<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 28, 1997
REGISTRATION NO. 333-38075
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
-----------------------
NATIONAL ENERGY GROUP, INC.
(Exact name of registrant as specified in its charter)
-----------------------
<TABLE>
<S> <C> <C>
DELAWARE 1311 58-1922764
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
4925 GREENVILLE AVENUE
SUITE 1400
DALLAS, TEXAS 75206
(214) 692-9211
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
MILES D. BENDER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
4925 GREENVILLE AVENUE, SUITE 1400
DALLAS, TEXAS 75206
(214) 692-9211
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE OF AGENT FOR SERVICE)
-----------------------
Copies to:
DIANE B. MUSE
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
1700 PACIFIC AVENUE, SUITE 4100
DALLAS, TEXAS 75201-4675
(214) 969-2800
Approximate date of commencement of proposed sale to public: As soon as
practicable after the registration statement becomes effective.
-----------------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [ ]
-----------------------
===============================================================================
<PAGE> 2
NATIONAL ENERGY GROUP, INC.
OFFER TO EXCHANGE
10 3/4% SERIES C SENIOR NOTES DUE 2006
($65,000,000 PRINCIPAL AMOUNT OUTSTANDING)
AND ALL OUTSTANDING 10 3/4% SERIES B SENIOR NOTES DUE 2006
($100,000,000 PRINCIPAL AMOUNT OUTSTANDING)
FOR
10 3/4% SERIES D SENIOR NOTES DUE 2006,
($165,000,000 PRINCIPAL AMOUNT)
----------------
The Exchange Offer will expire at 5:00 p.m., E.S.T., on November 25,
1997, unless extended.
----------------
National Energy Group, Inc., a Delaware corporation (the "Company"),
hereby offers (the "Exchange Offer"), upon the terms and subject to the
conditions set forth in this Prospectus and the accompanying Letter of
Transmittal (the "Letter of Transmittal"), to exchange up to an aggregate
principal amount of $65,000,000 of its outstanding 10 3/4% Series C Senior
Notes due 2006 (the "Outstanding Notes") and up to an aggregate principal
amount of $100,000,000 of its outstanding 10 3/4% Series B Senior Notes due
2006 (the "Series B Notes") for an equal principal amount of its 10 3/4% Series
D Senior Notes due 2006 in integral multiples of $1,000 (the "Exchange Notes"
and, together with the Outstanding Notes, the "Notes"). The Exchange Notes will
be senior unsecured obligations of the Company and are substantially identical
(including principal amount, interest rate, maturity and redemption rights) to
the Outstanding Notes and the Series B Notes for which they may be exchanged
pursuant to this Exchange Offer, except for certain transfer restrictions and
registration rights relating to the Outstanding Notes. The Series B Notes have
been issued under an Indenture dated as of November 1, 1996 (the "Series A/B
Indenture") between the Company and Bank One, Columbus, N.A. as trustee (the
"Series A/B Trustee"). See "Description of the Series A/B Notes." The
Outstanding Notes have been, and the Exchange Notes will be, issued under an
Indenture dated as of August 21, 1997 (the "Indenture"), between the Company
and Bank One, N.A. as trustee (the "Trustee"). See "Description of the Exchange
Notes." There will be no proceeds to the Company from the Exchange Offer;
however, pursuant to a Registration Rights Agreement dated as of August 21,
1997 (the "Registration Rights Agreement") among the Company and the Initial
Purchasers (as defined) of the Outstanding Notes, the Company will bear certain
offering expenses.
The Company will accept for exchange any and all validly tendered
Outstanding Notes and/or Series B Notes on or prior to 5:00 p.m., E.S.T., on
November 25, 1997, unless extended (the "Expiration Date"). Tenders of
Outstanding Notes and/or Series B Notes may be withdrawn at any time prior to
5:00 p.m., E.S.T., on the business day prior to the Expiration Date; otherwise
such tenders are irrevocable. Bank One, N.A. is acting as Exchange Agent (the
"Exchange Agent") in connection with the Exchange Offer. The minimum period of
time that the Exchange Offer will remain open is 28 days from the date the
Registration Statement is declared effective. The Exchange Offer is not
conditioned upon any minimum principal amount of Outstanding Notes or Series B
Notes being tendered for exchange, but is otherwise subject to certain
customary conditions.
(Cover text continued on next page)
----------------
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN RISKS
TO BE CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER AND IN EVALUATING AN
INVESTMENT IN THE EXCHANGE NOTES.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION OR AS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is October 28, 1997.
<PAGE> 3
The Exchange Notes will bear interest from the date of issuance at a rate
equal to 10 3/4% per annum on the same terms as the Outstanding Notes and the
Series B Notes. Outstanding Notes and the Series B Notes that are accepted
for exchange will cease to accrue interest upon issuance of the Exchange Notes.
Interest on the Exchange Notes will be payable semiannually on May 1 and
November 1 of each year commencing May 1, 1998. Accrued interest on the
Outstanding Notes and/or the Series B Notes that are tendered in exchange for
the Exchange Notes will be payable on or before May 1, 1998.
The Outstanding Notes in an aggregate principal amount of $65 million were
sold by the Company on August 21, 1997 to the Initial Purchasers in a
transaction not registered under the Securities Act of 1933, as amended (the
"Securities Act"), in reliance upon the exemption provided in Section 4(2) of
the Securities Act. The Initial Purchasers subsequently placed the Outstanding
Notes with qualified institutional buyers in reliance upon Rule 144A under the
Securities Act. Accordingly, the Outstanding Notes may not be re-offered,
resold or otherwise transferred in the United States unless so registered or
unless an applicable exemption from the registration requirements of the
Securities Act is available. The Exchange Notes are being offered hereunder in
order to satisfy the obligations of the Company under the Registration Rights
Agreement. See "The Exchange Offer."
On November 1, 1996, the Company issued $100 million aggregate principal
amount of unregistered 10 3/4% Senior Notes due 2006 (the "Series A Notes")
which were exchanged in February 1997 for the registered Series B Notes (the
Series A Notes together with the Series B Notes the "Series A/B Notes"). As
such, the Series B Notes are freely tradeable. THE COMPANY HAS INCLUDED THE
SERIES B NOTES IN THE EXCHANGE OFFER IN ORDER TO ALLOW THE OUTSTANDING NOTES
AND THE SERIES B NOTES TO TRADE AS A SINGLE ISSUE, WHICH THE COMPANY BELIEVES
WILL INCREASE THE LIQUIDITY OF THE EXCHANGE NOTES. SEE "RISK FACTORS - EXCHANGE
OFFER PROCEDURES" AND "RISK FACTORS - ABSENCE OF A PUBLIC MARKET FOR THE
EXCHANGE NOTES."
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties (including Exxon Capital Holdings (available April 13, 1989), Morgan
Stanley & Co, Inc. (available June 5, 1991) and Mary Kay Cosmetics, Inc.
(available June 5, 1991)), the Company believes that Exchange Notes issued
pursuant to this Exchange Offer may be offered for resale, resold and otherwise
transferred by a holder who is not an affiliate of the Company without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that the holder is acquiring the Exchange Notes in its
ordinary course of business and is not participating in and has no arrangement
or understanding with any person to participate in the distribution (within the
meaning of the Securities Act) of the Exchange Notes. Persons wishing to
exchange Outstanding Notes in the Exchange Offer must represent to the Company
that such conditions have been met.
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer (a "Participating Broker-Dealer") must
acknowledge that it will deliver a prospectus in connection with any resale of
Exchange Notes. The Letter of Transmittal for the Exchange Offer states that by
so acknowledging and delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of Exchange
Notes received in exchange for Outstanding Notes and/or Series B Notes where
such Outstanding Notes and/or Series B Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed to make this Prospectus available to any
Participating Broker-Dealer for use in connection with any such resale for a
period of up to one year from the date on which the registration statement, of
which this Prospectus forms a part, is declared effective. See "Plan of
Distribution."
The Company does not intend to list the Exchange Notes on any national
securities exchange or to seek the admission thereof to trading on the National
Association of Securities Dealers automatic quotation system ("NASDAQ"). The
Initial Purchasers have advised the Company that they intend to make a market
in the Exchange Notes; however, they are not obligated to do so and any
market-making may be discontinued at any time
2
<PAGE> 4
without notice. Accordingly, no assurance can be given that an active public or
other market will develop for the Exchange Notes or as to the liquidity of or
the trading market for the Exchange Notes.
ANY OUTSTANDING NOTES AND/OR SERIES B NOTES NOT TENDERED AND ACCEPTED IN
THE EXCHANGE OFFER WILL REMAIN OUTSTANDING. TO THE EXTENT THAT ANY OUTSTANDING
NOTES AND/OR SERIES B NOTES OF OTHER HOLDERS ARE TENDERED AND ACCEPTED IN THE
EXCHANGE OFFER, A HOLDER'S ABILITY TO SELL UNTENDERED OUTSTANDING NOTES AND/OR
SERIES B NOTES COULD BE ADVERSELY AFFECTED. FOLLOWING CONSUMMATION OF THE
EXCHANGE OFFER, THE HOLDERS OF UNTENDERED OUTSTANDING NOTES WILL CONTINUE TO BE
SUBJECT TO THE EXISTING RESTRICTIONS UPON TRANSFER THEREOF.
The Company expects that the Exchange Notes issued pursuant to this
Exchange Offer will be issued in the form of a Global Exchange Note (as defined
herein), which will be deposited with, or on behalf of, The Depository Trust
Company ("DTC") and registered in its name or in the name of Cede & Co., its
nominee. Beneficial interests in the Global Exchange Note representing the
Exchange Notes will be shown on, and transfers thereof to qualified
institutional buyers will be effected through, records maintained by DTC and
its participants. After the initial issuance of the Global Exchange Note,
Exchange Notes in certificated form will be issued in exchange for the Global
Exchange Note on the terms set forth in the Indenture. See "Description of
Exchange Notes-Global Exchange Note; Book-Entry Form."
----------------
No dealer, salesperson or other person has been authorized to give
information or to make any representations not contained in this Prospectus,
and, if given or made, such information or representations must not be relied
upon as having been authorized by the Company. This Prospectus does not
constitute an offer to sell or the solicitation of an offer to buy any security
other than the Exchange Notes offered hereby, nor does it constitute an offer
to sell or the solicitation of an offer to buy any of the Exchange Notes to any
person in any jurisdiction in which it is unlawful to make such an offer or
solicitation to such person. Neither the delivery of this Prospectus nor any
sale made hereunder shall under any circumstances create any implication that
the information contained herein is correct as of any date subsequent to the
date hereof.
AVAILABLE INFORMATION
The Company has filed with the Commission in Washington, D.C., a
Registration Statement on Form S-4 (the "Registration Statement") under the
Securities Act with respect to the securities offered by this Prospectus.
Certain of the information contained in the Registration Statement is omitted
from this Prospectus, and reference is hereby made to the Registration
Statement and exhibits and schedules relating thereto for further information
with respect to the Company and the securities offered by this Prospectus. The
Company is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith,
files reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information are available for inspection
at, and copies of such materials may be obtained upon payment of the fees
prescribed therefor by the rules and regulations of the Commission from the
Commission at its principal offices located at Judiciary Plaza, 450 Fifth
Street, Room 1024, Washington, D.C. 20549, and at the Regional Offices of the
Commission located at Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511; and at 7 World Trade Center, Suite
1300, New York, New York 10048. The Commission maintains a World Wide Web site
on the Internet at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants, including
the Company, that file electronically with the Commission. In addition, the
Common Stock of the Company ("Common Stock") is traded on The Nasdaq National
Market under the symbol NEGX, and such reports, proxy statements and other
information may be inspected at the offices of The Nasdaq National Market, 1735
K Street N.W., Washington, D.C. 20006.
So long as the Company is subject to the periodic reporting requirements
of the Exchange Act, it is required to furnish the information required to be
filed with the Commission to the Trustee and the holders of the Exchange Notes.
The Company has agreed that, even if it is entitled under the Exchange Act not
to furnish such information to the Commission, it will nonetheless continue to
furnish information that would be required to be
3
<PAGE> 5
furnished by the Company by Section 13 of the Exchange Act to the Trustee and
the holders of the Exchange Notes as if it were subject to such periodic
reporting requirements.
In addition, the Company has agreed that for so long as any of the
Outstanding Notes are outstanding and are "restricted securities" within the
meaning of Rule 144(a)(3) under the Securities Act, they will make available to
any prospective purchaser of the Outstanding Notes or beneficial owner of the
Outstanding Notes in connection with any sale thereof the information required
by Rule 144A(d) (4) (i) under the Securities Act.
INFORMATION INCORPORATED BY REFERENCE
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE THAT ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. COPIES OF ANY SUCH DOCUMENTS, OTHER THAN EXHIBITS
TO SUCH DOCUMENTS THAT ARE NOT SPECIFICALLY INCORPORATED BY REFERENCE THEREIN,
ARE AVAILABLE WITHOUT CHARGE TO ANY PERSON TO WHOM THIS PROSPECTUS IS
DELIVERED, UPON ORAL OR WRITTEN REQUEST TO SECRETARY, 4925 GREENVILLE AVENUE,
SUITE 1400, DALLAS, TEXAS 75206, TELEPHONE NUMBER (214) 692-9211. IN ORDER TO
ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY
NOVEMBER 20, 1997.
The Company's Annual Report on Form 10-K for the year ended December 31,
1996, the Company's Quarterly Reports on Form 10-Q for the periods ended March
31, 1997 and June 30, 1997, and the Company's Current Reports on Form 8-K and
Form 8-K/A dated August 29, 1996, and filed with the Commission pursuant to the
Exchange Act, are incorporated by reference in this Prospectus.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14,
or 15(d) of the Exchange Act, after the date of this Prospectus and prior to
the termination of the Registration Statement of which this Prospectus is a
part with respect to registration of the Exchange Notes, shall be deemed to be
incorporated by reference in this Prospectus and be a part hereof from the date
of filing of such documents. Any statement contained in a document incorporated
or deemed to be incorporated by reference in this Prospectus shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained in this Prospectus, or in any other subsequently filed
document that also is or is deemed to be incorporated by reference, modifies or
replaces such statement.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus and the documents incorporated by reference herein include
"forward-looking statements" within the meaning of various provisions of the
Securities Act and the Exchange Act. All statements, other than statements of
historical facts, included in this Prospectus and the documents incorporated by
reference herein that address activities, events or developments that the
Company expects or anticipates will or may occur in the future, including such
things as estimated future net revenues from oil and natural gas reserves and
the present value thereof, future capital expenditures (including the amount
and nature thereof), business strategy and measures to implement strategy,
competitive strengths, goals, expansion and growth of the Company's business
and operations, plans, references to future success, references to intentions
as to future matters and other such matters are forward-looking statements.
These statements are based on certain assumptions and analyses made by the
Company in light of its experience and its perception of historical trends,
current conditions and expected future developments as well as other factors it
believes are appropriate under the circumstances. However, whether actual
results and developments will conform with the Company's expectations and
predictions is subject to a number of risks and uncertainties, including the
risk factors discussed in this Prospectus, general economic, market or business
conditions, the opportunities (or lack thereof) that may be presented to and
pursued by the Company, competitive actions by other oil and natural gas
companies, changes in laws or regulations, and other factors, many of which are
beyond the control of the Company. Consequently, all of the forward-looking
statements made in this
4
<PAGE> 6
Prospectus and the documents incorporated by reference herein are qualified by
these cautionary statements and there can be no assurance that the actual
results or developments anticipated by the Company will be realized or, even if
substantially realized, that they will have the expected consequences to or
effects on the Company or its business or operations.
5
<PAGE> 7
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in connection with, the more detailed information and financial statements and
notes thereto included elsewhere or incorporated by reference in this
Prospectus. Unless the context otherwise requires, all references to "NEG" or
the "Company" are to National Energy Group, Inc.
THE COMPANY
NEG is an independent energy company engaged in the acquisition,
exploitation, development, exploration and production of oil and natural gas.
Through the acquisition of oil and natural gas properties with significant
reserve and production enhancement potential, and the subsequent exploitation
and development of those properties, the Company has substantially increased
its reserves and geographically diversified its property holdings. In its
acquisitions of oil and natural gas properties, the Company targets major
producing basins in Texas, Oklahoma, Arkansas, Louisiana, Mississippi, Alabama
and offshore in the Gulf of Mexico, and seeks to acquire reserves that are
balanced between oil and natural gas with a mix of both short and long reserve
lives. While continuing to pursue attractive acquisition opportunities, the
Company has increased its focus upon implementing a comprehensive exploitation
and development program for its existing properties. This program is designed
to enhance proved producing reserves and convert proved undeveloped reserves to
proved producing reserves through development drilling, workovers,
recompletions and other production enhancement activities. As a complement to
these efforts, the Company has developed an exploration program concentrating
primarily on onshore Gulf of Mexico prospects in Texas, Louisiana, Mississippi
and Alabama, and offshore Gulf of Mexico prospects in shallow state waters in
offshore Texas.
As a result of its acquisition, exploitation, development and exploration
activities, NEG has substantially increased its reserves, production and cash
flow since 1991. The Company's estimated net proved reserves and PV10% have
grown from 6.8 Bcfe and $6.1 million, respectively, on December 31, 1991, to
181.7 Bcfe (71% natural gas) and $291.7 million (62% proved developed),
respectively, at December 31, 1996, as determined from reserve reports prepared
by Netherland, Sewell & Associates, Inc., independent petroleum engineers.
NEG's average net daily production has increased from 1.2 Mmcfe for 1991 to
54.5 Mmcfe for the second quarter of 1997. As a result of increases in reserves
and production, the Company has increased cash flow from operations before
changes in operating assets and liabilities from $0.2 million for 1991 to $13.8
million for 1996 and $13.7 million for the first six months of 1997.
The Company estimates it has a backlog of approximately 206 development
opportunities (including recompletions, drilling locations and proposed
waterfloods) on its existing properties, which the Company believes will
provide at least a three-year inventory of development projects. The Company
has established an aggregate development and exploration capital budget for its
existing properties of approximately $57 million for 1997 consisting of
approximately $45 million for development and exploitation projects and
approximately $12 million for selective exploratory activities primarily on its
onshore Texas, Louisiana, Mississippi, Alabama and offshore Gulf of Mexico
properties, of which $34.9 million was spent during the first half of 1997
consisting of $32.8 million for development and exploitation projects and $2.1
million for exploratory activities. Actual amounts expended by the Company for
development and exploration activities will be dependent on a number of
factors, including oil and natural gas prices, seismic and drilling costs,
future drilling results and the availability of capital.
The Company's principal executive offices are located at 4925 Greenville
Avenue, Suite 1400, Dallas, Texas 75206, and its telephone number is (214)
692-9211.
BUSINESS STRATEGY
NEG strives to increase reserves, production and cash flow from operations
through a strategy of (i) focusing on development and exploitation activities
to maximize production and ultimate reserve recovery, (ii) acquiring oil and
natural gas properties with significant exploitation, development or
exploration potential, (iii)
6
<PAGE> 8
obtaining operational control of its properties, (iv) maintaining a low
operating cost structure, and (v) selectively exploring and developing
properties with significant reserve potential.
Development and Exploitation. In 1994, 1995 and 1996, the Company
participated in the drilling of 9 gross (6.4 net) development wells, 25 gross
(21.3 net) development wells and 29 gross (25.8 net) development wells,
respectively. All but two of the development wells drilled since 1994 have been
commercially productive. The Company intends to intensify development and
exploitation of its existing properties through development drilling,
workovers, redrills, recompletions, and other production enhancement techniques
to maximize its production and reserves. As of December 31, 1996, the Company
has identified approximately 206 development opportunities (including
recompletions and drilling locations) on the Company's existing properties. NEG
has a development and exploitation capital expenditure budget of approximately
$45 million for 1997, a major portion of which is targeted to develop proved
undeveloped reserves, of which $32.8 million was spent during the first six
months of 1997.
Property Acquisitions. Acquisitions of producing oil and gas properties
have contributed significantly to the Company's historical growth in reserves.
During the period from January 1, 1991 through December 31, 1996, the Company
has acquired, through fifteen transactions, 202.1 Bcfe of estimated net proved
reserves. While NEG expects to generate future growth in reserves and
production through its increased emphasis on development and exploratory
drilling, the Company will continue to seek to opportunistically acquire
properties that complement and enhance its inventory of development,
exploitation and exploration projects. Consistent with its historical
acquisition strategy, the Company expects to focus on purchases of
underdeveloped properties in its core areas of expertise either through
negotiated property acquisitions or acquisitions of companies with oil and
natural gas properties.
Operational Control. The Company generally prefers to operate and, except
for its exploratory prospects, own a majority working interest in its oil and
natural gas properties. This operating philosophy enables the Company to
control the nature, timing and costs of exploration and development of its
properties, as well as the marketing of the resulting production. At December
31, 1996, the Company operated 506 of the 833 producing wells in which it owns
an interest.
Low Operating Cost Structure. The Company seeks to increase cash flow by
maintaining a low unit operating cost structure through its focus on increasing
production while limiting its field operating and corporate overhead expenses.
Through these efforts, the Company has reduced historical unit lease operating
expenses 44% from $0.70 per Mcfe in 1991 to $0.39 per Mcfe for the six months
ended June 30, 1997. During these same periods, the Company decreased
historical unit general and administrative expenses 70% from $0.80 per Mcfe to
$0.24 per Mcfe.
Selective Exploration Program. To balance its relatively lower risk
development and exploitation activities, the Company expects that exploration
drilling will become a more important aspect of its business in the future. The
Company seeks to reduce the risks normally associated with exploratory drilling
by (i) allocating only a limited portion of its capital expenditure budget to
exploration activities, (ii) limiting its working interests in exploratory
prospects through participation by industry partners, (iii) obtaining
operational control of its prospects and (iv) utilizing advanced technologies,
including 3-D seismic surveys, where cost-effective. The Company's exploration
program targets prospects with significant reserve potential, focusing
primarily on its inventory of exploratory prospects in onshore Texas,
Louisiana, Mississippi and Alabama and offshore Gulf of Mexico, including the
Mustang Island Properties and Bayou Sorrel Properties. To provide additional
expertise in prospect generation and analysis for its exploration program and
to control prospect generation costs, the Company has entered into an agreement
with Sandefer Oil and Gas, Inc. ("Sandefer") under which prospects in
Louisiana, Texas and Mississippi are generated for NEG's consideration and
Sandefer participates with the Company in the evaluation, marketing and sale of
such prospects ("Sandefer Exploration Venture"). The agreement with Sandefer
also involves an arrangement with two geologists associated with Sandefer, who
have substantial exploration experience in the Gulf Coast region. The
geologists have access to the extensive engineering and licensed geological and
geophysical data bases for Louisiana, Texas and Mississippi owned or licensed
by Sandefer.
7
<PAGE> 9
THE EXCHANGE OFFER
The Outstanding Notes.................. The Outstanding Notes were sold by the
Company on August 21, 1997 (the
"Initial Offering"), to Jefferies &
Company, Inc. and Prudential
Securities Incorporated
(collectively, the "Initial
Purchasers") pursuant to a Purchase
Agreement dated August 21, 1997 (the
"Purchase Agreement"). The Initial
Purchasers subsequently resold the
Outstanding Notes to qualified
institutional buyers pursuant to Rule
144A under the Securities Act.
Registration Requirements.............. Pursuant to the Purchase Agreement,
the Company and the Initial
Purchasers entered into a
Registration Rights Agreement dated
August 21, 1997 (the "Registration
Rights Agreement"), which grants the
holders of the Outstanding Notes
certain exchange and registration
rights. The Exchange Offer is
intended to satisfy such exchange and
registration rights, which terminate
upon the consummation of the Exchange
Offer. If applicable law or
applicable interpretations of the
staff of the Commission do not permit
the Company to effect the Exchange
Offer, the Company has agreed to file
a shelf registration (the "Shelf
Registration Statement") covering
resales of the Outstanding Notes. See
"The Exchange Offer-Resale of
Exchange Notes" and "The Exchange
Offer-Shelf Registration Statement."
The Series B Notes..................... On November 1, 1996 the Company sold
Series A Notes (the "Series A Initial
Offering") to Bear, Stearns, Co.
Inc., Smith Barney Inc. and Jefferies
& Company, Inc. (collectively, the
"Series A Initial Purchasers").
Pursuant to a Registration Rights
Agreement dated November 1, 1996, an
exchange offer was made by the
Company in January, 1997 to exchange
all outstanding Series A Notes for
registered Series B Notes. Pursuant
to such exchange offer, all
outstanding Series A Notes were
exchanged for registered Series B
Notes. The Company is not required to
include the Series B Notes in the
Exchange Offer but has voluntarily
chosen to include the Series B Notes
in the Exchange Offer.
The Exchange Offer..................... The Company is offering to exchange
$1,000 principal amount of the
Exchange Notes for each $1,000
principal amount of (i) Outstanding
Notes and (ii) Series B Notes. As of
the date hereof, $65,000,000
aggregate principal amount of
Outstanding Notes are outstanding and
$100,000,000 aggregate principal
amount of Series B Notes are
outstanding. The Company will issue
the Exchange Notes to holders on
November 25, 1997, unless the
Exchange Offer is extended (the
"Exchange Date").
Based on an interpretation of the
staff of the Commission set forth in
no action letters issued to third
parties, the Company believes that
Exchange Notes issued pursuant to the
Exchange Offer in exchange for
Outstanding Notes may be offered for
resale, resold and otherwise
transferred by any holder thereof
(other than any such holder which is
an "affiliate" of the Company within
the meaning of Rule 405 under the
Securities Act) without compliance
with the registration and prospectus
delivery provisions of the Securities
Act, provided that such Exchange
Notes are acquired in the ordinary
course of such holder's business and
that such holder does not intend to
participate and has no
8
<PAGE> 10
arrangement or understanding with any
person to participate in the
distribution of such Exchange Notes.
Each Participating Broker-Dealer must
acknowledge that it will deliver a
prospectus in connection with any
resale of Exchange Notes. The Letter
of Transmittal for the Exchange Offer
states that by so acknowledging and
by delivering a prospectus, a
broker-dealer will not be deemed to
admit that it is an "underwriter"
within the meaning of the Securities
Act. This Prospectus, as it may be
amended or supplemented from time to
time, may be used by a broker-dealer
in connection with resales of
Exchange Notes received in exchange
for Outstanding Notes and/or Series B
Notes where such Outstanding Notes
and/or Series B Notes were acquired
by such broker-dealer as a result of
market-making activities or other
trading activities. The Company has
agreed to make this Prospectus
available to any Participating
Broker-Dealer for use in connection
with any such resale for a period of
up to one year from the date the
registration statement, of which this
Prospectus forms a part, is declared
effective. See "Plan of
Distribution."
Any holder who tenders in the
Exchange Offer with the intention to
participate, or for the purpose of
participating, in a distribution of
the Exchange Notes could not rely on
the position of the staff of the
Commission enunciated in Exxon
Capital Holdings Corporation
(available April 13, 1989) or similar
no-action letters and, in the
absence of an exemption therefrom,
must comply with the registration and
prospectus delivery requirements of
the Securities Act in connection with
the resale transaction. Failure to
comply with such requirements in such
instance may result in such holder
incurring liability under the
Securities Act for which the holder
is not indemnified by the Company.
Expiration Date........................ 5:00 p.m., E.S.T., on November 25,
1997, unless extended.
Interest on the Exchange Notes......... The Exchange Notes will bear interest
from the date of issuance of the
Exchange Notes at a rate equal to 10
3/4% per annum and will be payable
semi-annually on May 1 and November 1
of each year commencing May 1,
1998. Outstanding Notes and Series B
Notes that are accepted for exchange
will cease to accrue interest upon
the issuance of the Exchange Notes.
Interest on the Outstanding Notes or
the Series B Notes that are tendered
in exchange for the Exchange Notes
that has accrued from the most
recent Interest Payment Date to which
interest on the Outstanding Notes
or the Series B Notes, as the
case may be, has been paid through
the Exchange Date will be payable on
or before May 1, 1998.
Procedures for Tendering Each holder of Outstanding Notes and/
Outstanding Notes and/or Series or Series B Notes wishing to
B Notes............................. accept the Exchange Offer must
complete, sign and date the
accompanying Letter of Transmittal,
or a facsimile thereof, in accordance
with the instructions contained
herein and therein, and mail or
otherwise deliver such Letter of
Transmittal, or such facsimile,
together with the Outstanding Notes
and/or Series B Notes and any other
required documentation to the
Exchange Agent at the address set
forth herein. By executing the Letter
of Transmittal, each
9
<PAGE> 11
holder will represent to the Company
that, among other things, the holder
or the person receiving such Exchange
Notes, whether or not such person is
the holder, is acquiring the Exchange
Notes in the ordinary course of
business and that neither the holder
nor any such other person has any
arrangement or understanding with any
person to participate in the
distribution of such Exchange Notes.
In lieu of physical delivery of the
certificates representing Outstanding
Notes and/or Series B Notes,
tendering holders may transfer
Outstanding Notes and/or Series B
Notes pursuant to the procedure for
book-entry transfer as set forth
under "The Exchange Offer Procedures
for Tendering."
Special Procedures for Beneficial Any beneficial owner whose
Owners.............................. Outstanding Notes and/or Series B
Notes are registered in the name of a
broker-dealer, commercial bank, trust
company or other nominee and who
wishes to tender should contact such
registered holder promptly and
instruct such registered holder to
tender on such beneficial owner's
behalf.
If such beneficial owner wishes to
tender on such owner's own behalf,
such owner must, prior to completing
and executing the Letter of
Transmittal and delivering its
Outstanding Notes and/or Series B
Notes, either make appropriate
arrangements to register ownership of
the Outstanding Notes and/or Series B
Notes in such owner's name or obtain
a properly completed bond power from
the registered holder. The transfer
of record ownership may take
considerable time.
Guaranteed Delivery Procedures.......... Holders of Outstanding Notes and/or
Series B Notes who wish to tender
their Outstanding Notes and/or Series
B Notes and whose Outstanding Notes
and/or Series B Notes are not
immediately available or who cannot
deliver their Outstanding Notes
and/or Series B Notes, the Letter of
Transmittal or any other documents
required by the Letter of Transmittal
to the Exchange Agent (or comply with
the procedures for book-entry
transfer) prior to the Expiration
Date must tender their Outstanding
Notes and/or Series B Notes according
to the guaranteed delivery procedures
set forth in "The Exchange Offer -
Guaranteed Delivery Procedures."
Withdrawal Rights....................... Tenders may be withdrawn at any time
prior to 5:00 p.m., E.S.T., on the
business day prior to the Expiration
Date pursuant to the procedures
described under "The Exchange Offer -
Withdrawal of Tenders."
Acceptance of Outstanding Notes Subject to certain conditions, the
and/or Series B Notes and Company will accept for exchange any
Delivery of Exchange Notes........... and all Outstanding Notes and any
and all Series B Notes that are
properly tendered in the Exchange
Offer prior to 5:00 p.m., E.S.T., on
the Expiration Date. The Exchange
Notes issued pursuant to the Exchange
Offer will be delivered on the
Exchange Date. See "The Exchange
Offer - Terms of the Exchange Offer."
Federal Income Tax Consequences......... The exchange pursuant to the Exchange
Offer should not be a taxable event
for federal income tax purposes. See
"Certain Federal Income Tax
Consequences."
10
<PAGE> 12
Effect on Holders of Outstanding As a result of the making of this
Notes................................ Exchange Offer, the Company will have
fulfilled one of its obligations
under the Registration Rights
Agreement and, with certain
exceptions noted below, holders of
Outstanding Notes who do not tender
their Outstanding Notes will not have
any further registration rights under
the Registration Rights Agreement or
otherwise. Such holders will continue
to hold the untendered Outstanding
Notes and will be entitled to all the
rights and subject to all the
limitations applicable thereto under
the Indenture, except to the extent
such rights or limitations, by their
terms, terminate or cease to have
further effectiveness as a result of
the Exchange Offer. All untendered
Outstanding Notes will continue to be
subject to certain restrictions on
transfer. Accordingly, if any
Outstanding Notes are tendered and
accepted in the Exchange Offer, the
trading market of the untendered
Outstanding Notes could be adversely
affected. See "Risk Factors -
Exchange Offer Procedures" and "Risk
Factors - Absence of a Public Market
for the Exchange Notes."
Effect on Holders of Series B Notes..... Holders of Series B Notes who do not
tender their Series B Notes will
continue to hold untendered Series B
Notes and will be entitled to all the
rights and subject to all the
limitations applicable thereto under
the Series A/B Indenture. If any
holders of the Series B Notes tender
such notes, the trading market of
untendered Series B Notes could
adversely be affected. See "Risk
Factors - Exchange Offer Procedures"
and "Risk Factors - Absence of a
Public Market for the Exchange
Notes."
Exchange Agent.......................... Bank One, N.A.
SUMMARY OF TERMS OF THE EXCHANGE NOTES
Securities Offered ..................... $165,000,000 aggregate principal
amount of 10 3/4% Series D Senior
Notes due 2006.
Maturity Date........................... November 1, 2006.
Interest Payment Dates.................. May 1 and November 1 of each year,
commencing May 1, 1998.
Optional Redemption..................... The Exchange Notes will be redeemable
at the option of the Company, in
whole or in part, at any time on or
after November 1, 2001 at the
redemption prices set forth herein
or, if redeemed prior to November 1,
2001, at the Make-Whole Price, plus,
in each case, accrued and unpaid
interest to the date of redemption.
In addition, the Company may, at its
option, redeem up to 35% of the
aggregate principal amount of the
Exchange Notes at 110.75% of the
principal amount thereof, plus
accrued and unpaid interest to the
date of redemption, with the net
proceeds of one or more Equity
Offerings consummated on or before
November 1, 1999, provided at least
65% of the aggregate principal amount
of the Exchange Notes remains
outstanding following such
redemption. See "Description of the
Exchange Notes - Optional
Redemption."
11
<PAGE> 13
Ranking................................. The Exchange Notes will be senior
unsecured obligations of the Company
ranking pari passu with all existing
and future senior indebtedness of the
Company, and senior in right of
payment to all future subordinated
indebtedness of the Company. The
Exchange Notes will rank pari passu
with the Company's Outstanding Notes
and Series B Notes not otherwise
exchanged for Exchange Notes pursuant
to this Exchange Offer. As of
October 15, 1997, after giving effect
to the Initial Offering and the
application of the net proceeds
therefrom, the Company has no secured
indebtedness outstanding that
effectively ranks senior to the
Exchange Notes. Subject to certain
limitations set forth in the
Indenture, the Company may incur
additional senior indebtedness and
other indebtedness. See "Description
of the Exchange Notes - Ranking."
Guarantee............................... The Company currently has no
Restricted Subsidiaries (as defined).
In the event the Company in the
future acquires or creates a
Subsidiary, such Subsidiary shall be
a Restricted Subsidiary of the
Company, and the Indenture provides
that such Restricted Subsidiary (a
"Guarantor"), will unconditionally
guarantee (the "Guarantee") the
Exchange Notes. Any such Guarantee
will be a general unsecured senior
obligation of the Guarantor, ranking
pari passu with all existing and
future senior indebtedness of the
Guarantor, and senior in right of
payment to all future subordinated
indebtedness of the Guarantor. See
"Description of the Exchange Notes -
Guarantee."
Change of Control....................... Upon a Change of Control (as
defined), the Company will be
required, subject to certain
conditions, to offer to repurchase
all outstanding Exchange Notes at
101% of the principal amount thereof,
plus accrued and unpaid interest to
the date of purchase. See
"Description of the Exchange Notes -
Change of Control."
Certain Covenants....................... The Indenture contains certain
covenants, including, but not limited
to, covenants limiting the Company
and its Restricted Subsidiaries with
respect to the following: (i) asset
sales; (ii) restricted payments;
(iii) the incurrence of additional
indebtedness and the issuance of
certain redeemable preferred stock;
(iv) liens; (v) sale and leaseback
transactions; (vi) lines of business;
(vii) dividend and other payment
restrictions affecting subsidiaries;
(viii) mergers and consolidations;
(ix) transactions with affiliates;
and (x) the filing of certain
periodic reports. See "Description of
the Exchange Notes - Certain
Covenants."
RISK FACTORS
For a discussion of certain factors that should be considered by
prospective purchasers in evaluating an investment in the Notes, see "Risk
Factors."
12
<PAGE> 14
RISK FACTORS
In addition to the other information set forth elsewhere in this
Prospectus and incorporated by reference herein, the following factors relating
to the Company and this Exchange Offer should be considered by prospective
investors when evaluating an investment in the Exchange Notes offered hereby.
EXCHANGE OFFER PROCEDURES
Issuance of the Exchange Notes in exchange for Outstanding Notes
and/or Series B Notes pursuant to the Exchange Offer will be made only after a
timely receipt by the Company of such Outstanding Notes and/or Series B Notes,
a properly completed and duly executed Letter of Transmittal and all other
required documents. Therefore, holders of the Outstanding Notes and/or Series B
Notes desiring to tender such Outstanding Notes and/or Series B Notes in
exchange for Exchange Notes should allow sufficient time to ensure timely
delivery. The Company is under no duty to give notification of defects or
irregularities with respect to the tenders of Outstanding Notes and/or Series B
Notes for exchange. Outstanding Notes that are not tendered or are tendered but
not accepted will, following the consummation of the Exchange Offer, continue
to be subject to the existing restrictions upon transfer thereof. Upon
consummation of the Exchange Offer, the registration rights under the
Registration Rights Agreement will terminate. In addition, any holder of
Outstanding Notes who tenders in the Exchange Offer for the purpose of
participating in a distribution of the Exchange Notes may be deemed to have
received restricted securities and, if so, will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives
Exchange Notes for its own account in exchange for Outstanding Notes and/or
Series B Notes, where such Outstanding Notes and/or Series B Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any sale of such Exchange Notes. See "Plan of Distribution." TO
THE EXTENT THAT SOME OF THE OUTSTANDING NOTES OR SERIES B NOTES ARE TENDERED
AND ACCEPTED IN THE EXCHANGE OFFER, THE TRADING MARKET FOR UNTENDERED AND
TENDERED BUT UNACCEPTED OUTSTANDING NOTES OR SERIES B NOTES, AS THE CASE MAY
BE, COULD BE ADVERSELY AFFECTED.
SUBSTANTIAL INDEBTEDNESS
At June 30, 1997, on a pro forma basis giving effect to the Initial
Offering and the application of the net proceeds therefrom, the Company had
approximately $165 million of indebtedness (including current maturities of
long-term indebtedness) as compared to the Company's stockholders' equity of
$82 million. The Company may incur additional indebtedness under the Company's
Revised Credit Facility (as defined). See "Description of Certain Indebtedness
- - Revised Credit Facility" and "Description of the Exchange Notes Certain
Covenants."
This level of indebtedness may pose substantial risks to holders of
the Exchange Notes, including the possibility that the Company might not
generate sufficient cash flow to make the principal and interest payments on
the Exchange Notes. If the Company is unsuccessful in increasing its proved
reserves or realizing production from its proved undeveloped reserves, the
future net revenue from existing proved reserves may not be sufficient to make
such principal and interest payments on the Exchange Notes in accordance with
their terms. Such indebtedness may also adversely affect the Company's ability
to finance its future operations and capital needs, and may limit its ability
to pursue other business opportunities.
FUTURE CAPITAL REQUIREMENTS
The Company has made, and will continue to make, substantial capital
expenditures for acquisition, development and production of oil and natural gas
reserves, particularly since a significant portion of the proved reserves of
the Company consist of proved undeveloped reserves, which require substantial
capital expenditures to prove and develop. The Company has budgeted capital
expenditures of approximately $57 million for the year ending 1997, of which
$34.9 million was spent during the first six months of 1997. The Company is not
contractually committed to expend the budgeted funds. The Company currently
expects that available cash, cash flows from operations, proceeds from the
Initial Offering and available borrowings under the Revised Credit Facility
will be sufficient to fund planned capital expenditures for its existing
properties through December 31,
13
<PAGE> 15
1997. However, the Company may need to raise additional capital to fund
acquisitions which may become available to the Company in the future, and to
fund the development of any such acquisitions.
For periods after 1997, the Company may seek additional capital, if
required, from traditional reserve-based borrowing, equity and debt offerings
or joint ventures to further develop and explore its properties and to acquire
additional properties. The Company's ability to access additional capital will
depend on its continued success in exploring for and developing its oil and
natural 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 the Company from any source or that, if available, it will be at
prices or on terms acceptable to the Company. Should the Company be unable to
access the capital markets or should sufficient capital not be available, the
development and exploration of the Company's properties could be delayed or
reduced and, accordingly, oil and natural gas revenues and operating results
may be adversely affected.
RANKING OF THE EXCHANGE NOTES; EFFECTIVE SUBORDINATION
The Exchange Notes will be senior unsecured obligations of the Company
ranking pari passu with any of the Outstanding Notes and the Series B Notes
remaining outstanding after the Exchange Offer and all existing and future
senior indebtedness of the Company. Holders of secured indebtedness of the
Company and its subsidiaries, including the Revised Credit Facility, however,
will have claims with respect to the assets constituting collateral for such
indebtedness that are prior to the claims of holders of the Exchange Notes. The
obligations of the Company under the Revised Credit Facility are secured by a
substantial portion of the assets of the Company.
In the event of a default on the Exchange Notes, or a bankruptcy,
liquidation or reorganization of the Company, such assets will be available to
satisfy obligations with respect to the indebtedness secured by the Revised
Credit Facility before any payment therefrom could be made on the Exchange
Notes. Accordingly, the Exchange Notes will be effectively subordinated to
claims of secured creditors of the Company to the extent of such pledged
collateral. At June 30, 1997, after giving effect to the Initial Offering and
the application of the net proceeds therefrom, the Company had no outstanding
secured indebtedness effectively ranked senior to the Exchange Notes in right
of payment, and no other indebtedness other than the Outstanding Notes and the
Series B Notes. The Indenture limits the amount of Liens (as defined in
"Description of the Exchange Notes - Certain Definitions") securing the Revised
Credit Facility to the greater of (i) $40 million or (ii) $10 million plus 15%
of Adjusted Consolidated Net Tangible Assets (as defined in "Description of the
Exchange Notes - Certain Definitions").
RESTRICTIONS IMPOSED BY LENDERS
The instruments governing the indebtedness of the Company impose
significant operating and financial restrictions on the Company. Such
restrictions will affect, and in many respects significantly limit or prohibit,
among other things, the ability of the Company to incur additional
indebtedness, pay dividends, repay indebtedness prior to its stated maturity,
sell assets or engage in mergers or acquisitions. These restrictions could also
limit the ability of the Company to effect future financings, make needed
capital expenditures, withstand a future downturn in the Company's business or
the economy in general, or otherwise conduct necessary corporate activities. A
failure by the Company to comply with these restrictions could lead to a
default under the terms of such indebtedness and the Notes. In the event of
default, the holders of such indebtedness could elect to declare all of the
funds borrowed pursuant thereto to be due and payable together with accrued and
unpaid interest. In such event, there can be no assurance that the Company
would be able to make such payments or borrow sufficient funds from alternative
sources to make any such payment. Even if additional financing could be
obtained, there can be no assurance that it would be on terms that are
favorable or acceptable to the Company. In addition, the Company's indebtedness
under the Revised Credit Facility is secured by a substantial portion of the
assets of the Company. The pledge of such collateral to existing lenders could
impair the Company's ability to obtain favorable financing. See "Description of
Certain Indebtedness - Revised Credit Facility."
14
<PAGE> 16
REPURCHASE OF EXCHANGE NOTES UPON A CHANGE OF CONTROL
The Company must offer to repurchase the Exchange Notes upon the
occurrence of certain events. In the event of a Change of Control (as defined
in the Indenture) the Company must offer to repurchase all Exchange Notes then
outstanding at a purchase price equal to 101% of the principal amount thereof,
plus accrued and unpaid interest to the date of purchase. See "Description of
the Exchange Notes - Change of Control."
Prior to repurchasing such Exchange Notes, the Company may be required
to (i) repay all or a portion of indebtedness under the Revised Credit Facility
or (ii) obtain any requisite consent to permit the repurchase. If the Company
is unable to repay all of such indebtedness or is unable to obtain the
necessary consents, then the Company will be unable to offer to purchase the
Exchange Notes and such failure will constitute an Event of Default under the
Indenture. There can be no assurance that the Company will have sufficient
funds available at the time of any Change of Control to make any debt payment
(including repurchases of Exchange Notes) as described above.
The events that constitute a Change of Control under the Indenture may
also be events of default under the Revised Credit Facility or other senior
indebtedness of the Company. Such events may permit the lenders under such debt
instruments to reduce the borrowing base thereunder or accelerate the debt and
if the debt is not paid, to enforce security interests on, or commence
litigation which could ultimately result in a sale of, substantially all the
assets of the Company, thereby limiting the Company's ability to raise cash to
repurchase the Exchange Notes and reducing the practical benefit of the offer
to purchase provisions to the holders of the Exchange Notes. See "Description
of Certain Indebtedness - Revised Credit Facility."
ABSENCE OF A PUBLIC MARKET FOR THE EXCHANGE NOTES
The Outstanding Notes and the Series B Notes, respectively, are
currently owned by a relatively small number of beneficial owners. The
Outstanding Notes have not been registered under the Securities Act and are
subject to significant restrictions on resale. The Exchange Notes will
constitute a new issue of securities with no established trading market. The
Company does not intend to list the Outstanding Notes, the Series B Notes or
the Exchange Notes on any national securities exchange or to seek the admission
thereof to trading in the National Association of Securities Dealers Automated
Quotation System. The Company has been advised by the Initial Purchasers that,
following completion of the Exchange Offer, they presently intend to make a
market in the Exchange Notes. However, the Initial Purchasers are not obligated
to do so, and any market making activity with respect to the Exchange Notes may
be discontinued at any time without notice. In addition, such market making
activity will be subject to the limits imposed in the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and may be limited during the
Exchange Offer or the pendency of a shelf registration statement. While an
application to have the Exchange Notes accepted for trading in the PORTAL
market will be made, no assurance can be given that an active public or other
market will develop for the Exchange Notes or as to the liquidity of or the
trading market for the Exchange Notes. Future trading prices of the Exchange
Notes will depend upon many factors, including, among others, prevailing
interest rates, the Company's operating results and the market for similar
securities.
If all of the holders of the Series B Notes and the Outstanding Notes
tender such notes, the liquidity of the Exchange Notes would be increased as a
result of the larger size of the issue. However, there can be no assurance that
any or all holders of Series B Notes or the Outstanding Notes will accept the
Exchange Offer. Failure of holders of Outstanding Notes and Series B Notes to
accept the Exchange Offer could result in a decrease in the liquidity of the
Exchange Notes. In addition, wide acceptance of the Exchange Offer will affect
and could decrease the liquidity of the Series B Notes and the Outstanding
Notes held by non-tendering holders.
FRAUDULENT CONVEYANCE
Various fraudulent conveyance laws enacted for the protection of
creditors may apply to any Restricted Subsidiary of the Company that guarantees
the Exchange Notes. To the extent that a court were to find that (x) a
Guarantee was incurred by a Guarantor with intent to hinder, delay or defraud
any present or future creditor or the
15
<PAGE> 17
Guarantor contemplated insolvency with a design to prefer one or more creditors
to the exclusion in whole or in part of others or (y) a Guarantor did not
receive fair consideration or reasonably equivalent value for issuing its
Guarantee and such Guarantor (i) was insolvent, (ii) was rendered insolvent by
reason of the issuance of such Guarantee, (iii) was engaged or about to engage
in a business or transaction for which the remaining assets of such Guarantor
constituted unreasonably small capital to carry on its business or (iv)
intended to incur, or believed that it would incur, debts beyond its ability to
pay such debts as they matured, the court could avoid or subordinate such
Guarantee in favor of the Guarantor's creditors. Among other things, a legal
challenge of a Guarantee on fraudulent conveyance grounds may focus on the
benefits, if any, realized by a Guarantor as a result of the issuance by the
Company of the Exchange Notes. The Indenture contains a savings clause, which
generally limits the obligations of each Guarantor under its Guarantee to the
maximum amount as will, after giving effect to all of the liabilities of such
Guarantor, result in such obligations not constituting a fraudulent conveyance.
To the extent a Guarantee of any Guarantor was avoided as a fraudulent
conveyance or held unenforceable for any other reason, holders of the Exchange
Notes would cease to have any claim against such Guarantor and would be
creditors solely of the Company and any Guarantor whose Guarantee was not
avoided or held unenforceable. In such event, the claims of the holders of the
Exchange Notes against the issuer of an invalid Guarantee would be subject to
the prior payment of all liabilities of such Guarantor. There can be no
assurance that, after providing for all prior claims, there would be sufficient
assets to satisfy the claims of the holders of the Exchange Notes relating to
any avoided portions of any of the Guarantees.
The measure of insolvency for purposes of the foregoing considerations
will vary depending upon the law applied in any such proceeding. Generally,
however, a Guarantor may be considered insolvent if the sum of its debts,
including contingent liabilities, was greater than the fair marketable value of
all of its assets at a fair valuation or if the present fair marketable value
of its assets was less than the amount that would be required to pay its
probable liability on its existing debts, including contingent liabilities, as
they become absolute and mature.
Based upon financial and other information, the Company believes that
any Guarantee will be incurred for proper purposes and in good faith and that
the Company is solvent, will have sufficient capital for carrying on its
business and will be able to pay its debts as they mature. There can be no
assurance, however, that a court passing on such standards would agree with the
Company. See "Description of the Notes - Guarantee."
INCREASE IN SCOPE OF OPERATIONS
The Company believes that the completion of several acquisitions
during 1996, including the merger (the "Merger") of Alexander Energy
Corporation with and into National Energy Group of Oklahoma, Inc. ("NEG-OK")
and the subsequent merger (the "Subsequent Merger") of NEG-OK with and into the
Company, offer opportunities for long-term efficiencies in operations that
should positively affect future operating results of the Company. However, the
increased scope of operations will continue to present challenges to the
Company due to the increased time and resources required in the management
effort. Management and the Board of Directors of the Company believe that the
combinations will continue to be effected in a manner that will achieve the
maximum value to the Company's stockholders. However, although a majority of
the members of management and the Board of Directors individually have had
experience in combinations of this size, the Company has not. Accordingly,
there can be no assurance that the operations of the merged companies can be
effectively managed to realize the operational efficiencies anticipated to
result from the Merger and the Subsequent Merger. In addition, the continued
growth and expansion of the Company will depend, among other factors, on the
Company's ability to recruit and retain skilled and experienced management and
technical personnel. There can be no assurance that the Company will be
successful in such efforts.
CONTROL BY CERTAIN EQUITY STOCKHOLDERS IN THE CASE OF INSOLVENCY AND CERTAIN
OTHER EVENTS
As the holder of the Convertible Preferred Stock, Series D, of the
Company (the "Series D Preferred Stock"), High River Limited Partnership ("High
River") and its affiliates, Riverdale Investors Corp., Inc. and Carl C. Icahn,
will have certain rights if certain events occur that may indicate that the
Company is insolvent or is financially distressed. The member of the Board of
Directors appointed by the holders of the Series D Preferred Stock has the
right to veto any voluntary bankruptcy filing by the Company. The holders of
the Series D Preferred
16
<PAGE> 18
Stock also have the right to choose to elect one-half of the members of the
Board of Directors plus one member if certain events occur indicating
insolvency of the Company, such as an involuntary bankruptcy filing or a
default on indebtedness of the Company in excess of $10 million, which is not
cured within certain time periods of less than 30 days, including any such
event with respect to the Exchange Notes.
The owners of the 10% Cumulative Convertible Preferred Stock, Series
B, of the Company (the "Series B Preferred Stock") and the 10.5% Cumulative
Convertible Preferred Stock, Series C, of the Company (the "Series C Preferred
Stock") each have the right to elect one-third of the Board of Directors if,
with respect to four dividend payments for that series, the Company does not
pay dividends or pays the dividends in shares of Series B Preferred Stock or
Series C Preferred Stock, as the case may be. If the holders of the Series B
Preferred Stock and Series C Preferred Stock are each entitled to exercise this
right, the holders of Series C Preferred Stock may not exercise their rights
until the rights of the holders of the Series B Preferred Stock terminate. One
payment on the Series B Preferred Stock has been paid in shares of Series B
Preferred Stock.
The holders of the Convertible Preferred Stock, Series E (the "Series
E Preferred Stock") of the Company have the same voting rights as holders of
the Company's common stock with respect to the election of the Board of
Directors.
If the Company experiences financial difficulties for a prolonged
period of time so that all of these voting rights are triggered and exercised,
the holders of the Series B Preferred Stock, the Series C Preferred Stock, the
Series D Preferred Stock and the Series E Preferred Stock (collectively the
"Preferred Stock"), will have the right to elect at least 83% of the Board of
Directors.
FINANCIAL REPORTING IMPACT OF FULL COST METHOD OF ACCOUNTING
The Company follows the full cost method of accounting for 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 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 non-cash expense. As
a result of allocating additional cost, under the purchase method of
accounting, to the oil and natural gas properties in connection with the
Merger, the Company recognized a non-cash writedown of its oil and natural gas
properties of approximately $28.3 million, net of deferred taxes. The amount of
the actual writedown was charged to expense in the third quarter of 1996, the
period in which the Merger was consummated. At June 30, 1997, the Company was
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 further
decrease in oil and natural gas prices could result in additional writedowns.
VOLATILITY OF OIL AND NATURAL GAS PRICES AND MARKETS
The Company's profitability will be substantially dependent on
prevailing prices for oil and natural gas. The amounts of and prices obtainable
for the Company's oil and natural gas production will be affected by market
factors beyond the Company's control. Such factors include the extent of
domestic production, the level of imports of foreign oil and natural 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 natural gas industry. Prices for oil and natural
gas are subject to wide fluctuation in response to relatively minor changes in
supply of and demand for oil and natural gas, market uncertainty and a variety
of additional factors that are beyond the control of the Company. A substantial
and prolonged decline in oil and natural gas prices could have a material
adverse effect upon the Company, including the inability of the Company to fund
planned operations and capital expenditures, writedowns of the carrying value
of its oil and natural gas properties, and the Company's inability to meet debt
service requirements resulting in defaults under the Revised Credit Facility,
the Series A/B Indenture and the Indenture, as well as defaults in the
17
<PAGE> 19
payment of dividends on the Preferred Stock. In addition, the marketability of
the Company's production will depend in part upon the availability, proximity
and capacity of gathering systems, pipelines and processing facilities.
UNCERTAINTY OF ESTIMATES OF RESERVES AND FUTURE NET REVENUES; SIGNIFICANT
UNDEVELOPED RESERVES
There are numerous uncertainties inherent in estimating quantities of
proved reserves, including many factors beyond the control of the Company. The
reserve information set forth or incorporated by reference in this Prospectus
represents estimates based on reports prepared by the Company's independent
petroleum engineers, as well as internally generated reports. Petroleum
engineering is not an exact science. Information relating to the Company's
proved oil and natural gas reserves is based upon engineering estimates.
Estimates of economically recoverable oil and natural 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 natural gas
prices, future operating costs, severance and excise taxes, capital
expenditures and workover and remedial costs, all of which may vary
considerably from actual results. For these reasons, estimates of the
economically recoverable quantities of oil and natural 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 the Company's reserves will likely vary from estimates, and such variances
may be material. Approximately one-half of the Company's estimated proved
reserves are classified as undeveloped. Either inaccuracies in estimates of
proved undeveloped reserves or the inability to fund development could result
in substantially reduced reserves. In addition, the timing of receipt of
estimated future net revenues from proved undeveloped reserves will be
dependent upon the timing and implementation of drilling and development
activities estimated by the Company for purposes of the reserve report.
EXPLORATION AND DEVELOPMENT RISKS; LIMITED EXPLORATION HISTORY
Exploration and development of oil and natural gas properties 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. The
Company'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. The
Company has had limited experience in exploratory prospect generation and
drilling. The Company intends to engage consultants or contract operators with
experience in the particular areas targeted for exploration by the Company. The
Company has entered into the Sandefer Exploration Venture for such purpose in
the Louisiana, Mississippi and Texas Gulf Coast region.
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, natural gas or well fluids, pollution
and other physical and environmental risks are inherent in oil and natural gas
exploration and production. These hazards could result in substantial losses to
the Company 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. The Company carries insurance which it believes is in accordance
with customary industry practices, but, as is common in the oil and natural gas
industry, the Company 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.
18
<PAGE> 20
REPLACEMENT OF RESERVES
The Company's success will be largely dependent on its ability to
replace and expand its oil and natural gas reserves through the acquisition of
producing properties and the exploration for and development of oil and natural
gas reserves, both of which involve substantial risks. Without successful
acquisition or drilling ventures, the Company will be unable to replace the
reserves being depleted by production, and its assets and revenues, including
the reserves, will decline. There can be no assurance that the Company's
acquisition and exploration and development activities will result in the
replacement of, or additions to, the Company's reserves. Similarly, there can
be no assurance that the Company 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 natural 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.
GOVERNMENTAL REGULATION
The Company'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
natural gas and the release of materials into the environment or otherwise
relating to protection of the environment. In particular, the Company's oil and
natural 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
natural gas wells and other related facilities.
The Company has expended significant resources, both financial and
managerial, to comply with environmental regulations and permitting
requirements and anticipates that it will continue to do so in the future.
Although the Company believes that its operations are in general compliance
with all such existing laws and regulations, including applicable environmental
laws and regulations, risks of substantial costs and liabilities are inherent
in oil and natural 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 the Company's operations, could result in substantial costs and
liabilities in the future.
COMPETITION
The oil and natural gas industry is highly competitive. The Company
will compete in acquisitions and the development, production and marketing of
oil and natural gas with major oil companies, other independent oil and natural
gas concerns, and individual producers and operators. Many of these competitors
have substantially greater financial and other resources than the Company.
Furthermore, the oil and natural gas industry competes with other industries in
supplying the energy and fuel needs of industrial, commercial and other
consumers.
19
<PAGE> 21
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the Company's ratio of earnings to
fixed charges or the deficiency of earnings to fixed charges for each of the
five year in the period ended December 31, 1996 and for the six month periods
ended June 30, 1996 and 1997 (in thousands, except ratios):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
Pro Forma
---------
1992 1993 1994 1995 1996 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Ratios of
earnings to
fixed
charges(1)(2) --- --- --- 1.2x --- ---
Deficiency of
earnings to
fixed charges(1)(2)(3) $ (221) $ (299) $ (489) --- $(40,061) $ (6,711)
<CAPTION>
Six Months Ended June 30,
-----------------------------------
Pro Forma
---------
1996 1997 1997
---- ---- ----
<S> <C> <C> <C>
Ratios of
earnings to
fixed
charges(1)(2) 1.9x 1.5x ---
Deficiency of
earnings to
fixed charges(1)(2)(3) --- --- $ (474)
</TABLE>
- ------------------
(1) For the purpose of calculating the ratio of earnings to fixed charges or
the deficiency of earnings to fixed charges, fixed charges consist of interest
expense, capitalized interest, the interest component of rental expense and the
amortization of debt discount and financing costs. Earnings consist of income
before extraordinary items and income taxes plus fixed charges, excluding
capitalized interest.
(2) The pro forma ratio of earnings to fixed charges, or the deficiency of
earnings to fixed charges, has been prepared as if the Merger, the Series A
Initial Offering and the Initial Offering and the application of the proceeds
therefrom, had been consummated on January 1, 1996. The Exchange Offer has no
effect on the pro forma computations.
(3) The historical deficiency of earnings to fixed charges for the year ended
December 31, 1996 included a non-cash writedown of approximately $43 million
(before tax benefits of approximately $15 million) of the Company's oil and gas
properties, in accordance with the full cost method of accounting, which was
charged to expense in the third quarter of 1996, the period in which the Merger
was consummated.
RECENT DEVELOPMENTS
Subsequent to the date of the Company's proxy statement, Kayne,
Anderson Non-Traditional Investment, L.P. and investment partnership and
accounts managed by it ("Kayne Anderson") converted 13,813 shares of Series B
Preferred Stock, 17,000 shares of Series C Preferred Stock and 38,000 shares of
Series E Preferred Stock into an aggregate of 2.1 million shares of Common
Stock. On October 21, 1997 Kayne Anderson sold 3,388,915 shares of Common Stock
resulting in a reduction of its direct and beneficial ownership of Common Stock
of the Company on a fully diluted basis (assuming conversion of all of its
Preferred Stock and warrants to purchase Common Stock) to 4,414,068 shares or
11% of the Company's Common Stock. Currently outstanding are 38,187 shares of
Series B Preferred Stock convertible into 2,226,892 shares of Common Stock,
23,000 shares of Series C Preferred Stock convertible into 1,150,000 shares of
Common Stock and 12,000 shares of Series E Preferred Stock convertible into
533,333 shares of Common Stock.
On September 16, 1997 Robert A. West resigned as a director of the
Company.
20
<PAGE> 22
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Outstanding Notes were sold by the Company on August 21, 1997, to
the Initial Purchasers pursuant to the Purchase Agreement. The Initial
Purchasers subsequently placed the Outstanding Notes with qualified
institutional buyers in reliance on Rule 144A under the Securities Act. As a
condition of the purchase of the Outstanding Notes by the Initial Purchasers,
the Company entered into the Registration Rights Agreement with the Initial
Purchasers, which requires, among other things, that the Company file with the
Commission a registration statement under the Securities Act with respect to an
offer by the Company to the holders of the Outstanding Notes to issue and
deliver to such holders, in exchange for Outstanding Notes, a like principal
amount of Exchange Notes. The Company is required to use its best efforts to
cause the Registration Statement relating to the Exchange Offer to be declared
effective by the Commission under the Securities Act and commence the Exchange
Offer. The Exchange Notes are to be issued without a restrictive legend and may
be reoffered and resold by the holder without restrictions or limitations under
the Securities Act (other than any such holder that is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act). A copy of the
Registration Rights Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
On November 1, 1996 the Company sold Series A Notes to the Series A
Initial Purchasers. The Series A Initial Purchasers subsequently placed the
Series A Notes with qualified institutional buyers in reliance on Rule 144A
under the Securities Act. As a condition to the purchase of the Series A Notes
by the Series A Initial Purchasers, the Company entered into a Registration
Rights Agreement with the Series A Initial Purchasers which required the
Company to file with the Commission a Registration Statement of the Securities
Act with respect to an offer by the Company to the holders of the Series A
Notes to issue and deliver to such holders, in exchange for the Series A Notes,
a like principal amount of Series B Notes. In January, 1997 the Company filed a
Registration Statement with respect to the Series B Notes and all Series A
Notes were exchanged for registered Series B Notes in an exchange offer
pursuant thereto. The Series B Notes are identical in all material respects to
the Exchange Notes. The Company is including the Series B Notes in the Exchange
Offer (to combine both series of notes in order to enhance the liquidity of the
Exchange Notes.
The term "Holder" with respect to the Exchange Offer means any person
in whose name the Outstanding Notes or the Series B Notes are registered on the
books of the Company or any other person who has obtained a properly completed
bond power from the registered holder.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this
Prospectus and in the Letter of Transmittal, the Company will accept any and
all Outstanding Notes and any and all Series B Notes validly tendered and not
withdrawn prior to 5:00 p.m., E.S.T. on the business day prior to the
Expiration Date. On the Exchange Date, the Company will issue $1,000 principal
amount of Exchange Notes in exchange for $1,000 principal amount of Outstanding
Notes or Series B Notes, as the case may be, accepted in the Exchange Offer.
Holders may tender some or all of their Outstanding Notes and/or Series B Notes
pursuant to the Exchange Offer. However, Outstanding Notes and/or Series B
Notes may be tendered only in integral multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and
terms of the Outstanding Notes except that (i) the Exchange Notes have been
registered under the Securities Act and hence will not bear legends restricting
the transfer thereof and (ii) the holders of the Exchange Notes will not be
entitled to certain rights under the Registration Rights Agreement. The form
and terms of the Exchange Notes are substantially the same as the form and
terms of the Series B Notes. The Exchange Notes will evidence the same debt as
the Outstanding Notes, in addition to the debt evidenced by the Series B Notes,
and will be entitled the benefits of the Indenture.
As of the date of this Prospectus, $65,000,000 aggregate principal
amount of the Outstanding Notes and $100,000,000 aggregate principal amount of
the Series B Notes was outstanding and registered in the name of Cede
21
<PAGE> 23
& Co., as nominee for the Depository Trust Company. The Company has fixed the
close of business of October 20, 1997, as the record date for the Exchange
Offer for purposes of determining the persons to whom this Prospectus and the
Letter of Transmittal will be mailed initially.
Holders of Outstanding Notes and Series B Notes do not have any
appraisal or dissenters' rights under the General Corporation Law of Delaware,
the Indenture or the Series A/B Indenture in connection with the Exchange
Offer. The Company intends to conduct the Exchange Offer in accordance with the
applicable requirements of the Exchange Act and the rules and regulations of
the Commission thereunder, including Rule 14e-1 thereunder.
The Company shall be deemed to have accepted validly tendered
Outstanding Notes and/or Series B Notes when, as and if the Company has given
oral or written notice thereof to the Exchange Agent. The Exchange Agent will
act as agent for the tendering Holders for the purpose of receiving the
Exchange Notes from the Company.
If any tendered Outstanding Notes and/or Series B Notes are not
accepted for exchange because of an invalid tender, the occurrence of certain
other events set forth herein or otherwise, the certificates for any such
unaccepted Outstanding Notes and/or Series B Notes will be returned, without
expense, to the tendering Holder thereof as promptly as practicable after the
Expiration Date.
Holders who tender Outstanding Notes and/or Series B Notes in the
Exchange Offer will not be required to pay brokerage commissions or fees or,
subject to the instructions in the Letter of Transmittal, transfer taxes with
respect to the exchange of Outstanding Notes and/or Series B Notes pursuant to
the Exchange Offer. The Company will pay all charges and expenses, other than
transfer taxes in certain circumstances, in connection with the Exchange Offer.
See "--Fees and Expenses."
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest from the date of issuance of the
Exchange Notes. Outstanding Notes and Series B Notes that are accepted for
exchange will cease to accrue interest upon the issuance of the Exchange Notes.
Interest on the Outstanding Notes or Series B Notes that are tendered in
exchange for the Exchange Notes that has accrued from the most recent
Interest Payment Date to which interest on the Outstanding Notes or the
Series B Notes, as the case may be, has been paid through the Exchange Date
will be payable on or before May 1, 1998.
PROCEDURES FOR TENDERING
Only a Holder of Outstanding Notes and/or Series B Notes may tender
such Outstanding Notes and/or Series B Notes in the Exchange Offer. To tender
in the Exchange Offer, a Holder must complete, sign and date the Letter of
Transmittal, or a facsimile thereof, have the signatures thereon guaranteed if
required by the Letter of Transmittal and mail or otherwise deliver such Letter
of Transmittal or such facsimile, together with the Outstanding Notes and/or
Series B Notes and any other required documents, to the Exchange Agent prior to
5:00 p.m., E.S.T., on the Expiration Date. The Company is not asking any Holder
for a proxy, and no Holder is requested to send the Company a proxy. To be
tendered effectively, the Outstanding Notes and/or Series B Notes, Letter of
Transmittal and other required documents must be received by the Exchange Agent
at the address set forth below under "Exchange Agent" prior to 5:00 p.m.,
E.S.T., on the Expiration Date. Delivery of the Outstanding Notes and/or Series
B Notes may be made by book-entry transfer in accordance with the procedures
described below. Confirmation of such book-entry transfer must be received by
the Exchange Agent prior to the Expiration Date.
By executing the Letter of Transmittal, each Holder will make to the
Company the representations set forth below in the second paragraph under the
heading "--Resale of Exchange Notes."
The tender by a Holder and the acceptance thereof by the Company will
constitute agreement between such Holder and the Company in accordance with the
terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
22
<PAGE> 24
THE METHOD OF DELIVERY OF OUTSTANDING NOTES AND THE LETTER OF
TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE
ELECTION AND RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED
THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OUTSTANDING NOTES
SHOULD BE SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS,
DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE
TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Outstanding Notes and/or Series B Notes are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender should contact the registered Holder
promptly and instruct such registered Holder to tender on such beneficial
owner's behalf.
Signatures on the Letter of Transmittal or a notice of withdrawal, as
the case may be, must be guaranteed by an Eligible Institution (as defined
below) unless the Outstanding Notes or the Series B Notes, as the case may be,
tendered pursuant thereto are tendered (i) by a registered Holder who has not
completed the box entitled "Special Delivery Instructions" on the Letter of
Transmittal or (ii) for the account of an Eligible Institution. In the event
that signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, are required to be guaranteed, such guarantee must be by a member
firm of a registered national securities exchange or of the National
Association of Securities Dealers, Inc., a commercial bank or trust company
having an office or correspondent in the United States or an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange
Act (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered Holder of any Outstanding Notes and/or Series B Notes listed
therein, such Outstanding Notes and/or Series B Notes must be endorsed or
accompanied by a properly completed bond power, signed by such registered
Holder as such registered Holder's name appears on such Outstanding Notes
and/or Series B Notes with the signature thereon guaranteed by an Eligible
Institution.
If the Letter of Transmittal or any Outstanding Notes and/or Series B
Notes or bond powers are signed by trustees, executors, administrators,
guardians, attorneys-in-fact, officers of corporations or others acting in a
fiduciary or representative capacity, such persons should so indicate when
signing, and unless waived by the Company, evidence satisfactory to the Company
of their authority to so act must be submitted with the Letter of Transmittal.
The Company understands that the Exchange Agent will make a request
promptly after the date of this Prospectus to establish accounts with respect
to the Exchange Notes at DTC (the "Book-Entry Transfer Facility") for the
purpose of facilitating the Exchange Offer, and subject to the establishment
thereof, any financial institution that is a participant in the Book-Entry
Transfer Facility's system may make book-entry delivery of the Outstanding
Notes by causing such Book-Entry Transfer Facility to transfer such Outstanding
Notes and/or Series B Notes into the Exchange Agent's account with respect to
the Outstanding Notes and/or Series B Notes in accordance with the Book-Entry
Transfer Facility's procedures for such transfer. Although delivery of the
Outstanding Notes and/or Series B Notes may be effected through book-entry
transfer into the Exchange Agent's account at the Book-Entry Transfer Facility,
an appropriate Letter of Transmittal properly completed and duly executed with
any required signature guarantee and all other required documents must in each
case be transmitted to and received or confirmed by the Exchange Agent at its
address set forth below on or prior to the Expiration Date, or, if the
guaranteed delivery procedures described below are complied with, within the
time period provided under such procedures; provided, however, that a
participant in DTC's book-entry system may, in accordance with DTC's Automated
Tender Offer Program procedures and in lieu of physical delivery to the
Exchange Agent of a Letter of Transmittal, electronically acknowledge its
receipt of, and agreement to be bound by, the terms of the Letter of
Transmittal. Delivery of documents to the Book-Entry Transfer Facility does not
constitute delivery to the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Outstanding Notes and/or Series
B Notes will be determined by the Company in its sole discretion, which
23
<PAGE> 25
determination will be final and binding. The Company reserves the absolute
right to reject any and all Outstanding Notes and/or Series B Notes not
properly tendered or any Outstanding Notes and/or Series B Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Outstanding Notes
and/or Series B Notes. The Company's interpretation of the terms and conditions
of the Exchange Offer (including the instructions in the Letter of Transmittal)
will be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Outstanding Notes and/or Series B
Notes must be cured within such time as the Company shall determine. Although
the Company intends to notify Holders of defects or irregularities with respect
to tenders of Outstanding Notes and/or Series B Notes, neither the Company, the
Exchange Agent nor any other person shall incur any liability for failure to
give such notification. Tenders of Outstanding Notes and/or Series B Notes will
not be deemed to have been made until such defects or irregularities have been
cured or waived. Any Outstanding Notes and/or Series B Notes received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering Holders, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Outstanding Notes and/or Series B
Notes and (i) whose Outstanding Notes and/or Series B Notes are not immediately
available, (ii) who cannot deliver their Outstanding Notes and/or Series B
Notes, the Letter of Transmittal or any other required documents to the
Exchange Agent or (iii) who cannot complete the procedures for book-entry
transfer, prior to the Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives
from such Eligible Institution a properly completed and duly executed
Notice of-Guaranteed Delivery (by facsimile transmission, mail or hand
delivery) setting forth the name and address of the Holder, the
certificate number(s) of such Outstanding Notes and/or Series B Notes
and the principal amount of Outstanding Notes and/or Series B Notes
tendered, stating that the tender is being made thereby and
guaranteeing that, within five Nasdaq Stock Market trading days after
the Expiration Date, the Letter of Transmittal (or facsimile thereof),
together with the certificate(s) representing the Outstanding Notes
(or a confirmation of book-entry transfer of such Outstanding Notes
into the Exchange Agent's account at the Book-Entry Transfer Facility)
and any other documents required by the Letter of Transmittal, will be
deposited by the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of
Transmittal (or facsimile thereof), as well as the certificate(s)
representing all tendered Outstanding Notes and/or Series B Notes in
proper form for transfer (or a confirmation of book-entry transfer of
such Outstanding Notes and/or Series B Notes into the Exchange Agent's
account at the Book-Entry Transfer Facility) and all other documents
required by the Letter of Transmittal, are received by the Exchange
Agent within five Nasdaq Stock Market trading days after the
Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery
will be sent to Holders who wish to tender their Outstanding Notes and/or
Series B Notes according to the guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Outstanding Notes
and/or Series B Notes may be withdrawn at any time prior to 5:00 p.m., E.S.T.,
on the business day prior to the Expiration Date.
To withdraw a tender of Outstanding Notes and/or Series B Notes in the
Exchange Offer, a written or facsimile transmission notice of withdrawal must
be received by the Exchange Agent at its address set forth herein
24
<PAGE> 26
prior to 5:00 p.m., E.S.T., on the business day prior to the Expiration Date.
Any such notice of withdrawal must (i) specify the name of the person having
deposited the Outstanding Notes and/or Series B Notes to be withdrawn (the
"Depositor"), (ii) identify the Outstanding Notes and/or Series B Notes to be
withdrawn (including the certificate number(s) and principal amount of such
Outstanding Notes and/or Series B Notes, or, in the case of Outstanding Notes
and/or Series B Notes transferred by book-entry transfer, the name and number
of the account at the Book-Entry Transfer Facility to be credited), (iii) be
signed by the Holder in the same manner as the original signature on the Letter
of Transmittal by which such Outstanding Notes and/or Series B Notes were
tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee with respect to the
Outstanding Notes register the transfer of such Outstanding Notes and/or Series
B Notes into the name of the person withdrawing the tender, (iv) specify the
name in which any such Outstanding Notes and/or Series B Notes are to be
registered, if different from that of the Depositor and (v) if applicable
because the Outstanding Notes and/or Series B Notes have been tendered pursuant
to book-entry procedures, specify the name and number of the participant's
account at DTC to be credited, if different from that of the Depositor. All
questions as to the validity, form and eligibility (including time of receipt)
of such notices will be determined by the Company, whose determination shall be
final and binding on all parties. Any Outstanding Notes and/or Series B Notes
so withdrawn will be deemed not to have been validly tendered for purposes of
the Exchange Offer and no Exchange Notes will be issued with respect thereto
unless the Outstanding Notes and/or Series B Notes so withdrawn are validly
retendered. Any Outstanding Notes and/or Series B Notes which have been
tendered but which are not accepted for exchange, will be returned to the
Holder thereof without cost to such Holder as soon as practicable after
withdrawal, rejection of tender or termination of the Exchange Offer. Properly
withdrawn Outstanding Notes and/or Series B Notes may be retendered by
following one of the procedures described above under "Procedures for
Tendering" at any time prior to the Expiration Date.
EXCHANGE AGENT
Bank One, N.A. has been appointed as Exchange Agent for the Exchange
Offer. Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal and requests for Notice of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
<TABLE>
<CAPTION>
By Registered or Certified Mail: By Overnight Mail or Hand: By Facsimile.:
<S> <C> <C>
Bank One, N.A. Bank One, N.A. Bank One, N.A.
Corporate Trust Operations Corporate Trust Operations Attn: Lora Marsch
235 West Schrock Road 235 West Shrock Road Facsimile No. (614) 248-7234
Columbus, Ohio 43271-0184 Westerville, Ohio 43081 Confirm by Telephone No. (614) 248-4856
</TABLE>
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will
be borne by the Company. The principal solicitation is being made by mail;
however, additional solicitation may be made by telegraph, telephone, facsimile
or in person by officers and regular employees of the Company and its
affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers or others soliciting
acceptances of the Exchange Offer. The Company, however, will pay the Exchange
Agent reasonable and customary fees for its services and registration expenses,
including fees and expenses of the Trustee, filing fees, blue sky fees and
printing and distribution expenses.
The Company will pay all transfer taxes, if any, applicable to the
exchange of the Outstanding Notes pursuant to the Exchange Offer. If, however,
certificates representing the Exchange Notes or the Outstanding Notes for the
principal amounts not tendered or accepted for exchange are to be delivered to,
or are to be issued in the name of, any person other than the person signing
the Letter of Transmittal, or if a transfer tax is imposed for any reason other
than the exchange of the Outstanding Notes and/or Series B Notes pursuant to
the Exchange Offer, then the amount of any such transfer taxes (whether imposed
on the registered Holder or any other person) will be payable by the tendering
Holder.
25
<PAGE> 27
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Outstanding Notes and/or Series B Notes, which is face value, as reflected in
the Company's accounting records on the date of exchange. Accordingly, no gain
or loss for accounting purposes will be recognized. The expenses of the
Exchange Offer will be amortized over the term of the Exchange Notes.
RESALE OF EXCHANGE NOTES
Based on an interpretation by the staff of the Commission set forth in
no-action letters issued to third parties, the Company believes that Exchange
Notes issued pursuant to the Exchange Offer in exchange for Outstanding Notes
may be offered for resale, resold and otherwise transferred by any holder of
such Exchange Notes (other than any such holder which is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such Exchange Notes are acquired in the ordinary
course of such holder's business and such holder does not intend to participate
and has no arrangement or understanding with any person to participate in the
distribution of such Exchange Notes. Any holder who tenders in the Exchange
Offer with the intention to participate, or for the purpose of participating,
in a distribution of the Exchange Notes may not rely on the position of the
staff of the Commission enunciated in Exxon Capital Holdings Corporation and
Morgan Stanley & Co., Incorporated, or similar no-action letters, but rather
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. In addition, any such
resale transaction should be covered by an effective registration statement
containing the selling security holders information required by Item 507 of
Regulation S-K of the Securities Act. Each broker-dealer that receives Exchange
Notes for its own account in exchange for Outstanding Notes, where such
Outstanding Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange Notes.
See "Plan of Distribution."
By tendering in the Exchange Offer, each Holder will represent to the
Company that, among other things, (i) the Exchange Notes acquired pursuant to
the Exchange Offer are being obtained in the ordinary course of business of the
person receiving such Exchange Notes, whether or not such person is a Holder,
(ii) neither the Holder nor any such other person has an arrangement or
understanding with any person to participate in the distribution of such
Exchange Notes and (iii) the Holder and such other person acknowledge that if
they participate in the Exchange Offer for the purpose of distributing the
Exchange Notes (a) they must, in the absence of an exemption therefrom, comply
with the registration and prospectus delivery requirements of the Securities
Act in connection with any resale of the Exchange Notes and cannot rely on the
no-action letters referenced above and (b) failure to comply with such
requirements in such instance could result in such Holder incurring liability
under the Securities Act for which such Holder is not indemnified by the
Company. Further, by tendering in the Exchange Offer, each Holder that may be
deemed an "affiliate" (as defined under Rule 405 of the Securities Act) of the
Company will represent to the Company that such Holder understands and
acknowledges that the Exchange Notes may not be offered for resale, resold or
otherwise transferred by that Holder without registration under the Securities
Act or an exemption therefrom.
As set forth above, affiliates of the Company are not entitled to rely
on the foregoing interpretations of the staff of the Commission with respect to
resales of the Exchange Notes without compliance with the registration and
prospectus delivery requirements of the Securities Act.
SHELF REGISTRATION STATEMENT
If the Company is not permitted to consummate the Exchange Offer
because the Exchange Offer is not permitted by any applicable law or applicable
interpretation of the Commission or the staff of the Commission, the Company
has agreed to file with the Commission and use its best efforts to have
declared effective and keep continuously effective for up to three years a
registration statement that would allow resales of Outstanding Notes owned by
such holders.
26
<PAGE> 28
OTHER
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Outstanding Notes and/or
Series B Notes are urged to consult their financial and tax advisors in making
their own decision on what action to take.
The Company may in the future seek to acquire untendered Outstanding
Notes and/or Series B Notes in open market or privately negotiated
transactions, through subsequent exchange offers or otherwise. The Company,
however, has no present plans to acquire any Outstanding Notes and/or Series B
Notes that are not tendered in the Exchange Offer or to file a registration
statement to permit resales of any untendered Outstanding Notes.
USE OF PROCEEDS
This Exchange Offer is intended to satisfy certain of the Company's
obligations under the Purchase Agreement and the Registration Rights Agreement
with respect to the Outstanding Notes. The Company will not receive any cash
proceeds from the issuance of the Exchange Notes offered hereby. In
consideration for issuing the Exchange Notes contemplated in this Prospectus,
the Company will receive Outstanding Notes or Series B Notes, as the case may
be, in like principal amount, the form and terms of which are substantially
similar to the form and terms of the Exchange Notes, except as otherwise
described herein. The Outstanding Notes and the Series B Notes surrendered in
exchange for Exchange Notes will be retired and canceled and cannot be
reissued. Accordingly, issuance of the Exchange Notes will not result in any
increase or decrease in the indebtedness of the Company.
DESCRIPTION OF CERTAIN INDEBTEDNESS
The following summaries of the Revised Credit Facility, the Series A/B
Indenture and the Indenture do not purport to be complete and are subject to,
and qualified in their entirety by reference to, the applicable agreements.
REVISED CREDIT FACILITY
The Company has a revolving credit agreement (the "Revised Credit
Facility") with Bank One, Texas, N.A., as Bank and Administrative Agent, and
Credit Lyonnais New York Branch, as Bank and Syndication Agent (collectively,
the "Banks"). The current borrowing base under the Revised Credit Facility, as
amended on August 21, 1997, is $20 million. Borrowings under the Revised Credit
Facility are to be used for development drilling expenditures and acquisition
of producing oil and gas properties. The borrowing base will be redetermined at
least semiannually and may require mandated monthly principal reductions by an
amount determined by the Banks from time to time. The principal is due at
maturity, August 29, 2000. Interest is payable monthly and is calculated at the
Bank One Base Rate, as determined from time to time by Bank One (which
increases by .25% if the outstanding loan balance is greater than 75% of the
borrowing base). The Company may elect to calculate interest under the
EuroDollar Rate (as defined in the Revised Credit Facility) which increases by
(i) 0.50% if the outstanding loan balance is greater than 75% of the borrowing
base, and (ii) .25% plus 1.75% if the outstanding loan balance is greater than
50% but less than 75% of the borrowing base. At June 30, 1997, the Company had
approximately $33 million of outstanding indebtedness under the Revised Credit
Facility of which $10 million was repaid on July 3, 1997 and the remaining $23
million was repaid with the proceeds of the Initial offering on August ___,
1997.
The Company is required to pay a commitment fee on the unused portion
of the borrowing base equal to 1% per annum under the Revised Credit Facility.
The Company granted to the Banks liens on substantially all of the
Company's oil and natural gas properties, whether currently owned or hereafter
acquired, and a negative pledge on all other oil
27
<PAGE> 29
and natural gas properties. The Revised Credit Facility requires, among other
things, semiannual engineering reports covering oil and natural gas properties,
and maintenance of certain financial ratios, including the maintenance of a
minimum interest coverage, a current ratio and a minimum tangible net worth.
The Revised Credit Facility includes other covenants prohibiting cash
dividends, distributions, loans or advances to third parties, except that cash
dividends on Preferred Stock will be allowed so long as no event of default
exists or would exist as a result of the payment thereof. In addition, if the
Company is required to purchase or redeem any portion of the Notes, or if any
portion of the Notes becomes due, the borrowing base is automatically reduced
to zero, provided that certain redemptions of the Notes related to the sale of
assets or a change in control will result in only a proportionate reduction in
the borrowing base. At [JUNE 30,] 1997, the Company was not in violation of any
covenants of the Revised Credit Facility, as amended.
SERIES A/B NOTES
In November 1996, the Company issued $100 million aggregate principal
amount of unregistered 10 3/4% Senior Notes due 2006, which were exchanged for
the registered 10 3/4% Senior Notes due 2006 in an exchange offering commenced
in January 1997 (the "Series A/B Notes"). The terms of the Notes are
substantially identical to the terms of the Series A/B Notes. The Company is a
party to an Indenture (the "Series A/B Indenture") dated as of November 1, 1996
with Bank One, Columbus N.A. as trustee, governing the Series A/B Notes. The
Series A/B Indenture is substantially similar to the Indenture. See
"Description of the Exchange Notes."
DESCRIPTION OF THE EXCHANGE NOTES
The Outstanding Notes were and the Exchange Notes will be issued
pursuant to the Indenture dated as of August 21, 1997 between the Company and
Bank One, N.A., as trustee (the "Trustee"). The terms of the Exchange Notes are
identical in all material respects to the Outstanding Notes, except the
Exchange Notes have been registered under the Securities Act, and therefore,
will not bear legends restricting their transfer. The following summaries of
certain provisions of the Exchange Notes and the Indenture do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, the Exchange Notes and the Indenture. Capitalized terms used herein but not
otherwise defined shall have the meaning assigned to them in the Indenture.
GENERAL
The aggregate principal amount of the Exchange Notes will be limited
to $165 million. Each Exchange Note will mature on November 1, 2006 and will
bear interest at an annual rate of 10 3/4% per annum from the date of issuance
of the Exchange Notes, payable semiannually in arrears on May 1 and November 1
of each year, commencing May 1, 1998, to the Person in whose name the
Exchange Note is registered at the close of business on April 15 or October 15
preceding such interest payment date. Interest will be computed on the basis of
a 360-day year of twelve 30-day months. Interest (i) on the Outstanding Notes
that has accrued from August 21, 1997, the date of issuance of the Outstanding
Notes (or the most recent Interest Payment Date to which interest has been
paid) and (ii) on the Series B Notes from the most recent date to which
interest on such notes has been paid, through the Exchange Date, will be paid
on May 1, 1998. Principal, premium, if any, and interest will be payable at
the offices of the Trustee and the Paying Agent, provided that, at the option
of the Company, payment of interest may be made by check mailed to the address
of the Person entitled thereto as it appears in the register of the Notes
maintained by the Registrar.
Under certain circumstances, the Company will be able to designate
existing or future Subsidiaries as Unrestricted Subsidiaries. Unrestricted
Subsidiaries will not be subject to most of the restrictive covenants set forth
in the Indenture.
Any Outstanding Notes that remain outstanding after the Expiration
Date of the Exchange Offer, together with the Exchange Notes issued in
connection with the Exchange Offer, will be treated as a single class of
securities under the Indenture.
28
<PAGE> 30
RANKING
The Indebtedness evidenced by the Notes will be general senior
unsecured obligations of the Company. The Notes rank pari passu with all
existing and future Senior Indebtedness of the Company and senior in right of
payment to all future subordinated indebtedness of the Company. Holders of
secured indebtedness of the Company and its subsidiaries, including the Revised
Credit Facility, will have claims with respect to assets constituting
collateral for such indebtedness that are prior to the claims of the Holders of
the Exchange Notes. To the extent of pledged collateral, such indebtedness will
have priority over the Notes. As of June 30, 1997, on a pro forma basis after
giving effect to the Initial Offering and the application of the proceeds
therefrom, the Company would have had no outstanding secured indebtedness that
effectively would rank senior to the Notes, $100 million of indebtedness under
the Series A/B Notes, which would rank pari passu with the Notes, and no other
indebtedness other than the Notes. There is currently no indebtedness of the
Company or any Restricted Subsidiaries which would constitute subordinated
indebtedness.
GUARANTEE
The Indenture provides that each Person that becomes a Restricted
Subsidiary on or after the Issue Date will jointly and severally guarantee the
payment of the Note obligations in the manner described herein. There is
currently no Restricted Subsidiary of the Company and no outstanding Guarantee
of the Notes. A Guarantor will guarantee to each Holder and the Trustee, the
full and prompt performance of the Note obligations of the Company, including
the payment of principal of (premium, if any, on) and interest on the Notes
pursuant to its Guarantee. The obligations of a Guarantor under its Guarantee
will be general senior unsecured obligations of the Guarantor, which will rank
pari passu with all existing and future Senior Indebtedness of the Guarantor
and senior in right of payment to all future Subordinated Indebtedness of the
Guarantor. To the extent a Guarantor pledges oil and gas collateral to secure
Senior Indebtedness of such Guarantor, such indebtedness effectively will have
priority over the Guarantee.
In the event the obligations of the Notes are guaranteed by a
Guarantor, the obligations of the Guarantor under its Guarantee will be limited
to the amount as will, after giving effect to all other contingent and fixed
liabilities of the Guarantor and after giving effect to any collections from or
payments made by or on behalf of any other Restricted Subsidiaries that become
Guarantors in respect of the obligations of such other Restricted Subsidiary
under its Guarantee or pursuant to its contribution obligations under the
Indenture, result in the obligations of the Guarantor under its Guarantee not
constituting a fraudulent conveyance or fraudulent transfer under federal,
state or foreign law. In the event of more than one Guarantor, a Guarantor that
makes a payment or distribution under a Guarantee shall be entitled to a
contribution from each other Restricted Subsidiary that has become a Guarantor
in a pro rata amount based on the Adjusted Net Assets of the Guarantor.
The Indenture provides that, subject to the following paragraph, any
future Restricted Subsidiary that becomes a Guarantor may not consolidate or
merge with or into (whether or not the Guarantor is the surviving Person)
another Person unless (i) the Person formed by or surviving any such
consolidation or merger (if other than the Guarantor) is a corporation
organized and existing under the laws of the United States of America, any
state thereof, or the District of Columbia and expressly assumes all the
obligations of the Guarantor pursuant to a supplemental indenture, in a form
reasonably satisfactory to the Trustee, under the Notes and the Indenture, (ii)
immediately before and after giving effect to such transaction, no Default or
Event of Default exists, (iii) the Guarantor or the Person formed by or
surviving any such consolidation or merger on a pro forma basis will have
Consolidated Net Worth (immediately after the transaction) equal to or greater
than the Consolidated Net Worth of such Guarantor immediately preceding the
transaction and (iv) the Company will at the time of such transaction after
giving pro forma effect thereto as if such transaction had occurred at the
beginning of the applicable Reference Period, be permitted to incur at least
$1.00 of additional Indebtedness as described in the first paragraph under
"Certain Covenants - Limitation on Incurrence of Additional Indebtedness." The
foregoing will not prohibit a merger between Guarantors or a merger between the
Company and any Guarantor.
The Indenture provides that in the event of a sale or other
disposition of all or substantially all of the assets of a Guarantor, by way of
merger, consolidation or otherwise, or a sale or other disposition of all of
the capital stock or other ownership interests of the Guarantor, then the
Guarantor (in the event of a sale or other disposition, by way
29
<PAGE> 31
of such a
merger, consolidation or otherwise, of all of the capital stock or other
ownership interests of the Guarantor) or the corporation acquiring the property
(in the event of a sale or other disposition of all or substantially all of the
assets of the Guarantor) will be released and relieved of any obligations under
its Guarantee; provided that the Net Cash Proceeds of such sale or other
disposition are applied in accordance with the provisions of the Indenture
described under "Certain Covenants - Limitation on Sale of Assets."
OPTIONAL REDEMPTION
At any time on or after November 1, 2001, the Company may, at its
option, redeem all or any portion of the Notes at the redemption prices
(expressed as percentages of the principal amount of the Notes) set forth
below, plus, in each case, accrued and unpaid interest thereon to the
applicable redemption date, if redeemed during the 12-month period beginning
November 1 of the years indicated below:
<TABLE>
<CAPTION>
Year Percentage
- ---- ----------
<C> <C>
2001....................................... 105.375%
2002....................................... 102.688%
2003 and thereafter........................ 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to November 1, 2001,
the Company may, at its option, redeem all or any portion of the Notes at the
Make-Whole Price plus accrued and unpaid interest to the date of redemption. In
addition, in the event the Company consummates one or more Equity Offerings on
or prior to November 1, 1999, the Company, at its option, may redeem up to 35%
of the aggregate principal amount of the Notes with all or a portion of the
aggregate net proceeds received by the Company from such Equity Offering or
Equity Offerings at a redemption price of 110.75% of the aggregate principal
amount of the Notes so redeemed, plus accrued and unpaid interest thereon to
the redemption date; provided, however, that following such redemption, at
least 65% of the aggregate principal amount of the Notes remains outstanding.
Except as set forth under "Change of Control" and "Certain Covenants -
Limitation on Sale of Assets," the Company is not required to make any
mandatory redemption or sinking fund payments with respect to the Notes.
If less than all of the Notes are to be redeemed at any time,
selection of Notes for redemption will be made by the Trustee on a pro rata
basis, by lot or by any other method that the Trustee considers fair and
appropriate and that complies with the requirements of any securities exchange
on which the Notes may be listed, provided that no Notes with a principal
amount of $1,000 or less will be redeemed in part. Notice of redemption will be
mailed by first class mail at least 30 but not more than 60 days before the
redemption date to each Holder of Notes to be redeemed at its registered
address. If any Note is to be redeemed in part only, the notice of redemption
that relates to such Note will state the portion of the principal amount
thereof to be redeemed. A new Note in a principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof
upon cancellation of the original Note. On and after the redemption date,
interest ceases to accrue on Notes or portions of them called for redemption.
CHANGE OF CONTROL
The Indenture provides that, following the occurrence of any Change of
Control, the Company will offer (a "Change of Control Offer") to repurchase all
outstanding Notes at a purchase price equal to 101% of the aggregate principal
amount of the Notes, plus accrued and unpaid interest to the date of
repurchase. The Change of Control Offer will be deemed to have commenced upon
mailing of a notice pursuant to the Indenture and will terminate 20 Business
Days after its commencement, unless a longer offering period is required by
law. Promptly after the termination of the Change of Control Offer, the Company
will repurchase and mail or deliver payment for all Notes tendered in response
to the Change of Control Offer.
On the Change of Control payment date, the Company will, to the extent
lawful, (i) accept for payment Notes or portions thereof tendered pursuant to
the Change of Control Offer, (ii) deposit with the Paying Agent an
30
<PAGE> 32
amount equal to the Change of Control payment in respect of all Notes or
portions thereof so tendered and (iii) deliver to the Trustee the Notes so
accepted together with an officers' certificate stating the amount of the Notes
or portions thereof tendered to the Company. The Paying Agent will promptly
mail to each Holder of Notes so accepted payment in an amount equal to the
repurchase price for such Notes, and the Trustee will promptly authenticate and
mail to each Holder a new Note equal in principal amount to any unpurchased
portion of the Notes surrendered, if any; provided, that each such new Note
will be in a principal amount of $1,000 or an integral multiple thereof.
Change of Control means the occurrence of any of the following: (i)
the sale, lease or transfer, in one or a series of related transactions, of all
or substantially all of the Company's assets to any Person or group (as such
term is used in Section 13(d)(3) of the Exchange Act); (ii) the adoption of a
plan relating to the liquidation or dissolution of the Company; (iii) the
acquisition, directly or indirectly, by any Person or group (as such term is
used in Section 13(d)(3) of the Exchange Act) of beneficial ownership (as
defined in Rule 13d-3 under the Exchange Act) of more than 50% of the aggregate
voting power of the Voting Stock of the Company (for the purposes of this
definition, such other Person shall be deemed to beneficially own any Voting
Stock of a specified corporation held by a parent corporation, if such other
Person is the beneficial owner (as defined above), directly or indirectly, of
more than 35% of the voting power of the Voting Stock of such parent
corporation); or (iv) during any period of two consecutive years, individuals
who at the beginning of such period constituted the Board of Directors of the
Company (together with any new directors whose election by such Board of
Directors or whose nomination for election by the shareholders of the Company
was approved by a vote of 66 2/3% of the directors of the Company then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for any
reason to constitute a majority of the Board of Directors of the Company then
in office.
The Company will comply with Section 14 of the Exchange Act and the
provisions of Regulation 14E and any other tender offer rules under the
Exchange Act and any other federal and state securities laws, rules and
regulations which may then be applicable to any Change of Control Offer.
The Borrowing Base under the Revised Credit Facility may be subject to
reduction if the Company becomes obligated to repurchase the Notes except upon
the scheduled maturity date, including if the Company becomes obligated to
extend a Change of Control Offer or any other offer to repurchase, including a
Net Proceeds Offer. See "Revised Credit Facility." Even if the Company's banks
consented to an offer to repurchase without a reduction in the Borrowing Base,
the Company's ability to pay cash to the Holders of the Notes upon a repurchase
may be limited by the Company's then existing financial resources.
The Series A/B Indenture provides that upon the occurrence of a Change
of Control (as defined therein), the Company shall be required to make an offer
to the holders of the Series A/B Notes to repurchase any or all of the
outstanding Series A/B Notes at a purchase price equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest, if any, to the date
of purchase. Such event would result in an event of default under the Revised
Credit Facility.
CERTAIN COVENANTS
Limitation on Incurrence of Additional Indebtedness. The Indenture
provides that the Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, issue, incur, assume, guarantee,
become liable, contingently or otherwise, with respect to or otherwise become
responsible for the payment of (collectively, incur) any Indebtedness (other
than Permitted Indebtedness); provided, however, that if no Default or Event of
Default shall have occurred and be continuing at the time or as a consequence
of the incurrence of such Indebtedness, the Company or its Restricted
Subsidiaries may incur Indebtedness if, on a pro forma basis, after giving
effect to such incurrence and the application of the proceeds therefrom, both
of the following tests shall have been satisfied: (i) the Consolidated Interest
Coverage Ratio for the last four fiscal quarter Reference Period immediately
preceding the incurrence of such Indebtedness is at least (a) 2.25-to-1.0 with
respect to any date of incurrence of additional Indebtedness occurring on or
before the first anniversary date of the Series A/B Issue Date or (b)
2.50-to-1.0 with respect to any date of incurrence of additional Indebtedness
occurring after the first
31
<PAGE> 33
anniversary date of the Series A/B Issue Date and (ii) Adjusted Consolidated
Net Tangible Assets would have been equal to or greater than 125% of
Indebtedness of the Company and its Restricted Subsidiaries.
Notwithstanding the foregoing, if no Default or Event of Default shall
have occurred and be continuing at the time or as a consequence of the
incurrence of such Indebtedness, the Company and its Restricted Subsidiaries
may incur Permitted Indebtedness.
Any Indebtedness of a Person existing at the time such Person becomes
a Restricted Subsidiary (whether by merger, consolidation, acquisition or
otherwise) shall be deemed to be incurred by such Restricted Subsidiary at the
time it becomes a Restricted Subsidiary.
Limitation on Restricted Payments. The Indenture provides that the
Company will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, make any Restricted Payment, unless:
(i) no Default or Event of Default shall have occurred and be
continuing at the time of or immediately after giving effect to such Restricted
Payment;
(ii) at the time of and immediately after giving effect to such
Restricted Payment, the Company would be able to incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
first paragraph of the covenant captioned "Limitation on Incurrence of
Additional Indebtedness;" and
(iii) immediately after giving effect to such Restricted Payment, the
aggregate of all Restricted Payments declared or made after the Series A/B
Issue Date does not exceed the sum of (a) 50% of the Consolidated Net Income of
the Company and its Restricted Subsidiaries (or in the event such Consolidated
Net Income shall be a deficit, minus 100% of such deficit) during the period
(treated as one accounting period) subsequent to September 30, 1996 and ending
on the last day of the fiscal quarter for which financial information is
available immediately preceding the date of such Restricted Payment (less the
aggregate amount of dividends described in clauses (i) and (ii) of the
following paragraph that are either (x) paid after the last day of the fiscal
quarter for which financial information is available immediately preceding the
date of such Restricted Payment or (y) declared but not yet paid as of such
date); (b) the aggregate Net Cash Proceeds received by the Company during such
period from any Person other than a Subsidiary of the Company as a result of
the issuance or sale of Capital Stock of the Company (other than any
Disqualified Stock), other than in connection with the conversion of
Indebtedness or Disqualified Stock; (c) the aggregate Net Cash Proceeds
received by the Company during such period from any Person other than a
Subsidiary of the Company as a result of the issuance or sale of any
Indebtedness or Disqualified Stock to the extent that at the time the
determination is made such Indebtedness or Disqualified Stock, as the case may
be, has been converted into or exchanged for Capital Stock of the Company
(other than Disqualified Stock); (d) (i) in case any Unrestricted Subsidiary
has been redesignated a Restricted Subsidiary, an amount equal to the lesser of
(x) the book value (determined in accordance with GAAP) at the date of such
redesignation of the aggregate Investments made by the Company and its
Restricted Subsidiaries in such Unrestricted Subsidiary and (y) the fair market
value of such Investments in such Unrestricted Subsidiary at the time of such
redesignation, as determined in good faith by the Company's Board of Directors,
including a majority of the Company's Disinterested Directors, whose
determination shall be conclusive and evidenced by a resolution of such Board
(less, in the case of each of clauses (x) and (y), the amount of original
Investment (based upon book value determined in accordance with GAAP at the
time of such Investment) made by the Company or any Restricted Subsidiary
pursuant to clause (x) of the definition of "Permitted Business Investment"
minus the aggregate cash dividends paid by such Unrestricted Subsidiary to the
Company or any other Restricted Subsidiary since the date of such original
Investment, provided that the result of the foregoing shall not be less than
zero); or (ii) in case any Restricted Subsidiary has been redesignated an
Unrestricted Subsidiary, minus the greater of (x) the book value (determined in
accordance with GAAP) at the date of redesignation of the aggregate Investments
made by the Company and its Restricted Subsidiaries and (y) the fair market
value of such Investments in such Restricted Subsidiary at the time of such
redesignation, as determined in good faith by the Company's Board of Directors,
including a majority of the Company's Disinterested Directors, whose
determination shall be conclusive and evidenced by a resolution of such Board;
and (e) $5.0 million.
32
<PAGE> 34
Notwithstanding the foregoing, the above limitations will not prevent
(i) the payment of any dividend within 60 days after the date of declaration
thereof, if at such date of declaration such payment complied with the
provisions hereof; (ii) the payment of any dividend on any shares of Preferred
Stock of the Company issued and outstanding as of the Series A/B Issue Date in
accordance with the terms of such Preferred Stock in effect at the Series A/B
Issue Date; (iii) any dividend on shares of Capital Stock of the Company or any
Restricted Subsidiary payable solely in shares of Capital Stock (other than
Disqualified Stock); (iv) any dividend or other distribution payable from a
Subsidiary to the Company or any Restricted Subsidiary that is wholly-owned
directly or indirectly by the Company; and (v) the repurchase, redemption or
other acquisition or retirement of any shares of any class of Capital Stock of
the Company or any Restricted Subsidiary, in exchange for, or out of the
aggregate net proceeds of a substantially concurrent issue and sale (other than
to a Restricted Subsidiary) of shares of Capital Stock of the Company (other
than Disqualified Stock).
Limitation on Sale of Assets. The Indenture provides that the Company
will not, and will not permit any Restricted Subsidiary to, make any Asset Sale
unless:
(i) the Company (or its Restricted Subsidiary as the case may be)
receives consideration at the time of such sale or other disposition at least
equal to the fair market value thereof (as determined in good faith by the
Company, which determination, with respect to Asset Sales or series of related
Asset Sales with proceeds valued at greater than $5.0 million, shall be
evidenced by a resolution duly adopted by the Company's Board of Directors,
including a majority of the Company's Disinterested Directors);
(ii) at least 75% of the proceeds from such Asset Sale consist of
cash or U.S. dollar denominated Cash Equivalents; and
(iii) the Net Cash Proceeds received by the Company (or its Restricted
Subsidiary, as the case may be) from such Asset Sale are applied in accordance
with the following two paragraphs.
The Company may apply such Net Cash Proceeds, within 365 days from the
date of the receipt of Net Cash Proceeds from any Asset Sale, to: (a) the
repayment of Indebtedness of the Company under a Bank Credit Facility or other
Senior Indebtedness of the Company or Senior Indebtedness of a Guarantor, that
results in a permanent reduction in any revolving credit or other commitment
relating thereto or the maximum principal amount that may be borrowed
thereunder in an amount equal to the principal amount so repaid, (b) make an
Investment in assets used in the Oil and Gas Business in replacement of the
assets that were the subject of the Asset Sale giving rise to such Net Cash
Proceeds, or (c) develop by drilling, completing and producing reserves from
the oil and gas properties of the Company and the Restricted Subsidiaries.
If, upon completion of the 365-day period, the Net Cash Proceeds of
any Asset Sale less the aggregate amount applied by the Company during such
period as described in clauses (a), (b) or (c) in the immediately preceding
paragraph, together with any Net Cash Proceeds in excess of amounts similarly
applied by the Company from any prior Asset Sale after the date of receipt of
such Net Cash Proceeds (such aggregate constituting "Excess Proceeds"), exceeds
$5.0 million, then the Company will be obligated to make an offer (the "Net
Proceeds Offer") to repurchase the Notes (including any Additional Series D
Notes) and any other Senior Indebtedness including, without limitation, the
Series A/B Notes in respect of which such an offer to repurchase is also
required to be made concurrently with the Net Proceeds Offer, having an
aggregate principal amount equal to the Excess Proceeds (such repurchase to be
made on a pro rata basis if the amount available for such repurchase is less
than the principal amount of the Notes and other Senior Indebtedness including,
without limitation, the Series A/B Notes tendered in such Net Proceeds Offer)
at a repurchase price of 100% of the principal amount thereof plus accrued
interest, if any, to the date of repurchase. Upon the completion of the Net
Proceeds Offer, the amount of Excess Proceeds will be reset to zero, subject to
further increase resulting from subsequent Asset Sales.
Any Net Proceeds Offer will be conducted in substantially the same
manner as a Change of Control Offer. The Company will comply with Section 14 of
the Exchange Act and the provisions of Regulation 14E and any other tender
offer rules under the Exchange Act and any other federal and state securities
laws, rules and regulations which may then be applicable to any Net Proceeds
Offer.
33
<PAGE> 35
During the period between any Asset Sale and the application of the
Net Cash Proceeds therefrom in accordance with this covenant, all Net Cash
Proceeds shall be either (i) maintained in a segregated account and shall be
invested in Permitted Financial Investments or (ii) applied to temporarily
reduce borrowings under any revolving credit facility constituting Senior
Indebtedness of the Company or Senior Indebtedness of a Guarantor.
Notwithstanding the foregoing, the Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, make any Asset
Sale of any of the Capital Stock of a Restricted Subsidiary except pursuant to
an Asset Sale of all of the Capital Stock of such Restricted Subsidiary.
Limitation on Liens Securing Indebtedness. The Indenture provides that
the Company will not, and will not permit any of its Restricted Subsidiaries
to, create, incur, assume or suffer to exist any Liens (other than Permitted
Liens) upon any of their respective properties securing (i) any Indebtedness of
the Company, unless the Notes are equally and ratably secured or (ii) any
Indebtedness of any Guarantor, unless the Guarantees are equally and ratably
secured; provided, that if such Indebtedness is expressly subordinated to the
Notes or the Guarantees, the Lien securing such Indebtedness will be
subordinated and junior to any Lien securing the Notes or the Guarantees, with
the same relative priority as such Subordinated Indebtedness of the Company or
Subordinated Indebtedness of a Restricted Subsidiary that is a Guarantor will
have with respect to the Notes or the Guarantees, as the case may be.
Limitation on Mergers and Consolidations. The Indenture provides that
the Company will not consolidate with or merge with any Person or convey,
transfer or lease all or substantially all of its assets to any Person, unless:
(i) the Company survives such merger or the Person formed by such consolidation
or into which the Company is merged or that acquires by conveyance or transfer,
or which leases, all or substantially all of the assets of the Company is a
corporation organized and existing under the laws of the United States of
America, any state thereof or the District of Columbia and expressly assumes,
by supplemental indenture, the due and punctual payment of the principal of,
premium, if any, and interest on, all the Notes and the performance of every
other covenant and obligation of the Company under the Indenture; (ii)
immediately before and after giving effect to such transaction, no Default or
Event of Default exists; (iii) immediately after giving effect to such
transaction on a pro forma basis, the Consolidated Net Worth of the Company (or
the surviving or transferee entity) is equal to or greater than the
Consolidated Net Worth of the Company immediately before such transaction; and
(iv) immediately after giving effect to such transaction on a pro forma basis,
the Company (or the surviving or transferee entity) would be able to incur at
least $1.00 of additional Indebtedness (other than Permitted Indebtedness)
pursuant to the first paragraph of the covenant captioned "Certain Covenants -
Limitation on Incurrence of Additional Indebtedness." Upon any such
consolidation, merger, lease, conveyance or transfer in accordance with the
foregoing, the successor Person formed by such consolidation or into which the
Company is merged or to which such lease, conveyance or transfer is made shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture with the same effect as if such successor had
been named as the Company herein and thereafter the predecessor corporation
will be relieved of all further obligations and covenants under the Indenture
and the Notes.
Limitation on Sale/Leaseback Transactions. The Indenture provides that
the Company will not, and will not permit any of its Restricted Subsidiaries
to, enter into any Sale/Leaseback Transaction unless (i) the Company or such
Restricted Subsidiary, as the case may be, would be able to incur Indebtedness
in an amount equal to the Attributable Indebtedness with respect to such
Sale/Leaseback Transaction or (ii) the Company or such Restricted Subsidiary
receives proceeds from such Sale/Leaseback Transaction at least equal to the
fair market value thereof (as determined in good faith by the Company's Board
of Directors, whose determination in good faith, evidenced by a resolution of
such Board shall be conclusive) and such proceeds are applied in the same
manner and to the same extent as Net Cash Proceeds and Excess Proceeds from an
Asset Sale.
Limitation on Payment Restrictions Affecting Subsidiaries. The
Indenture provides that the Company will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause
or suffer to exist or become effective any consensual encumbrance or consensual
restriction on the ability of any Restricted Subsidiary of the Company to (i)
pay dividends or make any other distributions on its Capital Stock or on any
other interest or participation in the Company or a Restricted Subsidiary; (ii)
pay any Indebtedness owed to the Company or a Restricted Subsidiary of the
Company; (iii) make loans or advances to the Company or a Restricted
34
<PAGE> 36
Subsidiary of the Company; or (iv) transfer any of its properties or assets to
the Company or a Restricted Subsidiary of the Company (each, a "Payment
Restriction"), except for (a) encumbrances or restrictions under a Bank Credit
Facility; provided, that no encumbrance or restriction shall limit the ability
of any Restricted Subsidiary to transfer cash to the Company except upon the
occurrence of an event of default under the Bank Credit Facility; (b)
consensual encumbrances or consensual restrictions binding upon any Person at
the time such Person becomes a Restricted Subsidiary of the Company (unless the
agreement creating such consensual encumbrances or consensual restrictions was
entered into in connection with, or in contemplation of, such entity becoming a
Restricted Subsidiary); (c) consensual encumbrances or consensual restrictions
under any agreement that refinances or replaces any agreement described in
clauses (a) and (b) above, provided that the terms and conditions of any such
restrictions are in the aggregate no less favorable to the Holders of the Notes
than those under the agreement so refinanced or replaced; (d) customary
non-assignment provisions in leases, purchase money financings and any
encumbrance or restriction due to applicable law; and (e) consensual
encumbrances or consensual restrictions existing under the Series A/B
Indenture.
Limitation on Issuances and Sales of Restricted Subsidiary Stock. The
Indenture provides that the Company (i) will not permit any Restricted
Subsidiary to issue any Preferred Stock (other than to the Company or a
Restricted Subsidiary) and (ii) will not permit any Person (other than the
Company and/or one or more Restricted Subsidiaries) to own any Capital Stock of
any Restricted Subsidiary; provided, however, that this covenant shall not
prohibit (a) the issuance or sale of all, but not less than all, of the issued
and outstanding Capital Stock of any Restricted Subsidiary owned by the Company
or any of its Restricted Subsidiaries in compliance with the other provisions
of the Indenture, (b) the issuance or sale of (A) not more than 5 percent in
the aggregate of the issued and outstanding Capital Stock of any Restricted
Subsidiary (calculated on a fully diluted basis) by the Company or any
Restricted Subsidiary or (B) more than 5 percent of the issued and outstanding
Capital Stock of any Restricted Subsidiary if immediately following such
issuance and sale (calculated on a fully diluted basis) the Company and all
Subsidiaries will collectively own 95 percent or more of the Consolidated Total
Assets of the Company, and in the case of either (A) or (B), immediately
following such issuance and sale, the Company or one or more Restricted
Subsidiaries will collectively hold the voting power to elect a majority of the
directors of the Restricted Subsidiary and such power is not subject to
dilution or limitation, by the terms of such Capital Stock, by agreement, by
passage of time or the occurrence of any future event, (c) the ownership by
directors of directors' qualifying shares or the ownership by foreign nationals
of Capital Stock of any Restricted Subsidiary, to the extent mandated by
applicable law or (d) customary non-assignment provisions in leases or purchase
money financings and any customary encumbrance or restriction relating to same.
Limitation on Transactions with Affiliates. The Indenture provides
that the Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into any transaction or series
of transactions (including, without limitation, the sale, purchase or lease of
any assets or properties or the rendering of any services) with any Affiliate
or beneficial owner (as defined in Rules 13d- 3 and 13d-5 under the Exchange
Act) of 10% or more of the Company's common stock (other than with a Wholly
Owned Restricted Subsidiary of the Company) (an "Affiliate Transaction"), on
terms that are less favorable to the Company or such Restricted Subsidiary, as
the case may be, than would be available in a comparable transaction with an
unrelated Person. In addition, the Company will not, and will not permit any
Restricted Subsidiary of the Company to, enter into an Affiliate Transaction,
or any series of related Affiliate Transactions having a value of (a) more than
$1.0 million, unless a majority of the Board of Directors of the Company
(including a majority of the Company's Disinterested Directors) determines in
good faith, as evidenced by a resolution of such Board, that such Affiliate
Transaction or series of related Affiliate Transactions is fair to the Company
and in compliance with the first sentence of this paragraph; or (b) more than
$10.0 million, unless the Company receives a written opinion from a nationally
recognized investment banking firm that such transaction or series of
transactions is fair to the Company from a financial point of view.
Limitation on Line of Business. The Indenture provides that the
Company and the Subsidiaries will be operated in a manner such that their
business activities will be the Oil and Gas Business, or an Investment in a
business or Person engaged in the Oil and Gas Business.
35
<PAGE> 37
SEC Reports. Notwithstanding that the Company may not be required to
remain subject to the reporting requirements of Section 13 or 15(d) of the
Exchange Act, the Company will file with the SEC (if the SEC will so accept)
and provide the Trustee and Holders with annual reports and such information,
documents and other reports specified in Sections 13 and 15(d) of the Exchange
Act.
Future Designation of Restricted and Unrestricted Subsidiaries. The
foregoing covenants (including calculation of financial ratios and the
determination of limitations on the incurrence of Indebtedness and Liens) may
be affected by the designation by the Company of any existing or future
Subsidiary of the Company as an Unrestricted Subsidiary. Generally, a
Restricted Subsidiary includes any Subsidiary of the Company, whether existing
on or after the date of the Indenture, unless the Subsidiary of the Company is
designated as an Unrestricted Subsidiary pursuant to the terms of the
Indenture. The definition of "Unrestricted Subsidiary" set forth under the
caption "Certain Definitions" describes the circumstances under which a future
Subsidiary of the Company may be designated as an Unrestricted Subsidiary by
the Board of Directors of the Company.
Limitation on Restrictive Covenants. The Indenture will provide that,
notwithstanding any other provision of the Indenture, the restrictive covenants
set forth in the Indenture, including, without limitation, those described
under "--Limitation on Restricted Payments," "--Limitation on Sales of Assets,"
"--Limitation on Liens Securing Indebtedness," "--Limitation on Mergers and
Consolidations," "--Limitation on Sale/Leaseback Transactions" and
"--Limitation on Transactions with Affiliates," shall be and shall be deemed
limited to the extent necessary so that the creation, existence and
effectiveness of such restrictive covenants shall not result in a breach of the
covenant of the Series A/B Indenture relating to "Limitation on Payment
Restrictions Affecting Subsidiaries."
CERTAIN DEFINITIONS
The following is a summary of certain defined terms to be used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms and for the definitions of capitalized terms used herein and not
defined below.
"Adjusted Consolidated Net Tangible Assets" or "ACNTA" means (without
duplication), as of the date of determination, (a) the sum of (i) discounted
future net revenue from proved oil and gas reserves of the Company and its
Restricted Subsidiaries calculated in accordance with SEC guidelines before any
state or federal income taxes, as estimated by independent petroleum engineers
in a reserve report prepared as of the end of the Company's most recently
completed fiscal year, as increased by, as of the date of determination, the
discounted future net revenue of (A) estimated proved oil and gas reserves of
the Company and its Restricted Subsidiaries attributable to any acquisition
consummated since the effective date of such year-end reserve reports and (B)
estimated oil and gas reserves of the Company and its Restricted Subsidiaries
attributable to extensions, discoveries and other additions and upward
revisions of estimates of proved oil and gas reserves due to exploration,
development or exploitation, production or other activities conducted or
otherwise occurring since the effective date of such year-end reserve reports
which, in the case of subclauses (A) and (B), would, in accordance with
standard industry practice, result in such increases, in each case calculated
in accordance with SEC guidelines (utilizing the prices utilized in such
year-end reserve reports), and decreased by, as of the date of determination,
the discounted future net revenue of (C) estimated proved oil and gas reserves
of the Company and its Restricted Subsidiaries produced or disposed of since
the effective date of such year-end reserve report and (D) reductions in the
estimated oil and gas reserves of the Company and its Restricted Subsidiaries
since the effective date of such year-end reserve reports attributable to
downward revisions of estimates of proved oil and gas reserves due to
exploration, development or exploitation, production or other activities
conducted or otherwise occurring since the effective date of such year-end
reserve reports which would, in accordance with standard industry practice,
result in such revisions, in each case calculated in accordance with SEC
guidelines (utilizing the prices utilized in such year-end reserve reports);
provided that, in the case of each of the determinations made pursuant to
sub-clauses (A) through (D) above, such increases and decreases shall be as
estimated by the Company's engineers, except that if as a result of such
acquisitions, dispositions, discoveries, extensions or revisions, there is a
Material Change and in connection with the incurrence of Indebtedness under the
covenant captioned "Certain Covenants - Limitation on Incurrence of Additional
Indebtedness," all or any part of an increase in discounted future net revenue
resulting from the matters described in sub-clauses (A) and (B) above are
needed to permit the incurrence of such Indebtedness, then the discounted
future
36
<PAGE> 38
net revenue utilized for purposes of this clause (a)(i) shall be confirmed in
writing by independent petroleum engineers, provided that, in the event that the
determinations made pursuant to sub-clauses (C) and (D) above, when taken alone,
would not cause a Material Change, then such written confirmation need only
cover the incremental additions to discounted future net revenues resulting from
the determinations made pursuant to sub-clauses (A) and (B) above to the extent
needed to permit the incurrence of such Indebtedness, (ii) the capitalized costs
that are attributable to oil and gas properties of the Company and its
Restricted Subsidiaries to which no proved oil and gas reserves are attributed,
based on the Company's books and records as of a date no earlier than the date
of the Company's latest annual or quarterly financial statements, (iii) the Net
Working Capital on a date no earlier than the date of the Company's latest
annual or quarterly financial statements and (iv) the greater of (A) the net
book value on a date no earlier than the date of the Company's latest annual or
quarterly financial statements and (B) the appraised value, as estimated by
independent appraisers, of other tangible assets (including Investments in
unconsolidated Subsidiaries) of the Company and its Restricted Subsidiaries, as
of a date no earlier than the date of the Company's latest audited financial
statements, minus (b) the sum of (i) minority interests, (ii) any non-current
portion of gas balancing liabilities of the Company and its Restricted
Subsidiaries reflected in the Company's latest annual or quarterly financial
statements, (iii) the discounted future net revenue, calculated in accordance
with SEC guidelines (utilizing the prices utilized in the Company's year-end
reserve reports), attributable to reserves which are required to be delivered to
third parties to fully satisfy the obligations of the Company and its Restricted
Subsidiaries with respect to Volumetric Production Payments on the schedules
specified with respect thereto, (iv) the discounted future net revenue,
calculated in accordance with SEC guidelines, attributable to reserves subject
to Dollar-Denominated Production Payments which, based on the estimates of
production included in determining the discounted future net revenue specified
in (a) (i) above (utilizing the same prices utilized in the Company's year-end
reserve reports), would be necessary to fully satisfy the payment obligations of
the Company and its Restricted Subsidiaries with respect to Dollar-Denominated
Production Payments on the schedules specified with respect thereto and (v) the
discounted future net revenue, calculated in accordance with SEC guidelines
(utilizing the same prices utilized in the Company's year-end reserve reports),
attributable to reserves subject to participation interests, overriding royalty
interests or other interests of third parties, pursuant to participation,
partnership, vendor financing or other agreements then in effect, or which
otherwise are required to be delivered to third parties. If the Company changes
its method of accounting from the full cost method to the successful efforts
method or a similar method of accounting, Adjusted Consolidated Net Tangible
Assets will continue to be calculated as if the Company was still using the full
cost method of accounting.
Discounted future net revenue attributable to reserves subject to
Production Payments or other third party interests are excluded from the
definition of Adjusted Consolidated Net Tangible Assets to the extent
indicated, thereby limiting the amount of Indebtedness that may be incurred
pursuant to the test set forth in clause (ii) of the first paragraph of the
covenant captioned "Certain Covenants - Limitation on Incurrence of Additional
Indebtedness." However, certain estimated volumes of reserves in excess of the
delivery requirements under such Production Payments or with respect to
commitments to third party interests that are available for sale by the Company
are included in the definition of Adjusted Consolidated Net Tangible Assets,
thereby increasing the amount of Indebtedness that may be incurred under such
test.
"Adjusted Net Assets" of a Guarantor at any date shall mean the lesser
of (i) the amount by which the fair value of the property of such Guarantor
exceeds the total amount of liabilities, including, without limitation,
contingent liabilities (after giving effect to all other fixed and contingent
liabilities incurred or assumed on such date), but excluding liabilities under
the Guarantee of such Guarantor at such date and (ii) the amount by which the
present fair salable value of the assets of such Guarantor at such date exceeds
the amount that will be required to pay the probable liability of such
Guarantor on its debts (after giving effect to all other fixed and contingent
liabilities incurred or assumed on such date and after giving effect to any
collection from any Subsidiary of such Guarantor in respect of the obligations
of such Subsidiary under the Guarantee), excluding debt in respect of the
Guarantee, as they become absolute and matured.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition, control
when used with respect to any specified Person means the power to direct the
management and policies of such Person directly or indirectly, whether through
the ownership of Voting Stock, by contract or otherwise; and the
37
<PAGE> 39
terms controlling and controlled have meanings correlative to the foregoing;
provided that a corporation shall not be deemed an Affiliate of the Company
solely by reason of having a single common director with the Company who
constitutes less than a majority of the directors of either the Company and the
other corporation.
"Asset Sale" means any sale, lease, transfer, exchange or other
disposition having a fair market value of $1.0 million or more (or series of
sales, leases, transfers, exchanges or dispositions during any fiscal year
having an aggregate fair market value of such amount) of shares of Capital
Stock of a Restricted Subsidiary (other than directors' Qualifying Shares), or
of property or assets (including the creation of Dollar-Denominated Production
Payments and Volumetric Production Payments, other than Dollar-Denominated
Production Payments and Volumetric Production Payments created or sold in
connection with the financing of, and within 30 days after, the acquisition of
the properties subject thereto) or any interests therein (each referred to for
purposes of this definition as a disposition) by the Company or any of its
Restricted Subsidiaries, including any disposition by means of a merger,
consolidation or similar transaction (other than (a) by the Company to a Wholly
Owned Restricted Subsidiary or by a Subsidiary to the Company or a Wholly Owned
Restricted Subsidiary, (b) a sale of oil, gas or other hydrocarbons or other
mineral products in the ordinary course of business of the Company's oil and
gas production operations, (c) any abandonment, farm-in, farm-out, lease and
sub-lease of developed and/or undeveloped properties made or entered into in
the ordinary course of business (but excluding (x) any sale of a net profits or
overriding royalty interest, in each case conveyed from or burdening proved
developed or proved undeveloped reserves and (y) any sale of hydrocarbons or
other mineral products as a result of the creation of Dollar-Denominated
Production Payments or Volumetric Production Payments, other than
Dollar-Denominated Production Payments and Volumetric Production Payments
created or sold in connection with the financing of, and within 30 days after,
the acquisition of the properties subject thereto), (d) the disposition of all
or substantially all of the assets of the Company in compliance with the
covenant captioned "Certain Covenants - Limitation on Mergers and
Consolidations" and "Limitations on Sale/Leaseback Transactions," (e) the
provision of services and equipment for the operation and development of the
Company's oil and gas wells, in the ordinary course of the Company's oil and
gas service businesses, notwithstanding that such transactions may be recorded
as asset sales in accordance with full cost accounting guidelines, (f) the
issuance by the Company of shares of its Capital Stock, (g) any trade or
exchange by the Company or any Restricted Subsidiary of oil and gas properties
for other oil and gas properties owned or held by another Person provided that
(x) the fair market value of the properties traded or exchanged by the Company
or such Restricted Subsidiary (including any cash or Cash Equivalents, not to
exceed 15% of such fair market value, to be delivered by the Company or such
Restricted Subsidiary) is reasonably equivalent to the fair market value of the
properties (together with any cash or Cash Equivalents, not to exceed 15% of
such fair market value) to be received by the Company or such Restricted
Subsidiary as determined in good faith by the Board of Directors of the
Company, which determination shall be certified by a resolution of the Board of
Directors delivered to the Trustee if such fair market value is in excess of $5
million, provided that if such resolution indicates that such fair market value
is in excess of $10 million such resolution shall be accompanied by a written
appraisal by a nationally recognized investment banking firm or appraisal firm,
in each case specializing or having a specialty in oil and gas properties, and
(y) such exchange is approved by a majority of Disinterested Directors of the
Company and (h) the sale, transfer or other disposition in the ordinary course
of business of oil and natural gas properties, or interests therein, provided
that such properties either (i) do not have proved reserves attributed to them
or (ii) were purchased for the purpose of offering such properties for resale
or participations by other Persons).
"Attributable Indebtedness" means, with respect to any particular
lease under which any Person is at the time liable and at any date as of which
the amount thereof is to be determined, the present value of the total net
amount of rent required to be paid by such Person under the lease during the
primary term thereof, without giving effect to any renewals at the option of
the lessee, discounted from the respective due dates thereof to such date at
the rate of interest per annum implicit in the terms of the lease. As used in
the preceding sentence, the net amount of rent under any lease for any such
period shall mean the sum of rental and other payments required to be paid with
respect to such period by the lessee thereunder excluding any amounts required
to be paid by such lessee on account of maintenance and repairs, insurance,
taxes, assessments, water rates or similar charges. In the case of any lease
which is terminable by the lessee upon payment of a penalty, such net amount of
rent shall also include the amount of such penalty, but no rent shall be
considered as required to be paid under such lease subsequent to the first date
upon which it may be so terminated.
38
<PAGE> 40
"Average Life" means, as of the date of determination, with respect to
any Indebtedness, the quotient obtained by dividing (i) the product of (x) the
number of years from such date to the date of each successive scheduled
principal payment of such Indebtedness multiplied by (y) the amount of such
principal payment by (ii) the sum of all such principal payments.
"Bank Credit Facility" means a revolving credit, term credit and/or
letter of credit facility, the proceeds of which are used for working capital
and other general corporate purposes to be entered into by one or more of the
Company and/or its Restricted Subsidiaries and certain financial institutions,
as amended, extended or refinanced from time to time. The Revised Credit
Facility will constitute a Bank Credit Facility.
"Board of Directors" means, with respect to any Person, the Board of
Directors of such Person or any committee of the Board of Directors of such
Person duly authorized to act on behalf of the Board of Directors of such
Person.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of
corporate stock or partnership interests and any and all warrants, options and
rights with respect thereto (whether or not currently exercisable), including
each class of common stock and Preferred Stock of such Person.
"Capitalized Lease Obligations" of any Person means the obligations of
such Person to pay rent or other amounts under a lease of property, real or
personal, that is required to be capitalized for financial reporting purposes
in accordance with GAAP, and the amount of such obligations shall be the
capitalized amount thereof determined in accordance with GAAP.
"Cash Equivalents" means (i) any evidence of Indebtedness with a
maturity of 90 days or less issued or directly and fully guaranteed or insured
by the United States of America or any agency or instrumentality thereof
(provided that the full faith and credit of the United States of America is
pledged in support thereof); (ii) demand and time deposits and certificates of
deposit or acceptances with a maturity of 90 days or less of any financial
institution that is a member of the Federal Reserve System having combined
capital and surplus and undivided profits of not less than $500 million; (iii)
commercial paper with a maturity of 90 days or less issued by a corporation
that is not an Affiliate of the Company and is organized under the laws of any
state of the United States or the District of Columbia and rated at least A-1
by Standard & Poor's Ratings Services or at least P-1 by Moody's Investors
Service, Inc.; (iv) repurchase obligations with a term of not more than seven
days for underlying securities of the types described in clause (i) above
entered into with any commercial bank meeting the specifications of clause (ii)
above; and (v) overnight bank deposits and bankers' acceptances at any
commercial bank meeting the qualifications specified in clause (ii) above.
"Consolidated Interest Coverage Ratio" means, for any Reference Period,
the ratio on a pro forma basis of (a) the sum of (i) Consolidated Net Income,
(ii) Consolidated Interest Expense, (iii) Consolidated Tax Expense, (iv)
depreciation and depletion of the Company and its Restricted Subsidiaries, as
determined in accordance with GAAP on a consolidated basis plus (v) amortization
of the Company and its Restricted Subsidiaries including, without limitation,
amortization of capitalized debt issuance costs, as determined in accordance
with GAAP on a consolidated basis, in each case as determined for the Reference
Period to (b) Consolidated Interest Expense for such Reference Period; provided,
that, in calculating each of the items set forth in the foregoing (i)
acquisitions which occurred during the Reference Period or subsequent to the
Reference Period and on or prior to the date of the transaction giving rise to
the need to calculate the Consolidated Interest Coverage Ratio (the "Transaction
Date") shall be assumed to have occurred on the first day of the Reference
Period (provided further, that nonrecurring expenses incurred by NEG-OK prior to
the date NEG-OK became a Subsidiary shall be excluded from any calculation of
Consolidated Interest Coverage Ratio), (ii) the incurrence of any Indebtedness
(including the issuance of the Notes) or issuance of any Disqualified Stock
during the Reference Period or subsequent to the Reference Period and on or
prior to the Transaction Date shall be assumed to have occurred on the first day
of such Reference Period, (iii) any Indebtedness that had been outstanding
during the Reference Period that has been repaid on or prior to the Transaction
Date shall be assumed to have been repaid as of the first day of such Reference
Period, (iv) the Consolidated Interest Expense attributable to interest on any
Indebtedness or dividends on any Disqualified Stock
39
<PAGE> 41
bearing a floating interest (or dividend) rate shall be computed on a pro forma
basis as if the rate in effect on the Transaction Date was the average rate in
effect during the entire Reference Period and (v) in determining the amount of
Indebtedness pursuant to the covenant captioned "Certain Covenants - Limitation
on Incurrence of Additional Indebtedness," the incurrence of Indebtedness or
issuance of Disqualified Stock giving rise to the need to calculate the
Consolidated Interest Coverage Ratio and, to the extent the net proceeds from
the incurrence or issuance thereof are used to retire Indebtedness, the
application of the proceeds therefrom shall be assumed to have occurred on the
first day of the Reference Period.
"Consolidated Interest Expense" means, with respect to the Company and
its Restricted Subsidiaries, for the Reference Period, the aggregate amount
(without duplication) of (a) interest expensed in accordance with GAAP
(including, in accordance with the following sentence, interest attributable to
Capitalized Lease Obligations, but excluding interest attributable to
Dollar-Denominated Production Payments and amortization of deferred debt
expense) during such period in respect of all Indebtedness of the Company and
its Restricted Subsidiaries (including (i) amortization of original issue
discount on any Indebtedness (other than with respect to the Notes), (ii) the
interest portion of all deferred payment obligations, calculated in accordance
with GAAP and (iii) all commissions, discounts and other fees and charges owed
with respect to bankers' acceptance financings and currency and interest rate
swap arrangements, in each case to the extent attributable to such period), and
(b) dividend requirements of the Company and its Restricted Subsidiaries with
respect to any Preferred Stock or Disqualified Stock dividends (whether in cash
or otherwise (except dividends paid solely in shares of Capital Stock other
than Disqualified Stock)) paid (other than to the Company or any of its
Restricted Subsidiaries), declared, accrued or accumulated during such period,
divided by one minus the applicable actual combined federal, state, local and
foreign income tax rate of the Company and its Subsidiaries (expressed as a
decimal), on a consolidated basis, for the Reference Period preceding the date
of the transaction giving rise to the need to calculate Consolidated Interest
Expense, in each case to the extent attributable to such period and excluding
items eliminated in consolidation. For purposes of this definition, (a)
interest on a Capitalized Lease Obligation shall be deemed to accrue at an
interest rate reasonably determined by the Company to be the rate of interest
implicit in such Capitalized Lease Obligation in accordance with GAAP and (b)
interest expense attributable to any Indebtedness represented by the guarantee
by the Company or a Restricted Subsidiary of the Company of an obligation of
another Person (other than the Company or any other Restricted Subsidiary)
shall be deemed to be the interest expense attributable to the Indebtedness
guaranteed.
"Consolidated Net Income" of the Company means, for any period, the
aggregate net income (or loss) of the Company and its Restricted Subsidiaries
for such period on a consolidated basis, determined in accordance with GAAP;
provided, however, that there shall not be included in such Consolidated Net
Income: (a) any net income of any Person if such Person is not the Company or a
consolidated Restricted Subsidiary, except that (i) subject to the limitations
contained in clause (d) below, the Company's equity in the net income of any
such Person for such period shall be included in such Consolidated Net Income
up to the aggregate amount of cash or Cash Equivalents actually distributed by
such Person during such period to the Company or a Restricted Subsidiary as a
dividend or other distribution (subject, in the case of a dividend or other
distribution to a Restricted Subsidiary, to the limitations contained in clause
(c) below) and (ii) the Company's equity in a net loss of any such Person
(other than an Unrestricted Subsidiary) for such period shall be included in
determining such Consolidated Net Income; (b) any net income (or loss) of any
Person acquired by the Company or a Subsidiary in a pooling of interests
transaction for any period prior to the date of such acquisition; (c) the net
income of any Restricted Subsidiary to the extent that the payment of dividends
or the making of distributions by such Restricted Subsidiary, directly or
indirectly, to the Company, is prohibited; (d) any gain (but not loss) realized
upon the sale or other disposition of any property, plant or equipment of the
Company or any Restricted Subsidiary (including pursuant to any Sale/Leaseback
Transaction) which is not sold or otherwise disposed of in the ordinary course
of business and any gain (but not loss) realized upon the sale or other
disposition of any Capital Stock of any Person; (e) any gain (but not loss)
from currency exchange transactions not in the ordinary course of business
consistent with past practice; (f) the cumulative effect of a change in
accounting principles; (g) to the extent deducted in the calculation of net
income, the non-cash charges associated with the repayment of Indebtedness with
the proceeds from the sale of the Outstanding Notes and the Series A/B Notes
and the prepayment of any of the Outstanding Notes and the Series A/B Notes;
(h) any writedowns of noncurrent assets; provided, however, that any ceiling
limitation writedowns under SEC guidelines shall be treated as capitalized
costs, as if such writedowns had not occurred; and (i) any gain (but not loss)
attributable to extraordinary items.
40
<PAGE> 42
"Consolidated Net Worth" means, with respect to the Company and its
Restricted Subsidiaries, as at any date of determination, the sum of Capital
Stock (other than Disqualified Stock) and additional paid-in capital plus
retained earnings (or minus accumulated deficit) minus all intangible assets,
including, without limitation, organization costs, patents, trademarks,
copyrights, franchises, research and development costs, and any amount
reflected in treasury stock, of the Company and its Restricted Subsidiaries
determined on a consolidated basis in accordance with GAAP.
"Consolidated Tax Expense" means, for any period, the provisions for
federal, state, local and foreign income taxes (including state franchise taxes
accounted for as income taxes in accordance with GAAP) of the Company and its
Restricted Subsidiaries for such period as determined on a consolidated basis
in accordance with GAAP.
"Disinterested Director" means, with respect to an Affiliate
Transaction or series of related Affiliate Transactions, a member of the Board
of Directors of the Company who has no financial interest, and whose employer
has no financial interest, in such Affiliate Transaction or series of related
Affiliate Transactions.
"Disqualified Stock" means any Capital Stock of the Company or any
Restricted Subsidiary of the Company which, by its terms (or by the terms of
any security into which it is convertible or for which it is exchangeable), or
upon the happening of any event or with the passage of time, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the holder thereof, in whole or in part, on or
prior to the Maturity Date or which is exchangeable or convertible into debt
securities of the Company or any Restricted Subsidiary of the Company, except
to the extent that such exchange or conversion rights cannot be exercised prior
to the Maturity Date.
"Dollar-Denominated Production Payments" mean production payment
obligations recorded as liabilities in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"Equity Offering" means any underwritten public offering of common
stock of the Company pursuant to a registration statement filed pursuant to the
Securities Act or any private placement of Capital Stock (other than
Disqualified Stock) of the Company (other than to any Person who, prior to such
private placement, was a Subsidiary of the Company or any other Person
controlled by the Company) which offering or placement is consummated after the
Series A/B Issue Date.
"Exchange Act" means the Securities and Exchange Act of 1934, as
amended, and the rules and regulations of the SEC thereunder.
"GAAP" means generally accepted accounting principles as in effect in
the United States of America as of the Series A/B Issue Date.
"Guarantee" or "Guarantees" means any Guarantee issued by existing or
future Restricted Subsidiaries pursuant to Article X of the Indenture.
"Guarantor" means (i) each of the Subsidiaries that becomes a
guarantor of the Notes in compliance with the provisions of Article X of the
Indenture and (ii) each of the Subsidiaries executing a supplemental indenture
in which such Subsidiary agrees to be bound by the terms of the Indenture; in
each case until such time, if any, as such Subsidiary is released from the
Guarantee pursuant to Section 10.04 of the Indenture.
"Holder" means a Person in whose name a Note is registered on the
Registrar's books.
"Indebtedness" means, without duplication, with respect to any Person,
(a) all obligations of such Person (i) in respect of borrowed money (whether or
not the recourse of the lender is to the whole of the assets of such Person or
only to a portion thereof), (ii) evidenced by bonds, notes, debentures or
similar instruments, (iii) representing the balance deferred and unpaid of the
purchase price of any property or services (other than accounts
41
<PAGE> 43
payable or other obligations arising in the ordinary course of business), (iv)
evidenced by bankers' acceptances or similar instruments issued or accepted by
banks, (v) for the payment of money relating to a Capitalized Lease Obligation,
or (vi) evidenced by a letter of credit or a reimbursement obligation of such
Person with respect to any letter of credit; (b) all net obligations of such
Person under interest rate swap obligations, commodity swap obligations and
foreign currency hedges, except to the extent such net obligations are taken
into account in the determination of future net revenues from proved oil and gas
reserves for purposes of the calculation of Adjusted Consolidated Net Tangible
Assets; (c) all liabilities of others of the kind described in the preceding
clauses (a) or (b) that such Person has guaranteed or that are otherwise its
legal liability (including, with respect to any Production Payment, any
warranties or guaranties of production or payment by such Person with respect to
such Production Payment but excluding other contractual obligations of such
Person with respect to such Production Payment); (d) Indebtedness (as otherwise
defined in this definition) of another Person secured by a Lien on any asset of
such Person, whether or not such Indebtedness is assumed by such Person, the
amount of such obligations being deemed to be the lesser of (1) the full amount
of such obligations so secured and (2) the fair market value of such asset, as
determined in good faith by the Board of Directors of such Person, which
determination shall be evidenced by a resolution of such Board; (e) with respect
to such Person, the liquidation preference or any mandatory redemption payment
obligations in respect of Disqualified Stock; (f) the aggregate preference in
respect of amounts payable on the issued and outstanding shares of Preferred
Stock of any of the Company's Restricted Subsidiaries in the event of any
voluntary or involuntary liquidation, dissolution or winding up (excluding any
such preference attributable to such shares of Preferred Stock that are owned by
such Person or any of its Restricted Subsidiaries; provided, that if such Person
is the Company, such exclusion shall be for such preference attributable to such
shares of Preferred Stock that are owned by the Company or any of its Restricted
Subsidiaries); and (g) any and all deferrals, renewals, extensions, refinancings
and refundings (whether direct or indirect) of, or amendments, modifications or
supplements to, any liability of the kind described in any of the preceding
clauses (a), (b), (c), (d), (e), (f) or this clause (g), whether or not between
or among the same parties. Subject to clause (c) of the preceding sentence,
neither Dollar-Denominated Production Payments nor Volumetric Production
Payments shall be deemed to be Indebtedness.
"Investment" of any Person means (i) all investments by such Person in
any other Person in the form of loans, advances or capital contributions, (ii)
all guarantees of Indebtedness or other obligations of any other Person by such
Person, (iii) all purchases (or other acquisitions for consideration) by such
Person of assets, Indebtedness, Capital Stock or other securities of any other
Person and (iv) all other items that would be classified as investments
(including, without limitation, purchases of assets outside the ordinary course
of business) or advances on a balance sheet of such Person prepared in
accordance with GAAP.
"Issue Date" means the date on which the Notes are originally issued
under the Indenture.
"Lien" means, with respect to any Person, any mortgage, pledge, lien,
encumbrance, easement, restriction, covenant, right-of-way, charge or adverse
claim affecting title or resulting in an encumbrance against real or personal
property of such Person, or a security interest of any kind (including any
conditional sale or other title retention agreement, any lease in the nature
thereof, any option, right of first refusal or other similar agreement to sell,
in each case securing obligations of such Person and any filing of or agreement
to give any financing statement under the Uniform Commercial Code (or
equivalent statute or statutes) of any jurisdiction).
"Make-Whole Amount" with respect to a Note means an amount equal to
the excess, if any, of (i) the present value of the remaining interest, premium
and principal payments due on such Note as if such Note were redeemed on
November 1, 2001, computed using a discount rate equal to the Treasury Rate
plus 75 basis points, over (ii) the outstanding principal amount of such Note.
"Treasury Rate" is defined as the yield to maturity at the time of the
computation of United States Treasury securities with a constant maturity (as
compiled by and published in the most recent Federal Reserve Statistical
Release H.15(519), which has become publicly available at least two Business
Days prior to the date of the redemption notice or, if such Statistical Release
is no longer published, any publicly available source of similar market data)
most nearly equal to the then remaining maturity of the Notes assuming
redemption of the Notes on November 1, 2001; provided, however, that if the
Make-Whole Average Life of such Note is not equal to the constant maturity of
the United States Treasury securities for which a weekly average yield is
given, the Treasury Rate shall be obtained by linear interpolation (calculated
to the nearest one-
42
<PAGE> 44
twelfth of a year) from the weekly average yields of United States Treasury
securities for which such yields are given, except that if the Make-Whole
Average Life of such Notes is less than one year, the weekly average yield on
actually traded United States Treasury securities adjusted to a constant
maturity of one year shall be used.
"Make-Whole Average Life" means the number of years (calculated to the
nearest one-twelfth) between the date of redemption and November 1, 2001.
"Make-Whole Price" with respect to a Note means the greater of (i) the
sum of the outstanding principal amount and the Make-Whole Amount of such Note,
and (ii) the redemption price of such Note on November 1, 2001, determined
pursuant to the Indenture (105.375% of the principal amount).
"Material Change" means an increase or decrease (excluding changes
that result solely from changes in prices) of more than either (i) 10% from the
end of the immediately preceding fiscal quarter in the estimated discounted
future net revenue from proved oil and gas reserves of the Company and its
Restricted Subsidiaries, or (ii) 20% from the end of the immediately preceding
year in the estimated discounted future net revenue from proved oil and gas
reserves of the Company and its Restricted Subsidiaries, in each case
calculated in accordance with clause (a)(i) of the definition of Adjusted
Consolidated Net Tangible Assets; provided, however, that the following will be
excluded from the calculation of Material Change: (a) any acquisitions of oil
and gas reserves made after the end of the immediately preceding year for which
the discounted future net revenues have been estimated by independent petroleum
engineers since the end of the preceding year and on which a report or reports
exist and (b) any disposition of properties existing at the beginning of the
current year, as the case may be, for purposes of clause (i) or clause (ii)
above, that have been disposed of as provided in the covenant captioned
"Certain Covenants - Limitation on Sale of Assets."
"Maturity Date" means November 1, 2006.
"NEG-OK" means National Energy Group of Oklahoma, Inc., a Delaware
corporation and former wholly-owned Subsidiary of the Company that was merged
with and into the Company effective December 31, 1996.
"Net Cash Proceeds" means (a) with respect to any Asset Sale or
Sale/Leaseback Transaction of any Person, an amount equal to aggregate cash
proceeds received (including any cash proceeds received by way of deferred
payment of principal pursuant to a note or installment receivable or otherwise,
but only as and when received, and excluding any other consideration until such
time as such consideration is converted into cash) therefrom, in each case net
of all legal, title and recording tax expenses, commissions and other fees and
expenses incurred, and all federal, state or local taxes required to be accrued
as a liability as a consequence of such Asset Sale or Sale/Leaseback
Transaction, and in each case net of all Indebtedness which is secured by such
assets, in accordance with the terms of any Lien upon or with respect to such
assets, or which must, by its terms or in order to obtain a necessary consent
to such Asset Sale or Sale/Leaseback Transaction or by applicable law, be
repaid out of the proceeds from such Asset Sale or Sale/Leaseback Transaction
and which is actually so repaid and (b) in the case of any sale by the Company
of securities pursuant to clauses (b) or (c) of section (iii) of the covenant
captioned "Certain Covenants - Limitation on Restricted Payments," the amount
of aggregate net cash proceeds received by the Company, after payment of
expenses, commissions, discounts and any other transaction costs incurred in
connection therewith.
"Net Working Capital" means (i) all current assets of the Company and
its Restricted Subsidiaries, minus (ii) all current liabilities of the Company
and its Restricted Subsidiaries (including the current portion of gas balancing
liabilities), except current liabilities included in Indebtedness.
"Non-Recourse Indebtedness" means Indebtedness or that portion of
Indebtedness of a Person as to which (a) neither the Company nor any Restricted
Subsidiary (i) provides credit support including any undertaking, agreement or
instrument which would constitute Indebtedness or (ii) is directly or indirectly
liable for such Indebtedness and (b) no default with respect to such
Indebtedness (including any rights which the holders thereof may have to take
enforcement action against such Person) would permit (upon notice, lapse of time
or both) any holder of any other Indebtedness (other than Non-Recourse
Indebtedness) of the Company or its Restricted Subsidiaries to declare a default
on such other Indebtedness or cause the payment thereof to be accelerated or
payable prior to its stated maturity.
43
<PAGE> 45
"Oil and Gas Business" means the business of the exploration for, and
exploitation, development, production, processing (but not refining),
marketing, storage and transportation of, hydrocarbons, and other related
energy and natural resources businesses (including oil and gas services
businesses related to the foregoing).
"Oil and Gas Securities" means the Voting Stock of a Person primarily
engaged in the Oil and Gas Business, provided that such Voting Stock shall
constitute a majority of the Voting Stock of such Person in the event that such
Voting Stock is not registered under Section 12 of the Exchange Act.
"Permitted Business Investments" means (i) Investments in assets used
in the Oil and Gas Business; (ii) the acquisition of Oil and Gas Securities;
(iii) the entry into operating agreements, joint ventures, processing
agreements, farmout agreements, development agreements, area of mutual interest
agreements, contracts for the sale, transportation or exchange of oil and
natural gas, unitization agreements, pooling arrangements, joint bidding
agreements, service contracts, partnership agreements (whether general or
limited) or other similar or customary agreements, transactions, properties,
interests or arrangements, and Investments and expenditures in connection
therewith or pursuant thereto, in each case made or entered into in the
ordinary course of the Oil and Gas Business, excluding solely for purposes of
this clause (iii), however, Investments in corporations; (iv) the acquisition
of working interests, royalty interests or mineral leases relating to oil and
gas properties; (v) Investments by the Company or any Wholly Owned Restricted
Subsidiary in any Person which, immediately prior to the making of such
Investment, is a Wholly Owned Restricted Subsidiary; (vi) Investments in the
Company by any Wholly Owned Restricted Subsidiary; (vii) Investments permitted
under the covenant captioned "Certain Covenants - Limitation on Sales of
Assets" and "Limitations on Sale/Leaseback Transactions;" (viii) Investments in
any Person the consideration for which consists of Capital Stock (other than
Disqualified Stock); (ix) Investments constituting obligations under hedging
arrangements described in clause (viii) of the definition of "Permitted
Indebtedness;" and (x) Investments in Unrestricted Subsidiaries the assets of
which consist of assets used in the Oil and Gas Business (other than cash and
Cash Equivalents) received by the Company from any Person other than a
Subsidiary of the Company solely as a result of the issuance or sale of Capital
Stock of the Company (other than Disqualified Stock) provided that such
Investment is made within 30 days of the issuance or sale of such Capital
Stock.
"Permitted Company Refinancing Indebtedness" means Indebtedness of the
Company, the net proceeds of which are used to renew, extend, refinance, refund
or repurchase outstanding Indebtedness of the Company (other than any
Indebtedness incurred in reliance upon clause (ii) or clause (v) of the
definition of Permitted Indebtedness), provided that (i) if the Indebtedness
(including the Notes) being renewed, extended, refinanced, refunded or
repurchased is pari passu with or subordinated in right of payment to the
Notes, then such Indebtedness is pari passu with or subordinated in right of
payment to, as the case may be, the Notes at least to the same extent as the
Indebtedness being renewed, extended, refinanced, refunded or repurchased, (ii)
such Indebtedness is scheduled to mature no earlier than the Indebtedness being
renewed, extended, refinanced, refunded or repurchased, and (iii) such
Indebtedness has an Average Life at the time such Indebtedness is incurred that
is equal to or greater than the Average Life of the Indebtedness being renewed,
extended, refinanced, refunded or repurchased; provided, further, that such
Indebtedness (to the extent that such Indebtedness constitutes Permitted
Company Refinancing Indebtedness) is in an aggregate principal amount (or, if
such Indebtedness is issued at a price less than the principal amount thereof,
the aggregate amount of gross proceeds therefrom is) not in excess of the
aggregate principal amount then outstanding of the Indebtedness being renewed,
extended, refinanced, refunded or repurchased (or if the Indebtedness being
renewed, extended, refinanced, refunded or repurchased was issued at a price
less than the principal amount thereof, then not in excess of the amount of
liability in respect thereof determined in accordance with GAAP).
"Permitted Financial Investments" means the following kinds of
instruments if, in the case of instruments referred to in clauses (i) through
(iv) below, on the date of purchase or other acquisition of any such instrument
by the Company or any Subsidiary, the remaining term to maturity is not more
than one year: (i) readily marketable obligations issued or unconditionally
guaranteed as to principal of and interest on by the United States of America
or by any agency or authority controlled or supervised by and acting as an
instrumentality of the United States of
44
<PAGE> 46
America; (ii) repurchase obligations for instruments of the type described in
clause (i) for which delivery of the instrument is made against payment; (iii)
obligations (including, but not limited to, demand or time deposits, bankers'
acceptances and certificates of deposit) issued by a depository institution or
trust company incorporated or doing business under the laws of the United States
of America, any state thereof or the District of Columbia or a branch or
subsidiary of any such depository institution or trust company operating outside
the United States, provided, that such depository institution or trust company
has, at the time of the Company's or such Subsidiary's investment therein or
contractual commitment providing for such investment, capital surplus or
undivided profits (as of the date of such institution's most recently published
financial statements) in excess of $500 million; (iv) commercial paper issued by
any corporation, if such commercial paper has, at the time of the Company's or
any Subsidiary's investment therein or contractual commitment providing for such
investment, credit ratings of A-1 (or higher) by Standard & Poor's Ratings
Services and P-1 (or higher) by Moody's Investors Services, Inc.; and (v) money
market mutual or similar funds having assets in excess of $500 million.
"Permitted Indebtedness" means (i) Indebtedness of the Company and its
Restricted Subsidiaries outstanding as of the Series A/B Issue Date; (ii)
Indebtedness of the Company and its Restricted Subsidiaries under a Bank Credit
Facility, in a principal amount outstanding at any time not to exceed a
principal amount equal to the greater of (a) $40 million and (b) $10 million
plus 15% of Adjusted Consolidated Net Tangible Assets plus related accrued
interest and costs, less any Net Cash Proceeds applied pursuant to the covenant
"Limitation on Sale of Assets" to repay or prepay such Indebtedness that
results in a permanent reduction in any revolving credit or other commitment
relating thereto or the maximum amount that may be borrowed thereunder provided
that the aggregate amount of applied Net Cash Proceeds shall not permanently
reduce the amount of Permitted Indebtedness under this clause (ii) below $10
million principal amount plus related accrued interest and costs; (iii) other
Indebtedness of the Company and its Restricted Subsidiaries in a principal
amount not to exceed $10 million at any one time outstanding; (iv) Non-Recourse
Indebtedness; (v) Indebtedness of the Company to any Wholly Owned Restricted
Subsidiary of the Company and Indebtedness of any Restricted Subsidiary of the
Company to the Company or another Wholly Owned Restricted Subsidiary of the
Company; (vi) Permitted Company Refinancing Indebtedness; (vii) Permitted
Subsidiary Refinancing Indebtedness; (viii) obligations under hedging
arrangements that the Company and its Subsidiaries enter into in the ordinary
course of business for the purpose of protecting their production against
fluctuations in oil and natural gas prices; (ix) Indebtedness under the Notes
and the Series A/B Notes; and (x) Indebtedness of a Subsidiary pursuant to a
Guarantee of the Notes pursuant to Article X of the Indenture or of the Series
A/B Notes pursuant to the Series A/B Indenture.
"Permitted Investments" means Permitted Business Investments and
Permitted Financial Investments.
"Permitted Liens" means (i) Liens outstanding as of the Series A/B
Issue Date; (ii) Liens now or hereafter securing a Bank Credit Facility;
provided, however, such Liens are limited to securing Indebtedness in an amount
not in excess of that permitted to be incurred in accordance with clause (ii) of
the definition of Permitted Indebtedness; (iii) Liens now or hereafter securing
any interest rate hedging obligations so long as the related Indebtedness (a)
constitutes Senior Indebtedness or (b) is, or is permitted to be under the
Indenture, secured by a Lien on the same property securing such interest rate
obligations; (iv) Liens now or hereafter securing any interest rate hedging
obligations so long as the related Indebtedness (a) constitutes the Notes or the
Series A/B Notes (or any Permitted Company Refinancing Indebtedness in respect
thereof) or (b) is, or is permitted to be under the Indenture, secured by a Lien
on the same property securing such interest rate hedging obligations; (v) Liens
securing Indebtedness, the proceeds of which are used to refinance secured
Indebtedness of the Company or its Restricted Subsidiaries; provided, that such
Liens extend to or cover only the property or assets currently securing the
Indebtedness being refinanced; (vi) Liens for taxes, assessments and
governmental charges not yet delinquent or being contested in good faith and for
which adequate reserves have been established to the extent required by GAAP;
(vii) mechanics', workmen's, materialmen's, operators' or similar Liens arising
in the ordinary course of business; (viii) Liens in connection with workers'
compensation, unemployment insurance or other social security, old age pension
or public liability obligations; (ix) Liens, deposits or pledges to secure the
performance of bids, tenders, contracts (other than contracts for the payment of
money), leases, public or statutory obligations, surety, stay, appeal indemnity,
performance or other similar bonds, or other similar obligations arising in the
ordinary course of business; (x) survey exceptions, encumbrances, easements or
reservations of, or rights of others for, rights of way, zoning or other
restrictions as to the use of real properties, and minor defects in title which,
in the case of any of
45
<PAGE> 47
the foregoing, were not incurred or created to secure the payment of borrowed
money or the deferred purchase price of property or services, and in the
aggregate do not materially adversely affect the value of such properties or
materially impair use for the purposes of which such properties are held by the
Company or any Restricted Subsidiaries; (xi) Liens on, or related to, properties
to secure all or part of the costs incurred in the ordinary course of business
of exploration, drilling, development or operation thereof; (xii) Liens on
pipeline or pipeline facilities which arise out of operation of law; (xiii)
judgment and attachment Liens not giving rise to an Event of Default or Liens
created by or existing from any litigation or legal proceeding that are
currently being contested in good faith by appropriate proceedings and for which
adequate reserves have been made; (xiv) (a) Liens upon any property of any
Person existing at the time of acquisition thereof by the Company or a
Restricted Subsidiary, (b) Liens upon any property of a Person existing at the
time such Person is merged or consolidated with the Company or any Restricted
Subsidiary or existing at the time of the sale or transfer of any such property
of such Person to the Company or any Restricted Subsidiary, or (c) Liens upon
any property of a Person existing at the time such Person becomes a Restricted
Subsidiary; provided, that in each case such Lien has not been created in
contemplation of such sale, merger, consolidation, transfer or acquisition, and
provided that in each such case no such Lien shall extend to or cover any
property of the Company or any Restricted Subsidiary other than the property
being acquired and improvements thereon; (xv) Liens on deposits to secure public
or statutory obligations or in lieu of surety or appeal bonds entered into in
the ordinary course of business; (xvi) Liens in favor of collecting or payor
banks having a right of setoff, revocation, refund or chargeback with respect to
money or instruments of the Company or any Subsidiary on deposit with or in
possession of such bank; (xvii) purchase money security interests granted in
connection with the acquisition of assets in the ordinary course of business and
consistent with past practices, provided, that (a) such Liens attach only to the
property so acquired with the purchase money indebtedness secured thereby and
(b) such Liens secure only Indebtedness that is not in excess of 100% of the
purchase price of such assets; (xviii) Liens reserved in oil and gas mineral
leases for bonus or rental payments and for compliance with the terms of such
leases; (xix) Liens arising under partnership agreements, oil and gas leases,
farm-out agreements, division orders, contracts for the sale, purchase,
exchange, transportation or processing (but not refining) of oil, gas or other
hydrocarbons, unitization and pooling declarations and agreements, development
agreements, operating agreements, area of mutual interest agreements, and other
similar agreements which are customary in the Oil and Gas Business; (xx) Liens
securing obligations under hedging arrangements that the Company enters into in
the ordinary course of business for the purpose of protecting its production
against fluctuations in oil and natural gas prices; and (xxi) Liens to secure
Dollar-Denominated Production Payments and Volumetric Production Payments.
"Permitted Subsidiary Refinancing Indebtedness" means Indebtedness of
any Restricted Subsidiary, the net proceeds of which are used to renew, extend,
refinance, refund or repurchase outstanding Indebtedness of such Restricted
Subsidiary (other than any Indebtedness incurred in reliance upon clause (ii)
or clause (v) of the definition of Permitted Indebtedness), provided that (i)
if the Indebtedness (including any Guarantee) being renewed, extended,
refinanced, refunded or repurchased is pari passu with or subordinated in right
of payment to the Guarantee, then such Indebtedness is pari passu with or
subordinated in right of payment to, as the case may be, the Guarantee at least
to the same extent as the Indebtedness being renewed, extended, refinanced,
refunded or repurchased, (ii) such Indebtedness is scheduled to mature no
earlier than the Indebtedness being renewed, extended, refinanced, refunded or
repurchased, and (iii) such Indebtedness has an Average Life at the time such
Indebtedness is incurred that is equal to or greater than the Average Life of
the Indebtedness being renewed, extended, refinanced, refunded or repurchased,
provided, further, that such Indebtedness (to the extent that such Indebtedness
constitutes Permitted Subsidiary Refinancing Indebtedness) is in an aggregate
principal amount (or, if such Indebtedness is issued at a price less than the
principal amount thereof, the aggregate amount of gross proceeds therefrom is)
not in excess of the aggregate principal amount then outstanding of the
Indebtedness being renewed, extended, refinanced, refunded or repurchased (or
if the Indebtedness being renewed, extended, refinanced, refunded or
repurchased was issued at a price less than the principal amount thereof, then
not in excess of the amount of liability in respect thereof determined in
accordance with GAAP); provided, however, that a Restricted Subsidiary shall
not incur refinancing Indebtedness to renew, extend, refinance, refund or
repurchase outstanding Indebtedness of another Subsidiary unless such other
Subsidiary is a Guarantor.
"Person" means any individual, corporation, partnership, limited
liability company, joint venture, trust, estate, unincorporated organization or
government or any agency or political subdivision thereof.
46
<PAGE> 48
"Preferred Stock" as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated), which is
preferred as to the payment of dividends, or upon any voluntary or involuntary
liquidation or dissolution of such corporation, over shares of Capital Stock of
any other class of such corporation.
"Production Payments" means, collectively, Dollar-Denominated
Production Payments and Volumetric Production Payments.
"Reference Period" means, with respect to any Person, the four full
consecutive fiscal quarters ended with the last full fiscal quarter for which
financial information is available immediately preceding any date upon which
any determination is to be made pursuant to the terms of the Notes or the
Indenture.
"Restricted Payment" means, with respect to any Person, any of the
following: (i) any dividend or other distribution in respect of such Person's
Capital Stock (other than (a) dividends or distributions payable solely in
Capital Stock (other than Disqualified Stock) and (b) in the case of Restricted
Subsidiaries of the Company, dividends or distributions payable to the Company
or to a Restricted Subsidiary of the Company); (ii) the purchase, redemption or
other acquisition or retirement for value of any Capital Stock, or any option,
warrant, or other right to acquire shares of Capital Stock, of the Company or
any of its Restricted Subsidiaries (but excluding (a) any cashless exercise of
warrants or options or (b) payments in respect of cash elections or phantom
stock or similar awards under any director or employee benefit plan or
arrangement provided such payment is recorded as a compensation expense); (iii)
the making of any principal payment on, or the purchase, defeasance,
repurchase, redemption or other acquisition or retirement for value, prior to
any scheduled maturity, scheduled repayment or scheduled sinking fund payment,
of any Indebtedness which is subordinated in right of payment to the Notes; and
(iv) the making by such Person of any Investment other than a Permitted
Investment.
"Restricted Subsidiary" means any Subsidiary of the Company other than
an Unrestricted Subsidiary. The Board of Directors may designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided, however, that,
immediately after giving effect to such designation, the Company could incur at
least $1.00 in additional Indebtedness pursuant to the first paragraph of the
covenant captioned "Certain Covenants - Limitation on Incurrence of Additional
Indebtedness."
"Sale/Leaseback Transaction" means with respect to the Company or any
of its Restricted Subsidiaries, any arrangement with any Person providing for
the leasing by the Company or any of its Restricted Subsidiaries of any
principal property, acquired or placed into service more than 180 days prior to
such arrangement, whereby such property has been or is to be sold or
transferred by the Company or any of its Restricted Subsidiaries to such
Person.
"Senior Indebtedness" means any Indebtedness of the Company (whether
outstanding on the Series A/B Issue Date or thereafter incurred), unless such
Indebtedness is contractually subordinate or junior in right of payment of
principal, premium and interest to the Notes.
"Senior Indebtedness of a Guarantor" means any Indebtedness of such
Guarantor (whether outstanding on the Series A/B Issue Date or thereafter
incurred), unless such Indebtedness is contractually subordinate or junior in
right of payment of principal, premium and interest to the Guarantees.
"Series A/B Indenture" means the Indenture dated as of November 1,
1996, among the Company, NEG-OK, and Bank One, Columbus, N.A., as trustee,
providing for the issuance of the Series A/B Notes in the aggregate principal
amount of $100 million, as such may be amended or supplemented from time to
time.
"Series A/B Issue Date" means the date on which the Series A/B Notes
were originally issued under the Series A/B Indenture.
"Series A/B Notes" means the Company's 10 3/4% Senior Notes due 2006
issued pursuant to the Series A/B Indenture, as such may be amended or
supplemented from time to time.
47
<PAGE> 49
"Subordinated Indebtedness of a Guarantor" means any Indebtedness of
such Guarantor (whether outstanding on the Series A/B Issue Date or thereafter
incurred) which is contractually subordinate or junior in right of payment of
principal, premium and interest to the Guarantees.
"Subordinated Indebtedness of the Company" means any Indebtedness of
the Company (whether outstanding on the Series A/B Issue Date or thereafter
incurred) which is contractually subordinate or junior in right of payment of
principal, premium and interest to the Notes.
"Subsidiary" means any subsidiary of the Company. A subsidiary of any
Person means (i) a corporation a majority of whose Voting Stock is at the time,
directly or indirectly, owned by such Person, by one or more subsidiaries of
such Person or by such Person and one or more subsidiaries of such Person, (ii)
a partnership in which such Person or a subsidiary of such Person is, at the
date of determination, a general or limited partner of such partnership, but
only if such Person or its subsidiary is entitled to receive more than 50
percent of the assets of such partnership upon its dissolution, or (iii) any
other Person (other than a corporation or partnership) in which such Person,
directly or indirectly, at the date of determination thereof, has (x) at least
a majority ownership interest or (y) the power to elect or direct the election
of a majority of the directors or other governing body of such Person.
"Unrestricted Subsidiary" means (i) any Subsidiary of an Unrestricted
Subsidiary or (ii) any Subsidiary of the Company or of a Restricted Subsidiary
that is designated as an Unrestricted Subsidiary by a resolution adopted by the
Board of Directors in accordance with the requirements of the following
sentence. The Company may designate any Subsidiary of the Company or of a
Restricted Subsidiary (including a newly acquired or newly formed Subsidiary or
any Restricted Subsidiary of the Company), to be an Unrestricted Subsidiary by
a resolution of the Board of Directors of the Company, as evidenced by written
notice thereof delivered to the Trustee, if after giving effect to such
designation, (i) the Company could incur at least $1.00 of additional
Indebtedness pursuant to the first paragraph of the covenant captioned "Certain
Covenants - Limitation on Incurrence of Additional Indebtedness," (ii) the
Company could make an additional Restricted Payment of at least $1.00 pursuant
to the first paragraph of the covenant captioned "Certain Covenants - Limitation
on Restricted Payments," (iii) such Subsidiary does not own or hold any Capital
Stock of, or any lien on any property of, the Company or any Restricted
Subsidiary and (iv) such Subsidiary is not liable, directly or indirectly, with
respect to any Indebtedness other than Non-Recourse Indebtedness.
"U.S. Government Securities" means securities that are (i) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged or (ii) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States
of America the payment of which is unconditionally guaranteed as a full faith
and credit obligation by the United States of America, which, in either case
under clauses (i) or (ii) are not callable or redeemable at the option of the
issuer thereof.
"U.S. Legal Tender" means such coin or currency of the United States
as at the time of payment shall be legal tender for the payment of public and
private debts.
"Volumetric Production Payments" mean production payment obligations
recorded as deferred revenue in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"Voting Stock" means, with respect to any Person, securities of any
class or classes of Capital Stock in such Person entitling the holders thereof
(whether at all times or only so long as no senior class of stock has voting
power by reason of contingency) to vote in the election of members of the Board
of Directors or other governing body of such person, provided that, for
purposes of the definition of Change in Control, the Series D Preferred Stock
of the Company outstanding at the Series A/B Issue Date shall not be deemed
Voting Stock unless and until the holders of such class take any action, by
vote, consent or otherwise, to exercise any right of such class to elect or
appoint more than one member to the Board of Directors of the Company.
48
<PAGE> 50
"Wholly Owned Restricted Subsidiary" means a Restricted Subsidiary 95%
or more of the Capital Stock (other than directors' qualifying shares if
applicable) of which is owned by the Company or another Wholly Owned Restricted
Subsidiary.
EVENTS OF DEFAULT
The following will be "Events of Default" under the Indenture:
(i) default by the Company or any Guarantor in the payment of
principal of or premium, if any, on the Notes when due and payable at maturity,
upon repurchase pursuant to a Change of Control Offer or a Net Proceeds Offer,
upon acceleration or otherwise; or
(ii) default by the Company or any Guarantor for 30 days in payment of
any interest on the Notes; or
(iii) default by the Company or any Guarantor in the deposit of any
optional redemption payment; or
(iv) default by the Company or any Guarantor in the performance of the
covenants discussed under "Certain Covenants - Limitation on Mergers and
Consolidations;" or
(v) default by the Company or any Guarantor in the performance of any
other covenant or agreement in the Indenture (other than those described in
clauses (i) through (iv) above) which shall not have been remedied within 30
days after written notice by the Trustee or by the Holders of at least 25% in
principal amount of the Notes then outstanding; or
(vi) the occurrence and continuation beyond any grace period of any
default in the payment when due, whether by acceleration or otherwise, of the
principal of (premium, if any, on) and interest on any other Indebtedness
(other than Non-Recourse Indebtedness) of the Company or any Subsidiary (other
than an Unrestricted Subsidiary) of the Company having an outstanding principal
amount of $5.0 million or more, individually or in the aggregate; or
(vii) the commencement of proceedings, or the taking of any
enforcement action (including by way of set-off), by any holder of at least
$5.0 million in aggregate principal amount of Indebtedness (including any
amounts owed pursuant to a judgment or order) of the Company or any Subsidiary
(other than an Unrestricted Subsidiary provided that neither the Company nor
any Restricted Subsidiary is liable, directly or indirectly, for such
Indebtedness), after a default under such Indebtedness, to retain in
satisfaction of such Indebtedness or to collect or seize, dispose of or apply
in satisfaction of such Indebtedness, property or assets of the Company or its
Restricted Subsidiaries having a fair market value in excess of $5.0 million
individually or in the aggregate; provided that if any such proceedings or
actions are terminated or rescinded, or such Indebtedness is repaid or settled,
such Event of Default under the Indenture and any consequential acceleration of
the Notes shall be automatically rescinded, so long as (a) such rescission does
not conflict with any judgment or decree and (b) the holder of such
Indebtedness shall not have applied any such property or assets in satisfaction
of such Indebtedness; or
(viii) the entry by a court of one or more judgments or orders for the
payment in cash or other assets of $5.0 million or more individually or in the
aggregate (net of applicable insurance coverage acknowledged in writing by the
insurance carrier) having been rendered against the Company or any Subsidiary
(other than an Unrestricted Subsidiary; provided that neither the Company nor
any Restricted Subsidiary is liable, directly or indirectly, for such judgment
or order) and such judgment or order shall continue unsatisfied and unstayed
for a period of 60 days; or
(ix) the occurrence of certain events giving rise to ERISA liability;
or
(x) the failure of a Guarantee by a Guarantor to be in full force and
effect (other than a release of a Guarantee in accordance with the Indenture),
or the denial or disaffirmance by such entity thereof; or
49
<PAGE> 51
(xi) certain events involving bankruptcy, insolvency or reorganization
of the Company or any Subsidiary (other than an Unrestricted Subsidiary) of the
Company.
The Indenture provides that the Trustee may withhold notice to the
Holders of the Notes of any default (except in payment of principal of, or
premium, if any, or interest on the Notes) if the Trustee considers it in the
interest of the Holders of the Notes to do so.
The Indenture provides that if an Event of Default occurs and is
continuing with respect to the Indenture, the Trustee or the Holders of not
less than 25% in principal amount of the Notes outstanding may declare the
principal of and premium, if any, and accrued but unpaid interest on all Notes
to be due and payable. Upon such a declaration, such principal, premium, if
any, and interest will be due and payable immediately. If an Event of Default
relating to certain events of bankruptcy, insolvency or reorganization of the
Company or any Subsidiary of the Company occurs and is continuing, the
principal of, and premium, if any, and interest on all the Notes will become
and be immediately due and payable without any declaration or other act on the
part of the Trustee or any Holders of the Notes. The amount due and payable on
the acceleration of any Note will be equal to 100% of the principal amount of
such Note, plus accrued interest to the date of payment. Under certain
circumstances, the Holders of a majority in principal amount of the outstanding
Notes may rescind any such acceleration with respect to the Notes and its
consequences.
The Indenture provides that no Holder of a Note may pursue any remedy
under the Indenture unless (i) the Trustee shall have received written notice
of a continuing Event of Default, (ii) the Trustee shall have received a
request from Holders of at least 25% in principal amount of the Notes to pursue
such remedy, (iii) the Trustee shall have been offered indemnity reasonably
satisfactory to it, (iv) the Trustee shall have failed to act for a period of
60 days after receipt of such notice, request and offer of indemnity and (v) no
direction inconsistent with such written request has been given to the Trustee
during such 60-day period by the Holders of a majority in principal amount of
the Notes; provided, however, such provision does not affect the right of a
Holder of a Note to sue for enforcement of any overdue payment thereon.
The Holders of a majority in principal amount of the Notes then
outstanding will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee
under the Indenture, subject to certain limitations specified in the Indenture.
The Indenture requires the annual filing by the Company with the Trustee of a
written statement as to compliance with the covenants contained in the
Indenture.
MODIFICATION AND WAIVER
The Indenture provides that modifications and amendments to the
Indenture or the Notes may be made by the Company, the Guarantors and the
Trustee with the consent of the Holders of a majority in principal amount of
the Notes then outstanding; provided that no such modification or amendment
may, without the consent of the Holder of each Note then outstanding affected
thereby, (i) reduce the percentage of principal amount of Notes whose Holders
must consent to an amendment, supplement or waiver; (ii) reduce the rate or
change the time for payment of interest, including defaulted interest, on any
Note; (iii) reduce the principal amount of any Note or change the Maturity Date
of the Notes; (iv) reduce the redemption price, including premium, if any,
payable upon redemption of any Note or change the time at which any Note may or
shall be redeemed; (v) reduce the repurchase price, including premium, if any,
payable upon the repurchase of any Note or change the time at which any Note
may or shall be repurchased; (vi) make any Note payable in money other than
that stated in the Note; (vii) impair the right to institute suit for the
enforcement of any payment of principal of, or premium, if any, or interest on,
any Note; (viii) make any change in the percentage of principal amount of Notes
necessary to waive compliance with certain provisions of the Indenture; or (ix)
waive a continuing Default or Event of Default in the payment of principal of,
premium, if any, or interest on the Notes. The Indenture provides that
modifications and amendments of the Indenture may be made by the Company and
the Trustee without the consent of any holders of Notes in certain limited
circumstances, including (a) to cure any ambiguity, omission, defect or
inconsistency, (b) to provide for the assumption of the obligations of the
Company or any Guarantor under the Indenture upon the merger, consolidation or
sale or other disposition of all or substantially all of the assets of the
Company or such Guarantor, (c) to reflect the release of any Guarantor from its
Guarantee, or the addition of any Subsidiary of the Company as a
50
<PAGE> 52
Guarantor, in the manner provided in the Indenture, (d) to comply with any
requirement of the SEC in order to effect or maintain the qualification of the
Indenture under the Trust Indenture Act of 1939 or (e) to make any change that
would provide any additional benefit to the Holders or that does not adversely
affect the rights of any Holder of Notes in any material respect.
The Indenture provides that neither the Company nor any of its
Subsidiaries shall, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fees or otherwise, to any Holder of
any Notes for or as an inducement to any consent, waiver or amendment of any
terms or provisions of the Notes or the Indenture unless such consideration is
offered to be paid or agreed to be paid to all Holders of the Notes which so
consent, waive or agree to amend in the time period set forth in any
solicitation documents relating to such consent.
The Indenture provides that the Holders of a majority in aggregate
principal amount of the Notes then outstanding may waive any past default under
the Indenture, except a default in the payment of principal, premium, if any,
or interest.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance"). Such Legal Defeasance means that the Company will be deemed to
have paid and discharged the entire Indebtedness represented by the outstanding
Notes, except for (i) the rights of Holders of such Notes to receive payments
in respect of the principal of, premium, if any, and interest on such Notes
when such payments are due, (ii) the Company's obligations with respect to such
Notes concerning the issuance of temporary Notes, transfers and exchanges of
Notes, replacement of mutilated, destroyed, lost or stolen Notes, the
maintenance of an office or agency where Notes may be surrendered for transfer
or exchange or presented for payment, and duties of paying agents, (iii) the
rights, powers, trusts, duties and immunities of the Trustee, and the Company's
obligations in connection therewith and (iv) the Legal Defeasance provisions of
the Indenture. In addition, the Company may, at its option and at any time,
elect to have the obligations of the Company released with respect to certain
covenants described under "Certain Covenants" ("Covenant Defeasance"), and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the Notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment events) described
under "Events of Default" will no longer constitute an Event of Default with
respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance,
(i) the Company must irrevocably deposit with the Trustee or other qualifying
trustee, in trust, for the benefit of the Holders of the Notes, cash in U.S.
Legal Tender, U.S. Government Securities, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, premium, if any, and
interest on the outstanding Notes on the Maturity Date or on the applicable
mandatory redemption date, as the case may be; of such principal or installment
of principal, premium, if any, or interest; (ii) in the case of Legal
Defeasance, the Company must deliver to the Trustee an opinion of counsel
reasonably acceptable to the Trustee confirming that (a) the Company has
received from or there has been published by, the Internal Revenue Service a
ruling or (b) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and based
thereon such opinion of counsel shall confirm that, the Holders of the
outstanding Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such Legal Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Legal Defeasance had not occurred; (iii) in the
case of Covenant Defeasance, the Company shall have delivered to the Trustee an
opinion of counsel reasonably acceptable to the Trustee to the effect that the
Holders of the outstanding Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Covenant Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Covenant Defeasance had not
occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit or insofar as Events of Default from
bankruptcy or insolvency events are concerned, at any time in the period ending
on the 91st day after the date of deposit; (v) such Legal Defeasance or Covenant
Defeasance shall not result in a breach or violation of, or constitute a default
under any other material agreement or instrument to which the Company is a party
or by which the Company is bound; (vi) the Company shall have delivered to the
Trustee an
51
<PAGE> 53
Officers' Certificate stating that the deposit was not made by the Company with
the intent of preferring the Holders of Notes over other creditors of the
Company or with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or others; and (vii) the Company shall have delivered
to the Trustee an Officers' Certificate and an opinion of counsel each stating
that all conditions precedent provided for relating to the Legal Defeasance or
the Covenant Defeasance have been complied with.
GOVERNING LAW
The Indenture provides that it will be governed by, and construed in
accordance with, the laws of the State of New York, but without giving effect
to principles of conflicts of law to the extent that the application of the law
of another jurisdiction would be required thereby.
THE TRUSTEE
Bank One, N.A. is the Trustee under the Indenture. Its address is 100
East Broad Street, Columbus, Ohio 43271. The Company has also appointed the
Trustee as the initial Registrar, Transfer Agent and Paying Agent under the
Indenture.
The Trustee is permitted to become an owner or pledgee of Notes and
may otherwise deal with the Company or its Subsidiaries or Affiliates with the
same rights it would have if it were not Trustee. If, however, the Trustee
acquires any conflicting interest (as defined in the Trust Indenture Act of
1939), it must eliminate such conflict or resign.
The Indenture provides that in case an Event of Default shall occur
(and be continuing), the Trustee will be required to use the degree of care and
skill of a prudent person in the conduct of such person's own affairs. The
Trustee will be under no obligation to exercise any of its powers under the
Indenture at the request of any of the Holders of the Notes, unless such
Holders have offered the Trustee indemnity reasonably satisfactory to it.
GLOBAL EXCHANGE NOTE; BOOK-ENTRY FORM
The Exchange Notes initially exchanged by qualified institutional
buyers (as defined in Rule 144A under the Securities Act) will be represented
by a Global Exchange Note. The Global Exchange Note will be deposited on the
Exchange Date with DTC and registered in the name of DTC or its nominee (the
"Global Exchange Note Registered Owner"). Except as set forth below, the Global
Exchange Note may be transferred, in whole and not in part, only to another
nominee of DTC or to a successor of DTC or its nominee.
DTC is a limited-purpose trust company created to hold securities for
its participating organizations (collectively, the "Participants") and to
facilitate the clearance and settlement of transactions in those securities
between Participants through electronic book-entry changes in accounts of its
Participants. The Participants include securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations. Access
to DTC's system is also available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (collectively,
the "Indirect Participants"). Persons who are not Participants may beneficially
own securities held by or on behalf of DTC only through the Participants or the
Indirect Participants. The ownership interest and transfer of ownership
interest of each actual purchaser of each security held by or on behalf of DTC
are recorded on the records of the Participants and Indirect Participants.
Pursuant to procedures established by DTC, (i) upon deposit of the
Global Exchange Note, DTC will credit on its internal system, the principal
amounts of the Exchange Notes of the individual beneficial interests
represented by such Global Exchange Note to the respective accounts of
exchanging Holders who have accounts with DTC and (ii) ownership of such
interests in the Global Exchange Note will be shown on, and the transfer of
ownership thereof will be effected only through, records maintained by DTC
(with respect to the Participants) or by the Participants and the Indirect
Participants (with respect to other owners of beneficial interests in the
Global Exchange Note). The laws of some states require that certain persons
take physical delivery in definitive form of securities that they own.
Consequently, the ability to transfer Exchange Notes will be limited to that
extent.
52
<PAGE> 54
Except as described below, owners of interests in the Global Exchange
Note will not have Exchange Notes registered in their names, will not receive
physical delivery of Exchange Notes in definitive form and will not be
considered the registered owners thereof under the Indenture for any purpose.
None of the Company, the Trustee, nor any agent of the Company or the
Trustee will have any responsibility or liability for (i) any aspect of DTC's
records or any Participant's or Indirect Participant's records relating to or
payments made on account of beneficial ownership interests in the Global
Exchange Note, or for maintaining, supervising or reviewing any of DTC's
records or any Participant's or Indirect Participant's records relating to the
beneficial ownership interests in the Global Exchange Note or (ii) any other
matter relating to the actions and practices of DTC or any of its Participants
or Indirect Participants.
Payments in respect of the principal of, premium, if any, and interest
on any Exchange Notes registered in the name of the Global Exchange Note
Registered Owner on any relevant record date will be payable by the Trustee to
the Global Exchange Note Registered Owner in its capacity as the registered
holder under the Indenture. Under the terms of the Indenture, the Company and
the Trustee will treat the persons in whose names the Notes, including the
Global Exchange Note, are registered as the owners thereof for the purpose of
receiving such payments and for any and all other purposes whatsoever.
Consequently, neither the Company, the Trustee, nor any agent of the Company or
the Trustee has or will have any responsibility or liability for the payment of
such amounts to beneficial owners of the Exchange Notes or for any other matter
relating to actions or practices of DTC or any of its Participants or Indirect
Participants. The Company understands that DTC's current practice, upon receipt
of any payment in respect of securities such as the Exchange Notes (including
principal and interest), is to credit the accounts of the relevant Participants
with the payment on the payment date, in amounts proportionate to their
respective holdings in principal amount of beneficial interests in the relevant
security as shown on the records of DTC (unless DTC has reason to believe it
will not receive payment on such payment date). Payments by the Participants
and the Indirect Participants to the beneficial owners of Exchange Notes will
be governed by standing instructions and customary practices and will not be
the responsibility of DTC, the Trustee or the Company. Neither the Company nor
the Trustee will be liable for any delay by DTC or any of its Participants or
Indirect Participants in identifying the beneficial owners of the Exchange
Notes, and the Company and the Trustee may conclusively rely on and will be
protected in relying on instructions from the Global Exchange Note Registered
Owner for all purposes.
The Global Exchange Note is exchangeable for definitive certificated
Exchange Notes if (i) DTC notifies the Company that it is unwilling or unable
to continue as depositary for the Global Exchange Note or if the Company
determines that DTC is unable to continue as depositary and the Company
thereupon fails to appoint a successor depositary, (ii) the Company, at its
option, notifies the Trustee in writing that it elects to cause the issuance of
the Exchange Notes in definitive certificated form, (iii) there shall have
occurred and be continuing an Event of Default or an event which after notice
or lapse of time would be an Event of Default with respect to the Exchange
Notes, or (iv) as provided in the last paragraph hereunder. Such definitive
certificated Exchange Notes shall be registered in the names of the owners of
the beneficial interests in the Global Exchange Note as provided by the
Participants. Exchange Notes in definitive certificated form will be fully
registered, without coupons, in minimum denominations of $1,000 and integral
multiples of $1,000 above the amount. Upon issuance of Exchange Notes in
definitive certificated form, the Trustee is required to register the Exchange
Notes in the name of, and cause the Exchange Notes to be delivered to, the
Person or Persons (or the nominee thereof) identified as the beneficial owner
as DTC shall direct.
Although DTC has agreed to the foregoing procedures to facilitate
transfers of interest in the Global Exchange Note among Participants of DTC, it
is under no obligation to perform or continue to perform such procedures, and
such procedures may be discontinued at any time. Neither the Company nor the
Trustee will have any responsibility for the performance by DTC or its
Participants or Indirect Participants of their respective obligations under the
rules and procedures governing their operations.
53
<PAGE> 55
The information in this section concerning DTC and DTC's book-entry
system has been obtained from sources that the Company believes to be reliable,
but the Company takes no responsibility for the accuracy thereof.
Exchange Note in definitive form will be issued upon the resale,
pledge or other transfer of any Exchange Note or interest therein to any Person
or entity that is not a Qualified Institutional Buyer or that does not
participate in DTC.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain United States federal income tax
consequences resulting from the acquisition, ownership, and disposition of the
Exchange Notes which may be relevant to a holder or prospective purchaser of
one or more of such Exchange Notes. This summary does not purport to cover all
the material tax consequences of the acquisition, ownership and disposition of
Exchange Notes, and it is not intended as tax advice. IN ADDITION, PERSONS
CONSIDERING THE ACQUISITION OF NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS
CONCERNING THE APPLICATION OF U.S. FEDERAL INCOME TAX LAWS, AS WELL AS THE LAWS
OF ANY STATE, LOCAL, OR FOREIGN TAXING JURISDICTION, TO THEIR PARTICULAR
SITUATIONS AND THE POSSIBLE EFFECT OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
The legal conclusions expressed in this summary are based upon current
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
applicable Treasury regulations ("Regulations"), judicial authority and
administrative rulings and practice, all as in effect as of the date of this
Prospectus, and all of which are subject to change, either prospectively or
retroactively. There can be no assurance that the Internal Revenue Service (the
"Service") will not take a contrary view, and no rulings from the Service have
been or will be sought with respect to any matter involving the tax aspects of
the purchase, ownership or exchange or other disposition of the Notes.
Legislative, judicial or administrative changes or interpretations may be
forthcoming that could alter or modify the statements and conclusions set forth
herein. Any such changes or interpretations may or may not be retroactive and
could affect the tax consequences to holders.
This summary deals only with persons who will hold the Exchange Notes
as capital assets, and does not address tax considerations applicable to
investors who may be subject to special tax rules, such as financial
institutions, tax-exempt organizations, foreign corporations, foreign
individuals, insurance companies, dealers in securities or currencies, persons
who hold Notes as a hedge or as a position in a "straddle" for tax purposes,
and persons who have a "functional currency" other than the U.S. dollar. The
following discussion is limited to the United States federal income tax
consequences relevant to a holder of the Exchange Notes that is a citizen or
resident of the United States, or any political subdivision thereof, an estate
the income of which is subject to United States federal income tax regardless
of source or that is otherwise subject to United States federal income tax on a
net income basis in respect of the Exchange Notes, or a trust the
administration of which is subject to the primary supervision of a United
States court and which has one or more United States persons who have the
authority to control all substantial decisions of the trust. Under newly
enacted legislation, the Secretary of the Treasury has the authority to issue
Regulations allowing certain trusts in existence on August 20, 1996 (other than
a grantor trust within the meaning of subpart E of part I of subchapter J of
chapter 1 of the Internal Revenue Code of 1986) and which was treated as a
United States person before August 20, 1996, to elect to continue to be treated
as a United States person. However, such Regulations have not yet been
promulgated.
In addition, the description does not consider the effect of any
applicable foreign, state, local or other tax laws or estate or gift tax
considerations.
THE EXCHANGE OFFER
Pursuant to recently finalized Regulations, the exchange of
Outstanding Notes and/or Series B Notes for Exchange Notes pursuant to the
Exchange Offer should not constitute a significant modification of the terms of
the Outstanding Notes and/or Series B Notes and, accordingly, such exchange
should be treated as a "non-event" for
54
<PAGE> 56
federal income tax purposes. Therefore, such exchange should have no federal
income tax consequences to holders of the Outstanding Notes and/or Series B
Notes who exchange such notes for Exchange Notes, the holding period of an
Exchange Note will include the holding period of the Outstanding Notes and/or
the Series B Notes for which it was exchanged, and each holder of Exchange
Notes will continue to be required to include interest on such Exchange
Notes in its gross income in accordance with its method of accounting for
federal income tax purposes.
EFFECT OF CHANGE OF CONTROL
Upon a Change of Control, the Company is required to offer to redeem
all outstanding Notes for a price equal to 101% of the principal amount thereof
plus accrued and unpaid interest. Under the Regulations, such Change of Control
redemption requirements will not affect the yield or maturity date of the Notes
unless, based on all the facts and circumstances as of the Issue Date, it was
more likely than not that a Change of Control giving rise to the redemption
would occur. The Company will not treat the Change of Control redemption
provisions of the Notes as affecting the calculation of the yield to maturity
of any Note.
OPTIONAL REDEMPTION
The Company, at its option, may redeem part or all of the Notes at any
time on or after November 1, 2001, for specified percentages of the original
principal amount of the Notes, depending upon the time period in which any such
option is exercised or, if redeemed prior to November 1, 2001, for the
Make-Whole Price plus, in each case, accrued and unpaid interest to the date of
redemption. In addition, the Company may, at its option, redeem up to 35% of
the aggregate principal amount of the Notes at 110.75% of the principal amount
thereof from the net proceeds of one or more Equity Offerings that occur prior
to November 1, 1999, provided that at least 65% of the aggregate principal
amount of the Notes remains outstanding. The Regulations provide that, for
purposes of calculating yield and maturity, an issuer will be treated as
exercising any such option if its exercise would lower the yield of the debt
instrument. A redemption of Notes at the optional redemption prices, however,
would increase the effective yield of the debt instrument as calculated from
the Issue Date. The Company does not currently intend to exercise such options
with respect to the Notes and, in accordance with the Regulations, as of the
Issue Date, the optional redemption provisions will not be taken into account
in calculating the yield to maturity of the Notes.
PAYMENT OF INTEREST
Interest on an Exchange Note generally will be includable in the
income of a holder as ordinary income at the time such interest is received or
accrued, in accordance with such holder's method of accounting for United
States federal income tax purposes.
MARKET DISCOUNT
If a holder purchases a Note for less than the stated redemption price
at maturity (the "Note Issue Price") (the sum of all payments on the Note other
than qualified stated interest), the difference is considered "market discount,"
unless such difference is "de minimis," i.e., less than one-fourth of one
percent of the Note Issue Price multiplied by the number of complete years to
maturity (after the holder acquires the Note). Under the market discount rules,
any gain realized by the holder on a taxable disposition of a Note having
"market discount," as well as on any partial principal payment made with respect
to such Note, will be treated as ordinary income to the extent of the then
"accrued market discount" of the Note. An overview of the rules concerning the
calculation of "accrued market discount" is set forth in the paragraph
immediately below. In addition, a holder of such Note may be required to defer
the deduction of all or a portion of the interest expense on any indebtedness
incurred or continued to purchase or carry a Note.
Any market discount will accrue ratably from the date of acquisition
to the maturity date of the Note, unless the holder elects, irrevocably, to
accrue market discount on a constant interest rate method. The constant
interest rate method generally accrues interest at times and in amounts
equivalent to the result which would have occurred had the market discount been
original issue discount computed from the holder's acquisition of the Note
through the maturity date. The election to accrue market discount on a constant
interest rate method is irrevocable
55
<PAGE> 57
but may be made separately as to each Note held by the holder. Accrual of market
discount will not cause the accrued amounts to be included currently in a
holder's taxable income, in the absence of a disposition of, or principal
payment on, the Note. However, a holder of a Note may elect to include market
discount in income currently as it accrues on either a ratable or constant
interest rate method. In such event, interest expense relating to the
acquisition of a Note which would otherwise be deferred would be currently
deductible to the extent otherwise permitted by the Code. The election to
include market discount in income currently, once made, applies to all market
discount obligations acquired by such holder on or after the first day of the
first taxable year to which the election applies, and may not be revoked without
the consent of the Service. Accrued market discount which is included in a
Holder's gross income will increase the adjusted tax basis of the Note in the
hands of the Holder.
AMORTIZABLE BOND PREMIUM
If a holder acquires a Note for an amount which is greater than the
amount payable at maturity, such holder will be considered to have purchased
such Note with "amortizable bond premium" equal to the amount of such excess.
The Holder may elect to amortize the premium, using a constant yield method
employing six-month compounding, over the period from the acquisition date to
the maturity date of the Note. The "amount payable at maturity" will be
determined as of an earlier call date, using the call price payable on such
earlier date, if the combination of such earlier date and call price will
produce a smaller amortizable bond premium than would result from using the
scheduled maturity date and its amount payable. If an earlier call date is used
and the Note is not called, the Note will be treated as having matured on such
earlier call date and then as having been reissued on such date for the amount
so payable. Amortized amounts may be offset only against interest payments due
under the Note and will reduce the Holder's adjusted tax basis in the Note to
the extent so used.
Once made, an election to amortize and offset interest on bonds, such
as the Notes, will apply to all bonds in respect of which the election was made
that were owned by the taxpayer on the first day of the taxable year to which
the election relates and to all bonds of such class or classes subsequently
acquired by such taxpayer. Such election may only be revoked with the consent
of the Service. If a Holder of a Note does not elect to amortize the premium,
the premium will decrease the gain or increase the loss which would otherwise
be recognized upon disposition of the Note.
SALE, EXCHANGE, OR RETIREMENT OF NOTES
Upon the sale, exchange or retirement (including redemption) of a
Note, other than the exchange of an Outstanding Note or a Series B Note for an
Exchange Note, a holder of a Note generally will recognize gain or loss in an
amount equal to the difference between the amount of cash and the fair market
value of any property received on the sale, exchange or retirement of the Note
(other than in respect of accrued and unpaid interest on the Note, which such
amounts are treated as ordinary interest income) and such holder's adjusted tax
basis in the Note. If a holder holds the Note as a capital asset, such gain or
loss will be capital gain or loss, except to the extent of any accrued market
discount (see - "Market Discount" above), and generally will be long-term
capital gain or loss if the Note has a holding period of more than eighteen
months at the time of sale, exchange or retirement.
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, information reporting requirements will apply to interest
payments on the Notes made to holders other than certain exempt recipients
(such as corporations) and to proceeds realized by such holders on dispositions
of Notes. A 31% backup withholding tax will apply to such amounts only if the
holder (i) fails to furnish its social security or other taxpayer
identification number ("TIN") within a reasonable time after request therefor,
(ii) furnishes an incorrect TIN, (iii) fails to report properly interest or
dividend income, or (iv) fails, under certain circumstances, to provide a
certified statement, signed under penalty of perjury, that the TIN provided is
its correct number and that it is not subject to backup withholding. Any amount
withheld from a payment to a holder under the backup withholding rules is
allowable as a refund or as a credit against such holder's federal income tax
liability, provided that the required information is furnished to the Service.
Holders of Notes should consult their tax advisors as to their qualification
for exemption from backup withholding and the procedure for obtaining such an
exemption.
56
<PAGE> 58
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
Prospectus in connection with any resale of such Exchange Notes. The
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Outstanding Notes where such Outstanding Notes were acquired as a
result of market-making activities or other trading activities. The Company has
agreed that for a period of one year after the date the registration statement,
of which this Prospectus forms a part, is declared effective, it will make this
Prospectus, as amended or supplemented, available to any broker-dealer for use
in connection with any such resale.
The Company will not receive any proceeds from any sales of the
Exchange Notes by broker-dealers. Exchange Notes received by broker-dealers for
their own account pursuant to the Exchange Offer may be sold from time to time
in one or more transactions in the over-the-counter market, in negotiated
transactions through the writing of options on the Exchange Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchase or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such
Exchange Notes. Any broker-dealer that resells the Exchange Notes that were
received by it for its own account pursuant to the Exchange Offer and any
broker or dealer that participates in a distribution of such Exchange Notes may
be deemed to be an "underwriter" within the meaning of the Securities Act, and
any profit on any such resale of Exchange Notes and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal for the
Exchange Offer states that by so acknowledging and by delivering a prospectus,
a broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act.
For a period of 90 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay certain expenses
incident to the Exchange Offer, other than commissions or concession of any
brokers or dealers, and will indemnify the holders of the Securities (including
any broker-dealers) against certain liabilities, including liabilities under
the Securities Act.
By acceptance of this Exchange Offer, each broker-dealer that receives
Exchange Notes for its own account pursuant to the Exchange Offer agrees that,
upon receipt of notice from the Company of the happening of any event which
makes any statement in the Prospectus untrue in any material respect or which
request the making of any changes in the Prospectus in order to make the
statements therein not misleading (which notice the Company agrees to deliver
promptly to such broker-dealer), such broker-dealer will suspend use of the
Prospectus until the Company has amended or supplemented the Prospectus to
correct such misstatement or omission and has furnished copies of the amended
or supplemental Prospectus to such broker-dealer. If the Company shall give any
such notice to suspend the use of the Prospectus, it shall extend the 90-day
period referred to above by the number of days during the period from and
including the date of the giving of such notice to and including when
broker-dealers shall have received copies of the supplemented or amended
Prospectus necessary to permit resales of the Exchange Notes.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Akin,
Gump, Strauss, Hauer & Feld, L.L.P., Dallas, Texas.
57
<PAGE> 59
EXPERTS
The financial statements of the Company appearing in the Company's
Annual Report (Form 10-K) for the year ended December 31, 1996 have been
audited by Ernst & Young LLP independent auditors, as set forth in their report
thereon included therein and incorporated herein by reference. Such financial
statements are incorporated herein by reference in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Alexander Energy Corporation
("Alexander") (subsequently National Energy Group of Oklahoma, Inc.) at
December 31, 1995 and 1994 and for each of the three years in the period ended
December 31, 1995 incorporated by reference in this Prospectus have been
audited by Ernst & Young LLP, independent auditors, to the extent indicated in
their report incorporated by reference herein. The separate financial
statements of American National Energy Corporation ("ANEC") for the year ended
December 31, 1993 (not presented herein), prior to the merger of ANEC and
National Energy Group of Oklahoma, were audited by Coopers & Lybrand, L.L.P.
independent accountants, to the extent indicated in their report incorporated
herein by reference. The financial statements referred to above are
incorporated by reference herein in reliance upon such reports given upon the
authority of such firms as experts in accounting and auditing.
The estimates of the Company's proved oil and natural gas reserves and
related future net revenues and the present value thereof for certain periods
incorporated by reference herein have been derived from the reserve report of
Netherland & Sewell & Associates, Inc., independent petroleum engineers. All of
such information has been so included herein in reliance upon the authority of
such firm as experts in such matters.
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.
Behind the Pipe -- Hydrocarbons in a potentially producing horizon
penetrated by a well bore the production of which has been postponed pending
the production of hydrocarbons from another formation penetrated by the well
bore. These hydrocarbons are classified as proved by non-producing reserves.
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 natural 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
natural gas in sufficient quantities to justify completion as an oil or natural
gas well.
EBITDA -- Earnings (excluding discontinued operations, extraordinary
items, charges resulting from changes in accounting and significant
nonrecurring revenues and expenses) before interest expense, income taxes,
depletion, depreciation and amortization, and the provision for impairment of
oil and natural gas properties.
58
<PAGE> 60
EBITDA is not a measure of cash flow as determined by generally accepted
accounting principles. EBITDA information has been included in this Prospectus
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 natural
gas in an unproved area, to find a new reservoir in a field previously found to
be productive of oil or natural 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.
Infill Well -- A well drilled between known producing wells to better
exploit the reservoir.
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.
NYMEX -- New York Mercantile Exchange.
Oil and Natural 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 natural gas underlying the lands covered by the lease and the right to
produce any oil and natural 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 natural gas property entitling the owner to a share of oil and natural
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.
Productive Well -- A well that is producing oil or natural 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.
59
<PAGE> 61
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
natural 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 natural 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 natural gas property
entitling the owner to a share of oil and natural gas production free of costs
of production.
SEC -- Securities and Exchange Commission.
Secondary Recovery -- A method of oil and natural gas extraction in
which energy sources extrinsic to the reservoir are utilized.
Standardized Measure -- The estimated future net cash flows from
proved oil and natural 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 natural 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.
60
<PAGE> 62
================================================================================
ALL TENDERED OUTSTANDING NOTES AND SERIES B NOTES, EXECUTED LETTERS OF
TRANSMITTAL AND OTHER RELATED DOCUMENTS SHOULD BE DIRECTED TO THE EXCHANGE
AGENT. QUESTIONS AND REQUESTS FOR ASSISTANCE AND REQUESTS FOR ADDITIONAL COPIES
OF THE PROSPECTUS, THE LETTER OF TRANSMITTAL AND OTHER RELATED DOCUMENTS SHOULD
BE ADDRESSED TO THE EXCHANGE AGENT AS FOLLOWS:
BY REGISTERED OR CERTIFIED MAIL:
BANK ONE, N.A.
CORPORATE TRUST OPERATIONS
235 WEST SCHROCK ROAD
COLUMBUS, OHIO 43271-0184
BY OVERNIGHT MAIL OR HAND DELIVERY:
BANK ONE, N.A.
CORPORATE TRUST OPERATIONS
235 WEST SCHROCK ROAD
WESTERVILLE, OHIO 43081
BY FASCIMILE:
(614) 248-7234
ATTENTION: LORA MARSCH
CONFIRM BY TELEPHONE: (614) 248-4856
(ORIGINALS OF ALL DOCUMENTS SUBMITTED BY FACSIMILE SHOULD BE SENT PROMPTLY BY
HAND, OVERNIGHT DELIVERY, OR REGISTERED OR CERTIFIED MAIL.)
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS AND THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. NEITHER THE PROSPECTUS NOR THE ACCOMPANYING LETTER OF TRANSMITTAL
NOR BOTH TOGETHER CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH THE PROSPECTUS RELATES OR
AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS OR THE LETTER OF TRANSMITTAL OR BOTH TOGETHER NOR
ANY EXCHANGE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREIN OR THAT THERE HAS BEEN
NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
================================================================================
$165,000,000
NATIONAL ENERGY
GROUP, INC.
10 3/4% SERIES D SENIOR NOTES
DUE 2006
PROSPECTUS
OCTOBER 28, 1997
----------
TABLE OF CONTENTS
PAGE
Available Information.............................. 3
Information Incorporated by Reference.............. 4
Disclosure Regarding Forward-Looking Statements.... 4
Prospectus Summary................................. 6
Risk Factors....................................... 13
Ratio of Earnings to Fixed Charges ................ 20
Recent Developments ............................... 20
The Exchange Offer ................................ 21
Use of Proceeds ................................... 27
Description of Certain Indebtedness................ 27
Description of the Exchange Notes.................. 28
Certain Federal Income Tax Consequences............ 54
Plan of Distribution............................... 57
Legal Matters...................................... 57
Experts............................................ 58
Glossary........................................... 58
<PAGE> 63
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
As authorized by Section 145 of the General Corporation Law of
Delaware (the "Delaware Corporation Law"), each director and officer of the
Registrant may be indemnified by the Registrant against expenses (including
attorney's fees, judgments, fines and amounts paid in settlement) actually and
reasonably incurred in connection with the defense or settlement of any
threatened, pending or completed legal proceedings in which he is involved by
reason of the fact that he is or was a director or officer of the Registrant if
he acted in good faith and in a manner that he reasonably believed to be in or
not opposed to the best interests of the Registrant, and, with respect to any
criminal action or proceeding, if he had no reasonable cause to believe that
his conduct was unlawful. In each case, such indemnity shall be to the fullest
extent authorized by the Delaware Corporation Law, as amended, to the extent
such amendment permits the Registrant to provide broader indemnification
rights. If the legal proceeding, however, is by or in the right of the
Registrant, the director or officer may not be indemnified in respect of any
claim, issue or matter as to which he shall have been adjudged to be liable for
negligence or misconduct in the performance of his duty to the Registrant
unless a court determines otherwise.
Article Eighth of the Certificate of Incorporation of the Registrant
provides that no Director of the Registrant shall be personally liable to the
Registrant or its shareholders for monetary damages for any breach of fiduciary
duty as a Director except for liability: (1) for any breach of duty of loyalty
to the Registrant or its shareholders, (2) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(3) under Section 174 of the Delaware Corporation Law, or (4) for any
transaction from which the Director derived an improper personal benefit. In
addition, Article Ninth of the Certificate of Incorporation and Section 7.4 of
the Bylaws of the Registrant require the Registrant to indemnify to the fullest
extent authorized by law any person made or threatened to be made a party to
any action, suit or proceeding, whether criminal, civil, administrative, or
investigative, by reason of the fact that such person or such person's testator
or intestate is or was a director, officer, employee or agent of the Registrant
or serves or served at the request of the Registrant any other enterprise as a
director, officer, employee or agent.
The Registrant has agreed to indemnify the officers and directors of
the Registrant against any and all damages to which such indemnified
individuals may become subject, pursuant to any securities, corporate or other
laws, which damages arise in connection with this Registration Statement or any
amendment thereto, or from the inaccuracy or omission of any information in
connection with this Registration Statement. In the event that the foregoing
indemnity is unavailable or insufficient, then the indemnifying party shall
contribute to amounts paid or payable by the indemnified party in respect to
the damages of the indemnified party in such proportion as is appropriate to
reflect the relative fault of the indemnified and indemnifying parties.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
<PAGE> 64
<TABLE>
<S> <C>
4.1 Note Agreement dated as of April 25, 1989, by and among AEJH 1989
Limited Partnership, Alexander Energy Corporation ("Alexander") and
John Hancock Mutual Life Insurance (Incorporated by reference to
Alexander's Form 10-K for the fiscal year ended December 31, 1994).
4.2 Letter dated August 29, 1996 between Alexander and John Hancock Mutual
Life Insurance Company relating to the payment of the 1989 Notes
(Incorporated by reference to Alexander's Form 10-K for the fiscal
year ended December 31, 1994.)
4.3 Indenture dated as of November 1, 1996, among the Registrant, National
Energy Group of Oklahoma, Inc., formerly NEG-OK, Inc. ("NEG-OK"), and
Bank One, Columbus, N.A. (Incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q for the nine months ended September 30,
1996.)
4.4 Indenture dated August 21, 1997, among the Registrant and Bank One,
N.A.*
4.5 Registration Rights Agreement dated August 21, 1997, by and among the
Registrant and the Initial Purchasers*
5.1 Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.*
12.1 Computation of Ratio of Earnings to Fixed Charges*
23.1 Consent of Ernst & Young LLP, independent auditors
23.2 Consent of Coopers & Lybrand L.L.P., independent accountants
23.3 Consent of Netherland, Sewell & Associates, Inc., independent
petroleum engineers
23.4 Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in
Exhibit 5.1)*
24.1 Powers of Attorney (Included in signature pages to this Registration
Statement)*
25.1 Form T-1 of Bank One, N.A.*
99.1 Letter of Transmittal*
</TABLE>
* Previously Filed
(b) Financial Statement Schedules:
None.
A-2
<PAGE> 65
Item 22. Undertakings.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act
of 1934) that is incorporated by reference in this Registration Statement shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering hereof.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed it the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 and Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
A-3
<PAGE> 66
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Amendment No. 1 to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Dallas, State of Texas on this 28th day of October, 1997.
NATIONAL ENERGY GROUP, INC.
BY: /s/ Miles D. Bender
------------------------------
Miles D. Bender
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to the Registration Statement has been signed by or on behalf
of the following person in the capacities and on the dates indicated.
<TABLE>
<S> <C>
/s/Miles D. Bender Dated: October 28, 1997
- ----------------------------------------------------
Miles D. Bender
President, Chief Executive Officer and Director
/s/Robert A. Imel* Dated: October 28, 1997
- ----------------------------------------------------
Robert A. Imel
Chief Financial Officer and Senior Vice President
/s/Melissa H. Rutledge* Dated: October 28, 1997
- ----------------------------------------------------
Melissa H. Rutledge
Controller and Chief Accounting Officer
/s/George B. McCullough* Dated: October 28, 1997
- ----------------------------------------------------
George B. McCullough
Chairman of the Board and Director
/s/Norman C. Miller* Dated: October 28, 1997
- ----------------------------------------------------
Norman C. Miller
Chairman, Executive Committee and Director
/s/Robert H. Kite* Dated: October 28, 1997
- ----------------------------------------------------
Robert H. Kite
Director
</TABLE>
A-4
<PAGE> 67
<TABLE>
<S> <C>
/s/George McDonald* Dated: October 28, 1997
- ----------------------------------------------------
George McDonald
Director
/s/Robert V. Sinnott* Dated: October 28, 1997
- ----------------------------------------------------
Robert V. Sinnott
Director
/s/Elwood W. Schafer* Dated: October 28, 1997
- ----------------------------------------------------
Elwood W. Schafer
Director
/s/Jim L. David* Dated: October 28, 1997
- ----------------------------------------------------
Jim L. David
Vice President - Exploitation and Director
/s/Bob G. Alexander* Dated: October 28, 1997
- ----------------------------------------------------
Bob G. Alexander
Director
/s/Robert J. Mitchell* Dated: October 28, 1997
- ----------------------------------------------------
Robert J. Mitchell
Director
</TABLE>
*By Miles D. Bender as Attorney-in-Fact.
A-5
<PAGE> 68
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
<S> <C>
4.1 Note Agreement dated as of April 25, 1989, by and among AEJH 1989
Limited Partnership, Alexander Energy Corporation ("Alexander") and
John Hancock Mutual Life Insurance (Incorporated by reference to
Alexander's Form 10-K for the fiscal year ended December 31, 1994).
4.2 Letter dated August 29, 1996 between Alexander and John Hancock Mutual
Life Insurance Company relating to the payment of the 1989 Notes
(Incorporated by reference to Alexander's Form 10-K for the fiscal
year ended December 31, 1994.)
4.3 Indenture dated as of November 1, 1996, among the Registrant, National
Energy Group of Oklahoma, Inc., formerly NEG-OK, Inc. ("NEG-OK"), and
Bank One, Columbus, N.A. (Incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q for the nine months ended September 30,
1996.)
4.4 Indenture dated August 21, 1997, among the Registrant and Bank One,
N.A.*
4.5 Registration Rights Agreement dated August 21, 1997, by and among the
Registrant and the Initial Purchasers*
5.1 Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.*
12.1 Computation of Ratio of Earnings to Fixed Charges*
23.1 Consent of Ernst & Young LLP, independent auditors
23.2 Consent of Coopers & Lybrand L.L.P., independent accountants
23.3 Consent of Netherland, Sewell & Associates, Inc., independent
petroleum engineers
23.4 Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in
Exhibit 5.1)*
24.1 Powers of Attorney (Included in signature pages to this Registration
Statement)*
25.1 Form T-1 of Bank One, N.A.*
99.1 Letter of Transmittal*
</TABLE>
* Previously Filed
A-6
<PAGE> 1
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the caption "Experts"
and to the use of our report dated March 18, 1997, in Amendment No. 1 to the
Registration Statement (Form S-4 No. 333-38075) and related Prospectus of
National Energy Group, Inc. for the registration of $165 million of 10 3/4%
Series D Senior Notes due 2006. We also consent to the incorporation by
reference therein of our report dated March 30, 1996, except Notes 4 and 13 for
which date is May 10, 1996 with respect to the consolidated financial statements
of Alexander Energy Corporation included in the Company's Proxy Statement filed,
as part of, or in conjunction with, the Registration Statement on Form S-4, as
amended, declared effective August 3, 1996.
ERNST & YOUNG LLP
Dallas, Texas
October 28, 1997
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in Amendment No. 1 to the
Registration Statement on Form S-4 of National Energy Group, Inc. (File No.
333-38075) of our report, which includes an explanatory paragraph relating to
the Company's adoption of different methods of accounting for its oil and gas
properties and income taxes, dated February 22, 1994, on our audit of the
consolidated financial statements of American Natural Energy Corporation and
Subsidiaries (the "Company") for the year ended December 31, 1993.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P
Tulsa, Oklahoma
October 28, 1997
<PAGE> 1
Exhibit 23.3
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS
We hereby consent to the incorporation by reference in this Amendment No. 1
to the Registration Statement on Form S-4 of our reserve report to the interest
of National Energy Group, Inc. dated March 6, 1997, relating to the estimated
quantities of certain of the Company's proved reserves of oil and gas and the
related estimates of future net revenue and present values thereof, included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1996,
as well as in the Notes to the Consolidated Financial Statements of the Company
in such Annual Report. We also consent to the reference to us under the heading
"Experts" in such amendment to the Registration Statement.
NETHERLAND, SEWELL & ASSOCIATES, INC.
By: /s/ FREDRIC D. SEWELL
---------------------------------
Fredric D. Sewell
President
Dallas, Texas
October 27, 1997
