terms
as directors of NEG.
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<PAGE> 118
George B. McCullough. Effective December 17, 1990, Mr. McCullough was
appointed Chairman of the Board of Directors of NEG. From July 20, 1990 to June
11, 1991, Mr. McCullough was a Director of Big Piney. From October 1986 to June
11, 1991, Mr. McCullough served as Chairman of the Board of Directors of VP.
From 1948 to 1986, Mr. McCullough worked for Exxon Corporation ("Exxon"). Mr.
McCullough was elected as a Vice President of Exxon in 1980. He was responsible
for all employee relations for Exxon. Mr. McCullough holds B.A. and M.B.A.
degrees from Tulane University.
Norman C. Miller. Effective December 17, 1990, Mr. Miller was appointed a
Director of NEG and to the office of Chairman of the Executive Committee of NEG.
Mr. Miller had been a Director of Big Piney and Chairman of its Executive
Committee from July 20, 1990 until June 11, 1991. From September 1988 to June
11, 1991, Mr. Miller had been a Director of and Chairman of the Executive
Committee of VP. Mr. Miller was President and CEO of Delhi International Oil
Corporation from 1974 to 1981. Delhi was listed on the American Stock Exchange
and had operations in the United States, Australia, Canada, Columbia, Guatemala
and Panama. Mr. Miller was a Director of Woodbine Petroleum, a public company,
from 1983 to 1985. He received his B.S. degree in Geology from the University of
Oklahoma in 1947.
Miles D. Bender. Since December 17, 1990, Mr. Bender has been President,
Chief Executive Officer, Treasurer and a Director of NEG. From July 20, 1990 to
June 11, 1991, Mr. Bender served as President, Chief Executive Officer,
Treasurer and a Director of Big Piney. Mr. Bender was President, Chief Executive
Officer, Treasurer and a Director of VP from its inception in July, 1986 until
June 11, 1991. He was also President and a Director of Tierra Energy, Inc., from
1984 until 1990. From 1981 to 1984, he was general partner of Rio Colorado
Mining, Ltd., which was engaged in the minerals and natural resources
businesses. From 1970 to 1980, Mr. Bender was President and Chairman of the
Board of Syncom Incorporated ("Syncom"), a publicly-held company that
manufactured magnetic computer supplies. Syncom was listed on the Boston Stock
Exchange. Mr. Bender received his B.A. degree from and attended law school at
the University of Buffalo, and attended the advanced management program of
Harvard University Business School.
Robert H. Kite. Effective December 17, 1990, Mr. Kite was appointed a
Director of NEG. From November 1987 until June 11, 1991, Mr. Kite served as a
Director of VP. Since 1980, Mr. Kite has been Chief Operating Officer of KFT,
Ltd., a family-owned company with operations which include land holdings,
industrial and commercial developments, and equity and commodity investments. He
has also been Chief Executive Officer of Roamin' Korp., Inc. since 1982, which
is engaged in the businesses of construction, recording, mining and equity
investments. Mr. Kite graduated from Southern Methodist University in 1977 with
a B.S. degree in Psychology and Political Science. Mr. Kite is currently serving
as a member of the Board of Directors of the FBI Citizens Academy in Phoenix.
George N. McDonald. Effective December 17, 1990, Mr. McDonald was appointed
a Director of NEG. For more than five years prior to June 11, 1991, Mr. McDonald
was a Director of Big Piney, and, from 1982 to July 20, 1990, he served as Vice
President of Big Piney. From July 20, 1990 until June 11, 1991, Mr. McDonald was
a Director of VP. From 1973 to present, Mr. McDonald has been the President and
Owner of Canyon Courts, Inc. From 1985 to present, Mr. McDonald has also been a
Director of Ion Laser Technology, Inc. Mr. McDonald was also President of Ion
Laser Technology from 1985 to 1988, Chairman of the Board from 1985 to 1992 and
Secretary from 1990 to 1992. Since 1988, Mr. McDonald has also been
President/Owner of Medical Alignment Systems. From 1960 to 1972, Mr. McDonald
was an account executive with Merrill Lynch, Pierce, Fenner and Smith, Inc. and
certain predecessor firms. Mr. McDonald holds B.S. and M.B.A. degrees from the
University of Utah.
Robert V. Sinnott. Effective June 3, 1994, Mr. Sinnott was appointed a
Director of NEG. Mr. Sinnott has been Senior Vice President and Senior
Investment Officer of KAIM since 1992. From 1986 to 1992, Mr. Sinnott was Vice
President and Senior Securities Officer of Citicorp. From 1981 to 1986, Mr.
Sinnott was Director of Corporate Finance at United Energy Resources. From 1976
to 1981, he was Vice President at Bank of America. Mr. Sinnott received a
Bachelor of Arts from the University of Virginia in 1971, and in 1976, a MBA
from the Graduate School of Business Administration at Harvard University. Mr.
Sinnott is on the Board of Directors of Glacier Water Services, an AMEX-listed
vended water company, as well as KA
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Industries, a privately-owned specialty bakery, and Plains Resources, Inc., an
AMEX listed oil and gas company.
Elwood W. Schafer. Effective September 26, 1995, Mr. Schafer was appointed
a Director of NEG. Mr. Schafer has been a consultant to KAIM since January 1993.
Mr. Schafer was Managing Director and Chief Petroleum Engineer of Chemical Bank
from December 1991 (when Chemical Bank and Manufacturers Hanover Trust merged)
until July 1992. From 1974 until December 1991, Mr. Schafer worked for
Manufacturers Hanover Trust and reached the position of Managing Director and
Chief Petroleum Engineer. Mr. Schafer was Vice President and head of the oil
department at the Bank of New York from 1970 until he joined Manufacturers
Hanover Trust. From 1955 to 1970, Mr. Schafer worked at General American Oil
Company. Prior to that he spent four years with Core Labs doing Rocky Mountain
well-site geology. Mr. Schafer graduated from University of Illinois with a B.S.
in geology in 1950.
R. Thomas Fetters, Jr. Mr. Fetters was appointed Senior Vice
President -- Offshore Operations and Exploration of NEG effective September 18,
1995. Mr. Fetters has 30 years of exploration, production and management
experience, both domestic and foreign. Mr. Fetters was President and Chief
Operating Officer of XCL Exploration and Production, Inc. and XCL-China Ltd.
(both wholly owned subsidiaries of XCL Ltd., formerly The Exploration Company of
Louisiana, Inc.), from February 1990 until September 1995. From March 1989 to
February 1990 Mr. Fetters held the position of Chairman of Independent Energy
Corporation which was acquired by The Exploration Company of Louisiana. From May
1983 to March 1989, Mr. Fetters served as President and Chief Executive Officer
of CNG Producing Company in New Orleans and, from August 1966 to May 1983, held
various positions, from Geologist to Exploration Manager with several divisions
of Exxon, primarily in the Gulf Coast region and offshore Gulf of Mexico of the
U.S., and in Malaysia and Australia. At Exxon USA, Mr. Fetters held the
positions of Division Manager of Production Research and Exploration Planning
Manager. Mr. Fetters holds B.S. and M.S. degrees in geology from the University
of Tennessee.
William T. Jones. Since July 1994, Mr. Jones has been Vice
President -- Production and Engineering of NEG. From April 1991 to July 1994,
Mr. Jones was Chief Operating Officer for Ard Drilling Company in Abilene,
Texas. From July 1989 to April 1991, Mr. Jones was Senior Petroleum Engineer for
Snyder Oil Company in Fort Worth, Texas. Mr. Jones also worked at Shell Oil
Company as an Engineer from June 1968 to May 1973. Mr. Jones received a B.S. in
Petroleum Engineering from Mississippi State University.
Randall A. Carter. Effective December 17, 1990, Mr. Carter was appointed
General Counsel and Secretary of NEG. From July 20, 1990 to June 11, 1991, Mr.
Carter was Vice President, General Counsel, Secretary and a Director of Big
Piney. Mr. Carter was also General Counsel of VP from June 1990 to June 11,
1991. From July 1993 to the present, Mr. Carter has also been President and
owner of BeneFactor Funding Corp., a factoring company. From October 1991 to
March 1993 (when Mr. Carter sold the firm), Mr. Carter was President and owner
of Mutual Funds Corporation, a National Association of Securities Dealers, Inc.
member firm. From 1988 to 1989, Mr. Carter was Vice President and General
Counsel of Wichita River Oil Corporation, an American Stock Exchange listed oil
and gas company. From 1987 to 1988, Mr. Carter was Vice President/Investment
Banking of Stern Brothers & Co. From 1984 to 1987, Mr. Carter was an attorney at
Sullivan & Cromwell in New York, N.Y. Mr. Carter received a J.D. degree from the
University of Virginia School of Law in 1984.
Robert A. Imel. Effective September 8, 1993, Mr. Imel was appointed Chief
Financial Officer of NEG on a contract basis and currently is President of Imel
and Hayes, P.C. From March 1991 to August 1993, Mr. Imel was President and Chief
Financial Officer of Murexco Petroleum, Inc., Dallas, Texas. In May, 1992,
Murexco Petroleum, Inc. filed a voluntary bankruptcy petition and is currently
in bankruptcy court. In addition, from March 1988 to February 1991, Mr. Imel
served as Vice President and Chief Financial Officer of Phoenix Operating
Company in Dallas. From September 1984 until February 1988, Mr. Imel was Vice
President and Chief Financial Officer of Murexco Petroleum, Inc. and from
February 1983 to August 1984 he was Controller of Atlas Energy Corporation in
Dallas. He was Senior Accountant with Peat, Marwick, Mitchell & Co. in Dallas
from June 1980 until January 1983. Mr. Imel received his B.S. degree in
Accounting and Finance from Oklahoma State University and is currently licensed
as a CPA in the State of Texas.
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Melissa H. Rutledge. Effective August 15, 1994, Ms. Rutledge was appointed
Controller and Chief Accounting Officer of NEG. From September 1991 to August
1994, Ms. Rutledge was a Senior Auditor for Ernst & Young LLP in Dallas. Ms.
Rutledge received her B.S. degree in Accounting from Texas Tech University and
is currently licensed as a CPA in the State of Texas.
The Board of Directors of NEG met four times, and acted twice by unanimous
written consent, during the fiscal year ended December 31, 1995. Each of the
incumbent directors attended seventy-five percent or more of the aggregate of
(i) the number of meetings of the Board of Directors held during the period for
which he has been a director and (ii) the number of meetings of the Board
committees on which each such director served (Mr. Schafer has attended all of
the meetings since his appointment to the Board on September 26, 1995). NEG has
the following committees: Executive, consisting of Messrs. Miller, Bender and
McCullough; Finance and Audit, consisting of Messrs. Kite, McDonald and
McCullough; and Personnel and Compensation, consisting of Messrs. McCullough,
Miller, Kite, Bender and Sinnott. During the fiscal year ended December 31,
1995, the Executive Committee met four times and did not act by written consent,
the Finance and Audit Committee met once and did not act by written consent, and
the Personnel and Compensation Committee met twice and did not act by written
consent.
The functions of the Finance and Audit Committee are to review and discuss
with NEG's independent auditors the financial records of NEG and report to the
Board of Directors of NEG with respect to such financial records. The Executive
Committee may exercise all the powers and authority of the Board of Directors in
the management of the business and affairs of NEG, except that the Executive
Committee does not have power or authority to amend the Certificate of
Incorporation or by-laws, adopt an agreement of merger or consolidation or sale
of substantially all of NEG's assets, dissolve NEG or remove or indemnify a
director. The Executive Committee governs the conduct of NEG's business in the
intervals between Board of Directors meetings. The Personnel and Compensation
Committee advises NEG's management concerning executive officers and sets
compensation for executive officers. No other committees have been formed by the
Board.
The executive officers of NEG are elected annually at the first meeting of
NEG's Board of Directors held after each annual meeting of shareholders. Each
executive officer will hold office until the first meeting of the Board after
the annual meeting of shareholders next succeeding his or her election and until
his or her successor is duly elected and qualified, or until his or her death or
resignation or until he or she shall have been removed in the manner provided in
NEG's by-laws.
Effective immediately following the Merger, the following directors and
officers of Alexander will become officers of NEG, holding the following
respective offices: Sue Barnard, Vice President -- Administration and Human
Resources and Secretary; David E. Grose, Vice President -- Finance and
Treasurer; and Jim L. David, Vice President -- Exploration (Mid-Continent). For
certain biographical information regarding Ms. Barnard and Messrs. Grose and
David, see "Management -- Alexander -- Directors and Executive Officers." See
also "-- Executive Compensation -- NEG New Employment Agreements."
NEG has been advised that, effective immediately following the NEG Equity
Private Placement, Robert J. Mitchell will be appointed a director of NEG by the
holders of the NEG Series D Preferred. Mr. Mitchell has been Senior Vice
President -- Finance of ACF Industries Inc. since March 1995 and was Treasurer
of ACF Industries Inc. from December 1984 to March 1995. Mr. Mitchell has also
served as President and Treasurer of ACF Industries Holdings Inc. since August
1993 and as Vice President, Liaison Officer of Icahn & Co., Inc. since November
1984. From 1987 to January 1993, Mr. Mitchell served as Treasurer of TransWorld
Airlines, Inc. and was the Treasurer of TransWorld Airlines, Inc. when it filed
for reorganization under Chapter 11 of the United States Bankruptcy Code, as
amended, in January 1992. Mr. Mitchell is also a director of Cauds
Pharmaceutical Corporation. See "The Merger Proposals -- Conduct of Business
Following the Merger; Board of Directors and Management."
SECTION 16 REPORTING
Section 16(a) of the Exchange Act requires NEG's officers and Directors,
and persons who own more than 10% of a registered class of the NEG's equity
securities, to file reports of ownership and changes in
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<PAGE> 121
ownership with the SEC and the National Association of Securities Dealers, Inc.
Officers, directors, and greater than 10% shareholders are also required by SEC
regulations to furnish NEG with copies of all Section 16(a) forms they file.
Based solely on its review of copies of such forms received by it, NEG
believes that, during the period January 1, 1995 to December 31, 1995, all
filing requirements applicable to its officers, directors and greater than 10%
beneficial owners were complied with except as noted below. In 1996, each of the
following filed one Form 4 late and each Form 4 covered one transaction: George
B. McCullough, Norman C. Miller, Miles D. Bender, Robert H. Kite, George N.
McDonald, Robert V. Sinnott, Robert A. Imel, William T. Jones and Melissa H.
Rutledge. In addition, in 1996, R. Thomas Fetters, Jr. and Elwood W. Schafer
each filed one Form 3 late and each Form 3 reported one transaction.
EXECUTIVE COMPENSATION
The following tables set forth the cash compensation received by NEG's
Chief Executive Officer, Chief Financial Officer and Vice
President -- Production & Engineering during the fiscal years ended December 31,
1995, 1994 and 1993, and aggregate option/SAR exercises during the last fiscal
year and year end option/SAR values. None of the other executive officers' cash
compensation for all services rendered in all capacities to NEG exceeded
$100,000 during 1995, 1994 or 1993.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
AWARDS
ANNUAL COMPENSATION(1) -----------------------------
RESTRICTED SECURITIES OTHER
NAME AND ---------------------- STOCK AWARD(S) UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($) OPTION(#) ($)
- ------------------------------------ ---- --------- -------- -------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Miles D. Bender 1995 181,250 50,000 -- 200,000 78,971(4)
President & 1994 139,583 15,000 3,871(3) --
Chief Executive Officer 1993 123,456 -- -- --
Robert A. Imel 1995 101,670 10,000 13,000(3) 110,000 --
Chief Financial Officer(2) 1994 86,292 -- 21,575(3) -- --
1993 45,319 -- -- -- --
William T. Jones 1995 99,000 10,000 -- 110,000 --
Vice President, Production &
Engineering
</TABLE>
- ---------------
(1) Excludes the aggregate, incremental cost to NEG of perquisites and other
personal benefits, securities or property, the aggregate amount of which,
with respect to the named individual, does not exceed the lesser of $50,000
or 10% of reported annual salary and bonus for such person.
(2) Mr. Imel is currently employed by NEG on a contract basis. Mr. Imel began
working with NEG in September 1993.
(3) At December 31, 1995, Mr. Bender held 247,500 shares of restricted NEG
Common Stock, with a value of $804,375; at December 31, 1995, Mr. Imel held
80,500 shares of restricted NEG Common Stock, with a value of $261,625; and
at December 31, 1995, Mr. Jones held 50,000 shares of restricted NEG Common
Stock, with a value of $162,500.
(4) During 1995, the Board of Directors approved payment of $78,971 to Mr.
Bender for services rendered without pay in prior years, and for
reimbursement of certain other expenses.
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<PAGE> 122
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
- --------------------------------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE
UNDERLYING GRANTED TO EXERCISE APPRECIATION FOR
OPTIONS EMPLOYEES OR BASE OPTION TERM
GRANTED IN FISCAL PRICE --------------------
NAME (#) YEAR ($/SH) EXPIRATION DATE 5%($) 10%($)
- ---------------- ---------- ---------- -------- ----------------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Miles D. Bender 100,000(1) 13% 1.625 January 4, 1999 207,396 261,708
100,000(2) 13% 2.81 December 1, 2000 376,567 497,809
Robert A. Imel 60,000(1) 8% 1.625 January 4, 1999 124,437 157,025
50,000(2) 7% 2.81 December 1, 2000 188,283 248,904
William T. Jones 60,000(1) 8% 1.625 January 4, 1999 124,437 157,025
50,000(2) 7% 2.81 December 1, 2000 188,283 248,904
</TABLE>
- ---------------
(1) These option grants became 100% exercisable on January 4, 1996.
(2) These option grants are 50% exercisable on December 1, 1996 and 100%
exercisable on December 1, 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-
OPTIONS AT FY- MONEY OPTIONS AT
END(#) FY-END($)(1)
VALUE ---------------- ------------------
SHARES ACQUIRED REALIZED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) ($) UNEXERCISABLE UNEXERCISABLE
- ------------------------------- --------------- -------- ---------------- ------------------
<S> <C> <C> <C> <C>
Miles D. Bender -- -- 100,000/150,000 $237,500/$162,750
Robert A. Imel 25,000 60,938 30,000/80,000 $56,250/$90,750
William T. Jones -- -- 30,000/80,000 $56,250/$90,750
</TABLE>
- ---------------
(1) Based on the closing price of NEG Common Stock on December 29, 1995 of
$3.50.
Mr. Bender and Mr. Jones did not exercise any options during the fiscal
year ended December 31, 1995.
NEG does not have any long-term incentive plans or defined benefit or
actuarial plans. Therefore, the tables on long-term incentive plan awards and
pension plans are omitted from this Proxy Statement.
Compensation of Directors
NEG compensates non-employee Board of Directors members in the amount of
$500 for each official Board of Directors meeting and $500 for each Board of
Directors committee meeting unless such committee meeting is held at the time
of, or in conjunction with, an official Board of Directors meeting.
During 1995, the Directors received options to purchase Common Stock for
services rendered to NEG. The number of options granted were as follows: Miles
D. Bender -- 100,000 and 100,000 at exercise prices of $1.625 and $2.81,
respectively; George McCullough -- 20,000 and 30,000 at exercise prices of
$1.625 and $2.81, respectively; Norman C. Miller -- 20,000 and 30,000 at
exercise prices of $1.625 and $2.81, respectively; Robert H. Kite -- 20,000 and
15,000 at exercise prices of $1.625 and $2.81, respectively; George N.
McDonald -- 20,000 and 15,000 at exercise prices of $1.625 and $2.81,
respectively; Elwood W. Schafer -- 15,000 at an exercise price of $2.81; and
Robert Sinnott -- 20,000 and 15,000 at exercise prices of $1.625 and $2.81,
respectively.
During 1994, the Directors received grants of restricted Class B Common
Stock for services rendered to NEG. The values of the stock awarded were as
follows: Miles D. Bender -- $3,871, George B. McCullough -- $3,871, Norman C.
Miller -- $3,871, Robert H. Kite -- $3,871, and George N. McDonald -- $2,241.
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<PAGE> 123
Effective June 9, 1995, all outstanding shares of NEG's Class B Common Stock
were converted pursuant to its terms into NEG Common Stock.
During 1992, NEG's Board of Directors and shareholders approved NEG's 1992
Stock Option Plan (the "NEG Plan"). Awards may be granted to key employees or
non-employee directors of NEG. Awards may consist of options to purchase shares
of NEG Common Stock or stock appreciation rights (SARs) or a combination
thereof. The aggregate number of shares that NEG may issue under the NEG Plan
will not, at the time of the grant, exceed an amount equal to 10% of the number
of then-outstanding shares of NEG Common Stock. Furthermore, no more than 30% of
the shares of NEG Common Stock for which awards may be granted under the NEG
Plan may be granted to NEG's directors, and no one director may be granted
awards covering more than 75,000 shares of NEG Common Stock. No more than 50% of
the shares of NEG Common Stock for which awards may be granted under the NEG
Plan may be granted to officers of NEG who are not directors, and no one officer
who is not a director may be granted awards covering more than 125,000 shares.
The exercise price of an option or SAR may not be less than the fair market
value of NEG Common Stock on the date of grant. Payment due to NEG upon the
exercise of any option may be made in cash or in shares of NEG Common Stock or a
combination thereof. All options granted under the NEG Plan expire no later than
the tenth anniversary of the date of grant. As of July 19, 1996, options to
purchase 15,000 shares of NEG Common Stock had been granted pursuant to the NEG
Plan.
Mr. Norman Miller received $22,500 in 1995 for work performed for NEG. In
1994, Mr. Miller received a bonus of $5,000 for work on Company matters and
effective November 11, 1994, Mr. Miller began to receive $500 for each day he
works on Company matters.
In addition, NEG pays other incidental compensation to executive officers
and directors from time to time, consisting primarily of reimbursement for
travel and entertainment expenses on behalf of NEG.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
In January 1996, NEG executed employment agreements (the "Employment
Agreements") with Miles D. Bender, President and Chief Executive Officer, R.
Thomas Fetters, Jr., Senior Vice President -- Offshore Operations and
Exploration, William T. Jones, Vice President -- Production and Engineering, and
Melissa H. Rutledge, Controller and Chief Accounting Officer. In addition, in
January 1996, NEG executed similar agreements (the "Officer Agreements") with
Robert A. Imel, Chief Financial Officer, and Randall A. Carter, General Counsel
and Secretary. The Employment Agreements and Officer Agreements each provides
that the three-year term will be rolling (so that at any time during the term of
such agreements there is a remaining term of three years, but in no event beyond
the time the executive and/or officer reaches age 65); and each have a term of
three years from the effective date of a change in control.
The Employment Agreements and Officer Agreements define the "change in
control" to have occurred when (i) a person, entity or group becomes the
beneficial owner of a majority of the securities of NEG ordinarily having the
right to vote for election of directors, (ii) during any consecutive two year
period, the directors at the beginning of the period, (together with directors
approved by a vote of 66 2/3% of such initial directors plus directors
previously approved by such 66 2/3% margin) cease to constitute a majority of
NEG's Board of Directors, (iii) any sale, lease, exchange or transfer of all, or
substantially all, of NEG's assets occurs, or (iv) a merger or consolidation
occurs with the effect that any person, entity or group, or the shareholders
thereof, become the owner of securities of the surviving corporation
representing a majority of the voting power of such surviving corporation for
the election of directors. NEG's proposed merger with Alexander is specifically
excluded from the definition of a change in control.
The Employment Agreements and Officer Agreements provide for a three year
employment period during which the executive and/or officer receives for each
year (i) 100% of the average of the executives annual base salary at the time in
question and of the executives annual base salary for each of the preceding two
years (for Messrs. Imel and Carter, this clause (i) is 100% of the average of
gross cash compensation for each of the last three years), and (ii) 100% of the
average of the bonuses paid to the executive and/or officer for each of the
preceding three fiscal years. If the executive and/or officer is discharged
without cause or resigns for "good reason" after a change in control then, in
lieu of the compensation described in the preceding
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<PAGE> 124
sentence, the executive and/or officer is entitled to a lump sum cash severance
payment equal to three times the sum of (i) the executives annual base salary
then in effect (or, for Messrs. Carter and Imel, the average of gross cash
compensation for each of the three previous years), (ii) the average of cash
bonuses for each of the three previous years, and (ii) the average of
fully-vested NEG contributions to retirement plans for such executive and/or
officer for each of the three preceding years. In addition, at such time, all
options and all other retirement or pension contributions or benefits shall
become fully vested and shall remain fully exercisable for 360 days.
If the payments to an executive and/or officer, however, would result in an
"excess parachute payment" as defined in Section 280G of the Code, then such
payments will be reduced to the minimum extent necessary so that no portion of
such payments constitute an excess parachute payment. If any amount paid to an
executive and/or officer is determined to be subject to the excise tax imposed
by Section 4999 of the Code, NEG will pay such executive and/or officer an
additional cash amount so such person receives, net of such tax, the amount such
person would have received without such tax.
Pursuant to the Employment Agreements and Officer Agreements, the surviving
corporation can discharge the executive and/or officer for cause only if such
person has willfully breached or habitually neglected his or her duties, or has
been convicted of a felony. An executive and/or officer can resign for "good
reason" under the Employment Agreements and Officer Agreements if he or she is
assigned less significant responsibilities after a change in control, cash
compensation is reduced, the surviving corporation takes actions with the
purpose or intent and effect of inducing the executive and/or officers
resignation; or the surviving corporation declines to extend the term of the
Employment Agreements or Officer Agreements.
NEG New Employment Agreements
In connection with their appointment, following the Merger, as officers of
NEG, Sue Barnard, David E. Grose and Jim L. David have entered into NEG New
Employment Agreements to commence upon consummation of the Merger. See
"Management -- NEG -- Directors and Executive Officers." Mr. David's agreement
is for a two year term, provides for annual compensation of at least $102,000,
with at least a $10,000 annual bonus, and shares of NEG Common Stock in an
amount equal to $42,540. Ms. Barnard's and Mr. Grose's agreements are for 30
month terms, provide for annual compensation of at least $60,000 and $110,000,
respectively, and shares of NEG Common Stock in the amounts of $20,000 and
$37,650, respectively. Each of the above NEG New Employment Agreements provides
registration rights to Ms. Barnard and Messrs. David and Grose, and severance
benefits if NEG discharges such officer without cause or the officer resigns for
good reason after a change of control, as defined under the NEG New Employment
Agreements. Each of Ms. Barnard's and Mr. Grose's agreements also contain
severance provisions which generally entitle such persons to a payment in an
amount equal to two times their annual salary in the event their employment is
voluntarily terminated (either by NEG or the employee) within the first six
months of the term of their NEG New Employment Agreements. In addition, each of
Bob G. Alexander and Roger G. Alexander have entered into NEG New Employment
Agreements, effective upon consummation of the Merger, which terminate such
persons' Severance Agreements with Alexander. Such agreements provide for annual
compensation of $150,000 for Bob G. Alexander for the three year term of his
agreement and $8,333.33 per month for Roger G. Alexander during the first year,
which decreases to $5,208.33 per month during the remaining two years of his
three year agreement. Under each of such agreements, the aggregate compensation
amounts will be accelerated upon such person's termination by NEG or death.
Compensation Committee Interlocks and Insider Participation
Miles D. Bender served both as a member of the Personnel and Compensation
Committee of the Board of Directors of NEG (the "Compensation Committee") and as
the President and CEO of NEG during 1995. Robert V. Sinnott served as a member
of Compensation Committee during 1995 and as a director of Plains Resources,
Inc., the parent company of Plains to whom NEG sold 59% of its total oil and gas
sales during 1995. See "Certain Relationships and Related Transactions -- NEG."
115
<PAGE> 125
Personnel and Compensation Committee Report on Executive Compensation
The Compensation Committee is composed of four Directors and the President
and CEO of NEG. The Compensation Committee advises NEG's Board of Directors and
management concerning compensation for its executive officers. Compensation for
executive officers is based on the principles that compensation must be
competitive to enable NEG to motivate and retain highly qualified and talented
employees to lead and grow NEG's business and, at the same time, provide rewards
which are closely linked to NEG's and the individual's performance.
The Compensation Committee considers management skills, long term
performance, operating results, unusual accomplishments as well as economic
conditions and other external events that affect NEG's operations.
In addition to salaries, bonuses and stock options are generally granted
once or twice annually based on performance, length of service or other noted
accomplishments in helping to increase reserves and/or cash flows of NEG.
Options are currently not granted under a formal plan, but are generally issued
annually to executives at market price on the grant date.
During the fiscal year ended December 31, 1995, the base compensation for
Miles D. Bender, President and Chief Executive Officer, was $200,000 which
represented a 33% increase from the prior year. The Compensation Committee
believes the increase is reasonable based on the significant increase in the oil
and gas reserves and related cash flows for NEG, along with Mr. Bender's
performance and responsibilities. In addition, the increase served to provide
competitive compensation more reflective of other companies within the industry.
Based on the foregoing, the Compensation Committee also granted Mr. Bender a
$50,000 bonus and 200,000 options during 1995.
COMPENSATION COMMITTEE
George McCullough
Norman Miller
Robert Kite
Robert Sinnott
Miles Bender
116
<PAGE> 126
Corporate Performance
The following graph shows a five-year comparison of cumulative total
stockholder returns for NEG, the Nasdaq Market Index and an index of peer
companies in the oil and gas industry selected by NEG (the "Peer Group").
<TABLE>
<CAPTION>
Measurement Period
(Fiscal Year Covered) National Energy Group Inc. Nasdaq Market Index Peer Group Index
<S> <C> <C> <C>
1990 100.00 100.00 100.00
1991 50.00 128.38 60.13
1992 75.00 129.64 88.89
1993 120.00 155.50 94.80
1994 160.00 163.26 107.05
1995 280.00 211.77 112.73
</TABLE>
The total cumulative return on investment (change in the year end stock
price plus reinvested dividends) for each of the years for NEG, the Nasdaq
Market Index and the Peer Group is based on the stock price or composite index
beginning at the end of the calendar year 1990. NEG has never paid dividends on
the NEG Common Stock.
The Peer Group Index, is a diversified group of independent oil and gas
companies comprised of Abraxas Petroleum, C.P.N.V., Arch Petroleum, Inc., Basin
Exploration, Inc., Cairn Energy USA, Inc., Coho Energy, Inc., Comstock
Resources, Inc., Gothic Energy Corp., Hugoton Energy Corp., Lomak Petroleum,
Inc., Panaco, Inc. and Petrocorp, Inc.
117
<PAGE> 127
ALEXANDER
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of Alexander are identified below. The
officers serve at the pleasure of the Board of Directors. Roger G. Alexander is
the son of Bob G. Alexander.
<TABLE>
<CAPTION>
NAME AGE POSITION SINCE
- ------------------------------ --- ---------------------------------------- -----
<S> <C> <C> <C>
Bob G. Alexander.............. 62 President, Chief Executive Officer and 1980
Director
David E. Grose................ 43 Vice President, Treasurer, Chief 1983
Financial Officer and Director
Jim L. David.................. 56 Executive Vice President and Director 1980
Roger G. Alexander............ 41 Vice President (Land) and Director 1987
Phillip J. Lohmann............ 57 Vice President (Operations) 1996
Sue Barnard................... 51 Secretary 1982
Brian F. Egolf................ 46 Director 1992
Robert A. West................ 56 Director 1994
</TABLE>
Bob G. Alexander, a founder of Alexander, has been a director and the
President and Chief Executive Officer of Alexander since inception in 1980. From
1976 to 1980, Mr. Alexander was Vice President and General Manager of the
Northern Division of Reserve Oil, Inc. and President of Basin Drilling Corp.
(subsidiaries of Reserve Oil and Gas Company). Mr. Alexander attended the
University of Oklahoma and graduated in 1959 with a bachelor of science degree
in geological engineering. He has extensive experience in exploration, drilling
and production in the Mid-Continent, West Texas and Gulf Coast regions and Utah
for major and independent oil and natural gas companies. Professional
memberships include the Independent Petroleum Association of America ("IPAA"),
of which he currently serves as a member of the Executive and Economic
Committees, and the Oklahoma Independent Petroleum Association ("OIPA"), of
which he serves as a director, treasurer and a member of the OIPA Federal Energy
Policy Task Force. He is former vice-chairman of the Natural Gas Task Force of
Oklahoma and former chairman of The Commission on Natural Gas Policy.
David E. Grose, joined Alexander at its inception in March 1980 as a
financial accountant and served as Assistant Treasurer from October 1983 until
his election in 1987 as a director and Vice President, Treasurer and Chief
Financial Officer. From 1977 to 1980, he held a position in the corporate
accounting department of Reserve Oil and Gas Company and was the rig accountant
for Basin Drilling Corporation. Mr. Grose received a bachelor of arts degree in
political science from Oklahoma State University in 1974 and a masters degree in
business administration from Central State University in 1977. Professional
memberships include the Petroleum Accountants Society of Oklahoma City and the
IPAA. Mr. Grose formerly served on the Tax Committee of the IPAA.
Jim L. David, a founder of Alexander, has served as a director and Vice
President since its inception in March 1980. In August 1987, he was elected
Executive Vice President. Mr. David began his career in oil and gas exploration
with Mobil Oil Corporation as an exploration and development geologist. He
worked in this capacity in Shreveport, Louisiana; Corpus Christi, Texas; New
Orleans, Louisiana; Denver, Colorado; and Anchorage, Alaska. From October 1973
to October 1976, Mr. David served as Alaska chief geologist and senior staff
geologist for Texas International in Oklahoma City. Thereafter, he was employed
as exploration manager for Reserve Oil, Inc., Northern Division, in Oklahoma
City from January 1977 until formation of Alexander. Mr. David graduated with a
bachelor of arts degree in geology from Louisiana Tech University in 1962 and
obtained a master of arts in geology from the University of Missouri in 1964.
Professional memberships include the American Association of Geologists and the
Oklahoma City Geological Society. Mr. David is a certified petroleum geologist.
118
<PAGE> 128
Roger G. Alexander, a certified petroleum landman, has served as Vice
President (Land) and director of Alexander since February 1987. Mr. Alexander
joined Alexander as a landman in August 1983 and became senior landman in August
1984. In July 1985, he was named land manager. He was employed as a landman by
Texas Oil & Gas Corporation in its West Texas District, Midland, Texas, from
June 1981 to August 1983. Mr. Alexander graduated with a bachelor of business
administration degree, with a major in petroleum land management, from the
University of Oklahoma in 1981. Professional memberships include the American
Association of Petroleum Landmen and the Oklahoma City Association of Petroleum
Landmen.
Phillip J. Lohmann, was elected Vice President (Operations) in February
1996. Prior to joining Alexander he served as President of Lohmann & Associates,
Inc., Norman, Oklahoma, a petroleum operating and engineering consulting firm.
From 1974 to 1979, Mr. Lohmann was Vice President of Jasper & Lohmann
Engineering, Inc. He held several engineering positions in Oklahoma City and was
the District Manager for McCulloch Oil Corporation in Bakersfield, California,
from 1972 to 1974. He has extensive experience in exploration, drilling and
production in the Mid-Continent, Texas and California. Mr. Lohmann graduated
from the University of Oklahoma in 1962 with a bachelor of science degree in
industrial engineering and is a member of the Society of Petroleum Engineers.
Sue Barnard, has served as Corporate Secretary since 1985 and director of
investor relations since June 1988. Additionally, since 1986 she has served
Alexander in the capacities of Risk Manager and Manager of Human Resources. Ms.
Barnard joined Alexander in June 1982 as assistant to the Vice President --
Administration and as Assistant Corporate Secretary. Professional memberships
include the American Society of Corporate Secretaries.
Brian F. Egolf, received a bachelor of arts degree in political science and
history from Stanford University in 1970. Since graduation, Mr. Egolf has had an
extensive career in the oil and natural gas industry. He was a director and the
president of Bradmar from its inception in 1989 until Alexander acquired Bradmar
in March 1992. Mr. Egolf has been a general partner of The Egolf Company since
its formation in 1979. The Egolf Company served as the general partner of
Bradmar's predecessor, Petroleum Investments, Ltd., and served as the general
partner of nine oil and natural gas drilling partnerships.
Robert A. West, a 1961 graduate of The University of Tulsa, has had a
varied career in the energy business spanning more than 30 years. Since 1973,
Mr. West has owned and/or invested in various energy industry service companies
including Alexander Well Services, Inc. and Beacon Fluid Services (formerly
Beacon Well Services, Inc.). Since 1989, he has served as president and majority
shareholder of The West Group, Inc., a vacuum transport and completion fluids
service company. Mr. West's trade association memberships include the Oklahoma
Independent Petroleum Association. His civic contributions include serving since
1988 in various capacities on the Board of Trustees of The University of Tulsa.
Immediately after the Effective Time of the Merger, Messrs. Bob Alexander,
David and West will be appointed to the Board of Directors of NEG pursuant to
the Merger Agreement. See "The Merger Proposals -- Conduct of Business following
the Merger; Board of Directors and Management." In addition, Ms. Barnard and
Messrs. Grose and David will become officers of NEG effective immediately
following the Merger. See "-- NEG -- Directors and Executive Officers," and
"-- NEG -- Executive Compensation -- NEG New Employment Agreements."
119
<PAGE> 129
EXECUTIVE COMPENSATION
The following information is set forth with respect to the total cash
compensation paid to Alexander's five executive officers (including Alexander's
chief executive officer) whose cash compensation exceeded $100,000 during each
of the three years ending December 31, 1995, 1994 and 1993. None of the other
executive officers' cash compensations for all services rendered in all
capacities to Alexander and its subsidiaries exceeded $100,000 during 1995, 1994
and 1993.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
AWARDS
ANNUAL COMPENSATION(1) ----------------------
----------------------------------------------- RESTRICTED
OTHER ANNUAL STOCK
NAME AND PRINCIPAL FISCAL SALARY BONUS COMPENSATION AWARD(S) OPTIONS
POSITION YEAR ($)(2) ($)(3) ($) ($)(4) (#)
- ------------------------------- ------ ------- ------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Bob G. Alexander 1995 137,121 -- -- -- --
President and Chief 1994 133,021 233,156(5) -- -- --
Executive Officer 1993 122,424 69,553 -- -- --
Jim L. David 1995 89,847 -- -- -- --
Executive Vice President 1994 88,315 48,370 --
1993 79,973 69,553 -- -- --
David E. Grose 1995 79,778 -- -- -- --
Vice President, Treasurer 1994 78,631 48,370 -- 189,250 4,000
and Chief Financial Officer 1993 71,308 69,553 -- 10,500 3,000
Roger G. Alexander 1995 78,708 -- -- -- --
Vice President (Land) 1994 76,599 48,370 -- 189,250 4,000
1993 71,256 69,553 -- 10,500 3,000
James S. Wilson(6) 1995 79,383 -- -- -- --
Vice President 1994 76,881 48,370 -- 189,250 4,000
(Operations) 1993 71,308 69,553 -- 10,500 3,000
</TABLE>
- ---------------
(1) Excludes the aggregate, incremental cost to Alexander of perquisites and
other personal benefits, securities or property, the aggregate amount of
which, with respect to the named individual, does not exceed the lesser of
$50,000 or 10% of reported annual salary and bonus for such person.
(2) Includes amounts paid by Alexander which were deferred pursuant to Section
401(k) of the Code and accrued during the years ended December 31, 1995,
1994 and 1993.
(3) Alexander has a policy whereby bonuses may be awarded only if Alexander has
replaced produced reserves in the previous year. In those years in which
this occurs, 10% of the difference between internally generated cash flow
and the estimated finding cost for reserve replacement may be awarded to key
employees managing key corporate functions. Bonuses were awarded equally
among five executive officers of Alexander in 1994 and 1993. No bonuses were
paid in 1995. Included in the amount of bonus awarded for 1993, $9,853 was
paid as discretionary performance bonuses for successful completion of
Alexander's second public offering of common stock to each of the named
individuals.
(4) For 1994, the values of the grants are based on $4.625 and $6.00, the
closing sale prices of Alexander's common stock at October 5 and December 8,
the respective dates of grants of 2,000 and 30,000 shares, respectively, to
each of Messrs. Roger Alexander and Grose. Value for 1993 is based on $5.25,
the closing sale price at November 30, the date of grant. Restricted stock
awards of 32,000 shares in 1994 and 2,000 shares in 1993 to each of Messrs.
Roger Alexander and Grose were made pursuant to the Alexander 1993
Restricted Stock Plan. At December 31, 1995, there were held in escrow for
each of Messrs. Roger Alexander and Grose 16,500 restricted shares with a
value of $75,281. Vesting of the restricted stock awards was accelerated on
June 5, 1996.
120
<PAGE> 130
(5) Includes $184,786 of debt forgiveness in the form of a one-time bonus. In
June 1988, Mr. Bob Alexander purchased 200,000 shares of Alexander's
treasury stock for a sum aggregating $322,500. In connection with this
transaction, Alexander advanced Mr. Bob Alexander $77,500 bearing interest
at 10% repayable in ten annual installments. In November 1994, the Board of
Directors approved a resolution to forgive the outstanding receivable from
Mr. Bob Alexander and to also fund the principal and interest previously
paid to Alexander, resulting in an aggregate bonus of $184,786.
(6) Mr. Wilson resigned his position with Alexander on January 9, 1996.
Compensation of Directors
Through June 30, 1994, non-employee directors of Alexander were entitled to
receive a fee of $500 for each meeting attended. Effective July 1, 1994,
non-employee directors receive a fee of $2,000 for each meeting attended in
person and $500 for each meeting attended telephonically.
Option Exercises and Year End Option Values
The following information is set forth with respect to each exercise of
stock options during the year ended December 31, 1995 by each of Alexander's
named executive officers, and the year-end value of outstanding in-the-money
options held by those executive officers.
AGGREGATED OPTION EXERCISES FOR LAST FISCAL YEAR
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED IN-THE-
UNEXERCISED MONEY OPTIONS AT
OPTIONS AT FISCAL FISCAL YEAR-END
YEAR-END(#) ($)(1)
SHARES ----------------- -------------------
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
- ---------------------------------- ------------ ------------ ----------------- -------------------
<S> <C> <C> <C> <C>
Bob G. Alexander.................. -- -- -- --
Jim L. David...................... -- -- -- --
David E. Grose.................... -- -- 33,665/-- 63,567/--
Roger G. Alexander................ 3,333 896 5,833/-- 29,638/--
James S. Wilson................... -- -- 20,665/-- 34,300/--
</TABLE>
- ---------------
(1) Based on the closing sale price of Alexander's common stock on December 31,
1995 of $4.5625.
Option Grants in Last Fiscal Year
There were no stock options granted during the year ended December 31,
1995.
Termination of Employment and Change-in-Control Arrangements
In December 1994, Alexander executed Severance Agreements with its
executive officers. The Severance Agreements become effective only upon a change
in control or ownership. The Severance Agreements define "change in control" to
have occurred when (i) a person, entity or group acquires beneficial ownership
of (a) 30% or more of the outstanding shares of the Alexander Common Stock and
the Alexander Board of Directors deems the acquisition to be a change in control
or (b) 40% or more of the outstanding shares of Alexander Common Stock; (ii)
either the directors who constitute Alexander's Board of Directors at the time
of execution of the Severance Agreements (the "Incumbent Board"), or the
directors who are elected by Alexander's shareholders subsequent to execution of
the Severance Agreements and are approved by a majority of the Incumbent Board,
cease to hold at least a majority of the Board of Directors seats; or (iii) the
shareholders of Alexander have approved a reorganization, share exchange, merger
or consolidation which results in the shareholders of Alexander owning less than
50% of the combined voting power of the then outstanding voting securities, or a
liquidation or dissolution of Alexander or the sale of all or substantially all
of the assets of Alexander.
121
<PAGE> 131
The Severance Agreements provide for an employment period ending on the
earlier to occur of (i) three years from the change in control or (ii) the first
day of the month next following the executive's attainment of age 65. During
such period, the executive is to receive a base salary at least equal to the
highest monthly base salary paid to the executive during the 36-month period
immediately preceding the month in which the change in control occurs. In
addition to base salary, the executive will be awarded for each fiscal year an
annual bonus in cash at least equal to the highest bonus paid by Alexander to
the executive during the last five fiscal years immediately preceding the fiscal
year in which the change in control occurs. Prior to execution of the NEG New
Employment Agreements, Alexander estimated the maximum severance obligation for
executive employees to be $2.9 million, occurring only in the event that all
five of the executives that are parties to the agreements are terminated during
the three-year period subsequent to change in control of Alexander. See "The
Merger Proposals -- Treatment of Alexander Employment and Severance Agreements;
NEG New Employment Agreements."
Compensation Committee Interlocks and Insider Participation
Alexander's Compensation Committee consists of Brian F. Egolf, Chairman,
and Jim L. David. Mr. David served as Vice President of Exploration from the
inception of Alexander in 1980 until his election in 1987 to his current
position of Executive Vice President. Effective January 1, 1996, Alexander sold
228 wells to Petroleum Properties Management Company ("PPMC"). PPMC is
wholly-owned by a trust of which Brian F. Egolf, a director of Alexander, is a
beneficiary. Alexander operated 83 of the 228 wells. Of several prospective
buyers, PPMC offered Alexander the highest purchase price, which consisted of
approximately $800,000 of cash and the assumption of net gas balancing
liabilities of approximately $260,000.
122
<PAGE> 132
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
NEG
The following table sets forth the total number of shares of NEG's Common
Stock and Preferred Stock beneficially owned by (a) each person who, to the
knowledge of NEG, is the beneficial owner of 5% or more of the outstanding
shares of a class of NEG's capital stock, (b) each of NEG's present Directors
and officers and certain other parties, and (c) the Directors and officers of
NEG as a group, all as reported by each such person, as of July 19, 1996. In
addition, the following table sets forth the number of shares and the percent of
each class of currently outstanding NEG capital stock owned by each such person
immediately after the Effective Time of the Merger. Except as otherwise
indicated, ownership of shares by the persons named below includes sole voting
and investment power held by such persons.
<TABLE>
<CAPTION>
POST-MERGER
PRE-MERGER AMOUNT
AMOUNT AND NATURE
AND NATURE PRE-MERGER OF POST-MERGER
NAME AND ADDRESS OF BENEFICIAL OF BENEFICIAL PERCENT OF BENEFICIAL PERCENT OF
OWNER OWNERSHIP CLASS (1) OWNERSHIP CLASS(2)
--------------------------------- -------------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
COMMON STOCK
Richard A. Kayne 5,230,769(3) 30.1% 7,802,991(3) 18.9%
1800 Ave of Stars, Ste. 1424
Los Angeles, California 90067
Kayne, Anderson Investment 5,230,769(3) 30.1% 7,802,991(3) 18.9%
Mgmt, Inc.
1800 Ave of Stars, Ste. 1424
Los Angeles, California 90067
Miles D. Bender 1,298,144(4) 10.5% 1,298,144(4) 3.9%
4925 Greenville Ave., Ste. 1400
Dallas, Texas 75206
Carl C. Icahn 1,040,000(5) 8.5% 8,212,544(5) 21.3%
114 West 47th Street, 19th
Floor
New York, New York 10036
George B. McCullough 391,852(6) 3.2% 391,852(6) 1.2%
6510 Pauma Dr.
Houston, Texas 77069
Robert H. Kite 369,455(7) 3.0% 369,455(7) 1.1%
2722 N. 7th Street
Phoenix, Arizona 85006
Norman C. Miller 324,860(8) 2.7% 324,860(8) 1.0%
P. O. Box 1566
Griffin, Georgia 30224
Robert A. Imel 165,500(9) 1.4% 165,500(9) (17)
4925 Greenville Ave, Ste. 1400
Dallas, TX 75206
Randall A. Carter 164,882(10) 1.4% 164,882(10) (17)
234 Columbine, Suite 240
Denver, Colorado 80206
George N. McDonald 123,023(11) 1.0% 123,023(11) (17)
3656 Macintosh Lane
Salt Lake City, Utah 84121
</TABLE>
123
<PAGE> 133
<TABLE>
<CAPTION>
POST-MERGER
PRE-MERGER AMOUNT
AMOUNT AND NATURE
AND NATURE PRE-MERGER OF POST-MERGER
NAME AND ADDRESS OF BENEFICIAL OF BENEFICIAL PERCENT OF BENEFICIAL PERCENT OF
OWNER OWNERSHIP CLASS (1) OWNERSHIP CLASS(2)
--------------------------------- -------------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
William T. Jones 110,000(12) (17) 110,000(12) (17)
4925 Greenville Ave, Ste. 1400
Dallas, TX 75206
R. Thomas Fetters, Jr. 50,000(13) (17) 50,000(13) (17)
4925 Greenville Ave, Ste 1400
Dallas, TX 75206
Melissa H. Rutledge 30,000(14) (17) 30,000(14) (17)
4925 Greenville Ave, Ste. 1400
Dallas, TX 75206
Robert V. Sinnott 20,000(15) (17) 20,000(15) (17)
1800 Ave of Stars, Ste. 1424
Los Angeles, California 90067
Elwood W. Schafer 2,000(16) (17) 2,000(16) (17)
7018 Blackwood Drive
Dallas, TX 75231
All Directors and Officers as a 3,049,716(18) 24.2% 4,214,179(18) 12.4%
group (12 people before the
Merger and 18 people after the
Merger)
SERIES B PREFERRED STOCK
Richard A. Kayne 52,500(19) 100% 52,500(19) 100%
1800 Ave of Stars, Ste. 1424
Los Angeles, CA 90067
Kayne, Anderson Investment 52,500(19) 100% 52,500(19) 100%
Mgmt., Inc.
1800 Ave of Stars, Ste. 1424
Los Angeles, CA 90067
Arbco Associates L.P. 18,900(19) 36.0% 18,900(19) 36.0%
1800 Ave of Stars, Ste. 1424
Los Angeles, CA 90067
Offense Group Associates L.P. 15,750(19) 30.0% 15,750(19) 30.0%
1800 Ave of Stars, Ste. 1424
Los Angeles, California 90067
Kayne, Anderson Nontraditional 14,700(19) 28.0% 14,700(19) 28.0%
Investments, L.P.
1800 Ave of Stars, Ste. 1424
Los Angeles, California 90067
Opportunity Associates L.P. 3,150(19) 6.0% 3,150(19) 6.0%
1800 Ave of Stars, Ste. 1424
Los Angeles, California 90067
All Directors and Officers as a 0 0.0% 0 0.0%
Group (12 people before the
Merger and 18 people after the
Merger)
</TABLE>
124
<PAGE> 134
<TABLE>
<CAPTION>
POST-MERGER
PRE-MERGER AMOUNT
AMOUNT AND NATURE
AND NATURE PRE-MERGER OF POST-MERGER
NAME AND ADDRESS OF BENEFICIAL OF BENEFICIAL PERCENT OF BENEFICIAL PERCENT OF
OWNER OWNERSHIP CLASS (1) OWNERSHIP CLASS(2)
--------------------------------- -------------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
SERIES C PREFERRED STOCK
Richard A. Kayne 40,000(20) 100% 40,000(20) 100%
1800 Ave of Stars, Ste. 1424
Los Angeles, CA 90067
Kayne, Anderson Investment 40,000(20) 100% 40,000(20) 100%
Mgmt., Inc.
1800 Ave of Stars, Ste. 1424
Los Angeles, CA 90067
Arbco Associates L.P. 14,400(20) 36.0% 14,400(20) 36.0%
1800 Ave of Stars, Ste. 1424
Los Angeles, CA 90067
Offense Group Associates L.P. 12,000(20) 30.0% 12,000(20) 30.0%
1800 Ave of Stars, Ste. 1424
Los Angeles, CA 90067
Kayne, Anderson Nontraditional 11,200(20) 28.0% 11,200(20) 28.0%
Investments, L.P.
1800 Ave of Stars, Ste. 1424
Los Angeles, CA 90067
Opportunity Associates L.P. 2,400(20) 6.0% 2,400(20) 6.0%
1800 Ave of Stars, Ste. 1424
Los Angeles, CA 90067
All Directors and Officers as a 0 0.0% 0 0.0%
Group (12 people before the
Merger and 18 people after the
Merger)
SERIES D PREFERRED STOCK
High River Limited Partnership 0 0.0% 100,000(5) 100%
100 South Bedford Road
Mount Kisco, NY 10549
All directors and officers as a 0 0.0% 0 0.0%
group (12 people before the
Merger and 18 people after the
Merger)
SERIES E PREFERRED STOCK
Richard A. Kayne 0 0.0% 50,000(21) 100%
1800 Ave of Stars, Ste. 1424
Los Angeles, CA 90067
Kayne, Anderson Investment 0 0.0% 50,000(21) 100%
Mgmt., Inc.
1800 Ave of Stars, Ste. 1424
Los Angeles, CA 90067
Foremost Insurance Company 0 0.0% 20,000(21) 40%
c/o Kayne, Anderson
Investment Mgmt., Inc.
1800 Ave. of Stars, Suite 1424
Los Angeles, CA 90067
</TABLE>
125
<PAGE> 135
<TABLE>
<CAPTION>
POST-MERGER
PRE-MERGER AMOUNT
AMOUNT AND NATURE
AND NATURE PRE-MERGER OF POST-MERGER
NAME AND ADDRESS OF BENEFICIAL OF BENEFICIAL PERCENT OF BENEFICIAL PERCENT OF
OWNER OWNERSHIP CLASS (1) OWNERSHIP CLASS(2)
--------------------------------- -------------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Arbco Associates L.P. 0 0.0% 6,750(21) 13.5%
1800 Ave of Stars, Ste. 1424
Los Angeles, CA 90067
Offense Group Associates L.P. 0 0.0% 6,750(21) 13.5%
1800 Ave of Stars, Ste. 1424
Los Angeles, CA 90067
Kayne, Anderson Nontraditional 0 0.0% 6,750(21) 13.5%
Investments, L.P.
1800 Ave of Stars, Ste. 1424
Los Angeles, CA 90067
Topa Insurance Company 0 0.0% 5,000(21) 10%
c/o Kayne, Anderson
Investment Mgmt., Inc.
1800 Ave. of Stars, Suite 1424
Los Angeles, CA 90067
Kayne, Anderson Offshore Limited 0 0.0% 2,500(21) 5%
4800 Ave. of Stars, Ste. 1424
Los Angeles, CA 90067
Opportunity Associates L.P. 0 0.0% 2,250(21) 4.5%
1800 Ave of Stars, Ste. 1424
Los Angeles, CA 90067
All directors and officers as a 0 0.0% 0 0.0%
group (12 people before the
Merger and 18 people after the
Merger)
</TABLE>
- ---------------
(1) Based upon the 12,170,682 shares of issued and outstanding NEG Common Stock
and 52,500 shares of issued and outstanding NEG Series B Preferred and
40,000 shares of issued and outstanding NEG Series C Preferred, as of July
19, 1996; for each person or group, the percentages, are calculated on the
basis of the amount of outstanding securities of the particular class plus
any securities that such person or group has the right to acquire within 60
days pursuant to options, warrants, conversion privileges or other rights.
(2) Based upon the approximately 33,457,650 shares of NEG Common Stock that are
outstanding and 52,500 shares of issued and outstanding NEG Series B
Preferred, 40,000 shares of issued and outstanding NEG Series C Preferred,
100,000 shares of issued and outstanding NEG Series D Preferred and 50,000
shares of issued and outstanding NEG Series E Preferred as of immediately
after the Effective Time of the Merger, including securities issued in the
NEG Equity Private Placement; for each person or group the percentages, are
calculated on the basis of the amount of outstanding securities of the
particular class plus any securities that such person or group has the
right to acquire within 60 days pursuant to options, warrants, conversion
privileges or other rights.
(3) Richard A. Kayne is President, Chief Executive Officer and Director of
KAIM, a registered investment advisor, and of Kayne, Anderson Associates,
Inc. a registered broker/dealer. KAIM is the general partner of KAIM
Non-Traditional L.P. ("L.P.") which is the general partner of and
investment advisor to the four investment partnerships referred to in this
footnote. Mr. Kayne is also a limited partner in each investment
partnership and a general partner of one of them. Mr. Kayne and KAIM have
shared dispositive and voting power through four investment partnerships
for 52,500 shares of NEG Series B Preferred, which may be converted at any
time into 3,230,769 shares of NEG Common Stock, and 40,000 shares of NEG
Series C Preferred, which may be converted at any time into 2,000,000
shares of
126
<PAGE> 136
NEG Common Stock, and, after the Merger, through several investment
partnerships or accounts, for 50,000 shares of NEG Series E Preferred,
which may be converted at anytime into 2,222,222 shares of NEG Common Stock
and for warrants to purchase 350,000 shares of NEG Common Stock. The
percentage ownership figures in the table assume that all shares of NEG
Series B Preferred and NEG Series C Preferred are converted and 5,230,769
shares of NEG Common Stock are issued, and such shares are added to the
shares of NEG Common Stock outstanding as of July 19, 1996. In addition,
the post-Merger percentage ownership figures assume that 50,000 shares of
NEG Series E Preferred and warrants to purchase 350,000 shares of NEG
Common Stock are sold to the Kayne Anderson Investors in the NEG Equity
Private Placement, all shares of the NEG Series E Preferred are converted,
all warrants are exercised and 2,572,222 shares of NEG Common Stock are
issued, and such shares are added to the shares of NEG Common Stock
outstanding. For additional information on the record ownership of the NEG
Series B Preferred and NEG Series C Preferred and the shares of NEG Common
Stock into which they convert, see footnotes (19) and (20) below. For
additional information on the record ownership of the NEG Series E
Preferred and the shares of NEG Common Stock into which it converts, see
footnote (21) below. Mr. Kayne disclaims beneficial ownership of the shares
held by the investment partnerships in excess of the amount attributable to
him by virtue of his direct interest as a limited or general partner and by
virtue of his indirect interest in KAIM's interest in the investment
partnerships. KAIM and L.P. disclaim beneficial ownership of the shares
held by the investment partnerships in excess of the amount attributable to
them by virtue of their percentage interest in the investment partnerships.
Mr. Robert V. Sinnott is Senior Vice President and Senior Investment
Officer of L.P. and Mr. Elwood W. Schafer is a consultant to KAIM. Both are
Directors of NEG; neither Mr. Sinnott nor Mr. Schafer have dispositive or
voting power over the 52,500 shares of NEG Series B Preferred, the 40,000
shares of NEG Series C Preferred, the 50,000 shares of NEG Series E
Preferred or the 350,000 warrants to purchase NEG Common Stock or the
7,802,991 shares of NEG Common Stock into which such shares convert or
which are received upon exercise of the Warrants.
(4) Mr. Bender's shares include the following: 1,148,144 shares held directly
by Mr. Bender and options to purchase 150,000 shares; does not include
options to purchase 100,000 shares which are not yet exercisable.
(5) High River, the record owner of these shares, is a Delaware limited
partnership. Riverdale is a Delaware corporation and is the general partner
of High River. Icahn is the sole shareholder and a director of Riverdale.
Riverdale's principal business address is 90 South Bedford Road, Mount
Kisco, New York 10549 and Mr. Icahn's principal business address is c/o
Icahn Associates Corp., 114 West 47th Street, 19th Floor, New York, New
York 10036. The post-Merger ownership figures in the table assume that all
the shares of NEG Series D Preferred are converted, the warrants for
700,000 shares of NEG Common Stock are exercised and 5,144,444 shares of
NEG Common Stock are added to the shares of NEG Common Stock outstanding.
Riverdale and Mr. Icahn, by virtue of their relationships to High River,
may be deemed to beneficially own (as that term is defined in Rule 13d-3
under the Exchange Act) the shares which High River directly beneficially
owns. Each of Riverdale and Mr. Icahn disclaims beneficial ownership of
such shares for all other purposes. After the Merger, Mr. Robert J.
Mitchell will be appointed a director of NEG as the representative of the
holders of the NEG Series D Preferred. Mr. Mitchell does not have
dispositive or voting power over any of the shares owned by High River.
(6) Includes 351,852 shares held directly by Mr. McCullough and options to
purchase 40,000 shares; does not include options to purchase 30,000 shares
which are not yet exercisable. The figures in the table do not include
5,405 shares owned by Mr. McCullough's sons, for which Mr. McCullough
disclaims beneficial ownership. Mr. McCullough is Chairman of the Board of
Directors of NEG.
(7) Robert H. Kite, a Director of NEG, is Chief Operating Officer and 33.0%
beneficial owner of KFT, Ltd. and may be deemed to be the beneficial owner
of shares held by KFT, Ltd. KFT, Ltd. holds 176,297 shares and Mr. Kite
holds 153,158 shares directly. The share figure in the table also includes
options to purchase 40,000 shares, but does not include options to purchase
15,000 shares which are not yet exercisable.
127
<PAGE> 137
(8) Mr. Miller owns 234,860 shares directly, and 50,000 shares through Incorp,
Inc., of which Mr. Miller is owner. Includes options to purchase 40,000
shares but does not include options to purchase 30,000 shares which are not
yet exercisable. Mr. Miller is a Director and Chairman of the Executive
Committee of NEG.
(9) Includes 105,500 shares held directly by Mr. Imel and options to purchase
60,000 shares; does not include options to purchase 50,000 shares which are
not yet exercisable. Mr. Imel is Chief Financial Officer of NEG.
(10) Includes 164,882 shares held directly by Mr. Carter; does not include
options to purchase 20,000 shares which are not yet exercisable. Mr. Carter
is General Counsel and Secretary of NEG.
(11) Includes 123,023 shares held directly by Mr. McDonald, does not include
options to purchase 15,000 shares which are not yet exercisable. Mr.
McDonald is a Director of NEG.
(12) Includes 50,000 shares held directly by Mr. Jones and options to purchase
60,000 shares; does not include options to purchase 50,000 shares which are
not yet exercisable. Mr. Jones is Vice President -- Production &
Engineering of NEG.
(13) Includes 50,000 shares held directly by Mr. Fetters. Does not include
options to purchase 50,000 shares which are not yet exercisable. Mr.
Fetters is Senior Vice President -- Offshore Operations and Exploration.
(14) Includes 10,000 shares held directly by Ms. Rutledge and options to
purchase 20,000 shares; does not include options to purchase 10,000 shares
which are not yet exercisable. Ms. Rutledge is Controller and Chief
Accounting Officer of NEG.
(15) Includes options to purchase 20,000 shares held by Mr. Sinnott; does not
include options to purchase 15,000 shares which are not yet exercisable.
Mr. Sinnott is a Director of NEG and is Senior Vice President and Senior
Investment Officer of L.P. See footnote (3) above, footnotes (16), (19),
(20) and (21) below, and "Certain Relationships and Related
Transactions -- NEG" below.
(16) Includes 2,000 shares held directly by Mr. Schafer; does not include
options to purchase 15,000 shares which are not yet exercisable. Mr.
Schafer is a Director of NEG, and is a consultant to KAIM. See footnotes
(3) and (15) above, footnotes (19), (20) and (21) below and "Certain
Relationships and Related Transactions -- NEG" below.
(17) Less than one percent.
(18) Includes a total of 2,619,716 shares held directly or indirectly by the
officers and directors and options to purchase 430,000 shares prior to the
Merger and includes a total of 3,700,460 shares held directly or indirectly
by the officers and directors and options to purchase 513,719 shares after
the Merger.
(19) For information on Richard A. Kayne, KAIM and L.P., see footnote (3) above.
Arbco Associates L.P. has shared dispositive and voting power with Mr.
Kayne and KAIM of 18,900 shares of NEG Series B Preferred, which converts
into 1,163,077 shares of NEG Common Stock (or 7.6% of NEG's Common Stock
before the Merger, assuming all of the NEG Series B Preferred is converted
and the NEG Series C Preferred is not converted). Offense Group Associates
has shared dispositive and voting power with Mr. Kayne and KAIM for 15,750
shares of NEG Series B Preferred, which converts into 969,231 shares of NEG
Common Stock (or 6.3% of NEG Common Stock before the Merger, assuming all
NEG Series B Preferred is converted and the NEG Series C Preferred is not
converted). Kayne, Anderson Non-Traditional Investments has shared
dispositive and voting power with Mr. Kayne and KAIM for 14,700 shares of
NEG Series B Preferred, which converts into 904,615 shares of NEG Common
Stock (or 5.9% of NEG Common Stock before the Merger, assuming all of the
NEG Series B Preferred is converted and the NEG Series C Preferred is not
converted). Opportunity Associates L.P. has shared dispositive and voting
power with Mr. Kayne and KAIM of 3,150 shares of NEG Series B Preferred,
which converts into 193,846 shares of NEG Common Stock.
128
<PAGE> 138
(20) For information on Richard A. Kayne, KAIM and L.P., see footnote (3) above.
Arbco Associates L.P. has shared dispositive and voting power with Mr.
Kayne and KAIM of 14,400 shares of NEG Series C Preferred, which converts
into 720,000 shares of NEG Common Stock (or 5.1% of NEG's Common Stock
before the Merger, assuming all of the NEG Series C Preferred is converted
and the NEG Series B Preferred is not converted). Offense Group Associates
has shared dispositive and voting power with Mr. Kayne and KAIM for 12,000
shares of NEG Series C Preferred, which converts into 600,000 shares of NEG
Common Stock. Kayne, Anderson Non-Traditional Investments has shared
dispositive and voting power with Mr. Kayne and KAIM for 11,200 shares of
NEG Series C Preferred, which converts into 560,000 shares of NEG Common
Stock. Opportunity Associates L.P. has shared dispositive and voting power
with Mr. Kayne and KAIM of 2,400 shares of NEG Series C Preferred, which
converts into 120,000 shares of NEG Common Stock.
(21) For information on Richard A. Kayne, KAIM and L.P., see footnote (3) above.
Foremost Insurance Company will share dispositive and voting power with Mr.
Kayne and KAIM of 20,000 shares of NEG Series E Preferred, which converts
into 888,888 shares of NEG Common Stock. Arbco Associates L.P. will share
dispositive and voting power with Mr. Kayne and KAIM of 6,750 shares of NEG
Series E Preferred, which converts into 300,000 shares of NEG Common Stock.
Offense Group Associates will share dispositive and voting power with Mr.
Kayne and KAIM for 6,750 shares of NEG Series E Preferred, which converts
into 300,000 shares of NEG Common Stock. Kayne, Anderson Non-Traditional
Investments will share dispositive and voting power with Mr. Kayne and KAIM
for 6,750 shares of NEG Series E Preferred, which converts into 300,000
shares of NEG Common Stock. Topa Insurance Company will share dispositive
and voting power with Mr. Kayne and KAIM for 5,000 shares of NEG Series E
Preferred, which converts into 222,222 shares of NEG Common Stock. Kayne,
Anderson Offshore Limited will share dispositive and voting power with Mr.
Kayne and KAIM for 2,500 shares of NEG Series E Preferred, which converts
into 111,111 shares of NEG Common Stock. Opportunity Associates L.P. will
share dispositive and voting power with Mr. Kayne and KAIM of 2,250 shares
of NEG Series E Preferred, which converts into 100,000 shares of NEG Common
Stock.
Under the terms of the NEG Series D Preferred, a change in control of NEG
may occur if either of the events occur that trigger the NEG Series D Preferred
Contingent Voting Rights to elect one-half of the Board of Directors of NEG plus
one member and if such rights are exercised by such holders. See "Description of
Capital Stock -- NEG -- NEG Series D Preferred," and "Risk Factors -- Control by
Principal Shareholders."
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ALEXANDER
The following table and notes thereto set forth, as of July 19, 1996, the
number of shares of common stock of Alexander owned by those known by Alexander
to own beneficially more than five percent (5%) of the outstanding shares of
Alexander's Common Stock, as well as all shares beneficially owned by each
director, each named executive officer, and all directors and officers of
Alexander as a group. In addition, the following table sets forth the number of
shares of NEG Common Stock and percent of NEG Common Stock beneficially owned by
each person who will be an director, officer or five percent owner of NEG Common
Stock after the Merger. Unless otherwise noted, the person named has sole voting
and investment power over the shares reflected opposite his name. Alexander has
been provided such information by its directors and officers.
<TABLE>
<CAPTION>
AMOUNT OF PERCENT OF CLASS
PERCENT OF BENEFICIAL OF NEG COMMON
NAME OF BENEFICIAL AMOUNT AND NATURE CLASS BEFORE OWNERSHIP AFTER STOCK AFTER
OWNER OF BENEFICIAL OWNERSHIP THE MERGER THE MERGER THE MERGER
---------------------- ----------------------- ------------ --------------- ----------------
<S> <C> <C> <C> <C>
Carl C. Icahn(1)...... 1,193,000 9.6% 8,212,544 21.3%
Elliott Associates,
L.P.(2)............. 1,226,843 9.8% 2,085,633 6.2%
Bob G.
Alexander**(3)...... 294,548 2.4% 500,731 1.5%
Jim L. David**(4)..... 266,166 2.1% 466,662 1.4%
David E. Grose**(5)... 81,915 (8) 156,480 (8)
Roger G.
Alexander**(6)...... 68,448 (8) 121,036 (8)
Robert A. West*....... 7,066 (8) 12,012 (8)
Brian F. Egolf*....... -- (8) -- (8)
All Officers and
Directors as a group
(8 persons)(7)...... 730,658 5.8% 1,287,199 3.8%
</TABLE>
- ---------------
* Director
** Director and officer
(1) Reflects ownership as reported on Schedule 13D by High River, Riverdale and
Carl C. Icahn, an individual. Riverdale is the general partner of High River
and Mr. Icahn is the sole shareholder of Riverdale. The corporate address
for Mr. Icahn is 114 West 47th Street, 19th Floor, New York, NY 10036. The
post-Merger ownership number includes NEG Common Stock beneficially owned by
Mr. Icahn prior to the Merger and as a result of the NEG Equity Private
Placement.
(2) Reflects ownership as reported on Schedule 13D of the number of shares of
Common Stock of Alexander held by Elliott (together with its affiliates
Westgate International, L.P. and Martley International, Inc.). The address
for Elliott is 712 Fifth Avenue, New York, NY 10019.
(3) The amount shown owned by Mr. Alexander includes 83,882 shares owned by Mr.
Alexander's wife, Donna Ports Alexander. Mr. Alexander disclaims any
beneficial interest in the shares owned by his wife.
(4) The post-Merger ownership number includes 14,180 shares to be issued
pursuant to a NEG New Employment Agreement assuming a $3.00 NEG Average
Price.
(5) Includes the right to acquire 37,915 and 69,130 shares pursuant to stock
options, pre-Merger and post-Merger, respectively, which are or will be
exercisable, but which have not been exercised. The post-Merger ownership
number also includes 12,550 shares to be issued pursuant to a NEG New
Employment Agreement, assuming a $3.00 NEG Average Price.
(6) Includes the right to acquire 10,083 and 21,816 shares pursuant to stock
options, pre-Merger and post-Merger, respectively, which are or will be
exercisable, but which have not been exercised.
(7) Includes the right to acquire 55,205 and 105,535 shares pursuant to employee
stock options, pre-Merger and post-Merger, respectively, which are or will
be exercisable, but which have not been exercised. The post-Merger ownership
number also includes 33,396 shares to be issued pursuant to NEG New
Employment Agreements, assuming a $3.00 NEG Average Price.
(8) Less than one percent.
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<PAGE> 140
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
NEG
During the year ended December 31, 1995, NEG sold $4,618,136 of oil and
gas, or 59% of NEG's total oil and gas sales, to Plains. During the year ended
December 31, 1994, NEG sold $1,614,711 of oil and gas, or 51.1% of its total oil
and gas sales, to Plains. Robert V. Sinnott is a director of both NEG and Plains
Resources, Inc., which is the parent company of Plains. For information on the
ownership of NEG's securities by KAIM and investment partnerships associated
with KAIM, see the table, and footnotes 3, 19, 20 and 21 thereto under "Security
Ownership of Certain Beneficial Owners and Management -- NEG." KAIM and
investment partnerships associated with KAIM, and other accounts managed by
affiliates of KAIM, own on a fully diluted basis, 2,751,173 shares of Common
Stock of Plains Resources, Inc., or approximately 18.6% of the issued and
outstanding shares of Common Stock of Plains Resources, Inc. NEG has agreements
with Plains pursuant to which Plains purchases oil produced from the major
oil-producing properties which NEG operates, at West Texas Intermediate posted
prices plus a small premium. The premium is based on Plains purchasing
substantially all the production of NEG. If the agreements continue in 1996,
sales to Plains will account for a significant percentage of NEG's total oil and
gas sales in 1996.
On June 14, 1995, NEG consummated the sale of $4.0 million of NEG Series C
Preferred which was privately placed with investment partnerships associated
with KAIM (the "Purchasers"). 40,000 shares of NEG Series C Preferred were sold
by NEG at $100 per share, and the NEG Series C Preferred is convertible into
shares of the Common Stock at a conversion price of $2.00 per share of Common
Stock. The Purchasers own all of NEG's currently outstanding NEG Series C
Preferred. The Purchasers were Arbco Associates L.P, which purchased 14,400
shares of NEG Series C Preferred, or 36.0% of the NEG Series C Preferred;
Offense Group Associates L.P., which purchased 12,000 shares of NEG Series C
Preferred, or 30.0% of the NEG Series C Preferred; Kayne, Anderson
Nontraditional Investments L.P., which purchased 11,200 shares of NEG Series C
Preferred or 28.0% of the NEG Series C Preferred and Opportunity Associates
L.P., which purchased 2,400 shares of NEG Series C Preferred or 6.0% of the NEG
Series C Preferred. For more information on the Purchasers, see "Security
Ownership of Certain Beneficial Owners and Management -- NEG" and footnotes 3,
19, 20 and 21 thereto.
Additionally, Elwood Schafer, a consultant to KAIM, was appointed to the
Board of Directors of NEG pursuant to the NEG Series C Preferred Purchasers'
right to appoint one member of NEG's Board of Directors. Mr. Schafer does not
have dispositive or voting power over the 40,000 shares of NEG Series C
Preferred, the 52,500 shares of NEG Series B Preferred or any shares of NEG
Common Stock into which the NEG Series B Preferred or NEG Series C Preferred are
convertible. See footnotes 3, 16, 19, 20 and 21 to the table under "Security
Ownership of Certain Beneficial Owners and Management -- NEG."
On June 3, 1994, NEG consummated the sale of $5.0 million of NEG Series B
Preferred which was privately placed with the same Purchasers as the NEG Series
C Preferred. San Jacinto Securities, Inc. of Dallas, Texas acted as agent for
the placement. 50,000 shares of NEG Series B Preferred were sold by NEG at $100
per share, and the NEG Series B Preferred is convertible into shares of the NEG
Common Stock at a conversion price of $1.625 per share of NEG Common Stock. The
Purchasers own all of NEG's currently outstanding NEG Series B Preferred. The
Purchasers were Arbco Associates L.P., which purchased 18,000 shares of NEG
Series B Preferred, or 36.0% of the NEG Series B Preferred; Offense Group
Associates L.P., which purchased 15,000 shares of NEG Series B Preferred, or
30.0% of the NEG Series B Preferred; Kayne, Anderson Nontraditional Investments
L.P., which purchased 14,000 shares of NEG Series B Preferred, or 28.0% of the
NEG Series B Preferred and Opportunity Associates L.P., which purchased 3,000
shares of NEG Series B Preferred, or 6.0% of the NEG Series B Preferred.
Additionally, in June 1994, Robert V. Sinnott, Senior Vice President and
Senior Investment Officer of KAIM was appointed to the Board of Directors of NEG
pursuant to the NEG Series B Preferred Purchasers' right to appoint one member
of NEG's Board of Directors. Mr. Sinnott does not have dispositive or voting
power over the 52,500 shares of NEG Series B Preferred, the 40,000 shares of NEG
Series C Preferred, or any shares of NEG Common Stock into which the NEG Series
B Preferred or NEG Series C Preferred are
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<PAGE> 141
convertible. See footnotes 3, 15, 19, 20 and 21 to the table under "Security
Ownership of Certain Beneficial Owners and Management -- NEG."
Pursuant to the Bligh Acquisition, in December 1993, NEG acquired a 63.8%
working interest in the GAU. In connection with the Bligh Acquisition, NEG
borrowed funds from three directors in the form of subordinated notes, and sold
NEG Common Stock to two directors (one of which is also an officer). NEG
borrowed the following amounts from the following directors of NEG:
$100,000 -- George B. McCullough; $80,000 -- KFT Ltd., which is 29.0% owned by
Robert H. Kite; and $50,000 -- Norman C. Miller. In April 1994, KFT Ltd.
converted $30,000 in principal amount of its subordinated note into 48,000
shares of NEG Common Stock. In June 1994, KFT Ltd. converted an additional
$38,750 of its subordinated note into 62,000 shares of NEG Common Stock, and Mr.
McCullough converted $62,500 of his subordinated note into 100,000 shares of NEG
Common Stock and the remaining $37,500 was paid in cash. Also in June 1994, Mr.
Miller converted the full $50,000 principal amount of his subordinated note into
80,000 shares of NEG Common Stock and in July 1994, the remaining $11,250 owed
to KFT, Ltd. was paid in cash.
In addition, in connection with the Bligh Acquisition, NEG issued 792,000
shares of NEG Common Stock at a purchase price of $.625 per share. Robert H.
Kite, Director, bought 32,000 shares, for a total purchase price of $20,000.
Miles D. Bender, President and Chief Executive Officer of NEG and a director,
subscribed for 200,000 shares, for a total purchase price of $125,000, and
completed his transaction in April 1994.
See also "The Merger Proposals -- Interests of Certain Persons in the
Merger."
ALEXANDER
In March 1992, Alexander completed the acquisition of Bradmar. A condition
to closing the acquisition was that Petroleum Investments Securities Corp.
("PISC") would enter into a consulting/noncompetitive agreement with Alexander.
Brian F. Egolf, a non-employee director of Alexander, is an executive officer
and director of PISC. Mr. Egolf was a principal shareholder, executive officer
and director of Bradmar prior to the acquisition. Since consummation of the
acquisition on March 19, 1992, he has served as a director of Alexander.
Alexander has paid PISC an amount equal to $440,000 per year for a period of
three years in accordance with the consulting agreement. The consulting
agreement expired on March 18, 1995.
Effective January 1, 1996, Alexander sold 228 wells to PPMC. PPMC is
wholly-owned by a trust of which Brian F. Egolf, a director of Alexander, is a
beneficiary. Alexander operated 83 of the 228 wells. Of several prospective
buyers, PPMC offered Alexander the highest purchase price, which consisted of
approximately $800,000 of cash and the assumption of net gas balancing
liabilities of approximately $260,000.
See also "The Merger Proposals -- Interests of Certain Persons in the
Merger."
DESCRIPTION OF CAPITAL STOCK
NEG
CAPITAL STOCK
The authorized capital stock of NEG consists of 50,000,000 shares of Class
A Common Stock, par value $.01 per share; 200,000 shares of Class B common stock
("Class B"), par value $.01 per share; and 1,000,000 shares of preferred stock,
par value $1.00 per share. No shares of Class B were outstanding at December 31,
1995. NEG proposes to amend its authorized capital stock. See "NEG Certificate
of Incorporation Amendment Proposal."
NEG SERIES B PREFERRED
The NEG Series B Preferred is convertible into shares of NEG Common Stock
at a conversion price of $1.625 per share. The NEG Series B Preferred has a
liquidation and dividend preference over the NEG Common Stock. The NEG Series B
Preferred has a 10% dividend, payable semi-annually, and requires the dividends
be paid on the NEG Series B Preferred before any dividends are paid on NEG
Common Stock.
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NEG has the option to make dividend payments in shares of NEG Series B
Preferred; after the sixth such payment, the holders of NEG Series B Preferred
have the option to receive additional dividends in shares of NEG Series B
Preferred or to accrue such dividends in cash. If NEG pays dividends in shares
of NEG Series B Preferred, or does not pay dividends in either stock or cash,
for four dividend payments, the holders of NEG Series B Preferred have the right
to appoint one-third of the members of NEG's Board of Directors.
The NEG Series B Preferred initially was redeemable by NEG, between January
3, 1995 and June 3, 1997, at $110 per share and after June 3, 1997 at $100 per
share, plus accrued and unpaid dividends; however, NEG cannot redeem any shares
of NEG Series B Preferred unless and until all outstanding shares of the NEG
Series C Preferred have been redeemed by NEG. If the NEG Certificate of
Incorporation Amendment Proposal is approved by the NEG shareholders, no shares
of NEG Series B Preferred may be redeemed by NEG before June 14, 1999. See
"-- NEG Series C Preferred;" and "NEG Certificate of Incorporation Amendment
Proposal." The holders of NEG Series B Preferred currently have the right to
appoint one member to the NEG Board of Directors.
The holders of NEG Series B Preferred 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 NEG Series B Preferred, voting separately as a
class, is required to make changes to NEG's Certificate of Incorporation or
By-Laws which adversely affect the NEG Series B Preferred, to authorize or issue
additional shares of NEG Series B Preferred or to issue preferred stock equal to
or senior to the NEG Series B Preferred as to dividends or liquidation, to
effect a reclassification of the NEG Series B Preferred or, subject to certain
exceptions, to effect an extraordinary transaction that requires a vote of NEG's
shareholders. As a result, a class vote of the holders of NEG Series B Preferred
would be required for NEG to merge or be acquired and may therefore delay,
deter, or prevent a change in control of NEG. See "Risk Factors -- Control by
Principal Shareholders."
NEG SERIES C PREFERRED
The NEG Series C Preferred is convertible into shares of NEG Common Stock
at a conversion price of $2.00 per share. The NEG Series C Preferred has a
liquidation and dividend preference over the NEG Common Stock, and is parity
stock to the NEG Series B Preferred. The NEG Series C Preferred has a 10 1/2%
dividend, payable semi-annually. NEG has the option to make dividend payments in
shares of NEG Series C Preferred; after the sixth such payment, the holders of
NEG Series C Preferred have the option to receive additional dividends in shares
of NEG Series C Preferred or to accrue such dividends in cash. If NEG pays
dividends in shares of NEG Series C Preferred, or does not pay dividends in
either stock or cash, for four dividend payments, the holders of NEG Series C
Preferred (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
NEG's Board
of Directors; however, if the holders of NEG Series B Preferred are presently
entitled to a similar right, then the holders of NEG Series C Preferred shall
have no such right until the right of the holders of NEG Series B Preferred
terminates.
The NEG Series C Preferred presently is redeemable by NEG between June 14,
1997 and June 14, 1998, at $110 per share, and thereafter, at $100 per share,
plus accrued and unpaid dividends. If the NEG Certificate of Incorporation
Amendment Proposal is approved by the NEG shareholders, the NEG Series C
Preferred may not be redeemed by NEG until June 14, 1999. See "NEG Certificate
of Incorporation Amendment Proposal." No shares of NEG Series B Preferred may be
redeemed until all the shares of NEG Series C Preferred have been redeemed.
The holders of the NEG Series C Preferred currently have the right to
appoint one member to the Board of Directors. The holders of NEG Series C
Preferred 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
NEG Series C Preferred, voting separately as a class, is required to make
changes to NEG's Certificate of Incorporation or By-Laws which adversely affect
the NEG Series C Preferred, to authorize or issue additional shares of NEG
Series C Preferred or to issue preferred stock equal to or senior to the NEG
Series C Preferred as to dividends or liquidation, to effect a reclassification
of the NEG Series C Preferred, or, subject to certain exceptions, to effect an
extraordinary transaction that requires a vote of NEG shareholders. As a result,
a class vote of the
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holders of NEG Series C Preferred, as well as the NEG Series B Preferred, would
be required for NEG to merge or be acquired and may therefore delay, deter, or
prevent a change in control of NEG. See "Risk Factors -- Control by Principal
Shareholders."
NEG SERIES D PREFERRED
The NEG Series D Preferred immediately is convertible into shares of NEG
Common Stock initially at a conversion price of $2.25 per share, entitling the
holders to receive 4,444,444 shares of NEG Common Stock. Such conversion price
is subject to certain antidilution adjustments, including adjustments that may
occur if shares of NEG Common Stock are issued by NEG below the conversion price
of the NEG Series D Preferred. The NEG Series D Preferred has a liquidation
preference over the NEG Common Stock, but each of the NEG Series B Preferred and
the NEG Series C Preferred has a liquidation preference over the NEG Series D
Preferred. The NEG Series D Preferred liquidation preference ranks pari passu
with the NEG Series E Preferred liquidation preference. See "-- NEG Series E
Preferred." The NEG Series D Preferred does not require the payment of any
dividends but will participate with the NEG Common Stock in any dividends or
distributions to the NEG Common Stock on an as converted basis.
The holders of NEG Series D Preferred are entitled to one vote for each
share when entitled to vote as described below and as to matters upon which by
law they are entitled to vote as a class. The holders of NEG Series D Preferred
will have the right to appoint one member to NEG's Board of Directors. NEG may
not, without the consent of the director appointed by the holders of the NEG
Series D Preferred, voluntarily file for protection under federal or other
bankruptcy laws. In addition, the holders of the NEG Series D Preferred will
have the right to choose to appoint one-half of the members of the NEG Board of
Directors plus one member (including the member appointed by the NEG Series D
Preferred holders) if the NEG Series D Preferred Contingent Voting Rights are
triggered and the holders of the NEG Series D Preferred exercise their rights.
Thereafter, such holders will control the NEG Board of Directors. See "Risk
Factors -- Control by Principal Shareholders."
The right of the holders of NEG Series D Preferred to choose to appoint
one-half of the Board of Directors of NEG plus one member (including the member
appointed by the NEG Series D Preferred holders) is triggered by the following
events: (i) if an involuntary case under federal bankruptcy laws or other
applicable federal or state insolvency laws is commenced against NEG (including
a case for the appointment of a receiver, liquidator, custodian, trustee or
similar official for NEG or its assets) which does not seek emergency or
expedited relief if such case is not dismissed or stayed within 15 days or, if
such case seeks emergency or expedited relief against NEG, permanent relief is
granted or, if temporary relief is granted, NEG does not provide to the holders
of NEG Series D Preferred an opinion of counsel which states that NEG, without
condition, will prevail on the petition for permanent relief, or (ii) if a
default shall have occurred under notes or other evidences of indebtedness of
NEG where the aggregate outstanding principal amount exceeds $10.0 million, and
one of the following three circumstances exists. First, such indebtedness is due
in full by reason of failure to pay such indebtedness and the default is not
cured within 30 days. Second, such indebtedness is accelerated and such
acceleration is not rescinded within 15 days. Third, notice of foreclosure on
collateral securing such indebtedness has been given to NEG and has not been
rescinded after five days or the proposed date of the sale of the collateral is
less than five days away.
The holders of NEG Series D Preferred 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 NEG Series D Preferred, voting separately as a
class, is required to make changes to NEG's Certificate of Incorporation or
By-Laws which adversely affect the NEG Series D Preferred, or to authorize or
issue additional shares of NEG Series D Preferred or to issue preferred stock
equal to or senior to the NEG Series D Preferred as to liquidation.
The NEG Series D Preferred automatically will be converted into NEG Common
Stock if High River and its affiliates own less than 7.5% of the NEG Common
Stock on a fully diluted basis. To determine the percentage of NEG Common Stock
on a fully diluted basis that High River and its affiliates own as of any day,
the number of shares owned by High River and its affiliates on a fully diluted
basis (assuming conversion of all preferred stock and exercise of all
outstanding options and warrants owned by High River and its affiliates) as of
such date will be divided by the number of shares of NEG Common Stock on a fully
diluted
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basis (assuming conversion of all preferred stock and exercise of all options
and warrants by all holders) as of the date after Closing of the Merger and
after closing of the NEG Equity Private Placement (as adjusted by any
antidilution adjustments made with respect to the shares of NEG Common Stock
owned by High River and its affiliates).
NEG SERIES E PREFERRED
The NEG Series E Preferred immediately is convertible into shares of NEG
Common Stock initially at a conversion price of $2.25 per share, entitling the
holders to receive 2,222,222 shares of NEG Common Stock. Such conversion price
is subject to certain antidilution adjustments, including adjustments that may
occur if shares of NEG Common Stock are issued by NEG below the conversion price
of the NEG Series E Preferred. The NEG Series E Preferred has a liquidation
preference over the NEG Common Stock, but each of the NEG Series B Preferred and
the NEG Series C Preferred has a liquidation preference over the NEG Series E
Preferred. The NEG Series E Preferred liquidation preference ranks pari passu
with the NEG Series D Preferred liquidation preference. The NEG Series E
Preferred does not require the payment of any dividends but will participate
with the NEG Common Stock in any dividends or distributions to the NEG Common
Stock on an as converted basis.
The holders of NEG Series E Preferred are entitled to one vote for each
share as to matters upon which by law they are entitled to vote as a class. The
approval of a majority of the NEG Series E Preferred, voting separately as a
class, is required to make changes to NEG's Certificate of Incorporation or
By-Laws which adversely affect the NEG Series E Preferred, or to authorize or
issue additional shares of NEG Series E Preferred or to issue preferred stock
equal to or senior to the NEG Series E Preferred as to liquidation. The holders
of NEG Series E Preferred will be entitled to vote with the NEG Common Stock on
all matters submitted to the holders of NEG Common Stock, and such holders will
have the number of votes per share of NEG Series E Preferred as is equal to the
number of shares of NEG Common Stock into which such share is convertible on the
record date for such vote.
The NEG Series E Preferred automatically will be converted into NEG Common
Stock if investment partnerships or accounts managed by KAIM own less than 7.5%
of the NEG Common Stock on a fully diluted basis. To determine the percentage of
NEG Common Stock on a fully diluted basis that investment partnerships or
accounts managed by KAIM own as of any day, the number of shares owned by
investment partnerships or accounts managed by KAIM on a fully diluted basis
(assuming conversion of all preferred stock and exercise of all outstanding
options and warrants owned by investment partnerships or accounts managed by
KAIM) as of such date will be divided by the number of shares of NEG Common
Stock on a fully diluted basis (assuming conversion of all preferred stock and
exercise of all options and warrants by all holders) as of the date after
Closing of the Merger and after closing of the NEG Equity Private Placement (as
adjusted by any antidilution adjustments made with respect to the shares of NEG
Common Stock owned by investment partnerships or accounts managed by KAIM).
NEG COMMON STOCK
Holders of NEG Common Stock are entitled to one vote for each share held of
record on all matters voted on by shareholders. The shares of the NEG Common
Stock do not have cumulative voting rights with respect to election of
directors, which means that before the Merger the holders of more than 50% of
the shares of the NEG Common Stock voting for the election of the directors can
elect all of the directors to be elected by holders of the NEG Common Stock, in
which event the holders of the remaining shares of NEG Common Stock will not be
able to elect any directors. After the Merger, subject to the NEG Series D
Preferred Contingent Voting Rights, the holders of more than 50% of the shares
of the NEG Common Stock (including the number of shares of NEG Common Stock into
which the NEG Series E Preferred is converted for purposes of voting with the
NEG Common Stock) voting for the election of the directors can elect all of the
directors to be elected by holders of the NEG Common Stock and NEG Series E
Preferred, in which case the holders of the remaining shares of NEG Common Stock
and remaining shares of NEG Series E Preferred will not be able to elect any
directors. Upon any liquidation, dissolution, or winding-up of the affairs of
NEG, holders of the NEG Common Stock would be entitled to receive, pro rata, all
of the assets of NEG available
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for distribution to shareholders, after payment of any liquidation preference of
any NEG Preferred Stock that may be issued and outstanding at the time. Holders
of the NEG Common Stock have no subscription, redemption, sinking fund, or
preemptive rights.
The Class B was entitled to special conversion rights. In June 1995, as a
result of NEG's proven crude oil and natural gas reserves reaching a value in
excess of $25.0 million, the 129,644 shares of Class B Common Stock which were
outstanding at December 31, 1994, were converted into 1,296,440 shares of NEG
Common Stock, in accordance with the terms of the Class B Common Stock. Under
the terms of the Class B, such shares cannot be reissued. Under the terms of the
NEG Certificate of Incorporation Amendment Proposal, the Class B Common Stock
will be eliminated. See "NEG Certificate of Incorporation Amendment Proposal."
SECTION 203 OF THE DGCL
Under Section 203 of the DGCL, certain "business combinations" (defined
generally to include (i) mergers or consolidations between a Delaware
corporation and an interested shareholder (as defined below) and (ii)
transactions between a Delaware corporation and an interested shareholder
involving the assets or stock of such corporation or its majority-owned
subsidiaries, including transactions which increase the interested shareholder's
percentage ownership of stock) between a Delaware corporation, whose stock
generally is publicly traded or held or record by more than 2,000 shareholders,
and an interested shareholder (defined generally as those shareholders who on or
after December 23, 1987, become beneficial owners of 15 percent or more of a
Delaware corporation's voting stock) are prohibited for a three-year period
following the date that such shareholder became an interested shareholder,
unless (i) the corporation has elected in its certificate of incorporation not
to be so governed, (ii) the business combination or transaction was approved by
the board of directors of the corporation before the other party to the business
combination or transaction became an interested shareholder, (iii) upon
consummation of the transaction that made it an interested shareholder, the
interested shareholder owned at least 85 percent of the voting stock of the
corporation outstanding at the time the transaction commenced (excluding voting
stock owned by officers who also are directors and voting stock held in employee
benefit plans in which the employees do not have a confidential right to tender
or vote stock held by the plan), or (iv) the business combination was approved
by the board of directors of the corporation and ratified by two-thirds of the
voting stock which the interested shareholder did not own. The three-year
prohibition also does not apply to certain business combinations proposed by an
interested shareholder following the announcement or notification of certain
extraordinary transactions involving the corporation and a person who had not
been an interested shareholder during the previous three years or who became an
interested shareholder with the approval of a majority of the corporation's
directors.
NEG has not opted out of being governed by the above described provisions
of Delaware law. Consequently, business combinations between NEG and an
interested shareholder would be subject to its provisions.
TRANSFER AGENT AND REGISTRAR
To date, NEG has acted as its own transfer agent and registrar. Effective
as of the Effective Time, NEG has appointed Liberty Bank and Trust of Oklahoma
City, N.A., of Oklahoma City, Oklahoma transfer agent and registrar with respect
to the NEG Common Stock.
ALEXANDER
Alexander is authorized to issue up to 50 million shares of Alexander
Common Stock, par value $.03 per share, and up to 2 million shares of Preferred
Stock, par value $.01 per share (the "Alexander Preferred Stock"). As of July
19, 1996, there were 12,466,262 shares of Alexander Common Stock outstanding and
no shares of Alexander Preferred Stock outstanding.
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<PAGE> 146
COMMON STOCK
All shares of Alexander Common Stock have equal rights to participate in
dividends and, in the event of liquidation, in Alexander's assets, subject to
any preference established with respect to the Alexander Preferred Stock. Each
holder of Alexander Common Stock is entitled to one vote for each share held,
and voting rights for the election of directors are noncumulative. Shares of
Alexander Common Stock carry no conversion, preemptive or subscription rights
and are not subject to redemption.
PREFERRED STOCK
Alexander has an authorized class of undesignated Alexander Preferred Stock
consisting of 2 million shares. The Board of Directors is authorized, subject to
any limitation prescribed by law, without further shareholder approval, to issue
all of such shares of Alexander Preferred Stock, from time to time, in one or
more series. Each series of Alexander Preferred Stock shall have such number of
shares, designations, preferences, voting powers, qualifications and special or
relative rights or privileges as shall be determined by the Alexander Board of
Directors, which may include, among others, dividend rights, voting rights,
redemption and sinking fund provisions, liquidation preferences and conversion
rights.
In connection with the Rights Agreement, on December 15, 1994, Alexander
filed a Certificate of Designation with the Oklahoma Secretary of State
authorizing the Series A Junior Participating Preferred Stock. See
"-- Anti-Takeover Provisions -- Rights Agreement" for a description of such
stock.
ANTI-TAKEOVER PROVISIONS
The Certificate of Incorporation of Alexander, the Rights Agreement and the
Oklahoma Act include provisions which may have the effect of encouraging persons
considering unsolicited tender offers or other unilateral take-over proposals to
negotiate with the Board of Directors rather than pursue non-negotiated take-
over attempts. These provisions include authorized blank check preferred stock,
restrictions on business combinations, restrictions on voting "control shares,"
and the Associated Rights.
Blank Check Preferred Stock
Alexander's Certificate of Incorporation authorizes the issuance of blank
check preferred stock. The Board of Directors can establish the voting rights,
redemption rights, conversion rights and other rights relating to such preferred
stock without approval of the shareholders and could issue such stock in either
a private or public transaction. In some circumstances, the preferred stock
could be issued and have the effect of preventing a merger, tender offer or
other take-over attempt which the Board of Directors opposes.
Business Combinations
The Oklahoma Act generally contains limitations upon business combinations
with an "interested shareholder" or affiliate thereof. For purposes of this law,
an "interested shareholder" is one who is the beneficial owner of 15% or more of
all voting power of a public corporation. The law prohibits business
combinations with an interested shareholder for a period of three years
following the date such person becomes an interested shareholder. Business
combinations with an interested shareholder can be effected if (i) prior to such
date the Board of Directors approved either the business combination or the
transaction which resulted in such a party becoming an interested shareholder,
(ii) pursuant to the transaction which resulted in his becoming an interested
shareholder, the interested shareholder acquired at least 85% of all voting
power of the corporation excluding voting power held by officers and directors
and certain employee stock plans, or (iii) the business combination is approved
by the Board of Directors and authorized at an annual or special meeting by the
affirmative vote of at least 66 2/3% of the outstanding voting stock of
Alexander not owned by the interested shareholder.
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Control Shares
The Oklahoma Act provides that when a person acquires control shares
(initially 1/5 or more of the voting power) of an issuer, with certain
exceptions such as the acquisition of control shares pursuant to a merger to
which the issuer is a party, the voting power of such control shares is reduced
to zero. See "Comparison of Rights of Holders of NEG Securities and Alexander
Securities."
Rights Agreement
Under the Rights Agreement, Alexander stockholders have one right with
respect to each share of Alexander Common Stock held. Pursuant to the Rights
Agreement, separate right certificates will be distributed (the "Distribution
Date") upon the earlier to occur of ten business days following (i) a public
announcement that a person or group (an "Acquiring Person") has acquired, or
obtained the right to acquire, beneficial ownership of 20% or more of the
outstanding shares of Alexander Common Stock (the "Stock Acquisition Date") or
(ii) the commencement of a tender offer or exchange offer that could result in a
person or group beneficially owning 20% or more of the outstanding shares of
Alexander Common Stock. The rights are not exercisable until the separate right
certificates have been distributed and will expire at the close of business on
December 15, 2004, unless earlier redeemed by Alexander. Except as otherwise
determined by the Board of Directors, only shares of Alexander Common Stock
issued prior to the Distribution Date will be issued with rights.
Each right entitles the registered holder to purchase one one-hundredth of
a share of Series A Junior Participating Preferred Stock ("Alexander Series A
Preferred") at a purchase price of $25, subject to adjustment in certain
circumstances. Holders of the Alexander Series A Preferred will be entitled to
receive cumulative quarterly dividends in an amount per share equal to the
greater of $10 or 100 times the aggregate per share amount of all dividends
(other than stock dividends) declared on Alexander Common Stock since the first
issuance of Alexander Series A Preferred. Holders of the Alexander Series A
Preferred will be entitled to 100 votes per share (subject to adjustment to
prevent dilution) on all matters submitted to a vote of the shareholders. The
Alexander Series A Preferred is neither redeemable nor convertible. Before the
holders of Alexander Common Stock or any other junior stock receive any
liquidating distributions, the holders of shares of Alexander Series A Preferred
are entitled to a liquidation preference from available assets of Alexander of
$100 per share, plus accrued and unpaid dividends, but in any event such holders
are entitled to receive an aggregate distribution per share which is equal to
100 times the aggregate amount to be distributed per share of Alexander Common
Stock subject to adjustment to prevent dilution.
In the event that an Acquiring Person becomes the beneficial owner of more
than 20% of the then outstanding shares of Alexander Common Stock, each right
not beneficially owned by an Acquiring Person entitles its holder to purchase,
in lieu of Series A Preferred Stock, Alexander Common Stock having a value equal
to two times the exercise price of the right ($25, subject to adjustment to
prevent dilution).
Following a Stock Acquisition Date, if (i) Alexander is acquired in a
merger or consolidation or sells or transfers 50% or more of its total assets or
of those assets generating 50% or more of its gross earnings or (ii) a
recapitalization, reclassification or issuance of securities has the effect of
increasing the proportionate ownership of Alexander's securities by any
Acquiring Person by more than 1%, each holder of an exercisable right will have
the right to receive, upon exercise of the right, common stock of the acquiring
company having a value equal to two times the exercise price of the right ($25,
subject to adjustment to prevent dilution).
Until ten business days following the Stock Acquisition Date, Alexander may
redeem the rights in whole, but not in part, at a price of $0.01 per right.
Under certain circumstances, the decision to redeem requires the concurrence of
a majority of the directors who were directors prior to the Stock Acquisition
Date and successors nominated or approved by them. After the redemption period
has expired, Alexander's right of redemption may be reinstated if the beneficial
ownership of an Acquiring Person is reduced to 10% or less of the outstanding
shares of Alexander Common Stock in one or more transactions not involving
Alexander. Upon proper action of the Board of Directors, the rights will
terminate and the holders of rights will be entitled to receive only the $0.01
redemption price.
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<PAGE> 148
Until a right is exercised, the holder thereof, as such, has no rights as a
shareholder. While the distribution of the rights will not be taxable to
shareholders or to Alexander, shareholders may, depending upon the
circumstances, recognize taxable income in the event that the rights become
exercisable for Alexander Common Stock of Alexander or for common stock of the
Acquiring Person as set forth above.
Any of the provisions of the Rights Agreement, other than the provisions
relating to the principal economic terms of the rights, may be amended by the
Board of Directors of Alexander prior to the Distribution Date. After the
Distribution Date, the Board may amend the Rights Agreement to cure any
ambiguity, defect or inconsistency, to make changes which do not adversely
affect the interests of holders of rights (excluding the interests of any
Acquiring Person), or to shorten or lengthen any time period under the Rights
Agreement (except the time period governing redemption of the rights).
COMPARISON OF RIGHTS OF HOLDERS
OF NEG SECURITIES AND ALEXANDER SECURITIES
The attributes associated with the NEG Common Stock are controlled by NEG's
Certificate of Incorporation and the DGCL, whereas the attributes associated
with the Alexander Common Stock are controlled by Alexander's Certificate of
Incorporation, the Rights Agreement and the Oklahoma Act. See "Description of
Capital Stock" for a discussion of the attributes of each company's stock
controlled by their respective Certificates of Incorporation, business
combination statutes under the Oklahoma Act and the DGCL, and, in the case of
Alexander Common Stock, the Rights Agreement.
The Oklahoma Act is substantially equivalent to the DGCL. As a result, the
Merger will not result in any material change to the laws governing the rights
and obligations of Alexander shareholders, except as noted below.
Control Share Acquisition Act. The Oklahoma legislature enacted the Control
Share Acquisition Act in 1987 (the "Control Share Act"), and has enacted several
amendments since that time. The purpose of the Control Share Act is to
discourage hostile takeover attempts or the acquisition of a potentially
controlling ownership position without the approval of the Board of Directors.
The Control Share Act is not currently applicable to corporations which are not
incorporated under Oklahoma law and there are no provisions in the DGCL
comparable to the Control Share Act. The Control Share Act permits an Oklahoma
corporation which would otherwise be subject to the Control Share Act to be
excluded from its application by having an appropriate provision in its
Certificate of Incorporation to such effect.
Shareholder Written Consents. The Oklahoma Act contains provisions which
restrict the ability of shareholders of publicly-held, Oklahoma-incorporated
corporations to act by shareholder consent. Under the DGCL and for Oklahoma
corporations which are not publicly-held, any action required or permitted to be
taken by shareholders may be effected by written consent executed by holders of
stock having not less than the minimum number of shares required to approve such
action, which in most instances would be a majority of the outstanding shares.
Under the Oklahoma Act, actions by written shareholder consent require unanimous
approval for publicly-held corporations unless the corporation's certificate of
incorporation provides otherwise. This unanimous consent requirement is intended
to effectively preclude action by shareholder written consent for publicly-held
corporations and to require any shareholder vote to be taken at a meeting only
after proper notice and appropriate disclosure.
OTHER MATTERS
Neither NEG nor Alexander knows of any other matters to be brought before
the Meetings. If other matters are properly brought before the Meetings, it is
the intention of the persons named in the solicited proxy for such Meetings to
vote such proxy in accordance with their best judgment.
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<PAGE> 149
ALEXANDER 1996 ANNUAL MEETING
If the Merger is not consummated, it is anticipated that the 1996 Annual
Meeting of Shareholders of Alexander will be held in November 1996.
Under rules promulgated by the SEC, if the Merger is not consummated,
Alexander shareholders who desire to submit proposals for inclusion in the proxy
statement of Alexander to be utilized in connection with the 1997 Annual Meeting
of Shareholders of Alexander, to be held in June 1997, must submit such
proposals to the Secretary of Alexander no later than December 30, 1996.
Holders of Alexander Common Stock desiring to have proposals submitted for
consideration at future meetings of the shareholders of Alexander should consult
the applicable rules and regulations of the SEC with respect to such proposals,
including the permissible number and length of proposals and other matters
governed by such rules and regulations.
LEGAL OPINIONS
The validity of the NEG Common Stock to be issued in connection with the
Merger will be passed upon by Strasburger & Price, L.L.P., Dallas, Texas. The
tax opinion referred to under "The Merger Proposals -- Material Federal Income
Tax Consequences" has been rendered by Strasburger & Price, L.L.P.
EXPERTS
The financial statements of NEG at December 31, 1995 and 1994, and for each
of the three years in the period ended December 31, 1995, and the statements of
operating revenues and direct operating expenses of the Mustang Island Interest,
the Oak Hill Interest and the Enron Interest for the years ended December 31,
1994 and 1993 included in this Proxy Statement, have been audited by Ernst &
Young LLP independent auditors, as set forth in their reports thereon appearing
elsewhere herein. Such financial statements are included in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
The consolidated financial statements of Alexander at December 31, 1995 and
1994 and for each of the three years in the period ended December 31, 1995,
appearing in this Proxy Statement, have been audited by Ernst & Young LLP,
independent auditors, to the extent indicated in their report appearing herein.
The financial statements of ANEC (not presented herein), included in Alexander's
1993 financial statements, were audited by Coopers & Lybrand L.L.P. independent
accountants, to the extent indicated in their report appearing herein. The
financial statements referred to above are included in reliance upon such
reports given upon the authority of such firms as experts in accounting and
auditing.
The opinion attached hereto as Addendum B has been rendered by Oppenheimer,
and the information appearing herein and based upon such report, has been
included in reliance upon such opinion and upon the authority of such firm as an
expert with respect to the matters covered by such opinion and in giving such
opinions.
The opinion attached hereto as Addendum C has been rendered by Prudential
Securities, and the information appearing herein and based upon such report, has
been included in reliance upon such opinion and upon the authority of such firm
as an expert with respect to the matters covered by such opinion and in giving
such opinions.
The NEG Summary Reserve and Appraisal Report of Netherland & Sewell,
independent petroleum engineers, containing estimates of proved oil and gas
reserves and related future net revenues and the present value thereof, set
forth as Addendum E hereto, and the estimates of proved oil and gas reserves and
related future net revenues and the present value thereof as of December 31,
1995 included in this Proxy Statement have been derived from the reserve report
of such firm. All of such information has been so included herein in reliance
upon the authority of such firm as experts in such matters.
The Alexander Summary Reserve and Appraisal Report of Netherland & Sewell
containing estimates of proved oil and gas reserves and related future net
revenues and the present value thereof, set forth as Addendum F hereto, and the
estimates of proved oil and gas reserves and related future net revenues and the
140
<PAGE> 150
present value thereof as of December 31, 1995 included in this Proxy Statement
have been derived from the reserve report of such firm. All of such information
has been so included herein in reliance upon the authority of such firm as
experts in such matters.
NEG SHAREHOLDER PROPOSALS FOR 1997 ANNUAL MEETING
Under rules promulgated by the SEC, NEG shareholders who desire to submit
proposals for inclusion in the proxy statement of NEG to be utilized in
connection with the 1997 Annual Meeting of Shareholders of NEG, to be held in
June 1997, must submit such proposals to the Secretary of NEG no later than
December 30, 1996.
Holders of NEG Common Stock desiring to have proposals submitted for
consideration at future meetings of the shareholders of NEG should consult the
applicable rules and regulations of the SEC with respect to such proposals,
including the permissible number and length of proposals and other matters
governed by such rules and regulations.
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GLOSSARY
Wherever used herein, the following terms shall have the meanings
specified.
Bbl -- One stock tank barrel, or 42 US gallons liquid volume, used herein in
reference to crude oil or other liquid hydrocarbons.
Bcf -- One billion cubic feet.
Bcfe -- One billion cubic feet of natural gas equivalent.
Boe -- Barrels of oil equivalent (converting six Mcf of natural gas to one Bbl
of oil).
Developed Acreage -- Acres which are allocated or assignable to producing wells
or wells capable of production.
Development Well -- A well drilled within the proved area of an oil and gas
reservoir to the depth of a stratigraphic horizon known to be productive.
Dry Well -- A well found to be incapable of producing either oil or gas in
sufficient quantities to justify completion as an oil or gas well.
EBITDA -- Earnings before interest, income taxes, depletion, depreciation and
amortization, which is computed by adding interest expense, income taxes,
depletion, depreciation and amortization, and the provision for impairment of
oil and gas properties to income (loss) before extraordinary items and
cumulative effect of change in accounting method. EBITDA is not a measure of
cash flow as determined by generally accepted accounting principles. EBITDA
information has been included in this Proxy Statement because EBITDA is a
measure used by certain investors in determining historical ability to service
indebtedness. EBITDA should not be considered as an alternative to, or more
meaningful than, net income or cash flows as determined in accordance with
generally accepted accounting principles as an indicator of operating
performance or liquidity.
Exploratory Well -- A well drilled to find and produce oil or gas in an unproved
area, to find a new reservoir in a field previously found to be productive of
oil or gas in another reservoir, or to extend a known reservoir.
Gross Acres or Gross Wells -- The total acres or wells, as the case may be, in
which a working interest is owned.
Mbbl -- One thousand Bbl.
Mmbbl -- One million Bbl.
Mboe -- One thousand barrels of oil equivalent.
Mcf -- One thousand cubic feet.
Mcfe -- One thousand cubic feet of natural gas equivalent, using the ratio of
one Bbl of crude oil to six Mcf of natural gas.
Mmcf -- One million cubic feet.
Mmcfe -- One million cubic feet of natural gas equivalent.
Net Acres or Net Wells -- The sum of the fractional working interests owned in
gross acres or gross wells.
Oil and Gas Lease -- An instrument by which a mineral fee owner grants to a
lessee the right for a specific period of time to explore for oil and gas
underlying the lands covered by the lease and the right to produce any oil and
gas so discovered generally for so long as there is production in economic
quantities from such lands.
Overriding Royalty Interest -- A fractional undivided interest in an oil and gas
property entitling the owner to a share of oil and gas production, in addition
to the usual royalty paid to the owner, free of costs of production.
PDNP -- Proved developed, nonproducing or behind the pipe reserves.
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Productive Well -- A well that is producing oil or gas or that is capable of
production.
Proved Developed Reserves -- Reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.
Proved Reserves -- The estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
Proved Undeveloped Reserves or PUD -- Reserves that are expected to be recovered
from new wells on undrilled acreage, or from existing wells where a relatively
major expenditure is required for completion.
PV10% -- The discounted future net cash flows for proved oil and gas reserves
computed on the same basis as the Standardized Measure, but without deducting
income taxes, which is not in accordance with generally accepted accounting
principles. PV10% is an important financial measure for evaluating the relative
significance of oil and gas properties and acquisitions, but should not be
construed as an alternative to the Standardized Measure (as determined in
accordance with generally accepted accounting principles).
Royalty Interest -- An interest in an oil and gas property entitling the owner
to a share of oil and gas production free of costs of production.
Secondary Recovery -- A method of oil and gas extraction in which energy sources
extrinsic to the reservoir are utilized.
Standardized Measure -- The estimated future net cash flows from proved oil and
gas reserves computed using prices and costs, at the dates indicated, after
income taxes and discounted at 10%.
Undeveloped Acreage -- Lease acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of oil and gas regardless of whether such acreage contains proved reserves.
Working Interest -- The operating interest which gives the owner the right to
drill, produce and conduct operating activities on the property and a share of
production, subject to all royalties, overriding royalties and other burdens and
to all costs of exploration, development and operations and all risks in
connection therewith.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Pro Forma Combined Condensed Financial Statements (unaudited):
Pro Forma Combined Condensed Statements of Operations............................ F-3
Pro Forma Combined Condensed Balance Sheet at March 31, 1996..................... F-5
Notes to Pro Forma Combined Condensed Financial Statements....................... F-6
Historical Financial Statements:
NEG:
Report of Independent Auditors................................................... F-11
Balance Sheets at December 31, 1994 and 1995 and March 31, 1996 (unaudited)...... F-12
Statements of Operations for the years ended December 31, 1993, 1994 and 1995 and
the three months ended March 31, 1995 and 1996 (unaudited)...................... F-13
Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and
the three months ended March 31, 1995 and 1996 (unaudited)...................... F-14
Statements of Changes in Stockholders' Equity for the years ended December 31,
1993, 1994 and 1995 and the three months ended March 31, 1996 (unaudited)....... F-15
Notes to Financial Statements.................................................... F-16
Alexander:
Annual Financial Statements:
Reports of Independent Auditors................................................ F-31
Consolidated Balance Sheets at December 31, 1994 and 1995...................... F-33
Consolidated Statements of Operations for the years ended December 31, 1993,
1994 and 1995................................................................. F-34
Consolidated Statements of Stockholders' Equity for the years ended December
31, 1993, 1994 and 1995....................................................... F-35
Consolidated Statements of Cash Flows for the years ended December 31, 1993,
1994 and 1995................................................................. F-36
Notes to Consolidated Financial Statements..................................... F-37
Interim Financial Statements (unaudited):
Condensed Consolidated Balance Sheets at December 31, 1995 and March 31,
1996.......................................................................... F-54
Condensed Consolidated Statements of Operations for the three months ended
March 31, 1995 and 1996....................................................... F-55
Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 1995 and 1996....................................................... F-56
Notes to Condensed Consolidated Financial Statements........................... F-57
NEG Acquisitions:
Mustang Island Interest:
Report of Independent Auditors................................................. F-58
Statements of Operating Revenues and Direct Operating Expenses for the
Three-Month Period Ended March 31, 1995 (Unaudited) and the Years Ended
December 31, 1994
and 1993.................................................................... F-59
Notes to Statements of Operating Revenues and Direct Operating Expenses........ F-60
Oak Hill Interest:
Report of Independent Auditors................................................. F-62
Statements of Operating Revenues and Direct Operating Expenses for the
Five-Month Period Ended May 31, 1995 (Unaudited) and the Years Ended December
31, 1994
and 1993.................................................................... F-63
Notes to Statements of Operating Revenues and Direct Operating Expenses........ F-64
Enron Interest:
Report of Independent Auditors................................................. F-66
Statements of Operating Revenues and Direct Operating Expenses for the
Five-Month Period Ended May 31, 1995 (Unaudited) and the Years Ended December
31, 1994
and 1993.................................................................... F-67
Notes to Statements of Operating Revenues and Direct Operating Expenses........ F-68
</TABLE>
F-1
<PAGE> 154
PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The accompanying pro forma combined condensed financial statements assume
the Merger is accounted for using the purchase method of accounting. The pro
forma combined condensed financial statements are based on the historical
financial statements of NEG and Alexander included in this Proxy Statement. The
pro forma combined condensed financial statements are also based, in part, on
the respective historical statements of operating revenues and direct operating
expenses of certain oil and gas properties previously acquired by NEG and
accounted for as purchases (the "NEG Acquisitions"). Such statements of
operating revenues and direct operating expenses are included elsewhere herein.
The Pro Forma Combined Condensed Balance Sheet as of March 31, 1996 assumes
the Merger and the NEG Equity Private Placement had been consummated on that
date. The Pro Forma Combined Condensed Statements of Operations for the three
months ended March 31, 1996 and the year ended December 31, 1995 have been
prepared assuming the Merger and the NEG Equity Private Placement had been
consummated on January 1, 1995. The Pro Forma Combined Condensed Statement of
Operations for the year ended December 31, 1995, has been prepared with
additional pro forma adjustments for the NEG Acquisitions, assuming such
acquisitions had been consummated on January 1, 1995.
The pro forma adjustments are based upon available information and
assumptions that managements of NEG and Alexander believe are reasonable. The
pro forma combined condensed financial statements do not purport to represent
the financial position or results of operations which would have occurred had
such transactions been consummated on the dates indicated or NEG's financial
position or results of operations for any future date or period. These pro forma
combined condensed financial statements and notes thereto should be read in
conjunction with the historical financial statements and notes thereto described
above.
F-2
<PAGE> 155
NATIONAL ENERGY GROUP, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NEG ACQUISITIONS
------------------------------------------------------------
MUSTANG OAK HILL ENRON
ISLAND INTEREST INTEREST INTEREST
THREE MONTHS FIVE MONTHS FIVE MONTHS
NEG ENDED MARCH 31, ENDED MAY ENDED MAY PRO FORMA
HISTORICAL 1995 31, 1995 31, 1995 ADJUSTMENTS
---------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and gas sales..................................... $ 7,858 $ 127 $ 868 $ 401 $ --
Well operator and management fees:
Related parties..................................... -- -- -- -- --
Others.............................................. -- -- -- -- --
------- ---- ---- ---- -------
7,858 127 868 401 --
Cost and expenses:
Lease operating....................................... 1,732 57 212 145 --
Oil and gas production taxes.......................... 416 7 3 30 --
Depreciation, depletion, and amortization............. 3,149 -- -- -- 870(1)
Provision for impairment of oil and gas properties.... -- -- -- -- --
Abandoned merger and note offering expenses........... -- -- -- -- --
General and administrative............................ 1,635 -- -- -- --
------- ---- ---- ---- -------
6,932 64 215 175 870
------- ---- ---- ---- -------
Operating income (loss)................................. 926 63 653 226 (870)
Interest expense:
Stockholder........................................... -- -- -- -- --
Others................................................ (1,032) -- -- -- (278)(2)
Gain (loss) on securities............................... 221 -- -- -- --
Interest income and other............................... 91 -- -- -- --
------- ---- ---- ---- -------
Income (loss) before income taxes and extraordinary
item.................................................. 206 63 653 226 (1,148)
Income tax benefit...................................... -- -- -- -- --
------- ---- ---- ---- -------
Income (loss) before extraordinary item................. $ 206 $ 63 $ 653 $ 226 $(1,148)
======== ===== ===== ===== =======
Loss per common share before extraordinary item......... $ (0.05)
========
Weighted average number of common and common equivalent
shares outstanding.................................... 10,702 1,065(3)
======== =======
<CAPTION>
PRO FORMA
ADJUSTMENTS
FOR THE MERGER
NEG ALEXANDER AND RELATED PRO FORMA
PRO FORMA HISTORICAL TRANSACTIONS COMBINED
--------- --------- -------------- ---------
<S> <<C> <C> <C> <C>
Revenues:
Oil and gas sales..................................... $ 9,254 $16,599 $ 158(4) $26,011
Well operator and management fees:
Related parties..................................... -- 308 -- 308
Others.............................................. -- 2,334 137(7) 2,471
------- ------- ------- -------
9,254 19,241 295 28,790
Cost and expenses:
Lease operating....................................... 2,146 5,031 -- 7,177
Oil and gas production taxes.......................... 456 1,077 11(4) 1,544
Depreciation, depletion, and amortization............. 4,019 9,252 63(4) 14,100
766 (5)
Provision for impairment of oil and gas properties.... -- 2,300 -- 2,300
Abandoned merger and note offering expenses........... -- 752 -- 752
General and administrative............................ 1,635 3,442 (105)(6) 5,109
137 (7)
------- ------- ------- -------
8,256 21,854 872 30,982
------- ------- ------- -------
Operating income (loss)................................. 998 (2,613) (577) (2,192)
Interest expense:
Stockholder........................................... -- (447) 350(6) (97)
Others................................................ (1,310) (3,513) (1,240)(6) (6,063)
Gain (loss) on securities............................... 221 -- -- 221
Interest income and other............................... 91 370 -- 461
------- ------- ------- -------
Income (loss) before income taxes and extraordinary
item.................................................. -- (6,203) (1,467) (7,670)
Income tax benefit...................................... -- 1,744 513(8) 2,257
------- ------- ------- -------
Income (loss) before extraordinary item................. $ -- $(4,459) $ (954) $(5,413)
======= ======= ======= =======
Loss per common share before extraordinary item......... $ (0.06)(3) $ (0.36) $ (0.19)(9)
======= ======= =======
Weighted average number of common and common equivalent
shares outstanding.................................... 11,767 12,345 8,702(9) 32,814
======= ======= ======= =======
</TABLE>
See accompanying notes to pro forma combined condensed financial statements.
F-3
<PAGE> 156
NATIONAL ENERGY GROUP, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
FOR THE MERGER
NEG ALEXANDER AND RELATED PRO FORMA
HISTORICAL HISTORICAL TRANSACTIONS COMBINED
---------- --------- -------------- ---------
<S> <C> <C> <C> <C>
Revenues:
Oil and gas sales.............................. $ 3,795 $ 4,511 $ 8,306
Well operator and management fees:
Related parties............................. -- 45 45
Others...................................... -- 448 $ 53(7) 501
------- ------- ------ -------
3,795 5,004 53 8,852
Cost and expenses:
Lease operating................................ 607 944 -- 1,551
Oil and gas production taxes................... 188 276 -- 464
Depreciation, depletion, and amortization...... 1,651 2,083 12(4) 3,600
(146)(5)
General and administrative..................... 455 585 (26)(6) 1,067
53(7)
------- ------- ------ -------
2,901 3,888 (107) 6,682
------- ------- ------ -------
Operating income................................. 894 1,116 160 2,170
Interest expense:
Stockholder.................................... -- (99) 75(6) (24)
Others......................................... (476) (821) 87(6) (1,210)
Gain (loss) on securities........................ (8) -- -- (8)
Interest income and other........................ 23 106 -- 129
------- ------- ------ -------
Income before income taxes....................... 433 302 322 1,057
Provision for income taxes....................... -- (102) (113)(8) (215)
------- ------- ------ -------
Net income....................................... $ 433 $ 200 $ 209 $ 842
======= ======= ====== =======
Income per common share.......................... $ 0.02 $ 0.02 $ 0.02(9)
======= ======= =======
Weighted average number of common and common 6,809(9)
equivalent shares outstanding.................. 12,043 12,505 8,814(9) 40,171
======= ======= ====== =======
</TABLE>
See accompanying notes to pro forma combined condensed financial statements.
F-4
<PAGE> 157
NATIONAL ENERGY GROUP, INC.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
MARCH 31, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
FOR THE MERGER
NEG ALEXANDER AND RELATED PRO FORMA
HISTORICAL HISTORICAL TRANSACTIONS COMBINED
---------- ---------- -------------- ---------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................................ $ 1,005 $ 1,824 $ 15,000 (10)
64,337 (11)
$ 11,678
(4,000)(12)
(66,488)(13)
Marketable securities.................................... 1,473 -- (250)(12) 1,223
Accounts receivable...................................... 1,780 4,008 (130)(14) 5,658
Other.................................................... 1,042 660 -- 1,702
-------- -------- -------- --------
Total current assets....................................... 5,300 6,492 8,469 20,261
Investment in Alexander.................................... -- -- 69,393 (12)
--
(69,393)(15)
Property and equipment:
Oil and gas properties, net:
Proved................................................. 35,043 80,184 (2,396)(14)
57,205 (15) 112,831
(57,205)(16)
Unproved............................................... 2,021 701 4,000 (15) 6,722
-------- -------- -------- --------
Total oil and gas properties, net........................ 37,064 80,885 1,604 119,553
Other property and equipment, net........................ 606 1,392 -- 1,998
-------- -------- -------- --------
Total property and equipment, net.......................... 37,670 82,277 1,604 121,551
Other assets............................................... 615 1,504 663 (11)
(406)(13) 1,357
(1,019)(14)
-------- -------- -------- --------
Total assets............................................... $ 43,585 $ 90,273 $ 9,311 $143,169
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 4,007 $ 1,862 $ -- $ 5,869
Gas balancing, deferred revenue and oil and gas
proceeds............................................... 1,029 4,971 (1,526)(14) 4,474
Other accrued liabilities................................ 246 -- -- 246
Note payable and current portion of long-term debt....... 4,709 5,962 17,000 (11)
17,012
(10,659)(13)
-------- -------- -------- --------
Total current liabilities.................................. 9,991 12,795 4,815 27,601
Long-term debt, less current portion....................... 14,779 42,512 48,000 (11)
49,462
(55,829)(13)
Noncurrent gas balancing, gas prepayments and other
noncurrent
liabilities.............................................. 18 2,886 (1,158)(14)
2,064
318 (15)
Deferred income taxes...................................... 1,159 21,422 (15)
2,559
(20,022)(16)
Stockholders' equity:
Convertible preferred stock.............................. 93 -- 150 (10) 243
Common stock............................................. 121 374 212 (12)
333
(374)(15)
Additional paid-in capital............................... 22,037 40,355 14,850 (10)
64,891 (12) 101,778
(40,355)(15)
Unrealized loss on available-for-sale securities, net.... (213) -- 40 (12) (173)
Deficit.................................................. (3,241) (9,808) (406)(13)
(861)(14)
(40,698)
10,801 (15)
(37,183)(16)
-------- -------- -------- --------
Total stockholders' equity................................. 18,797 30,921 11,765 61,483
-------- -------- -------- --------
Total liabilities and stockholders' equity................. $ 43,585 $ 90,273 $ 9,311 $143,169
======== ======== ======== ========
Shares of common stock outstanding.........................
12,057 12,457 8,780 (9) 33,294
======== ======== ======== ========
Book value per common share................................ $ .79 $ 2.48 $ 1.12
======== ======== ========
</TABLE>
See accompanying notes to pro forma combined condensed financial statements.
F-5
<PAGE> 158
NATIONAL ENERGY GROUP, INC.
NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A -- PRO FORMA ADJUSTMENTS FOR THE NEG ACQUISITIONS
In April 1995, NEG acquired a producing oil and gas property in the Mustang
Island Field in offshore Nueces County, Texas ("Mustang Island Interest") from
Sierra Mineral Development, L.C. and LLOG Production Company (NEG assumed Sierra
Mineral's contractual rights and obligations with LLOG). In June 1995, NEG
completed the acquisition of producing gas properties in the Oak Hill Field in
Rusk County, Texas ("Oak Hill Interest") from Sierra 1994 I Limited Partnership
("Sierra"). In June 1995, NEG also completed the acquisition of producing oil
and gas properties in Eddy County, New Mexico, from Enron Oil and Gas Company
("Enron Interest"). Collectively, these properties are referred to as the NEG
Acquisitions.
The consideration given for the acquisition of the Mustang Island Interest
consisted on $900,000 in cash and 352,500 shares of the NEG Common Stock. NEG
funded the cash portion of the Mustang Island acquisition with available cash
balances. The consideration paid by the NEG to Sierra for the Oak Hill Interest
consisted of $7.2 million in cash, 612,311 shares of NEG Common Stock and
warrants to purchase 200,000 shares of NEG's Common Stock at a price per share
of $2.00. The cash portion of the acquisition was funded primarily by NEG's
existing reducing, revolving credit facility with Bank One, Texas, N.A. ("Bank
One"). The consideration given for the acquisition of the Enron Interest was
approximately $2.1 million in cash. This acquisition was funded by borrowings
under NEG's existing credit facility with Bank One and available cash balances.
The results of operations of the NEG Acquisitions are included in the
historical results of operations of NEG for periods subsequent to their
respective dates of acquisition. The accompanying Pro Forma Combined Condensed
Statement of Operations for the year ended December 31, 1995 has been prepared
as if the NEG Acquisitions had occurred on January 1, 1995, and it reflects the
following adjustments:
(1) To adjust depletion, depreciation, and amortization to reflect the
effect of the NEG Acquisitions. Depletion, depreciation, and amortization
of the oil and gas properties is computed using the unit-of-production
method.
(2) To adjust interest expense to reflect $9.3 million additional
borrowings under NEG's existing credit facility with Bank One directly
related to the acquisition of the Oak Hill interest and the Enron Interest.
The adjustment was computed using the actual interest rate applicable to
borrowings under such agreement during the periods presented. The
acquisition of the Mustang Island Interest was funded with available cash
balances.
(3) To adjust the weighted average number of common shares outstanding
for shares of NEG Common Stock issued as a result of the acquisition of the
Mustang Island Interest and the Oak Hill Interest and to reduce Texas Gas
Fund I's NPI interest in the GAU. The loss per common share is computed by
dividing the net loss, adjusted for preferred stock dividend requirements
of $735,000 for the year ended December 31, 1995, by the pro forma weighted
average common shares outstanding.
NOTE B -- PRO FORMA ADJUSTMENTS FOR THE MERGER AND RELATED TRANSACTIONS
On June 6, 1996, NEG and Alexander entered into the Merger Agreement
whereby Alexander will merge with a newly formed wholly owned subsidiary of NEG.
The Merger will be accounted for using the purchase method of accounting. In
completing the Merger, NEG will issue approximately 21.1 million shares of NEG
Common Stock in exchange for all of the issued and outstanding Alexander Common
Stock, based on the exchange ratio of 1.7 shares of NEG Common Stock for each
outstanding share of Alexander Common Stock and the number of shares of
Alexander Common Stock outstanding at March 31, 1996. The actual number of
shares of NEG Common Stock to be issued will be determined at the Effective Time
of the Merger based on the exchange ratio and the number of shares of Alexander
Common Stock then outstanding.
F-6
<PAGE> 159
NATIONAL ENERGY GROUP, INC.
NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
The Merger will be accounted for as a purchase of Alexander by NEG because,
at the date of Merger, NEG shareholders will hold securities representing more
than fifty percent of the total common and common equivalent shares of the
combined entity. In addition, the management and Board of Directors of the
combined company will consist substantially of individuals holding such
positions in NEG. As a result of the purchase method of accounting, NEG's cost
of acquiring Alexander will be allocated to the assets and liabilities acquired
based on estimated fair values.
The combined company will incur substantial costs related to the Merger.
The investment banking, legal, accounting, printing, mailing and similar
expenses are expected to be approximately $3.4 million, of which $1.4 million
consists of the estimated fair value of NEG Common Stock and warrants to
purchase NEG Common Stock to be issued to investment advisors. Other costs of
integrating operations of the two companies, including employee severance and
benefits; duplicate facilities and equipment; and integration of management
information and accounting, systems and other functions of NEG and Alexander are
expected to be approximately $2.0 million. Such costs will be accrued and
included as a cost of the Merger.
The accompanying Pro Forma Combined Condensed Statements of Operations
reflect the following adjustments for the Merger:
(4) To conform Alexander's method of accounting for natural gas
imbalances with the method utilized by NEG.
(5) To adjust depletion, depreciation, and amortization to reflect
NEG's purchase price allocated to property and equipment using the unit of
production method utilized by NEG. The pro forma results of operations
exclude a noncash writedown of oil and gas properties which is estimated to
be approximately $37.2 million in accordance with the full cost method of
accounting. See Note 16 of Notes to pro forma combined condensed financial
statements.
(6) To adjust interest expense and amortization of loan origination
costs to reflect $65.0 million of initial borrowings under the NEG New
Credit Facility and repayment of $66.5 million of borrowings under the
existing credit facilities of NEG and Alexander. The calculation of
interest expense assumes repayment of the initial borrowings beginning in
January 1995 in accordance with the terms of the NEG New Credit Facility.
The interest on borrowings under the NEG New Credit Facility was computed
using the applicable bank base rate in effect during the periods presented.
An increase of .125% in the assumed interest rate would increase pro forma
interest expense by $78,000 and $4,000 for the year ended December 31, 1995
and the three months ended March 31, 1996, respectively.
(7) To reclassify overhead charges billed to working interest owners
by NEG.
(8) To adjust the provision for income taxes for the change in
financial taxable income as a result of entries (4), (5) and (6).
(9) To reflect the issuance of 100,000 shares of NEG Series D
Preferred and 50,000 shares of NEG Series E Preferred pursuant to the NEG
Equity Private Placement and the incremental effect of the issuance of
shares of NEG Common Stock pursuant to the Merger, including 166,667 shares
to be issued for services provided by investment advisors. Pro forma net
income (loss) per common share information is computed by dividing net
income (loss), adjusted for preferred stock dividend requirements of
$945,000 for the year ended December 31, 1995 and $236,250 for the three
months ended March 31, 1996 by the pro forma weighted average common and
common equivalent shares outstanding. Shares issuable upon exercise of
options and warrants and upon the conversion of preferred stock are
included in the computations of pro forma income per common and common
equivalent share if the effect is dilutive.
F-7
<PAGE> 160
NATIONAL ENERGY GROUP, INC.
NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
The accompanying Pro Forma Combined Balance Sheet as of March 31, 1996
has been prepared as if the Merger had occurred on that date and includes
the following adjustments:
(10) To record the issuance of 100,000 shares of NEG Series D
Preferred, 50,000 shares of Series E Preferred and immediately exercisable
warrants to purchase 1,050,000 shares of NEG Common Stock for $2.50 per
share for an aggregate consideration of $15.0 million in cash pursuant to
the NEG Equity Private Placement. See "The Merger Proposals -- Transactions
Related to the Merger -- NEG Equity Private Placement." In connection with
this transaction, NEG will also issue warrants for 300,000 shares of NEG
Common Stock at an exercise price equal to $2 7/8 to certain investment
advisors. On a pro forma basis, there would be 33.3 million shares of NEG
Common Stock and 242,500 shares of NEG Preferred Stock outstanding as of
March 31, 1996. See "Capitalization."
(11) To record borrowings of $65.0 million under the NEG New Credit
Facility and related loan costs of $663,000.
(12) To record NEG's cost of acquiring Alexander (in thousands):
<TABLE>
<S> <C>
Estimated fair value of 21.1 million shares NEG Common Stock
issued......................................................... $63,210
Cost of 62,200 shares of Alexander Common Stock owned by NEG..... 290
Alexander stock options and warrants assumed..................... 443
Estimated fair value of 166,667 shares of NEG Common Stock and
800,000 warrants issued for services provided by investment
advisors....................................................... 1,450
Other investment advisor, legal, accounting and professional
fees........................................................... 2,000
Other merger related costs....................................... 2,000
-------
$69,393
=======
</TABLE>
The fair value of the securities to be issued in connection with the
Merger has been calculated assuming the price of the NEG Common Stock is
$3.00 per share.
(13) To record repayment of borrowings under existing credit
facilities of NEG and Alexander and to write off the unamortized balance of
related loan origination costs. Such write off is not reflected in the pro
forma combined condensed statement of operations for the year ended
December 31, 1995, because it will be an extraordinary item.
(14) To conform Alexander's method of accounting for natural gas
imbalances with the method utilized by NEG.
(15) To adjust assets and liabilities under the purchase method of
accounting based on NEG's purchase price. NEG's purchase price has been
allocated to the consolidated assets and liabilities of Alexander based on
preliminary estimates of fair values with the remaining purchase price
allocated to proved oil and gas properties. No goodwill has been recorded
in this transaction. The information presented herein may differ from the
actual purchase price allocation.
F-8
<PAGE> 161
NATIONAL ENERGY GROUP, INC.
NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
The preliminary allocation of the purchase price included in the pro forma
balance sheet is summarized as follows: (in thousands)
<TABLE>
<S> <C>
Working capital assumed, excluding current portion
of long-term debt............................... $ 1,055
Oil and gas properties:
Proved.......................................... 134,993
Unproved........................................ 4,701
Other property and equipment...................... 1,392
Other noncurrent assets........................... 353
Long-term debt assumed and refinanced............. (48,474)
Other noncurrent liabilities assumed.............. (2,046)
Deferred income taxes............................. (22,581)
--------
$ 69,393
========
</TABLE>
(16) To adjust the carrying value of proved oil and gas properties
pursuant to the full cost method of accounting. Under the full cost method
of accounting, the carrying value of oil and gas properties (net of related
deferred taxes) is generally not permitted to exceed the sum of the present
value (10% discount rate) of estimated future net cash flows from proved
reserves, based on current prices and costs, plus the lower of cost or
estimated fair value of unproved properties (the "cost center ceiling").
Based upon NEG and Alexander being at the ceiling amount at March 31, 1996
and the preliminary allocation of NEG's purchase price and Alexander's
estimated proved reserves and product prices in effect at March 31, 1996,
the purchase price allocated to oil and gas properties (net of related
deferred taxes) would be in excess of the cost center ceiling by
approximately $37.2 million, net of related deferred income taxes. The
resulting writedown will be included in the results of operations in the
period the Merger is consummated. The actual amount of such writedown will
increase or decrease as a result of finalization of the purchase price
allocation and changes in estimated proved reserves at the date of the
Merger.
NOTE C -- PRO FORMA COMBINED SUPPLEMENTAL OIL AND GAS RESERVE AND STANDARDIZED
MEASURE INFORMATION
The following is a summary of the pro forma combined quantities of proved
reserves prepared by combining the historical information of NEG and Alexander,
derived from estimates prepared by NEG's and Alexander's respective independent
engineers, adjusted for the NEG Acquisitions and conforming Alexander's method
of accounting for natural gas imbalances to the method utilized by NEG. See the
historical financial statements of NEG and Alexander, contained elsewhere
herein.
<TABLE>
<CAPTION>
OIL GAS
(MBBL) (MMCF)
------ -------
(IN THOUSANDS)
<S> <C> <C>
December 31, 1994................................................. 9,266 185,808
Purchases of reserves in place.................................. 21 360
Sales of minerals in place...................................... (374) (4,384)
Extensions, discoveries, and other additions.................... 78 2,042
Revisions of previous estimates................................. (2,287) (43,789)
Production...................................................... (475) (11,830)
------ -------
December 31, 1995................................................. 6,229 128,207
====== =======
Proved developed reserves:
December 31, 1994............................................... 3,395 106,375
December 31, 1995............................................... 2,848 78,270
</TABLE>
The following is a summary of the pro forma combined standardized measure
of discounted net cash flows related to the proved crude oil and natural gas
reserves of NEG and Alexander. For these calculations,
F-9
<PAGE> 162
NATIONAL ENERGY GROUP, INC.
NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
estimated future cash flows from estimated future production of proved reserves
were computed using crude oil and natural gas prices as of the end of each
period presented. Future development and production costs attributable to the
proved reserves were estimated assuming that existing conditions would continue
over the economic lives of the individual leases and costs were not escalated
for the future. Estimated future income tax expenses were calculated by applying
future statutory tax rates (based on the current tax law adjusted for permanent
differences and tax credits) to the estimated future pretax net cash flows
related to proved crude oil and natural gas reserves, less the tax basis of the
properties involved.
NEG and Alexander caution against using this data to determine the fair
value of its crude oil and natural gas properties. To obtain the best estimate
of fair value of the crude oil and natural gas properties, forecasts of future
economic conditions, varying discount rates, and consideration of other than
proved reserves would have to be incorporated into the calculation. In addition,
there are significant uncertainties inherent in estimating quantities of proved
reserves and in projecting rates of production that impair the usefulness of the
data.
The pro forma combined standardized measure of discounted future net cash
flows relating to proved crude oil and natural gas reserves is summarized as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Future cash inflows..................................................... $ 365,666
Future production and development costs................................. (164,952)
Future income tax expense............................................... (28,792)
---------
Future net cash flows................................................... 171,922
10% annual discount for estimated timing of cash flows.................. (57,732)
---------
Standardized measure of discounted future net cash flows................ $ 114,190
=========
</TABLE>
The following are the principal sources of change in the pro forma combined
standardized measure of discounted future net cash flows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
------------
<S> <C>
Balance at beginning of year............................................ $132,972
Sales and transfers of oil and gas produced, net of production costs.... (17,302)
Net changes in prices and production cost............................... 21,593
Purchases of reserves in place.......................................... 400
Extensions and discoveries, less related costs.......................... 2,394
Revisions of previous quantity estimates................................ (47,028)
Sales of reserves in place.............................................. (3,723)
Accretion of discount................................................... 10,275
Previously estimated development costs incurred during the year and
change future development costs....................................... 2,681
Net change in income taxes.............................................. 13,465
Change in production rates and other.................................... (1,537)
--------
Net change.............................................................. (18,782)
--------
Balance at end of year.................................................. $114,190
========
</TABLE>
F-10
<PAGE> 163
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
National Energy Group, Inc.
We have audited the accompanying balance sheets of National Energy Group,
Inc., as of December 31, 1994 and 1995, and the related statements of
operations, changes in stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of National Energy Group, Inc.,
at December 31, 1994 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
March 27, 1996
F-11
<PAGE> 164
NATIONAL ENERGY GROUP, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents..................................... $ 2,593,645 $ 6,076,199 $ 1,005,118
Marketable securities......................................... 1,182,150 1,824,724 1,472,550
Accounts receivable -- oil and gas sales...................... 344,972 1,407,349 1,366,081
Accounts receivable -- joint interest and other............... 543,771 262,619 414,011
Accounts receivable -- related parties........................ 23,999 -- --
Other......................................................... 267,731 335,751 1,042,070
----------- ----------- -----------
Total current assets................................... 4,956,268 9,906,642 5,299,830
Property and equipment:
Oil and gas properties, at cost (full cost method)............ 15,284,453 38,201,307 44,054,703
Pipeline...................................................... -- -- 481,108
Furniture, fixtures, and equipment............................ 329,445 372,395 381,345
----------- ----------- -----------
15,613,898 38,573,702 44,917,156
Accumulated depreciation, depletion, and amortization......... 2,501,047 5,602,571 7,246,890
----------- ----------- -----------
Net property and equipment...................................... 13,112,851 32,971,131 37,670,266
Other assets.................................................... 677,056 613,593 615,354
----------- ----------- -----------
Total assets........................................... $18,746,175 $43,491,366 $43,585,450
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable -- trade..................................... $ 820,377 $ 3,630,603 $ 3,243,666
Accounts payable -- revenue and other......................... 495,178 984,299 1,028,860
Accounts payable -- broker margin............................. -- 978,656 763,851
Accrued interest.............................................. 79,917 128,938 246,471
Note payable and current portion of long-term debt............ -- 6,500,000 4,709,000
----------- ----------- -----------
Total current liabilities.............................. 1,395,472 12,222,496 9,991,848
Long-term debt, less current portion............................ 6,000,000 13,475,000 14,779,000
Other long-term liabilities..................................... 23,189 19,303 18,052
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 52,500
Series C:
Authorized shares -- 80,000
Issued shares -- 40,000
Aggregate liquidation preference -- $4,000,000......... -- 40,000 40,000
Class A common stock $.01 par value:
Authorized shares -- 50,000,000
Issued shares -- 8,875,892, 11,880,125 and 12,056,532 at
December 31, 1994 and 1995 and March 31, 1996,
respectively.............................................. 88,778 118,801 120,565
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.................................... 13,626,117 21,485,224 22,037,359
Unrealized gain (loss) on marketable securities, net.......... 136,285 (247,492) (212,699)
Deficit....................................................... (2,713,497) (3,674,466) (3,241,175)
----------- ----------- -----------
Total stockholders' equity...................................... 11,327,514 17,774,567 18,796,550
----------- ----------- -----------
Total liabilities and stockholders' equity...................... $18,746,175 $43,491,366 $43,585,450
=========== =========== ===========
</TABLE>
See accompanying notes.
F-12
<PAGE> 165
NATIONAL ENERGY GROUP, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
1993 1994 1995 1995 1996
---------- ---------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Oil and gas sales............ $1,803,284 $3,158,716 $ 7,858,316 $1,090,748 $ 3,795,203
Costs and expenses:
Lease operating.............. 575,697 1,207,251 1,732,124 296,359 607,064
Oil and gas production
taxes..................... 109,876 176,320 415,867 61,156 187,786
Depreciation, depletion, and
amortization.............. 679,159 1,029,986 3,149,464 333,508 1,650,654
General and administrative... 567,106 826,459 1,634,429 236,671 455,355
---------- ---------- ----------- ---------- -----------
1,931,838 3,240,016 6,931,884 927,694 2,900,859
---------- ---------- ----------- ---------- -----------
Operating income (loss)........ (128,554) (81,300) 926,432 163,054 894,344
Interest expense............... (188,140) (517,086) (1,032,096) (154,125) (475,821)
Interest income and other,
net.......................... 27,266 109,017 90,875 30,653 22,872
Gain on sale of marketable
securities................... (10,065) -- 220,582 65,404 (8,104)
---------- ---------- ----------- ---------- -----------
Income (loss) before income
taxes........................ (299,493) (489,369) 205,793 104,986 433,291
Provision for income taxes..... -- -- -- -- --
---------- ---------- ----------- ---------- -----------
Income (loss) before
extraordinary item........... (299,493) (489,369) 205,793 104,986 433,291
Extraordinary loss on early
extinguishments of debt...... -- (121,917) (431,762) -- --
---------- ---------- ----------- ---------- -----------
Net income (loss).............. $ (299,493) $ (611,286) $ (225,969) $ 104,986 $ 433,291
========== ========== =========== ========== ===========
Income (loss) per common share:
Loss before extraordinary
item...................... $ (.05) $ (.09) $ (.05) $ .00 $ .02
========== ========== =========== ========== ===========
Net income (loss)............ $ (.05) $ (.10) $ (.09) $ .00 $ .02
========== ========== =========== ========== ===========
Weighted average number of
common and common equivalent
shares outstanding........... 6,121,025 8,476,821 10,701,635 9,267,536 12,043,247
========== ========== =========== ========== ===========
</TABLE>
See accompanying notes.
F-13
<PAGE> 166
NATIONAL ENERGY GROUP, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------ --------------------------
1993 1994 1995 1995 1996
----------- ----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.......................................... $ (299,493) $ (611,286) $ (225,969) $ 104,986 $ 433,291
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation, depletion and amortization........ 679,159 1,029,986 3,149,464 333,508 1,650,654
Amortization of loan costs...................... -- 19,114 21,060 9,968 21,060
Amortization of deferred compensation........... 39,808 41,694 39,809 10,501 8,751
Extraordinary loss on early extinguishments of
debt.......................................... -- 121,917 431,762 -- --
Common stock and warrants issued for services... 25,000 64,290 104,614 -- 3,333
Restricted stock grants......................... -- -- -- -- 3,999
Loss on sale of real estate..................... 10,065 -- -- -- --
Changes in operating assets and liabilities:
Accounts receivable........................... (80,602) (217,192) (784,668) (130,721) (110,124)
Accounts receivable from related parties...... 63,761 -- 23,999 -- --
Other current assets.......................... (40,980) (101,530) (108,615) (31,263) (710,318)
Accounts payable and accrued liabilities...... 122,168 26,299 425,626 (38,693) (440,899)
----------- ----------- ------------ ----------- -----------
Net cash provided by operating activities......... 518,886 373,292 3,077,082 258,286 859,747
----------- ----------- ------------ ----------- -----------
INVESTING ACTIVITIES
Purchases of marketable securities................ -- (1,081,041) (2,917,659) (1,095,010) (9,008)
Proceeds from sale of marketable securities....... -- 35,176 1,891,308 631,668 395,975
Proceeds from broker margin....................... -- -- 978,656 -- --
Purchases of furniture, fixtures, and equipment... (12,570) (48,632) (42,950) (11,029) (8,950)
Oil and gas acquisition, exploration, and
development expenditures........................ (3,335,469) (2,849,508) (16,912,919) (1,539,277) (5,399,368)
Proceeds from sales of oil and gas properties..... 30,766 90,500 69,306 69,306 --
Purchases of long-term assets and other........... (53,087) 41,471 (11,963) (11,089) (480,043)
----------- ----------- ------------ ----------- -----------
Net cash used in investing activities............. (3,370,360) (3,812,034) (16,946,221) (1,955,431) (5,501,394)
----------- ----------- ------------ ----------- -----------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt, net..... 4,580,000 5,691,366 17,514,077 -- 3,250,000
Proceeds from issuance of note payable............ -- -- 3,000,000 -- --
Repayments of long-term debt...................... (2,315,000) (4,200,000) (6,875,000) -- (3,737,000)
Repayments of other long-term liabilities......... -- (77,571) -- -- --
Proceeds from sale of common stock................ 370,000 -- -- -- --
Proceeds from exercise of stock options and
warrants........................................ 32,500 35,938 467,987 -- 57,769
Proceeds from issuance of Series B Preferred
Stock, net...................................... -- 4,436,372 -- -- --
Proceeds from issuance of Series C Preferred
Stock, net...................................... -- -- 3,980,343 -- --
Preferred stock dividends......................... (17,502) (14,705) (735,000) -- --
Payments for redemption of fractional shares...... (325) (477) (714) (164) (203)
Other............................................. (2,647) -- -- -- --
----------- ----------- ------------ ----------- -----------
Net cash provided by financing activities......... 2,647,026 5,870,923 17,351,693 (164) (429,434)
----------- ----------- ------------ ----------- -----------
Increase (decrease) in cash and cash
equivalents..................................... (204,448) 2,432,181 3,482,554 (1,697,309) (5,071,081)
Cash and cash equivalents at beginning of
period.......................................... 365,912 161,464 2,593,645 2,593,645 6,076,199
----------- ----------- ------------ ----------- -----------
Cash and cash equivalents at end of period........ $ 161,464 $ 2,593,645 $ 6,076,199 $ 896,336 $ 1,005,118
=========== =========== ============ =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid in cash............................. $ 166,313 $ 457,949 $ 983,075 $ 160,564 $ 358,288
=========== =========== ============ =========== ===========
</TABLE>
See accompanying notes.
F-14
<PAGE> 167
NATIONAL ENERGY GROUP, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<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, 1992................................. -- $ -- -- $ -- 5,425,838 $ 54,258
Common stock issuable under asset acquisition agreement...... -- -- -- -- -- --
Common stock issued for acquisition of certain limited
partnership interests....................................... -- -- -- -- 700,000 7,000
Common stock issued in litigation settlement................. -- -- -- -- 15,000 150
Common stock issued upon exercise of options................. -- -- -- -- 80,000 800
Stock issued for services.................................... -- -- -- -- 40,000 400
Sale of common stock for cash................................ -- -- -- -- 592,000 5,920
Common stock issued for acquisition of Goldsmith Adobe Unit
working interest............................................ -- -- -- -- 900,000 9,000
Dividends on Series A Preferred Stock........................ -- -- -- -- -- --
Other........................................................ -- -- -- -- -- --
Net loss..................................................... -- -- -- -- -- --
------ ------- ------ ------- ---------- --------
Balance at December 31, 1993................................. -- -- -- -- 7,752,838 77,528
Common stock issued upon exercise of options................. -- -- -- -- 62,500 625
Common stock issued or issuable under asset acquisition
agreements.................................................. -- -- -- -- 200,000 2,000
Issuance of Series B Preferred Stock......................... 50,000 50,000 -- -- -- --
Common stock issued for services............................. -- -- -- -- 22,500 225
Common stock issued upon conversion of Series A Preferred
Stock....................................................... -- -- -- -- 425,000 4,250
Common stock issued on conversion of long-term debt.......... -- -- -- -- 415,054 4,151
Unrealized gain on marketable securities..................... -- -- -- -- -- --
Dividends on Series A Preferred Stock........................ -- -- -- -- -- --
Dividends on Series B Preferred Stock........................ 2,500 2,500 -- -- -- --
Net loss..................................................... -- -- -- -- -- --
------ ------- ------ ------- ---------- --------
Balance at December 31, 1994................................. 52,500 52,500 -- -- 8,877,892 88,779
Common stock issued upon exercise of options and warrants.... -- -- -- -- 327,992 3,280
Common stock issued under asset acquisition agreement........ -- -- -- -- 300,000 3,000
Common stock and warrants issued for services................ -- -- -- -- 13,000 130
Common stock issued upon conversion of Class B Common
Stock....................................................... -- -- -- -- 1,296,440 12,964
Common stock and warrants issued to acquire interests in oil
and gas properties.......................................... -- -- -- -- 1,064,801 10,648
Issuance of Series C Preferred Stock......................... -- -- 40,000 40,000 -- --
Dividends on Series B Preferred Stock........................ -- -- -- -- -- --
Dividends on Series C Preferred Stock........................ -- -- -- -- -- --
Unrealized loss on marketable securities..................... -- -- -- -- -- --
Net loss..................................................... -- -- -- -- -- --
------ ------- ------ ------- ---------- --------
Balance at December 31, 1995................................. 52,500 52,500 40,000 40,000 11,880,125 118,801
Common stock issued upon exercise of options and warrants
(unaudited)................................................. -- -- -- -- 35,550 355
Warrants issued for services (unaudited)..................... -- -- -- -- -- --
Common stock issued to acquire interests in oil and gas
properties (unaudited)...................................... -- -- -- -- 140,857 1,409
Unrealized loss on marketable securities (unaudited)......... -- -- -- -- -- --
Net loss (unaudited)......................................... -- -- -- -- -- --
------ ------- ------ ------- ---------- --------
Balance at March 31, 1996 (unaudited)........................ 52,500 $52,500 40,000 $40,000 12,056,532 $120,565
====== ======= ====== ======= ========== ========
<CAPTION>
COMMON STOCK UNREALIZED
CLASS B ISSUABLE GAIN (LOSS)
COMMON STOCK UNDER ASSET ADDITIONAL ON AVAILABLE-
------------------ ACQUISITION PAID-IN FOR-SALE
SHARES AMOUNT AGREEMENT CAPITAL SECURITIES
-------- ------- ------------ ----------- -------------
<S> <C> <C>
Balance at December 31, 1992................................. 91,894 $ 919 $ 33,960 $ 6,295,633 $ --
Common stock issuable under asset acquisition agreement...... -- -- 63,950 -- --
Common stock issued for acquisition of certain limited
partnership interests....................................... -- -- -- 699,601 --
Common stock issued in litigation settlement................. -- -- -- 14,850 --
Common stock issued upon exercise of options................. -- -- -- 31,700 --
Stock issued for services.................................... -- -- -- 24,600 --
Sale of common stock for cash................................ -- -- -- 364,080 --
Common stock issued for acquisition of Goldsmith Adobe Unit
working interest............................................ -- -- -- 553,500 --
Dividends on Series A Preferred Stock........................ -- -- -- -- --
Other........................................................ -- -- -- (2,972) --
Net loss..................................................... -- -- -- -- --
-------- ------ --------- ----------- ---------
Balance at December 31, 1993................................. 91,894 919 97,910 7,980,992 --
Common stock issued upon exercise of options................. -- -- -- 35,313 --
Common stock issued or issuable under asset acquisition
agreements.................................................. -- -- 38,125 123,000 --
Issuance of Series B Preferred Stock......................... -- -- -- 4,386,372 --
Common stock issued for services............................. 37,750 377 -- 51,908 --
Common stock issued upon conversion of Series A Preferred
Stock....................................................... -- -- -- 420,720 --
Common stock issued on conversion of long-term debt.......... -- -- -- 380,311 --
Unrealized gain on marketable securities..................... -- -- -- -- 136,285
Dividends on Series A Preferred Stock........................ -- -- -- -- --
Dividends on Series B Preferred Stock........................ -- -- -- 247,500 --
Net loss..................................................... -- -- -- -- --
-------- ------ --------- ----------- ---------
Balance at December 31, 1994................................. 129,644 1,296 136,035 13,626,116 136,285
Common stock issued upon exercise of options and warrants.... -- -- -- 464,707 --
Common stock issued under asset acquisition agreement........ -- -- (136,035) 133,035 --
Common stock and warrants issued for services................ -- -- -- 79,203 --
Common stock issued upon conversion of Class B Common
Stock....................................................... (129,644) (1,296 ) -- (11,668) --
Common stock and warrants issued to acquire interests in oil
and gas properties.......................................... -- -- -- 3,269,003 --
Issuance of Series C Preferred Stock......................... -- -- -- 3,924,828 --
Dividends on Series B Preferred Stock........................ -- -- -- -- --
Dividends on Series C Preferred Stock........................ -- -- -- -- --
Unrealized loss on marketable securities..................... -- -- -- -- (383,777)
Net loss..................................................... -- -- -- -- --
-------- ------ --------- ----------- ---------
Balance at December 31, 1995................................. -- -- -- 21,485,224 (247,492)
Common stock issued upon exercise of options and warrants
(unaudited)................................................. -- -- -- 57,414 --
Warrants issued for services (unaudited)..................... -- -- -- 3,333 --
Common stock issued to acquire interests in oil and gas
properties (unaudited)...................................... -- -- -- 491,388 --
Unrealized loss on marketable securities (unaudited)......... -- -- -- -- 34,793
Net loss (unaudited)......................................... -- -- -- -- --
-------- ------ --------- ----------- ---------
Balance at March 31, 1996 (unaudited)........................ -- $ -- $ -- $22,037,359 $(212,699)
======== ====== ========= =========== =========
<CAPTION>
TOTAL
STOCKHOLDERS'
DEFICIT EQUITY
----------- -------------
Balance at December 31, 1992................................. $(1,520,511) $ 4,864,259
Common stock issuable under asset acquisition agreement...... -- 63,950
Common stock issued for acquisition of certain limited
partnership interests....................................... -- 706,601
Common stock issued in litigation settlement................. -- 15,000
Common stock issued upon exercise of options................. -- 32,500
Stock issued for services.................................... -- 25,000
Sale of common stock for cash................................ -- 370,000
Common stock issued for acquisition of Goldsmith Adobe Unit
working interest............................................ -- 562,500
Dividends on Series A Preferred Stock........................ (17,502) (17,502)
Other........................................................ -- (2,972)
Net loss..................................................... (299,493) (299,493)
----------- -----------
Balance at December 31, 1993................................. (1,837,506) 6,319,843
Common stock issued upon exercise of options................. -- 35,938
Common stock issued or issuable under asset acquisition
agreements.................................................. -- 163,125
Issuance of Series B Preferred Stock......................... -- 4,436,372
Common stock issued for services............................. -- 52,510
Common stock issued upon conversion of Series A Preferred
Stock....................................................... -- 424,970
Common stock issued on conversion of long-term debt.......... -- 384,462
Unrealized gain on marketable securities..................... -- 136,285
Dividends on Series A Preferred Stock........................ (14,705) (14,705)
Dividends on Series B Preferred Stock........................ (250,000) --
Net loss..................................................... (611,286) (611,286)
----------- -----------
Balance at December 31, 1994................................. (2,713,497) 11,327,514
Common stock issued upon exercise of options and warrants.... -- 467,987
Common stock issued under asset acquisition agreement........ -- --
Common stock and warrants issued for services................ -- 79,333
Common stock issued upon conversion of Class B Common
Stock....................................................... -- --
Common stock and warrants issued to acquire interests in oil
and gas properties.......................................... -- 3,279,651
Issuance of Series C Preferred Stock......................... -- 3,964,828
Dividends on Series B Preferred Stock........................ (525,000) (525,000)
Dividends on Series C Preferred Stock........................ (210,000) (210,000)
Unrealized loss on marketable securities..................... -- (383,777)
Net loss..................................................... (225,969) (225,969)
----------- -----------
Balance at December 31, 1995................................. (3,674,466) 17,774,567
Common stock issued upon exercise of options and warrants
(unaudited)................................................. -- 57,769
Warrants issued for services (unaudited)..................... -- 3,333
Common stock issued to acquire interests in oil and gas
properties (unaudited)...................................... -- 492,797
Unrealized loss on marketable securities (unaudited)......... -- 34,793
Net loss (unaudited)......................................... 433,291 433,291
----------- -----------
Balance at March 31, 1996 (unaudited)........................ $(3,241,175) $18,796,550
=========== ===========
</TABLE>
See accompanying notes.
F-15
<PAGE> 168
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
National Energy Group, Inc. (the "Company") was incorporated under the laws
of the State of Delaware on November 20, 1990. The Company is engaged in the
acquisition, development, and production of crude oil and natural gas.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits and money-market
investments with maturities of three months or less when purchased. At December
31, 1995 all cash and cash equivalents were invested with Bank One, Texas, N.A.
("Bank One").
Marketable Securities
The Company's marketable 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 interest income. The cost of securities
sold is based on the specific identification method.
The marketable securities are comprised of other independent oil and gas
companies. The common stock of one oil and gas company accounted for 86% and 62%
of the estimated fair market value of the total marketable securities held at
December 31, 1994 and 1995, respectively.
The following is a summary of available-for-sale securities at December 31,
1994 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
----------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Common stocks........................... $1,045,864 $ 138,178 $1,893 $1,182,149
========== ======== ====== ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Common stocks........................... $2,072,216 $ 1,026 $ 248,518 $1,824,724
========== ====== ======== ==========
</TABLE>
During the years ended December 31, 1994 and 1995, available-for-sale
securities with a fair value at the date of sale of $51,156 and $2,111,890,
respectively, were sold. The gross realized gains on such sales totaled $14,954
and $224,443, respectively. The gross realized losses on such sales totaled
$3,861 during 1995, and there were no realized losses during 1994.
F-16
<PAGE> 169
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Accounts Receivable
The Company sells crude oil and natural gas to various customers. In
addition, the Company participates with other parties in the operation of crude
oil and natural gas wells. Substantially all of the Company's accounts
receivable are due from either purchasers of crude oil and natural gas or
participants in crude oil and natural gas wells for which the Company serves as
the operator. Generally, operators of crude oil and natural gas properties have
the right to offset future revenues against unpaid charges related to operated
wells. Crude oil and natural gas sales are generally unsecured.
Natural Gas Production Imbalances
The Company accounts for natural gas production imbalances using the sales
method, whereby the Company recognizes revenue on all natural gas sold to its
customers notwithstanding the fact that its ownership may be less than 100% of
the natural gas sold.
Crude Oil and Natural Gas Properties
The Company utilizes the full cost method of accounting for its crude oil
and natural gas properties. Under the full cost method, all productive and
nonproductive costs incurred in connection with the acquisition, exploration,
and development of crude oil and natural gas reserves are capitalized and
amortized on the units-of-production method based upon total proved reserves.
The costs of unproven properties are excluded from the amortization calculation
until the individual properties are evaluated and a determination is made as to
whether reserves exist. Capitalized costs are limited to the aggregate of the
present value of future net reserves plus the lower of cost or fair market value
of unproved properties. Conveyances of properties, including gains or losses on
abandonments of properties, are treated as adjustments to the cost of crude oil
and natural gas properties, with no gain or loss recognized. The Company does
not believe that future costs related to dismantlement, site restoration, and
abandonment costs, net of estimated salvage values, will have a significant
effect on its results of operations or financial position because the salvage
value of equipment and related facilities should approximate or exceed any
future expenditures for dismantlement, restoration, or abandonment. The Company
has not incurred any net expenditures for costs of this nature during the last
two years.
The Company has capitalized internal costs of $117,379, $158,961 and
$141,516 for the years ended December 31, 1993, 1994 and 1995, respectively, and
$27,150 and $33,400 for the three months ended March 31, 1995 and 1996,
respectively. Such capitalized costs include salaries and related benefits of
individuals directly involved in the Company's acquisition, exploration and
development activities based on percentage of their time devoted to such
activities.
Furniture, Fixtures, and Equipment
Furniture, fixtures, and equipment are recorded at cost and are depreciated
over their estimated useful lives using the straight-line method.
Maintenance and repairs are charged against income when incurred; and
renewals and betterments, which extend the useful lives of furniture, fixtures,
and equipment, are capitalized.
Overhead Reimbursement Fees
Fees from overhead charges billed to working interest owners of $427,165,
$157,845 and $136,943, for the years ended December 31, 1993, 1994 and 1995,
respectively, and $32,340 and $53,214 for the three months ended March 31, 1995
and 1996, respectively, have been classified as a reduction of general and
administrative expenses in the accompanying statements of operations.
F-17
<PAGE> 170
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company uses the liability method in accounting for income taxes. Under
the liability method, deferred tax assets and liabilities are determined based
on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
Earnings (Loss) Per Share
Primary earnings (loss) per common and common equivalent share data is
computed by dividing net income (loss), adjusted for preferred stock dividend
requirements of $17,500, $264,705 and $735,000 in 1993, 1994, and 1995,
respectively, and $131,250, and $236,250 for the three months ended March 31,
1995 and 1996, respectively, 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 that they are dilutive. Fully diluted
earnings (loss) per share computations also assume the conversion of the
Company's preferred stock (Note 5) if such conversion has a dilutive effect.
For the years ended December 31, 1993, 1994 and 1995, and the three months
ended March 31, 1995 and 1996, 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
during each year.
Natural Gas Hedging Activities
In December 1995, the Company began hedging natural gas prices through the
use of commodity price swap agreements, in an effort to reduce the effects of
the volatility of the price of natural gas on the Company's operations. These
agreements involve the receipt of fixed-price amounts in exchange for variable
payments based on NYMEX prices and specific volumes. In connection with the
commodity price swap agreements, the Company may also enter into basis swap
agreements to reduce the effects of unusual fluctuations between prices actually
received at the well head and NYMEX prices. Through the use of commodity price
and basis swap agreements the Company can fix the price to be received for
specified volumes of production to the commodity swap price less the basis swap
price. The differential to be paid or received under the swap agreement is
accrued in the month of the related production and recognized as an adjustment
to oil and gas sales. The Company does not hold or issue financial instruments
for trading purposes.
New Accounting Pronouncement
In October 1995, the Financial Accounting Standards Board ("FASB") issued
its statement No. 123, "Accounting for Stock Based Compensation" ("FAS 123")
which establishes an alternative method of accounting for stock based
compensation to the method set forth in Accounting Principles Board Opinion No.
25 ("APB 25"). FAS 123 encourages, but does not require, adoption of a fair
value based method of accounting for stock options and similar equity
instruments granted to employees. The Company will continue to account for such
grants under the provisions of APB 25 and will adopt the disclosure provisions
of FAS 123 in the first quarter of 1996. Accordingly, adoption of FAS 123 will
not affect the Company's financial statements for the year ended December 31,
1995.
Interim Financial Information
In management's opinion, the accompanying interim financial statements
contain all adjustments (consisting solely of normal recurring accruals)
necessary to present fairly the financial position of the Company as of March
31, 1996, the related results of operations for the three month periods ended
March 31,
F-18
<PAGE> 171
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1996 and 1995 and cash flows for the three month periods ended March 31, 1996
and 1995. The results of operations for the three months ended March 31, 1996
are not necessarily indicative of the results expected for the full year.
Reclassifications
Certain previously reported amounts have been reclassified to conform with
the 1995 presentation.
2. ACQUISITIONS
Effective January 1, 1993, the Company acquired all of the limited
partnership interests of OilSearch Leasing Partners, Ltd., and OilSearch
Acquisition Group One, Ltd., and the crude oil and natural gas assets related to
the limited partnership interests. The consideration paid by the Company to the
limited partners consisted of 700,000 shares of Class A Common Stock ("Common
Stock"). The impact of this acquisition was not material to the Company's
results of operations or financial position.
In December 1993, the Company completed the acquisition of a 63.8% working
interest in the Goldsmith Adobe Unit ("GAU"), located in the Permian Basin of
West Texas, from Bligh Petroleum, Inc. ("Bligh"). This acquisition added
approximately 3.0 million barrels of crude oil and 2.5 billion cubic feet of
natural gas to the Company's proved reserves.
The consideration paid by the Company to Bligh for the acquisition
consisted of $2,775,000 in cash and 900,000 shares of Common Stock. The cash
portion of the acquisition was funded primarily by $2,150,000 increase in
borrowings under the Company's former credit agreement with Bank One. The
Company also used the proceeds from the issuance of 10% subordinated notes, with
a principal amount of $230,000, and 792,000 shares of Common Stock, of which
200,000 restricted shares of Common Stock were issued in 1994, to fund the
acquisition.
During 1994, the Company acquired an additional 17.0% working interest in
the GAU. Such interests were acquired for $584,095 in cash. The Company is the
operator of the GAU and holds a 91.8% working interest in the GAU.
In April 1995, the Company purchased 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") for $900,000 in cash and 352,500
shares of Common Stock. The cash portion of the acquisition 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"). The
consideration paid by the Company for Oak Hill consisted of $7,200,000 in cash,
612,301 shares of Common Stock and warrants to purchase 200,000 shares of Common
Stock at a price per share of $2.00. The cash portion of the acquisition was
funded primarily by borrowings under the Company's current credit facility with
Bank One. See Note 3.
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 (the "Enron Properties") for $2,119,295 in cash. This acquisition
was funded by borrowings under the credit facility with Bank One and available
cash.
F-19
<PAGE> 172
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following pro forma data presents the results of the Company for the
years ended December 31, 1994 and 1995, as if the acquisition of Mustang Island,
Oak Hill and the Enron Properties had occurred on January 1, 1994. The pro forma
results of operations are presented for comparative purposes only and are not
necessarily indicative of the results which would have been obtained had the
acquisitions been consummated as presented. The following data reflect pro forma
adjustments for the oil and gas revenues, production costs, and depreciation and
depletion related to the properties and additional interest on borrowed funds.
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED DECEMBER 31
-------------------------
1994 1995
---------- ----------
(UNAUDITED)
<S> <C> <C>
Revenues.................................................... $5,051,222 $9,253,803
========== ==========
Loss before extraordinary item.............................. $ (573,522) $ (73)
========== ==========
Loss before extraordinary item per common share............. $ (.06) $ (.06)
========== ==========
</TABLE>
In January 1996, the Company completed the acquisition of oil and gas
properties in offshore Nueces County, Texas, adjacent to the Company's Mustang
Island property, from C/A Limited, Chartex Petroleum Company and Petrotex
Engineering Company. The acquisition includes interests in five wells, a
pipeline and separation facility related to Mustang Island. The consideration
for this acquisition consisted of 140,857 shares of the Company's Common Stock
and $675,000 in cash.
In February 1996, the Company completed the acquisition of two oil and gas
wells on one offshore block, interests in five other offshore blocks, and a
related production platform and equipment in offshore Nueces County, Texas,
adjacent to the Company's Mustang Island property, from UMC Petroleum
Corporation (the "UMC Acquisition). The Company paid UMC Petroleum Corporation
$1,500,000 in cash.
In April 1996, the Company won exploration rights on 16 offshore tracts
(covering 7,765 acres) in the Mustang Island area in offshore Nueces County,
Texas through successful bids with the State of Texas. The Company paid
$1,437,302 in cash for these rights.
3. NOTE PAYABLE AND LONG-TERM DEBT
Note payable and long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1994 1995
---------- -----------
<S> <C> <C>
Bank One credit facility................................... $ -- $19,975,000
Gas Fund credit facility................................... 6,000,000 --
---------- -----------
6,000,000 19,975,000
Less current maturities:
Advance Note............................................. -- 3,000,000
Current portion of Revolving Note........................ -- 3,500,000
---------- -----------
$6,000,000 $13,475,000
========== ===========
</TABLE>
In June 1995, the Company consummated a $33,000,000 reducing revolving line
of credit facility (the "Facility") with Bank One. The initial advance under the
Facility of $12,500,000 was used to pay off the Company's credit facility with
Texas Gas Fund I, to purchase Oak Hill and the Enron Properties (Note 2), and
for closing fees. Subsequent advances have been used for development of the GAU,
other acquisitions of oil and gas properties (Note 2), and exploration
activities.
F-20
<PAGE> 173
The Facility consists of a Revolving Note of up to $30,000,000, subject to
a borrowing base, and an Advance Note of up to $3,000,000 (primarily for the
development of GAU). Interest on the Revolving Note is at a rate of prime plus
1% (subject to reduction in certain circumstances) or LIBOR plus 3.75% (subject
to reduction in certain circumstances), at the Company's option. Interest on the
Advance Note is at a rate of prime plus 4%. Payments of interest and principal
are made monthly. The Facility is secured by all of the Company's principal oil
and gas properties and related equipment, oil and gas inventory, and related
receivables. Prepayments are allowed at any time. At December 31, 1995, the
Company had $16,975,000 outstanding under the Revolving Note and $3,000,000
outstanding under the Advance Note.
The Revolving Note has a maturity date of June 30, 1999, and the Advance
Note has a maturity date of June 30, 1996. The Company's ability to borrow under
the Revolving Note is dependent upon the reserve value of its oil and gas
properties. At December 31, 1995, the borrowing base was $17.0 million. The
borrowing base is subject to adjustment quarterly based on the reserve value.
Bank One has substantial discretion in determining the reserve value and
borrowing base. In addition, the borrowing base is reduced monthly by an amount
redetermined semiannually by Bank One. The amount of such automatic reduction
was $175,000 per month for the period July 31, 1995 through January 31, 1996.
Effective February 1, 1996 the amount of the monthly reduction was adjusted to
$256,000. If the amount outstanding under the Revolving Note exceeds the
borrowing base, the Company is required to repay such excess. In January 1996,
the Company repaid $3.5 million of borrowings outstanding under the Revolving
Note.
In April 1996, a new Advance Note of up to $3,000,000 was issued to the
Company with a maturity date of March 31, 1997 and the borrowing base was
increased to $21,500,000. Effective May 1, 1996, the amount of the monthly
reduction of the borrowing base was adjusted to $315,000.
The Facility contains restrictive and affirmative covenants, and
maintenance of required financial ratios. In addition, 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, as
defined, has occurred and is continuing or would occur as a result of such
payment. At December 31, 1995, the Company was not in violation of any covenants
of the Facility.
Borrowings of $6,000,000 were outstanding at December 31, 1994, under the
credit facility with Texas Gas Fund I. A portion of the proceeds from the Texas
Gas Fund I facility were used to repay the Company's previous loan with Bank One
which resulted in an extraordinary charge of $121,917, or $.01 per common share,
in 1994. Borrowings under the Texas Gas Fund I facility were repaid using
proceeds from the Facility, resulting in an extraordinary charge of $431,762 or
$.04 per common share, in 1995.
Effective June 9, 1994, the full principal amount and accrued interest on
the 8.5% subordinated notes payable, which were issued in connection with the
acquisition of certain oil and gas assets in 1992, were converted into 125,054
shares of Common Stock.
In connection with the acquisition of the GAU working interest in December
1993, the Company borrowed $230,000 from three directors in the form of 10%
subordinated notes. During 1994, $181,250 principal amount of the subordinated
notes were converted into 290,000 shares of Common Stock and the remaining
$48,750 principal amount was retired for cash.
The carrying value of the Company's note payable and long-term debt
approximates their fair values.
F-21
<PAGE> 174
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. LEASE
The Company leases office space under an operating lease. Rental expense
charged to operations was approximately $70,851, $80,132 and $100,493 during the
years ended December 31, 1993, 1994 and 1995, respectively. Minimum lease
payments under future operating lease commitments at December 31, 1995, are as
follows:
<TABLE>
<S> <C>
1996........................................................ $ 147,792
1997........................................................ 156,551
1998........................................................ 53,491
--------
$357,834
========
</TABLE>
5. STOCKHOLDERS' EQUITY
Capital Stock
The authorized capital stock of the Company consists of 50,000,000 shares
of Class A common stock, par value $.01 per share ("Common Stock"); 200,000
shares of Class B common stock ("Class B"), par value $.01 per share; and
1,000,000 shares of convertible preferred stock par value $1.00 per share. The
management of the Company plans to recommend to the Company's stockholders, at
the next Annual Meeting of Stockholders, that the Company's Certificate of
Incorporation be amended to eliminate Class B. No shares of Class B were
outstanding at December 31, 1995.
Preferred Stock
In connection with the acquisition of certain oil and gas assets in 1992,
the Company's Board of Directors authorized the issuance of up to 5,000 shares
of redeemable convertible preferred stock designated as 5% Redeemable
Convertible Preferred Stock, Series A, par value, $1.00 per share ("Series A
Preferred Stock"). The Series A Preferred Stock was converted into 425,000
shares of Common Stock during 1994.
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").
Fifty thousand shares of Series B were sold by the Company at $100.00 per share.
The Series B is convertible into shares of Common Stock at a conversion price of
$1.625 per share. 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 holders of Series B 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 holders
of Series B have the right to appoint one-third of the members of the Company's
Board of Directors. The Series B would be redeemable by the Company, until June
3, 1997, 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. As a result, no shares of Series B can be
redeemed before June 14, 1997. 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, 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 authorize or issue additional shares of Series B or to
issue preferred stock equal to or senior to the Series B 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
F-22
<PAGE> 175
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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").
Forty thousand shares of Series C were sold by the Company at $100.00 per share.
The Series C is convertible into shares of Common Stock at a conversion price of
$2.00 per share.
The Series C has a liquidation and dividend preference over the 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
holders of Series C 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
holders of Series C (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. The Series C is redeemable by the Company between June 14, 1997 and
June 14, 1998, at $110.00 per share and, thereafter, at $100.00 per share, plus
accrued and unpaid dividends. No shares of Series B may be redeemed until all
the shares of Series C have been redeemed. The holders of the 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, 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 authorize or issue additional shares of Series C or 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.
Common Stock
Holders of Common Stock are entitled to one vote for each share held of
record on all matters voted on by stockholders. The shares of the Common Stock
do not have cumulative voting rights, which means that the holders of more than
50% of the shares of the Common Stock voting for the election of the directors
can elect all of the directors to be elected by holders of the Common Stock, in
which event the holders of the remaining shares of Common Stock will not be able
to elect any director. Upon any liquidation, dissolution, or winding-up of the
affairs of the Company, holders of the Common Stock would be entitled to
receive, pro rata, all of the assets of the Company available for distribution
to stockholders, after payment of any liquidation preference of any Preferred
Stock that may be issued and outstanding at the time. Holders of the Common
Stock have no subscription, redemption, sinking fund, or preemptive rights.
The Class B was entitled to special conversion rights. 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 which
were outstanding at December 31, 1994, were converted into 1,296,440 shares of
Common Stock, in accordance with the terms of the Class B. Under the terms of
the Class B, such shares cannot be reissued.
In connection with the repayment of borrowings under the Texas Gas Fund I
credit facility, the Company issued 100,000 shares of Common Stock to reduce a
net profits interest in the GAU held by Texas Gas Fund I.
F-23
<PAGE> 176
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Common Stock issuable under asset acquisition agreement at December 31,
1993 and 1994, represents additional consideration related to the acquisition of
certain oil and gas assets in 1992. In January 1995, 300,000 shares of Common
Stock were issued in satisfaction of this obligation.
Warrants
In June 1994, in connection with the sale of the Series B Preferred Stock,
the Company issued warrants to purchase 307,692 shares of Common Stock at a
price of $1.625 per share. During 1995, 255,492 of these warrants were
exercised. These warrants expire June 3, 1997.
In 1995, the Company granted warrants to purchase 300,000 shares of Common
Stock at a price of $1.625 per share, pursuant to a consulting agreement. The
first 100,000 warrants were exercisable immediately and expire July 31, 1997,
the next 100,000 became exercisable on July 31, 1995 and expire July 31, 1998,
and the remaining 100,000 become exercisable on July 31, 1996 and expire July
31, 1999. The estimated fair value of the warrants was deferred at the date of
grant and is being charged to general and administrative expenses over the
vesting period.
In June 1995, in connection with the acquisition of Oak Hill (Note 2), the
Company issued warrants to purchase 200,000 shares of Common Stock at a price of
$2.00 per share. These warrants will become exercisable on June 28, 1996 and
expire June 30, 1998.
The following table summarizes warrants outstanding at December 31, 1995:
<TABLE>
<CAPTION>
NUMBER OF SHARES EXPIRATION WARRANTS EXERCISE
UNDER WARRANT DATE EXERCISABLE PRICE
- ---------------- ------------- ----------- --------
<S> <C> <C> <C>
52,200............................................ June 3, 1997 52,200 $1.625
100,000............................................ July 31, 1997 100,000 $1.625
100,000............................................ July 31, 1998 100,000 $1.625
100,000............................................ July 31, 1999 -- $1.625
200,000............................................ June 30, 1998 -- $2.00
------- -------
552,200 252,200
======= =======
</TABLE>
Stock Options
During 1992, the Company's Board of Directors and stockholders approved the
Company's 1992 Stock Option Plan (the "Plan"). Awards may be granted to key
employees or nonemployee directors of the Company. Awards may consist of options
to purchase shares of Common Stock or stock appreciation rights ("SARs") or a
combination thereof. The aggregate number of shares that the Company may issue
under the Plan will not, at the time of the grant, exceed an amount equal to 10%
of the number of then-outstanding shares of Common Stock. Furthermore, no more
than 30% of the shares of Common Stock for which awards may be granted under the
Plan may be granted to the Company's directors, and no one director may be
granted awards covering more than 75,000 shares of Common Stock. No more than
50% of the shares of Common Stock for which awards may be granted under the Plan
may be granted to officers of the Company who are not directors, and no one
officer who is not a director may be granted awards covering more than 125,000
shares. The exercise price of an option or SAR may not be less than the fair
market value of Common Stock on the date of grant. All options granted under the
Plan expire no later than the tenth anniversary of the date of grant. At
December 31, 1995, 15,000 options had been granted pursuant to the Plan. At
present, the Company does not plan to issue further options under the Plan.
In addition, during 1993, 1994 and 1995, the Company's Board of Directors
issued options to purchase 272,500, 40,000 and 765,000 shares of Common Stock,
respectively, to certain officers and directors. These options were issued
outside of the Plan.
F-24
<PAGE> 177
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Option transactions are summarized below:
<TABLE>
<CAPTION>
NUMBER OF OPTION
SHARES PRICE RANGE
--------- -------------
<S> <C> <C>
Outstanding (90,000 options exercisable) at December 31,
1992....................................................... 105,000 $ .25 -$ .50
Granted...................................................... 272,500 $ .625-$1.06
Exercised.................................................... (80,000) $ .25 -$1.06
-------
Outstanding (297,500 options exercisable) at December 31,
1993....................................................... 297,500 $ .50 -$1.06
Granted...................................................... 40,000 $1.625
Canceled..................................................... (35,000) $ .625-$1.06
Exercised.................................................... (62,500) $ .50 -$ .625
-------
Outstanding (200,000 options exercisable) at December 31,
1994....................................................... 240,000 $ .625-$1.625
Granted...................................................... 765,000 $1.625-$2.875
Exercised.................................................... (72,500) $ .625-$1.625
-------
Outstanding (347,500 options exercisable) at December 31,
1995....................................................... 932,500 $ .625-$2.875
=======
</TABLE>
6. INCOME TAXES
The reconciliation of income taxes computed at the U.S. federal statutory
tax rates to the benefit for income taxes on the income (loss) before
extraordinary item is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1993 1994 1995
--------- --------- --------
<S> <C> <C> <C>
Income tax (benefit) at statutory rate........... $(100,380) $(166,385) $ 69,970
Utilization of net operating loss carryforward... -- -- (69,970)
Benefit of net operating loss not recognized..... 100,380 166,385 --
--------- --------- --------
$ -- $ -- $ --
========= ========= ========
</TABLE>
The computation of the net deferred tax (liability) follows:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1994 1995
--------- ---------
<S> <C> <C>
Deferred tax liabilities:
Property and equipment..................................... $(357,330) $(198,790)
Other...................................................... (14,677) (8,378)
Deferred tax assets:
Net operating loss carryforward............................ 915,268 823,319
Other...................................................... 6,499 --
--------- ---------
549,760 616,151
Less valuation allowance..................................... (549,760) (616,151)
--------- ---------
$ -- $ --
========= =========
</TABLE>
At December 31, 1995, the Company had net operating loss carryforwards
available for federal income tax purposes of approximately $2,424,000, which
expire beginning in the year 2003. As a result of an asset acquisition in April
1992, utilization of $1,447,000 of the net operating loss carryforward for
income tax purposes is restricted to approximately $160,000 per year because of
a change in ownership, as defined by the Tax Reform Act of 1986.
F-25
<PAGE> 178
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. GAS HEDGING ACTIVITIES AND COMMITMENTS
While the use of hedging arrangements limits the downside risk of adverse
price movements, it may also limit future gains from favorable movements. All
hedging is accomplished pursuant to swap agreements based upon standard forms.
The Company addresses market risk by selecting instruments whose value
fluctuations correlate strongly with the underlying commodity being hedged.
Credit risk related to hedging activities is managed by requiring minimum credit
standards for counterparties, periodic settlements, and mark to market
valuations. The Company has not been required to provide collateral relating to
its hedging activities.
In December 1995, the Company had entered into various swap agreements to
fix the selling prices for natural gas at a weighted average NYMEX price of
$2.805 per Mcf for 225,000 Mcf of natural gas to be produced during 1996. The
Company closed the positions prior to December 31, 1995, resulting in a deferred
gain of approximately $70,875 which will be recognized in 1996.
Subsequent to December 31, 1995 and as of March 25, 1996, the Company has
entered into additional swap agreements to fix selling prices for natural gas at
a weighted average NYMEX price of $2.19 per Mcf for 1,300,000 Mcf of natural gas
to be produced during 1996. In addition, the Company entered into a basis swap
agreement with a basis differential of $.205 covering 900,000 Mcf of natural gas
to be produced during 1996.
8. CRUDE OIL AND NATURAL GAS PRODUCING ACTIVITIES
Capitalized costs relating to crude oil and natural gas producing
activities and related accumulated depreciation, depletion, and amortization are
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Proved crude oil and natural gas properties... $12,015,897 $15,284,453 $37,493,394
Unproved crude oil and natural gas
properties.................................. -- -- 707,913
Accumulated depreciation, depletion, and
amortization................................ (1,400,618) (2,320,378) (5,366,293)
----------- ----------- -----------
$10,615,279 $12,964,075 $32,835,014
=========== =========== ===========
</TABLE>
The unproven properties are excluded from the amortization base and consist
primarily of acreage, acquisition costs, and related geological and geophysical
costs. These costs are expected to be evaluated during the Company's 1996
drilling program.
Costs incurred in crude oil and natural gas producing activities for the
years ended December 31, 1993, 1994 and 1995, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------
1993 1994 1995
---------- ---------- -----------
<S> <C> <C> <C>
Acquisitions of properties:
Proved........................................ $4,283,855 $1,153,548 $13,657,383
Unproved...................................... $ -- $ 134,512 $ 707,913
Exploration costs............................... $ -- $ 130,182 $ 73,034
Development costs............................... $ 371,550 $2,006,183 $ 8,595,363
Amortization rate per equivalent barrel......... $ 4.08 $ 4.20 $ 5.97
</TABLE>
Depletion, depreciation and amortization increased $351,964 for the fourth
quarter of 1995 due to downward revisions in estimated proved reserves at
December 31, 1995.
F-26
<PAGE> 179
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Revenues from individual customers exceed 10% of total crude oil and
natural gas sales are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1993 1994 1995
-------- ---------- ----------
<S> <C> <C> <C>
Plains Marketing and Transportation............... $542,502 $1,614,711 $4,618,136
Energy Source, Inc................................ -- -- $ 870,285
GPM Natural Gas Corporation....................... $296,894 $ 553,613 $ --
</TABLE>
The Company believes that the loss of these customers would not have a
significant impact on the Company's results of operations or financial
condition.
9. SUPPLEMENTARY CRUDE OIL AND NATURAL GAS RESERVE INFORMATION (UNAUDITED)
The Company has interests in crude oil and natural gas properties that are
principally located in Texas, Oklahoma, New Mexico, Wyoming and offshore Texas.
The Company does not own or lease any crude oil and natural gas properties
outside the United States.
The Company retains independent engineering firms to provide annual
year-end estimates of the Company's future net recoverable crude oil, natural
gas, and natural gas liquids reserves. Estimated proved net recoverable reserves
as shown below include only those quantities that can be expected to be
commercially recoverable at prices and costs in effect at the balance sheet
dates under existing regulatory practices and with conventional equipment and
operating methods.
Proved developed reserves represent only those reserves expected to be
recovered through existing wells. Proved undeveloped reserves include those
reserves expected to be recovered from new wells on undrilled acreage or from
existing wells on which a relatively major expenditure is required for
recompletion.
F-27
<PAGE> 180
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Net quantities of proved developed and undeveloped reserves of natural gas
and crude oil, including condensate and natural gas liquids, are summarized as
follows:
<TABLE>
<CAPTION>
NATURAL GAS
CRUDE OIL (THOUSAND
(BARRELS) CUBIC FEET)
----------- -----------
<S> <C> <C>
December 31, 1992......................................... 955,519 7,784,592
Purchase of reserves in place............................. 2,861,349 3,310,747
Extensions and discoveries................................ 10,808 997,422
Revisions of previous estimates........................... (57,773) (562,127)
Production................................................ (48,819) (483,241)
---------- ----------
December 31, 1993......................................... 3,721,084 11,047,393
Purchase of reserves in place............................. 1,035,137 1,858,271
Extensions and discoveries................................ 906,526 1,996,771
Revisions of previous estimates........................... (387,840) (879,838)
Production................................................ (115,642) (620,843)
Sales of reserves in place................................ (3,524) (21,280)
---------- ----------
December 31, 1994......................................... 5,155,741 13,380,474
Purchase of reserves in place............................. 190,063 25,785,458
Revisions of previous estimates........................... (1,141,288) (6,453,623)
Production................................................ (283,440) (1,752,990)
Sales of reserves in place................................ -- (90,207)
---------- ----------
December 31, 1995......................................... 3,921,076 30,869,112
========== ==========
Proved developed reserves:
December 31, 1992....................................... 671,619 7,258,287
December 31, 1993....................................... 1,641,800 8,781,785
December 31, 1994....................................... 1,532,470 9,205,784
December 31, 1995....................................... 1,632,404 13,304,031
</TABLE>
The Company's principal properties are the GAU and Oak Hill, both of which
are located onshore in Texas, and Mustang Island located in offshore Nueces
County, Texas. As of December 31, 1993, 1994 and 1995, the Company's net
interest in the proved reserves of the GAU was approximately 3,613,000 BOE,
5,422,000 BOE and 4,167,000 BOE, respectively. As of December 31, 1995, the
Company's net interests in the proved reserves of Oak Hill and Mustang Island
were 3,342,632 BOE and 721,313 BOE, respectively.
The following is a summary of a standardized measure of discounted net cash
flows related to the Company's proved crude oil and natural gas reserves. For
these calculations, estimated future cash flows from estimated future production
of proved reserves were computed using crude oil and natural gas prices as of
the end of each period presented. Future development and production costs
attributable to the proved reserves were estimated assuming that existing
conditions would continue over the economic lives of the individual leases and
costs were not escalated for the future. Estimated future income tax expenses
were calculated by applying future statutory tax rates (based on the current tax
law adjusted for permanent differences and tax credits) to the estimated future
pretax net cash flows related to proved crude oil and natural gas reserves, less
the tax basis of the properties involved.
The Company cautions against using this data to determine the fair value of
its crude oil and natural gas properties. To obtain the best estimate of fair
value of the crude oil and natural gas properties, forecasts of future economic
conditions, varying discount rates, and consideration of other than proved
reserves would have to be incorporated into the calculation. In addition, there
are significant uncertainties inherent in estimating quantities of proved
reserves and in projecting rates of production that impair the usefulness of the
data.
F-28
<PAGE> 181
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The standardized measure of discounted future net cash flows relating to
proved crude oil and natural gas reserves are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------
1994 1995
------------ ------------
<S> <C> <C>
Future cash inflows...................................... $107,208,656 $132,218,400
Future production and development costs.................. (55,049,902) (71,109,500)
Future income tax expenses............................... (12,687,965) (7,123,405)
------------ ------------
Future net cash flows.................................... 39,470,789 53,985,495
10% annual discount for estimated timing of cash flows... (18,631,286) (21,858,394)
------------ ------------
Standardized measure of discounted future net cash
flows.................................................. $ 20,839,503 $ 32,127,101
============ ============
</TABLE>
The following are the principal sources of change in the standardized
measure of discounted future net cash flows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
1993 1994 1995
----------- ----------- ------------
<S> <C> <C> <C>
Sales and transfers of crude oil and natural
gas produced, net of production costs....... $(1,117,711) $(1,775,145) $ (5,710,325)
Net changes in prices and production costs.... (1,662,230) 14,785,630 14,654,096
Development costs incurred during the period
and changes in estimated future development
costs....................................... -- (119,443) (11,886,400)
Purchases of reserves in place................ 6,570,174 3,414,926 15,455,400
Sales of reserves in place.................... -- (30,585) (97,210)
Extensions and discoveries, less related
costs....................................... 1,447,183 4,605,206 --
Revisions of previous quantity estimates...... (390,769) (1,985,978) (8,871,208)
Accretion of discount......................... 1,437,375 1,439,950 2,744,504
Net change in income taxes.................... (1,079,408) (6,952,217) 5,564,560
Changes in production rates (timing) and
other....................................... (2,238,430) (4,221,647) (565,819)
----------- ----------- ------------
Net change.................................... $ 2,966,184 $ 9,160,697 $ 11,287,598
=========== =========== ============
</TABLE>
During recent years, there have been significant fluctuations in the prices
paid for crude oil in the world markets. This situation has had a destabilizing
effect on crude oil posted prices in the United States, including the posted
prices paid by purchasers of the Company's crude oil. The net weighted average
prices of crude oil and natural gas at December 31, 1993, 1994 and 1995 used in
the above table were $13.03, $16.59 and $18.71 per barrel of crude oil,
respectively, and $1.86, $1.62 and $1.91 per thousand cubic feet of natural gas,
respectively.
10. LEGAL PROCEEDINGS AND CLAIMS
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 tortuous and contractual claims. The plaintiffs
seek unspecified damages which include remediation and various tortuous and
contractual damages.
The Company believes that it is operating in compliance with applicable
environmental laws and regulations and believes, based on the advice of counsel,
that the ultimate resolution of the lawsuit will not have a material effect on
the Company's financial condition or results of operations.
F-29
<PAGE> 182
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. PROPOSED MERGER
On December 29, 1995, the Company and Alexander Energy Corporation
("Alexander") signed a letter of intent providing for the merger of Alexander
and the Company. The letter of intent was subject to, among other conditions,
the execution of a definitive merger agreement. On March 25, 1996, the Company
and Alexander modified the terms of the letter of intent to reduce the original
exchange ratio from 1.8 to 1.7 shares of the Company's Common Stock for each
share of Alexander common stock.
On June 6, 1996, the Company and Alexander executed a definitive Merger
Agreement. Consummation of the Merger is subject to certain conditions,
including the approval by the shareholders of the Company and Alexander.
F-30
<PAGE> 183
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Alexander Energy Corporation
We have audited the accompanying consolidated balance sheets of Alexander
Energy Corporation as of December 31, 1994 and 1995 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 1994 and 1995 financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Alexander Energy Corporation at December 31, 1994 and 1995 and the consolidated
results of its operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles.
We previously audited and reported on the consolidated statements of
operations, stockholders' equity, and cash flows of Alexander Energy Corporation
for the year ended December 31, 1993, prior to the 1994 restatement for the
pooling of interests as described in Note 2. The contribution of Alexander
Energy Corporation to total revenues and net income represented 65% and 50% of
the respective restated totals. Financial statements of the other pooled company
included in the 1993 restated consolidated statements were audited and reported
on separately by other auditors. We also have audited, as to combination only,
the consolidated statements of operations, stockholders' equity and cash flows
for the year ended December 31, 1993 after restatement for the 1994 pooling of
interests; in our opinion, such 1993 consolidated financial statements have been
properly combined on the basis described in Note 2 to the consolidated financial
statements.
As discussed in Note 1 to the consolidated financial statements, in 1993
the Company changed its method of accounting for income taxes.
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
March 30, 1996, except Notes 4 and 13
for which the date is May 10, 1996
F-31
<PAGE> 184
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
American Natural Energy Corporation
We have audited the consolidated balance sheet of American Natural Energy
Corporation and Subsidiaries as of December 31, 1993 (not included herein) and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the year ended December 31, 1993. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
American Natural Energy Corporation and Subsidiaries as of December 31, 1993 and
the consolidated results of their operations and their cash flows for the year
ended December 31, 1993, in conformity with generally accepted accounting
principles.
As discussed in Notes 2 and 4 of the Company's 1993 financial statements,
the Company changed its method of accounting for its oil and gas properties and
income taxes.
COOPERS & LYBRAND
Tulsa, Oklahoma
February 22, 1994
F-32
<PAGE> 185
ALEXANDER ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
ASSETS (Note 4)
<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................... $ 792,752 $ 1,451,983
Accounts receivable:
Joint interest operations and other:
Limited partnerships and other related parties (Note 3)............. 271,617 299,374
Others.............................................................. 1,877,781 602,265
Oil and gas sales..................................................... 3,252,954 3,291,252
Supply inventories, at lower of cost or market.......................... 306,653 370,057
Prepaid expenses and other.............................................. 145,102 158,032
------------ ------------
Total current assets............................................. 6,646,859 6,172,963
Properties and equipment, at cost (Note 11):
Oil and gas properties, based on full cost accounting:
Properties subject to amortization.................................... 126,490,676 130,833,467
Unproved properties not being amortized............................... 991,652 734,757
------------ ------------
127,482,328 131,568,224
Other properties and equipment.......................................... 2,392,986 2,450,669
------------ ------------
129,875,314 134,018,893
Less accumulated amortization, depreciation and impairment............ 38,330,143 49,863,075
------------ ------------
Net properties and equipment..................................... 91,545,171 84,155,818
Notes receivable from related parties, gas balancing receivables, deferred
charges and other assets, at cost (Note 3).............................. 1,622,105 1,537,917
------------ ------------
$ 99,814,135 $ 91,866,698
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade................................................................. $ 6,589,976 $ 2,723,334
Limited partnerships and other related parties (Note 3)............... 181,492 29,316
Gas balancing, deferred revenue and oil and gas proceeds:
Limited partnerships (Note 3)......................................... 765,150 592,094
Others................................................................ 3,675,130 5,160,770
Long-term debt due within one year (Note 4):
Stockholder........................................................... 1,000,000 1,000,000
Others................................................................ 16,253 3,162,475
------------ ------------
Total current liabilities........................................ 12,228,001 12,667,989
Long-term debt due after one year (Note 4):
Stockholder............................................................. 3,000,000 2,000,000
Others.................................................................. 42,588,280 41,426,018
Non-recourse debt (Note 5)................................................ 925,452 924,967
Gas balancing and other noncurrent liabilities............................ 4,047,859 3,163,282
Deferred income taxes (Note 6)............................................ 2,800,000 1,056,000
Commitments and contingencies (Note 7)
Stockholders' equity (Notes 2, 4 and 8):
Preferred stock -- $.01 par value; 2,000,000 shares authorized; none
issued and outstanding................................................ -- --
Common stock -- $.03 par value; 20,000,000 and 50,000,000 shares
authorized in 1994 and 1995, respectively; issued -- 12,271,563 in
1994 and 12,451,605
in 1995............................................................... 368,147 373,548
Paid-in capital......................................................... 39,405,383 40,262,808
Accumulated deficit..................................................... (5,548,987) (10,007,914)
------------ ------------
Total stockholders' equity....................................... 34,224,543 30,628,442
------------ ------------
$ 99,814,135 $ 91,866,698
============ ============
</TABLE>
See accompanying notes.
F-33
<PAGE> 186
ALEXANDER ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Oil and gas sales (Note 9)........................ $17,707,809 $17,389,814 $16,599,191
Well operator and management fees:
Related parties (Note 3)....................... 532,816 361,488 308,045
Others......................................... 2,135,315 2,253,853 2,334,257
Marketing fees, interest and other (Notes 3 and
10)............................................ 1,532,800 677,401 370,235
----------- ----------- -----------
Total revenues............................ 21,908,740 20,682,556 19,611,728
Costs and expenses:
Direct lifting costs (Note 3)..................... 4,129,383 4,959,323 5,030,648
Gross production and severance tax................ 1,170,109 1,175,680 1,076,841
Amortization and depreciation (Note 11)........... 5,762,107 7,246,329 9,252,410
Provision for impairment of oil and gas properties
(Note 11)...................................... -- -- 2,300,000
General and administrative (Note 3)............... 3,878,892 4,033,984 3,441,701
Interest expense:
Stockholder.................................... 713,852 550,211 447,172
Others......................................... 1,348,809 1,845,285 3,513,571
Nonrecurring expenses (Notes 2 and 10)............ -- 2,432,002 752,312
Litigation settlement (Note 10)................... -- 733,964 --
----------- ----------- -----------
Total costs and expenses.................. 17,003,152 22,976,778 25,814,655
----------- ----------- -----------
Income (loss) before provision (credit) for income
taxes, extraordinary items and cumulative effect
of change in accounting for income taxes.......... 4,905,588 (2,294,222) (6,202,927)
Provision (credit) for deferred income taxes (Note
6):
Deferred tax...................................... 1,131,000 -- (1,744,000)
Nonrecurring change in ownership.................. 1,200,000 -- --
----------- ----------- -----------
2,331,000 -- (1,744,000)
----------- ----------- -----------
Income (loss) before extraordinary items and
cumulative effect of change in accounting for
income taxes...................................... 2,574,588 (2,294,222) (4,458,927)
Extraordinary items (Note 12):
Gain on extinguishment of long-term obligation.... -- 1,051,760 --
Loss on early extinguishment of debt, net of
income tax benefit of $298,000................. (510,000) -- --
----------- ----------- -----------
Income (loss) before cumulative effect of change in
accounting for income taxes....................... 2,064,588 (1,242,462) (4,458,927)
Cumulative effect of change in accounting for income
taxes (Note 1).................................... 425,000 -- --
----------- ----------- -----------
Net income (loss)................................... $ 2,489,588 $(1,242,462) $(4,458,927)
=========== =========== ===========
Net income (loss) applicable to common stock........ $ 2,452,931 $(1,242,462) $(4,458,927)
=========== =========== ===========
Weighted average common and common equivalent shares
outstanding....................................... 10,148,552 12,168,172 12,344,767
=========== =========== ===========
Net income (loss) per common and common equivalent
share:
Income (loss) before extraordinary items and
cumulative effect of change in accounting for
income taxes................................... $ .25 $ (.19) $ (.36)
Extraordinary items............................... (.05) .09 --
Cumulative effect of change in accounting for
income taxes................................... .04 -- --
----------- ----------- -----------
Net income (loss)................................... $ .24 $ (.10) $ (.36)
=========== =========== ===========
</TABLE>
See accompanying notes.
F-34
<PAGE> 187
ALEXANDER ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
PREFERRED COMMON PAID-IN ACCUMULATED TREASURY
STOCK STOCK CAPITAL DEFICIT STOCK TOTAL
--------- -------- ----------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992...... $ 360,735 $198,456 $24,253,971 $ (6,709,457) $(460,116) $17,643,589
Common stock issued and
conversion of preferred
stock, net of issuance
costs........................ (1,000) 134,575 13,167,456 -- 460,116 13,761,147
Issuance of common stock for
royalty interest............. -- 6,755 187,843 -- -- 194,598
Retirement of Series B preferred
stock........................ (359,735) -- (40,265) -- -- (400,000)
Issuance of warrants............ -- -- 65,099 -- -- 65,099
Issuance of common stock in
connection with exercise of
warrants..................... -- 10,935 624,065 -- -- 635,000
Exercise of employee stock
options and issuance of stock
awards, net of unearned
compensation................. -- 744 48,157 -- -- 48,901
Net income...................... -- -- -- 2,489,588 -- 2,489,588
Dividends....................... -- -- -- (86,656) -- (86,656)
--------- -------- ----------- ------------ --------- -----------
Balance at December 31, 1993...... -- 351,465 38,306,326 (4,306,525) -- 34,351,266
Exercise of stock options and
issuance of stock awards, net
of unearned compensation..... -- 16,682 1,099,057 -- -- 1,115,739
Net loss.......................... -- -- -- (1,242,462) -- (1,242,462)
--------- -------- ----------- ------------ --------- -----------
Balance at December 31, 1994...... -- 368,147 39,405,383 (5,548,987) -- 34,224,543
Exercise of stock options and
vesting of stock awards, net
of unearned compensation..... -- 5,401 857,425 -- -- 862,826
Net loss.......................... -- -- -- (4,458,927) -- (4,458,927)
--------- -------- ----------- ------------ --------- -----------
Balance at December 31, 1995...... $ -- $373,548 $40,262,808 $(10,007,914) $ -- $30,628,442
========= ======== =========== ============ ========= ===========
</TABLE>
See accompanying notes.
F-35
<PAGE> 188
ALEXANDER ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1993 1994 1995
------------ ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................. $ 2,489,588 $ (1,242,462) $(4,458,927)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Extraordinary loss (gain) before tax and after cash payment.... 707,600 (1,131,100) --
Cumulative effect of change in accounting for income taxes..... (425,000) -- --
Amortization and depreciation.................................. 5,762,107 7,246,329 9,252,410
Provision for impairment of oil and gas properties............. -- -- 2,300,000
Amortization of deferred compensation for stock awards......... -- 68,615 405,744
Amortization of loan discount and issuance cost................ 65,000 -- 97,381
Loss on disposal of other equipment............................ 8,705 -- --
Accretion of imputed interest.................................. 361,534 220,500 149,500
Deferred income tax provision (credit)......................... 2,033,000 -- (1,744,000)
Change in assets and liabilities as a result of operating
activities:
Decrease (increase) in accounts receivable................... 395,167 (654,804) 1,196,268
Decrease (increase) in supply inventories, prepaid expenses
and other................................................... (251,243) 503,552 (76,334)
Increase (decrease) in accounts payable...................... 1,478,546 (1,930,431) (4,018,818)
Increase (decrease) in gas balancing, natural gas
prepayments, oil and gas proceeds due others and other
noncurrent liabilities...................................... (560,211) (1,615,384) 278,507
------------ ------------ -----------
Net cash provided by operating activities................. 12,064,793 1,464,815 3,381,731
Cash flows from investing activities:
Additions to oil and gas properties............................... (17,940,203) (36,009,580) (5,880,605)
Additions to other properties and equipment....................... (351,001) (440,742) (74,683)
Change in deferred charges and other assets, net.................. 595,498 -- --
Proceeds from the sale of assets.................................. 694,007 4,163,219 1,792,231
------------ ------------ -----------
Net cash used by investing activities..................... (17,001,699) (32,287,103) (4,163,057)
Cash flows from financing activities:
Proceeds from long-term debt...................................... 18,488,572 30,986,958 2,000,000
Payments on long-term debt and for extinguishment of long-term
obligation..................................................... (26,417,193) (2,358,639) (1,016,525)
Collection of stock subscription receivable....................... -- 645,000 --
Proceeds from sale of common, preferred stock and treasury stock,
net of offering costs.......................................... 13,761,246 -- --
Exercise of employee stock options................................ 48,901 1,047,124 457,082
Payments to retire preferred stock................................ (400,000) -- --
Payment of preferred stock dividend............................... (136,656) -- --
------------ ------------ -----------
Net cash provided by financing activities................. 5,344,870 30,320,443 1,440,557
------------ ------------ -----------
Net increase (decrease) in cash and cash equivalents during the
year.............................................................. 407,964 (501,845) 659,231
Cash and cash equivalents at beginning of year...................... 886,633 1,294,597 792,752
------------ ------------ -----------
Cash and cash equivalents at end of year............................ $ 1,294,597 $ 792,752 $ 1,451,983
============ ============ ===========
</TABLE>
SUPPLEMENTAL INFORMATION:
Interest paid amounted to $1,701,127, $2,174,996 and $4,037,025 for the
years ended December 31, 1993, 1994 and 1995, respectively.
See accompanying notes.
F-36
<PAGE> 189
ALEXANDER ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation -- The consolidated financial statements
include the accounts of Alexander Energy Corporation (the "Company"), its
wholly-owned subsidiaries which were merged with the Company on June 30, 1995
(Note 2), and the Company's proportionate share of the assets, liabilities,
revenues and costs and expenses of oil and gas limited partnerships in which the
Company acts as general partner.
Nature of operations -- The Company's business activities include property
acquisitions and exploitation; geological and geophysical evaluation of
prospective acreage; selection, negotiation and purchase of oil and gas
prospects; participation in drilling exploratory and development wells; and
operation of producing oil and gas properties. The Company diversifies its
exploration efforts between oil and gas with particular emphasis in the
Mid-Continent region of the United States.
Oil and gas properties -- The Company follows the full cost method of
accounting for oil and gas properties prescribed by the Securities and Exchange
Commission ("SEC"). Under the full cost method, all acquisition, exploration and
development costs are capitalized. The Company capitalizes internal costs
including: salaries and related fringe benefits of employees directly engaged in
the acquisition, exploration and development of oil and gas properties, as well
as other directly identifiable general and administrative costs associated with
such activities. Such capitalized internal costs were approximately $885,000,
$1,232,000, and $1,101,000, respectively, in each of the three years in the
period ended December 31, 1995.
The costs of unproved properties are excluded from costs to be amortized
pending a determination of the existence of proved reserves. Such unproved
properties are assessed periodically for impairment. The amount of impairment is
included in the costs to be amortized.
Under the full cost method, the net book value of oil and gas properties,
less related deferred income taxes, may not exceed a calculated "ceiling." The
ceiling is the estimated after-tax future net revenues from proved oil and gas
properties, discounted at 10% per annum plus the lower of cost or fair market
value of unproved properties. In calculating future net revenues, prices and
costs in effect at the time of the calculation are held constant indefinitely,
except for changes which are fixed and determinable by existing contracts. The
net book value is compared to the ceiling on a quarterly basis. The excess, if
any, of the net book value above the ceiling is required to be written off as an
expense. As described in Note 11, in 1995 the Company recognized a provision for
impairment of the carrying value of its oil and gas properties. Under the SEC's
full cost accounting rules, any write down recorded may not be reversed even
though higher oil and gas prices may increase the ceiling applicable to future
periods. There can be no assurance that future oil and gas reserve volume or
product price decreases will not result in additional reductions in the net book
value of the oil and gas properties.
Amortization and depreciation -- Amortization of oil and gas properties is
computed using a unit of revenue method based on current gross revenues from
production in relation to estimated future gross revenues from production of
proved oil and gas reserves (Note 11).
Depreciation of other properties and equipment is computed on the
straight-line method over estimated useful lives of 3 to 40 years.
Capitalization of interest -- Interest costs related to significant
exploratory oil and gas wells and unproved oil and gas leases not being
amortized are capitalized until such time as the properties are evaluated and
transferred to the full cost amortization base. For the years ended December 31,
1993, 1994 and 1995 total interest costs amounted to $2,077,890, $2,423,496 and
$3,995,743 with $15,229, $28,000 and $35,000 being capitalized, respectively.
Income taxes -- On January 1, 1993, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes"
("SFAS 109"). Among other changes, SFAS 109 relaxed the recognition and
measurement criteria for deferred tax assets and alternative minimum
F-37
<PAGE> 190
ALEXANDER ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
tax from that provided for under its previous method of accounting for income
taxes under SFAS No. 96. Adoption of this standard resulted in the elimination
of deferred income taxes payable of $425,000, related entirely to alternative
minimum tax, which is reflected in the 1993 statement of operations as the
cumulative effect of a change in accounting principle.
Under SFAS 109, deferred income taxes are provided on the tax effect of
presently existing temporary differences, net of operating loss carryforwards
and statutory depletion carryforwards. The tax effect is measured using the
enacted marginal tax rates and laws that will be in effect when the differences
and carryforwards are expected to reverse or be utilized.
Net income (loss) per common and common equivalent share -- Net income
(loss) per common and common equivalent share is computed on the basis of
weighted average shares of common stock, stock options and warrants outstanding
during each period, as applicable.
Stock-based compensation -- In October 1995, the Financial Accounting
Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation,"
which establishes financial accounting and reporting standards for stock-based
employee compensation plans. Effective for fiscal years beginning after December
15, 1995, the statement provides the option to continue under the accounting
provisions of APB Opinion 25, while requiring pro forma footnote disclosures of
the effects on net income and earnings per share, calculated as if the new
method had been implemented. The Company will adopt the financial reporting
provisions of SFAS 123 for 1996, but expects to elect to continue under the
accounting provisions of APB Opinion 25.
Gas balancing and natural gas prepayments -- The Company records gas sales
on the entitlement method, recognizing only its net share of all production as
revenues. Any amount received in excess of the Company's revenue interest is
recorded as a gas balancing liability and, conversely, amounts not received for
the Company's entitled interest in gas produced are accrued as a gas balancing
receivable (collectively referred to as "net gas balancing liability"). The
Company has also received non-interest bearing prepayments on future natural gas
production which provide for recoupment, most of which are refundable upon the
earlier of the end of the productive life of each well or expiration of the gas
purchase contract. The natural gas prepayments will be recognized as revenue
when, and if, the gas is delivered. The portion of the net gas balancing and
natural gas prepayment liabilities that may be contractually recouped during the
next fiscal year is recorded as due within one year in the accompanying balance
sheets. As of December 31, 1994 and 1995 the Company has net gas balancing and
natural gas prepayment liabilities aggregating $3,457,000 and $3,528,000,
respectively, of which $785,000 and $1,604,000 are classified as due within one
year.
Cash equivalents -- Temporary investments with a maturity at the date of
acquisition of 90 days or less are considered to be cash equivalents.
Credit and market risk -- The Company conducts the majority of its
operations in the states of Oklahoma, Texas and Arkansas and operates
exclusively in the oil and natural gas industry. The Company's joint interest
and oil and gas sales receivables are generally unsecured; however, the Company
has not experienced any significant losses in prior years and is not aware of
any significant uncollectible accounts at December 31, 1995.
Fair value of financial statements -- Cash and cash equivalents, accounts
receivable, accounts payable and revenues payable are estimated to have a fair
value approximating the carrying amount due to the short maturity of these
instruments.
Due to the uncertainty of the timing of recoupment for net gas balancing
liabilities and gas prepayments management is unable to determine the fair value
of such instruments, however, based upon current product pricing and expected
reserve depletion management believes that the fair value is not materially
different than the carrying value.
F-38
<PAGE> 191
ALEXANDER ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of the unsecured revolving credit facility is believed to
approximate its carrying value due to variable interest rates on the
instruments. Fair values for fixed-rate borrowing approximate carrying values
inasmuch as management believes that the rates and terms approximate such terms
that could be obtained under similar instruments.
Use of estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
2. BUSINESS COMBINATIONS
On June 30, 1995, a certificate of merger was filed with the State of
Oklahoma merging its wholly-owned subsidiaries, American Natural Energy
Corporation ("ANEC"), Edwards & Leach Oil Company and Bradmar Petroleum
Corporation ("Bradmar") into the Company as the surviving corporation. The
merger had no effect on the consolidated financial position or on the
consolidated results of operations for the periods presented.
In July 1994, the Company acquired ANEC, an Oklahoma corporation based in
Tulsa, Oklahoma, in a merger (the "Merger") accounted for as a pooling of
interests. Accordingly, in 1994 the Merger was given retroactive effect and the
Company's financial statements for periods prior to the Merger represent the
combined financial statements of the previously separate entities adjusted to
conform ANEC's accounting policies to those used by the Company. ANEC became a
wholly owned subsidiary of the Company and each issued and outstanding share of
ANEC's common stock was converted into the right to receive 1.62 shares of the
Company's common stock. In addition, the Company assumed all outstanding options
granted under the stock option plans maintained by ANEC. As a result of the 1994
transaction, the Company issued approximately 5.8 million shares of Company
common stock.
Separate and combined results of Alexander Energy Corporation and ANEC
prior to the Merger are as follows (in thousands):
<TABLE>
<CAPTION>
COMPANY ANEC ADJUSTMENTS COMBINED
------- ------ ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Six months ended June 30, 1994 (unaudited)
Revenue..................................... $ 5,938 $4,636 $ (44) $10,530
Net income.................................. 318 1,014 104 1,436
Year ended December 31, 1993
Revenue..................................... 14,207 8,425 (723) 21,909
Income before extraordinary item and
cumulative effect of a change in
accounting principle..................... 820 1,214 540 2,574
Net income.................................. 1,245 704 540 2,489
</TABLE>
The adjustments consist principally of conforming ANEC's policies to the
policies used by the Company. These conformed policies include revenue
recognition related to gas balancing, amortization of oil and gas properties and
equipment, income taxes and overhead reimbursements on Company operated
properties. The cumulative effect of these conforming adjustments increased
consolidated accumulated deficit at December 31, 1991 by approximately $950,000.
F-39
<PAGE> 192
ALEXANDER ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the Merger, the Company incurred nonrecurring charges to
operations in 1994 of $2.4 million related to the combination of the Company and
ANEC. These costs include legal, accounting, investment banking, printing and
other costs.
In November 1994, the Company acquired certain producing gas properties,
located principally in Oklahoma and Arkansas, from JMC Exploration, Inc. (the
"JMC Acquisition") for a net purchase price of approximately $18.2 million,
including the assumption of a net gas balancing liability of $320,000. The
operations of the JMC Acquisition have been included in the accompanying
statements of operations and cash flows beginning November 15, 1994.
The following unaudited pro forma combined data gives effect to the JMC
Acquisition as if such transaction had been consummated as of January 1, 1993
and 1994. The pro forma information is based on the historical financial
statements of the Company and the JMC Acquisition, giving effect to the
transaction under the purchase method of accounting. The unaudited pro forma
combined data are presented for illustrative purposes and are not necessarily
indicative of the actual results that would have occurred had the acquisition
been consummated as of January 1, 1993 or 1994, respectively, or of future
results of the combined operations. The data reflect adjustments for (1)
amortization and depreciation of the JMC Acquisition's oil and gas properties,
(2) incremental general and administrative expenses of the JMC Acquisition, (3)
incremental interest expense resulting from the borrowings on the Company's
credit facility used to fund the cash requirements of the acquisition, and (4)
certain other pro forma adjustments.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------
1993 1994
------- -------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
--------------------
<S> <C> <C>
Revenues........................................................ $30,046 $25,295
Income (loss) before discontinued operations, extraordinary
items and cumulative effect of change in accounting........... 4,170 (1,741)
Net income (loss)............................................... 4,085 (689)
Net income (loss) per common share and common equivalent
share......................................................... $ .40 $ (.06)
</TABLE>
3. TRANSACTIONS WITH RELATED PARTIES
In June 1988, the Chief Executive Officer purchased 200,000 shares of the
Company's treasury stock for a sum aggregating $322,500. In connection with this
transaction the Company advanced the Chief Executive Officer $77,500 bearing
interest at 10% repayable in 10 annual installments. The remaining balance of
this advance aggregated $52,801 at December 31, 1993. In November 1994, the
Board of Directors approved a resolution to forgive the outstanding receivable
from the Chief Executive Officer and also refund the principle and interest
previously paid to the Company, resulting in an aggregate charge to 1994
operations of approximately $190,000.
The Company has interests in three limited partnerships engaged in oil and
gas activities. The Company acts as general partner of these partnerships and
arranges for the exploration, development and subsequent operations of the
partnerships' properties. In return, the Company is entitled to receive
management fees, reimbursement for administrative overhead and share in the
partnerships' revenues and costs and expenses according to the respective
partnership agreements.
During June 1993, the Company acquired the limited partner's interest in an
oil and gas partnership for which the Company served as the general partner. The
purchase price of this acquisition was $1,350,000 and was accounted for under
the purchase method of accounting. The results of the acquisition is included in
the results of operations of the Company since the date of the acquisition.
F-40
<PAGE> 193
ALEXANDER ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the year ended December 31, 1993 and the eight months ended August
31, 1994, the Company sold approximately 20% and 16%, respectively, of its oil
production through an entity (IEM, Ltd.) in which the Company owned a limited
partner interest recorded on the equity method (Note 9). Net distributable
income of IEM, Ltd. was allocated 60% to the limited partners and 40% to the
general partner. For the year ended December 31, 1993 and the eight months ended
August 31, 1994, the Company received 100% of the amount allocable to the
limited partners. Effective August 31, 1994, the Company terminated its
marketing arrangement with IEM and thus, withdrew as a limited partner. As a
result, the Company's equity interests in IEM's operating profit or loss ceased
as of August 31, 1994. The Company received the highest posted price for all
such production, an indirect marketing fee from the ultimate purchaser and a
percentage of operating profit of IEM, if any. In 1993 and the eight-month
period ended August 31, 1994, the Company recorded pass-through marketing fees
of $96,000 each period and operating profits (losses) of $1,500 and $(9,700),
respectively. At December 31, 1994, the Company had an undistributed net
operating profit receivable associated with this interest of approximately
$84,000 (none in 1995).
The Company also purchases certain well operating chemicals and stimulants
from another entity in which the Company owns a limited partner interest. In
1993, 1994 and 1995 oil and gas operating expenses and property development
costs include approximately $521,000, $726,000 and $465,000, respectively,
related to purchases from this related party.
As a requirement of the 1992 acquisition of Bradmar, the Company entered
into consulting/non-compete agreements with two former officers and directors of
Bradmar, one of which presently serves on the board of directors of the Company.
The agreements required total payments of a minimum $1,320,000 to be paid in
monthly payments of $36,667 over a thirty-six-month period from the date of the
acquisition. During 1995, the Company paid the final installments under these
agreements in the amount of $91,624 ($440,000 in each of 1993 and 1994).
4. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1994 1995
----------- -----------
<S> <C> <C>
Revolving credit facility(A).............................. $42,000,000 $33,000,000
Term note(A).............................................. -- 11,000,000
Notes to stockholder(B)................................... 4,000,000 3,000,000
Mortgage note payable, interest at 10.5%; principal and
interest due in monthly installments of $5,382, with the
balance due in December 1999; secured by real estate
with a net book value of $669,429 at December 31,
1995.................................................... 546,545 539,825
Other..................................................... 57,988 48,668
----------- -----------
46,604,533 47,588,493
Less amounts due within one year.......................... 1,016,253 4,162,475
----------- -----------
Long-term debt due after one year......................... $45,588,280 $43,426,018
=========== ===========
</TABLE>
F-41
<PAGE> 194
ALEXANDER ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- ---------------
(A) At December 31, 1995, the Company had $44 million outstanding under its
revolving credit facility with a bank. Subsequent to December 31, 1995, the
lender reduced the borrowing base to $33 million, effective to December 31,
1995, requiring the $11 million excess borrowings to be converted to a term
note. In May 1996, the Company amended the credit agreement (the "Amended
Agreement"). Under the Amended Agreement, the term note requires monthly
payments of principal of $350,000 plus interest, effective beginning April
1996, through its maturity date of April 1, 1997 at which time the unpaid
principal and interest become due. The Company will also be required to
make a principal payment of $750,000 in May 1996 representing proceeds from
the sale of oil and gas properties completed in January 1996. The Amended
Agreement further requires that monthly cash flow from operations, as
defined, in excess of $700,000 and proceeds from the sale of assets, common
or preferred stock, debt placements or capital from any other source to be
applied first against the outstanding balance of the term note. The term
note will bear interest at the prime rate plus 3% (an aggregate rate of
11.25% at March 31, 1996) through October 15, 1996 and the prime rate plus
4% thereafter. The borrowings associated with the revolving credit facility
cannot exceed the borrowing base, which relates to the Company's oil and
gas reserve base. The borrowing base is subject to semiannual
redeterminations each April and October until April 1, 1997, at which time
the borrowing base is reduced quarterly by 1/16th through December 31,
2000. In addition to the foregoing semiannual redeterminations, the lender
has the right, at its sole discretion, to redetermine the borrowing base,
subject to certain limitations, any time until maturity. Under the Amended
Agreement, the revolving credit facility interest rate will also increase
beginning effective April 1996. Under the revolving credit facility, the
Company has the ability to choose the index the interest rate is based on
and can fix the rate for a term of up to six months. At December 31, 1995,
the Company had elected to use the one-month London Interbank Offering Rate
("LIBOR") plus 1.5% (an aggregate rate of 7.3125%), which will increase
under the Amendment to LIBOR plus 2%.
The Amended Agreement requires, among other things, that the company
maintain minimum amounts of tangible net worth, a specified interest
coverage and current ratio, and places limitations on investments,
additional indebtedness, capital expenditures, mergers and liquidations,
consolidations, acquisitions, amounts of gas balancing liabilities and
payment of dividends. In May 1996, the Company obtained a waiver from the
lender for events of noncompliance. Also, in connection with the Amended
Agreement, the lender reduced the minimum requirements related to the
interest coverage and current ratio covenants, as defined, from 4:1 and 1:1
to 2.65:1 and .5:1, respectively, through April 1, 1997. The Company
expects to be able to comply with the amended financial requirements in
future periods. All of the borrowings outstanding with this lender, under
the Amended Agreement, are secured by a first and prior lien on
substantially all of the Company's assets.
(B) In June 1988, the Company entered into an agreement with a stockholder
whereby the Company issued 10% unsecured notes in the amount of $5,000,000.
This note agreement requires semiannual interest payments, with annual
principal payments of $1,000,000 beginning in June 1994 and continuing
through 1998. This note agreement requires principal prepayments if less
than 50% of the Company's consolidated cash flow is not expended on
indebtedness, as defined, and capital expenditures. It also limits the sale
or disposition of subsidiaries, partnerships or joint ventures, the sale of
Company assets, the incurrence of additional indebtedness, declarations of
dividends and requires the Company to maintain cash flow each fiscal year
equal to the greater of a) 200% of the aggregate consolidated principal
payments during such fiscal year, b) 200% of the aggregate consolidated
principal payments during the next succeeding fiscal year, or c) discounted
future net revenues equal to 225% of the aggregate consolidated debt (as
defined).
In May 1996, the Company obtained a waiver from the stockholder through
April 1, 1997, for noncompliance with certain covenants existing as of
December 31, 1995. Under the waiver, the Company will be required to make
its previously scheduled principal payment of $1.0 million plus interest in
June 1996. The stockholder may at its sole discretion, require the
remaining $2 million of unpaid
F-42
<PAGE> 195
ALEXANDER ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
principal and accumulated interest due anytime after April 1, 1997. The
Company also secured the stockholder loan on an equal basis with the bank
debt discussed in (A) above and agreed to liquidate and distribute the
assets of the AEJH 1985, AEJH 1987 and AEJH 1989 Limited Partnerships.
As of December 31, 1995, long-term debt, which excludes the non-recourse
debt maturities discussed in Note 5, maturing during the subsequent five years
and thereafter is as follows (based on the Company's borrowing base and
outstanding borrowings at December 31, 1995 and waivers received from lenders):
1996 -- $4,162,475; 1997 -- $16,050,700; 1998 -- $8,263,110; 1999 -- $8,257,600;
2000 -- $10,320,300 and thereafter -- $534,308.
5. NON-RECOURSE DEBT
In 1989, AEJH 1989 Limited Partnership ("AEJH 1989"), for which the Company
serves as general partner, entered into an agreement with a stockholder of the
Company (and limited partner of AEJH 1989), whereby AEJH 1989 issued secured
10 1/2% notes payable in the amount of $2,185,276 ($1,092,638 net to the
Company's interest at the date of issuance) to acquire leasehold interests in a
group of producing oil and gas properties. These notes require monthly principal
and interest payments equal to 80.75% of net proceeds, as defined, from the
producing oil and gas properties. The lender may recover the outstanding balance
on the notes only from proceeds from the oil and gas properties of AEJH 1989.
Inasmuch as the future payments on these notes will be paid only from net
proceeds from these producing oil and gas properties, no amounts are included in
current portion of long-term debt in the accompanying balance sheets.
6. INCOME TAXES
A reconciliation of the Company's income tax provision (credit) and the
amount computed by applying the statutory federal income tax rate of 35% to
income (loss) before income taxes, extraordinary items and cumulative effect of
change in accounting is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1993 1994 1995
---------- --------- -----------
<S> <C> <C> <C>
Statutory rate applied to income (loss) before
income taxes, extraordinary items and
cumulative effect of change in accounting... $1,717,000 $(803,000) $(2,171,000)
Increase (decrease) relating to:
Permanent differences, 1994 primarily
related to nondeductible merger costs.... -- 852,000 16,000
Statutory depletion......................... (79,000) (106,000) (75,000)
State income taxes, net of federal
benefit.................................. 112,000 -- (143,000)
Change in the valuation allowance on
deferred tax assets(2)................... 641,000 57,000 635,000
Other....................................... (60,000) -- (6,000)
---------- --------- -----------
Provision (credit) for deferred income
taxes(1).................................... $2,331,000 $ -- $(1,744,000)
========== ========= ===========
</TABLE>
F-43
<PAGE> 196
ALEXANDER ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- ---------------
(1) Includes $2,121,000 and $210,000 in 1993 and ($1,589,000) and ($155,000) in
1995 for federal and state income taxes, respectively.
(2) The 1993 change relates primarily to the nonrecurring change in ownership.
The 1995 change is due to the change in the estimated timing of future
taxable temporary differences and the utilization of net operating loss and
statutory depletion carryforwards as a result of the provision for
impairment of oil and gas properties (Note 11).
Deferred tax assets and liabilities consist of the following at December
31:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and intangible drilling costs deducted for
tax in excess of financial........................... $12,564,000 $12,324,000
Deferred tax assets:
Oil and gas revenues recognized for tax before
financial............................................ 723,000 836,000
Net operating loss carryforwards........................ 10,859,000 12,429,000
Statutory depletion carryforwards....................... 1,354,000 1,429,000
Investment tax credit carryforwards..................... 201,000 201,000
Other................................................... 45,000 89,000
----------- -----------
13,182,000 14,984,000
Valuation allowances(1)................................. (3,418,000) (3,716,000)
----------- -----------
Net deferred tax assets................................. 9,764,000 11,268,000
----------- -----------
Net deferred tax liabilities............................ $ 2,800,000 $ 1,056,000
=========== ===========
</TABLE>
- ---------------
(1) The change in the valuation allowance primarily relates to the effect of the
provision for impairment of oil and gas properties as described above,
partially offset by the expiration of a net operating loss carryforward in
1995 which was included in the 1994 deferred tax assets and valuation
allowance.
In connection with the Offering in March 1993 (Note 8), the Company had an
ownership change pursuant to Section 382 of the Internal Revenue Code. The
Company sustained a nonrecurring non-cash charge to operations of approximately
$1.2 million during the three months ended March 31, 1993 due to an increase in
the valuation allowance. The increase in the valuation allowance represents the
effects of the annual limitations on the utilization of net operating loss
carryforwards resulting from the change in ownership. In addition, ANEC had an
ownership change in September 1993 as a result of its 1993 offering, which
resulted in a limitation on the utilization of its net operating loss
carryforwards.
At December 31, 1995, the Company has federal income tax net operating loss
("NOL") carryforwards of approximately $33.3 million which begin to expire in
1996. For federal income tax purposes, the Company also has investment tax
credit and statutory depletion carryforwards of approximately $201,000 (expiring
from 1996 through 2001) and $3.8 million, respectively. The actual utilization
of net operating loss and other carryforwards may differ from the estimated
usage of such tax assets for purposes of estimating the valuation allowance. As
a result, such changes could result in subsequent changes to the valuation
allowance and could have a material impact on the results of operations and the
Company's financial position. Quarterly, management of the Company evaluates the
realizability of its deferred tax assets by assessing the need for additional
valuation allowances.
F-44
<PAGE> 197
ALEXANDER ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES
In December 1994, the Company executed employment agreements, special
severance agreements and implemented a corporate separation policy for its
management, technical support staff and other employees, respectively, which
become effective upon a change in control of ownership, as defined. As of
December 31, 1995, severance benefits under such agreements, assuming a change
in control, would aggregate approximately $4.1 million. A provision for these
benefits will not be made until a change in control is probable. See Note 13.
The Company's capital expenditure budget for 1996 was approximately $13
million, of which approximately $1.6 million had been committed as of December
1995.
A petition was filed in Oklahoma County District Court on July 25, 1995,
against the Company and its directors by Bill V. Dean and Elliott Associates,
L.P. ("Elliott"). The suit purported to be a derivative action on behalf of the
Company against the Board of Directors for breach of fiduciary duties in
enacting a share rights plan, approving certain severance contracts and policy,
and proposing the Senior Note Offering. No damages are being sought against the
Company. The suit asks that the Company's share rights plan and severance
contracts and policy be invalidated, seeks an injunction against the Company's
Senior Note Offering and requests damages to the Company from the directors in
excess of $10,000. In August 1995, the Company elected to defer its proposed
Senior Note Offering. The Company filed a motion to dismiss which was granted by
the court in 1995 dismissing Elliott as plaintiff. The court granted Elliott
leave to file an amended petition. Elliott declined to file an amended petition
and is appealing its dismissal to the Oklahoma Court of Appeals. The Company and
its directors have filed their answer denying all allegations. The suit is
currently in discovery. The Company believes the derivative action is without
merit and will vigorously defend against this action.
The Company is involved in various legal actions arising in the normal
course of business. In the opinion of management, the Company's liability, if
any, in these pending actions would not have a material effect on the Company's
financial position or the results of operations.
8. PREFERRED AND COMMON STOCK
In April 1990, stockholders authorized the Board of Directors of the
Company to issue up to 2,000,000 shares of $.01 par value preferred stock with
preferences, qualifications, limitations and designations as deemed appropriate.
On May 30, 1990, the Company issued 100,000 shares of 5% Series A
cumulative convertible preferred stock, $.01 par value, to MWR Investments,
Inc., a wholly owned subsidiary of Midwest Capital Group, Inc., ("MWR") for
$1,000,000. The preferred stock was converted into common stock of the Company
in March 1993 at a conversion rate of 1 share of preferred for 3.33 shares of
common.
In 1993, dividends of $.50 per share ($60,273; $50,000 of which was in
arrears at December 31, 1992) and $.20 per share ($26,383) were paid on the
Company's Series A preferred stock and ANEC's Series B preferred stock,
respectively.
In December 1994, the Board of Directors authorized the Company to reserve
300,000 shares of Series A Junior Participating Preferred Stock in connection
with establishing a rights plan providing shareholders one right for each share
of common stock held. Each right entitles its holder to purchase 1/100 of a
share of Series A Junior Participating Preferred Stock for $25.00, subject to
adjustment. The rights become exercisable and separately transferable ten
business days after a) an announcement that a person has acquired or obtained
the right to acquire 20% or more of the common stock or b) commencement of a
tender offer that could result in a person owning 20% or more of the common
stock. See Note 7.
If any person becomes the beneficial owner of 20% or more of the Company's
common stock, each right not beneficially owned by that person entitles its
holder to purchase, in lieu of Series A Junior Participating
F-45
<PAGE> 198
ALEXANDER ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Preferred Stock, Company common stock with a value equal to twice the exercise
price of the right, subject to adjustment to prevent dilution. In the event of
certain merger or asset sale transactions with another party or transactions
which would increase the equity ownership of a shareholder who then owned 20% or
more of the Company, each right will entitle its holder to purchase a similar
value of the merging or acquiring party's common stock. The rights, which have
no voting power, expire on December 15, 2004. The rights may be redeemed for
$.01 per right until ten business days after a person has acquired 20% or more
of the common stock.
On December 31, 1992, ANEC issued 133,333 shares of Series B preferred
stock and 30,000 shares of ANEC's common stock (48,600 shares of the Company's
common stock) for $400,000. In September 1993, ANEC redeemed such preferred
stock for $400,000 out of the proceeds of a secondary public offering of equity
securities.
In March 1993, the Company registered 2,990,000 shares of the Company's
common stock (the "Offering"), of which the Company and a stockholder sold
2,556,667 and 433,333 shares, respectively. In conjunction with the Offering,
the Company issued to the underwriters warrants to purchase 75,000 shares of
common stock. The warrants are exercisable beginning March 1994 at an exercise
price of $5.10 per share and expire in March 1998. The exercise price and the
number of shares of common stock for which the warrants are exercisable are
subject to adjustment upon the occurrence of certain dilutive events.
In September 1993, ANEC sold 1,100,000 shares of ANEC's common stock
(1,782,000 shares of the Company's common stock) and received $4 million, net of
underwriters commissions and costs of the offering (the "ANEC Offering"). In
connection with this offering, ANEC issued purchase warrants to purchase 97,500
shares of ANEC's common stock (157,950 shares of the Company's common stock) at
$5.70 per share ($3.52 for the Company's common stock), expiring in September
1998.
In April 1993, ANEC issued 139,000 shares of ANEC's common stock (225,180
shares of the Company's common stock) in connection with the acquisition of a
7.5% overriding royalty interest in ANEC's oil and gas properties in connection
with the early termination of a credit agreement.
Also in April 1993, ANEC issued warrants to purchase 260,000 shares of
ANEC's common stock (421,200 shares of the Company's common stock) at $3.00 per
share ($1.85 for the Company's common stock), expiring in April 1996, in
connection with the issuance of subordinated notes, retired in September 1993
with proceeds from the ANEC Offering. In December 1993, ANEC issued 225,000
shares of common stock (364,500 shares of the Company's common stock) upon the
exercise of a like number of warrants in exchange for a stock subscription
receivable of $645,000 which was collected in January 1994. The remaining 35,000
warrants at December 31, 1993 were exercised during 1994 for 56,700 shares of
the Company's common stock.
The Company initially reserved 66,666 shares of its common stock for
issuance to directors and key employees under a nonqualified stock option plan
(which terminated in 1991, except for outstanding options at the date of
termination). The plan is administered by the Compensation Committee (the
"Committee") of the Board of Directors. The exercise period of the options was
determined by the Committee at the date of grant, provided the exercise period
is between one and ten years from the date of grant. These options provide for
accelerated vesting schedules upon a change in control, as defined (Note 13).
F-46
<PAGE> 199
ALEXANDER ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information regarding the Company's nonqualified stock option plan is
summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Options outstanding at beginning of period................. 14,660 9,245 7,413
Exercised.................................................. (250) -- (583)
Surrendered or forfeited................................... (5,165) (1,832) (4,665)
------ ------ ------
Options outstanding at end of period ($1.50 to $1.65 per
share at December 31, 1995; all options are exercisable
at December 31, 1995).................................... 9,245 7,413 2,165
====== ====== ======
</TABLE>
The Company also has reserved 133,333 shares (10,022 available for future
grants at December 31, 1995) of its common stock for issuance to directors and
key employees under an incentive stock option plan (the "Plan"). The Plan is
administered by the Committee and, with the exception of a time period under
which options can be issued, contains similar provisions to the nonqualified
stock option plan.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1993 1994 1995
------- ------- ------
<S> <C> <C> <C>
Options outstanding at beginning of period............... 120,393 103,348 86,016
Exercised................................................ (17,045) (7,333) (9,080)
Surrendered or forfeited................................. -- (9,999) --
------- ------- ------
Options outstanding at end of period ($1.50 to $4.125 per
share at December 31, 1995; all options are exercisable
at December 31, 1995).................................. 103,348 86,016 76,936
======= ======= ======
</TABLE>
The Company also has reserved 250,000 (157,964 available for future grants
at December 31, 1995) shares of its common stock for issuance to directors and
key employees under a stock option plan approved at the 1993 annual
stockholders' meeting authorizing grants of both nonqualified and incentive
stock options (the "1993 Plan"). The 1993 Plan is administered by the Committee
and, with the exception of a time period under which options can be issued,
contains similar provisions to the nonqualified and incentive stock option plans
discussed above. During 1993, ANEC granted options for 51,000 shares (exercise
price of $3.25 per share) of its common stock under a plan similar to the
Company's 1993 Plan. As a result of the Merger, those options were converted to
options to acquire shares of the Company's common stock, under the 1993 Plan.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Options outstanding at beginning of period.............. -- 121,920 116,660
Granted (1993 -- $2.01 to $5.00 per share;
1994 -- $4.625 per share 121,920)..................... 121,920 35,000 --
Exercised............................................... -- (3,316) (8,879)
Surrendered or forfeited................................ -- (36,944) (27,940)
------- ------- -------
Options outstanding at end of period ($2.01 to $5.00 per
share at December 31, 1995; 41,096 options are
exercisable at December 31, 1995)..................... 121,920 116,660 79,841
======= ======= =======
</TABLE>
The Company also has reserved 500,000 shares of its common stock for awards
to directors and key employees under a restricted stock award plan approved at
the 1993 annual stockholders' meeting (the "Award Plan"). The Award Plan is
administered by the Committee. Stock is awarded, issued and held by an
F-47
<PAGE> 200
ALEXANDER ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
escrow agent until such time as a vesting period, which period is determined by
the Committee, has been satisfied. Voting rights commence at the time of award.
In the fourth quarter of 1993 and 1994, the Company granted 7,500 and 100,000
shares, respectively, under the Award Plan (none in 1995). The market value, at
the award date, was $38,000 and $603,000, respectively, for the 1993 and 1994
awards. Unearned compensation ($113,000, net of forfeitures, at December 31,
1995) is being amortized over the three-year vesting period. Such amortization
amounted to $2,200, $69,000, and $406,000 in 1993, 1994 and 1995 respectively.
At December 31, 1995 55,375 shares were vested under the Award Plan. The awards
provide for accelerated vesting schedules upon a change in control, as defined
(Note 13).
In 1993, ANEC issued options to purchase 51,000 shares of ANEC common stock
(82,620 shares of the Company's common stock) to three business advisors at
$3.00 per share, all of which were exercised during 1994.
In 1993, ANEC granted options to certain members of management to purchase
287,500 shares of ANEC's common stock (465,750 shares of the Company's common
stock), at prices ranging from $3.25 to $5.00 per share ($2.01 to $3.09 for the
Company's shares). These options provided for accelerated vesting schedules upon
change in control. In 1994, immediately prior to and in connection with the
Merger, options were exercised for 187,500 shares of ANEC common stock (303,750
of the Company's common stock) at prices of $5.00 and $3.25 ($2.01 and $3.09 for
the Company's common stock). In 1995, the remaining options for 162,000 shares
of the Company's common stock were exercised at a price of $2.01 (81,000 shares)
and $3.09 (81,000 shares).
9. MAJOR PURCHASERS
The Company's oil and gas production is sold under contracts with various
purchasers (Note 3). Gas sales to two purchasers individually approximated 12%
and 13% of total oil and gas revenues for the years ended December 31, 1993 and
1994, respectively. Gas sales to one purchaser approximated 13% of total oil and
gas revenues for the year ended December 31, 1995.
10. OTHER REVENUES, LITIGATION SETTLEMENT, AND OTHER NONRECURRING EXPENSES
In May 1993, the Company settled a lawsuit over the prices received by
Bradmar under certain gas contracts. The Company included approximately $1.25
million of proceeds from the settlement in 1993 revenues.
In the fourth quarter of 1994, in an effort to resolve ANEC's litigation
with Unit Drilling Company ("Unit") and Midwest Energy Corporation ("MEC"), the
Company acquired Unit's claim against MEC and in late December, agreed to
mediation with MEC. On December 22, 1994, the Company agreed to a negotiated
settlement with MEC, the effect of which was a release of the Company's claim
against MEC, the exchange of certain interests in oil and gas properties and a
net payment to MEC of $625,000. The aggregate effect of this negotiated
settlement resulted in a charge to 1994 operations, including legal fees, of
approximately $734,000.
During 1995, the Company incurred aggregate costs of $752,000 related to a
proposed merger and a subsequent senior note offering. As a result of
terminating such merger and debt offering activities, the Company expensed such
costs.
11. AMORTIZATION AND IMPAIRMENT OF OIL AND GAS PROPERTIES
Oil and gas properties amortization expense, excluding impairment, per
dollar of oil and gas revenue for the years ended December 31, 1993, 1994 and
1995 was $.32, $.41 and $.55, respectively. Accumulated amortization and
impairment relating to oil and gas producing activities at December 31, 1994 and
1995 amounted to $37,374,264 and $48,804,474, respectively.
F-48
<PAGE> 201
ALEXANDER ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In the fourth quarter of 1995, the Company recorded approximately $660,000
of incremental amortization on oil and gas properties over that recorded in each
of the previous three quarters. The increase is attributable to the downward
revisions in oil and gas reserve estimates (Note 14).
As of December 31, 1995, the Company's net book value of oil and gas
properties exceeded the ceiling (Note 1). The ceiling has been reduced for the
effect of the oil and gas properties sold in January 1996 of approximately $1.9
million and the timing of development cost expenditures of approximately $1.1
million. Accordingly, a provision for impairment was recognized in the fourth
quarter of 1995 of $2.3 million ($2.0 million, net of the deferred tax benefit).
The provision for impairment is primarily attributable to declines in estimated
reserves due to downward revisions to reserve estimates as described in Note 14
and is highly dependent upon the development of proved undeveloped reserves
consistent with the timing projected in the reserve studies and the prevailing
market prices of oil and gas at each measurement date. Also, see Note 4.
12. EXTRAORDINARY ITEMS
During April 1993, ANEC terminated a lending agreement with Endowment
Energy Partners, L.P. and repaid the outstanding indebtedness. The action
resulted in an early extinguishment of debt and an extraordinary loss of
$510,000, net of applicable income taxes.
In November 1994, the Company settled a dispute with a stockholder to whom
the Company had issued unsecured notes payable and warrants (the "Stock Purchase
Warrants") to purchase 223,333 shares of the Company's common stock, resulting
in a gain of approximately $1.1 million. In anticipation of the lender
exercising the Stock Purchase Warrants and a related warrant put option, the
Company had accrued $2,231,100 as of December 31, 1993; however, the Company
alleged that the lender failed to exercise the Stock Purchase Warrants, and
failed to properly exercise its warrant put option. After litigating this
matter, through the Federal Court, the Company settled this dispute, resulting
in a $1.1 million reduction of the $2.2 million liability previously recorded
and cancellation of the Stock Purchase Warrants.
13. SUBSEQUENT EVENT
On January 2, 1996, the Company announced that it had signed a letter of
intent providing for a combination of National Energy Group, Inc. ("NEG") and
the Company. Under terms of the letter of intent as extended, the Company and
NEG had until April 30, 1996 to complete their due diligence investigations and
attempt to reach a definitive agreement on the terms of a transaction. On May 6,
1996, the Company announced that the Company and NEG had not reached agreement
on the terms of a definitive merger agreement by the April 30, 1996 standstill
deadline; however, both companies are continuing to negotiate. NEG is an
independent oil and gas company with 1995 revenues of approximately $7.9
million.
F-49
<PAGE> 202
ALEXANDER ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SUPPLEMENTARY OIL AND GAS INFORMATION
FINANCIAL DATA
All of the oil and gas producing activities of the Company are located in
the United States and represent substantially all of the business activities of
the Company. The following costs include all such costs incurred during each
period, except for depreciation and amortization of costs capitalized:
COSTS INCURRED IN OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1993 1994 1995
----------- ----------- ----------
<S> <C> <C> <C>
Acquisition of properties:
Proved (2)................................. $ 3,971,549 $19,303,678 $ 331,571
Unproved (1)............................... 493,886 647,269 416,392
----------- ----------- ----------
4,465,435 19,950,947 747,963
Exploration costs............................ 20,977 302,098 569,576
Development costs (2)........................ 11,244,307 12,014,693 2,770,835
----------- ----------- ----------
Total costs incurred......................... $15,730,719 $32,267,738 $4,088,374
=========== =========== ==========
</TABLE>
- ---------------
(1) Net of reimbursed costs and the excess of sales proceeds over cost of
properties transferred to the limited partnerships.
(2) Net of reimbursed costs and sales proceeds from properties sold.
CAPITALIZED COSTS:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1993 1994 1995
----------- ------------ ------------
<S> <C> <C> <C>
Proved and unproved properties being
amortized................................ $94,599,583 $126,490,676 $130,833,467
Unproved properties not being amortized..... 615,007 991,652 734,757
Less accumulated amortization and
impairment............................... (30,291,574) (37,374,264) (48,804,474)
----------- ------------ ------------
Net capitalized costs....................... $64,923,016 $ 90,108,064 $ 82,763,750
=========== ============ ============
</TABLE>
UNPROVED PROPERTIES NOT BEING AMORTIZED:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Property acquisition costs......................... $533,673 $882,318 $624,953
Capitalized interest............................... 81,334 109,334 109,804
-------- -------- --------
$615,007 $991,652 $734,757
======== ======== ========
</TABLE>
The costs of unproved properties not being amortized are related to
properties which are not individually significant and on which the evaluation
process has not been completed. When evaluated these costs will be transferred
to properties being amortized.
OIL AND GAS RESERVE DATA (UNAUDITED)
ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES:
The estimates of proved reserves of the Company were estimated by
independent petroleum engineers, Netherland, Sewell and Associates, Inc. for
1995 and by independent petroleum engineers, Edinger Engineering Inc. for the
1993 and 1994 proved producing reserves, except as noted below for ANEC. Proved
F-50
<PAGE> 203
ALEXANDER ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
nonproducing and proved undeveloped reserves for 1993 and 1994 were estimated by
Company petroleum engineers and the 1994 reserves were reviewed by Edinger
Engineering Inc., as specified in their letter dated March 29, 1995 except as
noted below for ANEC. This review should not be construed to be an audit as
defined by the Society of Petroleum Engineers' audit guidelines. The estimated
proved reserves of ANEC were determined by ANEC petroleum engineers for 1993 and
are combined with the Company below.
All studies have been prepared in accordance with regulations prescribed by
the SEC. Proved reserves cannot be measured exactly because the estimation of
reserves involves numerous judgmental and arbitrary determinations. Accordingly,
reserve estimates must be continually revised as a result of new information
obtained from drilling and production history or as a result of changes in
economic conditions. It is reasonably possible that significant revisions of end
of the period reserves could occur in the near-term based on the new
information. Additionally, the 1995 reserve study estimates for proved
nonproducing and proved undeveloped reserves are based upon approximately $22.5
million of future capital expenditures, estimated to be incurred primarily over
the next three years. The Company believes it has the capability of executing
such expenditures on a timely basis; however, there can be no assurances of
such. Should the actual timing of such expenditures differ from the projected
timing, the differences could result in subsequent revisions to the discounted
future net revenues associated with such reserves. The majority of the Company's
reserves are located in Arkansas, Oklahoma and onshore Texas.
<TABLE>
<CAPTION>
CRUDE OIL, CONDENSATE AND
NATURAL GAS LIQUIDS (BARRELS) NATURAL GAS (MCF)
---------------------------------- ----------------------------------------
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
---------------------------------- ----------------------------------------
1993 1994 1995 1993 1994 1995
--------- --------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Proved developed and undeveloped reserves:
Beginning of period........................ 3,967,994 3,939,915 3,931,981 101,510,640 121,920,500 145,202,568
Purchases of minerals-in-place............. 371,201 43,344 20,657 4,142,156 28,610,484 359,755
Sales of minerals-in-place................. (47,759) (107,935) (373,568) (686,463) (6,293,000) (4,294,334)
Revisions of previous estimates (A)........ (262,482) (247,542) (1,167,618) (539,002) (13,971,181) (35,172,247)
Extensions, discoveries and other
additions................................ 194,151 528,429 77,542 23,825,184 22,986,453 2,042,021
Production................................. (283,190) (224,230) (181,022) (6,332,015) (8,050,688) (9,067,588)
--------- --------- ---------- ----------- ----------- -----------
End of period.............................. 3,939,915 3,931,981 2,307,972 121,920,500 145,202,568 99,070,175
========= ========= ========== =========== =========== ===========
</TABLE>
- ---------------
(A) In 1994, the Company's oil and gas reserves were revised downwards as a
result of declines in product prices which shortened the economic lives of
the properties. Additionally, gas reserves associated with one field were
revised downward by approximately 13 Bcf based upon the performance history
of the field (which had previously been estimated using the volumetric
method and the limited production data available at that time). Revisions
to this field were somewhat offset by other upward revisions made to
certain producing Oklahoma properties based on the performance history of
those properties.
In 1995, approximately 31 Bcfe was reclassified from proved undeveloped to
probable and possible. The Company believes this is the result of a more
conservative application of engineering assumptions than used previously.
Additionally, in 1995 the Company experienced approximately 11 Bcfe of
additional downward reserve revisions. A significant portion of these
revisions relates to certain undeveloped locations which the company now
believes is being depleted through existing proved producing properties,
previously thought to be accessible only through recompletions and/or
additional development drilling.
<TABLE>
<CAPTION>
CRUDE OIL, CONDENSATE AND
NATURAL GAS LIQUIDS (BARRELS) NATURAL GAS (MCF)
----------------------------------- --------------------------------------
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
----------------------------------- --------------------------------------
1993 1994 1995 1993 1994 1995
--------- --------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Proved developed reserves:
Beginning of period......................... 1,819,924 1,797,023 1,754,840 47,289,039 65,068,990 86,085,662
========= ========= ========= ========== ========== ==========
End of period............................... 1,797,023 1,754,820 1,215,916 65,068,990 86,085,662 66,697,746
========= ========= ========= ========== ========== ==========
</TABLE>
F-51
<PAGE> 204
ALEXANDER ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reserves of wells which have performance history were estimated through
analysis of production trends and other appropriate performance relationships.
Where production and reservoir data was limited, the volumetric method was used
and it is more susceptible to subsequent revisions.
OIL AND GAS RESERVE DATA (UNAUDITED)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS:
Future net cash inflows are based on the future production of proved
reserves of crude oil, condensate, natural gas and natural gas liquids as
estimated by petroleum engineers by applying current prices of oil and gas (with
consideration of price changes only to the extent fixed and determinable and
with consideration of the timing of gas sales under existing contracts or spot
market sales) to estimated future production of proved reserves. Prices used in
determining future cash inflows for oil and natural gas for the periods ended
December 31, 1993, 1994 and 1995 were as follows: 1993 -- $12.75, $2.20;
1994 -- $16.25, $1.62; and 1995 -- $18.40, $1.96, respectively. Future net cash
flows are then calculated by reducing such estimated cash inflows by the
estimated future expenditures (based on current costs) to be incurred in
developing and producing the proved reserves and by the estimated future income
taxes. Estimated future income taxes are computed by applying the appropriate
year-end tax rate to the future pretax net cash flows relating to the Company's
estimated proved oil and gas reserves. The estimated future income taxes give
effect to permanent differences and tax credits and allowances.
The standardized measure of discounted future net cash flows is based on
criteria established by Financial Accounting Standards Statement No. 69,
"Accounting for Oil and Gas Producing Activities" and is not intended to be a
"best estimate" of the fair value of the Company's oil and gas properties. For
this to be the case, forecasts of future economic conditions, varying price and
cost estimates, varying discount rates and consideration of other than proved
reserves (i.e., probable reserves) would have to be incorporated into the
valuations.
The following table sets forth the Company's estimated standardized measure
of discounted future net cash flows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Future cash inflows.................................. $318,762 $298,771 $236,825
Future development costs............................. (35,797) (38,731) (22,528)
Future production costs.............................. (78,793) (70,993) (71,314)
Future income taxes.................................. (55,291) (38,127) (22,193)
-------- -------- --------
Future net cash flows................................ 148,881 150,920 120,790
10% annual discount.................................. (54,216) (52,027) (36,742)
-------- -------- --------
Standardized measure of discounted future net cash
flows.............................................. $ 94,665 $ 98,893 $ 84,048
======== ======== ========
</TABLE>
The standardized measure of estimated cash flows includes amounts related to
properties sold in January 1996. It also assumes development costs relating to
proved undeveloped reserves in 1996 of $11.6 million, substantially all of which
will have to be funded from various financing alternatives. Proceeds from the
financing alternative will have to be sufficient in amount to also retire the
Company's outstanding term note with a bank. See Notes 4 and 11.
F-52
<PAGE> 205
ALEXANDER ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OIL AND GAS RESERVE DATA (UNAUDITED)
The following table sets forth changes in the standardized measure of
discounted future net cash flows as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Standardized measure of discounted future cash
flows -- beginning of period..................... $ 84,879 $ 94,665 $ 98,893
Net changes in sales prices and production costs... 557 (21,775) 7,337
Sales of oil and gas produced, net of operating
expenses......................................... (12,358) (11,255) (10,492)
Purchases of minerals-in-place(A).................. 5,445 20,414 400
Sales of minerals-in-place......................... (523) (7,233) (3,626)
Revisions of previous quantity estimates........... (675) (11,558) (38,157)
Extensions, discoveries and improved recovery, less
related costs.................................... 20,169 15,119 2,394
Previously estimated development costs incurred
during the year and change in future development
costs............................................ 4,195 9,347 14,567
Accretion of discount.............................. 6,207 7,715 7,140
Net change in income taxes......................... (8,987) 12,931 7,896
Other(B)........................................... (4,244) (9,477) (2,304)
-------- -------- --------
Standardized measure of discounted future cash
flows -- end of period........................... $ 94,665 $ 98,893 $ 84,048
======== ======== ========
</TABLE>
- ---------------
(A) The purchases in 1994 consists primarily of the JMC Acquisition, which
includes proved developed and undeveloped reserves.
(B) The change included in the caption "Other" results principally from net
changes in the timing of production of oil and gas reserves and the change
in timing related to the development of proved undeveloped reserves.
F-53
<PAGE> 206
ALEXANDER ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(INFORMATION AT MARCH 31, 1996 IS UNAUDITED.)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents...................................... $ 1,451,983 $ 1,824,020
Accounts receivable............................................ 4,192,891 4,007,860
Prepaid expenses and other..................................... 528,089 660,134
------------ -----------
Total current assets................................... 6,172,963 6,492,014
Properties and equipment, less accumulated amortization and
depreciation of $49,863,075 as of December 31, 1995 and
$51,932,658 as of March 31, 1996............................... 84,155,818 82,277,467
Other assets, net................................................ 1,537,917 1,504,136
------------ -----------
$ 91,866,698 $90,273,617
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities....................... $ 8,505,514 $ 6,832,847
Long-term debt due within one year............................. 4,162,475 5,962,475
------------ -----------
Total current liabilities.............................. 12,667,989 12,795,322
Long-term debt due after one year................................ 44,350,985 42,512,100
Noncurrent gas balancing, gas prepayments and other noncurrent
liabilities.................................................... 3,163,282 2,886,571
Deferred income taxes............................................ 1,056,000 1,158,825
Stockholders' equity:
Preferred stock -- none issued and outstanding................. -- --
Common stock -- issued -- 12,451,605 and 12,456,985 shares at
December 31, 1995 and March 31, 1996, respectively.......... 373,548 373,709
Paid-in capital................................................ 40,262,808 40,355,404
Accumulated deficit............................................ (10,007,914) (9,808,314)
------------ -----------
Total stockholders' equity............................. 30,628,442 30,920,799
------------ -----------
$ 91,866,698 $90,273,617
============ ===========
</TABLE>
See accompanying notes.
F-54
<PAGE> 207
ALEXANDER ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1995 1996
---------- ----------
<S> <C> <C>
Revenues:
Oil and gas sales................................................. $4,523,633 $4,511,548
Interest and other................................................ 35,021 105,914
Management fees and well operator reimbursements.................. 698,152 492,776
---------- ----------
Total revenues............................................ 5,256,806 5,110,238
Costs and expenses:
Direct lifting costs.............................................. 1,405,989 943,723
Gross production and severance tax................................ 277,460 276,558
Amortization and depreciation..................................... 2,257,487 2,083,195
General and administrative expenses............................... 746,663 584,615
Interest expense.................................................. 970,509 919,722
Nonrecurring abandoned merger costs............................... 300,000 --
---------- ----------
Total costs and expenses.................................. 5,958,108 4,807,813
---------- ----------
Income (loss) before provision (benefit) for income taxes........... (701,302) 302,425
Provision (benefit) for deferred income taxes....................... (260,000) 102,825
---------- ----------
Net income (loss)................................................... $ (441,302) $ 199,600
========== ==========
Weighted average shares of common stock and common equivalent shares
outstanding....................................................... 12,272,616 12,504,790
========== ==========
Net income (loss) per common and common equivalent share............ $ (.04) $ .02
========== ==========
</TABLE>
See accompanying notes.
F-55
<PAGE> 208
ALEXANDER ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 1)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1995 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................... $ (441,302) $ 199,600
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Amortization and depreciation................................ 2,257,487 2,083,195
Amortization of deferred compensation for stock awards....... 101,435 30,326
Accretion of imputed interest................................ 37,425 24,408
Deferred income taxes........................................ (260,000) 102,825
Decrease in accounts receivable.............................. 277,777 185,031
Increase in prepaid expenses and other....................... (427,792) (132,045)
Increase (decrease) in accounts payable and accrued
liabilities................................................. 53,294 (1,672,667)
Increase in noncurrent gas balancing liability and other
noncurrent liabilities...................................... 26,794 40,596
----------- -----------
Net cash provided by operating activities............... 1,625,118 861,269
Cash flows from investing activities:
Decrease in other assets, net................................... 92,776 33,781
Additions to properties and equipment........................... (2,181,042) (1,348,491)
Proceeds from the sale of properties and equipment.............. 45,691 801,932
----------- -----------
Net cash used by investing activities................... (2,042,575) (512,778)
Cash flows from financing activities:
Proceeds from borrowings on long-term debt...................... 2,000,000 --
Payments on long-term debt...................................... (5,691) (38,885)
Proceeds from exercise of employee stock options................ 4,876 62,431
----------- -----------
Net cash provided by financing activities............... 1,999,185 23,546
----------- -----------
Net increase in cash and cash equivalents during the period....... 1,581,728 372,037
----------- -----------
Cash and cash equivalents at beginning of period.................. 792,752 1,451,983
----------- -----------
Cash and cash equivalents at end of period........................ $ 2,374,480 $ 1,824,020
=========== ===========
</TABLE>
Interest paid amounted to $837,574 and $847,907 for the three months ended March
31, 1995 and 1996, respectively.
In 1996, the Company eliminated gas balancing liabilities of approximately
$342,000 in connection with the sale of certain properties.
See accompanying notes.
F-56
<PAGE> 209
ALEXANDER ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The consolidated results presented for the three-month periods ended
March 31, 1995 and 1996 are unaudited but the management of Alexander Energy
Corporation believes that all adjustments, which consist only of normal
recurring adjustments, necessary for a fair presentation of the consolidated
results of operations for the periods have been included. The consolidated
results are not necessarily indicative of those to be expected for the full
year. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 1995.
2. Net income (loss) per common and common equivalent share is computed on
the basis of weighted average shares of common stock, and dilutive stock options
and warrants. Fully diluted per share information is considered equal to primary
per share information because the addition of potentially dilutive securities
that are not common stock equivalents would have been either antidilutive or
immaterial.
F-57
<PAGE> 210
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
National Energy Group, Inc.
We have audited the accompanying statements of operating revenues and
direct operating expenses for the Mustang Island Interest (as defined in Note A
to the accompanying statements) purchased by National Energy Group, Inc. (the
"Company") for the years ended December 31, 1994 and 1993. These statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the accompanying statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the accompanying statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
The accompanying statements were prepared for the purpose of complying with
the rules and regulations of the Securities and Exchange Commission and are not
intended to be a complete presentation of the revenues and expenses of the
Mustang Island Interest.
In our opinion, the statements referred to above present fairly, in all
material respects, the operating revenues and direct operating expenses of the
Mustang Island Interest for the years ended December 31, 1994 and 1993 in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
September 12, 1995
F-58
<PAGE> 211
MUSTANG ISLAND INTEREST
STATEMENTS OF OPERATING REVENUES AND DIRECT OPERATING EXPENSES
(NOTE A)
<TABLE>
<CAPTION>
THREE-MONTH YEAR ENDED
PERIOD ENDED DECEMBER 31,
MARCH 31, ---------------------
1995 1994 1993
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Oil and gas sales........................................ $126,602 $358,785 $401,309
Direct operating expenses:
Lease operating........................................ 56,474 238,171 173,871
Oil and gas production taxes........................... 7,224 21,211 23,127
-------- -------- --------
63,698 259,382 196,998
-------- -------- --------
Excess of operating revenues over direct operating
expenses............................................... $ 62,904 $ 99,403 $204,311
======== ======== ========
</TABLE>
See accompanying notes to statements of operating revenues and
direct operating expenses.
F-59
<PAGE> 212
MUSTANG ISLAND INTEREST
NOTES TO STATEMENTS OF OPERATING REVENUES AND
DIRECT OPERATING EXPENSES
NOTE A -- BASIS OF PRESENTATION
In April 1995, the Company acquired a producing oil and gas property in the
Mustang Island Field in offshore Nueces County, Texas ("Mustang Island
Interest") from Sierra Mineral Development, L.C. and LLOG Production Company
(the Company assumed Sierra Mineral's contractual rights and obligations with
LLOG).
The consideration given for the acquisition of the Mustang Island Interest
consisted of $900,000 in cash and 352,500 shares of the Company's Class A Common
Stock. The Company funded the cash portion of the Mustang Island Interest
acquisition with available cash balances.
The operating revenues and direct operating expenses presented herein
relate only to the interest in the producing oil and gas properties acquired and
do not represent all of the oil and gas operations of the sellers. Direct
operating expenses include the actual costs of maintaining the producing
properties and their production, but do not include charges for depletion,
depreciation, and amortization; federal and state income taxes; interest; or
general and administrative expenses, including well overhead charges.
Presentation of complete historical financial statements for the three-month
period ended March 31, 1995 and the years ended December 31, 1994 and 1993 is
not practicable since the Mustang Island Interest was not accounted for as a
separate entity; and therefore, such statements are not available. The operating
revenues and direct operating expenses for the periods presented may not be
representative of future operations.
NOTE B -- SUPPLEMENTAL OIL AND GAS RESERVE AND STANDARDIZED MEASURE INFORMATION
(UNAUDITED)
The Company retained an independent engineering firm to provide an estimate
of the future net oil and gas reserves of the Mustang Island Interest as of
April 1, 1995. The reserve quantity information has been derived from this
report.
Estimated quantities of proved net reserves include only those quantities
that can be expected to be commercially recoverable at prices and costs in
effect at the effective date of the acquisition, under existing regulatory
practices and with conventional equipment and operating methods. Proved
developed reserves represent only those reserves expected to be recovered
through existing wells with existing equipment and operating methods. Proved
undeveloped reserves include those reserves expected to be recovered from new
wells on undrilled acreage or from existing wells on which a relatively major
expenditure is required for recompletion.
ESTIMATED QUANTITIES OF PROVED RESERVES
<TABLE>
<CAPTION>
OIL GAS
(BBL) (MCF)
------- ---------
<S> <C> <C>
January 1, 1993................................................ 154,786 3,064,568
Production................................................... 13,989 16,555
------- ---------
December 31, 1993.............................................. 140,797 3,048,013
Production................................................... 19,812 44,253
------- ---------
December 31, 1994.............................................. 120,985 3,003,760
======= =========
</TABLE>
F-60
<PAGE> 213
MUSTANG ISLAND INTEREST
NOTES TO STATEMENTS OF OPERATING REVENUES AND
DIRECT OPERATING EXPENSES -- (CONTINUED)
ESTIMATED QUANTITIES OF PROVED DEVELOPED RESERVES
<TABLE>
<CAPTION>
OIL GAS
(BBL) (MCF)
------- -------
<S> <C> <C>
January 1, 1993.................................................. 108,230 211,568
December 31, 1993................................................ 94,241 195,013
December 31, 1994................................................ 74,429 150,760
</TABLE>
The following is a summary of a standardized measure of discounted future
net cash flows related to the proved oil and gas reserves of the Mustang Island
Interest. For these calculations, estimated future cash flows from estimated
future production of proved reserves were computed using oil and gas prices as
of the end of each period presented. Future development and production costs
attributable to the proved reserves were estimated assuming that existing
conditions would continue over the economic life of the properties, and costs
were not escalated for the future. The Mustang Island Interest is not a separate
tax paying entity. Accordingly, the standardized measure of discounted future
net cash flows from proved reserves is presented before deduction of federal
income taxes. The information presented below should not be viewed as an
estimate of the fair value of the Mustang Island Interest, nor should it be
considered indicative of any future trends.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1993
------------ ------------
<S> <C> <C>
Future cash inflows....................................... $ 7,475,215 $ 7,058,775
Future production and development costs................... (3,819,609) (4,078,991)
Discount of future net cash flows at 10% per annum........ (716,104) (641,910)
----------- -----------
Discounted future net cash flows before income taxes...... $ 2,939,502 $ 2,337,874
=========== ===========
</TABLE>
The weighted average prices of oil and gas at December 31, 1994 and
December 31, 1993 used in the above table were $18.50 and $14.54 per barrel,
respectively, and $1.75 and $1.71 per Mcf, respectively.
The following are the principal sources of change in the standardized
measure of discounted future net cash flows of the Mustang Island Interest:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1994 1993
-------- -----------
<S> <C> <C>
Sales and transfers of oil and gas produced, net of
production costs.......................................... $(99,403) $ (204,311)
Net changes in prices and production costs.................. 467,244 (1,412,443)
Accretion of discount....................................... 233,787 359,512
-------- -----------
Net change.................................................. $601,628 $(1,257,242)
======== ===========
</TABLE>
F-61
<PAGE> 214
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
National Energy Group, Inc.
We have audited the accompanying statements of operating revenues and
direct operating expenses for the Oak Hill Interest (as defined in Note A to the
accompanying statements) purchased by National Energy Group, Inc. (the
"Company") for the years ended December 31, 1994 and 1993. These statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the accompanying statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the accompanying statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
The accompanying statements were prepared for the purpose of complying with
the rules and regulations of the Securities and Exchange Commission and are not
intended to be a complete presentation of the revenues and expenses of the Oak
Hill Interest.
In our opinion, the statements referred to above present fairly, in all
material respects, the operating revenues and direct operating expenses of the
Oak Hill Interest for the years ended December 31, 1994 and 1993 in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
September 12, 1995
F-62
<PAGE> 215
OAK HILL INTEREST
STATEMENTS OF OPERATING REVENUES AND DIRECT OPERATING EXPENSES
(NOTE A)
<TABLE>
<CAPTION>
FIVE-MONTH YEAR ENDED
PERIOD ENDED DECEMBER 31,
MAY 31, ---------------------
1995 1994 1993
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Oil and gas sales........................................ $868,306 $382,427 $323,182
Direct operating expenses:
Lease operating........................................ 212,387 163,171 70,128
Oil and gas production taxes........................... 3,193 16,773 24,239
-------- -------- --------
215,580 179,944 94,367
-------- -------- --------
Excess of operating revenues over direct operating
expenses............................................... $652,726 $202,483 $228,815
======== ======== ========
</TABLE>
See accompanying notes to statements of operating revenues and
direct operating expenses.
F-63
<PAGE> 216
OAK HILL INTEREST
NOTES TO STATEMENTS OF OPERATING REVENUES AND
DIRECT OPERATING EXPENSES
NOTE A -- BASIS OF PRESENTATION
In June 1995, the Company completed the acquisition of producing gas
properties in the Oak Hill Field in Rusk County, Texas ("Oak Hill Interest")
from Sierra 1994 I Limited Partnership ("Sierra").
The consideration paid by the Company to Sierra for the Oak Hill Interest
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 Facility with Bank One (See discussion in
Note A to the Pro Forma Statement of Operations).
The operating revenues and direct operating expenses presented herein
relate only to the interest in the producing oil and gas properties acquired and
do not represent all of the oil and gas operations of Sierra. Direct operating
expenses include the actual costs of maintaining the producing properties and
their production, but do not include charges for depletion, depreciation, and
amortization; federal and state income taxes; interest; or general and
administrative expenses, including well overhead charges. Presentation of
complete historical financial statements for the five-month period ended May 31,
1995 and the years ended December 31, 1994 and 1993 is not practicable since the
Oak Hill Interest was not accounted for as a separate entity; and therefore,
such statements are not available. The operating revenues and direct operating
expenses for the periods presented may not be representative of future
operations.
NOTE B -- SUPPLEMENTAL OIL AND GAS RESERVE AND STANDARDIZED MEASURE INFORMATION
(UNAUDITED)
The Company retained an independent engineering firm to provide an estimate
of the future net oil and gas reserves of the Oak Hill Interest as of April 1,
1995. The reserve quantity information has been derived from this report.
Estimated quantities of proved net reserves include only those quantities
that can be expected to be commercially recoverable at prices and costs in
effect at the effective date of the acquisition, under existing regulatory
practices and with conventional equipment and operating methods. Proved
developed reserves represent only those reserves expected to be recovered
through existing wells with existing equipment and operating methods. Proved
undeveloped reserves include those reserves expected to be recovered from new
wells on undrilled acreage or from existing wells on which a relatively major
expenditure is required for recompletion.
ESTIMATED QUANTITIES OF PROVED RESERVES
<TABLE>
<CAPTION>
OIL GAS
(BBL) (MCF)
------ ----------
<S> <C> <C>
January 1, 1993................................................ 43,773 22,312,163
Production................................................... 338 183,646
------ ----------
December 31, 1993.............................................. 43,435 22,128,517
Production................................................... 433 239,292
------ ----------
December 31, 1994.............................................. 43,002 21,889,225
====== ==========
</TABLE>
F-64
<PAGE> 217
OAK HILL INTEREST
NOTES TO STATEMENTS OF OPERATING REVENUES AND
DIRECT OPERATING EXPENSES -- (CONTINUED)
ESTIMATED QUANTITIES OF PROVED DEVELOPED RESERVES
<TABLE>
<CAPTION>
OIL GAS
(BBL) (MCF)
------ ---------
<S> <C> <C>
January 1, 1993................................................. 20,882 9,024,163
December 31, 1993............................................... 20,544 8,840,517
December 31, 1994............................................... 20,111 8,601,225
</TABLE>
The following is a summary of a standardized measure of discounted future
net cash flows related to the proved oil and gas reserves of the Oak Hill
Interest. For these calculations, estimated future cash flows from estimated
future production of proved reserves were computed using oil and gas prices as
of the end of each period presented. Future development and production costs
attributable to the proved reserves were estimated assuming that existing
conditions would continue over the economic life of the properties, and costs
were not escalated for the future. The Oak Hill Interest is not a separate tax
paying entity. Accordingly, the standardized measure of discounted future net
cash flows from proved reserves is presented before deduction of federal income
taxes. The information presented below should not be viewed as an estimate of
the fair value of the Oak Hill Interest, nor should it be considered indicative
of any future trends.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1993
------------ ------------
<S> <C> <C>
Future cash inflows..................................... $ 40,338,294 $ 43,770,703
Future production and development costs................. (21,056,247) (21,236,191)
Discount of future net cash flows at 10% per annum...... (8,027,752) (9,130,408)
------------ ------------
Discounted future net cash flows before income taxes.... $ 11,254,295 $ 13,404,104
============ ============
</TABLE>
The weighted average prices of oil and gas at December 31, 1994 and
December 31, 1993 used in the above table were $18.50 and $19.86 per barrel,
respectively, and $1.82 and $1.96 per Mcf, respectively.
The following are the principal sources of change in the standardized
measure of discounted future net cash flows of the Oak Hill Interest:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1994 1993
----------- ----------
<S> <C> <C>
Sales and transfers of oil and gas produced, net of
production
costs.................................................... $ (202,483) $ (228,815)
Net changes in prices and production costs................. (3,287,736) 1,908,944
Accretion of discount...................................... 1,340,410 1,065,816
----------- ----------
Net change................................................. $(2,149,809) $2,745,945
=========== ==========
</TABLE>
F-65
<PAGE> 218
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
National Energy Group, Inc.
We have audited the accompanying statements of operating revenues and
direct operating expenses for the Enron Interest (as defined in Note A to the
accompanying statements) purchased by National Energy Group, Inc. (the
"Company") for the years ended December 31, 1994 and 1993. These statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the accompanying statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the accompanying statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
The accompanying statements were prepared for the purpose of complying with
the rules and regulations of the Securities and Exchange Commission and are not
intended to be a complete presentation of the revenues and expenses of the Enron
Interest.
In our opinion, the statements referred to above present fairly, in all
material respects, the operating revenues and direct operating expenses of the
Enron Interest for the years ended December 31, 1994 and 1993 in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
September 12, 1995
F-66
<PAGE> 219
ENRON INTEREST
STATEMENTS OF OPERATING REVENUES AND DIRECT OPERATING EXPENSES
(NOTE A)
<TABLE>
<CAPTION>
FIVE-MONTH
PERIOD ENDED YEAR ENDED DECEMBER 31,
MAY 31, -------------------------
1995 1994 1993
------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Oil and gas sales..................................... $400,579 $1,151,294 $2,178,702
Direct operating expenses:
Lease operating..................................... 144,398 314,821 206,368
Oil and gas production taxes........................ 30,043 86,347 163,403
-------- ---------- ----------
174,441 401,168 369,771
-------- ---------- ----------
Excess of operating revenues over direct operating
expenses............................................ $226,138 $ 750,126 $1,808,931
======== ========== ==========
</TABLE>
See accompanying notes to statements of operating revenues and
direct operating expenses.
F-67
<PAGE> 220
ENRON INTEREST
NOTES TO STATEMENTS OF OPERATING REVENUES AND
DIRECT OPERATING EXPENSES
NOTE A -- BASIS OF PRESENTATION
In June 1995, the Company completed the acquisition of producing oil and
gas properties in Eddy County, New Mexico, for Enron Oil and Gas Company ("Enron
Interest"), pursuant to a Purchase and Sale Agreement dated as of March 29, 1995
between the Company and 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 (see discussion in
Note A to the Pro Forma Statement of Operations) and available cash balances.
The operating revenues and direct operating expenses presented herein
relate only to the interest in the producing oil and gas properties acquired and
do not represent all of the oil and gas operations of Enron. Direct operating
expenses include the actual costs of maintaining the producing properties and
their production, but do not include charges for depletion, depreciation, and
amortization; federal and state income taxes; interest; or general and
administrative expenses, including well overhead charges. Presentation of
complete historical financial statements for the five-month period ended May 31,
1995 and the years ended December 31, 1994 and 1993 is not practicable since the
Enron Interest was not accounted for as a separate entity; and therefore, such
statements are not available. The operating revenues and direct operating
expenses for the periods presented may not be representative of future
operations.
NOTE B -- SUPPLEMENTAL OIL AND GAS RESERVE AND STANDARDIZED MEASURE INFORMATION
(UNAUDITED)
The Company's internal reserve engineers prepared as estimate of the future
net oil and gas reserves of the Enron Interest as of May 1, 1995. The reserve
quantity information has been derived from this estimate.
Estimated quantities of proved net reserves include only those quantities
that can be expected to be commercially recoverable at prices and costs in
effect at the effective date of the acquisition, under existing regulatory
practices and with conventional equipment and operating methods. Proved
developed reserves represent only those reserves expected to be recovered
through existing wells with existing equipment and operating methods. Proved
undeveloped reserves include those reserves expected to be recovered from new
wells on undrilled acreage or from existing wells on which a relatively major
expenditure is required for recompletion.
ESTIMATED QUANTITIES OF PROVED RESERVES
<TABLE>
<CAPTION>
OIL GAS
(BBL) (MCF)
------- ----------
<S> <C> <C>
January 1, 1993................................................. 20,505 5,720,454
Production.................................................... 3,881 1,104,216
------ ---------
December 31, 1993............................................... 16,624 4,616,238
Production.................................................... 2,889 660,574
------ ---------
December 31, 1994............................................... 13,735 3,955,664
====== =========
</TABLE>
ESTIMATED QUANTITIES OF PROVED DEVELOPED RESERVES
<TABLE>
<CAPTION>
OIL GAS
(BBL) (MCF)
------- ----------
<S> <C> <C>
January 1, 1993................................................. 20,505 5,720,454
December 31, 1993............................................... 16,624 4,616,238
December 31, 1994............................................... 13,735 3,955,664
</TABLE>
F-68
<PAGE> 221
ENRON INTEREST
NOTES TO STATEMENTS OF OPERATING REVENUES AND
DIRECT OPERATING EXPENSES -- (CONTINUED)
The following is a summary of a standardized measure of discounted future
net cash flows related to the proved oil and gas reserves of the Enron Interest.
For these calculations, estimated future cash flows from estimated future
production of proved reserves were computed using oil and gas prices as of the
end of each period presented. Future development and production costs
attributable to the proved reserves were estimated assuming that existing
conditions would continue over the economic life of the properties, and costs
were not escalated for the future. The Enron Interest is not a separate tax
paying entity. Accordingly, the standardized measure of discounted future net
cash flows from proved reserves is presented before deduction of federal income
taxes. The information presented below should not be viewed as an estimate of
the fair value of the Enron Interest, nor should it be considered indicative of
any future trends.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1993
------------ ------------
<S> <C> <C>
Future cash inflows....................................... $ 6,137,850 $ 8,383,973
Future production and development costs................... (986,357) (1,368,349)
Discount of future net cash flows at 10% per annum........ (1,623,848) (1,956,358)
------------ ------------
Discounted future net cash flows before income taxes...... $ 3,527,645 $ 5,059,266
============ ============
</TABLE>
The weighted average prices of oil and gas at December 31, 1994 and
December 31, 1993 used in the above table were $17.50 and $20.13 per barrel,
respectively, and $1.50 and $1.73 per Mcf, respectively.
The following are the principal sources of change in the standardized
measure of discounted future net cash flows of the Enron Interest:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1994 1993
----------- -----------
<S> <C> <C>
Sales and transfers of oil and gas produced, net of
production
costs................................................... $ (750,126) $(1,808,931)
Net changes in prices and production costs................ (1,287,422) (2,567,101)
Accretion of discount..................................... 505,927 857,754
----------- -----------
Net change................................................ $(1,531,621) $(3,518,278)
=========== ===========
</TABLE>
F-69
<PAGE> 222
ADDENDUM A-1
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
NATIONAL ENERGY GROUP, INC.,
NEG-OK, INC.
AND
ALEXANDER ENERGY CORPORATION
June 6, 1996
<PAGE> 223
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<C> <S> <C>
ARTICLE I. THE MERGER
1.01 The Exchange Ratio........................................................ A-1-1
1.02 The Merger................................................................ A-1-1
1.03 Effect of the Merger...................................................... A-1-2
1.04 Exchange of Certificates.................................................. A-1-2
1.05 Taking Necessary Action; Further Action................................... A-1-3
1.06 Closing................................................................... A-1-3
1.07 No Fractional Shares...................................................... A-1-3
1.08 Dissenting Shares......................................................... A-1-3
ARTICLE II. REPRESENTATIONS AND WARRANTIES OF NEG
2.01 Organization, NEG's Subsidiaries, etc..................................... A-1-4
2.02 Capital Stock of NEG and Acquisition...................................... A-1-4
2.03 Ownership Interests in and Securities of Others........................... A-1-5
2.04 Financial Matters......................................................... A-1-5
2.05 Tax Matters............................................................... A-1-6
2.06 Title and Liens........................................................... A-1-7
2.07 Agreements, Contracts and Commitments..................................... A-1-7
2.08 No Breach of Statute or Contract; Governmental Authorizations............. A-1-8
2.09 Litigation or Adverse Events.............................................. A-1-8
2.10 Patents, Trademarks, etc.................................................. A-1-9
2.11 Authorization of Agreement................................................ A-1-9
2.12 Disclosure in Proxy Statement -- Prospectus............................... A-1-9
2.13 Broker's or Finder's Fees................................................. A-1-9
2.14 Insurance................................................................. A-1-9
2.15 Permits................................................................... A-1-10
2.16 Completeness of Documents Furnished by NEG................................ A-1-10
2.17 Disposition of Assets..................................................... A-1-10
2.18 Employees and Labor....................................................... A-1-10
2.19 Obligations to Employees.................................................. A-1-11
2.20 Vested Vacation Entitlement............................................... A-1-12
2.21 Environmental Matters..................................................... A-1-12
2.22 Books of Account.......................................................... A-1-13
2.23 Prior Obligations......................................................... A-1-13
2.24 Oil and Gas Reserve Report................................................ A-1-13
2.25 Title to Interests........................................................ A-1-13
2.26 Compliance with Leases and Laws........................................... A-1-14
2.27 Sale of Production........................................................ A-1-15
2.28 Contracts................................................................. A-1-15
2.29 Status of NEG Wells....................................................... A-1-15
2.30 Tax Partnerships.......................................................... A-1-15
2.31 Equipment and Off-Lease Facilities........................................ A-1-16
2.32 SEC Documents............................................................. A-1-16
2.33 Related Party Transactions................................................ A-1-16
2.34 Certain Payments.......................................................... A-1-16
2.35 Royalty Accounts.......................................................... A-1-16
2.36 Accounts Payable.......................................................... A-1-16
</TABLE>
(i)
<PAGE> 224
<TABLE>
<CAPTION>
PAGE
------
<C> <S> <C>
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF ALEXANDER
3.01 Organization, Alexander's Subsidiaries, etc............................... A-1-17
3.02 Capital Stock of Alexander................................................ A-1-18
3.03 Ownership Interests in and Securities of Others........................... A-1-18
3.04 Financial Matters......................................................... A-1-18
3.05 Tax Matters............................................................... A-1-19
3.06 Title and Liens........................................................... A-1-20
3.07 Agreements, Contracts and Commitments..................................... A-1-20
3.08 No Breach of Statute or Contract; Governmental Authorizations............. A-1-21
3.09 Litigation or Adverse Events.............................................. A-1-21
3.10 Patents, Trademarks, etc.................................................. A-1-21
3.11 Authorization of Agreement................................................ A-1-22
3.12 Disclosure in Proxy Statement-Prospectus.................................. A-1-22
3.13 Broker's or Finder's Fees................................................. A-1-22
3.14 Insurance................................................................. A-1-22
3.15 Permits................................................................... A-1-23
3.16 Completeness of Documents Furnished by Alexander.......................... A-1-23
3.17 Disposition of Assets..................................................... A-1-23
3.18 Employees and Labor....................................................... A-1-23
3.19 Obligations to Employees.................................................. A-1-24
3.20 Vested Vacation Entitlement............................................... A-1-25
3.21 Environmental Matters..................................................... A-1-25
3.22 Books of Account.......................................................... A-1-26
3.23 Prior Obligations......................................................... A-1-26
3.24 Oil and Gas Reserve Report................................................ A-1-26
3.25 Title to Interests........................................................ A-1-26
3.26 Compliance with Leases and Laws........................................... A-1-27
3.27 Sale of Production........................................................ A-1-28
3.28 Contracts................................................................. A-1-28
3.29 Status of Alexander Wells................................................. A-1-28
3.30 Tax Partnerships.......................................................... A-1-28
3.31 Equipment and Off-Lease Facilities........................................ A-1-28
3.32 SEC Documents............................................................. A-1-28
3.33 Related Party Transactions................................................ A-1-29
3.34 Certain Payments.......................................................... A-1-29
3.35 Royalty Accounts.......................................................... A-1-29
3.36 Accounts Payable.......................................................... A-1-29
ARTICLE IV. CONDUCT AND TRANSACTIONS PRIOR TO EFFECTIVE DATE OF THE MERGER
4.01 Investigations; Operation of Business of Alexander........................ A-1-29
4.02 Investigations; Operation of Business of NEG.............................. A-1-31
4.03 Shareholder Approvals..................................................... A-1-33
4.04 NEG Registration Statement, etc........................................... A-1-33
4.05 Information for Proxy Statement-Prospectus................................ A-1-34
4.06 Restricted Common Stock................................................... A-1-34
4.07 Letters from Affiliates................................................... A-1-34
4.08 Consents.................................................................. A-1-34
4.09 NEG Board of Directors.................................................... A-1-34
4.10 Outstanding Alexander Options, Warrants and Stock Awards.................. A-1-34
4.11 Filings................................................................... A-1-35
4.12 Notices of Certain Events................................................. A-1-35
</TABLE>
(ii)
<PAGE> 225
<TABLE>
<CAPTION>
PAGE
------
<C> <S> <C>
4.13 Tax Free Reorganization................................................... A-1-35
4.14 Recognition of Employment and Severance Agreements........................ A-1-35
ARTICLE V. CONDITIONS OF MERGER; ABANDONMENT OF MERGER
5.01 Conditions of Obligations of Alexander.................................... A-1-35
(a) Resolutions of Shareholders and Board of Directors.................... A-1-35
(b) Representations and Warranties of NEG and Acquisition to be True...... A-1-36
(c) Third Party Consents.................................................. A-1-36
(d) Registration of NEG Stock............................................. A-1-36
(e) No Material Adverse Change............................................ A-1-36
(f) Statutory Requirements................................................ A-1-36
(g) Opinion of Counsel of NEG............................................. A-1-36
(h) Fairness Opinion...................................................... A-1-37
(i) NEG Stock Price....................................................... A-1-37
(j) NEG Financing......................................................... A-1-37
(k) Filing of Form S-4.................................................... A-1-37
5.02 Conditions of Obligation of NEG........................................... A-1-37
(a) Resolutions of Shareholders and Boards of Directors................... A-1-37
(b) Representations and Warranties of Alexander to be True................ A-1-38
(c) Third Party Consents.................................................. A-1-38
(d) Registration of NEG Stock............................................. A-1-38
(e) No Material Adverse Change............................................ A-1-38
(f) Statutory Requirements................................................ A-1-38
(g) Opinion of Counsel of Alexander....................................... A-1-38
(h) Receipt of Letters from Alexander Affiliates.......................... A-1-39
(i) Fairness Opinion...................................................... A-1-39
(j) Outstanding Alexander Common Stock.................................... A-1-39
(k) NEG Stock Price....................................................... A-1-39
(l) NEG Financing......................................................... A-1-39
5.03 Conditions of Obligations of NEG and Alexander............................ A-1-40
(a) Tax Opinion........................................................... A-1-40
(b) Payment of Prudential and McAfee & Taft............................... A-1-40
5.04 Termination of Agreement and Abandonment of Merger........................ A-1-40
(a) Mutual Consent........................................................ A-1-40
(b) By Alexander.......................................................... A-1-40
(c) By NEG................................................................ A-1-40
5.05 Effect of Termination and Abandonment..................................... A-1-41
ARTICLE VI. GENERAL
6.01 Amendments................................................................ A-1-41
6.02 "Subsidiaries"; "Material Adverse Effect"; "Knowledge")................... A-1-41
6.03 Schedules................................................................. A-1-41
6.04 Survival of Covenants, Representations and Warranties..................... A-1-41
6.05 Governing Law............................................................. A-1-41
6.06 Notices................................................................... A-1-42
6.07 No Assignment............................................................. A-1-42
6.08 Fees and Expenses......................................................... A-1-42
6.09 Headings.................................................................. A-1-42
6.10 Counterparts.............................................................. A-1-42
6.11 Entire Agreement.......................................................... A-1-42
6.12 Publicity................................................................. A-1-43
6.13 No Third Party Beneficiaries.............................................. A-1-43
</TABLE>
(iii)
<PAGE> 226
EXHIBITS AND SCHEDULES
EXHIBITS
<TABLE>
<S> <C> <C>
EXHIBIT A Amendment to Certificate of Incorporation of NEG
EXHIBIT B Certificate of Merger
EXHIBIT C Form of Affiliates Letter
</TABLE>
SCHEDULES
<TABLE>
<S> <C> <C>
Schedule 2.01 Subsidiaries and Partnerships of NEG
Schedule 2.02 Capital Stock of NEG
Schedule 2.03 Ownership Interests in Securities of Others
Schedule 2.04 Financial Matters
Schedule 2.05 Tax and Other Returns and Reports
Schedule 2.06 Title and Liens
Schedule 2.07 Agreements, Contracts and Commitments
Schedule 2.08 No Breach of Statute or Contract; Governmental Authorizations
Schedule 2.09 Litigation or Adverse Events
Schedule 2.13 Brokers
Schedule 2.14 Insurance
Schedule 2.17 Disposition of Assets
Schedule 2.18 Employees and Labor
Schedule 2.19 Obligations to Employees
Schedule 2.20 Vested Vacation Entitlement
Schedule 2.21 Environmental
Schedule 2.25A Title to NEG Interests -- Producing Leases
Schedule 2.25B Title to NEG Interests -- Non-Producing Leases
Schedule 2.25C Title to NEG Interests -- Non-Producing Mineral Fee Interests
Schedule 2.26 Compliance with Leases and Laws
Schedule 2.27 Sale of Production
Schedule 2.28 Contracts
Schedule 2.29 Status of NEG Wells
Schedule 2.30 Tax Partnerships
Schedule 2.32 SEC Documents of NEG
Schedule 2.33 Related Party Transactions of NEG
Schedule 2.34 Certain Payments of NEG
Schedule 2.35 Royalty Accounts
Schedule 2.36 Accounts Payable
Schedule 3.01 Subsidiaries and Partnerships of Alexander
Schedule 3.02 Capital Stock of Alexander
Schedule 3.03 Ownership Interests in Securities of Others
Schedule 3.04 Financial Matters
Schedule 3.05 Tax and Other Returns and Reports
Schedule 3.06 Title and Liens
Schedule 3.07 Agreements, Contracts and Commitments
Schedule 3.08 No Breach of Statute or Contract; Governmental Authorizations
Schedule 3.09 No Litigation or Adverse Events
Schedule 3.13 Brokers
Schedule 3.14 Insurance
Schedule 3.17 Disposition of Assets
Schedule 3.18 Employees and Labor
Schedule 3.19 Obligations to Employees
</TABLE>
(iv)
<PAGE> 227
<TABLE>
<S> <C> <C>
Schedule 3.20 Vested Vacation Entitlement
Schedule 3.21 Environmental Matters
Schedule 3.25A Title to Alexander Interests -- Producing Leases
Schedule 3.25B Title to Alexander Interests -- Non-Producing Leases
Schedule 3.25C Title to Alexander Interests -- Non-Producing Mineral Fee Interests
Schedule 3.26 Compliance with Leases and Laws
Schedule 3.27 Sale of Production
Schedule 3.28 Contracts
Schedule 3.29 Status of Alexander Wells
Schedule 3.30 Tax Partnerships
Schedule 3.32 SEC Documents of Alexander
Schedule 3.33 Related Party Transactions of Alexander
Schedule 3.34 Certain Payments of Alexander
Schedule 3.35 Royalty Accounts
Schedule 3.36 Accounts Payable
Schedule 4.01 Alexander's Proposed Capital Expenditures
Schedule 4.02 NEG's Proposed Capital Expenditures and Conduct of Business Pending
Closing
</TABLE>
(v)
<PAGE> 228
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
NATIONAL ENERGY GROUP, INC.,
NEG-OK, INC. AND
ALEXANDER ENERGY CORPORATION
---------------------
AGREEMENT AND PLAN OF MERGER (hereinafter called the "Agreement"), dated as
of the 7th of June, 1996, by and among NATIONAL ENERGY GROUP, INC., a Delaware
corporation ("NEG"), NEG-OK, Inc., a Delaware corporation ("Acquisition"), and
ALEXANDER ENERGY CORPORATION, an Oklahoma corporation ("Alexander").
WITNESSETH:
WHEREAS, all of the outstanding capital stock of Acquisition is owned by
NEG; and
WHEREAS, the Boards of Directors of NEG, Acquisition and Alexander,
respectively, deem it advisable and in the best interests of the respective
companies and their respective shareholders that Alexander merge with and into
Acquisition pursuant to this Agreement and applicable provisions of the Oklahoma
General Corporation Act (the "Oklahoma Act") and the General Corporation Law of
the State of Delaware (the "DGCL") (the "Merger"); and
WHEREAS, this Agreement, among other things, provides for (i) the merger of
Alexander with and into Acquisition, and (ii) the automatic conversion of each
share of Alexander's common stock, par value $0.03 per share ("Alexander Common
Stock"), outstanding at the Effective Time (as defined in Section 1.02),
together with any and all rights associated with such Alexander Common Stock
pursuant to the Rights Agreement ("Rights Agreement") dated December 15, 1994,
between Alexander and Liberty Bank and Trust Company of Oklahoma City, N.A. and
all related documents ("Associated Rights"), into one and seven tenths (1.7)
shares of Common Stock of NEG, par value $0.01 per share (the "NEG Common
Stock") which is currently entitled Class A Common Stock, but which will be
renamed Common Stock after shareholder approval of NEG's Amendment to
Certificate of Incorporation, a copy of which is attached hereto as Exhibit A;
and
WHEREAS, the Boards of Directors of the respective companies have approved
and adopted this Agreement as a plan of reorganization within the provisions of
Sections 368(a)(1)(A) and 368(a)(2)(D) of the Internal Revenue Code of 1986, as
amended (the "Code");
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements, provisions and covenants herein contained, the parties hereto hereby
agree as follows:
ARTICLE I
THE MERGER
1.01 The Exchange Ratio. NEG shall acquire Alexander through the merger of
Alexander with and into NEG's wholly-owned subsidiary, Acquisition, under the
terms of which each share of Alexander Common Stock issued and outstanding at
the Effective Time (as defined in Section 1.02 hereof), together with all
Associated Rights, will be converted as a result of the Merger into one and
seven tenths (1.7) shares of fully paid and nonassessable shares of NEG's Common
Stock (the "Exchange Ratio").
Each share of Acquisition issued and outstanding at the Effective Time
shall remain outstanding.
1.02 The Merger. Subject to Article V of this Agreement, a Certificate of
Merger substantially in the form attached hereto as Exhibit B (the "Certificate
of Merger") shall be executed with reasonable promptness by the parties after
satisfaction or waiver of the conditions to the Merger set forth herein and
delivered to the Secretary of State of the State of Oklahoma (the "Oklahoma
Secretary of State") and the Secretary of State of the State of Delaware (the
"Delaware Secretary of State") for filing and to be effective
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on such date (the "Effective Date" or the "Effective Date of the Merger") and
time (the "Effective Time" or the "Time of Filing") as may be mutually agreed by
NEG and Alexander and set forth in the Certificate of Merger. As of the
Effective Time of the Merger, the separate existence of Alexander shall cease
and Alexander shall be merged with and into Acquisition, and the name of
Acquisition shall be changed to NEG-OK, Inc.
1.03 Effect of the Merger. In accordance with the provisions of this
Agreement, the Oklahoma Act and the DGCL, at the Effective Time, Alexander shall
be merged with and into Acquisition, which shall be the surviving corporation
(Acquisition being herein sometimes referred to as the "Surviving Corporation").
The Certificate of Incorporation and By-Laws of Acquisition as in effect at the
Effective Time shall continue to be the Certificate of Incorporation and By-Laws
of the Surviving Corporation until amended or supplemented in accordance with
the DGCL. The officers and directors of Acquisition at the Effective Time shall
be the officers and directors of Acquisition immediately after the Effective
Time, each to serve until his respective successor is duly elected and
qualified, or until his earlier resignation or removal. Acquisition, as the
Surviving Corporation, shall, at and after the Effective Time, possess all the
rights, privileges, powers and franchises, of a public as well as of a private
nature, of Alexander and Acquisition (the "Constituent Corporations"), subject
to all the restrictions, disabilities and duties of each of the Constituent
Corporations; and all rights, privileges, powers and franchises of each of the
Constituent Corporations, and all property, real, personal and mixed, and all
debts due on whatever account, as well as stock subscriptions and all other
things in action or belonging to each of the Constituent Corporations shall be
vested in the Surviving Corporation; and all property, rights, privileges,
powers and franchises, and all and every other interest shall be thereafter the
property of the Surviving Corporation as they were of the Constituent
Corporations and the title to any real estate, or any interest thereto, vested
in any of the Constituent Corporations shall not revert or be in any way
impaired by reason of the provisions of the Merger, the Oklahoma Act or the
DGCL; but all rights of creditors and all liens upon any property of any of the
Constituent Corporations shall be preserved unimpaired, and all debts,
liabilities and duties of the respective Constituent Corporations shall
thenceforth attach to the Surviving Corporation, and may be enforced against the
Surviving Corporation to the same extent as if said debts, liabilities and
duties had been incurred or contracted by it. Without limiting the generality of
the foregoing, from and after the Effective Time, the Surviving Corporation
shall assume and be liable for all of the obligations of Alexander under
Alexander's Certificate of Incorporation and By-Laws as in effect immediately
prior to the Effective Time relating to the indemnification of persons who are
directors or officers of Alexander immediately prior to the Effective Time; it
is the intent of this provision that the officers and directors be as fully
indemnified after the Effective Time of the Merger for acts or omissions prior
thereto as they were prior to the Merger. The provisions of this Section 1.03
shall survive the termination of the Agreement and shall be enforceable after
the Effective Time by each of the persons who are officers and directors of
Alexander immediately prior to the Effective Time.
1.04 Exchange of Certificates. Immediately after the Effective Time, each
holder of an outstanding certificate or certificates which immediately prior to
the Effective Time represented shares of Alexander Common Stock and Associated
Rights (the "Certificates") shall surrender the same to a bank or other
financial institution selected by NEG and satisfactory to Alexander, which shall
act as exchange agent for all such holders (the "Exchange Agent"), and such
holders shall be entitled upon such surrender to receive in exchange therefor
certificates representing the number of whole shares of NEG Common Stock into
which the shares theretofore represented by the Certificates so surrendered
shall have been converted pursuant to Section 1.01 above. Approval of this
Agreement by the shareholders of Alexander shall constitute ratification of the
appointment of the Exchange Agent. At the Effective Time, all rights of holders
of Alexander Common Stock and the Associated Rights, except with respect to
Alexander Dissenting Shares (as defined below), if any, shall cease, except for
the right to receive shares of NEG Common Stock as provided herein, and neither
shares of Alexander Common Stock nor the Associated Rights shall be deemed to be
outstanding for any purpose whatsoever. Until so surrendered, each outstanding
Certificate shall be deemed for all corporate purposes (except the payment of
dividends) from and after the Effective Time to evidence the ownership of the
number of whole shares of NEG Common Stock into which the shares and rights
represented thereby prior to such Effective Time shall have been converted.
After the Effective Time and until the Certificates are so surrendered, no
dividend payable to holders of record of NEG shall be paid to the holders of
such
A-1-2
<PAGE> 230
Certificates in respect thereof. Upon surrender of such Certificates, however,
there shall be paid to the holders of the Certificates for NEG Common Stock
issued in exchange therefor the amount of dividends, if any, which theretofore
became payable after the Effective Time with respect to such whole shares of NEG
Common Stock, but which have not theretofore been paid on such stock. No
interest shall be payable with respect to the payment of any such dividends.
Promptly after the Effective Time, the Exchange Agent shall mail or deliver to
each recordholder of Certificates a form letter of transmittal and instructions
for use in surrendering Certificates and receiving payment therefor, which
letter of transmittal shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass only upon proper delivery of the
Certificates to the Exchange Agent. If payment is to be made to a person other
than the person in whose name the Certificate surrendered is registered, it
shall be a condition of payment that the Certificate so surrendered shall be
properly endorsed or otherwise in proper form for transfer and that the person
requesting such payment shall pay any transfer or other taxes required by reason
of the payment to a person other than the registered holder or established to
the satisfaction of NEG that such tax has been paid or is not applicable.
1.05 Taking Necessary Action; Further Action. The parties shall use all
reasonable efforts to take all such action as may be necessary or appropriate in
order to effectuate the Merger as promptly as possible, including recording the
Certificate of Merger for the State of Delaware in the Office of the Recorder of
the County of Newcastle in Delaware, if appropriate. If, at any time after the
Effective Time of the Merger, any further action is necessary or desirable to
carry out the purposes of this Agreement, or to vest the Surviving Corporation
with full right, title and possession to all assets, property, rights,
privileges, powers and franchises of the Constituent Corporations, the officers
and directors of the Surviving Corporation are fully authorized in the name of
the Constituent Corporations or otherwise to take, and shall take, all such
action.
1.06 Closing. Subject to the terms and provisions hereof, after
satisfaction or waiver of the conditions to the Merger set forth herein, the
effectiveness of the Merger will be confirmed at 11:00 a.m. at the offices of
Strasburger & Price, LLP, 901 Main Street, Suite 4300, Dallas, Texas on August
30, 1996, or at such earlier or later date or place as shall be mutually agreed
by NEG and Alexander, such date and time herein sometimes referred to as the
"Closing" or "Closing Date."
1.07 No Fractional Shares. No certificates or scrip for fractional shares
of NEG Common Stock will be issued and no such fractional share interest shall
entitle the owner thereof to vote or to have any rights of a shareholder of NEG.
In lieu of such fractional shares, any holder of Alexander Common Stock and
Associated Rights who otherwise would have been entitled to receive fractional
shares of NEG Common Stock shall, after surrender of his Certificate, be paid
the cash value of each such fraction, which shall be equal to the fraction
multiplied by the closing sales price of NEG Common Stock on the Nasdaq National
Market for the trading day preceding the Closing Date. The Exchange Agent shall,
subject to any applicable abandoned property, escheat or similar law, until one
year after the Effective Date, pay to such holders, upon surrender of their
Certificates, the cash value of such fraction so determined, without interest.
Any balance of such cash, as to which Certificates shall not have been
surrendered by the expiration of such one-year period, shall thereafter be
returned to and held by NEG subject to any applicable statute of limitations or
any abandoned property, escheat or similar law.
1.08 Dissenting Shares. Notwithstanding anything in this Agreement to the
contrary, all shares of Alexander Common Stock which are outstanding immediately
prior to the Effective Time and which are held by holders who shall have
delivered a written demand for appraisal of such Alexander Common Stock
("Alexander Dissenting Shares") in the manner provided in Section 1091 of the
Oklahoma Act shall not be converted into or be exchangeable for the right to
receive the consideration provided for in Section 1.01; but the holders thereof
shall be entitled to payment of the appraised value of such shares in accordance
with the provisions of Section 1091 of the Oklahoma Act; provided, however, that
(i) if any holder of Alexander Dissenting Shares shall subsequently deliver a
written withdrawal of such holder's demand for appraisal of such Alexander
Common Stock (with the written approval of NEG, if such withdrawal is not
tendered within 60 days after the Effective Time), or (ii) if neither any holder
of Alexander Dissenting Shares nor NEG has filed a petition demanding a
determination of the value of all Alexander Dissenting Shares within the time
provided in Section 1091 of the Oklahoma Act, such holders shall forfeit the
right to appraisal of such shares
A-1-3
<PAGE> 231
and such shares shall thereupon be deemed to have become exchangeable for, as of
the Effective Time, the right to receive the merger consideration provided in
Section 1.01, without any interest thereon.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF NEG
NEG (unless the context otherwise indicates, for purposes of this Agreement
NEG shall include the NEG Subsidiaries and the NEG Partnerships as defined
herein) represents and warrants to Alexander as follows:
2.01 Organization, NEG's Subsidiaries, etc. NEG is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. NEG has the corporate power and authority to own its property and to
carry on its business as now being conducted. NEG has the corporate power and
authority to execute, deliver and perform this Agreement and the Certificate of
Merger and to consummate the transactions contemplated hereby and thereby; and
NEG is duly qualified and/or licensed, as may be required, and in good standing
in each of the jurisdictions in which the nature of the business conducted by it
or the character of the property owned, leased or used by it makes such
qualification and/or licensing necessary, except where the failure to be so
qualified, licensed and/or in good standing would not individually or in the
aggregate have or result in a Material Adverse Effect (as defined in Section
6.02(b) hereof) on or to NEG.
NEG has delivered to Alexander certified copies of its Certificate of
Incorporation and Bylaws which reflect all amendments made at any time prior to
the date of this Agreement and are complete and accurate in all respects as of
the date hereof. The minute books containing the records of meetings of the
shareholders and Board of Directors of NEG are complete and correct in all
respects. Such minute books have been made available to Alexander for
examination. NEG is not in default under or in violation of any provision of its
Certificate of Incorporation or Bylaws except for such defaults or violations
which individually or in the aggregate would not have a Material Adverse Effect
on or to NEG.
Schedule 2.01 hereto sets forth a complete and correct description of (i)
the name and jurisdiction of incorporation of each of the direct and indirect
Subsidiaries of NEG (such subsidiaries are sometimes hereafter collectively
referred to as the "NEG Subsidiaries" or individually as an "NEG Subsidiary"
and, except for those accounted for on the equity method of accounting,
sometimes collectively referred to as the "NEG Consolidated Subsidiaries") and
(ii) the name and jurisdiction of organization of, and interest of NEG in, each
partnership or joint venture in which NEG owns an equity interest (collectively
the "NEG Partnerships" or individually an "NEG Partnership"). Except as set
forth on Schedule 2.01, (i) all of the issued and outstanding shares of capital
stock of each NEG Subsidiary have been duly authorized and validly issued, are
fully paid and nonassessable and are owned directly or beneficially by NEG or an
NEG Subsidiary free and clear of any liens, claims or other encumbrances or
rights of third parties, and (ii) the interest of NEG or an NEG Subsidiary in
each NEG Partnership is owned by NEG or an NEG Subsidiary free and clear of any
liens, claims or encumbrances or rights of third parties. Except as set forth on
Schedule 2.01, there are no outstanding options, warrants or rights to purchase
or acquire any capital stock of any of the NEG Subsidiaries, and there are no
contracts, commitments, understandings, arrangements or restrictions by which
any NEG Subsidiary or NEG is bound to sell or issue any shares of capital stock
of such NEG Subsidiary or any interest in any NEG Partnership.
Each NEG Subsidiary is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, has the
corporate power and authority to own its respective property and to carry on its
respective business as now being conducted, and is duly qualified and/or
licensed as may be required and in good standing as a foreign corporation, as
the case may be, in each jurisdiction in which the nature of the business
conducted by it or the character of the property owned, leased or used by any of
them makes such qualification and/or licensing necessary, except in such
jurisdictions where the failure to be so qualified would not individually or in
the aggregate have a Material Adverse Effect on NEG.
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<PAGE> 232
2.02 Capital Stock of NEG and Acquisition.
(a) As of the date of this Agreement, the authorized capital stock of NEG
consists of (i) 50,000,000 shares of Class A Common Stock, $0.01 par value, of
which 12,114,532 shares are issued and outstanding; (ii) 200,000 shares of Class
B Common Stock, $0.01 par value, none of which are issued and outstanding; and
(iii) 1,000,000 shares of preferred stock, $1.00 par value, of which 52,500
shares of 10% Cumulative Convertible Preferred Stock, Series B ("Series B
Preferred") and 40,000 shares of 10 1/2% Cumulative Convertible Preferred Stock,
Series C ("Series C Preferred") (collectively, the "NEG Preferred Stock") are
issued and outstanding. As of the date of this Agreement, there are no shares of
capital stock held in the treasury of NEG. Such issued and outstanding shares of
NEG Common Stock and NEG Preferred Stock are validly authorized and issued and
fully paid and nonassessable. Except as set forth in Schedule 2.02 attached
hereto, NEG has not, subsequent to December 31, 1995, declared or paid any
dividend, or declared or made any distribution on, or authorized the creation or
issuance of, or issued, or authorized or effected any split-up or any other
recapitalization of, any of its capital stock, or directly or indirectly
redeemed, purchased or otherwise acquired any of its outstanding capital stock.
Except as set forth in Schedules 2.02 and 2.18, there are no contracts,
commitments, understandings, arrangements or restrictions by which NEG is bound
to sell or issue any shares of capital stock of NEG. Except as described at
Schedule 2.02, all dividends which have been declared by NEG with respect to its
capital stock have been fully paid or distributed, as applicable. Except as set
forth on Schedule 2.02, NEG has not heretofore agreed to take any such action,
will not take any such action during the period between the date of this
Agreement and the Effective Date of the Merger and there are no outstanding
contractual obligations of NEG to repurchase, redeem or otherwise acquire any
outstanding shares of capital stock of NEG.
(b) Set forth on Schedule 2.02 attached hereto is a list of all outstanding
options, warrants or other rights to subscribe for or to purchase from NEG any
capital stock of NEG or securities convertible into or exchangeable for capital
stock of NEG setting forth, in each case, the name of the optionee, the number
of shares subject to options which are currently exercisable, the number of
shares subject to options which will become exercisable in the future and the
date on which such options become exercisable, the option exercise price,
whether or not stock appreciation rights ("SAR's") are attached to the options
and the date or dates on which such SAR's become exercisable.
(c) The authorized capital stock of Acquisition consists of 50,000 shares
of common stock, par value $1.00 per share, of which 100 shares of Acquisition
Common Stock are issued and outstanding and owned of record by NEG. No shares of
common stock of Acquisition are held in the treasury. As of the date of this
Agreement, there are no outstanding options, warrants or other rights to
subscribe for or purchase from Acquisition any capital stock of Acquisition, or
securities convertible into capital stock of Acquisition.
2.03 Ownership Interests in and Securities of Others. Set forth in
Schedule 2.03 attached hereto are (i) a description of the types and amounts of
investment securities, bonds and debentures owned by NEG and (ii) a list of all
equity or ownership interests of NEG in other business enterprises or entities
other than the NEG Consolidated Subsidiaries, and Schedule 2.03 indicates any
such interests which are held subject to any legal, contractual or other
limitations or restrictions on the right to resell the same. Except as set forth
in Schedule 2.03, there are no outstanding options, warrants or other rights to
subscribe for or purchase from NEG any of the debt, equity, or ownership
interests set forth in such Schedule 2.03.
2.04 Financial Matters.
(a) NEG has previously furnished Alexander a true and complete copy of (i)
NEG's Annual Report on Form 10-KSB, as amended on Form 10-KSB/A Amendment No. 1,
and Form 10-KSB/A Amendment No. 2, filed with the Securities and Exchange
Commission ("SEC"), for the year ended December 31, 1995, which amended report
(the "NEG 10-K") includes Balance Sheets of NEG as at December 31, 1995 and
December 31, 1994, and the related Statements of Operations, Statements of
Changes in Stockholders' Equity and Statements of Cash Flows for each of the
years ended December 31, 1995 and December 31, 1994 reported upon by Ernst &
Young LLP ("Ernst & Young"), independent certified public accountants, and (ii)
NEG's Quarterly Report on Form 10-QSB filed with the SEC for the period ended
March 31, 1996 (the "NEG 10-Q"), which report includes the unaudited Balance
Sheet of NEG at that date (the "NEG
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<PAGE> 233
March 31 Balance Sheet"), and the end of the preceding year, and the related
Statements of Operations and Statements of Cash Flow for the required periods.
All year end financial statements have been prepared in conformity with
generally accepted accounting principles applied on a basis consistent with
prior periods, except as set forth in such financial statements and the notes
thereto. Except as set forth in Schedule 2.04, the Balance Sheets of NEG as at
December 31, 1995 and December 31, 1994 contained in the NEG 10-K present fairly
the financial condition of NEG as of the dates thereof, and the related
Statements of Operations of NEG contained in the NEG 10-K present fairly the
results of the operations thereof for the periods indicated. Except as disclosed
in Schedule 2.04, the NEG March 31 Balance Sheet fairly presents the financial
condition of NEG as of the date thereof, and the related Statement of Operations
of NEG contained in the NEG 10-Q fairly presents the results of operations
thereof for the period indicated, including all necessary adjustments (which
consist of only normal recurring accruals). For the purposes of this Agreement,
all financial statements of NEG shall include any notes to such financial
statements.
(b) NEG does not have any liabilities or obligations, either accrued,
absolute, contingent or otherwise, which in the aggregate are material to NEG,
which have not been:
(i) reflected in the Balance Sheet and notes thereto of NEG dated
December 31, 1995 (the "NEG Balance Sheet"), or the NEG March 31 Balance
Sheet; or
(ii) disclosed to Alexander in writing in connection with this
Agreement; or
(iii) incurred, consistent with past practices, in or as a result of
the ordinary course of business since December 31, 1995.
(c) Except as is determinable from the NEG Balance Sheet, the NEG 10-Q, as
set forth on Schedule 2.04 or except as contemplated by this Agreement, between
December 31, 1995 and the date of this Agreement, NEG has not engaged in any
material transaction not in the ordinary course of its business and, except as
set forth in Schedule 2.04, there has not been, occurred or arisen since
December 31, 1995:
(i) any material adverse change in the financial condition or in the
operations of the business of NEG from that shown on the NEG Balance Sheet;
or
(ii) any damage or destruction in the nature of a casualty loss, or
interference with its business from such loss or from any labor dispute or
court or governmental action, order or decree, whether covered by insurance
or not, either individually or in the aggregate, which had a Material
Adverse Effect on or to NEG; or
(iii) any event, condition or state of facts (other than the general
state of the national economy, prices of oil and gas generally in the
United States and proposed state or federal legislation or regulation) of
any character which would have a Material Adverse Effect on or to NEG; or
(iv) any extraordinary loss or collective losses (as defined in
Opinions No. 9 and No. 30 of the Accounting Principles Board of the
American Institute of Certified Public Accountants) suffered by NEG which
has a Material Adverse Effect on NEG, or any waiver by NEG of any rights
which are material to NEG.
2.05 Tax Matters.
(a) Except as set forth on Schedule 2.05, all federal, state, local and
foreign tax returns, reports and declarations required to be filed by NEG have
been timely filed (or appropriate extensions or waivers have been obtained) with
the appropriate governmental agencies in all jurisdictions in which such returns
and reports are required to be filed.
(b) All federal, state, local and foreign income, profits, franchise,
sales, use, occupation, property, production, severance, excise and other taxes
(including interest and penalties) (collectively "Taxes") due from NEG (i) have
been fully paid or adequately reserved against on the books of NEG, the NEG
Balance Sheet or the NEG March 31 Balance Sheet, or (ii) are being contested in
good faith by appropriate proceedings and are disclosed in Schedule 2.05
attached hereto. Any deficiencies or assessments claimed or
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made as a result of examination of the federal or state income tax returns of
NEG by the Internal Revenue Service (the "IRS") or the appropriate state taxing
authority have either been paid or settled or fully reserved against on its
books or on the financial statements of NEG.
(c) No waivers of statutes of limitation in respect of any tax returns or
tax reports have been given or requested, except as shown on Schedule 2.05.
(d) There are no potential tax deficiencies which are reasonably likely to
arise from issues which have been raised by the IRS or any other taxing
authority that have not been disclosed in Schedule 2.05 and are reasonably
likely to have a Material Adverse Effect on or to NEG.
(e) Notwithstanding the foregoing representations regarding Taxes and tax
returns described in this Section 2.05, NEG represents and warrants that with
respect to all taxable years ended on and prior to December 31, 1995, NEG shall
owe no additional Taxes except those that have been paid or as to which proper
and adequate reserves and allowances have been provided on the books of NEG or
the NEG Balance Sheet.
2.06 Title and Liens. NEG has defensible title to all of the properties
and assets included in the NEG Balance Sheet, including, without limitation, the
NEG Leases (as defined in, and after giving effect to the provisions of Section
2.25), which are material to NEG and its Consolidated Subsidiaries considered as
one enterprise except for properties and assets disposed of in the ordinary
course of its business subsequent to the date thereof. There are no mortgages,
liens, security interests, assignments of production, deeds of trust, charges,
deficiencies or encumbrances of any nature whatsoever covering or affecting any
of such properties or assets except (i) as set forth on Schedule 2.06, (ii)
liens for taxes and assessments not yet subject to penalties for nonpayment, or
(iii) such liens, security interests, assignments of production, encumbrances,
charges or deficiencies, which individually or in the aggregate are immaterial
to such property or asset.
2.07 Agreements, Contracts and Commitments. NEG has listed on Schedule
2.07 (or, with respect to employee benefit obligations, Schedule 2.18) all
contracts, agreements and instruments to which it is a party or by which it is
bound as of the date hereof and which are in any single case of material
importance to the conduct of the business of NEG and its Consolidated
Subsidiaries considered as one enterprise. Each such document, or a true and
correct copy thereof, has been made available for inspection and copying by
Alexander at its sole expense, and Alexander has been provided a written
description of each oral arrangement so listed. Except as set forth in Schedule
2.07 or Schedule 2.18 attached hereto, NEG does not have as of the date hereof
(i) any collective bargaining agreements or any agreements that contain any
severance pay liabilities or obligations, (ii) any bonus, deferred compensation,
pension, profit-sharing or retirement plans, programs or other similar employee
benefit arrangements, (iii) any employment agreement, contract or commitment
with an employee, or agreements to pay severance, (iv) any agreement of
guarantee or indemnification running from NEG to any person or entity, (v) any
agreement, indenture or other instrument for borrowed money and any agreement or
other instrument which contains restrictions with respect to payment of
dividends or any other distribution in respect of NEG Common Stock or any other
outstanding securities of NEG, (vi) any agreement, contract or commitment
containing any covenant limiting the freedom of NEG to engage in any line of
business or compete with any person, (vii) any agreement, contract or commitment
relating to capital expenditures in excess of $10,000 and involving future
payments, (viii) any agreement, contract or commitment relating to the
acquisition of capital stock or an amount of assets exceeding $10,000 in value
of any business enterprise, or (ix) any agreement, contract or commitment not
made in the ordinary course of business. Except as set forth on Schedule 2.07,
NEG has not breached, nor to NEG's knowledge is there any claim or any legal
basis for a claim that NEG has breached, any of the terms or conditions of any
agreement, contract or commitment set forth in any of the Schedules attached to
this Agreement or of any other agreement, contract or commitment, if any such
breach, whether considered individually or in the aggregate, could reasonably be
expected to have a Material Adverse Effect on or to NEG.
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2.08 No Breach of Statute or Contract; Governmental Authorizations.
(a) Assuming compliance with NEG's obligations under this Agreement,
neither the execution and delivery of this Agreement by NEG nor compliance by
NEG with the terms and provisions of this Agreement will violate any applicable
law, statute, rule or regulation of any municipal, parish, local, city, county,
state or federal court, agency, board, legislature, commission, or other
legislative, judicial, administrative or regulatory body ("Governmental Body"),
or will as of the Effective Date of the Merger conflict with or result in a
breach of any of the terms, conditions or provisions of any judgment, order,
injunction, decree or ruling of any Governmental Body to which NEG is subject or
of any agreement or instrument to which NEG is a party or by which it is bound,
or constitute a default thereunder, or result in the creation of any lien,
charge or encumbrance upon any property or asset of NEG or cause any
acceleration of maturity on any obligation or loan, or give to others any
interest or rights, including rights of termination or cancellation, in or with
respect to any of the material properties, assets, agreements, contracts or
business of NEG and its Consolidated Subsidiaries considered as one enterprise,
except as set forth in Schedule 2.08 attached hereto which describes all third
party consents necessary to the consummation of this Agreement.
(b) Except for applicable requirements, if any, of the Securities and
Exchange Act of 1934 ("34 Act"), the Securities Act of 1933 (the "33 Act"), the
premerger notification requirements of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), the Nasdaq National
Market, the filing and recordation of appropriate merger documents as required
by the Oklahoma Act and the DGCL, filings required pursuant to any state
securities or "blue sky" laws and such other notices, reports or other filings
the failure of which to be made would not, individually or in the aggregate,
have a Material Adverse Effect on NEG or prevent or materially impair the
consummation of the transactions contemplated hereby, NEG is not required to
submit any notice, report or other filing to any Governmental Body, domestic or
foreign, in connection with the execution, delivery or performance of this
Agreement or the consummation of the transactions contemplated hereby.
(c) NEG has delivered to Alexander true and complete copies, described in
Schedule 2.08, of all reports made by it during the past two fiscal years to the
Equal Employment Opportunity Commission ("EEOC"), Occupational Safety and Health
Administration ("OSHA") and the Department of Labor (the "DOL"), and tax returns
to, and tax rulings and tax audit reports from, the IRS and state and local
jurisdictions. Schedule 2.08 also contains a brief description of all other
types of material periodic reports to all other state or federal Governmental
Bodies other than the SEC.
(d) NEG is not in violation of any applicable law, statute, rule,
governmental regulation or order, or court decree or judgment which violation,
considered individually or in the aggregate, could reasonably be expected to
have or result in a Material Adverse Effect on or to NEG. NEG and, where
applicable, its employees and agents hold all licenses, franchises,
authorizations and permits required for the conduct of NEG business which the
failure to hold would result in a Material Adverse Effect on or to NEG.
2.09 Litigation or Adverse Events. Schedule 2.09 attached hereto contains
a description of each suit, action and legal, administrative, arbitration or
other proceeding or governmental investigation pending or, to the knowledge of
NEG, threatened (the "NEG Cases"), to which NEG is a party or of which any of
its assets or properties are the subject, which description reflects the names
of the parties, the style of the action and a brief description of the subject
matter of the action. NEG has made available to Alexander true and correct
copies of all pleadings and other filings made in connection with the NEG Cases.
None of the NEG Cases, whether considered individually or in the aggregate,
could reasonably be expected to have or result in a Material Adverse Effect on
or to NEG, except as set forth in Schedule 2.09.
Except as set forth in Schedule 2.09, there are no claims against or
liabilities or obligations of, or to the knowledge of NEG, any legal basis for
any claims against or liabilities or obligations of, NEG or its Consolidated
Subsidiaries which are reasonably likely to result in a material reduction in
the consolidated net worth of NEG and its Consolidated Subsidiaries, considered
as one enterprise, from that shown on the NEG Balance Sheet or the NEG March 31
Balance Sheet or any material charge against consolidated net earnings of NEG
and its Consolidated Subsidiaries, considered as one enterprise, except as
expressly disclosed in this
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Agreement or any Schedule hereto, financial data and other material submitted in
connection therewith or except as disclosed in writing to Alexander.
2.10 Patents, Trademarks, etc. NEG and the NEG Subsidiaries own, or have
adequate licenses or other rights to use all patents, trade names, common law
trademarks, private labels, trademark registrations and applications, copyrights
and copyright registrations and applications used in or necessary for their
respective businesses as now conducted. To the knowledge of NEG, there are no
claims or demands of any other person, firm or corporation pertaining to any of
such patents, trade names, trademark registrations and applications, common law
trademarks, copyrights or copyright registrations and applications and no
proceedings have been instituted, are pending or, to the knowledge of NEG,
threatened which challenge the rights of NEG in respect thereof. To the
knowledge of NEG, none of such patents, trade names, trademark registrations and
applications, common law trademarks, copyrights or copyright registrations and
applications, as the case may be, infringes on, or, to NEG's knowledge, is being
infringed by, other patents, trade names, private labels, trademarks or
copyrights and none is subject to any outstanding order, judgment, decree,
stipulation or agreement restricting the ownership or use of such patents, trade
names, trademarks or copyrights. NEG has not given nor is it bound by an
agreement of indemnification for patent, trade name, trademark or copyright
infringement as to any property produced, used or sold by it.
2.11 Authorization of Agreement. The execution, delivery and performance
of this Agreement by NEG and Acquisition have been duly and validly authorized
and approved by the Board of Directors of NEG and Acquisition, and NEG and
Acquisition have taken, or, prior to the Effective Date of the Merger, will use
all reasonable efforts to take, all other action required by law, their
Certificates of Incorporation and bylaws, and any other action required, to
authorize such execution, delivery and performance.
The execution, delivery and performance by NEG and Acquisition of all other
agreements and transactions contemplated hereby have been, or prior to Closing
will be, duly authorized and approved by all requisite corporate action on the
part of NEG and Acquisition. This Agreement has been, and the other agreements
and instruments contemplated hereby, when executed, will be, duly executed and
delivered by NEG and Acquisition and, assuming the due authorization, execution
and delivery hereof and thereof by the other parties hereto or thereto, this
Agreement constitutes and, when executed, each of the other agreements
contemplated hereby will constitute, a valid and binding obligation of NEG and
Acquisition, enforceable against NEG and Acquisition in accordance with its
terms, subject to applicable bankruptcy, reorganization, insolvency, moratorium,
fraudulent conveyance and similar laws affecting creditors' rights generally
from time to time and to general principles of equity.
2.12 Disclosure in Proxy Statement -- Prospectus. None of the information
which has been or will be supplied by NEG to Alexander which has been or will be
included (or incorporated by reference to SEC filings of NEG) in the
Registration Statement on Form S-4, as amended (the "Registration Statement"),
containing a Prospectus covering shares of NEG Common Stock to be issued
pursuant to the Merger and Proxy Statements for Alexander and NEG (the
Prospectus and the Proxy Statements and any supplements thereto are herein
referred to as the "Proxy Statement-Prospectus") in connection with the meeting
of the shareholders of Alexander held to approve the Merger will, (i) in the
case of the Proxy Statement-Prospectus contain any statement which, at the time
and in light of the circumstances under which it is made, is false or misleading
with respect to any material fact, or omit to state any material fact necessary
in order to make the statements therein not false or misleading or necessary to
correct any statement in any prior communication with respect to the
solicitation of a proxy for the same meeting or subject matter which has become
false or misleading, or (ii) in the case of the Registration Statement at the
time it becomes effective, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading.
2.13 Broker's or Finder's Fees. Except as disclosed in Schedule 2.13, no
agent, broker, person or firm acting on behalf of NEG or under its authority is,
or will be entitled to, any advisory, commission or broker's or finder's fee
from any of the parties hereto in connection with any of the transactions
contemplated herein.
2.14 Insurance. Schedule 2.14 lists each policy of insurance under which
NEG may currently make a claim or has made any claim which remains unresolved.
NEG has provided Alexander with a true and correct
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copy of each such policy or the binder therefor. Except as disclosed in Schedule
2.14, with respect to each such insurance policy or binder, (i) to NEG's
knowledge, the policy is legal, valid, binding and enforceable and in full force
and effect; (ii) to NEG's knowledge, if the term of the policy extends beyond
the Effective Time, the policy will continue to be legal, valid, binding and
enforceable and in full force and effect on identical terms following the
Effective Time; and (iii) neither NEG nor, to NEG's knowledge, any other party
to the policy is in material breach or default (including with respect to the
payment of premiums or the giving of notices), and, to NEG's knowledge, no event
has occurred which, with notice or the lapse of time, would constitute such a
breach or default or permit termination, modification or acceleration, under the
policy. Schedule 2.14 describes any self-insurance arrangement affecting NEG. In
all material respects, NEG has at all times been insured in respect of its
properties, assets and businesses in such amounts, of such types, and covering
such casualties, risks and contingencies as is ordinarily carried by prudent
companies engaged in similar businesses and owning similar properties and assets
in the same general areas in which NEG operates.
2.15 Permits. NEG has all material governmental licenses, authorizations,
code approvals and permits (the "Permits") required by any governmental
authority for the lawful operation of its business and each of its properties.
There is no outstanding violation of any of the Permits that would have a
Material Adverse Effect on or to NEG, and none is anticipated. The Permits are
in full force and effect and have been duly and validly issued. Neither the
execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby gives or will give any governmental body or
licensor or licensee of NEG any right to change the terms or provisions of, or
terminate or cancel, any Permit to which NEG is a party.
2.16 Completeness of Documents Furnished by NEG. The Certificate of
Incorporation and bylaws of NEG, as amended, and all leases, instruments,
agreements and other documents (including all Schedules and documents made
available, furnished or delivered pursuant to this Agreement), and all copies
thereof, which have been or will be made available, furnished or delivered to
Alexander for its inspection and review pursuant to the terms of this Agreement
or in connection with the transactions contemplated hereby, are, or if not
heretofore made available, furnished or delivered, will, when made available,
furnished or delivered, be complete and correct originals or copies of the
originals.
2.17 Disposition of Assets. Since December 31, 1995, NEG has not made any
sale or other disposition of any of its material properties or assets or
surrendered any of its rights with respect thereto or the usage thereof, or made
any material additions to its properties or assets, or entered into or amended
any material agreements, or entered into any material transaction, except as set
forth on Schedule 2.17.
2.18 Employees and Labor.
(a) NEG has listed in Schedule 2.18 and has made available for inspection
and copying by Alexander at Alexander's sole expense true and complete copies of
all employee benefit plans within the meaning of Section 3(3) of ERISA (as
defined below), or any plan, program, arrangement, agreement, or obligation to
provide benefits in the form of bonus, incentive, deferred compensation, dental,
medical, disability, hospitalization, insurance, death benefits, vacation,
severance, pension, profit sharing, retirement benefits, stock purchase, stock
option, restricted stock, fringe benefits, or any other employee benefits of any
kind whatsoever (collectively, the "NEG Single Employer Plans"), as well as any
other written agreements or other arrangements, which are currently in effect,
between NEG and any of its officers, directors, employees, independent
contractors and consultants and anyone who has formerly served in any such
capacity (or any of their respective dependents, heirs, legatees, beneficiaries
or legal representatives). NEG has not entered into any similar oral agreements
or other arrangements, which in either instance is currently in effect. Except
as disclosed in Schedule 2.18, there are no loans or other obligations payable
or owing by NEG to any officer, director or employee of NEG (except salaries and
wages incurred and accrued in the ordinary course of business), nor are there
any loans or debts payable or owing by any of such persons to NEG or any
guarantees by NEG of any loan or obligation of any nature to which any such
person is a party.
(b) NEG has complied with all applicable laws relating to the employment of
labor, including, without limitation, provisions relating to wages, hours,
insurance and other benefits, equal opportunity, age discrimination, collective
bargaining, workers' compensation and the payment of social security and other
taxes (collectively the "Employment Laws"), except for such noncompliance as
would not individually or in the
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aggregate result in a Material Adverse Effect on or to NEG. Except as described
in Schedule 2.18, there is not and will not be any material liability of NEG
arising out of claims made or suits brought for injury, sickness, disease,
death, termination of employment or conditions of employment of any person
(including any employee or former employee or any contractor or subcontractor of
NEG or any agent or distributor of NEG) arising out of or in connection with any
event occurring or a state of facts existing prior to the Effective Date arising
under any Employment Laws. NEG is not a party to or otherwise bound by any
compliance or affirmative action plan, award, settlement agreement, decree or
other obligation arising out of or in connection with any violation or alleged
violation of any Employment Laws.
(c) There are no collective bargaining agreements or other labor union
agreements or understandings to which NEG or its Subsidiaries is a party or by
which any of them is bound. Since December 31, 1995, neither NEG nor its
Subsidiaries has encountered any labor union organizing activity, or had any
actual or threatened employee strikes, work stoppages, slowdowns or lockouts.
(d) Except as set forth on Schedule 2.18, NEG does not have any
liabilities, taxes or sanctions that have arisen under the Consolidated Omnibus
Budget Reconciliation Act of 1984 ("COBRA") or the Code, nor is there any
action, suit, proceeding, claim, appeal, or demand against NEG and/or any of its
employees arising by reason of or relating to any failure by NEG to comply with
the continuing health care coverage of COBRA and Sections 601 through 608 of the
Employee Retirement Income Security Act of 1974 ("ERISA"), which failure
occurred with respect to any current or prior employee of NEG or any qualified
beneficiary of such employee (as defined in COBRA).
(e) Except as set forth in Schedule 2.18, no person has asserted any claim
under which NEG has any liability under any health insurance, sickness, life
insurance, disability, medical, surgical, hospital, death benefit or any other
employee benefit plan maintained by NEG or to which NEG is a party or may be
bound or under any workers compensation or similar law which exceeds $10,000 and
is not fully covered by insurance maintained with responsible insurers or which
has not been reserved for in the books of accounts of NEG as of the date of this
Agreement. Except as set forth on Schedule 2.18, NEG does not provide any
benefits to retirees or former employees, under NEG's medical plans, the
aggregate expense for which is required to be accrued under Statement of
Financial Accounting Standards No. 106 ("FASB 106"). Except as set forth on
Schedule 2.18, to the extent such benefits are provided to retirees or former
employees of NEG, such benefits may be terminated at any time with no liability
to NEG.
2.19 Obligations to Employees.
(a) All obligations of NEG, whether arising by operation of law, contract,
agreement, or otherwise, for bonuses or other forms of compensation or benefits,
or for payments to trusts or other funds or to any Governmental Body or to any
employees, former employees, directors, officers, agents, or any other
individual (or any of their respective heirs, legatees, beneficiaries, or legal
representatives), with respect to any NEG Single Employer Plan of any kind
whatsoever with respect to periods ending on or before the date of this
Agreement have been paid or accrued at December 31, 1995, if due, all in
accordance with generally accepted accounting principles.
(b) NEG does not have any accumulated funding deficiencies, as such term is
defined in ERISA and in the Code, with respect to any NEG Single Employer Plans.
NEG has not incurred any liability to the Pension Benefit Guaranty Corporation
("PBGC"), other than for the payment of insurance premiums, all of which have
been paid when due, the IRS or the DOL with respect to any NEG Single Employer
Plan. As to each multiemployer pension plan ("Multiemployer Plan") which is
subject to the Multiemployer Pension Plan Amendments Act of 1980 ("MEPPA"), NEG
has not incurred and does not expect to incur any withdrawal liability. The
consummation of this Agreement will not result in either a complete or partial
withdrawal from any of the Multiemployer Plans. All of the NEG Single Employer
Plans have been amended as, when and to the extent necessary to comply with and
qualify under the applicable provisions of the Code.
(c) Except as described in Schedule 2.19, the NEG Single Employer Plans
which are pension benefit plans have received, or have applied for and expect to
receive, determination letters from the IRS to the effect that such plans are
qualified and exempt from federal income taxes under Sections 401(a) and 501(a),
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respectively, of the Code, and no amendments have been made to such NEG Single
Employer Plans other than those covered by such determination letters or
applications for such determination letters with respect to such amendments
which have been timely filed with the IRS. No determination letter received with
respect to any NEG Single Employer Plan has been revoked nor, to the knowledge
of NEG, has revocation been threatened. Each of the NEG Single Employer Plans
has been administered at all times in all respects in accordance with its
respective terms. There are no pending investigations by any governmental agency
involving the NEG Single Employer Plans, no deficiency or termination
proceedings involving the NEG Single Employer Plans, and no pending or, to the
knowledge of NEG, threatened claims (except for claims for benefits payable in
the normal operation of the NEG Single Employer Plans), suits or proceedings
against any NEG Single Employer Plan or asserting any rights or claims to
benefits under any NEG Single Employer Plan nor, to the knowledge of NEG, are
there any facts which could give rise to any liability in the event of any such
investigation, claim, suit or proceeding.
(d) Neither the NEG Single Employer Plans nor any trusts created
thereunder, nor any trustee, administrator or other fiduciary thereof, has
engaged in a "prohibited transaction" with respect to any NEG Single Employer
Plan (as such term is defined in Section 4975 of the Code or Section 406 of
ERISA). Except as set forth in Schedule 2.19, NEG has not experienced any
reportable event within the meaning of ERISA or other event or condition which
constitutes a reportable event, or any other event or condition which presents a
material risk of termination of any NEG Single Employer Plan by the PBGC, or has
had any tax imposed upon it by the IRS for any alleged violation under Section
4975 of the Code, or has engaged in any transaction which might subject NEG or
any such NEG Single Employer Plan to any liability for such tax. The terms of
any such NEG Single Employer Plans comply with ERISA and the Code, if
applicable, in all respects, and any and all reporting and disclosure
requirements of ERISA or the IRS and the DOL with respect to any such NEG Single
Employer Plan have been timely met. The information supplied to the actuary by
NEG for use in preparing those annual reports for the NEG Single Employer Plans
was complete and accurate and NEG has no reason to believe that the conclusions
expressed in such reports are incorrect.
(e) If termination (whether complete or partial) of any NEG Single Employer
Plan has occurred, then all liabilities with respect thereto have been satisfied
in full and no present liability exists with respect to any such prior
termination.
2.20 Vested Vacation Entitlement. Except as set forth on Schedule 2.20,
NEG books of account and financial statements referred to in Section 2.04 hereof
provide for vested vacation entitlement in accordance with Statement of
Financial Accounting Standards No. 43 ("FASB 43") and for all other material
accruals for other employee benefits required by generally accepted accounting
principles.
2.21 Environmental Matters. Except as disclosed at Schedule 2.21, in
connection with the use, ownership or operation of NEG's assets or oil well, gas
well or other well located on lands covered by a lease in which NEG has any
interest or on lands spaced, pooled or unitized therewith, NEG and, to NEG's
knowledge, each person or entity owning or having owned any interest (leasehold,
fee, equitable or otherwise) in, or using or operating or having operated or
used, any such asset or well, have complied in all material respects with all
applicable laws, ordinances, permits, licenses, orders, statutes, rules,
permitting and licensing requirements, and regulations promulgated or issued by
any Governmental Body, relating to the protection of the environment (including,
without limitation, ambient air, and subsurface and surface waters, soils and
lands), natural resources, wildlife or human health, including, without
limitation, all laws, statutes, orders, ordinances, rules, permits, licenses,
permitting and licensing requirements, and regulations concerning (i) emissions,
discharges, migrations, spills, leaks, releases or threatened releases
("Releases") of petroleum (including, without limitation, oil, used oil, waste
oil, gasoline, diesel, and petroleum based fuels), petroleum products and
by-products, petroleum wastes, petroleum contaminated soils, salt water, brine,
asbestos, wastes associated with oil and gas drilling, exploration and
production activities, wastes associated with naturally occurring radioactive
materials, pollutants, contaminants, deleterious substances, chemicals,
radioactive substances and materials, "hazardous substances," as that term is
defined in the Comprehensive Environmental Response, Compensation and Liability
Act, as same may be amended, or "hazardous wastes," as that term is defined in
the Resource Conservation and Recovery Act, as same may be amended (hereinafter
individually and collectively called "Pollutants"), into the environment or the
workplace, and/or (ii) the production,
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manufacture, processing, distribution, generation, use, treatment, storage,
disposal, transportation, or handling of Pollutants (collectively,
"Environmental Laws"), for which the failure to have complied or be in
compliance therewith or the remedial obligations resulting therefrom would
result in a Material Adverse Effect on or to NEG.
Except as disclosed at Schedule 2.21, NEG does not have knowledge of, and
has not received notice from any Governmental Body, person or entity, of any
Release, or any event, condition, circumstance, activity, practice or incident
concerning or affecting NEG assets that (i) would result in NEG failing to
comply with any Environmental Law or the terms of any Permit issued pursuant
thereto, or (ii) would result in any common law or other liability of NEG to any
person, entity or Governmental Body for damage or injury to natural resources,
wildlife, human health or the environment, which failure or liability would
result in a Material Adverse Effect on or to NEG.
Except as disclosed at Schedule 2.21, there is no civil, criminal, or
administrative action, lawsuit, demand, litigation, claim, hearing, notice of
violation, investigation, or proceeding pending or, to NEG's knowledge,
threatened against NEG, or any present or former owner of any interest in, or
operator of, any oil well, gas well or other well in which NEG has any interest
or any other of NEG's assets as a result of the maintenance of a nuisance, or
the violation or breach of any Environmental Law or any remedial obligation
arising thereunder, the terms of any Permit issued under any Environmental Law
affecting NEG's assets, properties or business or any duty arising at common law
to any person, entity or Governmental Body relating to the protection of the
environment, which would result in a Material Adverse Effect on or to NEG.
2.22 Books of Account. NEG has maintained its books of account in the
usual, regular and ordinary manner.
2.23 Prior Obligations. NEG has no contractual obligation relating to the
disposition, by merger or otherwise, of any of the equity securities of NEG or
of all or any significant portion of NEG's assets except as described in this
Agreement or the Schedules hereto.
2.24 Oil and Gas Reserve Report. To NEG's knowledge, the proved oil and
gas quantities included in the reserve report prepared for NEG by Netherland,
Sewell and Associates ("N&S") as of December 31, 1995 (the "NEG Reserve
Report")fairly presents the estimated quantities of projected oil and gas
production attributable to the assets of NEG as stated therein as of the date
thereof. It is understood that such estimated quantities are based in whole or
in part on studies performed by independent engineers, and NEG does not
represent or warrant the accuracy of such studies. NEG made available to N&S all
information within its possession or its control relevant to such studies and,
to NEG's knowledge, such information was true and correct. To NEG's knowledge,
there has been no material adverse change in the information provided to N&S,
and no event or circumstance has occurred which could reasonably be expected to
result in a decrease of more than 10% in the projected proved oil and gas
quantities in the aggregate set forth in the NEG Reserve Report since the date
of such report, except for the production of oil, gas and other hydrocarbons in
the ordinary course of business, the acquisition and disposition of interests in
oil and gas properties described on Schedules 2.25A, B and C and decreases in
oil and gas prices generally in the United States.
2.25 Title to Interests. Schedule 2.25A identifies (i) each oil well and
gas well in which NEG owns an interest, vested or contingent, and which is
producing or capable of producing hydrocarbons in commercial quantities
(individually an "NEG Well" and collectively the "NEG Wells") and (ii) NEG's net
revenue interest and leasehold cost bearing interest (i.e., working interest) in
each NEG Well. Adjacent to the name of each NEG Well is a description of all
lands constituting the drilling and spacing unit or other allowable production
unit in which such NEG Well is situated. Each oil, gas, and mineral lease in
which NEG owns any interest and which interest is entitled to share in the
production of hydrocarbons or the proceeds of sale of the production of
hydrocarbons from the NEG Wells is hereinafter individually and are collectively
called the "NEG Producing Leases." Schedule 2.25B describes all oil, gas, and
mineral leases, other than the NEG Producing Leases, in which NEG owns any
interest and the type of interest which NEG owns therein (hereinafter
individually and collectively called the "NEG Non-Producing Leases;" the NEG
Non-Producing Leases and the NEG Producing Leases are hereinafter individually
and collectively called the "NEG Leases"). Schedule 2.25C describes (i) all
lands in which NEG owns a fee simple or term mineral or royalty
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interest, which is not entitled to share in the production of hydrocarbons from
the NEG Wells or the proceeds of sale of the production of hydrocarbons from the
NEG Wells (the "NEG Non-Producing Mineral Fee Interests"), and (ii) NEG's
interest in and to the NEG Non-Producing Mineral Fee Interests by virtue of such
ownership. The lands described at Schedules 2.25A-C are individually and
collectively called the "NEG Land." The NEG Wells, the NEG Leases, and the NEG
Land, together with (i) all contracts, agreements, leases, licenses, permits,
authorizations, easements, and orders (individually and collectively called the
"NEG Agreements") in any way relating to the NEG Wells, NEG Leases and/or the
NEG Land, the operations conducted or to be conducted pursuant thereto or
thereon, or the production, treatment, sale or disposal of hydrocarbons or water
produced therefrom or attributable thereto, (ii) all wells, personal property,
fixtures (including, without limitation, pipe, plants and pipelines), equipment
(including, without limitation, compressors, parts, rods, tubular goods and
supplies) and improvements located at, under or on the NEG Wells, the NEG Leases
and/or the NEG Land, or used or obtained in connection therewith or with the
operation or maintenance of the NEG Wells or other facilities thereon or with
the production, treatment, sale or disposal of hydrocarbons or water produced
therefrom or attributable thereto, and (iii) all other rights and interests in,
to or under or derived from the NEG Wells, the NEG Leases, the NEG Agreements,
and/or the NEG Land (including, without limitation, all mineral and royalty
interests, and all overriding royalty interests and all other interests in or
payable out of or measured by production, and all surface interests, for a term
or in fee), or in any way relating thereto, are referred to herein as the "NEG
Interests."
As respects each NEG Well, NEG's interests in the NEG Producing Leases and
the NEG Lands are such that, after giving effect to existing spacing orders,
operating agreements, unit agreements, communitization agreements and orders,
unitization orders and pooling designations and orders, subject to the
limitations described in Schedule 2.25A, and after taking into account all
royalty interests, overriding royalty interests, net profit interests,
production payments and other burdens on production attributable to third
parties, (i) NEG is entitled, during the entire extended terms of the NEG
Producing Leases covering such NEG Well, to a share (expressed as a decimal) of
all oil, gas and other minerals produced from such NEG Well which is not less
than the "net revenue interest" set out in connection with the description of
such NEG Well, free and clear of all liens, claims, mortgages, deeds of trust,
assignments of production, and security interests, other than those described in
Schedule 2.06, (ii) NEG owns an undivided interest (expressed as a decimal)
equal to the "working interest" set out in connection with the description of
such NEG Well in and to all property and rights incident thereto, including all
rights in, to and under all agreements, leases, permits, easements, licenses and
orders in any way relating thereto, and in and to all wells, personal property,
fixtures and improvements thereon, appurtenant thereto or used or obtained in
connection therewith or with the production or treatment or sale or disposal of
hydrocarbons or water produced therefrom or attributable thereto, and (iii) NEG
is obligated, during the entire extended terms of the NEG Producing Leases to
which production from such NEG Well is attributable, for a share of the costs
relating to the exploration, development, and operation of such NEG Well which
is no greater than the "working interest" set out in connection with the
description of such NEG Well.
2.26 Compliance With Leases and Laws. NEG has complied in all material
respects with the terms and provisions of the NEG Leases. To NEG's knowledge and
except as disclosed on Schedule 2.26, no default exists under any of the terms
and provisions, express or implied, of any of the NEG Leases or under any of the
terms and provisions of any agreement to which any of the NEG Leases are
subject, and NEG has not received notice of any claim of such default. All
bonuses, rentals, shut-in royalties and royalties due under the NEG Leases and
applicable laws, rules and regulations of the federal and state Governmental
Bodies having jurisdiction with respect to same have been timely and properly
paid and are not in suspense for any reason, except as disclosed in Schedule
2.26. NEG's aggregate delay rental and bonus obligations due under the terms of
the NEG Non-Producing Leases for each of calendar years 1996, 1997 and 1998 are
set forth at Schedule 2.26. There is no express provision under any NEG Lease or
any agreement which requires the drilling of additional wells or other
operations to earn or continue to hold any of the NEG Leases and all lands
covered thereby, except as disclosed in Schedule 2.26. All NEG Wells have been
drilled, completed, and operated in compliance with all applicable federal,
state and local laws and regulations applicable thereto (including, without
limitation, the Environmental Laws), except to the extent such failure to comply
would not result in a Material Adverse Effect to NEG. Based on information
available to NEG, all production from
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the NEG Wells has been properly accounted for and all proceeds attributable
thereto have been properly paid to the persons entitled thereto in accordance
with payment practices customary in the oil and gas industry and applicable law,
except as disclosed in Schedule 2.26, and all necessary filings with
Governmental Bodies have been properly made in connection with the drilling,
completion, and operations of each NEG Well and all other oil and gas operations
on the NEG Land and, except as disclosed in Schedule 2.26, no production or sale
of oil, gas and other hydrocarbons heretofore produced or sold from or
attributable to the NEG Leases has been in excess of any allowable quantity
(plus permitted tolerances) or price or in violation of any other rule or
regulation affecting the sale of hydrocarbons as established by the applicable
regulatory authorities. Schedule 2.26 identifies by amount all proceeds
attributable to the production of hydrocarbons through December 31, 1995, which
are owing to third parties and which are in the possession or under the control
of NEG. Except as disclosed in Schedule 2.26, no gas produced from the NEG
Interests is subject to the price control jurisdiction of the Federal Energy
Regulatory Commission ("FERC") under the Natural Gas Policy Act ("NGPA").
2.27 Sale of Production. Except as set forth in Schedule 2.27, to NEG's
knowledge, NEG has no production from any NEG Well which is subject to balancing
rights of third parties or is subject to balancing duties under governmental
requirements, and no third party has production from any NEG Well which is
subject to the balancing rights of NEG. Except as set forth on Schedule 2.27, no
production from any NEG Well has exceeded the allowable production established
therefor by the appropriate Governmental Body. Except as set forth on Schedule
2.27, NEG is not obligated by virtue of any prepayment made under any production
sales contract or any other contract containing a take-or-pay clause or relating
to the settlement of a take-or-pay dispute, or under any similar arrangement, to
deliver oil, gas, natural gas liquids or other hydrocarbons or minerals produced
from or allocated to any of the NEG Leases at any time after the Effective Time
without receiving full payment therefor at the time of delivery. Except as
disclosed on Schedule 2.27, NEG has not collected any proceeds from the sale of
hydrocarbons produced from the NEG Interests which are subject to refund. Except
as set forth in Schedule 2.27, proceeds from the sale of oil, gas and natural
gas liquids from the NEG Wells are being received by NEG in a timely manner and
based upon the net revenue interest described at Schedule 2.25 for each such NEG
Well and in accordance with the terms of the applicable purchase agreement
governing such sale, and are not being held in suspense for any reason. NEG has
described in Schedule 2.27 and made available to Alexander for examination all
contracts and agreements (other than routine division orders terminable by NEG
upon less than sixty (60) days' notice) pursuant to which hydrocarbons produced
from the NEG Interests are sold, transported, processed or otherwise disposed of
or marketed. Except as disclosed in Schedule 2.27, no person has any call upon,
right of first refusal, preferential right or option to purchase or similar
rights with respect to the NEG Interests or to the production therefrom. Except
as disclosed in Schedule 2.27, price renegotiation procedures have not been
commenced under FERC Order No. 451 which involve or which hereafter may affect
any gas produced from the NEG Interests. Except as disclosed in Schedule 2.27,
no offer of credits under FERC Order No. 500 has been made which would entitle
any purchaser of gas produced from the NEG Interests to credit transported
volumes against such purchaser's take-or-pay obligations under any contract for
the sale of gas produced from the NEG Interests.
2.28 Contracts. NEG has described in Schedule 2.28 all partnership, joint
venture, farmout, dry hole, bottom hole, acreage contribution, area of mutual
interest, purchase and/or acquisition agreements of which any terms remain
executory which may affect the NEG Interests, and all other executory contracts
to which NEG is a party which would have a Material Adverse Effect on any item
of the NEG Interests.
2.29 Status of NEG Wells. Except as disclosed on Schedule 2.29, all NEG
Wells are producing or capable of producing hydrocarbons in commercial
quantities (based upon prevailing economic conditions) without the necessity of
reworking or recompletion operations. To NEG's knowledge and except as disclosed
in Schedule 2.29, there are no obligations existing for the plugging or
abandonment (including obligations for restoration of the surface) of any oil
and/or gas well, salt water disposal well or other well located at the NEG
Interests.
2.30 Tax Partnerships. Except as disclosed on Schedule 2.30, no item of
the NEG Interests is treated for income tax purposes as being owned by a
partnership.
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2.31 Equipment and Off-Lease Facilities. That portion of the NEG Interests
consisting of personal property, facilities, and fixtures, including without
limitation, all property and assets used in connection with the operation of the
NEG Interests, is in good condition and repair, ordinary wear and tear excepted,
and is adequate for the proper operation of the NEG Interests, except for such
repairs and additions necessary for the proper operation of the NEG Interests
and which individually or in the aggregate would not result in a Material
Adverse Effect on NEG.
2.32 SEC Documents. NEG has delivered or made available to Alexander the
Registration Statement of NEG filed with the SEC on Form S-4 (No. 33-38331) in
1991, and all exhibits, amendments and supplements thereto (the "NEG
Registration Statement"), and each registration statement, report, definitive
proxy statement or definitive information statement and all exhibits thereto
filed since the effective date of the NEG Registration Statement, which are
listed on Schedule 2.32, each in the form (including exhibits and any amendments
thereto) filed with the SEC (collectively, the "NEG Reports"). The NEG Reports,
which were filed with the SEC in a timely manner except as set forth in Schedule
2.32, constitute all forms, reports and documents required to be filed by NEG
under the 33 Act, the 34 Act and the rules and regulations promulgated
thereunder. As of their respective dates, the NEG Reports (i) complied as to
form in all material respects with the applicable requirements of the 33 Act
and/or the 34 Act and (ii) did not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements made therein, in the light of the circumstances under
which they were made, not misleading. Each of the balance sheets of NEG included
in or incorporated by reference into the NEG Reports (including the related
notes and schedules) fairly presents the financial position of NEG as of its
date and each of the statements of income, retained earnings and cash flows of
NEG included in or incorporated by reference into the NEG Reports (including any
related notes and schedules) fairly presents the results of operations, retained
earnings or cash flows, as the case may be, of NEG for the periods set forth
therein (subject, in the case of unaudited statements, to normal year-end audit
adjustments which would not be material in amount or effect), in each case in
accordance with generally accepted accounting principles consistently applied
during the periods involved, except as may be noted therein and except, in the
case of any unaudited statements, as permitted by Form 10-Q promulgated under
the 34 Act.
2.33 Related Party Transactions. Set forth in Schedule 2.33 is a complete
list of all arrangements, agreements and contracts between NEG and any person
who is an officer, director or affiliate of NEG, any relative of any of the
foregoing or any entity of which any of the foregoing is an affiliate.
2.34 Certain Payments. Except as set forth in Schedule 2.34, the execution
of, and performance of the transactions contemplated by, this Agreement will not
(either alone or upon the occurrence of any additional or subsequent events) (i)
constitute an event under any NEG benefit plan, policy, practice, agreement or
other arrangement or any trust or loan (the "NEG Employee Arrangements") that
will or may result in any payment (whether of severance pay or otherwise),
acceleration, forgiveness of indebtedness, vesting, distribution, increase in
benefits or obligations to fund benefits with respect to any employee, director
or consultant of NEG, or (ii) result in the triggering or imposition of any
restrictions or limitations on the right of NEG or Alexander to amend or
terminate any NEG Employee Arrangements and receive the full amount of any
excess assets remaining or resulting from such amendment or termination, subject
to applicable taxes. Except as set forth in Schedule 2.34, no payment or benefit
which will be required to be made pursuant to the terms of any agreement,
commitment or NEG benefit plan, as a result of the transactions contemplated by
this Agreement, to any officer, director or employee of NEG will be
characterized as an "excess parachute payment" within the meaning of Section
280G(b)(1) of the Code.
2.35 Royalty Accounts. Schedule 2.35 sets forth as of April 30, 1996, the
amount of funds held by NEG in suspense and which are owed to third party owners
of royalty, overriding royalty, working or other interests for past production
of oil and gas attributable to the NEG Interests.
2.36 Accounts Payable. The accounts payable reflected on the NEG Balance
Sheet, the NEG March 31 Balance Sheet and those reflected on the books of NEG at
the time of the Closing reflect all amounts owed by NEG, in respect of trade
accounts due and other payables as required by generally accepted accounting
principles to be identified on such NEG Balance Sheet, NEG March 31 Balance
Sheet or in the books of
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NEG. Schedule 2.36 sets forth all accounts payable past due as of April 30, 1996
and will be updated by NEG to set forth all accounts payable past due as of the
date of Closing.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ALEXANDER
Alexander (unless the context otherwise indicates, for purposes of this
Agreement Alexander shall include the Alexander Subsidiaries and the Alexander
Partnerships as defined herein) represents and warrants to NEG and Acquisition
as follows:
3.01 Organization, Alexander's Subsidiaries, etc. Alexander is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Oklahoma. Alexander has the corporate power and authority to own
its property and to carry on its business as now being conducted. Alexander has
the corporate power and authority to execute, deliver, and perform this
Agreement and the Certificate of Merger and to consummate the transactions
contemplated hereby and thereby; and Alexander is duly qualified and/or
licensed, as may be required, and in good standing in each of the jurisdictions
in which the nature of the business conducted by it or the character of the
property owned, leased or used by it makes such qualification and/or licensing
necessary, except where the failure to be so qualified, licensed and/or in good
standing would not individually or in the aggregate have or result in a Material
Adverse Effect on or to Alexander.
Alexander has delivered to NEG certified copies of its Certificate of
Incorporation and Bylaws which reflect all amendments made at any time prior to
the date of this Agreement and are complete and accurate in all respects as of
the date hereof. The minute books containing the records of meetings of the
shareholders and Board of Directors of Alexander are complete and correct in all
respects. Such minute books have been made available to NEG for examination.
Alexander is not in default under or in violation of any provision of its
Certificate of Incorporation or Bylaws except for such defaults or violations
which individually or in the aggregate would not have a Material Adverse Effect
on or to Alexander.
Schedule 3.01 hereto sets forth a complete and correct description of (i)
the name and jurisdiction of incorporation of each of the direct and indirect
Subsidiaries of Alexander (such subsidiaries are sometimes hereafter
collectively referred to as the "Alexander Subsidiaries" or individually as an
"Alexander Subsidiary" and, except for those accounted for on the equity method
of accounting, sometimes collectively referred to as the "Alexander Consolidated
Subsidiaries") and (ii) the name and jurisdiction of organization of, and
interest of Alexander in, each partnership or joint venture in which Alexander
owns an equity interest (collectively the "Alexander Partnerships" or
individually an "Alexander Partnership"). Except as set forth on Schedule 3.01,
(i) all of the issued and outstanding shares of capital stock of each Alexander
Subsidiary have been duly authorized and validly issued, are fully paid and
nonassessable and are owned beneficially or directly by Alexander or an
Alexander Subsidiary free and clear of any liens, claims or other encumbrances
or rights of third parties, and (ii) the interest of Alexander or an Alexander
Subsidiary in each Alexander Partnership is owned by Alexander or an Alexander
Subsidiary free and clear of any liens, claims or encumbrances or rights of
third parties. Except as set forth on Schedule 3.01, there are no outstanding
options, warrants or rights to purchase or acquire any capital stock of any of
the Alexander Subsidiaries, and there are no contracts, commitments,
understandings, arrangements or restrictions by which any Alexander Subsidiary
or Alexander is bound to sell or issue any shares of capital stock of such
Alexander Subsidiary or any interest in any Alexander Partnership.
Each Alexander Subsidiary is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, has the
corporate power and authority to own its respective property and to carry on its
respective business as now being conducted, and is duly qualified and/or
licensed as may be required and in good standing as a foreign corporation, as
the case may be, in each jurisdiction in which the nature of the business
conducted by it or the character of the property owned, leased or used by any of
them makes such qualification and/or licensing necessary, except in such
jurisdictions where the failure to be so qualified would not individually or in
the aggregate have a Material Adverse Effect on Alexander.
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3.02 Capital Stock of Alexander.
(a) As of the date of this Agreement, the authorized capital stock of
Alexander consists of 20,000,000 shares of common stock, par value $.03 per
share, and 2,000,000 shares of preferred stock, par value $.01 per share, of
which 12,463,931 shares of Alexander Common Stock and no shares of preferred
stock, are issued and outstanding. As of the date of this Agreement, there are
no shares of Alexander Common Stock held in the treasury of Alexander. Such
shares of issued and outstanding Alexander Common Stock are validly authorized
and issued and fully paid and nonassessable. Except as set forth in Schedule
3.02 attached hereto, Alexander has not, subsequent to December 31, 1995,
declared or paid any dividend, or declared or made any distribution on, or
authorized the creation or issuance of, or issued, or authorized or effected any
split-up or any other recapitalization of, any of its capital stock, or directly
or indirectly redeemed, purchased or otherwise acquired any of its outstanding
capital stock. Except as described at Schedule 3.02, all dividends which have
been declared by Alexander have been fully paid or distributed as applicable.
Except as set forth in Schedules 3.02 and 3.18, there are no contracts,
commitments, understandings, arrangements or restrictions by which Alexander is
bound to sell or issue any shares of capital stock of Alexander. Except as set
forth on Schedule 3.02, Alexander has not heretofore agreed to take any such
action, will not take any such action during the period between the date of this
Agreement and the Effective Date of the Merger and there are no outstanding
contractual obligations of Alexander to repurchase, redeem or otherwise acquire
any outstanding shares of capital stock of Alexander.
(b) Set forth on Schedule 3.02 attached hereto is a list of all outstanding
options, warrants or other rights to subscribe for or to purchase from Alexander
any capital stock of Alexander or securities convertible into or exchangeable
for capital stock of Alexander setting forth, in each case, the name of the
optionee, the number of shares subject to options which are currently
exercisable, the number of shares subject to options which will become
exercisable in the future and the date on which such options become exercisable,
the option exercise price, whether or not stock appreciation rights ("SAR's")
are attached to the options and the date or dates on which such SAR's become
exercisable. Schedule 3.02 also lists all awards of stock to employees of
Alexander which are subject to forfeiture upon termination of employment setting
forth, in each case, the name of the recipient of the award of stock, the number
of shares of such award, the vesting of any such award and the terms of the
forfeiture of such award.
3.03 Ownership Interests in and Securities of Others. Set forth in
Schedule 3.03 attached hereto are (i) a description of the types and amounts of
investment securities, bonds and debentures owned by Alexander and (ii) a list
of all equity or ownership interests of Alexander in other business enterprises
or entities other than the Alexander Consolidated Subsidiaries, and Schedule
3.03 indicates any such interests which are held subject to any legal,
contractual or other limitations or restrictions on the right to resell the
same. Except as set forth in Schedule 3.03, there are no outstanding options,
warrants or other rights to subscribe for or purchase from Alexander any of the
debt, equity, or ownership interests set forth in such Schedule 3.03.
3.04 Financial Matters.
(a) Alexander has previously furnished NEG a true and complete copy of (i)
Alexander's Annual Report on Form 10-K, filed with the SEC, for the year ended
December 31, 1995, which report (the "Alexander 10-K") includes Consolidated
Balance Sheets of Alexander and the Alexander Consolidated Subsidiaries as at
December 31, 1995 and December 31, 1994, and the related Consolidated Statements
of Operations, Consolidated Statements of Changes in Stockholders' Equity and
Consolidated Statements of Cash Flows for each of the years ended December 31,
1995, December 31, 1994 and December 31, 1993, reported upon by Ernst & Young,
independent certified public accountants, and (ii) Alexander's Quarterly Report
on Form 10-Q filed with the SEC for the period ended March 31, 1996 ("Alexander
10-Q"), which report includes the unaudited Consolidated Balance Sheet of
Alexander and its Consolidated Subsidiaries at that date (the "Alexander March
31 Balance Sheet") and the end of the preceding year, and related Consolidated
Statements of Operations and Consolidated Statements of Cash Flow for the
required periods. All year end financial statements have been prepared in
conformity with generally accepted accounting principles applied on a basis
consistent with prior periods, except as set forth in such financial statements
and the notes thereto. Except as set forth in Schedule 3.04, the Consolidated
Balance Sheets of Alexander and its
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Consolidated Subsidiaries as at December 31, 1995 and December 31, 1994
contained in the Alexander 10-K present fairly the financial condition of
Alexander and its Consolidated Subsidiaries as of the dates thereof, and the
related Consolidated Statements of Operations of Alexander and its Consolidated
Subsidiaries contained in the Alexander 10-K present fairly the results of the
operations thereof for the periods indicated. Except as disclosed in Schedule
3.04, the Alexander March 31 Balance Sheet fairly presents the financial
condition of Alexander as of the date thereof, and the related Consolidated
Statement of Operations of Alexander and its Consolidated Subsidiaries contained
in the Alexander 10-Q fairly present the results of operations thereof for the
period indicated, including all necessary adjustments (which consist only of
normal recurring accruals). For the purposes of this Agreement, all financial
statements of Alexander and its Consolidated Subsidiaries shall include any
notes to such financial statements.
(b) Neither Alexander nor any of the Alexander Consolidated Subsidiaries
has any liabilities or obligations, either accrued, absolute, contingent or
otherwise, which in the aggregate are material to Alexander and its Consolidated
Subsidiaries, considered as one enterprise, which have not been:
(i) reflected in the Consolidated Balance Sheet and notes thereto of
Alexander and its Consolidated Subsidiaries dated December 31, 1995 (the
"Alexander Balance Sheet"), or the Alexander March 31 Balance Sheet; or
(ii) disclosed to NEG in writing in connection with this Agreement; or
(iii) incurred, consistent with past practices, in or as a result of
the ordinary course of business since December 31, 1995.
(c) Except as is determinable from the Alexander Balance Sheet, the
Alexander 10-Q or except as contemplated by this Agreement, between December 31,
1995 and the date of this Agreement neither Alexander nor any of its
Consolidated Subsidiaries has engaged in any material transaction not in the
ordinary course of its business and, except as set forth in Schedule 3.04, there
has not been, occurred or arisen since December 31, 1995:
(i) any material adverse change in the financial condition or in the
operations of the business of Alexander and its Consolidated Subsidiaries,
considered as one enterprise, from that shown on the Alexander Balance
Sheet; or
(ii) any damage or destruction in the nature of a casualty loss, or
interference with its business from such loss or from any labor dispute or
court or governmental action, order or decree, whether covered by insurance
or not, either individually or in the aggregate, which had a Material
Adverse Effect on or to Alexander; or
(iii) any event, condition or state of facts (other than the general
state of the national economy, prices of oil and gas generally in the
United States and proposed state or federal legislation or regulation) of
any character which would have a Material Adverse Effect on or to
Alexander; or
(iv) any extraordinary loss or collective losses (as defined in
Opinions No. 9 and No. 30 of the Accounting Principles Board of the
American Institute of Certified Public Accountants) suffered by Alexander
or any of its Consolidated Subsidiaries which had a Material Adverse Effect
on Alexander, or any waiver by Alexander or any of its Consolidated
Subsidiaries of any rights which are material to Alexander and its
Consolidated Subsidiaries considered as one enterprise.
3.05 Tax Matters.
(a) All federal, state, local and foreign tax returns, reports and
declarations required to be filed by Alexander have been timely filed (or
appropriate extensions or waivers have been obtained) with the appropriate
governmental agencies in all jurisdictions in which such returns and reports are
required to be filed.
(b) All Taxes due from Alexander (i) have been fully paid or adequately
reserved against on the books of Alexander, the Alexander Balance Sheet or the
Alexander March 31 Balance Sheet, or (ii) are being
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contested in good faith by appropriate proceedings and are disclosed in Schedule
3.05 attached hereto. Any deficiencies or assessments claimed or made as a
result of examination of the federal or state income tax returns of Alexander by
the IRS or the appropriate state taxing authority have either been paid or
settled or fully reserved against on its books or on the financial statements of
Alexander.
(c) No waivers of statutes of limitation in respect of any tax returns or
tax reports have been given or requested, except as shown on Schedule 3.05.
(d) There are no potential tax deficiencies which are reasonably likely to
arise from issues which have been raised by the IRS or any other taxing
authority that have not been disclosed in Schedule 3.05 and are reasonably
likely to have a Material Adverse Effect on or to Alexander.
(e) Notwithstanding the foregoing representations regarding Taxes and tax
returns described in this Section 3.05, Alexander represents and warrants that
with respect to all taxable years ended on and prior to December 31, 1995,
Alexander shall owe no additional Taxes except those that have been paid or as
to which proper and adequate reserves and allowances have been provided on the
books of Alexander or the Alexander Balance Sheet.
3.06 Title and Liens. Alexander has defensible title to all of the
properties and assets included in the Alexander Balance Sheet, including,
without limitation, the Alexander Leases (as defined in, and after giving effect
to the provisions of Section 3.25), which are material to Alexander and its
Consolidated Subsidiaries considered as one enterprise, except for properties
and assets disposed of in the ordinary course of its business subsequent to the
date thereof. There are no mortgages, liens, security interests, assignments of
production, deeds of trust, charges, deficiencies or encumbrances of any nature
whatsoever covering or affecting any of such properties or assets except (i) as
set forth on Schedule 3.06, (ii) liens for taxes and assessments not yet subject
to penalties for nonpayment, or (iii) such liens, security interests,
assignments of production, encumbrances, charges or deficiencies, which
individually or in the aggregate are immaterial to such property or asset.
3.07 Agreements, Contracts and Commitments. Alexander has listed on
Schedule 3.07 (or, with respect to employee benefit obligations, Schedule 3.18)
all contracts, agreements and instruments to which it is a party or by which it
is bound as of the date hereof and which are in any single case of material
importance to the conduct of the business of Alexander and its Consolidated
Subsidiaries considered as one enterprise. Each such document, or a true and
correct copy thereof, has been made available for inspection and copying by NEG
at its sole expense, and NEG has been provided a written description of each
oral arrangement so listed. Except as set forth in Schedule 3.07 or Schedule
3.18 attached hereto, Alexander does not have as of the date hereof (i) any
collective bargaining agreements or any agreements that contain any severance
pay liabilities or obligations, (ii) any bonus, deferred compensation, pension,
profit-sharing or retirement plans, programs or other similar employee benefit
arrangements, (iii) any employment agreement, contract or commitment with an
employee, or agreements to pay severance, (iv) any agreement of guarantee or
indemnification running from Alexander to any person or entity, (v) any
agreement, indenture or other instrument for borrowed money and any agreement or
other instrument which contains restrictions with respect to payment of
dividends or any other distribution in respect of Alexander Common Stock or any
other outstanding securities of Alexander, (vi) any agreement, contract or
commitment containing any covenant limiting the freedom of Alexander to engage
in any line of business or compete with any person, (vii) any agreement,
contract or commitment relating to capital expenditures in excess of $10,000 and
involving future payments, (viii) any agreement, contract or commitment relating
to the acquisition of capital stock or an amount of assets exceeding $10,000 in
value of any business enterprise, or (ix) any agreement, contract or commitment
not made in the ordinary course of business. Except as set forth on Schedule
3.07, Alexander has not breached, nor to Alexander's knowledge is there any
claim or any legal basis for a claim that Alexander has breached, any of the
terms or conditions of any agreement, contract or commitment set forth in any of
the Schedules attached to this Agreement or of any other agreement, contract or
commitment, if any such breach, whether considered individually or in the
aggregate, could reasonably be expected to have a Material Adverse Effect on or
to Alexander.
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3.08 No Breach of Statute or Contract; Governmental Authorizations.
(a) Assuming compliance with Alexander's obligations under this Agreement,
neither the execution and delivery of this Agreement by Alexander nor compliance
by Alexander with the terms and provisions of this Agreement will violate any
applicable law, statute, rule or regulation of any Governmental Body, or will as
of the Effective Date of the Merger conflict with or result in a breach of any
of the terms, conditions or provisions of any judgment, order, injunction,
decree or ruling of any Governmental Body to which Alexander is subject or of
any agreement or instrument to which Alexander is a party or by which it is
bound, or constitute a default thereunder, or result in the creation of any
lien, charge or encumbrance upon any property or asset of Alexander or cause any
acceleration of maturity on any obligation or loan, or give to others any
interest or rights, including rights of termination or cancellation, in or with
respect to any of the material properties, assets, agreements, contracts or
business of Alexander and its Consolidated Subsidiaries considered as one
enterprise, except as set forth in Schedule 3.08 attached hereto which describes
all third party consents necessary to the consummation of this Agreement.
(b) Except for applicable requirements, if any, of the 33 Act, 34 Act, the
premerger notification requirements of the HSR Act, the Nasdaq National Market,
the filing and recordation of appropriate merger documents as required by the
DGCL and the Oklahoma Act, filings required pursuant to any state securities or
"blue sky" laws, and such other notices, reports or other filings the failure of
which to be made would not, individually or in the aggregate, have a Material
Adverse Effect on Alexander or prevent or materially impair the consummation of
the transactions contemplated hereby, Alexander is not required to submit any
notice, report or other filing to any Governmental Body, domestic or foreign, in
connection with the execution, delivery or performance of this Agreement or the
consummation of the transactions contemplated hereby.
(c) Alexander has delivered to NEG true and complete copies, described in
Schedule 3.08, of all reports made by it during the past two fiscal years to the
EEOC, OSHA and the DOL, and tax returns to, and tax rulings and tax audit
reports from, the IRS and state and local jurisdictions. Schedule 3.08 also
contains a brief description of all other types of material periodic reports to
all other state or federal Governmental Bodies other than the SEC.
(d) Alexander is not in violation of any applicable law, statute, rule,
governmental regulation or order, or court decree or judgment which violation,
considered individually or in the aggregate, could reasonably be expected to
have or result in a Material Adverse Effect on or to Alexander. Alexander and,
where applicable, its employees and agents hold all licenses, franchises,
authorizations and permits required for the conduct of Alexander's business
which the failure to hold would result in a Material Adverse Effect on or to
Alexander.
3.09 Litigation or Adverse Events. Schedule 3.09 attached hereto contains
a description of each suit, action and legal, administrative, arbitration or
other proceeding or governmental investigation pending or, to the knowledge of
Alexander, threatened (the "Alexander Cases"), to which Alexander is a party or
of which any of its assets or properties are the subject, which description
reflects the names of the parties, the style of the action and a brief
description of the subject matter of the action. Alexander has made available to
NEG true and correct copies of all pleadings and other filings made in
connection with the Alexander Cases. None of the Alexander Cases, whether
considered individually or in the aggregate, could reasonably be expected to
have or result in a Material Adverse Effect on or to Alexander, except as set
forth in Schedule 3.09.
Except as set forth in Schedule 3.09, there are no claims against or
liabilities or obligations of, or to the knowledge of Alexander, any legal basis
for any claims against or liabilities or obligations of, Alexander or its
Consolidated Subsidiaries which are reasonably likely to result in a material
reduction in the consolidated net worth of Alexander and its Consolidated
Subsidiaries, considered as one enterprise, from that shown on the Alexander
Balance Sheet or the Alexander March 31 Balance Sheet or any material charge
against consolidated net earnings of Alexander and its Consolidated
Subsidiaries, considered as one enterprise, except as expressly disclosed in
this Agreement or any Schedule hereto, financial data and other material
submitted in connection therewith or except as disclosed in writing to NEG.
3.10 Patents, Trademarks, etc. Alexander and the Alexander Subsidiaries
own, or have adequate licenses or other rights to use all patents, trade names,
common law trademarks, private labels, trademark
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registrations and applications, copyrights and copyright registrations and
applications used in or necessary for their respective businesses as now
conducted. To the knowledge of Alexander, there are no claims or demands of any
other person, firm or corporation pertaining to any of such patents, trade
names, trademark registrations and applications, common law trademarks,
copyrights or copyright registrations and applications and no proceedings have
been instituted, are pending or, to the knowledge of Alexander, threatened which
challenge the rights of Alexander in respect thereof. To the knowledge of
Alexander, none of such patents, trade names, trademark registrations and
applications, common law trademarks, copyrights or copyright registrations and
applications, as the case may be, infringes on, or, to Alexander's knowledge, is
being infringed by, other patents, trade names, private labels, trademarks or
copyrights and none is subject to any outstanding order, judgment, decree,
stipulation or agreement restricting the ownership or use of such patents, trade
names, trademarks or copyrights. Alexander has not given nor is it bound by an
agreement of indemnification for patent, trade name, trademark or copyright
infringement as to any property produced, used or sold by it.
3.11 Authorization of Agreement. The execution, delivery and performance
of this Agreement by Alexander have been duly and validly authorized and
approved by the Board of Directors of Alexander, and Alexander has taken, or,
prior to the Effective Date of the Merger, will use all reasonable efforts to
take, all other action required by law, its Certificate of Incorporation and
bylaws, and any other action required, to authorize such execution, delivery and
performance.
The execution, delivery and performance by Alexander of all other
agreements and transactions contemplated hereby have been, or prior to Closing
will be, duly authorized and approved by all requisite corporate action on the
part of Alexander. This Agreement has been, and the other agreements and
instruments contemplated hereby, when executed, will be, duly executed and
delivered by Alexander and, assuming the due authorization, execution and
delivery hereof and thereof by the other parties hereto or thereto, this
Agreement constitutes and, when executed, each of the other agreements
contemplated hereby will constitute, a valid and binding obligation of
Alexander, enforceable against Alexander in accordance with its terms, subject
to applicable bankruptcy, reorganization, insolvency, moratorium, fraudulent
conveyance and similar laws affecting creditors' rights generally from time to
time and to general principles of equity.
3.12 Disclosure in Proxy Statement-Prospectus. None of the information
which has been or will be supplied by Alexander to NEG which has been or will be
included (or incorporated by reference to SEC filings of Alexander) in the
Registration Statement in connection with the meeting of the shareholders of NEG
held to approve the Merger will, (i) in the case of the Proxy
Statement-Prospectus contain any statement which, at the time and in light of
the circumstances under which it is made, is false or misleading with respect to
any material fact, or omit to state any material fact necessary in order to make
the statements therein not false or misleading or necessary to correct any
statement in any prior communication with respect to the solicitation of a proxy
for the same meeting or subject matter which has become false or misleading, or
(ii) in the case of the Registration Statement at the time it becomes effective,
contain an untrue statement of a material fact, or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading.
3.13 Broker's or Finder's Fees. Except as disclosed in Schedule 3.13, no
agent, broker, person or firm acting on behalf of Alexander or under its
authority is, or will be entitled to, any advisory, commission or broker's or
finder's fee from any of the parties hereto in connection with any of the
transactions contemplated herein.
3.14 Insurance. Schedule 3.14 lists each policy of insurance under which
Alexander may currently make a claim or has made any claim which remains
unresolved. Alexander has provided NEG with a true and correct copy of each such
policy or the binder therefor. Except as disclosed in Schedule 3.14, with
respect to each such insurance policy or binder, (i) to Alexander's knowledge,
the policy is legal, valid, binding and enforceable and in full force and
effect; (ii) to Alexander's knowledge, if the term of the policy extends beyond
the Effective Time, the policy will continue to be legal, valid, binding and
enforceable and in full force and effect on identical terms following the
Effective Time; and (iii) neither Alexander nor, to Alexander's knowledge, any
other party to the policy is in material breach or default (including with
respect to the payment of premiums or the giving of notices), and, to
Alexander's knowledge, no event has occurred which,
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with notice or the lapse of time, would constitute such a breach or default or
permit termination, modification or acceleration, under the policy. Schedule
3.14 describes any self-insurance arrangement affecting Alexander. In all
material respects, Alexander has at all times been insured in respect of its
properties, assets and businesses in such amounts, of such types, and covering
such casualties, risks and contingencies as is ordinarily carried by prudent
companies engaged in similar businesses and owning similar properties and assets
in the same general areas in which Alexander operates.
3.15 Permits. Alexander has all of the Permits required by any governmental
authority for the lawful operation of its business and each of its properties.
There is no outstanding violation of any of the Permits that would have a
Material Adverse Effect on or to Alexander, and none is anticipated. The Permits
are in full force and effect and have been duly and validly issued. Neither the
execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby gives or will give any Governmental Body or
licensor or licensee of Alexander any right to change the terms or provisions
of, or terminate or cancel, any Permit to which Alexander is a party.
3.16 Completeness of Documents Furnished by Alexander. The Certificate of
Incorporation and bylaws of Alexander, as amended, and all leases, instruments,
agreements and other documents (including all Schedules and documents made
available, furnished or delivered pursuant to this Agreement), and all copies
thereof, which have been or will be made available, furnished or delivered to
NEG for its inspection and review pursuant to the terms of this Agreement or in
connection with the transactions contemplated hereby, are, or if not heretofore
made available, furnished or delivered, will, when made available, furnished or
delivered, be complete and correct originals or copies of the originals.
3.17 Disposition of Assets. Since December 31, 1995, Alexander has not
made any sale or other disposition of any of its material properties or assets
or surrendered any of its rights with respect thereto or the usage thereof, or
made any material additions to its properties or assets, or entered into or
amended any material agreements, or entered into any material transaction,
except as set forth on Schedule 3.17.
3.18 Employees and Labor.
(a) Alexander has listed in Schedule 3.18 and has made available for
inspection and copying by NEG at NEG's expense true and complete copies of all
employee benefit plans within the meaning of Section 3(3) of ERISA, or any plan,
program, arrangement, agreement or obligation to provide benefits in the form of
bonus, incentives, deferred compensation, dental, medical, disability,
hospitalization, insurance, death benefits, vacation, severance, pension, profit
sharing, retirement benefits, stock purchase, stock option, restricted stock,
fringe benefits, or any other employee benefits of any kind whatsoever
(collectively, the "Alexander Single Employer Plans"), as well as any other
written agreements or other arrangements, which in either instance are currently
in effect, between Alexander and any of its officers, directors, employees,
independent contractors and consultants and anyone who has formerly served in
any such capacity (or any of their respective defendants, heirs, legatees,
beneficiaries or legal representatives). Alexander has not entered into any
similar oral agreements or other arrangements, which in either instance is
currently in effect. Except as disclosed in Schedule 3.18, there are no loans or
other obligations payable or owing by Alexander to any officer, director or
employee of Alexander (except salaries and wages incurred and accrued in the
ordinary course of business), nor are there any loans or debts payable or owing
by any of such persons to Alexander or any guarantees by Alexander of any loan
or obligation of any nature to which any such person is a party.
(b) Alexander has complied with all applicable Employment Laws, except for
such noncompliance as would not individually or in the aggregate result in a
Material Adverse Effect on or to Alexander. Except as described in Schedule
3.18, there is not and will not be any material liability of Alexander arising
out of claims made or suits brought for injury, sickness, disease, death,
termination of employment or conditions of employment of any person (including
any employee or former employee or any contractor or subcontractor of Alexander
or any agent or distributor of Alexander) arising out of or in connection with
any event occurring or a state of facts existing prior to the Effective Date
arising under any Employment Laws. Alexander is not a party to or otherwise
bound by any compliance or affirmative action plan, award, settlement agreement,
decree or other obligation arising out of or in connection with any violation or
alleged violation of any Employment Laws.
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(c) There are no collective bargaining agreements or other labor union
agreements or understandings to which Alexander or its Subsidiaries is a party
or by which any of them is bound. Since December 31, 1995, neither Alexander nor
its Subsidiaries has encountered any labor union organizing activity, or had any
actual or threatened employee strikes, work stoppages, slowdowns or lockouts.
(d) Except as set forth on Schedule 3.18, Alexander does not have any
liabilities, taxes or sanctions that have arisen under COBRA or the Code, nor is
there any action, suit, proceeding, claim, appeal, or demand against Alexander
and/or any of its employees arising by reason of or relating to any failure by
Alexander to comply with the continuing health care coverage of COBRA and
Sections 601 through 608 of ERISA, which failure occurred with respect to any
current or prior employee of Alexander or any qualified beneficiary of such
employee (as defined in COBRA).
(e) Except as set forth in Schedule 3.18, no person has asserted any claim
under which Alexander has any liability under any health insurance, sickness,
life insurance, disability, medical, surgical, hospital, death benefit or any
other employee benefit plan maintained by Alexander or to which Alexander is a
party or may be bound or under any workers compensation or similar law which
exceeds $10,000 and is not fully covered by insurance maintained with
responsible insurers or which has not been reserved for in the books of accounts
of Alexander as of the date of this Agreement. Alexander does not provide any
benefits to retirees or former employees under Alexander's medical plans, the
aggregate expense for which is required to be accrued under FASB 106. To the
extent such benefits are provided to retirees or former employees of Alexander,
such benefits may be terminated at any time with no liability to Alexander.
3.19 Obligations to Employees.
(a) All obligations of Alexander, whether arising by operation of law,
contract, agreement, or otherwise, for bonuses or other forms of compensation or
benefits, or for payments to trusts or other funds or to any Governmental Body
or to any employees, former employees, directors, officers, agents, or any other
individual (or any of their respective heirs, legatees, beneficiaries, or legal
representatives) with respect to any Alexander Single Employer Plans of any kind
whatsoever with respect to periods ending on or before the date of this
Agreement have been paid or accrued at December 31, 1995, if due, all in
accordance with generally accepted accounting principles.
(b) Alexander does not have any accumulated funding deficiencies, as such
term is defined in ERISA and in the Code, with respect to any Alexander Single
Employer Plans. Alexander has not incurred any liability to the PBGC, other than
for the payment of insurance premiums, all of which have been paid when due, the
IRS or the DOL with respect to any such Alexander Single Employer Plan. As to
each Multiemployer Plan which is subject to MEPPA, Alexander has not incurred
and does not expect to incur any withdrawal liability. The consummation of this
Agreement will not result in either a complete or partial withdrawal from any of
the Multiemployer Plans. All of the Alexander Single Employer Plans have been
amended as, when and to the extent necessary to comply with and qualify under
the applicable provisions of the Code.
(c) Except as described in Schedule 3.19, the Alexander Single Employer
Plans which are pension benefit plans have received, or have applied for and
expect to receive, determination letters from the IRS to the effect that such
plans are qualified and exempt from federal income taxes under Sections 401(a)
and 501(a), respectively, of the Code, and no amendments have been made to such
Alexander Single Employer Plans other than those covered by such determination
letters or applications for such determination letters with respect to such
amendments which have been timely filed with the IRS. No determination letter
received with respect to any Alexander Single Employer Plan has been revoked
nor, to the knowledge of Alexander, has revocation been threatened. Each of the
Alexander Single Employer Plans has been administered at all times in all
respects in accordance with its respective terms. There are no pending
investigations by any governmental agency involving the Alexander Single
Employer Plans, no deficiency or termination proceedings involving the Alexander
Single Employer Plans, and no pending or, to the knowledge of Alexander,
threatened claims (except for claims for benefits payable in the normal
operation of the Alexander Single Employer Plans), suits or proceedings against
any Alexander Single Employer Plan or asserting any rights or
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claims to benefits under any Alexander Single Employer Plan nor, to the
knowledge of Alexander, are there any facts which could give rise to any
liability in the event of any such investigation, claim, suit or proceeding.
(d) Neither the Alexander Single Employer Plans nor any trusts created
thereunder, nor any trustee, administrator or other fiduciary thereof, has
engaged in a "prohibited transaction" with respect to any Alexander Single
Employer Plan (as such term is defined in Section 4975 of the Code or Section
406 of ERISA). Except as set forth in Schedule 3.19, Alexander has not
experienced any reportable event within the meaning of ERISA or other event or
condition which constitutes a reportable event, or any other event or condition
which presents a material risk of termination of any Alexander Single Employer
Plan by the PBGC, or has had any tax imposed upon it by the IRS for any alleged
violation under Section 4975 of the Code, or has engaged in any transaction
which might subject Alexander or any such Alexander Single Employer Plan to any
liability for such tax. The terms of any such Alexander Single Employer Plans
comply with ERISA and the Code, if applicable, in all respects, and any and all
reporting and disclosure requirements of ERISA or the IRS and the DOL with
respect to any such Alexander Single Employer Plan have been timely met. The
information supplied to the actuary by Alexander for use in preparing those
annual reports for the Alexander Single Employer Plans was complete and accurate
and Alexander has no reason to believe that the conclusions expressed in such
reports are incorrect.
(e) If termination (whether complete or partial) of any Alexander Single
Employer Plan has occurred, then all liabilities with respect thereto have been
satisfied in full and no present liability exists with respect to any such prior
termination.
(f) All stock options and restricted stock referred to in Section 4.10
satisfy the requirements of Code Section 162(m) and applicable regulations for
performance based compensation, or otherwise are exempt from the provisions of
Code Section 162(m). Any cancellation, substitution or modification of stock
options or restricted stock required by Section 4.10 is permitted under the
terms of the applicable benefit plan or agreement, and does not require the
consent or agreement of any holder of stock options or restricted stock.
3.20 Vested Vacation Entitlement. Except as set forth on Schedule 3.20,
Alexander's books of account and financial statements referred to in Section
3.04 hereof provide for vested vacation entitlement in accordance with FASB 43
and for all other material accruals for other employee benefits required by
generally accepted accounting principles.
3.21 Environmental Matters. Except as disclosed at Schedule 3.21, in
connection with the use, ownership or operation of Alexander's assets or any oil
well, gas well or other well located on lands covered by a lease in which
Alexander has any interest or on lands spaced, pooled or unitized therewith,
Alexander and, to Alexander's knowledge, each person or entity owning or having
owned any interest (leasehold, fee, equitable or otherwise) in, or using or
operating or having operated or used, any such asset or well, have complied in
all material respects with all Environmental Laws, for which the failure to have
complied or be in compliance therewith or the remedial obligations resulting
therefrom would result in a Material Adverse Effect on or to Alexander.
Except as disclosed at Schedule 3.21, Alexander does not have knowledge of,
and has not received notice from, any Governmental Body, person or entity, of
any Release, or any event, condition, circumstance, activity, practice or
incident concerning or affecting Alexander's assets that (i) would result in
Alexander failing to comply with any Environmental Law or the terms of any
Permit issued pursuant thereto, or (ii) would result in any common law or other
liability of Alexander to any person, entity or Governmental Body for damage or
injury to natural resources, wildlife, human health or the environment, which
failure or liability would result in a Material Adverse Effect on or to
Alexander.
Except as disclosed at Schedule 3.21, there is no civil, criminal, or
administrative action, lawsuit, demand, litigation, claim, hearing, notice of
violation, investigation, or proceeding pending or, to Alexander's knowledge,
threatened against Alexander, or any present or former owner of any interest in,
or operator of, any oil well, gas well or other well in which Alexander has any
interest or any other of Alexander's assets as a result of the maintenance of a
nuisance, or the violation or breach of any Environmental Law or any remedial
obligation arising thereunder, the terms of any Permit issued under any
Environmental Law affecting
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Alexander's assets, properties or business, or any duty arising at common law to
any person, entity or Governmental Body relating to the protection of the
environment, which would result in a Material Adverse Effect on or to Alexander.
3.22 Books of Account. Alexander has maintained its books of account in
the usual, regular and ordinary manner.
3.23 Prior Obligations. Alexander has no contractual obligation relating
to the disposition, by merger or otherwise, of any of the equity securities of
Alexander or of all or any significant portion of Alexander's assets except as
described in this Agreement or the Schedules hereto.
3.24 Oil and Gas Reserve Report. To Alexander's knowledge, the proved oil
and gas quantities in the reserve report prepared with respect to Alexander by
N&S as of December 31, 1995 (the "Alexander Reserve Report") fairly present the
estimated quantities of projected oil and gas production attributable to the
assets of Alexander as stated therein as of the date thereof. It is understood
that such estimated quantities are based in whole or in part on studies
performed by independent engineers, and Alexander does not represent or warrant
the accuracy of such studies. Alexander made available to N&S all information
within its possession or its control relevant to such studies and, to
Alexander's knowledge, such information was true and correct. To Alexander's
knowledge, there has been no material adverse change in the information provided
to N&S, and no event or circumstance has occurred which could reasonably be
expected to result in a decrease of more than 10% in the projected proved oil
and gas quantities in the aggregate set forth in the Alexander Reserve Report
since the date of such report, except for the production of oil, gas and other
hydrocarbons in the ordinary course of business, the acquisition and disposition
of interests in oil and gas properties described on Schedules 3.25A, B and C,
and decreases in oil and gas prices generally in the United States.
3.25 Title to Interests. Schedule 3.25A identifies (i) each oil well and
gas well in which Alexander owns an interest, vested or contingent, and which is
producing or capable of producing hydrocarbons in commercial quantities
(individually an "Alexander Well" and collectively called the "Alexander Wells")
and (ii) Alexander's net revenue interest and leasehold cost bearing interest
(i.e., working interest) in each Alexander Well. Adjacent to the name of each
Alexander Well is a description of all lands constituting the drilling and
spacing unit or other allowable production unit in which such Alexander Well is
situated. Each oil, gas, and mineral lease in which Alexander owns any interest
and which interest is entitled to share in the production of hydrocarbons or the
proceeds of sale of the production of hydrocarbons from the Alexander Wells is
hereinafter individually and are collectively called the "Alexander Producing
Leases." Schedule 3.25B describes all oil, gas, and mineral leases, other than
the Alexander Producing Leases, in which Alexander owns any interest and the
type of interest which Alexander owns therein (hereinafter individually and
collectively called the "Alexander Non-Producing Leases;" the Alexander
Non-Producing Leases and the Alexander Producing Leases are hereinafter
individually and collectively called the "Alexander Leases"). Schedule 3.25C
describes (i) all lands in which Alexander owns a fee simple or term mineral or
royalty interest, which are not entitled to share in the production of
hydrocarbons from the Alexander Wells or the proceeds of sale of the production
of hydrocarbons from the Alexander Wells (the "Alexander Non-Producing Mineral
Fee Interests"), and (ii) Alexander's interest in and to the Alexander
Non-Producing Mineral Fee Interests by virtue of such ownership. The lands
described at Schedules 3.25A-C are individually and collectively called the
"Alexander Land." The Alexander Wells, the Alexander Leases, and the Alexander
Land, together with (i) all contracts, agreements, leases, licenses, permits,
authorizations, easements, and orders (individually and collectively called the
"Alexander Agreements") in any way relating to the Alexander Wells, Alexander
Leases and/or the Alexander Land, the operations conducted or to be conducted
pursuant thereto or thereon, or the production, treatment, sale or disposal of
hydrocarbons or water produced therefrom or attributable thereto, (ii) all
wells, personal property, fixtures (including, without limitation, pipe, plants
and pipelines), equipment (including, without limitation, compressors, parts,
rods, tubular goods and supplies) and improvements located at, under or on the
Alexander Wells, the Alexander Leases and/or the Alexander Land, or used or
obtained in connection therewith or with the operation or maintenance of the
Alexander Wells or other facilities thereon or with the production, treatment,
sale or disposal of hydrocarbons or water produced therefrom or attributable
thereto, and (iii) all other rights and interests in, to or under or derived
from the Alexander Wells, the Alexander Leases, the Alexander Agreements, and/or
the Alexander Land (including,
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without limitation, all mineral and royalty interests, and all overriding
royalty interests and all other interests in or payable out of or measured by
production, and all surface interests, for a term or in fee), or in any way
relating thereto, are referred to herein as the "Alexander Interests."
As respects each Alexander Well, Alexander's interests in the Alexander
Producing Leases and the Alexander Land are such that, after giving effect to
existing spacing orders, operating agreements, unit agreements, communitization
agreements and orders, unitization orders and pooling designations and orders,
subject to the limitations described in Schedule 3.25A, and after taking into
account all royalty interests, overriding royalty interests, net profit
interests, production payments and other burdens on production attributable to
third parties, (i) Alexander is entitled, during the entire extended terms of
the Alexander Producing Leases covering such Alexander Well, to a share
(expressed as a decimal) of all oil, gas and other minerals produced from such
Alexander Well which is not less than the "net revenue interest" set out in
connection with the description of such Alexander Well, free and clear of all
liens, claims, mortgages, deeds of trust, assignments of production, and
security interests, other than those described in Schedule 3.06, (ii) Alexander
owns an undivided interest (expressed as a decimal) equal to the "working
interest" set out in connection with the description of such Alexander Well in
and to all property and rights incident thereto, including all rights in, to and
under all agreements, leases, permits, easements, licenses and orders in any way
relating thereto, and in and to all wells, personal property, fixtures and
improvements thereon, appurtenant thereto or used or obtained in connection
therewith or with the production or treatment or sale or disposal of
hydrocarbons or water produced therefrom or attributable thereto, and (iii)
Alexander is obligated, during the entire extended terms of the Alexander
Producing Leases to which production from such Alexander Well is attributable,
for a share of the costs relating to the exploration, development, and operation
of such Alexander Well which is no greater than the "working interest" set out
in connection with the description of such Alexander Well.
3.26 Compliance With Leases and Laws. Alexander has complied in all
material respects with the terms and provisions of the Alexander Leases. To
Alexander's knowledge and except as disclosed on Schedule 3.26, no default
exists under any of the terms and provisions, express or implied, of any of the
Alexander Leases or under any of the terms and provisions of any agreement to
which any of the Alexander Leases are subject, and Alexander has not received
notice of any claim of such default. All bonuses, rentals, shut-in royalties and
royalties due under the Alexander Leases and applicable law, rules and
regulations of the federal and state Governmental Bodies having jurisdiction
with respect to same have been timely and properly paid and are not in suspense
for any reason, except as disclosed in Schedule 3.26. Alexander's aggregate
delay rental and bonus obligations due under the terms of the Alexander
Non-Producing Leases for each of calendar years 1996, 1997, and 1998 are set
forth at Schedule 3.26. There is no express provision under any Alexander Lease
or any agreement which requires the drilling of additional wells or other
operations to earn or continue to hold any of the Alexander Leases and all lands
covered thereby, except as disclosed in Schedule 3.26. All Alexander Wells have
been drilled, completed, and operated in compliance with all applicable federal,
state and local laws and regulations applicable thereto (including, without
limitation, the Environmental Laws), except to the extent such failure to comply
would not result in a Material Adverse Effect to Alexander. Based on information
available to Alexander, all production from the Alexander Wells has been
properly accounted for and all proceeds attributable thereto have been properly
paid to the persons entitled thereto in accordance with payment practices
customary in the oil and gas industry and applicable law, except as disclosed in
Schedule 3.26, and all necessary filings with Governmental Bodies have been
properly made in connection with the drilling, completion, and operations of
each Alexander Well and all other oil and gas operations on the Alexander Land
and, except as disclosed in Schedule 3.26, no production or sale of oil, gas and
other hydrocarbons heretofore produced or sold from or attributable to the
Alexander Leases has been in excess of any allowable quantity (plus permitted
tolerances) or price or in violation of any other rule or regulation affecting
the sale of hydrocarbons as established by the applicable regulatory
authorities. Schedule 3.26 identifies by amount all proceeds attributable to the
production of hydrocarbons through December 31, 1995, which are owing to third
parties and which are in the possession or under the control of Alexander.
Except as disclosed in Schedule 3.26, no gas produced from the Alexander
Interests is subject to the price control jurisdiction of the FERC under the
NGPA.
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3.27 Sale of Production. Except as set forth in Schedule 3.27, to
Alexander's knowledge, Alexander has no production from any Alexander Well which
is subject to balancing rights of third parties or is subject to balancing
duties under governmental requirements, and no third party has production from
any Alexander Well which is subject to the balancing rights of Alexander. Except
as set forth on Schedule 3.27, no production from any Alexander Well has
exceeded the allowable production established therefor by the appropriate
Governmental Body. Except as set forth on Schedule 3.27, Alexander is not
obligated by virtue of any prepayment made under any production sales contract
or any other contract containing a take-or-pay clause or relating to the
settlement of a take-or-pay dispute, or under any similar arrangement, to
deliver oil, gas, natural gas liquids or other hydrocarbons or minerals produced
from or allocated to any of the Alexander Leases at any time after the Effective
Time without receiving full payment therefor at the time of delivery. Except as
disclosed on Schedule 3.27, Alexander has not collected any proceeds from the
sale of hydrocarbons produced from the Alexander Interests which are subject to
refund. Except as set forth in Schedule 3.27, proceeds from the sale of oil, gas
and natural gas liquids from the Alexander Wells are being received by Alexander
in a timely manner and based upon the net revenue interest described at Schedule
3.25 for each such Alexander Well and in accordance with the terms of the
applicable purchase agreement governing such sale, and are not being held in
suspense for any reason. Alexander has described in Schedule 3.27 and made
available to NEG for examination all contracts and agreements (other than
routine division orders terminable by Alexander upon less than sixty (60) days'
notice) pursuant to which hydrocarbons produced from the Alexander Interests are
sold, transported, processed or otherwise disposed of or marketed. Except as
disclosed in Schedule 3.27, no person has any call upon, right of first refusal,
preferential right or option to purchase or similar rights with respect to the
Alexander Interests or to the production therefrom. Except as disclosed in
Schedule 3.27, price renegotiation procedures have not been commenced under FERC
Order No. 451 which involve or which hereafter may affect any gas produced from
the Alexander Interests. Except as disclosed in Schedule 3.27, no offer of
credits under FERC Order No. 500 has been made which would entitle any purchaser
of gas produced from the Alexander Interests to credit transported volumes
against such purchaser's take-or-pay obligations under any contract for the sale
of gas produced from the Alexander Interests.
3.28 Contracts. Alexander has described in Schedule 3.28 all partnership,
joint venture, farmout, dry hole, bottom hole, acreage contribution, area of
mutual interest, purchase and/or acquisition agreements of which any terms
remain executory which may affect the Alexander Interests, and all other
executory contracts to which Alexander is a party which would have a Material
Adverse Effect on any item of the Alexander Interests.
3.29 Status of Alexander Wells. Except as disclosed on Schedule 3.29, all
Alexander Wells are producing or capable of producing hydrocarbons in commercial
quantities (based upon prevailing economic conditions) without the necessity of
reworking or recompletion operations. To Alexander's knowledge and except as
disclosed in Schedule 3.29, there are no obligations existing for the plugging
or abandonment (including obligations for restoration of the surface) of any oil
and/or gas well, salt water disposal well or other well located at the Alexander
Interests.
3.30 Tax Partnerships. Except as disclosed on Schedule 3.30, no item of
the Alexander Interests is treated for income tax purposes as being owned by a
partnership.
3.31 Equipment and Off-Lease Facilities. That portion of the Alexander
Interests consisting of personal property, facilities, and fixtures, including
without limitation, all property and assets used in connection with the
operation of the Alexander Interests, is in good condition and repair, ordinary
wear and tear excepted, and is adequate for the proper operation of the
Alexander Interests, except for such repairs and additions necessary for the
proper operation of the Alexander Interests and which individually or in the
aggregate would not result in a Material Adverse Effect on Alexander.
3.32 SEC Documents. Alexander has delivered or made available to NEG each
registration statement, report, definitive proxy statement or definitive
information statement and all exhibits thereto filed since December 31, 1991,
which are listed on Schedule 3.32, each in the form (including exhibits and any
amendments thereto) filed with the SEC (collectively, the "Alexander Reports").
The Alexander Reports, which were filed with the SEC in a timely manner except
as set forth in Schedule 3.32, constitute all forms,
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reports and documents required to be filed by Alexander under the 33 Act, the 34
Act and the rules and regulations promulgated thereunder. As of their respective
dates, the Alexander Reports (i) complied as to form in all material respects
with the applicable requirements of the 33 Act and/or the 34 Act and (ii) did
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading. Each of the balance sheets of Alexander included in or incorporated
by reference into the Alexander Reports (including the related notes and
schedules) fairly presents the financial position of Alexander as of its date
and each of the statements of income, retained earnings and cash flows of
Alexander included in or incorporated by reference into the Alexander Reports
(including any related notes and schedules) fairly presents the results of
operations, retained earnings or cash flows, as the case may be, of Alexander
for the periods set forth therein (subject, in the case of unaudited statements,
to normal year-end audit adjustments which would not be material in amount or
effect), in each case in accordance with generally accepted accounting
principles consistently applied during the periods involved, except as may be
noted therein and except, in the case of any unaudited statements, as permitted
by Form 10-Q promulgated under the 34 Act.
3.33 Related Party Transactions. Set forth in Schedule 3.33 is a complete
list of all arrangements, agreements and contracts between Alexander and any
person who is an officer, director or affiliate of Alexander, any relative of
any of the foregoing or any entity of which any of the foregoing is an
affiliate.
3.34 Certain Payments. Except as set forth in Schedule 3.34, the execution
of, and performance of the transactions contemplated by, this Agreement will not
(either alone or upon the occurrence of any additional or subsequent events) (i)
constitute an event under any Alexander benefit plan, policy, practice,
agreement or other arrangement or any trust or loan (the "Alexander Employee
Arrangements") that will or may result in any payment (whether of severance pay
or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution,
increase in benefits or obligations to fund benefits with respect to any
employee, director or consultant of Alexander or (ii) result in the triggering
or imposition of any restrictions or limitations on the right of NEG or
Alexander to amend or terminate any Alexander Employee Arrangements and receive
the full amount of any excess assets remaining or resulting from such amendment
or termination, subject to applicable taxes. Except as set forth in Schedule
3.34, no payment or benefit which will be required to be made pursuant to the
terms of any agreement, commitment or Alexander benefit plan, as a result of the
transactions contemplated by this Agreement, to any officer, director or
employee of Alexander will be characterized as an "excess parachute payment"
within the meaning of Section 280G(b)(1) of the Code.
3.35 Royalty Accounts. Schedule 3.35 sets forth as of April 30, 1996, the
amount of funds held by Alexander in suspense and which are owed to third party
owners of royalty, overriding royalty, working or other interests for past
production of oil and gas attributable to the Alexander Interests.
3.36 Accounts Payable. The accounts payable reflected on the Alexander
Balance Sheet, the Alexander March 31 Balance Sheet and those reflected on the
books of Alexander at the time of the Closing reflect all amounts owed by
Alexander, in respect of trade accounts due and other payables as required by
generally accepted accounting principles to be identified on such Alexander
Balance Sheet, Alexander March 31 Balance Sheet or in the books of Alexander.
Schedule 3.36 sets forth all accounts payable past due as of April 30, 1996 and
will be updated by Alexander to set forth all accounts payable past due as of
the date of Closing.
ARTICLE IV
CONDUCT AND TRANSACTIONS PRIOR TO
EFFECTIVE DATE OF THE MERGER
4.01 Investigations; Operation of Business of Alexander. Between the date
of this Agreement and the Effective Date of the Merger:
(a) (i) Alexander shall give NEG, its agents and representatives, full
access to all of the premises of Alexander, the Alexander Partnerships, and the
Alexander Subsidiaries, including well sites, and books and
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records and to cause their respective officers to furnish NEG, its agents and
representatives with such financial and operating data and other information
with respect to the respective businesses and properties of Alexander, the
Alexander Partnerships, and the Alexander Subsidiaries as NEG, its agents and
representatives shall from time to time reasonably request; provided, however,
that any such investigation shall not affect any of the representations and
warranties of Alexander hereunder, and provided further, that any such
investigation shall be conducted in such manner as not to interfere unreasonably
with the operation of the respective businesses of Alexander, the Alexander
Partnerships, and the Alexander Subsidiaries. In the event of termination of
this Agreement, except as prevented by law, NEG will, and shall cause its agents
and representatives to, return to Alexander all documents, work papers and other
materials obtained from Alexander, the Alexander Partnerships, and the Alexander
Subsidiaries in connection with the transactions contemplated hereby, and all
copies, extracts or other reproductions thereof in whole or in part (the
"Alexander Confidential Material"). The term Alexander Confidential Information
does not include information which (i) is public information, (ii) was already
known to NEG, (iii) is developed by NEG independently from the information
supplied to NEG pursuant to this Agreement, or (iv) is furnished to NEG by a
third party who is not an employee, agent, representative, or advisor of
Alexander or any entity in which Alexander has an interest independently from
NEG's investigation pursuant to the transactions contemplated by this Agreement.
NEG agrees, and shall cause its affiliates and their respective officers,
directors, employees, financial advisors and agents (collectively, "NEG
Representatives") to keep confidential any information obtained pursuant to this
Agreement unless such information is readily ascertainable from public or
published information or trade sources. If this Agreement is terminated, NEG
shall not use, and shall cause each NEG Representative not to use, any of the
Alexander Confidential Information to NEG's or any other person's or entity's
financial advantage or to the detriment of Alexander. The confidentiality
provisions of this Section 4.01(a) shall survive the termination of this
Agreement.
(ii) Subject to Subsection 4.01(a)(iii) below or except as required by law,
the Alexander Confidential Material will be kept confidential and will not,
without the prior written consent of Alexander, be disclosed by NEG or the NEG
Representatives, in whole or in part, and will not be used by NEG or the NEG
Representatives, directly or indirectly, for any purpose other than in
connection with this Agreement, the Merger, the other transactions contemplated
by this Agreement or evaluating, negotiating or advising NEG with respect to the
transactions contemplated herein. Moreover, NEG agrees to transmit the Alexander
Confidential Material to the NEG Representatives only if and to the extent that
the NEG Representatives need to know the Alexander Confidential Material for
purposes of such transaction and are informed by NEG of the confidential nature
of the Alexander Confidential Material and of the terms of this Section. In any
event, NEG will be responsible for any actions by the NEG Representatives which
are not in accordance with the provisions hereof.
(iii) In the event that NEG, the NEG Representatives or anyone to whom NEG
or the NEG Representatives supply the Alexander Confidential Material are
requested or required (by oral questions, interrogatories, requests for
information or documents, subpoena, civil investigative demand, any informal or
formal investigation by any Governmental Body or otherwise in connection with
legal processes) to disclose any of the Alexander Confidential Material, NEG
agrees (i) to immediately notify Alexander of the existence, terms and
circumstances of such a request, (ii) to consult with Alexander on the
advisability of taking legally available steps to resist or narrow such request
and (iii) if disclosure of such information is required, to furnish only that
portion of the Alexander Confidential Material which, in the opinion of NEG's
counsel, NEG is legally compelled to disclose and to cooperate with any action
by Alexander to obtain an appropriate protective order or other reliable
assurance that confidential treatment will be accorded the Alexander
Confidential Material (it being agreed that Alexander shall reimburse NEG for
all reasonable out-of-pocket expenses incurred by NEG in connection with such
cooperation).
(b) Alexander will, to the extent required for continued operation of its
business without impairment, use its reasonable efforts to preserve
substantially intact the books and records and the business organization of
Alexander, to keep available the services of its present officers and employees,
and to preserve the present relationships of Alexander with persons having
significant business relations therewith such as suppliers, customers, brokers,
agents or otherwise and to promptly notify NEG of an emergency or other change
which
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would have a Material Adverse Effect on Alexander, any governmental complaints,
investigations, hearings (or communications indicating that the same may be
contemplated) or the breach in any material respect of any representation,
warranty, covenant or agreement contained herein.
(c) Alexander will conduct its business only in the ordinary course and, by
way of amplification and not limitation, Alexander will not, without the prior
written consent of NEG, except with respect to the issuance of shares previously
reserved for issuance as described in Schedule 3.02, (i) issue, sell or
otherwise dispose of any shares of its capital stock, or (ii) grant any other
options or warrants or other rights to purchase or otherwise acquire any shares
of Alexander's capital stock or issue any securities convertible into shares of
Alexander's capital stock, or (iii) adopt any new employee benefit plans or
modify or alter any existing employee benefit plan, or (iv) declare, set aside,
or pay any dividend or distribution with respect to the capital stock of
Alexander, or (v) directly or indirectly redeem, purchase or otherwise acquire
any capital stock of Alexander, or (vi) effect a split or reclassification of
any capital stock of Alexander or a recapitalization of Alexander, or (vii)
change the charter or bylaws of Alexander, or (viii) grant any increase in the
compensation payable or to become payable by Alexander to officers or salaried
employees of Alexander or any increase in any Alexander Single Employer Plan or
Alexander Employee Arrangement for any officers or employees, or (ix) borrow,
except for working capital purposes not to exceed $10,000, or agree to borrow
any funds, or guarantee or agree to guarantee the obligations of others, or (x)
waive any rights of substantial value, or (xi) except in the ordinary course of
business enter into an agreement, contract or commitment which, if entered into
prior to the date of this Agreement, would be required to be listed in a
Schedule attached to this Agreement, or materially amend or change the terms of
any such agreement, contract or commitment, or (xii) take any action or omit to
take any action which would result in any of its representations or warranties
set forth in this Agreement becoming untrue or any of the conditions or
obligations of Alexander set forth in Section 5.02 hereof not being satisfied.
Listed on Schedule 4.01 hereto are all of Alexander's presently proposed capital
expenditures exceeding $10,000. Without the prior written consent of NEG,
Alexander will not make any other capital expenditures in excess of $100,000 in
any one case or $150,000 in the aggregate.
(d) Alexander shall furnish NEG a copy of all amendments to the Alexander
10-K and of any other form filed with the SEC under the 34 Act from the date of
filing of the Alexander 10-K to the Effective Date of the Merger.
(e) Following its execution of this Agreement, neither Alexander nor any of
its affiliates or agents, will directly or indirectly solicit, initiate or
participate in negotiations with any person other than NEG with respect to the
disposition of any of the equity securities of Alexander or any options with
respect thereto or merger of Alexander with another corporation, or any
disposition of all or any significant portion of the assets of Alexander not in
the ordinary course of business, or similar transaction (each an "Alexander
Acquisition Proposal"), nor shall Alexander or any of its affiliates or agents
provide any information concerning Alexander with respect to an Alexander
Acquisition Proposal, unless Alexander has been advised by counsel that
participation in such negotiations or the provision of such information in
response to any unsolicited offer is required by the fiduciary duties of
Alexander's Board of Directors under applicable law. In the event anyone should
solicit, initiate negotiations with or make inquiries of Alexander relative to
an Alexander Acquisition Proposal, Alexander will promptly notify NEG.
(f) Alexander will continue to maintain its books of account in the usual,
regular and ordinary manner.
4.02 Investigations; Operation of Business of NEG. Between the date of
this Agreement and the Effective Date of the Merger:
(a) (i) NEG shall give Alexander, its agents and representatives, full
access to all of the premises of NEG, the NEG Partnerships, and the NEG
Subsidiaries including well sites, and books and records, and to cause their
respective officers to furnish Alexander, its agents and representatives with
such financial and operating data and other information with respect to the
respective businesses and properties of NEG, the NEG Partnerships, and the NEG
Subsidiaries as Alexander, its agents and representatives shall from time to
time reasonably request; provided, however, that any such investigation shall
not affect any of the representations and warranties of NEG hereunder, and
provided further, that any such investigation shall be conducted in such manner
as not to interfere unreasonably with the operation of the respective businesses
of NEG, the
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NEG Partnerships, and the NEG Subsidiaries. In the event of termination of this
Agreement, except as prevented by law, Alexander will, and shall cause its
agents and representatives to, return to NEG all documents, work papers and
other materials obtained from NEG, the NEG Partnerships, and the NEG
Subsidiaries in connection with the transactions contemplated hereby, and all
copies, extracts or other reproductions thereof in whole or in part (the "NEG
Confidential Material"). The term NEG Confidential Information does not include
information which (i) is public information, (ii) was already known to
Alexander, (iii) is developed by Alexander independently from the information
supplied to Alexander pursuant to this Agreement, or (iv) is furnished to
Alexander by a third party who is not an employee, agent, representative, or
advisor of NEG or any entity in which NEG has an interest independently from
Alexander's investigation pursuant to the transactions contemplated by this
Agreement. Alexander agrees, and shall cause its affiliates and their respective
officers, directors, employees, financial advisors and agents (collectively,
"Alexander Representatives") to keep confidential any information obtained
pursuant to this Agreement unless such information is readily ascertainable from
public or published information or trade sources. If this Agreement is
terminated, Alexander shall not use, and shall cause each Alexander
Representative not to use, any of the NEG Confidential Information to
Alexander's or any other person's or entity's financial advantage or to the
detriment of NEG. The confidentiality provisions of this Section 4.02(a) shall
survive the termination of this Agreement.
(ii) Subject to Subsection 4.02(a)(iii) below or except as required by law,
the NEG Confidential Material will be kept confidential and will not, without
the prior written consent of NEG, be disclosed by Alexander or the Alexander
Representatives, in whole or in part, and will not be used by Alexander or the
Alexander Representatives, directly or indirectly, for any purpose other than in
connection with this Agreement, the Merger, the other transactions contemplated
by this Agreement or evaluating, negotiating or advising Alexander with respect
to the transactions contemplated herein. Moreover, Alexander agrees to transmit
the NEG Confidential Material to the Alexander Representatives only if and to
the extent that the Alexander Representatives need to know the NEG Confidential
Material for purposes of such transaction and are informed by Alexander of the
confidential nature of the NEG Confidential Material and of the terms of this
Section. In any event, Alexander will be responsible for any actions by the
Alexander Representatives which are not in accordance with the provisions
hereof.
(iii) In the event that Alexander, the Alexander Representatives or anyone
to whom Alexander or the Alexander Representatives supply the NEG Confidential
Material are requested or required (by oral questions, interrogatories, requests
for information or documents, subpoena, civil investigative demand, any informal
or formal investigation by any Governmental Body or otherwise in connection with
legal processes) to disclose any of the NEG Confidential Material, Alexander
agrees (i) to immediately notify NEG of the existence, terms and circumstances
of such a request, (ii) to consult with NEG on the advisability of taking
legally available steps to resist or narrow such request and (iii) if disclosure
of such information is required, to furnish only that portion of the NEG
Confidential Material which, in the opinion of Alexander's counsel, Alexander is
legally compelled to disclose and to cooperate with any action by NEG to obtain
an appropriate protective order or other reliable assurance that confidential
treatment will be accorded the NEG Confidential Material (it being agreed that
NEG shall reimburse Alexander for all reasonable out-of-pocket expenses incurred
by Alexander in connection with such cooperation).
(b) NEG will, to the extent required for continued operation of its
business without impairment, use its reasonable efforts to preserve
substantially intact the books and records and the business organization of NEG,
to keep available the services of its present officers and employees, and to
preserve the present relationships of NEG with persons having significant
business relations therewith such as suppliers, customers, brokers, agents or
otherwise and to promptly notify Alexander of an emergency or other change which
would have a Material Adverse Effect on NEG, any governmental complaints,
investigations, hearings (or communications indicating that the same may be
contemplated) or the breach in any material respect of any representation,
warranty, covenant or agreement contained herein.
(c) NEG will conduct its business only in the ordinary course and, by way
of amplification and not limitation, NEG will not, without the prior written
consent of Alexander, except with respect to the issuance of shares as described
in Schedule 2.02, (i) issue, sell or otherwise dispose of shares of its capital
stock, or
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(ii) grant any other options or warrants or other rights to purchase or
otherwise acquire any shares of NEG's capital stock or issue any securities
convertible into shares of NEG's capital stock, or (iii) adopt any new employee
benefit plans or modify or alter any existing employee benefit plan except as
otherwise disclosed on Schedule 4.02, or (iv) declare, set aside, or pay any
dividend or distribution with respect to the capital stock of NEG other than
ordinary semi-annual cash dividends by NEG consistent with past practice in an
amount not in excess of $5.00 per share of Series B Preferred and $5.25 per
share of Series C Preferred, or (v) directly or indirectly redeem, purchase or
otherwise acquire any capital stock of NEG, or (vi) effect a split or
reclassification of any capital stock of NEG or a recapitalization of NEG, or
(vii) change the charter or bylaws of NEG except as otherwise disclosed on
Schedule 4.02, or (viii) grant any increase in the compensation payable or to
become payable by NEG to officers or salaried employees of NEG or any increase
in any NEG Single Employer Plan or NEG Employee Arrangement for any officers or
employees except as otherwise disclosed on Schedule 4.02, or (ix) borrow, except
for working capital purposes not to exceed $10,000 and except as set forth on
Schedule 4.02, or agree to borrow any funds, or guarantee or agree to guarantee
the obligations of others, or (x) waive any rights of substantial value, or (xi)
except in the ordinary course of business and except as set forth on Schedule
4.02, enter into an agreement, contract or commitment which, if entered into
prior to the date of this Agreement, would be required to be listed in a
Schedule attached to this Agreement, or materially amend or change the terms of
any such agreement, contract or commitment, or (xii) take any action or omit to
take any action which would result in any of its representations or warranties
set forth in this Agreement becoming untrue or any of the conditions or
obligations of NEG set forth in Section 5.01 hereof not being satisfied. Listed
on Schedule 4.02 hereto are all of NEG's presently proposed capital expenditures
exceeding $10,000. Without the prior written consent of Alexander, NEG will not
make any other capital expenditures in excess of $100,000 in any one case or
$150,000 in the aggregate.
(d) NEG shall furnish Alexander a copy of any amendment to the NEG 10-K and
of any other report filed with the SEC under the 34 Act from the date of filing
of the NEG 10-K to the Effective Date of the Merger.
(e) Following its execution of this Agreement, neither NEG nor any of its
affiliates or agents, will directly or indirectly solicit, initiate or
participate in negotiations with any person other than Alexander with respect to
the disposition of any of the equity securities of NEG or any options with
respect thereto or merger of NEG with any corporation, or any disposition of all
or any significant portion of the assets of NEG not in the ordinary course of
business, or similar transaction (each an "NEG Acquisition Proposal"), nor shall
NEG or any of its affiliates or agents provide any information concerning NEG
with respect to an NEG Acquisition Proposal, unless NEG has been advised by
counsel that participation in such negotiations or the provision of such
information in response to any unsolicited offer is required by the fiduciary
duties of NEG's Board of Directors under applicable law. In the event anyone
should solicit, initiate negotiations with or make inquiries of NEG relative to
an NEG Acquisition Proposal, NEG will promptly notify Alexander.
(f) NEG will maintain its books of account in the usual, regular and
ordinary manner.
4.03 Shareholder Approvals. NEG and Alexander each shall submit this
Agreement to its respective shareholders for approval, all as provided by law
and their respective Certificates of Incorporation. Each of Alexander and NEG
will, through its respective Board of Directors, recommend to the holders of
their respective Common Stock the approval of the Merger and will not rescind
its declaration that the Merger is advisable unless such party has been advised
by counsel that such recommendation cannot be made by the Board of Directors or
must be rescinded because such recommendation violates the fiduciary duties of
such Board of Directors under applicable law. Such actions shall be effected
with reasonable promptness and as the parties shall mutually determine
desirable.
4.04 NEG Registration Statement, etc. Prior to the Effective Date of the
Merger, NEG shall have prepared and filed with the SEC the Registration
Statement under the 33 Act, for the purpose of registering the shares of NEG
Common Stock to be exchanged for the shares of Alexander Common Stock pursuant
to Article I of this Agreement. NEG and Alexander will use all reasonable
efforts to cause such Registration
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Statement, together with applicable state securities law qualifications, to
become effective by August 9, 1996, or as soon thereafter as may be practicable.
4.05 Information for Proxy Statement-Prospectus. NEG and Alexander will
each furnish to the other such data and information relating to it as the other
may reasonably request for the purpose of including such data and information in
the Proxy Statement-Prospectus or the Registration Statement.
4.06 Restricted Common Stock. Alexander will deliver to NEG not later than
ten (10) days before the Effective Date of the Merger, a schedule listing
Alexander's Affiliates (as herein defined) and the amounts of shares of
Alexander Common Stock owned by Such Affiliates and the numbers of the
certificates representing the same. Alexander shall furnish NEG with such
information and documents as NEG shall reasonably request for purposes of
reviewing and updating such list. For the purposes of Sections 4.06 and 4.07 and
Exhibit C to this Agreement, "Affiliates" means each director or executive
officer and each person who, should he sell, transfer or distribute NEG Common
Stock acquired by him in connection with the Merger, would be subject to the
requirements of paragraphs (c) and (d) of Rule 145, as amended, under the 33
Act, or who would otherwise be considered to be an Affiliate under the
applicable rules and regulations of the SEC and the 33 Act.
4.07 Letters from Affiliates. Prior to Closing, Alexander will use its
reasonable efforts to obtain from each of its Affiliates a letter substantially
in the form attached as Exhibit C hereto.
4.08 Consents. Prior to Closing, NEG and Alexander shall each use its
respective reasonable efforts to obtain the consent or approval of each person
whose consent or approval shall be required in order to permit it to consummate
the Merger.
4.09 NEG Board of Directors. In connection with the Merger, the following
persons shall be nominated for election as directors of NEG at the annual
shareholders meeting of NEG at which the Merger is considered to serve for the
ensuing year or until their successors are duly elected and qualified: George B.
McCullough, Norman C. Miller, Miles D. Bender, Robert H. Kite, George N.
McDonald, Robert V. Sinnott and Elwood W. Schafer and immediately after the
Effective Time, the board of directors of NEG shall increase the size of the NEG
board of directors to ten and elect Bob G. Alexander, Jim L. David and Robert A.
West as directors to serve for the ensuing year or until their successors are
duly elected and qualified; provided, however, if any such person becomes
unwilling or unable to serve prior to the Effective Time, any person who is to
replace George B. McCullough, Norman C. Miller, Miles D. Bender, Robert H. Kite,
George N. McDonald, Robert V. Sinnott or Elwood W. Schafer (an NEG designated
director) shall be named by NEG, and any person who is to replace Bob G.
Alexander, Jim L. David or Robert A. West (an Alexander designated director)
shall be named by Alexander.
4.10 Outstanding Alexander Options, Warrants and Stock Awards. NEG shall
deliver at Closing to each record holder of options or warrants identified in
Schedule 3.02 hereof that remain unexercised in whole or in part at the
Effective Time, in substitution therefor and in cancellation thereof, options or
warrants, as the case may be, to purchase a number of shares of NEG Common Stock
determined by multiplying the number of shares of Alexander Common Stock subject
to the option or warrant by the Exchange Ratio (rounded to the nearest whole
number of shares). The per share exercise price of each substitute option or
warrant shall be determined by dividing the per share exercise price for the
Alexander option or warrant by the Exchange Ratio, and rounding the exercise
price to the nearest whole cent. Other terms of such substitute options or
warrants shall be the same terms as are contained in the options and warrants
identified on Schedule 3.02. As promptly as practicable after the Effective
Time, NEG shall use its best efforts to cause a registration statement on Form
S-8, or any successor form to be declared effective by the SEC under the 33 Act
for the issuance and sale of all shares of NEG Common Stock which are subject to
such options or warrants. NEG shall deliver at Closing to each holder of
restricted stock awards set forth on Schedule 3.02 that remain subject to
forfeiture at the Effective Time, in substitution therefor and in cancellation
thereof, a number of shares of NEG Common Stock determined by multiplying the
number of such shares subject to forfeiture by the Exchange Ratio. The
provisions of this Section 4.10 shall survive the Effective Time and the
Closing.
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4.11 Filings. Subject to the terms and conditions herein provided, NEG and
Alexander shall use all reasonable efforts to cooperate with one another in (i)
determining which filings are required to be made prior to the Effective Time
with, and which consents, approvals, permits or authorizations are required to
be obtained prior to the Effective Time from, Governmental Bodies in connection
with the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby and (ii) timely making all such filings and
timely seeking all such consents, approvals, permits or authorizations.
4.12 Notices of Certain Events. Each of Alexander or NEG, as appropriate,
shall promptly notify the other of receipt of:
(a) any notice or other communication from any person other than a
Governmental Body alleging that the consent of such person is or may be required
in connection with, or that any rights or properties of Alexander or NEG may be
lost or subjected to any preferential purchase or other similar rights by reason
of, the transactions contemplated by this Agreement;
(b) any notice or other communication from any Governmental Body in
connection with the transactions contemplated by this Agreement; and
(c) notice of any actions, suits, claims, investigations or proceedings
commenced or, to its knowledge, threatened, against, relating to or involving or
otherwise affecting Alexander, NEG or Acquisition or any of their respective
Subsidiaries which, if pending on the date of this Agreement, would have been
required to have been disclosed in a Schedule which relate to the consummation
of the transactions contemplated by this Agreement.
4.13 Tax Free Reorganization. During the period from the date of this
Agreement through the Effective Time, unless the other parties shall otherwise
agree in writing, none of NEG, Acquisition, any other Subsidiary of NEG,
Alexander or any Subsidiary of Alexander shall knowingly take or fail to take
any action which action or failure to act would jeopardize the treatment of
NEG's combination with Alexander as a tax free reorganization under the Code.
4.14 Recognition of Employment and Severance Agreements. Alexander has
previously adopted certain employment and severance agreements for certain of
its executive officers entitled The Alexander Energy Corporation Employment
Agreement, The Alexander Energy Corporation Special Severance Agreement, and The
Alexander Energy Corporation Separation Policy (collectively such agreements are
herein called the "Severance Agreements") which are listed on Schedule 3.18. NEG
recognizes that the Severance Agreements are a significant benefit to the
affected employees of Alexander and acknowledges that NEG has reviewed these
Severance Agreements and agrees that, after the Effective Time, such agreements
remaining in existence after the Effective Time will be enforceable against NEG
to the same extent as enforceable against Alexander prior to the Merger. NEG
agrees that it shall take no acts to terminate, amend or modify the Severance
Agreements in any manner which would be detrimental to the employees of
Alexander who are covered under the Severance Agreements without the prior
consent of the employee who would be adversely effected by any such termination,
amendment or modification.
ARTICLE V
CONDITIONS OF MERGER; ABANDONMENT OF MERGER
5.01 Conditions of Obligations of Alexander. The obligations of Alexander
to effect the Merger shall be subject to the following conditions:
(a) Resolutions of Shareholders and Board of Directors. NEG and Acquisition
shall have furnished Alexander with (i) certified copies of resolutions duly
adopted by the holders of at least a majority of the outstanding stock of NEG
and Acquisition entitled to vote thereon approving and authorizing the
transactions contemplated by this Agreement and (ii) certified copies of
resolutions duly adopted by the Board of Directors of NEG and Acquisition
authorizing all necessary and proper corporate action to enable NEG and
Acquisition to comply with the terms of this Agreement and approving the
execution and delivery to Alexander of this Agreement.
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(b) Representations and Warranties of NEG and Acquisition to be True.
Except to the extent waived in writing by Alexander hereunder, (i) the
representations and warranties of NEG and Acquisition herein contained shall be
true in all material respects at the Time of Filing with the same effect as
though made at such time; and (ii) NEG and Acquisition shall have performed all
material obligations and complied with all material covenants required by this
Agreement to be performed or complied with by them prior to the Time of Filing.
Each of NEG and Acquisition shall have also delivered to Alexander a
certificate, dated the Closing Date and signed by two of their respective
officers, to both of the aforementioned effects. In the event any of the
Schedules need to be updated as a result of any events that have occurred since
the execution of this Agreement, such certificate shall have attached to it
updates of all such Schedules to this Agreement; provided, however, no change in
or amendment to a Schedule by a party hereto made after the date hereof shall
constitute a waiver hereunder of any right of the other party or any condition
to the such other party's obligations hereunder without the specific written
consent of such other party.
(c) Third Party Consents. NEG shall have obtained and delivered to
Alexander consents to the transactions contemplated by this Agreement from the
parties to all material contracts referred to in the Schedules attached hereto
in accordance with this Agreement, which require such consent.
(d) Registration of NEG Stock. The Registration Statement shall have been
declared effective under the 33 Act and applicable state securities laws, no
stop order suspending the effectiveness of the Registration Statement shall have
been issued and no proceeding for that purpose shall have been instituted or be
pending.
(e) No Material Adverse Change. There shall not have occurred since
December 31, 1995, (i) any material adverse change in the business, properties,
results of operations or financial condition of NEG and its Consolidated
Subsidiaries, considered as one enterprise, or (ii) any loss or damage to any of
the properties or assets (whether or not covered by insurance) of NEG or any of
its Consolidated Subsidiaries which, in either case, will have a Material
Adverse Effect on NEG.
(f) Statutory Requirements. All statutory requirements for the valid
consummation by NEG of the transactions contemplated by this Agreement shall
have been fulfilled and all authorizations, consents and approvals of all
Governmental Bodies required to be obtained in order to permit consummation by
NEG of the transactions contemplated by this Agreement and to permit the
business presently carried on by NEG to continue unimpaired to any material
degree immediately following the Effective Date of the Merger shall have been
obtained. Neither the Federal Trade Commission, the United States Department of
Justice, nor any other governmental agency, whether federal, state or local,
shall have instituted (or threatened to institute in a writing directed to NEG
or Alexander or any of the NEG or Alexander Subsidiaries) an investigation which
is pending at the Time of Filing relating to the Merger, and between the date of
this Agreement and the Time of Filing no action or proceeding shall have been
instituted or, to the knowledge of NEG, shall have been threatened by any party
(public or private) before a court or other governmental body to restrain or
prohibit the transactions contemplated by this Agreement or to obtain damages in
respect thereof.
(g) Opinion of Counsel of NEG. Alexander shall have received from
Strasburger & Price, LLP, counsel to NEG, an opinion dated the Closing Date, in
form and substance satisfactory to Alexander's counsel, McAfee & Taft A
Professional Corporation, to the effect that (i) each of NEG and the NEG
Subsidiaries is a corporation duly incorporated and validly existing and in good
standing under the laws of its respective jurisdiction of incorporation; (ii)
each of NEG and the NEG Subsidiaries has the corporate power to carry on its
business as now being conducted; (iii) the authorized capital stock of NEG and
the number of shares of capital stock outstanding are as set forth in Section
2.02 of this Agreement, and that such issued shares have been duly authorized,
are validly issued and outstanding, and are fully paid and nonassessable; (iv)
the shares of NEG Common Stock into which the shares of Alexander Common Stock
are to be converted pursuant to Article I of this Agreement have been duly
authorized and, immediately after the Effective Date of the Merger, will be duly
and validly issued and will be fully paid and nonassessable; (v) NEG and
Acquisition each has the requisite corporate power and authority and has taken
all requisite corporate action necessary to enable NEG and Acquisition to
execute and deliver this Agreement and to consummate the transactions
contemplated thereby; (vi) this Agreement has been duly and validly executed and
delivered by NEG and Acquisition and is the valid, binding and enforceable
obligation of NEG and Acquisition (subject to
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bankruptcy, insolvency, reorganization, receivership, moratorium and other
similar laws affecting the rights of creditors generally, and to principles of
equity); (vii) neither the execution and delivery by NEG and Acquisition of this
Agreement nor compliance with the terms and provisions thereof will violate any
law, statute, rule or regulation, injunction, order or decree of any
governmental agency or authority or court, of which such counsel is aware, or
conflict with or result in the breach of any term, condition or provision of any
material agreement or commitment listed as an exhibit to or described in the NEG
Reports and any SEC filings under Section 4.02(d) hereof, or cause any
acceleration of maturity of any material obligation or loan known to such
counsel, or give to others any material interests or rights known to counsel
(including rights of termination or cancellation) in or with respect to any
material properties or assets; (viii) to such counsel's knowledge, neither NEG
nor any NEG Subsidiary is engaged in any legal or administrative proceeding
which is reasonably likely to have a Material Adverse Effect on NEG; (ix) except
as described in such opinion, to such counsel's knowledge, all authorizations,
consents and approvals of all Governmental Bodies required to be obtained by NEG
and Acquisition in order to permit consummation of the Merger (excluding state
securities or "Blue Sky" requirements) have been obtained; and (x) upon filing
of the Certificate of Merger, the Merger shall become effective in accordance
with this Agreement.
Such counsel shall also provide a statement in their opinion letter to the
effect that nothing has come to their attention that would lead them to believe
the Registration Statement with respect to the information supplied by NEG
(except for the financial statements or other financial or statistical data, as
to which they need make no comment), at the time it became effective, contained
an untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading or that the Proxy Statement-Prospectus with respect to the
information supplied by NEG (except for the financial statements or other
financial or statistical data, as to which they need make no comment), at the
time the Proxy Statement-Prospectus was mailed or at the Effective Date of the
Merger, contained an untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
Such opinion shall also cover such other matters incidental to the matters
herein contemplated as Alexander and its counsel may reasonably request. In
rendering such opinion, counsel may rely, to the extent counsel determines such
reliance necessary or appropriate, upon opinions of local counsel as to matters
of law other than that of the United States and Texas and, as to matters of
fact, upon certificates of state officials or of any officer or officers of NEG
provided the extent of such reliance is stated in the opinion.
(h) Fairness Opinion. Alexander shall have received an opinion, dated as of
the date of this Agreement and confirmed as of the date of the Proxy
Statement-Prospectus, from Prudential Securities Incorporated to the effect that
the Exchange Ratio is fair, from a financial point of view, to the holders of
Alexander Common Stock, which opinion shall not have been withdrawn.
(i) NEG Stock Price. The average closing sales price for the NEG Common
Stock on the Nasdaq National Market for the ten (10) trading days immediately
prior to the Closing Date (the "NEG Average Price") shall not be less than
$2.40.
(j) NEG Financing. Alexander shall have received on or before the date of
this Agreement satisfactory evidence of a commitment from a bank or banks to
provide NEG with financing after the Closing for not less than $65,000,000 (the
"Commitment"), which Commitment may not be amended or terminated on or before
the Effective Time.
(k) Filing of Form S-4. NEG shall have filed with the SEC the Registration
Statement on Form S-4 used to register the shares of NEG Common Stock to be
exchanged for the shares of Alexander Common Stock pursuant to this Agreement on
or before June 14, 1996.
5.02 Conditions of Obligation of NEG. The obligation of NEG to effect the
Merger shall be subject to the following conditions:
(a) Resolutions of Shareholders and Boards of Directors. Alexander shall
have furnished NEG with (i) certified copies of resolutions duly adopted by the
holders of at least a majority of the outstanding stock of Alexander entitled to
vote thereon approving and authorizing the transactions contemplated by this
Agree-
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ment and (ii) certified copies of resolutions duly adopted by the Board of
Directors of Alexander authorizing all necessary and proper corporate action to
enable Alexander to comply with the terms of this Agreement and approving the
execution and delivery to NEG of this Agreement.
(b) Representations and Warranties of Alexander to be True. Except to the
extent waived in writing by NEG hereunder, (i) the representations and
warranties of Alexander herein contained shall be true in all material respects
at the Time of Filing with the same effect as though made at such time; and (ii)
Alexander shall have performed all material obligations and complied with all
material covenants required by this Agreement to be performed or complied with
by it prior to the Time of Filing. Alexander shall have also delivered to NEG a
certificate of Alexander, dated the Closing Date and signed by two of its
officers, to both of the aforementioned effects. In the event any of the
Schedules need to be updated as a result of any events that have occurred since
the execution of this Agreement, such certificate shall have attached to it
updates of all Schedules to this Agreement; provided, however, no change in or
amendment to a Schedule by a party hereto made after the date hereof shall
constitute a waiver hereunder of any right of the other party or any condition
to the such other party's obligations hereunder without the specific written
consent of such other party.
(c) Third Party Consents. Alexander shall have obtained and delivered to
NEG consents to the transactions contemplated by this Agreement from the parties
to all material contracts referred to in the Schedules attached hereto in
accordance with this Agreement, which require such consent.
(d) Registration of NEG Stock. The Registration Statement shall have been
declared effective under the 33 Act and applicable state securities laws, no
stop order suspending the effectiveness of the Registration Statement shall have
been issued and no proceeding for that purpose shall have been instituted or be
pending.
(e) No Material Adverse Change. There shall not have occurred since
December 31, 1995 (i) any material adverse change in the business, properties,
results of operations or financial condition of Alexander and its Consolidated
Subsidiaries, considered as one enterprise, or (ii) any loss or damage to any of
the properties or assets (whether or not covered by insurance) of Alexander or
any of its Consolidated Subsidiaries which, in either case, will have a Material
Adverse Effect on Alexander.
(f) Statutory Requirements. All statutory requirements for the valid
consummation by Alexander of the transactions contemplated by this Agreement
shall have been fulfilled and all authorizations, consents and approvals of all
Governmental Bodies required to be obtained in order to permit consummation by
Alexander of the transactions contemplated by this Agreement and to permit the
business presently carried on by Alexander to be continued by Acquisition
unimpaired to any material degree immediately following the Effective Date of
the Merger shall have been obtained. Neither the Federal Trade Commission, the
United States Department of Justice, nor any other governmental agency, whether
federal, state or local, shall have instituted (or threatened to institute in a
writing directed to NEG or Alexander or any of the NEG or Alexander
Subsidiaries) an investigation which is pending at the Time of Filing relating
to the Merger, and between the date of this Agreement and the Time of Filing no
action or proceeding shall have been instituted or, to the knowledge of
Alexander, shall have been threatened by any party (public or private) before a
court or other governmental body to restrain or prohibit the transactions
contemplated by this Agreement or to obtain damages in respect thereof.
(g) Opinion of Counsel of Alexander. NEG shall have received from McAfee &
Taft A Professional Corporation, counsel to Alexander, an opinion, dated the
Closing Date, in form and substance satisfactory to NEG counsel, Strasburger &
Price, LLP, to the effect that (i) each of Alexander and the Alexander
Subsidiaries is a corporation duly incorporated and validly existing and in good
standing under the laws of its respective jurisdiction of incorporation; (ii)
each of Alexander and the Alexander Subsidiaries has the corporate power to
carry on its business as now being conducted; (iii) the authorized capital stock
of Alexander and the number of shares of capital stock outstanding are as set
forth in Section 3.02 of this Agreement, and that such issued shares have been
duly authorized, are validly issued and outstanding, and are fully paid and
nonassessable; (iv) Alexander has the requisite corporate power and authority
and has taken all requisite corporate action necessary to enable it to execute
and deliver this Agreement and to consummate the transactions contemplated
thereby; (v) this Agreement has been duly and validly executed and delivered by
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Alexander and is the valid, binding and enforceable obligation of Alexander
(subject to bankruptcy, insolvency, reorganization, receivership, moratorium and
other similar laws affecting the rights of creditors generally, and to
principles of equity); (vi) neither the execution and delivery by Alexander of
this Agreement nor compliance with the terms and provisions of thereof will
violate any law, statute, rule or regulation, injunction, order or decree of any
governmental agency or authority or court, of which such counsel is aware, or
conflict with or result in a breach of any term, condition or provision of any
material agreement or commitment listed as an exhibit to or described in the
Alexander reports and any SEC filings under Section 4.01(d) hereof, or cause any
acceleration or maturity of any material obligation or loan known to such
counsel, or give to others any material interests or rights known to counsel
(including rights of termination or cancellation) in or with respect to any
material properties or assets; (vii) to such counsel's knowledge, neither
Alexander nor any Alexander Subsidiary is engaged in any legal or administrative
proceeding which is reasonably likely to have a Material Adverse Effect on
Alexander; (viii) except as described in such opinion, to such counsel's
knowledge, all authorizations, consents and approvals of all Governmental Bodies
required to be obtained by Alexander in order to permit consummation of the
Merger (excluding state securities or "Blue Sky" requirements) have been
obtained; (ix) upon filing of the Certificate of Merger, the Merger shall become
effective in accordance with this Agreement; (x) no anti-takeover statutes or
regulations under Oklahoma law are applicable to the transactions contemplated
by the Agreement, including but not limited to Section 1090.3 of the Oklahoma
Act; and (xi) no Associated Rights will become exercisable as a result of
consummating the transactions contemplated by the Agreement.
Such counsel shall also provide a statement in their opinion letter to the
effect that nothing has come to their attention that would lead them to believe
the Registration Statement with respect to the information supplied by Alexander
(except for the financial statements or other financial or statistical data, as
to which they need make no comment), at the time it became effective, contained
an untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading or that the Proxy Statement-Prospectus with respect to the
information supplied by Alexander (except for the financial statements or other
financial or statistical data, as to which they need make no comment), at the
time the Proxy Statement-Prospectus was mailed or at the Effective Date of the
Merger, contained an untrue statement of material fact or omitted to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
Such opinion shall also cover such other matters incidental to the matters
herein contemplated as NEG and its counsel may reasonably request. In rendering
such opinion, counsel may rely, to the extent counsel determines such reliance
necessary or appropriate, upon opinions of local counsel as to matters of law
other than that of the United States and Oklahoma and, as to matters of fact,
upon certificates of state officials and of any officer or officers of Alexander
provided the extent of such reliance is specified in the opinion.
(h) Receipt of Letters from Alexander Affiliates. NEG shall have received
from each Alexander Affiliate a duly executed letter substantially in the form
of Exhibit C attached hereto.
(i) Fairness Opinion. NEG shall have received an opinion, dated as of the
date of this Agreement and confirmed as of the date of the Proxy
Statement-Prospectus, from Oppenheimer & Co., Inc. to the effect that the
Exchange Ratio is fair, from a financial point of view, to the holders of NEG
Common Stock, which opinion shall not have been withdrawn.
(j) Outstanding Alexander Common Stock. Alexander shall have no more than
12,850,000 shares of Alexander Common Stock outstanding, on a fully diluted
basis, immediately prior to the Effective Time.
(k) NEG Stock Price. The NEG Average Price shall not be greater than $3.60.
(l) NEG Financing. NEG shall have received on or before the date of this
Agreement the Commitment, and such bank or banks shall fund the loan described
in the Commitment on the terms set forth therein simultaneous with the Closing.
NEG shall use its best efforts to cause the loan described in the Commitment to
close simultaneous with the Closing; provided, however, that NEG shall not be
obligated to close if the sum of the refinancing of the existing debt of NEG and
Alexander and the costs of closing the transactions contemplated by this
Agreement (including all estimated costs under Section 1.08) exceeds
$80,000,000.
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5.03 Conditions of Obligations of NEG and Alexander. The obligations of
each of NEG and Alexander to effect the Merger shall be subject to the following
conditions:
(a) Tax Opinion. NEG, Alexander and Acquisition shall have received an
opinion of Strasburger & Price, LLP, in form and substance satisfactory to NEG,
Alexander and Acquisition, dated the date of this Agreement and confirmed as of
the date of the Proxy Statement-Prospectus and confirmed as of the Effective
Date, substantially to the effect that, for United States federal income tax
purposes, on the basis of facts, representations and assumptions set forth in
such opinion (and such facts so stated, represented or assumed and information
relied upon will not, to the actual knowledge of the attorneys with such law
firm devoting substantive attention to this matter, be false or incorrect as of
the date of such opinion):
(i) The Merger will constitute a reorganization for federal income tax
purposes within the meaning of Section 368(a) of the Code and Alexander,
NEG and Acquisition will each be a party to that reorganization within the
meaning of Section 368(b) of the Code;
(ii) No gain or loss will be recognized by NEG, Acquisition or
Alexander for federal income tax purposes as a result of the Merger;
(iii) No gain or loss will be recognized for federal income tax
purposes by holders of Alexander Common Stock who are United States persons
(within the meaning of the Code) upon the exchange of their shares of
Alexander Common Stock for shares of NEG Common Stock pursuant to the
conversion of shares that will occur in the Merger, except that gain or
loss will be recognized on the receipt of cash, if any, received (i) in
lieu of fractional shares of NEG Common Stock, or (ii) for shares of
Alexander Common Stock pursuant to exercise of dissenters' rights of
appraisal;
(iv) For federal income tax purposes, the basis of the shares of any
NEG Common Stock received in exchange for shares of Alexander Common Stock
pursuant to the Merger will be the same as the basis of the Alexander
Common Stock surrendered in exchange therefor, decreased by the amount of
any tax basis allocable to (i) a fractional share interest for which cash
is received, or (ii) shares for which cash is received pursuant to exercise
of dissenter's rights of appraisal; and
(v) For federal income tax purposes, the holding period of the shares
of NEG Common Stock received in exchange for shares of Alexander Common
Stock will include the holding period of such shares of Alexander Common
Stock, provided that such shares of Alexander Common Stock were held as
capital assets by the holder thereof as of the Effective Date.
(vi) In rendering such opinion, Strasburger & Price, LLP, may receive
and rely upon representations contained in certificates of Alexander, NEG
and Acquisition.
(b) Payment of Prudential and McAfee & Taft. Alexander, and if Alexander is
financially unable, NEG, as immediate successor to Alexander, shall pay any and
all fees or expenses due Prudential Securities Incorporated ("Prudential") and
McAfee & Taft for services rendered to Alexander in conjunction with the Merger,
in cash or other readily available funds acceptable to Prudential and McAfee &
Taft, as the case may be, at or immediately prior to Closing.
5.04 Termination of Agreement and Abandonment of Merger. Anything herein
to the contrary notwithstanding, this Agreement and the Merger contemplated
hereby may be terminated at any time before the Time of Filing, whether before
or after approval of this Agreement by the respective shareholders of Alexander
and NEG, as follows, and in no other manner:
(a) Mutual Consent. By mutual consent of the Boards of Directors of
Alexander and NEG.
(b) By Alexander. By the Board of Directors of Alexander if, by October 1,
1996, the conditions set forth in Section 5.01 or 5.03 of this Article V shall
not have been met (or waived as provided in this Agreement).
(c) By NEG. By the Board of Directors of NEG if, by October 1, 1996, the
conditions set forth in Section 5.02 or 5.03 of this Article V shall not have
been met (or waived as provided in this Agreement).
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5.05 Effect of Termination and Abandonment. In the event of termination of
this Agreement and the abandonment of the Merger pursuant to this Article V, no
party hereto (or any of its directors or officers) shall have any liability or
further obligation to any other party to this Agreement, except as provided in
Sections 4.01 or 4.02 and except that nothing herein will relieve any party from
liability for any breach of this Agreement.
ARTICLE VI
GENERAL
6.01 Amendments. Subject to applicable law, this Agreement and the form of
any exhibit attached hereto may be amended upon authorization by the Boards of
Directors of the parties hereto before and after the meetings of shareholders
referred to in Section 4.03 of Article IV hereof at any time prior to the Time
of Filing except that no such amendment after any shareholders' meeting
approving the Merger shall affect the rates of conversion and exchange provided
for in Article I of this Agreement.
6.02 "Subsidiaries"; "Material Adverse Effect"; "Knowledge".
(a) A "S(s)ubsidiary" with respect to any corporation referred to in this
Agreement shall mean a corporation (or equivalent legal entity under foreign
law) of which NEG, Alexander or any other corporation referred to in this
Agreement, as the case may be, owns more than 50% of the stock, the holders of
which are ordinarily and generally, in the absence of contingencies, entitled to
vote for the election of a majority of the directors except that, with respect
to consolidated financial statements referred to in this Agreement, a
"S(s)ubsidiary" shall include only those corporations the accounts of which are
consolidated with NEG or Alexander or any other corporation referred to in this
Agreement, as the case may be.
(b) Whenever in this Agreement the term "Material Adverse Effect" is used
with respect to any entity, it shall mean any material adverse change in or
effect upon the business, operations, assets, properties or financial condition
of such entity and its Subsidiaries considered as a single enterprise.
(c) Whenever in this Agreement the term "knowledge" is used with respect to
any entity, it shall mean the actual knowledge of the officers and directors of
the entity, after reasonable investigation and all knowledge which such officers
or directors, as the case may be, after the exercise of reasonable judgment,
should have known.
6.03 Schedules. The Schedules delivered pursuant to the terms of this
Agreement shall be bound together, initialed by each of Alexander and NEG and
deemed attached hereto and made a part hereof. To the extent any information
disclosed in a schedule to any Section of this Agreement or the initialed
documentation referred to in the next succeeding sentence is also responsive
disclosure to any other Section of this Agreement, such disclosure shall have
been deemed referred to therein. To the extent Alexander or NEG makes a
representation in a Section of this Agreement that does not call for a
disclosure schedule, and such disclosure is made in a schedule to this Agreement
it shall be nonetheless deemed disclosed under this Agreement, as shall
documentation concurrently furnished to the other party with such Schedules.
6.04 Survival of Covenants, Representations and Warranties. The respective
covenants, representations and warranties of Alexander, NEG and Acquisition
contained herein shall expire and be terminated at the Effective Time, unless
otherwise specifically herein provided.
6.05 Governing Law. This Agreement and the legal relations between the
parties shall be governed by and construed in accordance with the laws of the
State of Delaware.
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6.06 Notices. All notices, requests, demands or other communications
required or permitted by this Agreement shall be in writing and effective when
received, and delivery shall be made personally or by registered or certified
mail, return receipt requested, postage prepaid, or overnight courier or
confirmed facsimile transmission, addressed as follows:
(a) If to Alexander:
Alexander Energy Corporation
701 Cedar Lake Blvd.
Oklahoma City, Oklahoma 73114-7800
Attention: Mr. Bob G. Alexander
President
Facsimile No.: (405) 552-4550
with a copy to:
McAfee & Taft
A Professional Corporation
10th Floor, Two Leadership Square
Oklahoma City, Oklahoma 73102
Attention: Jerry A. Warren, Esq.
Facsimile No.: (405) 235-0439
(b) If to NEG or Acquisition:
National Energy Group, Inc.
1400 One Energy Square
4925 Greenville Avenue
Dallas, Texas 75206
Attention: Mr. Miles D. Bender, President
Facsimile No.: (214) 692-9310
with a copy to:
Strasburger & Price, LLP
901 Main Street, Suite 4300
Dallas, Texas 75202
Attention: Mike Joplin, Esq.
Facsimile No.: (214) 651-4330
6.07 No Assignment. This Agreement may not be assigned by operation of law
or otherwise.
6.08 Fees and Expenses. All fees and expenses, including attorneys' fees,
shall be borne by the respective party who has incurred such fee or expense.
6.09 Headings. The descriptive headings of the several Articles, Sections
and paragraphs of this Agreement are inserted for convenience only and do not
constitute a part of this Agreement.
6.10 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties hereto and delivered to each of the other parties hereto.
6.11 Entire Agreement. This Agreement constitutes the entire agreement
among NEG, Alexander and Acquisition with respect to the subject matter hereof
and supersedes all other prior agreements and understandings among the parties
with respect to the subject matter.
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6.12 Publicity. The initial press release relating to this Agreement shall
be a joint press release and thereafter NEG and Alexander shall, subject to
their respective legal obligations (including requirements of the Nasdaq
National Market and other similar regulatory bodies), consult with each other,
and use reasonable efforts to agree upon the text of any press release before
issuing any such press release or otherwise making public statements with
respect to the transactions contemplated hereby and in making any filings with
any federal or state governmental or regulatory agency or with the Nasdaq
National Market with respect thereto.
6.13 No Third Party Beneficiaries. Nothing in this Agreement, whether
express or implied, is intended to confer any rights or remedies under or by
reason of this Agreement on any person other than the parties to it, nor is
anything in this Agreement intended to relieve or discharge the obligation or
liability of any third persons to any party to this Agreement, nor shall any
provision give any third persons any rights of subrogation or action over or
against any party to this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed on its behalf by its officers thereunto duly authorized, all as of
the day and year first above written.
ALEXANDER ENERGY CORPORATION
<TABLE>
<S> <C>
By /s/ BOB G. ALEXANDER
ATTEST: ----------------------------
/s/ SUE BARNARD Bob G. Alexander, President
- ------------------------------
Sue Barnard, Secretary
NEG-OK, Inc.
ATTEST:
/s/ GRACE BRICKER By /s/ MILES D. BENDER
- ------------------------------ ----------------------------
Grace Bricker, Secretary Miles D. Bender, President
ATTEST: NATIONAL ENERGY GROUP, INC.
/s/ RANDALL A. CARTER
- ------------------------------
Randall A. Carter, Secretary By /s/ MILES D. BENDER
----------------------------
Miles D. Bender, President
</TABLE>
A-1-43
<PAGE> 271
EXHIBIT 99.3
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
NATIONAL ENERGY GROUP, INC.
The undersigned officer of National Energy Group, Inc., a corporation
organized and existing under and by virtue of the General Corporation Law of the
State of Delaware (the "Corporation"), does hereby certify as follows:
1. That the Board of Directors of the Corporation, in accordance with
Section 242 of the General Corporation Law of the State of Delaware, adopted
resolutions proposing that certain provisions of the Certificate of
Incorporation of the Corporation, be amended as set forth below (the
"Amendment"), and directed that the Amendment be submitted to the stockholders
of the Corporation entitled to vote thereon for their consideration and
approval:
A. Article FOURTH of the Certificate of Incorporation of the Corporation
shall be deleted and replaced to read in its entirety as follows:
"The total number of shares of stock which the Corporation shall
have authority to issue is 101,000,000 shares, consisting of
100,000,000 shares of Common Stock, $.01 par value per share, and
1,000,000 shares of Preferred Stock, $1.00 par value per share,
issuable in series.
The Board of Directors of the Corporation is expressly authorized to
cause the Preferred Stock to be issued from time to time, in one or more
series, and in connection with each such series to determine and fix by the
resolution or resolutions providing for the creation and issuance of such
shares of Preferred Stock the number and designation thereof, the powers
(including without limitation any type of voting powers -- special, no or
otherwise), designations, preferences, conversion rights, cumulative,
relative, participating, optional or other rights, if any, and the
qualifications, limitations or restrictions thereof, if any, to the full
extent permitted by the General Corporation Law of Delaware. The
Certificate of Designations of National Energy Group, Inc. of 10%
Cumulative Convertible Preferred Stock, Series B and the Certificate of
Designations of National Energy Group, Inc. of 10 1/2% Cumulative
Convertible Preferred Stock, Series C, filed with the Delaware Secretary of
State on June 2, 1994 and June 14, 1995, respectively, are each
incorporated herein by reference.
B. The first paragraph of Section 2(vi), Redemption Rights, of the
Certificate of Designation of National Energy Group, Inc. of 10% Cumulative
Convertible Preferred Stock, Series B shall be deleted and replaced to read in
its entirety as follows:
"(vi) Redemption Rights. The Series B may not be redeemed before
June 14, 1999. Thereafter, the Company, at the option of the Board of
Directors, may redeem, in cash, the whole or any part of the shares of
Series B at the time outstanding, upon notice given as hereinafter
specified, at the following redemption prices: from June 14, 1999, to
June 14, 2000, $110 per share of Series B and, thereafter, $100 per
share of Series B, together with all accrued and unpaid dividends to
the redemption date."
C. The first paragraph of Section 2(vi), Redemption Rights, of the
Certificate of Designation of National Energy Group, Inc. of 10 1/2% Cumulative
Convertible Preferred Stock, Series C shall be deleted and replaced to read in
its entirety as follows:
"(vi) Redemption Rights. The Series C may not be redeemed before June
14, 1999. Thereafter, the Company, at the option of the Board of Directors,
may redeem, in cash, the whole or any part of the shares of Series C at the
time outstanding, upon notice given as hereinafter specified, at the
following redemption prices: from June 14, 1999, to June 14, 2000, $110 per
share of Series C and, thereafter, $100 per share of Series C, together
with all accrued and unpaid dividends to the redemption date. 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."
D. All references to the Class A Common Stock or Class A of the
Corporation in the Certificate of Incorporation or the Certificate of
Designations shall be deemed to be a reference to the Common Stock, $.01 par
value per share, of the Corporation.
<PAGE> 272
2. That a majority of the outstanding stock of the Corporation entitled to
vote thereon approved and adopted the Amendment at the annual meeting of
stockholders on , 1996, in accordance with Section 242 of the
General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the undersigned officer of the Corporation does hereby
certify under penalties of perjury that this Certificate of Amendment is the act
and deed of the Corporation and the facts stated herein are true and accordingly
have hereunto set my hand this day of , 1996.
------------------------------------
Miles D. Bender, President and
Chief Executive Officer
<PAGE> 273
ADDENDUM A-2
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
This First Amendment to Agreement and Plan of Merger (the "Amendment") is
made and entered into as of this 20th day of June, 1996, by and among National
Energy Group, Inc., a Delaware corporation ("NEG"), NEG-OK, Inc., a Delaware
corporation ("Acquisition"), and Alexander Energy Corporation, an Oklahoma
corporation ("Alexander").
WHEREAS, all of the outstanding capital stock of Acquisition is owned by
NEG; and
WHEREAS, the Boards of Directors of NEG, Acquisition and Alexander,
respectively, have determined that it is in the best interests of the respective
companies and their respective shareholders that Alexander merge with and into
Acquisition pursuant to the Agreement and Plan of Merger dated as of June 6,
1996 (the "Agreement") and applicable provisions of the Oklahoma General
Corporation Act (the "Oklahoma Act") and the General Corporation Law of the
State of Delaware (the "Merger"); and
WHEREAS, the parties executed the Agreement providing the terms, conditions
and agreements applicable to the Merger; and
WHEREAS, the parties to this Amendment desire to amend the Agreement to
revise and clarify several provisions of the Agreement and to supplement their
understandings with respect to certain matters relating to dissenters' rights
and payments for fractional shares; and
WHEREAS, the shareholders of Alexander that dissent from the Merger and
elect to exercise their appraisal rights under the Oklahoma Act will be entitled
to receive from Acquisition payment of the fair value of their shares of
Alexander Common Stock as determined under the Oklahoma Act (the "Dissenters'
Payments"); and
WHEREAS, expenses incurred (i) to determine the entitlement to, and the
amount of, the Dissenters' Payments, and (ii) for the administration effort
involved in handling disbursement of the Dissenters' Payments (collectively, the
"Appraisal Expense Payments"); and
WHEREAS, Section 1.07 of the Agreement provides for the payment of cash in
lieu of issuing fractional shares of NEG Common Stock to the holders of
Alexander Common Stock that receive NEG Common Stock in exchange for their
Alexander Common Stock pursuant to the Merger (the "Fractional Share Payments");
and
WHEREAS, NEG, Acquisition and Alexander, respectively, deem it advisable
and in the best interest of the respective companies and their respective
shareholders that NEG make capital contributions to Acquisition equal to the sum
of (i) the aggregate of all Dissenters' Payments, (ii) the aggregate of all
Appraisal Expense Payments incurred by Acquisition, and (iii) the aggregate of
all Fractional Share Payments made by Acquisition; and
WHEREAS, the parties intend that these understandings with respect to
dissenters' rights and payments for fractional shares shall be incorporated
into, and made a part of, the Agreement.
NOW THEREFORE, in consideration of the mutual premises and covenants and
subject to the terms and conditions hereinafter set forth, the parties hereby
agree as follows:
1. Reference to Section 6.02 on page (iv) of the Table of Contents to the
Agreement is hereby amended to read, in its entirety, as follows:
"6.02 "Subsidiaries"; "Material Adverse Effect"; "Knowledge"......67"
2. A reference to Section 6.14 on page (iv) of the Table of Contents to the
Agreement is hereby added to read, in its entirety, as follows:
"6.14 "Capital Contribution by NEG to Acquisition"................70"
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<PAGE> 274
3. The initial paragraph on page 1 of the Agreement is hereby amended to
reflect that the Agreement is dated as of the 6th day of June, 1996.
4. The last sentence of Section 1.02 of the Agreement is hereby amended to
read, in its entirety, as follows:
"As of the Effective Time of the Merger, the separate existence of
Alexander shall cease and Alexander shall be merged with and into
Acquisition."
5. The first sentence of Section 4.06 of the Agreement is hereby amended to
read, in its entirety, as follows:
"Alexander will deliver to NEG not later than ten (10) days before
the Effective Date of the Merger, a schedule listing Alexander's
Affiliates (as herein defined) and the amounts of shares of Alexander
Common Stock owned by such Affiliates and the numbers of the
certificates representing the same."
6. Section 5.01(h) of the Agreement is hereby amended to read, in its
entirety, as follows:
"(h) Fairness Opinion. Alexander shall have received an opinion,
dated as of the date of this Agreement, from Prudential Securities
Incorporated to the effect that the Exchange Ratio is fair, from a
financial point of view, to the holders of Alexander Common Stock,
which opinion shall not have been withdrawn."
7. Section 5.01(k) of the Agreement is hereby deleted in its entirety.
8. Section 5.02(i) of the Agreement is hereby amended to read, in its
entirety, as follows:
"(i) Fairness Opinion. NEG shall have received an opinion, dated as
of the date of this Agreement, from Oppenheimer & Co., Inc. to the
effect that the Exchange Ratio is fair, from a financial point of
view, to the holders of NEG Common Stock, which opinion shall not
have been withdrawn."
9. Section 5.02(l) is hereby amended to read in its entirety as follows:
"(l) NEG Financing. NEG shall have received on or before the date of
this Agreement the Commitment, and such bank or banks shall fund the
loan described in the Commitment on the terms set forth therein
simultaneous with or immediately after the Closing. NEG shall use its
best efforts to cause the loan described in the Commitment to close
simultaneous with or immediately after the Closing; provided,
however, that NEG shall not be obligated to close if the sum of the
refinancing of the existing debt of NEG and Alexander and the costs
of closing the transactions contemplated by this Agreement (including
all estimated costs under Section 1.08) exceeds $80,000,000.
10. A new Section 6.14 is hereby added to the Agreement to read in its
entirety as follows:
"6.14 Capital Contribution by NEG to Acquisition. At the
Effective Time of the Merger, and from time to time thereafter, NEG
shall make contributions of capital to Acquisition which in the
aggregate shall equal the amount of the Agreed Capital Contributions.
"Agreed Capital Contributions" shall be equal to the sum of (i) the
aggregate of all payments made by Acquisition to holders of Alexander
Dissenting Shares (the "Dissenters' Payments"), (ii) the aggregate of
all expenses incurred (A) to determine the entitlement to, and the
amount of, the Dissenters' Payments, and (B) for the administration
effort involved in handling disbursement of the Dissenters' Payments
(collectively, the "Appraisal Expense Payments"), and (iii) the
aggregate of all payments of cash made by Acquisition pursuant to
Section 1.07 in lieu of issuing fractional shares of NEG Common Stock
to the holders of Alexander Common Stock that receive NEG Common
Stock in exchange for their Alexander Common Stock pursuant to the
Merger (the "Fractional Share Payments"). The parties intend that
Acquisition shall acquire substantially all of the assets of
Alexander pursuant to the Agreement and that the
A-2-2
<PAGE> 275
assets of Alexander acquired by Acquisition shall not be dissipated
by the payment of (i) Dissenters' Payments, (ii) Appraisal Expense
Payments by Acquisition, or (iii) Fractional Share Payments by
Acquisition, and the parties agree that the Agreement shall be
construed in a manner consistent with such intention."
11. Unless otherwise specified herein, each capitalized term used herein
shall have the meaning assigned to such term in the Agreement.
12. All of the other terms and conditions of the Agreement remain in full
force and effect.
IN WITNESS WHEREOF, the undersigned have cause this First Amendment to
Agreement and Plan of Merger to be duly executed as of the date and year first
written above.
NATIONAL ENERGY GROUP, INC.
By: /s/ MILES D. BENDER
------------------------------
Miles D. Bender, President
NEG-OK, INC.
By: /s/ MILES D. BENDER
------------------------------
Miles D. Bender, President
ALEXANDER ENERGY CORPORATION
By: /s/ BOB G. ALEXANDER
------------------------------
Bob G. Alexander, President
A-2-3
<PAGE> 276
ADDENDUM B
[OPPENHEIMER & CO., INC. LETTERHEAD]
June 6, 1996
The Board of Directors
National Energy Group, Inc.
1400 One Energy Square
4925 Greenville Avenue
Dallas, Texas 75206
Gentlemen:
You have requested our opinion as to the fairness, from a financial point
of view, to the holders of the outstanding shares of Class A Voting Common
Stock, par value $0.01 per share, (the "National Stock") of National Energy
Group Inc. (the "Company" or "National") of the offer of 1.7 shares of National
Stock per share of Alexander Energy Corporation ("Alexander") Common Stock (the
"Alexander Stock"). The consideration being offered to such holders pursuant to
the terms and conditions set forth in the Agreement and Plan of Merger by and
among National Energy Group, Inc. and Alexander Energy Corporation dated as of
June 6, 1996 (the "Agreement") which includes, among other conditions,
provisions which provide that the proposed merger may not be effected if the
average of the share price for National Stock for the ten trading days
immediately prior to the date of closing of the merger exceeds $3.60 per share
or is less than $2.40 per share.
In arriving at our opinion, we reviewed the Agreement and held discussions
with certain senior officers, directors and other representatives and advisors
of the Company and of Alexander concerning the business, operations and
prospects of the Company and of Alexander. We examined certain publicly
available business and financial information relating to the Company and
Alexander as well as certain financial forecasts, reserve reports and other data
which were provided to us by the senior managements of the Company and of
Alexander. We reviewed the financial terms set forth in the Agreement in
relation to, among other things: current and historical market prices and
trading volumes of the National Stock and the Alexander Stock; the Company's and
Alexander's historical and projected earnings and cash flow; and the
capitalization and financial condition of the Company and of Alexander. We also
considered, to the extent publicly available, the financial terms of certain
other similar transactions recently effected which we considered comparable to
the transaction set forth in the Agreement and analyzed certain financial, stock
market and other publicly available information relating to the businesses of
other companies whose operations we considered comparable to those of the
Company and of Alexander. In addition to the foregoing, we conducted such other
analyses and examinations and considered such other financial, economic and
market criteria as we deemed necessary to arrive at our opinion.
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information publicly available, including such information furnished to us or
otherwise discussed with us by management of the Company and of Alexander. With
respect to financial forecasts and other information so provided or otherwise
discussed with us, we assumed, with the consent of the Board of Directors of the
Company, that such forecasts and other information were reasonably prepared to
reflect the best currently available estimates and judgments of the management
of the Company and of Alexander as to the expected future financial performance
of the Company and of Alexander. Other than reserve reports prepared by
Netherland, Sewell & Associates, Inc. dated December 31, 1995 for the Company
and January 1, 1996 for Alexander, we have not made or been provided with an
independent evaluation or appraisal of the assets or liabilities (contingent or
otherwise) of the Company or of Alexander nor have we made physical inspection
of all of the properties or assets of the Company or of Alexander. Our opinion
is necessarily based upon financial, stock market and other conditions and
circumstances existing and disclosed to us as of the date hereof.
<PAGE> 277
Oppenheimer & Co., Inc. has been engaged to render financial advisory
services to the Company in connection with the Agreement and activities leading
up to the receipt of the offer set forth in the Agreement. Oppenheimer & Co.,
Inc. will receive a fee for its services which include the delivery of this
opinion. In addition, Oppenheimer & Co., Inc. may provide investment banking
services to the Company in the future for which Oppenheimer & Co., Inc. will
receive customary fees. In the ordinary course of our business, we and our
affiliates may actively trade the securities of the Company, for our own account
or for the account of our customers and, accordingly, may at any time hold a
long or short position in such securities. Oppenheimer & Co., Inc. has informed
the Company that certain of its employees have, prior to their employment by
Oppenheimer & Co., Inc., performed investment banking services for Alexander.
The Board of Directors of the Company has acknowledged this fact and has agreed
to waive any potential conflicts relating to those prior services.
Our advisory services and the opinion expressed herein are provided for the
use of the Board of Directors of the Company in its evaluation of the Agreement,
and our opinion may not be published or otherwise used or referred to, in whole
or in part, nor shall any public reference to Oppenheimer & Co., Inc. be made
without our prior written consent; provided that this opinion may be included in
its entirety in any filing made by the Company or Alexander with the Securities
and Exchange Commission with respect to the merger contemplated by the Agreement
and the transactions related thereto.
Based upon and subject to the foregoing, our experience as investment
bankers, our work as described above and other factors we deemed relevant, we
are of the opinion that, as of the date hereof, the consideration to be paid to
the holders of Alexander Stock, pursuant to the Agreement is fair, from a
financial point of view, to the holders of National Stock.
Very truly yours,
OPPENHEIMER & CO., INC.
BY: /s/ RONALD D. ORMAND
- ------------------------------------
Ronald D. Ormand
Managing Director
B-2
<PAGE> 278
ADDENDUM C
[PRUDENTIAL SECURITIES LETTERHEAD]
June 6, 1996
Board of Directors
Alexander Energy Corporation
701 Cedar Lake Blvd.
Oklahoma City, OK 73114-7800
Members of the Board:
We understand that Alexander Energy Corporation ("Alexander" or the
"Company"), National Energy Group, Inc. ("NEG"), and NEG Acquisition Company, a
wholly-owned subsidiary of NEG (the "Merger Sub"), have entered into an
Agreement and Plan of Merger (the "Merger Agreement"), dated June 6, 1996,
pursuant to which Alexander will be merged with and into Merger Sub (the
"Merger"). At the Merger, Alexander will cease to exist and Merger Sub will
succeed to all of the assets, rights, liabilities and obligations of Alexander.
We further understand that in the Merger, each outstanding share of Alexander
common stock will be converted into 1.70 shares of common stock of NEG (the
"Merger Consideration").
You have requested our opinion as to the fairness from a financial point of
view of the Merger Consideration to be received by the stockholders of
Alexander.
In conducting our analysis and arriving at the opinion expressed herein, we
have:
(1) read the Merger Agreement and reviewed the terms of the Merger;
(2) reviewed historical audited financial information for both the
Company and NEG for each of the three fiscal years ending December 31, 1995
and the unaudited Company and NEG financial information for the quarter
ending March 31, 1996;
(3) analyzed certain operating and financial information with respect
to the business, operations and prospects of the Company and NEG, including
financial forecasts furnished to us by the Company and NEG;
(4) analyzed the trading history of Alexander and NEG common stock
from January 1, 1994 to the present and compared those trading histories
with those of other companies that we deemed comparable;
(5) reviewed certain reserve and production estimates for Alexander
and NEG included in audits performed by Netherland, Sewell & Associates,
Inc. as of December 31, 1995;
(6) compared the historical financial results and present financial
condition of Alexander and NEG with other companies we deemed comparable;
(7) compared the financial terms of the Merger with the financial
terms of certain other transactions that we deemed relevant;
(8) reviewed such other financial studies and analyses and performed
such other investigations as we deemed necessary, including our assessment
of economic and market conditions generally and with respect to the
exploration and development industry;
(9) conducted discussions with the management of Alexander and NEG
concerning their respective businesses, operations, assets, financial
condition and prospects, including financial forecasts, and undertook such
other studies, analyses and investigations as we deemed appropriate; and
(10) contacted 59 companies regarding the possible acquisition of the
Company.
<PAGE> 279
In arriving at our opinion, we have assumed and relied upon the accuracy
and completeness of the financial and other information used by us without
assuming any responsibility for independent verification of such information and
have further relied upon the assurances of management of the Company and NEG
that they are not aware of any facts that would make such information inaccurate
or misleading. With respect to the financial projections of the Company and NEG,
upon advice of the Company, we have assumed that such projections have been
reasonably prepared on a basis reflecting the best currently available estimates
and judgements of the management of the Company and NEG, as the case may be, as
to the future financial performance of the Company and NEG and that the Company
and NEG will perform substantially in accordance with such projections. In
addition, we have assumed that the $65.0 million of new bank financing and the
private placement of 5,555,556 shares of NEG common stock at $2.25 per share, as
contemplated in the combined projections of the Company and NEG, will occur at
or prior to the Merger. In arriving at our opinion, we have not conducted a
physical inspection of the properties and facilities of the Company or NEG and
have not made or obtained any evaluations or appraisals of the assets or
liabilities of the Company or NEG. Our opinion necessarily is based upon market,
economic and other conditions as they exist and can be evaluated as of the date
of this letter.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the consideration to be received by the stockholders of the
Company in the Merger is fair from a financial point of view.
We have acted as financial advisor to the Company in connection with the
Merger and will receive a fee for our services which is contingent upon the
consummation of the Merger. A portion of our fee may be paid in common stock of
NEG and warrants to purchase common stock of NEG. In addition, the Company has
agreed to indemnify us for certain liabilities that may arise out of the
rendering of this opinion. In the ordinary course of our business, we may trade
in the equity securities of the Company for our own account and for the accounts
of our customers and, accordingly, may at any time hold a long or short position
in such securities.
This opinion does not constitute a recommendation to any shareholder of the
Company as to how any such shareholder should vote on the Merger. This opinion
does not address the relative merits of the Merger and any other transactions or
business strategies discussed by the Board of Directors of the Company as
alternatives to the Merger or the decision of the Board of Directors of the
Company to proceed with the Merger. Furthermore, no opinion is expressed herein
as to the price at which the NEG common stock or the Alexander common stock may
trade at any time.
This opinion has been prepared at the request and for the use of the Board
of Directors of the Company in connection with the Merger and shall not be
reproduced, summarized, described or referred to, provided to any other person
or otherwise made public, without the prior written consent of Prudential
Securities Incorporated.
Very truly yours,
PRUDENTIAL SECURITIES
INCORPORATED
By: /s/ ALLEN MORTON
-----------------------------
C-2
<PAGE> 280
ADDENDUM D
SECTION 1091 OF THE OKLAHOMA GENERAL CORPORATION ACT
A. Any shareholder of a corporation of this state who holds shares of stock
on the date of the making of a demand pursuant to the provisions of subsection D
of this section with respect to such shares, who continuously holds such shares
through the effective date of the merger or consolidation, who has otherwise
complied with the provisions of subsection D of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to the provisions of Section 1073 of this title shall be entitled to an
appraisal by the district court of the fair value of his shares of stock under
the circumstances described in subsections B and C of this section. As used in
this section, the word "shareholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation. The provisions of this subsection shall be effective only with
respect to mergers or consolidations consummated pursuant to an agreement of
merger or consolidation entered into after November 1, 1988.
B. 1. Except as otherwise provided for in this subsection, appraisal rights
shall be available for the shares of any class or series of stock of a
constituent corporation in a merger or consolidation, or of the acquired
corporation in a share acquisition, to be effected pursuant to the provision of
Section 1081, 1082, 1086, 1087, or 1091.1 of this title or Section 12 of this
act.
2. a. No appraisal rights under this section shall be available for the
shares of any class or series of stock which, at the record date fixed to
determine the shareholders entitled to receive notice of and to vote at the
meeting of shareholders to act upon the agreement of merger or consolidation,
were either:
(1) listed on a national securities exchange; or
(2) held of record by more than two thousand shareholders.
b. In addition, no appraisal rights shall be available for any shares of
stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the shareholders of the surviving
corporation as provided for in subsection F of section 1081 of this title.
3. Notwithstanding the provisions of paragraph 2 of this subsection,
appraisal rights provided for in this section shall be available for the shares
of any class or series of stock of a constitute corporation if the holders
thereof are required by the terms of any agreement of merger or consolidation
pursuant to the provisions of Sections 1081, 1082, 1086 or 1087 of this title to
accept for such stock anything except:
a. shares of stock of the corporation surviving or resulting from such
merger or consolidation; or
b. shares of stock of any other corporation which at the effective date of
the merger or consolidation, will be either listed on a national securities
exchange or held of record by more than two thousand shareholders; or
c. cash in lieu of fractional shares of the corporations described in
subparagraphs a and b of this paragraph; or
d. any combination of the shares of stock and cash in lieu of the
fractional shares described in subparagraphs a, b and c of this paragraph.
4. In the event all of the stock of a subsidiary Oklahoma corporation party
to a merger effected pursuant to the provisions of Section 1083 of this title is
not owned by the parent corporation immediately prior to the merger, appraisal
rights shall be available for the shares of the subsidiary Oklahoma corporation.
C. Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections D and E
of this section, shall apply as nearly as is practicable.
<PAGE> 281
D. Appraisal rights shall be perfected as follows:
1. If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
shareholders, the corporation, not less than twenty (20) days prior to the
meeting, shall notify each of its shareholders entitled to such appraisal rights
that appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each shareholder electing to demand the appraisal of the shares of the
shareholder shall deliver to the corporation, before the taking of the vote on
the merger or consolidation, a written demand for appraisal of the shares of the
shareholder. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the shareholder and that the shareholder intends
thereby to demand the appraisal of shares of the shareholder. A proxy or vote
against the merger or consolidation shall not constitute such a demand. A
shareholder electing to take such action must do so by a separate written demand
as herein provided. Within ten (10) days after the effective date of such merger
or consolidation, the surviving or resulting corporation shall notify each
shareholder of each constituent corporation who has complied with the provisions
of this subsection and has not voted in favor of or consented to the merger or
consolidation as of the date that the merger or consolidation has become
effective; or
2. If the merger or consolidation was approved pursuant to the provisions
of Section 1073 or 1083 of this title, the surviving or resulting corporation,
either before the effective date of the merger or consolidation or within ten
(10) days thereafter, shall notify each of the shareholders entitled to
appraisal rights of the effective date of the merger or consolidation and that
appraisal rights are available for any or all of the shares of the constitute
corporation, and shall include in such notice a copy of this section. The notice
shall be sent by certified or registered mail, return receive requested,
addressed to the shareholder at the address of the shareholder as it appears on
the records of the corporation. Any shareholder entitled to appraisal rights
may, within twenty (20) days after the date of mailing of the notice, demand in
writing from the surviving or resulting corporation the appraisal of the shares
of the shareholder. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the shareholder and that the shareholder intends
to demand the appraisal of the shares of the shareholder.
E. Within one hundred twenty (120) days after the effective date of the
merger or consolidation, the surviving or resulting corporation or any
shareholder who has complied with the provisions of subsections A and D of this
section and who is otherwise entitled to appraisal rights, may file a petition
in district court demanding a determination of the value of the stock of all
such shareholders. Provided however, at any time within sixty (60) days after
the effective date of the merger or consolidation, any shareholder shall have
the right to withdraw the demand of the shareholder for appraisal and to accept
the terms offered upon the merger or consolidation. Within one hundred twenty
(120) days after the effective date of the merger or consolidation, any
shareholder who has complied with the requirements of subsections A and D of
this section, upon written request, shall be entitled to receive from the
corporation surviving the merger or resulting from the consolidation a statement
setting forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been received
and the aggregate number of holders of such shares. Such written statement shall
be mailed to the shareholder within ten (10) days after the shareholder's
written request for such a statement is received by the surviving or resulting
corporation or within ten (10) days after expiration of the period for delivery
of demands for appraisal pursuant to the provisions of subsection D of this
section, whichever is later.
F. Upon the filing of any such petition by a shareholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which, within
twenty (20) days after such service, shall file in the office of the court clerk
of the district court in which the petition was filed a duly verified list
containing the names and addresses of all shareholders who have demanded payment
for their shares and written agreements as to the value of their shares have not
been reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The court clerk, if so ordered by the
court, shall give notice of the time and place fixed for the hearing of such
petition by registered or certified mail to the surviving or resulting
corporation and to the shareholders shown on the list at the addresses therein
stated. Such notice shall also be given by one or more publications at least one
(1) week before the day of the hearing, in a newspaper of general circulation
published in the City of Oklahoma City, Oklahoma, or such publication as the
court deems advisable. The forms of the notices by mail
D-2
<PAGE> 282
and by publication shall be approved by the court, and the costs thereof shall
be borne by the surviving or resulting corporation.
G. At the hearing on such petition, the court shall determine the
shareholders who have complied with the provisions of this section and who have
become entitled to appraisal rights. The court may require the shareholders who
have demanded an appraisal for their shares and who hold stock represented by
certificates to submit their certificates of stock to the court clerk for
notation thereon of the pendency of the appraisal proceedings; and if any
shareholder fails to comply with such direction, the court may dismiss the
proceedings as to such shareholder.
H. After determining the shareholders entitled to an appraisal, the court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
court shall take into account all relevant factors. In determining the fair rate
of interest, the court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any shareholder entitled to participate
in the appraisal proceeding, the court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the shareholder entitled to an appraisal. Any
shareholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to the provisions of subsection F of this section and who
has submitted the certificates of stock of the shareholder to the court clerk,
if such is required, may participate fully in all proceedings until it is
finally determined that the shareholder is not entitled to appraisal rights
pursuant to the provisions of this section.
I. The court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
shareholders entitled thereto. Interest may be simple or compound, as the court
may direct. Payment shall be so made to each such shareholder, in the case of
holders of uncertificated stock immediately, and in the case of holders of
shares represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The court's decree may be enforced as
other decrees in the district court may be enforced, whether such surviving or
resulting corporation be a corporation of this state or of any other state.
J. The costs of the proceeding may be determined by the court and taxed
upon the parties as the court deems equitable in the circumstances. Upon
application of a shareholder, the court may order all or a portion of the
expenses incurred by any shareholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all of
the shares entitled to an appraisal.
K. From and after the effective date of the merger or consolidation, no
shareholder who has demanded the appraisal rights of the shareholder as provided
for in subsection D of this section shall be entitled to vote such stock for any
purpose or to receive payment of dividends or other distributions on the stock,
except dividends or other distributions payable to shareholders of record at a
date which is prior to the effective date of the merger or consolidation;
provided, however, that if no petition for an appraisal shall be filed within
the time provided for in subsection E of this section, or if such shareholder
shall deliver to the surviving or resulting corporation a written withdrawal of
the shareholder's demand for an appraisal and an acceptance of the merger or
consolidation, either within sixty (60) days after the effective date of the
merger or consolidation as provided for in subsection E of this section or
thereafter with the written approval of the corporation, then the right of such
shareholder to an appraisal shall cease. Provided, however, no appraisal
proceeding in the district court shall be dismissed as to any shareholder
without the approval of the court, and such approval may be conditioned upon
such terms as the court deems just.
L. The shares of the surviving or resulting corporation into which the
shares of such objecting shareholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
D-3
<PAGE> 283
ADDENDUM E
[NETHERLAND, SEWELL & ASSOCIATES, INC. LETTERHEAD]
February 15, 1996
Mr. William T. Jones
National Energy Group, Inc.
1400 One Energy Square
4925 Greenville Avenue
Dallas, Texas 75206
Dear Mr. Jones:
In accordance with your request, we have estimated the proved reserves and
future revenue, as of December 31, 1995, to the National Energy Group, Inc.
(NEG) interest in certain oil and gas properties located in the United States as
listed in the accompanying tabulations. This report has been prepared using
constant prices and costs in accordance with the guidelines of the Securities
and Exchange Commission (SEC).
As presented in the accompanying summary projections, Tables I through IV,
we estimate the net reserves and future net revenue to the NEG interest, as of
December 31, 1995, to be:
<TABLE>
<CAPTION>
NET RESERVES FUTURE NET REVENUE
----------------------- ----------------------------
OIL GAS PRESENT WORTH
CATEGORY (BARRELS) (MCF) TOTAL AT 10%
------------------------------------ --------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Proved Developed
Producing......................... 1,630,373 11,854,030 $27,880,900 $20,562,700
Non-Producing..................... 2,031 1,450,001 1,410,000 776,200
Proved Undeveloped.................. 2,288,672 17,565,081 31,818,000 14,939,700
--------- ---------- ----------- -----------
Total Proved.............. 3,921,076 30,869,112 $61,108,900 $36,278,600
</TABLE>
The oil reserves shown include crude oil, condensate, and gas plant
liquids. Oil volumes are expressed in barrels which are equivalent to 42 United
States gallons. Gas volumes are expressed in thousands of standard cubic feet
(MCF) at the contract temperature and pressure bases.
As shown in the Table of Contents, this report includes summary projections
of reserves and revenue for each reserve category along with one-line summaries
of reserves, economics, and basic data by lease. For the purposes of this
report, the term "lease" refers to a single economic projection.
The estimated reserves and future revenue shown in this report are for
proved developed producing, proved developed non-producing, and proved
undeveloped reserves. In accordance with SEC guidelines, our estimates do not
include any value for probable or possible reserves which may exist for these
properties. This report does not include any value which could be attributed to
interests in undeveloped acreage beyond those tracts for which undeveloped
reserves have been estimated.
Future gross revenue to the NEG interest is prior to deducting state
production taxes and ad valorem taxes. Future net revenue is after deducting
these taxes, future capital costs, and operating expenses, but before
consideration of federal income taxes. In accordance with SEC guidelines, the
future net revenue has been discounted at an annual rate of 10 percent to
determine its "present worth." The present worth is shown to indicate the effect
of time on the value of money and should not be construed as being the fair
market value of the properties.
For the purposes of this report, a field inspection of the properties has
not been performed nor has the mechanical operation or condition of the wells
and their related facilities been examined. We have not investigated possible
environmental liability related to the properties; therefore, our estimates do
not include
<PAGE> 284
any costs which may be incurred due to such possible liability. Also, our
estimates do not include any salvage value for the lease and well equipment nor
the cost of abandoning the properties.
Oil prices used in this report are based on a December 31, 1995 West Texas
Intermediate posted price of $18.00 per barrel, adjusted by lease for gravity,
transportation fees, and regional posted price differentials. Gas prices used in
this report are the December 1995 prices received for each lease. Oil and gas
prices are held constant in accordance with SEC guidelines.
Lease and well operating costs are based on operating expense records of
NEG. For non-operated properties, these costs include the per-well overhead
expenses allowed under joint operating agreements along with costs estimated to
be incurred at and below the district and field levels. As requested, lease and
well operating costs for the operated properties include only direct lease and
field level costs. Headquarters general and administrative overhead expenses of
NEG are not included. Lease and well operating costs are held constant in
accordance with SEC guidelines. Capital costs are included as required for
workovers, new development wells, and production equipment.
We have made no investigation of potential gas volume and value imbalances
which may have resulted from overdelivery or underdelivery to the NEG interest.
Therefore, our estimates of reserves and future revenue do not include
adjustments for the settlement of any such imbalances; our projections are based
on NEC receiving its net revenue interest share of estimated future gross gas
production.
The reserves included in this report are estimates only and should not be
construed as exact quantities. They may or may not be recovered; if recovered,
the revenues therefrom and the costs related thereto could be more or less than
the estimated amounts. The sales rates, prices received for the reserves, and
costs incurred in recovering such reserves may vary from assumptions included in
this report due to governmental policies and uncertainties of supply and demand.
Also, estimates of reserves may increase or decrease as a result of future
operations.
In evaluating the information at our disposal concerning this report, we
have excluded from our consideration all matters as to which legal or
accounting, rather than engineering and geological, interpretation may be
controlling. As in all aspects of oil and gas evaluation, there are
uncertainties inherent in the interpretation of engineering and geological data;
therefore, our conclusions necessarily represent only informed professional
judgments.
The titles to the properties have not been examined by Netherland, Sewell &
Associates, Inc., nor has the actual degree or type of interest owned been
independently confirmed. The data used in our estimates were obtained from
National Energy Group, Inc. and the nonconfidential files of Netherland, Sewell
& Associates, Inc. and were accepted as accurate. We are independent petroleum
engineers, geologists, and geophysicists; we do not own an interest in these
properties and are not employed on a contingent basis. Basic geologic and field
performance data together with our engineering work sheets are maintained on
file in our office.
Very truly yours,
/s/ FREDERIC D. SEWELL
---------------------------------
E-2
<PAGE> 285
ADDENDUM F
[NETHERLAND, SEWELL & ASSOCIATES, INC. LETTERHEAD]
March 1, 1996
Mr. Bob G. Alexander
Alexander Energy Corporation
701 Cedar Lake Boulevard
Oklahoma City, Oklahoma 73114
Dear Mr. Alexander:
In accordance with your request, we have estimated the proved, probable,
and possible reserves and future revenue, as of January 1, 1996, to the
Alexander Energy Corporation (Alexander) corporate interest in certain oil and
gas properties located in the United States as listed in the accompanying
tabulations. This interest includes directly owned interest and General Partner
interest derived from 3 limited partnerships managed by Alexander. This report
has been prepared using constant prices and costs in accordance with the
guidelines of the Securities and Exchange Commission (SEC). However, inasmuch as
the SEC does not recognize probable and possible reserves, the sections of this
report dealing with such reserves should not be used in filings with the SEC.
As presented in the accompanying summary projections, Tables I through VI,
we estimate the net reserves and future net revenue to the Alexander interest,
as of January 1, 1996, to be:
<TABLE>
<CAPTION>
NET RESERVES FUTURE NET REVENUE
----------------------- -----------------------------
OIL GAS PRESENT WORTH
CATEGORY (BARRELS) (MCF) TOTAL AT 10%
----------------------------------- --------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
Proved Developed
Producing........................ 1,036,340 58,201,146 $ 84,342,800 $53,597,300
Non-Producing.................... 179,576 8,496,600 13,286,800 7,776,900
Proved Undeveloped................. 1,092,056 32,372,429 45,353,100 24,073,400
--------- ---------- ------------ -----------
Total Proved............. 2,307,972 99,070,175 $142,982,700 $85,447,600
Probable(1)........................ 558,499 14,765,057 $ 19,451,600 $ 9,119,800
Possible(1)........................ 466,167 10,118,921 $ 15,060,500 $ 6,643,800
</TABLE>
- ---------------
(1) These reserves and future revenue are not risk weighted.
The oil reserves shown include crude oil and condensate. Oil volumes are
expressed in barrels which are equivalent to 42 United States gallons. Gas
volumes are expressed in thousands of standard cubic feet (MCF) at the contract
temperature and pressure bases.
As shown in the Table of Contents, this report includes summary projections
of reserves and revenue for each reserve category along with one-line summaries
of reserves, economics, and basic data by lease. For the purposes of this
report, the term "lease" refers to a single economic projection.
The estimated reserves and future revenue shown in this report are for
proved developed producing, proved developed non-producing, proved undeveloped,
probable, and possible reserves. This report does not include any value which
could be attributed to interests in undeveloped acreage beyond those tracts for
which undeveloped reserves have been estimated.
Future gross revenue to the Alexander corporate interest is prior to
deducting state production taxes and ad valorem taxes. Future net revenue is
after deducting these taxes, future capital costs, and operating expenses, but
before consideration of federal income taxes. In accordance with SEC guidelines,
the future net revenue has been discounted at an annual rate of 10 percent to
determine its "present worth." The present
<PAGE> 286
worth is shown to indicate the effect of time on the value of money and should
not be construed as being the fair market value of the properties.
For the purposes of this report, a field inspection of the properties has
not been performed nor has the mechanical operation or condition of the wells
and their related facilities been examined. We have not investigated possible
environmental liability related to the properties; therefore, our estimates do
not include any costs which may be incurred due to such possible liability.
Also, our estimates do not include any salvage value for the lease and well
equipment nor the cost of abandoning the properties.
Oil prices used in this report are based on a December 31, 1995 West Texas
Intermediate posted price of $18.00 per barrel, adjusted by lease for gravity,
transportation fees, and regional posted price differentials. Gas prices used in
this report are based on either the most current price available for each lease,
adjusted to a December 1995 regional spot market price, or the contract price.
Oil and gas prices are held constant in accordance with SEC guidelines.
Lease and well operating costs are based on operating expense records of
Alexander. For non-operated properties, these costs include the per-well
overhead expenses allowed under joint operating agreements along with costs
estimated to be incurred at and below the district and field levels. As
requested, lease and well operating costs for the operated properties include
only direct lease and field level costs. Headquarters general and administrative
overhead expenses of Alexander are not included. Lease and well operating costs
are held constant in accordance with SEC guidelines. Capital costs are included
as required for workovers, new development wells, and production equipment.
We have made no investigation of potential gas volume and value imbalances
which may have resulted from overdelivery or underdelivery to the Alexander
corporate interest. Therefore, our estimates of reserves and future revenue do
not include adjustments for the settlement of any such imbalances; our
projections are based on Alexander receiving its net revenue interest share of
estimated future gross gas production.
The reserves included in this report are estimates only and should not be
construed as exact quantities. They may or may not be recovered; if recovered,
the revenues therefrom and the costs related thereto could be more or less than
the estimated amounts. The sales rates, prices received for the reserves, and
costs incurred in recovering such reserves may vary from assumptions included in
this report due to governmental policies and uncertainties of supply and demand.
Also, estimates of reserves may increase or decrease as a result of future
operations.
In evaluating the information at our disposal concerning this report, we
have excluded from our consideration all matters as to which legal or
accounting, rather than engineering and geological, interpretation may be
controlling. As in all aspects of oil and gas evaluation, there are
uncertainties inherent in the interpretation of engineering and geological data;
therefore, our conclusions necessarily present only informed professional
judgments.
The titles to the properties have not been examined by Netherland, Sewell &
Associates, Inc., nor has the actual degree or type of interest owned been
independently confirmed. The data used in our estimates were obtained from
Alexander Energy Corporation, other interest owners, various operators of the
properties, and the nonconfidential files of Netherland, Sewell & Associates,
Inc. and were accepted as accurate. We are independent petroleum engineers,
geologists, and geophysicists; we do not own an interest in these properties and
are not employed on a contingent basis. Basic geologic and field performance
data together with our engineering work sheets are maintained on file in our
office.
Very truly yours,
/s/ FREDERIC D. SEWELL
-------------------------------
F-2
<PAGE> 287
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PROXY NATIONAL ENERGY GROUP, INC. PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Miles D. Bender and Randall A. Carter, and
each of them, with full power of substitution, to vote all of the shares of
capital stock of National Energy Group, Inc. ("NEG") that the undersigned is
entitled to vote at the Annual Meeting of Shareholders to be held at the
Senator's Lecture Hall, Wyndham Anatole Hotel, 2201 Stemmons Freeway, Dallas,
Texas 75207, at 10:00 a.m., Central Time, Thursday, August 29, 1996, and at any
adjournment thereof, as indicated below:
1. A proposal to issue shares of NEG Common Stock in connection with the merger
(the "Merger") of Alexander Energy Corporation ("Alexander") with and into
NEG-OK, Inc., a wholly-owned subsidiary of NEG ("NEG-OK"), and to approve the
Merger and the related Agreement and Plan of Merger dated as of June 6, 1996,
as amended as of June 20, 1996, among NEG, Alexander and NEG-OK, pursuant to
which each share of Alexander Common Stock outstanding immediately prior to
the Merger (other than dissenting shares) and all associated rights for such
share will be converted into the right to receive 1.7 shares of NEG Common
Stock.
/ / FOR / / AGAINST / / ABSTAIN
2. Election of Directors
<TABLE>
<S> <C>
/ / FOR all nominees listed below / / WITHHOLD AUTHORITY
(except as marked to the contrary) to vote for all nominees listed below
</TABLE>
Nominees: George B. McCullough, Norman C. Miller, Miles D. Bender, Robert H.
Kite and George N. McDonald
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR AN INDIVIDUAL NOMINEE, LINE
THROUGH THE NOMINEE'S NAME AS IT APPEARS ABOVE.)
3. A proposal to amend the NEG Certificate of Incorporation to eliminate the
authorization of the Class B Common Stock, to change the name of the Class A
Common Stock to "Common Stock," to increase the number of authorized shares
of Common Stock from 50 million to 100 million shares, to clarify the powers
of the Board of Directors to issue NEG Preferred Stock without shareholder
approval and to extend from June 14, 1997 to June 14, 1999, the period during
which NEG may not redeem the NEG Series B Preferred Stock and the NEG Series
C Preferred Stock.
/ / FOR / / AGAINST / / ABSTAIN
4. Ratification of the selection of Ernst & Young LLP as NEG's independent
auditors for the current fiscal year ended December 31, 1996; and
/ / FOR / / AGAINST / / ABSTAIN
5. At their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting or any adjournment thereof.
PLEASE CONTINUE ON REVERSE SIDE
- --------------------------------------------------------------------------------
<PAGE> 288
- --------------------------------------------------------------------------------
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSALS 1, 3 AND 4 AND FOR ALL OF THE NOMINEES LISTED IN PROPOSAL 2
ABOVE.
This proxy may be revoked prior to the exercise of the powers conferred by the
proxy.
The undersigned hereby acknowledges receipt of the Proxy Statement dated August
9, 1996.
Dated , 1996
------------------------------------
(Signature of Shareholders)
------------------------------------
(Signature of Shareholders)
PLEASE DATE, SIGN AND MAIL PROMPTLY
IN THE ENCLOSED ENVELOPE. PLEASE
SIGN EXACTLY AS YOUR NAME APPEARS
HEREON. WHERE THERE IS MORE THAN ONE
OWNER, EACH SHOULD SIGN. WHEN
SIGNING AS AN ATTORNEY,
ADMINISTRATOR, EXECUTOR, GUARDIAN OR
TRUSTEE, PLEASE ADD YOUR TITLE AS
SUCH. IF EXECUTED BY A CORPORATION,
THE PROXY SHOULD BE SIGNED BY A DULY
AUTHORIZED OFFICER. IF EXECUTED BY A
PARTNERSHIP, PLEASE SIGN IN THE
PARTNERSHIP NAME BY AN AUTHORIZED
PERSON.
PLEASE SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED ENVELOPE.
- --------------------------------------------------------------------------------
<PAGE> 289
- --------------------------------------------------------------------------------
PROXY ALEXANDER ENERGY CORPORATION PROXY
SPECIAL MEETING OF SHAREHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Bob G. Alexander, Jim L. David and David E.
Grose, or any of them, Proxies for the undersigned, with full power of
substitution in each, to represent and to vote, as designated below, all shares
of common stock of Alexander Energy Corporation which the undersigned is
entitled to vote at the Special Meeting of Shareholders to be held on Thursday,
August 29, 1996 at the Governor's Lecture Hall, Wyndham Anatole Hotel, 2201
Stemmons Freeway, Dallas, Texas 75207, at 10:00 a.m., Central Time, and at any
adjournments thereof as follows:
1. Adoption of the Agreement and Plan of Merger dated June 6, 1996, as amended
as of June 20, 1996, by and among Alexander Energy Corporation, National
Energy Group, Inc. and NEG-OK, Inc., and approval of the Merger and the
transactions contemplated thereby, as described in the accompanying Joint
Proxy Statement and Prospectus, pursuant to which each share of Alexander
Common Stock outstanding immediately prior to the Merger (other than
dissenting shares) and all associated rights for such share will be converted
into the right to receive 1.7 shares of NEG Common Stock.
FOR / / AGAINST / / ABSTAIN / /
2. In their discretion, on such other matters as may properly come before the
meeting or any adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
"FOR" PROPOSAL 1. YOU MAY REVOKE THIS PROXY AT ANY TIME PRIOR TO VOTE THEREOF.
PLEASE CONTINUE ON REVERSE SIDE
- --------------------------------------------------------------------------------
<PAGE> 290
- --------------------------------------------------------------------------------
The undersigned hereby acknowledges receipt of the Joint Proxy Statement and
hereby expressly revokes any and all proxies heretofore given or executed by him
with respect to the shares represented by this Proxy.
Dated , 1996
-----------------------------------
Signature
-----------------------------------
Signature if held jointly
PLEASE SIGN EXACTLY AS NAME(S)
APPEAR HEREON. WHEN SHARES ARE HELD
BY JOINT OWNERS, BOTH SHOULD SIGN.
WHEN SIGNING IN A REPRESENTATIVE
CAPACITY, PLEASE GIVE FULL TITLE
AND ATTACH PROOF OF AUTHORITY
UNLESS ALREADY ON FILE WITH THE
CORPORATION. IF A CORPORATION OR
PARTNERSHIP, PLEASE SIGN IN FULL
CORPORATE OR PARTNERSHIP NAME BY
PRESIDENT OR PARTNER OR OTHER
AUTHORIZED PERSON.
PLEASE SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED ENVELOPE.
- --------------------------------------------------------------------------------
