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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 13, 1997
REGISTRATION NO. 333-17817
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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NATIONAL ENERGY GROUP, INC.
(Exact name of registrant as specified in its charter)
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<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.)
4925 GREENVILLE AVENUE MILES D. BENDER
SUITE 1400 NATIONAL ENERGY GROUP, INC.
DALLAS, TEXAS 75206 4925 GREENVILLE AVENUE, SUITE 1400
(214) 692-9211 DALLAS, TEXAS 75206
(Address, including zip code, and (214) 692-9211
telephone number, (Name, address, including zip code,
including area code, of registrant's and telephone number, including
principal executive offices) area code, of agent for service)
</TABLE>
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Copy to:
CAROL GLENDENNING, ESQ.
STRASBURGER & PRICE, L.L.P.
901 MAIN STREET, SUITE 4300
DALLAS, TEXAS 75202
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this Registration
Statement.
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. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY *
* NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH *
* SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO *
* REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH *
* STATE. *
* *
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SUBJECT TO COMPLETION, DATED JANUARY 13, 1997
PROSPECTUS
OFFER TO EXCHANGE
ALL OUTSTANDING
10 3/4% SENIOR NOTES DUE 2006
($100,000,000 PRINCIPAL AMOUNT OUTSTANDING)
FOR
10 3/4% SENIOR NOTES DUE 2006,
($100,000,000 PRINCIPAL AMOUNT)
OF
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<S> <C> <C>
LOGO NATIONAL ENERGY GROUP, INC.
</TABLE>
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The Exchange Offer will expire at 5:00 p.m., E.S.T., on February 17, 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
$100,000,000 of its 10 3/4% Senior Notes due 2006 (the "Exchange Notes") for an
equal principal amount of its outstanding 10 3/4% Senior Notes due 2006 (the
"Outstanding Notes" and, together with the Exchange Notes, the "Notes"), in
integral multiples of $1,000. 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
for which they may be exchanged pursuant to this Exchange Offer, except for
certain transfer restrictions and registration rights relating to the
Outstanding Notes and except for certain interest provisions relating to such
rights. The Outstanding Notes have been, and the Exchange Notes will be, issued
under an Indenture dated as of November 1, 1996 (the "Indenture"), among the
Company, National Energy Group of Oklahoma, Inc., formerly a wholly-owned
subsidiary of the Company ("NEG-OK") and merged into the Company effective
December 31, 1996, and Bank One, Columbus, N.A. as trustee (the "Trustee"). See
"Description of the Exchange Notes." There will be no proceeds to the Company
from this offering; however, pursuant to a Registration Rights Agreement dated
as of October 29, 1996 (the "Registration Rights Agreement") among the Company,
NEG-OK and the Initial Purchasers (as defined) of the Outstanding Notes, the
Company will bear certain offering expenses.
(Cover text continued on next page)
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SEE "RISK FACTORS" ON PAGE 16 FOR A DISCUSSION OF CERTAIN RISKS TO BE
CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER AND IN EVALUATING AN INVESTMENT
IN THE EXCHANGE NOTES.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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THE DATE OF THIS PROSPECTUS IS JANUARY 13, 1997.
<PAGE> 3
The Company will accept for exchange any and all validly tendered
Outstanding Notes on or prior to 5:00 p.m., E.S.T., on February 17, 1997, unless
extended (the "Expiration Date"). Tenders of Outstanding Notes may be withdrawn
at any time prior to 5:00 p.m., E.S.T., on the Expiration Date; otherwise such
tenders are irrevocable. Bank One, Columbus, N.A. is acting as Exchange Agent in
connection with the Exchange Offer. The Exchange Offer is not conditioned upon
any minimum principal amount of Outstanding Notes being tendered for exchange,
but is otherwise subject to certain customary conditions.
The Exchange Notes will bear interest from the date of issuance (or the
most recent Interest Payment Date (as defined) to which interest on such
Exchange Notes has been paid), at a rate equal to 10 3/4% per annum and on the
same terms as the Outstanding Notes. Interest on the Exchange Notes will be
payable semiannually on May 1 and November 1 of each year commencing May 1,
1997. Accrued interest on the Outstanding Notes that are tendered in exchange
for the Exchange Notes will be payable on or before May 1, 1997. Outstanding
Notes that are accepted for exchange will cease to accrue interest on and after
the date on which interest on the Exchange Notes will begin to accrue.
The Outstanding Notes were sold by the Company on November 1, 1996 to the
Initial Purchasers in transactions 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."
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, 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 where such Outstanding 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 Nasdaq
Stock Market. 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 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 not tendered and accepted in the Exchange Offer will
remain outstanding. To the extent that any Outstanding Notes of other holders
are tendered and accepted in the Exchange Offer, a holder's ability to sell
untendered Outstanding Notes could be adversely affected. Following consummation
of
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<PAGE> 4
the Exchange Offer, the holders of 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."
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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 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 furnished by the Company by Section 13
of the Exchange Act to the Trustee and the holders of the 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 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 Notes or beneficial owner of the Notes in connection with any
sale thereof the information required by Rule 144A(d)(4)(i) under the Securities
Act.
3
<PAGE> 5
INFORMATION INCORPORATED BY REFERENCE
The Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1995, the Company's Quarterly Reports on Form 10-Q for the periods
ended March 31, 1996, June 30, 1996, and September 30, 1996, and the Company's
Current Reports on Form 8-K and Form 8-K/A No. 1 dated June 30, 1995, on Form
8-K and Form 8-K/A No. 1 dated August 29, 1996, and on Form 8-K dated October
10, 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.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon written or oral request of such person, a
copy of any and all of the information that has been incorporated by reference
in this Prospectus (not including exhibits to the information that are
incorporated by reference unless such exhibits are specifically incorporated by
reference into the information that this Prospectus incorporates). Written or
telephone requests for copies of such material should be directed to National
Energy Group, Inc., 4925 Greenville Ave., Suite 1400, Dallas, Texas 75206,
Attention: Secretary (telephone (214) 692-9211).
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
"Safe Harbor" Statement under the Private Securities Litigation Reform Act
of 1995: The forward-looking statements provided below and in other locations
throughout this document (collectively, "Forward-Looking Statements") are based
on NEG's and NEG-OK's historical operating trends, their proved reserves as of
June 30, 1996 and other information available to the management of the Company.
These statements assume that market conditions for NEG's oil and gas production
are comparable to those experienced in 1995 and the first nine months of 1996.
These statements also assume that no significant changes will occur in the
operating environment for the Company's oil and gas properties following the
Exchange Offer. Finally, the Forward-Looking Statements assume no material
changes in the composition of NEG's property base as the result of any material
acquisitions or divestitures and that no material changes will occur in NEG's
financial facilities, except as disclosed herein. NEG cautions that the
Forward-Looking Statements are subject to all the risks and uncertainties
discussed under the captions "Summary Historical and Pro Forma Combined
Financial, Operating and Oil and Natural Gas Data;" "Risk Factors;" "Selected
Pro Forma Combined Financial, Operating and Oil and Natural Gas Data;"
"Management's Discussion and Analysis of Pro Forma Financial Condition and
Results of Operations," "Management's Discussion and Analysis of Financial
Condition and Results of Operations;" "NEG-OK Management's Discussion and
Analysis of Financial Condition and Results of Operations;" "Business and
Properties;" and "Pro Forma Combined Condensed Financial Statements." Moreover,
NEG may make material acquisitions, execute new contracts or terminate existing
contracts, or enter into new financing transactions that may affect the accuracy
of the Forward-Looking Statements. None of these events can be predicted with
certainty and, accordingly, are not taken into consideration in the
Forward-Looking Statements made herein. For all of the foregoing reasons, actual
results may vary materially from the Forward-Looking Statements and there is no
assurance that the assumptions used are necessarily the most likely to occur.
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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 in this Prospectus. Unless the context otherwise
requires, all references to "NEG" or the "Company," are to National Energy
Group, Inc. and its subsidiaries, including NEG-OK. References to "NEG-OK" prior
to the merger (the "Merger") of Alexander Energy Corporation ("Alexander") with
and into NEG-OK, which was effected August 29, 1996, are to Alexander and its
subsidiaries. Effective December 31, 1996, NEG-OK was merged with and into NEG.
"Pro Forma" information gives effect (i) to certain historical acquisitions of
the Company using the purchase method of accounting, (ii) to the Merger and
certain related transactions (the "Related Transactions"), including the sale by
the Company of equity securities for $15.0 million (the "Equity Private
Placement") and borrowings under a restated loan agreement (the "Credit
Facility") to refinance certain indebtedness of the Company and NEG-OK, (iii) to
the acquisition of certain oil and natural gas properties in South Lake Boeuf,
Louisiana acquired by the Company on September 30, 1996 (the "Lake Boeuf
Acquisition"), and (iv) to the offer and sale of the Outstanding Notes to the
Initial Purchasers on November 1, 1996 (the "Initial Offering") and the
application of net proceeds therefrom.
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 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 recently
initiated an exploration program concentrating primarily on prospects onshore in
southern Louisiana and in shallow state waters in offshore Nueces County, Texas.
As a result of its acquisition, exploitation, development and exploration
activities (including the Merger and the Lake Boeuf Acquisition), 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 176.2 Bcfe (74% natural
gas) and $165.2 million (56% proved developed), respectively, on a pro forma
basis at June 30, 1996 as estimated in reports prepared by the Company's
independent petroleum engineers, Netherland, Sewell & Associates, Inc.
("Netherland & Sewell"). NEG's average net daily production has increased from
1.2 Mmcfe for 1991 to 39.0 Mmcfe for the pro forma nine months ended September
30, 1996. As a result of increases in reserves and production, the Company has
increased EBITDA from $0.3 million for 1991 to $15.6 million for Pro Forma 1995,
and from $8.8 million during the nine months ended September 30, 1996, to $17.9
million during the same period on a Pro Forma basis.
The Company estimates it has a backlog of approximately 250 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 $47.6 million for the last three months of
1996 and for 1997 consisting of approximately $38.4 million for development and
exploitation projects and approximately $9.2 million for selective exploratory
activities primarily on its offshore Gulf of Mexico and onshore southern
Louisiana properties. Actual amounts expended by the Company for
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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.
SIGNIFICANT ACQUISITIONS
As a result of the Merger with Alexander in August 1996, the Company added
approximately 106 Bcfe of estimated net proved reserves, as of June 30, 1996, to
its reserve base. Alexander's properties are located principally in the Anadarko
Basin of Oklahoma, the Cotton Valley Trend of Texas and the Arkoma Basin of
Oklahoma and Arkansas. The Alexander properties were attractive to NEG primarily
due to the large number of identified development drilling opportunities, with
approximately 37% of Alexander's estimated net proved reserves as of June 30,
1996 classified as proved undeveloped. The Company intends to aggressively
develop and enhance the reserves acquired in the Merger through development
drilling and selective workovers, recompletions and redrills. The Merger has
also brought to the Company additional personnel experienced in geology,
exploitation and natural gas marketing who complement the existing personnel of
the Company. For the primary purpose of achieving greater operating efficiencies
following the Merger, the Board of Directors of NEG on December 6, 1996 approved
the merger of NEG-OK with and into NEG, with NEG as the surviving corporation,
and such merger was effective as of December 31, 1996 (the "Subsequent Merger").
The Merger followed ten previous acquisitions of oil and natural gas
properties by the Company since January 1, 1991 that also provided project
inventories with significant exploitation and development opportunities. From
January 1, 1991 through September 30, 1996, the Company has acquired 191 Bcfe of
estimated net proved reserves which is approximately 20 times its net production
of 9.6 Bcfe during the same period. The Company's first substantial increase in
proved reserves, production and cash flow resulted from its acquisition of a 95%
working interest in and subsequent development of the oil producing Goldsmith
Adobe Unit in Ector County, Texas (the "GAU") acquired in several transactions
commencing in 1992. Through November 30, 1996, NEG has drilled 52 wells in the
GAU with a 98% success rate and has increased average gross daily production
attributable to the unit from approximately 450 Boe in 1992 to approximately
1,550 Boe in November 1996. The Company's continuing development program at the
GAU includes drilling an average of two wells per month for the next two years.
The Company followed the GAU acquisitions with its 1995 acquisition of a 99%
working interest in the Oak Hill field located in the Cotton Valley Trend of
east Texas, in which it also implemented a drilling program in 1996.
During 1995 and 1996, the Company expanded its operations to include
offshore oil and natural gas properties in the Mustang Island area located in
shallow state waters of Nueces County, Texas (the "Mustang Island Properties"),
where it has acquired, through a series of transactions, interests in eight
wells and 24 offshore lease tracts covering 13,810 gross (11,295 net) acres. As
part of its exploration program, the Company has commissioned a 3-D seismic
survey of this area and has acquired the production infrastructure necessary to
implement its present plans to explore and develop these offshore properties.
In September 1996 the Company completed the Lake Boeuf Acquisition, in
which NEG acquired an approximate 87.5% working interest in two wells and
certain proved undeveloped reserves in South Lake Boeuf, Louisiana for
approximately $7.2 million, consisting of $1.5 million in cash and approximately
$5.7 million in shares of Common Stock of the Company. The Lake Boeuf
Acquisition added net proved reserves of 17.5 Bcfe (40% natural gas) with a
PV10% of $23.1 million as of June 30, 1996, as estimated by Netherland & Sewell,
substantially all of which are proved undeveloped reserves. In nearby Iberville
Parish, the Company recently drilled an exploration well that represents a new
field discovery in East Bayou Sorrel, and in October and December 1996 acquired
additional interests in such well (collectively, the "East Bayou Sorrel
Acquisition").
In November 1996 the Company completed the acquisition of a 100% working
interest in the Bayou Sorrel field in Iberville Parish, Louisiana (the "Bayou
Sorrel Acquisition"), which field is also located adjacent to the Company's
recently announced discovery well at East Bayou Sorrel. The purchase price for
the
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100% working interest was approximately $11.2 million, consisting of
approximately $9.2 million cash and $2 million in shares of Common Stock. As a
result of the area of mutual interest provisions contained in the existing
operating agreement for East Bayou Sorrel, the Company's working interest in the
Bayou Sorrel Acquisition has been reduced to approximately 88.5%, and the
Company will be reimbursed for the portion of the cash purchase price that is
commensurate to the reduction in the working interest.
The combination of the Bayou Sorrel Acquisition and the East Bayou Sorrel
Acquisition is expected to give the Company a significant operating position in
the Bayou Sorrel area which includes interests in (i) approximately 2,600 gross
undeveloped acres related to the deeper horizons that have tested productive in
the East Bayou Sorrel discovery well, and (ii) production facilities, pipelines
and production infrastructure necessary to develop and explore the area. See
"Business and Properties -- Acquisitions."
Pending Acquisition. In December 1996, the Company entered into an
agreement in principle with John Hancock Mutual Life Insurance Company
("Hancock") to purchase, for $4.0 million in cash or cash and Common Stock,
Hancock's limited partnership interests in certain limited partnerships in which
the Company is the general partner (the "Pending Acquisition.") The limited
partnerships own working interests in the Anadarko and Arkoma Basin areas of
Oklahoma and the Giddings area of Texas. At January 1, 1996, engineering reports
showed an aggregate PV10% of approximately $7 million relative to Hancock's
interest in such partnerships.
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) 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 the first nine months of
1996, the Company participated in the drilling of 50 gross (43.0 net)
development wells, 49 gross (42.4 net) of which were 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 June 30, 1996, Netherland & Sewell has identified approximately 215
development opportunities (including recompletions, drilling locations and
proposed waterfloods) on the Company's existing properties, and as of December
31, 1995, had identified 35 probable and possible drilling locations on NEG-OK's
properties. NEG has a development and exploitation capital expenditure budget of
approximately $38.4 million for the last three months of 1996 and for the year
ending December 31, 1997, most of which is targeted to develop proved
undeveloped reserves.
Property Acquisitions. Acquisitions of producing oil and gas properties
have contributed significantly to the Company's historical growth in 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, to 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 September 30, 1996 and
pro forma for the Bayou Sorrel Acquisition, NEG operated 488 of the 719
producing wells in which it owns an interest. The Company also operated
approximately 85% of its aggregate PV10% as of June 30, 1996, after giving
effect to the Merger and the Lake Boeuf Acquisition.
7
<PAGE> 9
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 41% from $0.70 per Mcfe in 1991 to $.41 per Mcfe during the nine months
ended September 30, 1996. During these same periods, the Company decreased
historical unit general and administrative expenses 51% from $0.80 per Mcfe to
$.39 per Mcfe. NEG's emphasis on reducing its unit operating expenses has
contributed to its 180% improvement in unit gross profit margins from $0.60 per
Mcfe to $1.68 per Mcfe over these same periods. The Company believes the Merger
and the Subsequent Merger will provide further opportunities to improve its unit
operating costs through planned acceleration of production from NEG-OK's
properties and economies of scale expected to be recognized in general and
administrative expenses by combining the two operations.
Selective Exploration Program. To balance its relatively lower risk
development and exploitation activities, the Company expects that exploration
drilling will become a more important, although limited, aspect of its business
in the future. The Company's recently initiated exploration program targets
prospects with significant reserve potential, focusing primarily on its
inventory of exploratory prospects onshore Texas, Louisiana, Mississippi and
Alabama and offshore Gulf of Mexico, including the Mustang Island 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 (the
"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. NEG also 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 EXCHANGE OFFER
The Outstanding Notes...... The Outstanding Notes were sold by the Company on
November 1, 1996, to Bear, Stearns Co. Inc., Smith
Barney Inc. and Jefferies & Company, Inc.
(collectively, the "Initial Purchasers") pursuant
to a Purchase Agreement dated October 29, 1996 (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,
NEG-OK and the Initial Purchasers entered into a
Registration Rights Agreement dated October 29,
1996 (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."
8
<PAGE> 10
The Exchange Offer......... The Company is offering to exchange $1,000
principal amount of the Exchange Notes for each
$1,000 principal amount of Outstanding Notes. As of
the date hereof, $100,000,000 aggregate principal
amount of Outstanding Notes are outstanding. The
Company will issue the Ex-
change Notes to holders on February 18, 1997 (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 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 where such Outstanding 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 February 17, 1997.
Interest on the Notes...... The Exchange Notes will bear interest from the date
of issuance of the Exchange Notes. Interest on the
Outstanding Notes that are tendered in exchange for
the Exchange Notes that has accrued from November
1, 1996, the date of issuance of the Outstanding
Notes, through the Exchange Date will be payable on
or before May 1, 1997.
Procedures for Tendering
Outstanding Notes........ Each holder of Outstanding Notes wishing to accept
the Exchange Offer must complete, sign and date the
accompanying Letter of Transmittal, or
9
<PAGE> 11
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 any other required documentation to the
Exchange Agent at the address set forth herein. By
executing the Letter of Transmittal, each 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,
tendering holders may transfer Notes pursuant to
the procedure for book-entry transfer as set forth
under "The Exchange Offer -- Procedures for
Tendering."
Special Procedures for
Beneficial Owners.......... Any beneficial owner whose Outstanding 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, either make
appropriate arrangements to register ownership of
the Outstanding Notes in such owner's name or
obtain a properly completed bond power from the
registered holder. The transfer of registered
ownership may take considerable time.
Guaranteed Delivery
Procedures............... Holders of Outstanding Notes who wish to tender
their Outstanding Notes and whose Outstanding Notes
are not immediately available or who cannot deliver
their Outstanding 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 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 Expiration Date pursuant to
the procedures described under "The Exchange
Offer -- Withdrawal of Tenders."
Acceptance of Outstanding
Notes and Delivery of
Exchange Notes........... Subject to certain conditions, the Company will
accept for exchange any and all Outstanding 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."
10
<PAGE> 12
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."
Effect on Holders of
Outstanding Notes..........
As a result of the making of this 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."
Exchange Agent............. Bank One, Columbus, N.A.
SUMMARY OF TERMS OF THE EXCHANGE NOTES
Securities Offered......... $100,000,000 aggregate principal amount of 10 3/4%
Senior Notes due 2006.
Maturity Date.............. November 1, 2006.
Interest Payment Dates..... May 1 and November 1 of each year, commencing May
1, 1997.
Optional Redemption........ The 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, plus accrued and unpaid interest to
the date of redemption, or at the Make-Whole Price
plus accrued and unpaid interest to the date of
redemption if redeemed prior to November 1, 2001.
In addition, the Company may, at its option, redeem
prior to November 1, 1999 up to $35 million
aggregate principal amount of the Notes at 110.75%
of the principal amount thereof, plus accrued and
unpaid interest to the date of redemption, from the
net proceeds of one or more Equity Offerings,
provided that at least $65 million aggregate
principal amount of the Notes remains outstanding
following such redemption. See "Description of
Exchange Notes -- Optional Redemption."
Mandatory Redemption....... None, except as set forth below under "Offers to
Purchase."
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. As
of September 30, 1996, on a pro forma basis after
giving effect to the Initial Offering and the
application of the proceeds therefrom, the Company
and NEG-OK would have had approximately $1.4
million of secured indebtedness that effectively
11
<PAGE> 13
would rank senior to the Exchange Notes, and no
other indebtedness other than the 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.................. As a result of the Subsequent Merger, the Company
currently has no Restricted Subsidiaries, as
defined. In the event the Company in the future
designates a Subsidiary as a Restricted Subsidiary
of the Company, the Indenture provides that such
subsidiary (a "Guarantor"), will unconditionally
guarantee (the "Guarantee") the 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 Offer.... Upon a Change of Control, the Company will be
required, subject to certain conditions, to offer
to repurchase all outstanding 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 risks that should be considered in connection
with the Exchange Offer and in evaluating an investment in the Exchange Notes,
see "Risk Factors."
12
<PAGE> 14
SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL,
OPERATING AND OIL AND NATURAL GAS RESERVE DATA
(IN THOUSANDS, EXCEPT FOR RATIOS AND PER UNIT DATA)
The summary historical financial information presented below has been
derived from the financial statements of the Company for each of the three years
in the period ended December 31, 1995 and from unaudited financial statements of
the Company for the nine months ended September 30, 1995 and 1996. The
historical data should be read in conjunction with the financial statements and
the related notes thereto of NEG included elsewhere in this Prospectus. The
summary Pro Forma combined financial information presented below should be read
in conjunction with the Pro Forma Combined Condensed Financial Statements and
the separate historical financial statements of NEG and NEG-OK and notes
thereto. The Pro Forma combined financial data are not necessarily indicative of
the operating results or financial position that would have been achieved had
the transactions to which they give pro forma effect been effective at the date
or during the periods presented or of the results that may be obtained in the
future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------- ----------------------------------------
HISTORICAL PRO FORMA(1) HISTORICAL PRO FORMA(1)
--------------------------- ------------ ------------------ ------------------
1993 1994 1995 1995 1995 1996 1995 1996
------ ------ ------- ------------ ------ -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Oil and natural gas sales............. $1,803 $3,159 $ 7,858 $ 26,011 $4,861 $ 13,181 $19,169 $25,480
Well operator and management fees..... 427 158 137 2,779 101 314 2,183 1,627
------ ------ ------- -------- ------ -------- ------- -------
Total revenues.................. 2,230 3,317 7,995 28,790 4,962 13,495 21,352 27,107
Costs and expenses:
Lease operating expenses.............. 575 1,207 1,732 7,177 1,138 2,096 5,396 4,556
Oil and natural gas production
taxes............................... 110 176 416 1,544 261 663 1,095 1,417
General and administrative expenses... 994 985 1,772 5,109 1,015 1,957 3,509 3,629
Depreciation, depletion and
amortization........................ 679 1,030 3,149 15,205 1,711 5,444 11,382 10,994
Writedown of oil and natural gas
properties(2)....................... -- -- -- 2,300 -- 43,497 -- --
Other non-recurring expenses.......... -- -- -- 752 -- -- 731 --
------ ------ ------- -------- ------ -------- ------- -------
Total costs and expenses........ 2,358 3,398 7,069 32,087 4,125 53,657 22,113 20,596
------ ------ ------- -------- ------ -------- ------- -------
Operating income (loss)................. (128) (81) 926 (3,297) 837 (40,162) (761) 6,511
Interest expense........................ (188) (517) (1,032) (11,194) (653) (1,826) (8,526) (8,517)
Other income............................ 17 109 312 682 302 36 570 413
------ ------ ------- -------- ------ -------- ------- -------
Income (loss) before income taxes and
extraordinary item.................... (299) (489) 206 (13,809) 486 (41,952) (8,717) (1,593)
Income tax benefit...................... -- -- -- 4,406 -- 15,146 3,051 557
------ ------ ------- -------- ------ -------- ------- -------
Income (loss) before extraordinary
item.................................. $ (299) $ (489) $ 206 $ (9,403) $ 486 $(26,806) $(5,666) $(1,036)
====== ====== ====== ======== ====== ======== ======= =======
OTHER FINANCIAL DATA:(3)(4)(5)
EBITDA.................................. $ 568 $1,058 $ 4,387 $ 15,642 $2,850 $ 8,815 $11,922 $17,918
Ratio of EBITDA to interest expense..... 3.0x 2.0x 4.3x 1.4x 4.4x 4.8x 1.4x 2.1x
Ratio of earnings to fixed charges...... -- .1x 1.2x -- 1.7x -- -- .8x
Cash provided by operating activities... $ 519 $ 373 $ 3,077 $ 1,199 $2,490 $ 4,780 $ 554 $ 6,593
Capital expenditures for oil and natural
gas properties and equipment.......... 3,335 2,850 16,913 22,794 15,147 16,528 19,537 20,648
Net cash provided by financing
activities............................ 2,647 5,871 17,352 18,792 10,762 14,644 13,206 11,525
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
---------------------------
HISTORICAL PRO FORMA(1)
---------- ------------
<S> <C> <C>
BALANCE SHEET DATA:(6)
Cash and cash equivalents............................................................... $ 8,650 $ 39,650
Working capital......................................................................... 1,748 35,748
Total assets............................................................................ 166,834 201,247
Long-term debt.......................................................................... 63,337 101,337
Stockholders' equity.................................................................... 77,142 76,555
ACNTA................................................................................... -- 206,715
Ratio of ACNTA to total debt............................................................ -- 2.0x
</TABLE>
13
<PAGE> 15
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------ --------------------------------------
HISTORICAL PRO FORMA(1) HISTORICAL PRO FORMA(1)
-------------------------- ------------ ---------------- ------------------
1993 1994 1995 1995 1995 1996 1995 1996
------ ------ ------ ------------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Production:
Oil (Mbbls).......................... 49 116 283 475 177 344 335 429
Natural gas (Mmcf)................... 483 621 1,753 11,830 1,065 2,997 9,089 8,121
Natural gas equivalent (Mmcfe)....... 776 1,315 3,454 14,680 2,125 5,060 11,097 10,696
Average sales prices:
Oil (per Bbl)........................ $16.46 $16.01 $17.22 $16.95 $17.21 $20.59 $ 17.10 $ 20.31
Natural gas (per Mcf)................ 2.07 2.11 1.70 1.52 1.71 2.04 1.48 2.06
Natural gas equivalent (per Mcfe).... 2.32 2.40 2.28 1.77 2.29 2.61 1.73 2.38
Unit economics (per Mcfe):
Average sales price.................. $ 2.32 $ 2.40 $ 2.28 $ 1.77 $ 2.29 $ 2.61 $ 1.73 $ 2.38
Lease operating expenses............. .74 .92 .50 .49 .54 .41 .49 .42
Oil and natural gas production
taxes.............................. .14 .13 .12 .11 .12 .13 .10 .13
------ ------ ------ ------ ------ ------ ------- -------
Gross margin....................... 1.44 1.35 1.66 1.17 1.63 2.07 1.14 1.83
General and administrative
expenses........................... 1.28 .75 .51 .35 .48 .39 .32 .34
------ ------ ------ ------ ------ ------ ------- -------
Gross profit....................... $ .16 $ .60 $ 1.15 $ .82 $ 1.15 $ 1.68 $ .82 $ 1.49
====== ====== ====== ============= ====== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------------------
AS OF JUNE 30, 1996
HISTORICAL PRO FORMA ----------------------
--------------------------------------------------- --------- PRO
1991 1992 1993 1994 1995 1995 HISTORICAL FORMA
------- ------- ------- ------- ------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RESERVE DATA:(7)(8)
Proved reserves:
Oil (Mbbls)..................... 305 956 3,721 5,156 3,921 7,965 3,815 7,721
Natural gas (Mmcf).............. 4,946 7,785 11,047 13,380 30,869 135,265 30,129 129,919
Total proved reserves (Mmcfe)... 6,776 13,521 33,373 44,316 54,395 183,055 53,019 176,243
% Natural gas................... 73.0% 57.6% 33.1% 30.2% 56.7% 73.9% 56.8% 73.7%
Proved developed reserves
(Mmcfe)....................... 6,132 11,286 18,633 18,401 23,098 98,191 21,890 91,227
% Proved developed.............. 90.5% 83.5% 55.8% 41.5% 42.5% 53.6% 41.3% 51.8%
Estimated future net cash flows
before income taxes............. $11,153 $21,924 $28,991 $52,159 $61,109 $233,773 $ 75,835 $274,206
PV10%............................. $ 6,142 $10,894 $14,374 $27,445 $36,279 $141,788 $ 46,149 $165,239
Standardized Measure.............. $ 5,015 $ 813 $11,679 $20,840 $32,127 $128,763 $ 40,185 $136,897
</TABLE>
- ---------------
(1) The Pro Forma statement of operations data, other financial data and
operating data have been prepared as if the historical acquisitions of the
Company, including the Merger and Related Transactions, the Lake Boeuf
Acquisition and the Initial Offering, including the sale of the Notes and
the application of the net proceeds therefrom, had been consummated on
January 1, 1995. The Pro Forma balance sheet data have been prepared as if
the Initial Offering and the application of the net proceeds therefrom had
been consummated on September 30, 1996. The Pro Forma results of operations
exclude a noncash writedown of oil and natural gas properties of
approximately $28.3 million (net of deferred income taxes), 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.
(2) The historical results of operations for the nine months ended September 30,
1996 include a noncash writedown of oil and natural gas properties of
approximately $28.3 million (net of deferred taxes), in accordance with the
full cost method of accounting, which resulted from the Merger. See Note 2
of Notes to Consolidated Financial Statements.
(3) See the Glossary included elsewhere in this Prospectus for the definition of
EBITDA. EBITDA is not a measure of cash flow as determined by generally
accepted accounting principles. The Company has included information
concerning EBITDA because EBITDA is a measure used by certain investors in
determining the Company's historical ability to service its indebtedness;
however, this measure may not be comparable to similarly titled measures of
other companies. EBITDA should not be considered as an alternative to, or
more meaningful than, net income or cash flows as determined in accordance
with generally accepted accounting principles as an indicator of the
Company's operating performance or liquidity.
(4) In addition to cash flows provided by operating activities, provided by or
used in financing activities and used by capital expenditures for oil and
natural gas properties and equipment, the Company also has cash flows which
are provided or used by other investing activities. Pro Forma cash flow from
operating activities has been computed by adjusting the combined cash flows
of the Company and NEG-OK by pro forma adjustments for the operating
revenues and direct operating expenses of the Company's acquisitions in 1995
and pro forma adjustments for interest expense. Pro Forma net cash flows
provided by financing activities represent the combined cash flows from
financing activities of the Company and NEG-OK. See "Management's Discussion
and Analysis of Pro Forma Financial Condition and Results of Operations;"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources;" "NEG-OK Management's
Discussion and Analysis of Financial Condition and
14
<PAGE> 16
Results of Operations -- Liquidity and Capital Resources;" and the Pro Forma
Combined Condensed Financial Statements included elsewhere in this
Prospectus.
(5) For the purpose of calculating the ratio 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. The
Company's historical earnings were insufficient to cover fixed charges by
$299,000, $489,000 and $42.0 million for the years ended December 31, 1993
and 1994, and the nine months ended September 30, 1996, respectively. Pro
Forma earnings were insufficient to cover fixed charges by $13.8 million for
the year ended December 31, 1995, and $8.7 million and $1.6 million for the
nine month periods ending September 30, 1995 and September 30, 1996,
respectively.
(6) ACNTA means Adjusted Consolidated Net Tangible Assets as defined in the
Indenture. See "Description of the Exchange Notes -- Certain Definitions."
ACNTA as of September 30, 1996 is calculated using discounted future net
revenues as estimated by Netherland & Sewell as of June 30, 1996.
(7) Represents proved reserves based on estimates prepared by Netherland &
Sewell as of December 31, 1995 and June 30, 1996 and estimates prepared by
other independent engineers as of December 31, 1993 and 1994. See "Business
and Properties -- Oil and Natural Gas Reserves" and Note F of Notes to Pro
Forma Combined Condensed Financial Statements.
(8) The Company believes that PV10%, while not determined in accordance with
generally accepted accounting principles, is an important financial measure
used by investors in independent oil and natural gas producing companies for
evaluating the relative significance of oil and natural gas properties and
acquisitions. PV10% should not be construed as an alternative to the
Standardized Measure, as determined in accordance with generally accepted
accounting principles.
15
<PAGE> 17
RISK FACTORS
In addition to the other information set forth elsewhere in this
Prospectus, 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 pursuant
to the Exchange Offer will be made only after a timely receipt by the Company of
such Outstanding Notes, a properly completed and duly executed Letter of
Transmittal and all other required documents. Therefore, holders of the
Outstanding Notes desiring to tender such Outstanding 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 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, 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 sale of such Exchange
Notes. See "Plan of Distribution." To the extent that some of the Outstanding
Notes are tendered and accepted in the Exchange Offer, the trading market for
untendered and tendered but unaccepted Outstanding Notes could be adversely
affected. See "The Exchange Offer."
SUBSTANTIAL INDEBTEDNESS
At September 30, 1996, on a pro forma basis, after giving effect to the
Initial Offering, the Company and NEG-OK would have had approximately $101.4
million of indebtedness (including current maturities of long-term indebtedness)
as compared to the Company's stockholders' equity of $76.6 million. See "Use of
Proceeds" and "Capitalization." The Company may incur additional indebtedness
under the amendment to the Credit Facility entered into in connection with the
Initial Offering (as amended, the "Amended Credit Facility"). See "Description
of Amended Credit Facility" and "Description of the Exchange Notes -- Certain
Covenants."
This level of indebtedness may pose substantial risks to holders of Notes,
including the possibility that the Company might not generate sufficient cash
flow to pay the principal of and interest on the 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 pay the principal of and interest on the 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 substantial 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 $47.6 million for the three months ended December
31, 1996 and for the year ended 1997, excluding the capital expenditures made
for East Bayou Sorrel Acquisition and the Bayou Sorrel Acquisition and to be
made for the Pending Acquisition. The Company is not contractually committed to
expend the budgeted funds. The
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Company currently expects that available cash, cash flows from operations,
proceeds from the Initial Offering and available borrowings under the Amended
Credit Facility will be sufficient to fund planned capital expenditures for its
existing properties through 1997, including the East Bayou Sorrel Acquisition,
the Bayou Sorrel Acquisition and the Pending Acquisition. However, the Company
may need to raise additional capital to fund acquisitions which may become
available to the Company in the future, and the development thereof.
For periods after 1997, the Company may seek additional capital, if
required, from traditional reserve base 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. See "Management's Discussion and Analysis of Pro Forma
Financial Condition and Results of Operations."
RANKING OF THE NOTES; EFFECTIVE SUBORDINATION
The Exchange Notes will be senior unsecured obligations of the Company
ranking pari passu with any of the Outstanding 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 Amended 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 Notes. The obligations of the Company under the Amended
Credit Facility are secured by substantially all of the oil and natural gas
properties of the Company.
In the event of a default on the Notes, or a bankruptcy, liquidation or
reorganization of the Company and its Restricted Subsidiaries, such assets will
be available to satisfy obligations with respect to the indebtedness secured
thereby before any payment therefrom could be made on the Notes. Accordingly,
the Notes will be effectively subordinated to claims of secured creditors of the
Company and its Restricted Subsidiaries to the extent of such pledged
collateral. At September 30, 1996, after giving pro forma effect to the Initial
Offering and the application of proceeds therefrom, the Company and NEG-OK would
have had $1.4 million of secured indebtedness, that effectively would rank
senior to the Notes in right of payment, and no other indebtedness other than
the Notes. The Indenture limits the amount of Liens securing the Amended Credit
Facility to the greater of (i) $40 million and (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 and the
Restricted Subsidiaries. Such restrictions will affect, and in many respects
significantly limit or prohibit, among other things, the ability of the Company
and the Restricted Subsidiaries 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 Amended Credit Facility is
secured by a substantial portion of the assets of
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the Company. The pledge of such collateral to existing lenders could impair the
Company's ability to obtain favorable financing. See "Description of Amended
Credit Facility."
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
The Company must offer to repurchase the 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 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 Notes, the Company may be required to (i) repay
all or a portion of indebtedness under the Amended 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 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 Notes)
as described above.
The events that constitute a Change of Control under the Indenture may also
be events of default under the Amended Credit Facility or other senior
indebtedness of the Company and the Restricted Subsidiaries. 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 Notes and reducing the
practical benefit of the offer to purchase provisions to the holders of the
Notes. See "Description of Amended Credit Facility."
FRAUDULENT CONVEYANCE
Various fraudulent conveyance laws enacted for the protection of creditors
may apply to any Restricted Subsidiary of the Company that guarantees the 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 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 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 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 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 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
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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 "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of the Exchange
Notes -- Guarantee."
ABSENCE OF A PUBLIC MARKET FOR THE EXCHANGE NOTES
The Outstanding Notes 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 or the
Exchange Notes on any national securities exchange or to seek the admission
thereof to trading on The Nasdaq Stock Market. 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 Exchange Act, and may be limited during the Exchange Offer or the pendency
of a shelf registration statement. 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.
INCREASE IN SCOPE OF OPERATIONS
The Company believes that the Merger and the Subsequent Merger 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 present challenges to the Company due to the increased time and
resources required in the management effort. The management and Board of
Directors of the Company believe that the combinations can be effected in a
manner that will realize the value of the two companies and while a majority of
the members of management and the Board of Directors individually have had
experience in combinations of this size, the Company does not. Accordingly,
there can be no assurance that the process of effecting the business combination
can be effectively managed to realize the operational efficiencies anticipated
to result from the Merger and the Subsequent Merger. In addition, the continued
growth and expansion of the Company will depend, among other factors, on the
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 SHAREHOLDERS IN THE CASE OF CERTAIN INSOLVENCY AND
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 Stock also have the right to choose to elect one-half of the members
of the Board 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 are not cured within
certain time periods of less than 30 days, including any such event with respect
to the 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") share the right to elect one-third of the Board of Directors if, with
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respect to four dividend payments for either series, the Company does not pay
dividends or pays 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.
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 Preferred Stock will have the right to elect at least 83% of the Board of
Directors. See "Description of Capital Stock."
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 noncash 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 noncash
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
September 30, 1996 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. See Note 2 of Notes to the Consolidated
Financial Statements.
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 bank loans. 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 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
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natural gas prices, future operating costs, severance and excise taxes, capital
expenditures and workover and remedial costs, all of which may in fact vary
considerably from actual results. For these reasons, estimates of the
economically recoverable quantities of oil and 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. See "Business and
Properties -- Oil and Natural Gas Reserves."
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. See "Business and
Properties -- Drilling Activity" and "Business and Properties -- Principal Areas
of Operations -- Exploration."
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. See "Business and Properties -- Operational
Hazards and Insurance."
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.
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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 material 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
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. See "Business and
Properties -- Regulation."
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. See "Business and Properties -- Competition."
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Outstanding Notes were sold by the Company on November 1, 1996, 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 and NEG-OK
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. The term "Holder" with respect to
the Exchange Offer means any person in whose name the Outstanding 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 validly tendered and not withdrawn prior to 5:00 p.m., E.S.T.,
on 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 accepted in the Exchange Offer. Holders may tender some or all
of their Outstanding Notes pursuant to the Exchange Offer. However, Outstanding
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 Notes will not be entitled to
certain rights under the Registration Rights Agreement. The Exchange Notes will
evidence the same debt as the Outstanding Notes and will be entitled to the
benefits of the Indenture.
As of the date of this Prospectus, $100,000,000 aggregate principal amount
of the Outstanding Notes was outstanding and registered in the name of Cede &
Co., as nominee for the Depository Trust Company. The Company has fixed the
close of business of January 7, 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 do not have any appraisal or dissenters'
rights under the General Corporation Law of Delaware or the 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 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 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 will be
returned, without expense, to the tendering Holder thereof as promptly as
practicable after the Expiration Date.
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Holders who tender Outstanding 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 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. Interest on the Outstanding Notes that are tendered in exchange
for the Exchange Notes that has accrued from November 1, 1996, the date of
issuance of the Outstanding Notes, through the Exchange Date will be payable on
or before May 1, 1997. Interest on the Exchange Notes will be payable
semi-annually on each May 1 and November 1, commencing May 1, 1997.
PROCEDURES FOR TENDERING
Only a Holder of Outstanding Notes may tender such Outstanding 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 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, 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 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.
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 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 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
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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 listed therein, such Outstanding
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 with the signature thereon guaranteed by an Eligible
Institution.
If the Letter of Transmittal or any Outstanding 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
into the Exchange Agent's account with respect to the Outstanding Notes in
accordance with the Book-Entry Transfer Facility's procedures for such transfer.
Although delivery of the Outstanding 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 will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and all
Outstanding Notes not properly tendered or any Outstanding 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. 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 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, neither
the Company, the Exchange Agent nor any other person shall incur any liability
for failure to give such notification. Tenders of Outstanding Notes will not be
deemed to have been made until such defects or irregularities have been cured or
waived. Any Outstanding 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.
25
<PAGE> 27
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Outstanding Notes and (i) whose
Outstanding Notes are not immediately available, (ii) who cannot deliver their
Outstanding 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 the principal amount of Outstanding 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 in proper form for transfer (or a confirmation of
book-entry transfer of such Outstanding 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 according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Outstanding Notes may be
withdrawn at any time prior to 5:00 p.m., E.S.T., on the Expiration Date.
To withdraw a tender of Outstanding 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 prior to 5:00 p.m., E.S.T., on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having deposited the Outstanding Notes to be withdrawn (the "Depositor"),
(ii) identify the Outstanding Notes to be withdrawn (including the certificate
number(s) and principal amount of such Outstanding Notes, or, in the case of
Outstanding 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 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 into the name of the person withdrawing
the tender, (iv) specify the name in which any such Outstanding Notes are to be
registered, if different from that of the Depositor and (v) if applicable
because the Outstanding 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 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 so withdrawn are
validly retendered. Any Outstanding 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 may be
retendered by following one of the procedures described above under "Procedures
for Tendering" at any time prior to the Expiration Date.
26
<PAGE> 28
EXCHANGE AGENT
Bank One, Columbus, 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>
<S> <C> <C>
By Registered or Certified Mail: By Overnight Mail or Hand: By Facsimile:
Bank One, Columbus, N.A. Bank One, Columbus, N.A. Bank One, Columbus, N.A.
235 West Schrock Road 235 West Schrock Road Attn: Corporate Trust Operations
Westerville, Ohio 43271-0184 Westerville, Ohio 43081 Facsimile No. (614) 248-5088
Attn: Corporate Trust Operations Attn: Corporate Trust Operations 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 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.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Outstanding 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 (available
April 13, 1989) and Morgan Stanley & Co., Incorporated (June 5, 1991), 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
27
<PAGE> 29
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.
OTHER
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Outstanding 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
in open market or privately negotiated transactions, through subsequent exchange
offers or otherwise. The Company has no present plans to acquire any Outstanding
Notes that are not tendered in the Exchange Offer or to file a registration
statement to permit resales of any untendered Outstanding Notes.
28
<PAGE> 30
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.
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 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 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.
The net proceeds to the Company from the offering of Outstanding Notes was
approximately $96.0 million. Of the total net proceeds, the Company used
approximately $62.0 million to repay borrowings under the Credit Facility,
approximately $9.2 million to consummate the Bayou Sorrel Acquisition and
approximately $7.0 million to consummate a portion of the East Bayou Sorrel
Acquisition. See "Description of Amended Credit Facility" and "Business and
Properties -- Acquisitions." The balance of $17.8 million is being used to fund
costs associated with the Company's development and exploration projects, which
may include the acquisition and exploitation of additional underdeveloped
properties. Pending such use, the net proceeds have been deposited in interest
bearing accounts or invested in short-term interest bearing instruments.
CAPITALIZATION
The following table sets forth the cash and cash equivalents and the
capitalization of the Company at September 30, 1996, on a historical basis and
on a pro forma basis giving effect to the Initial Offering and the application
of the net proceeds therefrom ("Pro Forma"). The historical data should be read
in conjunction with the historical financial statements of the Company included
elsewhere herein or incorporated herein by reference. The Pro Forma data has
been prepared on the basis described in the Pro Forma Combined Condensed
Financial Statements included elsewhere herein. All dollar amounts in the table
are in thousands.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
1996
--------------------
PRO
HISTORICAL FORMA
-------- --------
<S> <C> <C>
Cash and cash equivalents........................................ $ 8,650 $ 39,650
======== ========
Long-term debt, including current portion:(1)
Credit Facility and Amended Credit Facility(2)................. $ 65,000 $ --
10 3/4% Senior Notes due 2006.................................. -- 100,000
Other long-term debt........................................... 1,353 1,353
-------- --------
Total long-term debt, including current portion........ 66,353 101,353
-------- --------
Stockholders' equity:
Convertible preferred stock.................................... 243 243
Common stock................................................... 352 352
Additional paid-in capital..................................... 107,791 107,791
Deficit........................................................ (31,244) (31,831)
-------- --------
Total stockholders' equity............................. 77,142 76,555
-------- --------
Total capitalization................................... $143,495 $177,908
======== ========
</TABLE>
- ---------------
(1) Includes the following current portions of long-term debt:
Historical -- $3,016,000 and Pro Forma -- $16,000.
(2) For further discussion, see "Description of Amended Credit Facility" and
Note 3 of the Notes to Consolidated Financial Statements of the Company,
included elsewhere herein.
29
<PAGE> 31
SELECTED PRO FORMA COMBINED FINANCIAL,
OPERATING AND OIL AND NATURAL GAS RESERVE DATA
(IN THOUSANDS, EXCEPT FOR RATIOS AND PER UNIT DATA)
The selected pro forma combined condensed financial information presented
below should be read in conjunction with the Pro Forma Combined Condensed
Financial Statements and the separate historical financial statements of NEG and
NEG-OK and the related notes thereto. The Pro Forma combined condensed
financial, operating and oil and natural gas reserve data are not necessarily
indicative of the operating results or financial position that would have been
achieved had the transactions to which they give pro forma effect been effective
at the date or during the periods presented or of the results that may be
obtained in the future.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ----------------------------
1995 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:(1)
Revenues:
Oil and natural gas sales.............................. $ 26,011 $ 19,169 $ 25,480
Well operator and management fees...................... 2,779 2,183 1,627
---------- ---------- ----------
Total revenues................................. 28,790 21,352 27,107
Costs and expenses:
Lease operating expenses............................... 7,177 5,396 4,556
Oil and natural gas production taxes................... 1,544 1,095 1,417
General and administrative expenses.................... 5,109 3,509 3,629
Depreciation, depletion and amortization............... 15,205 11,382 10,994
Writedown of oil and natural gas properties(2)......... 2,300 -- --
Other non-recurring expenses........................... 752 731 --
---------- ---------- ----------
Total costs and expenses....................... 32,087 22,113 20,596
---------- ---------- ----------
Operating income (loss).................................. (3,297) (761) 6,511
Interest expense......................................... (11,194) (8,526) (8,517)
Other income............................................. 682 570 413
---------- ---------- ----------
Loss before income taxes and extraordinary item.......... (13,809) (8,717) (1,593)
Income tax benefit....................................... 4,406 3,051 557
---------- ---------- ----------
Loss before extraordinary item........................... $ (9,403) $ (5,666) $ (1,036)
========== ========== ==========
Loss per common share before extraordinary
item................................................... $ (0.30) $ (.19) $ (.05)
========== ========== ==========
OTHER FINANCIAL DATA:(1)(2)(3)(4)
EBITDA................................................... $ 15,642 $ 11,922 $ 17,918
Ratio of EBITDA to interest expense...................... 1.4x 1.4x 2.1x
Ratio of earnings to fixed charges....................... -- -- .8x
Cash provided by operating activities.................... $ 1,199 $ 554 $ 6,593
Capital expenditures for oil and natural gas properties
and equipment.......................................... 22,794 19,537 20,648
Net cash provided by financing activities................ 18,792 13,206 11,525
</TABLE>
30
<PAGE> 32
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
1996
-------------
<S> <C>
BALANCE SHEET DATA:(1)(5)
Cash and cash equivalents....................................................... $ 39,650
Working capital (deficit)....................................................... 35,748
Total assets.................................................................... 201,247
Long-term debt.................................................................. 101,337
Stockholders' equity............................................................ 76,555
ACNTA........................................................................... 206,715
Ratio of ACNTA to total debt.................................................... 2.0x
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER
YEAR ENDED 30,
DECEMBER 31, -----------------
1995 1995 1996
------------ ------ ------
<S> <C> <C> <C>
OPERATING DATA:(1)
Production:
Oil (Mbbls)................................................ 475 335 429
Natural gas (Mmcf)......................................... 11,830 9,089 8,121
Natural gas equivalent (Mmcfe)............................. 14,680 11,097 10,696
Average sale prices:
Oil (per Bbl).............................................. $16.95 $17.10 $20.31
Natural gas (per Mcf)...................................... 1.52 1.48 2.06
Natural gas equivalent (per Mcfe).......................... 1.77 1.73 2.38
Unit economics (per Mcfe):
Average sales price........................................ $ 1.77 $ 1.73 $ 2.38
Lease operating expenses................................... .49 .49 .42
Oil and natural gas production taxes....................... .11 .10 .13
------ ------ ------
Gross margin............................................ 1.17 1.14 1.83
General and administrative expenses........................ .35 .32 .34
------ ------ ------
Gross profit............................................ $ .82 $ .82 $ 1.49
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, JUNE 30,
1995 1996
------------ --------
<S> <C> <C>
RESERVE DATA:(1)(6)(7)
Proved reserves:
Oil (Mbbls)........................................................ 7,965 7,721
Natural gas (Mmcf)................................................. 135,265 129,919
Total proved reserves (Mmcfe)...................................... 183,055 176,243
% Natural gas...................................................... 73.9% 73.7%
Proved developed reserves (Mmcfe).................................. 98,191 91,227
% Proved developed................................................. 53.6% 51.8%
Estimated future net cash flows before income taxes.................. $233,773 $274,206
PV10%................................................................ 141,788 165,239
Standardized Measure................................................. 128,763 136,897
</TABLE>
- ---------------
(1) The Pro Forma statement of operations data, other financial data and
operating data have been prepared as if the historical acquisitions of the
Company, including the Merger and Related Transactions, the Lake Boeuf
Acquisition and the Initial Offering, including the sale of the Outstanding
Notes and the application of the net proceeds therefrom, had been
consummated on January 1, 1995. The Pro Forma balance sheet data have been
prepared as if the Initial Offering and the application of the net proceeds
therefrom had been consummated on September 30, 1996. The Pro Forma results
of operations exclude a noncash writedown of oil and natural gas properties
of approximately $28.3 million (net of deferred income taxes), in accordance
with the full cost method of accounting. The writedown was charged to
expense in the third quarter of 1996, the period in which the Merger was
consummated.
31
<PAGE> 33
(2) See the Glossary included elsewhere in this Prospectus for the definition of
EBITDA. EBITDA is not a measure of cash flow as determined by generally
accepted accounting principles. The Company has included information
concerning EBITDA because EBITDA is a measure used by certain investors in
determining the Company's historical ability to service its indebtedness;
however, this measure may not be comparable to similarly titled measures of
other companies. EBITDA should not be considered as an alternative to, or
more meaningful than, net income or cash flows as determined in accordance
with generally accepted accounting principles as an indicator of the
Company's operating performance or liquidity.
(3) In addition to cash flows provided by operating activities, provided by or
used in financing activities and used by capital expenditures for oil and
natural gas properties and equipment, the Company also has cash flows which
are provided or used by other investing activities. Cash flow from operating
activities has been computed by adjusting the combined cash flows of the
Company and NEG-OK by pro forma adjustments for the operating revenues and
direct operating expenses of the NEG acquisitions in 1995 and pro forma
adjustments for interest expense. Pro Forma net cash flows provided by
financing activities represent the combined cash flows from financing
activities of the Company and NEG-OK. See "Management's Discussion and
Analysis of Pro Forma Financial Condition and Results of Operations;"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources;" "NEG-OK Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources;" and the Pro Forma Combined
Condensed Financial Statements included elsewhere in this Prospectus.
(4) For the purpose of calculating the ratio 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. Pro Forma
earnings were insufficient to cover fixed charges by $13.8 million for the
year ended December 31, 1995, and by $8.7 million and $1.6 million for the
nine month periods ending September 30, 1995 and September 30, 1996,
respectively.
(5) ACNTA means Adjusted Consolidated Net Tangible Assets as defined in the
Indenture. See "Description of Exchange Notes." ACNTA as of September 30,
1996 is calculated using discounted future net revenues as estimated by
Netherland & Sewell as of June 30, 1996.
(6) Includes proved reserves based on estimates prepared by Netherland & Sewell
for December 31, 1995 and June 30, 1996. See "Business and Properties -- Oil
and Natural Gas Reserves" and Note F of Notes to Pro Forma Combined
Condensed Financial Statements.
(7) The Company believes that PV10%, while not determined in accordance with
generally accepted accounting principles, is an important financial measure
used by investors in independent oil and natural gas producing companies for
evaluating the relative significance of oil and natural gas properties and
acquisitions. PV10% should not be construed as an alternative to the
Standardized Measure, as determined in accordance with generally accepted
accounting principles.
32
<PAGE> 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
PRO FORMA FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PRO FORMA EFFECTS OF THE MERGER AND THE INITIAL OFFERING
On June 6, 1996, the Company, Alexander and NEG-OK executed a definitive
Agreement and Plan of Merger (as amended, the "Merger Agreement"). Consummation
of the Merger occurred on August 29, 1996 after the approval by the shareholders
of the Company and Alexander. Pursuant to the Merger, (a) the separate corporate
existence of Alexander terminated and NEG-OK, as the surviving corporation,
continued as a wholly-owned subsidiary of the Company with the combined assets
and liabilities of Alexander and NEG-OK, (b) each share of Alexander common
stock, par value $.03 per share ("Alexander Common Stock"), together with all
rights associated with the Alexander Common Stock pursuant to the Rights
Agreement dated December 15, 1994 (the "Rights Agreement"), between Alexander
and Liberty Bank & Trust Company of Oklahoma City, N.A., and all related
documents, outstanding immediately before the Merger, were converted into 1.7
shares of the Company's Common Stock and (c) all outstanding options and
warrants to purchase Alexander Common Stock were assumed by NEG-OK and converted
into options and warrants to purchase Common Stock of the Company.
The Merger was accounted for as a purchase of Alexander by NEG utilizing
the purchase method of accounting. As such, the costs of acquiring Alexander
were allocated to the assets and liabilities acquired using estimated fair
values with the remainder of the purchase price allocated to proved oil and
natural gas properties. No goodwill was recorded in this transaction. However,
based on the Pro Forma combined cost center ceiling at September 30, 1996 and
the preliminary allocation of the Company's purchase price, the purchase price
allocated to oil and natural gas properties (net of related deferred taxes) at
September 30, 1996 is in excess of the cost center ceiling by approximately
$28.3 million, which resulted in a noncash writedown of the oil and natural gas
properties. The writedown was charged to expense in the third quarter of 1996,
the period in which the Merger was consummated.
The Company incurred substantial indebtedness in connection with the
Merger. At September 30, 1996, after giving Pro Forma effect to the Initial
Offering, the Company would have working capital, long-term debt and
stockholders' equity of $35.7 million, $101.3 million and $76.6 million,
respectively. Pro Forma interest expense for the year ended December 31, 1995
would have been $11.2 million. Pro Forma cash flows from operating activities
(assuming that additional interest was paid in cash) would have been $1.2
million for the year ended December 31, 1995. Such amount does not include any
interest income from the investment of available cash after reduction of the
outstanding borrowings or give effect to the operating results which would occur
from utilizing working capital and availability on the Amended Credit Facility
for oil and natural gas property exploitation, development, exploration or
acquisitions following the Initial Offering.
33
<PAGE> 35
PRO FORMA RESULTS OF OPERATIONS
The following table sets forth certain information regarding the historical
and Pro Forma production volumes, oil and natural gas sales, average sales
prices, lease operating expenses and general and administrative expenses for the
periods indicated.
<TABLE>
<CAPTION>
PRO FORMA
------------------
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30,
----------------------- ------------------
HISTORICAL PRO FORMA 1995 1996
---------- --------- ------- -------
<S> <C> <C> <C> <C>
Net production:
Oil (Mbbls)................................ 283 475 335 429
Natural gas (Mmcf)......................... 1,753 11,830 9,089 8,121
Natural gas equivalent (Mmcfe)............. 3,454 14,680 11,097 10,696
Oil and natural gas sales (in thousands):
Oil........................................ $4,880 $ 8,044 $ 5,725 $ 8,716
Natural gas................................ 2,978 17,967 13,444 16,764
------ ------- ------- -------
Total.............................. $7,858 $26,011 $19,169 $25,480
====== ======= ======= =======
Average sales price:
Oil (per Bbl).............................. $17.22 $ 16.95 $ 17.10 $ 20.31
Natural gas (per Mcf)...................... 1.70 1.52 1.48 2.06
Natural gas equivalent (per Mcfe).......... 2.28 1.77 1.73 2.38
Lease operating expenses per Mcfe............ .50 .49 .49 .42
General and administrative expenses per
Mcfe....................................... .51 .35 .32 .34
</TABLE>
PRO FORMA NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH PRO FORMA NINE
MONTHS ENDED SEPTEMBER 30, 1995
Revenues. Total Pro Forma revenues increased by $5.8 million (27%) to 27.1
million for 1996 from $21.4 million for 1995. Pro Forma oil and natural gas
sales increased $6.3 million (33%) to $25.5 million from $19.2 million in 1995.
The increase in oil and natural gas sales is due to the increase in average oil
and natural gas prices received and the increase in production from the
development of the GAU, partially offset by a decline in volumes produced from
other properties due to the sale of certain producing properties by NEG-OK
during 1995 and the first three months of 1996. Pro Forma well operation and
management fees declined $556,000 due to the reduction in the number of
properties operated by NEG-OK.
Operating Expenses. Pro Forma total costs and expenses decreased $1.5
million (7%) to $20.6 million for 1996 from $22.1 million for 1995. Pro Forma
lease operating expenses and production taxes decreased $518,000 (8%) due to the
sale of higher cost wells by NEG-OK during 1995 and the first three months of
1996, partially offset by the increased production attributable to the GAU. Pro
Forma depreciation, depletion and amortization decreased $388,000 (3%) in 1996
reflecting the lower production volumes. Pro Forma general and administrative
expenses increased $120,000 (3%) in 1996 due to increased personnel costs
associated with the Merger and the Company's other acquisitions.
Pro Forma operating income increased $7.3 million to $6.5 million in 1996
from a loss of $761,000 in 1995, as a result of the increase in oil and natural
gas prices and production from the GAU, partially offset by the impact of the
sales of producing properties by NEG-OK in 1995 and 1996. The Pro Forma results
of operations exclude a noncash writedown of oil and natural gas properties of
approximately $28.3 million (net of deferred income taxes), in accordance with
the full cost method of accounting. The writedown was charged to expense in the
third quarter of 1996, the period in which the Merger was consummated.
Other Revenues and Expenses. Pro Forma interest expense remained relatively
unchanged for 1996 from 1995.
34
<PAGE> 36
PRO FORMA YEAR ENDED DECEMBER 31, 1995 COMPARED WITH HISTORICAL YEAR ENDED
DECEMBER 31, 1995
Revenues. Total Pro Forma revenues increased by $20.8 million from $8.0
million historically to $28.8 million after giving effect to certain historical
acquisitions, the Merger and Related Transactions. For the year ended December
31, 1995, Pro Forma oil and natural gas sales increased by $18.1 million from
$7.9 million to $26.0 million. The increase in oil and natural gas sales is due
to the 11,226 Mmcfe increase in oil and natural gas production from 3,454 Mmcfe
historically to 14,680 Mmcfe on a Pro Forma basis. The average price on a
natural gas equivalent basis decreased $.51 per Mcfe from $2.28 historically to
$1.77 on a Pro Forma basis. The decrease was primarily due to the relative
increase in natural gas production (which commanded a lower price relative to
oil on a 6:1 conversion ratio) resulting from the 1995 Acquisitions (as defined)
and the Merger and the historical increase in the Company's natural gas
production which occurred in the second half of 1995 when the Company received a
higher price for its natural gas sold. Pro Forma well operator and management
fees increased by $2.6 million from $137,000 to $2.8 million primarily due to
the increased production and well operations of NEG-OK.
Operating Expenses. Total Pro Forma costs and expenses increased from $7.1
million historically to $32.1 million after giving effect to certain historical
acquisitions and the Merger. Pro Forma lease operating expenses and oil and
natural gas production taxes increased an aggregate of $6.6 million from $2.1
million to $8.7 million, general and administrative expenses increased $3.3
million from $1.8 million to $5.1 million, depreciation, depletion, amortization
and impairment of oil and natural gas properties increased $14.4 million from
$3.1 million to $17.5 million and other non-recurring expenses increased 100% to
$752,000. These Pro Forma increases are primarily due to the operations of
NEG-OK and the incremental cost allocated to the oil and natural gas properties
acquired in the Merger.
Pro Forma operating income decreased by $4.2 million to a loss of $3.3
million as a result of the increase in revenues from increased oil and natural
gas sales and well operator and management fees being exceeded by the increase
in operating expenses which includes a $2.3 million charge related to the
historical impairment of NEG-OK's oil and natural gas properties. The Pro Forma
results of operations exclude a noncash writedown of $28.3 million (net of
deferred income taxes) to the Company's oil and natural gas properties
attributable to the preliminary allocation of the Company's purchase price
related to the Merger, in accordance with the full cost method of accounting.
The writedown was charged to expense in the third quarter of 1996, the period in
which the Merger was consummated.
Other Revenues and Expenses. Pro Forma interest expense increased from $1.0
million to $11.2 million while interest and other income increased from $311,000
to $682,000. The increase in interest expense is due to the increase in Pro
Forma indebtedness outstanding and an increase in the average interest rate on
the Company's borrowings as a result of the issuance of the Notes. The increase
in interest and other income is attributable to that of NEG-OK.
The Company estimates that it has approximately $35 million in net
operating loss carryforwards ("NOLs") at December 31, 1995. While the Merger
resulted in a change in control of the Company and NEG-OK pursuant to Section
382 of the Internal Revenue Code, the Company does not expect such change to
result in significant further limitations on its ability to utilize its NOLs;
however, there can be no assurance that the Company will realize such NOLs.
LIQUIDITY AND CAPITAL RESOURCES
EQUITY PRIVATE PLACEMENT
On August 29, 1996, High River purchased 100,000 shares of Series D
Preferred Stock and warrants to purchase 700,000 shares of Common Stock,
exercisable at $2.50 per share, for $10.0 million; and two insurance companies
and four investment partnerships managed by Kayne, Anderson Investment
Management, Inc. (the "Kayne Anderson Investors") purchased 50,000 shares of
Convertible Preferred Stock, Series E, of the Company (the "Series E Preferred
Stock") and warrants to purchase 350,000 shares of Common Stock, exercisable at
$2.50 per share, for $5.0 million. In consideration of the purchase by the Kayne
Anderson Investors of shares in the Equity Private Placement, the Company agreed
to extend the period
35
<PAGE> 37
during which the Series B Preferred Stock and the Series C Preferred Stock
cannot be redeemed by the Company from June 14, 1997 to June 14, 1999. As a
result, dividends on the Series B Preferred Stock and Series C Preferred Stock
will continue to accrue and be payable at rates of 10% and 10.5% per annum,
respectively. Annual combined preferred dividend requirements currently
aggregate $945,000. See Note 5 of the historical financial statements of the
Company.
CREDIT FACILITIES
On August 29, 1996, the Company entered into the Credit Facility with Bank
One, Texas, N.A. ("Bank One") and Credit Lyonnais New York Branch (collectively,
the "Banks") to provide funds to refinance the debt of the Company under a prior
credit facility with Bank One entered into in June 1995 (the "Prior Credit
Facility") and of NEG-OK existing at the date of the Merger. Borrowings under
the Credit Facility were repaid with the proceeds of the Initial Offering. In
addition, simultaneously with the closing of the Initial Offering, the Company
entered into the Amended Credit Facility. The Amended Credit Facility is a
revolving line of credit with an initial borrowing base of $25.0 million, $10.0
million of which will be limited for use to make acquisitions of oil and gas
properties. The Banks have the ability to redetermine the Borrowing Base
semi-annually at their discretion. The Amended Credit Facility contains certain
covenants, including maintenance of a minimum interest coverage ratio, a current
ratio and a minimum net worth. The Notes allow for certain borrowings under the
Amended Credit Facility; however the Indenture limits the amount of Senior
Indebtedness and Other Indebtedness which the Company may have outstanding. See
"Description of the Exchange Notes -- Certain Covenants."
Cash dividends on Common Stock or Preferred Stock will be allowed under the
Amended Credit Facility as long as no event of default exists or would exist as
a result of the payment thereof. See "Description of Amended Credit Facility."
THE NOTES
The Notes bear interest at 10 3/4% per annum, payable semi-annually on May
1 and November 1, commencing May 1, 1997. The Notes mature November 1, 2006, but
may be redeemed after November 1, 2001, at the Company's option. The Indenture
governing the Notes contains certain covenants, including, but not limited to,
covenants limiting the Company and its Restricted Subsidiaries' ability to incur
additional indebtedness. See "Description of the Exchange Notes."
EBITDA
Pro Forma combined EBITDA for the Company and NEG-OK for the nine months
ended September 30, 1996 was $17.9 million. This compares to $11.9 million for
the same period in 1995. EBITDA should not be considered an alternative to net
income as an indicator of the Company's operating performance or an alternative
to cash flows as a measure of liquidity.
CAPITAL EXPENDITURES AND CAPITAL RESOURCES
The Company's capital requirements relate primarily to its budgeted
development and exploitation programs and, to a lesser extent, its exploration
program. For the nine months ended September 30, 1996, the Company on a Pro
Forma basis spent $20.6 million to acquire oil and natural gas properties and to
develop and explore its existing properties. The Company has budgeted capital
expenditures of approximately $47.6 million for the three months ended December
31, 1996 and the year ended December 31, 1997, excluding the East Bayou Sorrel
Acquisition, the Bayou Sorrel Acquisition and the Pending Acquisition. The
Company estimates that it will spend approximately $38.4 million on development
and exploitation of its properties and approximately $9.2 million on its
exploration program. No further amounts have been budgeted for acquisitions.
However, the Company may need to raise additional capital to fund any further
acquisitions that the Company may make in the future and any related development
of the acquired properties. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
36
<PAGE> 38
At September 30, 1996, after giving effect to the Initial Offering, the
Company would have cash and working capital of $39.7 million and $35.7 million,
an increase of $31.0 million and $34.0 million, respectively, from those of the
Company on a historical basis. Pending the use of such funds as described below
and elsewhere in this Prospectus, the Company has invested such amounts in
short-term interest bearing instruments.
Management of the Company believes that available cash, cash flow from
operations, proceeds from the Initial Offering and available borrowings under
the Amended Credit Facility will be adequate to fund budgeted capital
expenditures and debt service requirements during the remainder of 1996 and
1997. Capital expenditures for periods after 1997 will be limited to available
borrowings under the Amended Credit Facility or other credit facilities, funds
provided by equity and debt offerings and cash flows from operating activities.
However, there can be no assurance that the Company will realize such
anticipated growth or that the Company's business will generate sufficient cash
flows from operations or financing activities to enable the Company to fund
additional capital expenditures or service its indebtedness. See "Risk
Factors -- Substantial Indebtedness" and "-- Future Capital Requirements."
37
<PAGE> 39
SELECTED NEG HISTORICAL FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT FOR RATIOS AND PER UNIT DATA)
The following table sets forth selected historical financial and operating
data with respect to the Company as of and for each of the five years in the
period ended December 31, 1995, and as of and for the nine month periods ended
September 30, 1995 and 1996. The Company acquired significant producing oil and
natural gas properties in all the periods presented which affects the
comparability of the historical financial and operating data for the periods
presented. The financial data was derived from the historical financial
statements of the Company. This information is not necessarily indicative of the
Company's future performance. The Company has never declared or paid dividends
on its Common Stock. The financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and the related notes
thereto of the Company included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------ -----------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:(1)(2)
Oil and natural gas sales.................................... $ 996 $1,626 $1,803 $3,159 $7,858 $4,861 $ 13,181
Well operator fees........................................... 48 537 427 158 137 101 314
------ ------ ------ ------ ------ ------ --------
Total revenues....................................... 1,044 2,163 2,230 3,317 7,995 4,962 13,495
Costs and expenses:
Lease operating expenses................................... 312 670 575 1,207 1,732 1,138 2,096
Oil and natural gas production taxes....................... 64 109 110 176 416 261 663
General and administrative expenses........................ 355 964 994 985 1,772 1,015 1,957
Writedown of oil and natural gas properties(3)............. -- -- -- -- -- -- 43,497
Depreciation, depletion and amortization................... 249 466 679 1,030 3,149 1,711 5,444
------ ------ ------ ------ ------ ------ --------
Total costs and expenses............................. 980 2,209 2,358 3,398 7,069 4,125 53,657
------ ------ ------ ------ ------ ------ --------
Operating income (loss)...................................... 64 (46) (128) (81) 926 837 (40,162)
Interest expense............................................. (88) (175) (188) (517) (1,032) (653) (1,826)
Other income (expenses)...................................... (2) -- 17 109 312 302 36
------ ------ ------ ------ ------ ------ --------
Income (loss) before income taxes and extraordinary item..... (26) (221) (299) (489) 206 486 (41,952)
Income tax benefit........................................... -- -- -- -- -- -- 15,146
------ ------ ------ ------ ------ ------ --------
Income (loss) before extraordinary item...................... $ (26) $ (221) $ (299) $ (489) $ 206 $ 486 $(26,806)
====== ====== ====== ====== ====== ====== ========
Net income (loss)............................................ $ (26) $ (221) $ (299) $ (611) $ (226) $ 54 $(27,098)
====== ====== ====== ====== ====== ====== ========
Income (loss) per common share before extraordinary item..... $(0.01) $(0.05) $(0.05) $(0.09) $(0.05) $ 0.00 $ (1.87)
====== ====== ====== ====== ====== ====== ========
Net loss per common share.................................... $(0.01) $(0.05) $(0.05) $(0.10) $(0.09) $ (.04) $ (1.89)
====== ====== ====== ====== ====== ====== ========
OTHER FINANCIAL DATA:(4)(5)(6)
EBITDA....................................................... $ 311 $ 419 $ 568 $1,058 $4,387 $2,850 $ 8,815
Ratio of earnings to fixed charges........................... .7x -- -- .1x 1.2x 1.7x --
Cash provided by operating activities........................ $ 17 $ 642 $ 519 $ 373 $3,077 $2,490 $ 4,780
Capital expenditures for oil and natural gas properties and
equipment.................................................. 18 254 3,335 2,850 16,913 15,147 16,528
Net cash provided by financing activities.................... 358 802 2,647 5,871 17,352 10,762 14,644
OPERATING DATA:(1)
Production:
Oil (Mbls)................................................. 27 40 49 116 283 177 344
Natural gas (Mmcf)......................................... 280 420 483 621 1,753 1,065 2,997
Natural gas equivalent (Mmcfe)............................. 444 661 776 1,315 3,454 2,125 5,060
Average sale prices:
Oil (per Bbl).............................................. $20.16 $20.43 $16.46 $16.01 $17.22 $17.21 $ 20.59
Natural gas (per Mcf)...................................... 1.59 1.92 2.07 2.11 1.70 1.71 2.04
</TABLE>
38
<PAGE> 40
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------ -----------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Unit economics (per Mcfe):
Average sale prices:....................................... $ 2.24 $ 2.46 $ 2.32 $ 2.40 $ 2.28 $ 2.29 $ 2.61
Lease operating expenses................................... .70 1.01 .74 .92 .50 .54 .41
Oil and natural gas production taxes....................... .14 .16 .14 .13 .12 .12 .13
------ ------ ------ ------ ------ ------ --------
Gross margin............................................. 1.40 1.29 1.44 1.35 1.66 1.63 2.07
General and administrative................................. .80 1.46 1.28 .75 .51 .48 .39
------ ------ ------ ------ ------ ------ --------
Gross profit (loss)...................................... $ .60 $ (.17) $ .16 $ .60 $ 1.15 $ 1.15 $ 1.68
====== ====== ====== ====== ====== ====== ========
BALANCE SHEET DATA (AT PERIOD END):(1)
Cash and cash equivalents.................................... $ 394 $ 366 $ 161 $2,594 $6,076 $ 700 $ 8,650
Working capital (deficit).................................. (1,066) (2,155) (1,213) 3,561 (2,316) (2,018) 1,748
Total assets............................................... 4,413 8,742 12,710 18,746 43,491 35,417 166,834
Long-term debt............................................. -- 120 3,799 6,000 13,475 9,875 63,337
Stockholders' equity....................................... 2,692 4,864 6,320 11,328 17,775 18,523 77,142
</TABLE>
- ---------------
(1) Reflects the revenues, results of operations and production subsequent to
the dates of acquisitions of various oil and natural gas properties that
affect the comparability of the data presented. In April 1992, the Company
acquired substantially all of the assets of TriSearch, Inc. The Company
acquired a 63.8% working interest in the GAU in December 1993 and an
additional interest of 17% in the GAU during 1994. During 1995, the Company
acquired interests in producing oil and natural gas properties in the
Mustang Island area, the Oak Hill Field, and in Eddy County, New Mexico. In
addition, on August 29, 1996, the Company completed the Merger. See Note 2
of Notes to Consolidated Financial Statements of the Company.
(2) Includes extraordinary losses on early extinguishments of debt of $121,917
in 1994, $431,762 for the year ended December 31, 1995 and $292,372 for the
nine months ended September 30, 1996.
(3) The historical results of operations for the nine months ended September 30,
1996 include a noncash writedown of oil and natural gas properties of
approximately $28.3 million (net of deferred taxes), in accordance with the
full cost method of accounting, which resulted from the Merger. See Note 2
of Notes to Consolidated Financial Statements.
(4) See the Glossary included elsewhere in this Prospectus for the definition of
EBITDA. EBITDA is not a measure of cash flow as determined by generally
accepted accounting principles. The Company has included information
concerning EBITDA because EBITDA is a measure used by certain investors in
determining the Company's historical ability to service its indebtedness;
however, this measure may not be comparable to similarly titled measures of
other companies. EBITDA should not be considered as an alternative to, or
more meaningful than, net income or cash flows as determined in accordance
with generally accepted accounting principles as an indicator of the
Company's operating performance or liquidity.
(5) In addition to cash flows provided by operating activities, provided by or
used in financing activities and used by oil and natural gas acquisition,
exploration, and development expenditures, the Company also has significant
cash flows which are provided by or used by other investing activities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and the historical financial
statements of the Company.
(6) For the purpose of calculating the ratio of earnings to fixed charges, fixed
charges consist of interest expense, the interest component of rental
expense and the amortization of debt discount and financing costs. Earnings
consist of income before income taxes plus fixed charges. Earnings were
insufficient to cover fixed charges by $26,000, $221,000, $299,000, $489,000
and $42.0 million for the years ended December 31, 1991, 1992, 1993 and
1994, and the nine months ended September 30, 1996, respectively.
39
<PAGE> 41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
During 1995 and the six months ended June 30, 1996, NEG acquired an
estimated 27.0 Bcfe and 4.4 Bcfe in proved reserves, respectively (based on
reserve estimates at the date of acquisition). As a result of acquisitions and
efforts to increase production from the GAU and Cotton Valley Trend, proved
reserves, as estimated by Netherland & Sewell, increased to 54.4 Bcfe and 53.0
Bcfe at December 31, 1995 and June 30, 1996, respectively. In August 1996, the
Company completed the Merger with Alexander whereby the Company acquired 105.7
Bcfe in proved reserves and, in September 1996, completed the Lake Boeuf
Acquisition which added 17.5 Bcfe of proved reserves, each based on June 30,
1996 reserve estimates.
During 1995 and the first nine months of 1996, oil and natural gas sales,
net of lease operating expenses and production taxes, increased more rapidly
than general and administrative expenses and depreciation, depletion and
amortization. As a consequence, NEG recognized net income of $1.2 million
(excluding the $28.3 million writedown of oil and gas properties) for the nine
months ended September 30, 1996 and recognized income from operations of $.9
million for 1995 after recording losses from operations in each year from 1992
through 1994.
RESULTS OF OPERATIONS
The following table sets forth certain information regarding the production
volumes, oil and natural gas sales, average sales prices, lease operating
expenses and general and administrative expenses associated with NEG's oil and
natural gas sales for the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------- -------------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Net production:
Oil (Bbls)............ 48,819 115,642 283,440 176,591 343,732
Natural gas (Mcf)..... 483,241 620,843 1,752,990 1,065,037 2,997,430
---------- ---------- ---------- ---------- -----------
Natural gas equivalent
(Mcfe)............. 776,155 1,314,695 3,453,630 2,124,583 5,059,822
========== ========== ========== ========== ===========
Oil and natural gas
sales:
Oil................... $ 803,561 $1,851,443 $4,880,313 $3,039,963 $ 7,077,222
Natural gas........... 999,723 1,307,273 2,978,003 1,821,213 6,104,228
---------- ---------- ---------- ---------- -----------
Total......... $1,803,284 $3,158,716 $7,858,316 $4,861,176 $13,181,450
========== ========== ========== ========== ===========
Average sales price:
Oil (Bbls)............ $ 16.46 $ 16.01 $ 17.22 $ 17.21 $ 20.59
Natural gas (Mcf)..... 2.07 2.11 1.70 1.71 2.04
Lease operating expenses
per Mcfe.............. .74 .92 .50 .54 .41
General and
administrative
expenses per Mcfe..... 1.28 .75 .51 .48 .39
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1995
Revenues. Total revenues increased by $8.5 million (172%) to $13.5 million
for 1996 from $5.0 million for 1995. The increase in revenues is due to the
increase in production from the development of the GAU, and the increase in
production due to the acquisitions of Mustang Island, Oak Hill, and the Enron
Properties, the UMC Acquisition and the CA Acquisition completed during the
first quarter of 1996, and the Merger with Alexander Energy Corporation
completed August 29, 1996. The acquisition of Mustang Island, Oak Hill and the
Enron Properties collectively referred to herein as the "1995 Acquisitions", and
the UMC Acquisition and
40
<PAGE> 42
CA Acquisition are referred to herein as the "1996 Acquisitions." In 1996, the
Company produced 344,000 barrels of oil, an increase of 95% over 177,000 barrels
in 1995, and 2,997,000 Mcf of gas, an increase of 181% over 1,065,000 Mcf in
1995.
Also contributing to the increase in revenues with the increase in average
oil prices of $3.38 per barrel to $20.59 for 1996 from $17.21 for 1995, and the
increase in average gas prices of $.33 per Mcf to $2.04 for 1996 and $1.71 for
1995. In addition, in 1996, the Company recognized $20,315 in hedging gains from
commodity swap agreements.
Costs and Expenses. Total costs and expenses, excluding the write-down,
increased $6.0 million (146%) to $10.2 million for 1996 from $4.1 million for
1995. Lease operating expenses and production taxes increased $1.4 million (97%)
to $2.8 million for 1996 from $1.4 million for 1995 primarily due to the
development of GAU, the 1995 and 1996 Acquisitions and the Merger. Lease
operating expenses per Mcfe decreased by $.13 to $.41 per Mcfe for 1996 from
$.54 per Mcfe for 1995. This decrease is a result of the lower operating costs
of the acquired properties combined with reductions in costs at the GAU obtained
through economies of scale resulting from the additional wells drilled since
August 1994.
Depreciation, depletion, and amortization increased $3.7 million (218%) to
$5.4 million for 1996 compared to $1.7 million for 1995. This increase is due to
the increased production from the GAU, the 1995 and 1996 Acquisitions and the
Merger. The depletion rate per Mcfe was $1.02 for 1996 compared to $.79 for
1995. This increase in the depletion rate is primarily due to downward revisions
in estimated proved reserves at December 31, 1995 in connection with the
Company's change in independent reserve engineers to Netherland, Sewell &
Associates, Inc. and the Merger.
At August 29, 1996, as a result of allocating the cost of acquiring
Alexander, under the purchase method of accounting to the proved oil and gas
properties acquired in connection with the Merger, the Company recognized a
non-cash writedown of the oil and gas properties, net of related deferred income
taxes of $28.3 million, based on prices received in August 1996 of $20.75 per
Bbl and $2.21 per Mcf. Such writedown is based on the preliminary purchase price
of the Merger. See Note 2 of Notes to Consolidated Financial Statements.
Although general and administrative expenses ("G&A") increased $.9 million
to $2.0 million for 1996, G&A per Mcfe decreased to $.39 (19%) for 1996 from
$.48 for 1995. This decrease is attributable to the increase in production from
the GAU, the 1995 and 1996 Acquisitions and to a lesser extent the Merger,
without a proportionate increase in the G&A costs to the Company.
Other Income and Expenses. The increase of $1.2 million (180%) in interest
expense to $1.8 million for 1996 from $.7 million for 1995, was due to the
increase in the amount of outstanding debt as a result of borrowings under a
prior credit facility and the Credit Facility to fund the 1996 Acquisitions and
the Merger during 1996, and was partially offset by the decline in weighted
average interest rates. The average debt outstanding for 1996 was $26 million as
compared to only $8.8 million for 1995. The weighted average interest rate for
1996 was 8.92% as compared to 9.72% for 1995.
Net Loss. A net loss of $27.0 million was generated for 1996, compared with
net income of $54,000 for 1995. Net income for 1995 includes an extraordinary
charge resulting from the write-off of unamortized loan costs attributable to a
prior credit facility which was paid off out of proceeds from the Credit
Facility. The net loss for 1996 includes a net non-cash write down of $28.3
million to the Company's oil and gas properties, attributable to the preliminary
allocation of the Company's purchase price related to the Merger, which is
partially offset by the increased production on the GAU, the 1995 and 1996
Acquisitions and due to the Merger. Also included in the net loss was a loss on
sale of marketable securities of $118,000 for 1996 as compared to a gain of
$221,000 for 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
Revenues. Total revenues increased by $4,678,698 (141.0%) to $7,995,259 for
1995 from $3,316,561 for 1994. The increase in revenues is principally due to
the continued development of the GAU and the increase in production due to the
1995 Acquisitions. In 1995, NEG produced 283,440 barrels of oil, an increase of
41
<PAGE> 43
145.1% over 115,642 barrels in 1994, and 1,752,990 Mcf of natural gas, an
increase of 182.4% over 620,843 Mcf in 1994. The increase in oil production is
almost entirely a result of the GAU's increased oil production resulting from
the development since August 1994. The 1995 Acquisitions accounted for the
increased natural gas production. Also contributing to the increase in revenues
was the increase in average oil prices of $1.21 per barrel to $17.22 for 1995
from $16.01 for 1994. The decline in average natural gas prices of $.41 per Mcf
to $1.70 for 1995 down from $2.11 for 1994 was offset by the 182.4% increase in
natural gas production.
Costs and Expenses. Total costs and expenses increased $3,670,966 (108.0%)
to $7,068,827 for 1995 from $3,397,861 for 1994. Lease operating expenses and
production taxes increased $764,420 (55.3%) to $2,147,991 for 1995 from
$1,383,571 for 1994 primarily due to the development of the GAU and the 1995
Acquisitions. Lease operating expenses and production taxes attributable to the
GAU increased $284,687 from 1994 to 1995, representing 37.2% of the total
increase for NEG. Lease operating expenses and production taxes attributable to
the 1995 Acquisitions totalled $256,059 for 1995, representing 33.5% of the
total increase for NEG since those properties were not purchased until 1995.
Lease operating expenses as a percent of oil and natural gas sales decreased to
22.0% for 1995 from 38.2% for 1994. This decrease is a result of the lower
operating costs of the acquired properties, reductions in costs at the GAU
obtained through economies of scale resulting from the additional wells drilled
since August 1994 and fewer workovers performed during 1995 than during 1994.
Depreciation, depletion and amortization increased $2,119,478 (205.8%) to
$3,149,464 for 1995 compared to $1,029,986 for 1994. This increase was, in part,
related to the increased production from the GAU and the 1995 Acquisitions. In
addition, the depletion rate on oil and natural gas properties increased to
$1.05 per Mcfe for the fourth quarter from $.79 per Mcfe due to downward
revisions in estimated proved reserves at December 31, 1995.
Although G & A increased $787,068 to $1,771,372 for 1995, G & A per Mcfe
decreased to $.51 (32.0%) for 1995 from $.75 for 1994. This decrease is
attributable to the increase in production from the GAU and the 1995
Acquisitions, without a proportionate increase in G & A costs to NEG.
Other Income and Expenses. The increase of $515,010 (99.6%) in interest
expense to $1,032,096 for 1995 from $517,086 for 1994, was due to the increase
in the amount of outstanding debt as a result of borrowings under the Prior
Credit Facility during 1995 and was partially offset by a decline in weighted
average interest rates. The average debt outstanding for 1995 was $10,590,598 as
compared to only $5,183,333 for 1994. The weighted average interest rate for
1995 was 9.66% as compared to 11.24% for 1994. During 1995, NEG realized a gain
of $220,582 on the sale of marketable securities.
Net Loss. Income before extraordinary item of $205,793 was generated for
1995, compared with a loss before extraordinary item of $489,369 for 1994. This
increase is directly the result of the increased production on the GAU and the
increase in production resulting from the 1995 Acquisitions. Also contributing
to this increase was a realized gain of $220,582 on the sale of marketable
securities in 1995.
A net loss of $225,969, after an extraordinary charge of $431,762, was
generated for 1995, compared with a net loss of $611,286, after an extraordinary
charge of $121,917, in 1994. The extraordinary charge in 1995 resulting from the
write-off of unamortized loan costs attributable to the Texas Gas Fund I
facility which was paid off out of proceeds from the Prior Credit Facility. The
extraordinary charge in 1994 was in connection with the write-off of unamortized
loan costs attributable to NEG's credit facility with Bank One, which was paid
off in 1994 with proceeds from the credit facility with Texas Gas Fund I.
YEAR ENDED DECEMBER 31, 1994 COMPARED WITH YEAR ENDED DECEMBER 31, 1993
Revenues. Total revenues increased by $1,086,112 (48.7%) to $3,316,561 for
1994 from $2,230,449 for 1993. The increase in revenues is entirely due to the
increase in production from the GAU working interests acquired from Bligh
Petroleum, Inc. in December 1993 (the "Bligh Acquisition"). In 1994, NEG
produced 115,642 barrels of oil, an increase of 136.9% over 48,819 barrels in
1993, and 620,843 Mcf of natural gas, an increase of 28.5% over 483,241 Mcf in
1993. As previously stated, the increase in oil and natural gas production is
due to the Bligh Acquisition. The decline in average oil prices of $.45 per
barrel to $16.01 for
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<PAGE> 44
1994 down from $16.46 for 1993 partially offset the increase in revenues. The
slight increase in average natural gas prices of $.04 per Mcf to $2.11 for 1994
from $2.07 for 1993 did not significantly impact 1994 revenues.
Costs and Expenses. Total costs and expenses increased $1,038,858 (44.0%)
to $3,397,861 for 1994 from $2,359,003 for 1993. Lease operating expenses and
production taxes increased $697,998 (101.8%) to $1,383,571 for 1994 from
$685,573 for 1993 almost entirely due to the acquisition of working interests in
the GAU during 1993 and 1994. Lease operating expenses as a percent of oil and
natural gas sales increased to 38.2% for 1994 from 31.9% for 1993, primarily
from workovers performed during 1994.
Depreciation, depletion and amortization increased $350,827 (51.7%) to
$1,029,986 for 1994 compared to $679,159 for 1993. This increase is due to the
increased production from the additional GAU working interest purchased in the
Bligh Acquisition.
Although G & A expenses decreased only $9,967 to $984,304 for 1994 from
$994,271 for 1993, G & A per Mcfe decreased to $.75 (41.4%) for 1994 from $1.28
for 1993. This decrease is attributable to the increase in production from the
Bligh Acquisition without a proportionate increase in G & A costs to NEG.
Other Income and Expenses. The increase of $328,946 (174.8%) in interest
expense to $517,086 for 1994 from $188,140 for 1993, was due to the increase in
the amount of outstanding debt as a result of borrowings under the credit
facility with Texas Gas Fund I during 1994 and the increase in the weighted
average interest rates. The average debt outstanding for 1994 was $5,183,333 as
compared to $2,763,150 for 1993. The weighted average interest rate was 11.24%
as compared to 8.86% for 1993.
Net Income. A loss before extraordinary item of $489,369 was generated for
1994, compared with a net loss of $299,493 for 1993. The increase in net loss
before extraordinary item was primarily the result of an increase in interest
expense due to the Bligh Acquisition and the credit facility with Texas Gas Fund
I, which was partially offset by investment income and improved operating
results. In 1994, NEG recorded on extraordinary charge for early extinguishment
of debt of $121,917, as the Bank One loan was paid off out of proceeds from the
Texas Gas Fund I Facility.
LIQUIDITY AND CAPITAL RESOURCES
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1995
Net cash provided by operating activities was $4.8 million for the nine
months ended September 30, 1996, compared to $2.5 million for the same period in
1995. The increase in cash flow from operating activities is primarily due to
the significant increase in income from operations related to the Merger and the
1995 and 1996 Acquisitions before depreciation, depletion, and amortization as
discussed above.
Net cash used in investing activities was $16.9 million for 1996 compared
with $15.1 million for 1995. This increase was principally due to increased
expenditures for oil and gas property acquisitions (including Alexander and
prospect inventory), exploration and development partially offset by the fact
that virtually no expenditures were made for the purchase of marketable
securities during 1996 as compared to $2.9 million purchased in 1995.
Net cash provided by financing activities was $14.6 million for 1996
compared with $10.8 million for 1995. The cash used by financing activities
during 1996 primarily consisted of repayments of borrowings under various credit
facilities and debt assumed in the Merger of $69 million offset by borrowings of
$72 million and proceeds from the issuance of preferred stock of $15 million.
Borrowings under the prior credit facility were used to fund acquisitions,
development of GAU and working capital.
The Company's working capital at September 30, 1996 was $1.7 million.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
At December 31, 1995, NEG had existing cash and cash equivalents of
$6,076,199. Net cash provided by operating activities was $3,077,082 for 1995,
compared to $373,292 for 1994. The increase in cash flow from
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<PAGE> 45
operating activities is primarily due to the significant increase in income from
operations before depreciation, depletion and amortization.
Net cash used in investing activities was $16,946,221 for 1995 compared
with $3,812,034 for 1994. This increase was principally due to expenditures for
development of the GAU and the cash used in the 1995 Acquisitions.
Net cash provided by financing activities was $17,351,693 for 1995 compared
with $5,870,923 for 1994. The cash provided by financing activities during 1995
primarily consisted of increased borrowings under the Prior Credit Facility of
$20,514,077 and the net proceeds from the issuance of the Series C Preferred
Stock of $3,980,343. Borrowings under the Prior Credit Facility were used to
repay outstanding borrowings under the Texas Gas Fund I facility of $6.0 million
and to fund acquisitions, development of GAU and working capital.
NEG's working capital deficit at December 31, 1995 was $2,315,854. This
deficit is primarily attributable to the inclusion of the current portion of the
Prior Credit Facility which totals $6.5 million, which was offset in part by an
increased cash and accounts receivable position. Also contributing to the
working capital deficit was the increase in accounts payable resulting from
increased development activities during 1995.
EBITDA
The Company's EBITDA increased by $6.0 (209%) million to $8.8 million for
the nine months ended September 30, 1996 as compared to the same period in 1995.
The increase in EBITDA occurred primarily as a result of the Merger and the
continued successful development of the GAU combined with the 1995 and 1996
Acquisitions.
EBITDA should not be considered an alternative to net income as an
indicator of the Company's operating performance or an alternative to cash flows
as a measure of liquidity.
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 substantial portion of the proved reserves of the
Company consist of proved undeveloped reserves, which require substantial
capital expenditures to prove and develop.
In October 1996, the Company acquired an additional 14% working interest in
the East Bayou Sorrel discovery well (the Schwing No. 1) and related acreage,
located in Iberville Parish, Louisiana, increasing the Company's interest in
such well to approximately 31% (East Bayou Sorrel Acquisition). The purchase
price was approximately $3.3 million cash. The East Bayou Sorrel Acquisition
will also reduce the interest in the Bayou Sorrel Acquisition described below
that the Company will be required to offer to all other interest owners pursuant
to area of mutual interest provisions contained in the existing East Bayou
Sorrel operating agreement.
In November 1996 the Company completed the acquisition of a 100% working
interest in the Bayou Sorrel field in Iberville Parish, Louisiana (Bayou Sorrel
Acquisition), which field is located adjacent to the Company's recently
announced discovery well at East Bayou Sorrel. The purchase price for the 100%
working interest was approximately $11.2 million, consisting of $9.2 million
cash and $2 million in shares of Common Stock. As a result of the area of mutual
interest provisions contained in the existing operating agreement for East Bayou
Sorrel, the Company's working interest in Bayou Sorrel Acquisition has been
reduced to approximately 88.5%, and the Company will be reimbursed for the
portion of the purchase price that is commensurate to the reduction in the
working interest.
The Company has budgeted capital expenditures of approximately $47.6
million for the three months ended December 31, 1996 and the year ended December
31, 1997, excluding the East Bayou Sorrel Acquisition, the Bayou Sorrel
Acquisition and the Pending Acquisition. 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 issuance of the
Notes and available borrowings under the Credit Facility,
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<PAGE> 46
sufficient to fund planned capital expenditures for its existing properties
through 1997, including the Bayou Sorrel Acquisition and the Pending
Acquisition. At November 1, 1996, following closing of the issuance of the
Notes, the Company had cash and cash equivalents of $34 million, an increase of
$25 million from $9 million at September 30, 1996. However, the Company may need
to raise additional capital to fund acquisitions which may become available to
the Company in the future, and the development thereof.
For periods after 1997, the Company may seek additional capital, if
required, from traditional reserve base borrowings, 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.
NOTES
On November 1, 1996, the Company closed the offering of $100,000,000 of its
10 3/4% million Senior Notes due 2006. The net proceeds of the Notes of
approximately $96.0 million were used to repay approximately $62 million of
borrowings under the Credit Facility and to increase the Company's working
capital. The Notes bear interest at 10 3/4% per annum, payable semi-annually on
May 1 and November 1, commencing May 1, 1997. The Notes mature November 1, 2006,
but may be redeemed after November 1, 2001, at the Company's option. The
Indenture governing the Notes contains certain covenants, including, but not
limited to, covenants restricting the Company and its Restricted Subsidiaries,
as defined, ability to incur additional indebtedness. See Note 12 of Notes to
Consolidated Financial Statements.
CREDIT FACILITIES
In August 1996, the Company consummated a $100.0 million reducing revolving
line of credit, with an initial borrowing base of $60.0 million and a $5.0
million term loan. The proceeds from the initial borrowings were used to
refinance the existing indebtedness of the Company and Alexander. On November 1,
1996 this facility was paid-off with a portion of the proceeds from the Notes.
Simultaneously, the Company entered into amendments to the Credit Facility. The
Amended Credit Facility is a revolving line of credit with an initial borrowing
base of $25.0 million, $10.0 million of which can only be used to make
acquisitions of producing oil and gas properties. The Credit Facility contains
certain covenants, including maintenance of a minimum interest coverage ratio, a
current ratio and a minimum tangible net worth. See Note 3 of Notes to
Consolidated Financial Statements.
PREFERRED STOCK
In June 1994, the Company consummated the sale of $5.0 million of Series B
Preferred Stock. Fifty thousand shares of Series B Preferred Stock were sold by
the Company at $100.00 per share. The Series B Preferred Stock is convertible
into shares of Common Stock at a conversion price of $1.625 per share.
In June 1995, the Company consummated the sale of $4.0 million of Series C
Preferred Stock. Forty thousand shares of Series C Preferred Stock were sold by
the Company at $100.00 per share. The Series C Preferred Stock is convertible
into shares of Common Stock at a conversion price of $2.00 per share. The Series
B Preferred Stock and Series C Preferred Stock require that dividends be paid on
the Series B Preferred Stock and Series C Preferred Stock before any dividends
are paid on Common Stock. See Note 5 of Notes to Consolidated Financial
Statements of the Company.
In August 1996, the Company completed the sale of 100,000 shares of Series
D preferred stock for $10.0 million and 50,000 shares of Series E preferred
stock for $5.0 million. The Series D and Series E are convertible into shares of
Common Stock at a conversion price of $2.25 per share. In conjunction therewith,
the Company agreed to extend the date at which it may first redeem its Series B
and Series C convertible
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<PAGE> 47
preferred stock from June 14, 1997 to June 14, 1999. See Note 5 of Notes to
Consolidated Financial Statements.
CHANGES IN PRICES AND INFLATION
The Company's revenues and value of its oil and gas properties have been
and will continue to be affected by changes in oil and gas prices. Oil and gas
prices are subject to seasonal and other fluctuations that are beyond the
Company's ability to control or predict.
The Company hedges crude oil and natural gas prices through the use of
commodity swap agreements in an effort to reduce the effects of the volatility
of the price of crude oil and natural gas on the Company's operations. These
agreements involve the receipt of fixed-price amounts in exchange for variable
payments based on NYMEX prices and specific volumes. In connection with the
commodity swap agreements, the Company may also enter into basis swap agreements
to reduce the effects of unusual fluctuations between prices actually received
at the well head and NYMEX prices. Through the use of commodity price and basis
swap agreements, the Company can fix the price to be received for specified
volumes of production to the commodity swap price less the basis swap price. The
differential to be paid or received, under the swap agreement, is accrued in the
month of the related production and recognized as a component of crude oil and
natural gas sales. The Company does not hold or issue financial instruments for
trading purposes.
While the use of hedging arrangements limits the downside risk of adverse
price movements, it may also limit future gains from favorable movements. All
hedging is accomplished pursuant to swap agreements based upon standard forms.
The Company addresses market risk by selecting instruments whose value
fluctuations correlate strongly with the underlying commodity being hedged.
Credit risk related to hedging activities is managed by requiring minimum credit
standards for counterparties, periodic settlements, and mark to market
valuations. The Company has not been required to provide collateral relating to
hedging activities.
At September 30, 1996, the Company had a basis swap agreement with a basis
differential of $.205 covering 300,000 Mcf of natural gas to be produced during
the remainder of 1996.
During the first nine months of 1996, the Company recognized a net gain of
$20,000 related to hedging transactions.
Although certain of the Company's costs and expenses, are affected by the
level of inflation, inflation has not had a significant effect on the Company's
results of operations during the nine months ended September 30, 1995 and 1996.
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<PAGE> 48
SELECTED NEG-OK HISTORICAL FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT FOR RATIOS AND PER UNIT DATA)
The following table sets forth selected historical financial and operating
data with respect to NEG-OK as of and for each of the four years in the period
ended December 31, 1995, and as of and for the six month periods ended June 30,
1995 and 1996. As a result of the consummation of the Merger on August 29, 1996,
and the subsequent combined financial reporting of the Company and NEG-OK, no
historical financial and operating data is available with respect to NEG-OK for
the nine month period ended September 30, 1996. The financial data was derived
from the consolidated financial statements of NEG-OK. NEG-OK never declared or
paid dividends on the NEG-OK Common Stock. The financial data set forth below
should be read in conjunction with "NEG-OK Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the consolidated financial
statements and the notes thereto of NEG-OK incorporated by reference in this
Prospectus. The information reflects the accounts of NEG-OK and its wholly-owned
subsidiaries, and their proportionate share of the assets, liabilities, revenues
and costs and expenses of oil and natural gas limited partnerships in which they
act as general partner.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------- ------------------
1992(1) 1993 1994(2) 1995 1995 1996
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:(3)
Revenues:
Oil and natural gas sales............................... $13,107 $17,708 $17,390 $16,599 $ 9,090 $ 9,262
Well operator and management fees....................... 2,663 2,668 2,615 2,642 1,414 972
------- ------- ------- ------- ------- -------
Total revenues.................................... 15,770 20,376 20,005 19,241 10,504 10,234
Costs and expenses:
Lease operating expenses................................ 3,610 4,129 4,959 5,031 2,762 1,841
Oil and natural gas production taxes.................... 1,008 1,170 1,176 1,077 558 568
General and administrative expenses..................... 3,240 3,879 4,034 3,442 1,721 1,290
Depreciation, depletion and amortization................ 4,583 5,762 7,246 9,252 4,369 4,261
Provisions for impairment of oil and natural gas
properties............................................ -- -- -- 2,300 -- --
Other non-recurring expenses............................ -- -- 3,166 752 300 --
------- ------- ------- ------- ------- -------
Total costs and expenses.......................... 12,441 14,940 20,581 21,854 9,710 7,960
------- ------- ------- ------- ------- -------
Operating income (loss)................................... 3,329 5,436 (576) (2,613) 794 2,274
Interest expense.......................................... (3,029) (2,063) (2,395) (3,960) (1,983) (1,929)
Other income.............................................. 247 1,533 677 370 151 275
------- ------- ------- ------- ------- -------
Income (loss) before income taxes and extraordinary
item.................................................... 547 4,906 (2,294) (6,203) (1,038) 620
Income tax expense (benefit).............................. 5 2,331 -- (1,744) (384) 211
------- ------- ------- ------- ------- -------
Income (loss) before extraordinary item................... $ 542 $ 2,575 $(2,294) $(4,459) $ (654) $ 409
======= ======= ======= ======= ======= =======
OTHER FINANCIAL DATA:(4)(5)
EBITDA.................................................... $ 8,159 $11,480 $10,514 $10,062 $ 5,614 $ 6,810
Cash provided by operating activities..................... 4,717 12,065 1,465 3,382 1,376 4,869
Capital expenditures for oil and natural gas properties
and equipment........................................... 3,462 17,940 36,010 5,881 3,053 2,654
Net cash provided by (used in) financing activities....... (25) 5,345 30,320 1,441 2,011 (2,814)
</TABLE>
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<PAGE> 49
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------- ------------------
1992(1) 1993 1994(2) 1995 1995 1996
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Production:
Oil (Mbls).............................................. 215 283 224 181 106 65
Natural gas (Mmcf)...................................... 5,257 6,332 8,051 9,068 4,881 3,962
Natural gas equivalent (Mmcfe).......................... 6,547 8,031 9,396 10,154 5,519 4,352
Average sale prices:
Oil (per Bbl)........................................... $ 18.70 $ 16.99 $ 15.44 $ 16.57 $ 17.59 $ 18.89
Natural gas (per Mcf)................................... 1.73 2.04 1.73 1.50 1.48 2.03
Natural gas equivalent (per Mcfe)....................... 2.00 2.20 1.85 1.63 1.65 2.13
Unit economics (per Mcfe):
Average sale price...................................... $ 2.00 $ 2.20 $ 1.85 $ 1.63 $ 1.65 $ 2.13
Lease operating expenses................................ .55 .51 .53 .50 .50 .42
Oil and natural gas production taxes.................... .16 .15 .12 .11 .10 .13
------- ------- ------- ------- ------- -------
Gross margin.......................................... 1.29 1.54 1.20 1.02 1.05 1.58
General and administrative expenses..................... .50 .48 .43 .34 .31 .30
------- ------- ------- ------- ------- -------
Gross profit.......................................... $ .79 $ 1.06 $ .77 $ .68 $ .74 $ 1.28
======= ======= ======= ======= ======= =======
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents................................. $ 887 $ 1,295 $ 793 $ 1,452 $ 1,174 $ 1,572
Working capital (deficit)................................. (7,912) (7,100) (5,581) (6,495) (2,926) (8,320)
Total assets.............................................. 65,832 75,769 99,814 91,867 98,392 89,654
Long-term debt............................................ 24,194 16,764 46,514 44,351 48,498 39,406
Stockholders' equity...................................... 17,644 34,351 34,225 30,628 33,796 31,222
</TABLE>
- ---------------
(1) Includes the acquisition of Bradmar, which was consummated on March 18,
1992.
(2) Includes the JMC acquisition which occurred in November 1994, as discussed
in Note 2 of Notes to Consolidated Financial Statements of NEG-OK.
(3) Includes $2.4 million and $734,000 in 1994 of costs related to the merger
with ANEC and costs to settle litigation against ANEC, respectively, as
discussed in Notes 2 and 10 of Notes to Consolidated Financial Statements of
NEG-OK. Includes $300,000 and $452,000 in 1995 of abandoned merger costs and
terminated senior subordinated note offering expenses, respectively, as
discussed in Note 10 of Notes to Consolidated Financial Statements of
NEG-OK. Other income (expenses) in 1993 includes approximately $1.25 million
of proceeds from a lawsuit settlement, as discussed in Note 10 of Notes to
Consolidated Financial Statements of NEG-OK.
(4) See the Glossary included elsewhere in this Prospectus for the definition of
EBITDA. EBITDA is not a measure of cash flow as determined by generally
accepted accounting principles. NEG-OK has included information concerning
EBITDA because EBITDA is a measure used by certain investors in determining
NEG-OK's historical ability to service its indebtedness; however, this
measure may not be comparable to similarly titled measures of other
companies. EBITDA should not be considered as an alternative to, or more
meaningful than, net income or cash flows as determined in accordance with
generally accepted accounting principles as an indicator of NEG-OK's
operating performance or liquidity.
(5) In addition to cash flows provided by operating activities, provided by or
used in financing activities and used by oil and natural gas acquisition,
exploration, and development expenditures, NEG-OK also had significant cash
flows which were provided by or used by other investing activities. See
"NEG-OK Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and the
consolidated historical financial statements of NEG-OK.
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<PAGE> 50
NEG-OK MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
NEG-OK (formerly Alexander) followed the full cost method of accounting for
its oil and natural gas properties. Under such method, the net book value of
such properties, less related deferred income taxes, may not exceed a calculated
"ceiling." The ceiling is the estimated after-tax future net revenues from
proved oil and natural gas properties, discounted at 10% per annum plus the
lower of cost or fair market value of unproved properties. In calculating future
net revenues, prices and costs in effect at the time of the calculation are held
constant indefinitely, except for changes which are fixed and determinable by
existing contracts. The net book value is compared to the ceiling on a quarterly
basis. The excess, if any, of the net book value above the ceiling is required
to be written off as an expense. In the fourth quarter of 1995, NEG-OK
recognized a writedown of its net book value of oil and natural gas properties
in excess of the ceiling of $2.3 million ($2.0 million, net of the deferred tax
credit), as discussed in Notes 1, 11 and 14 of Notes to Consolidated Financial
Statements of NEG-OK. Under the SEC's full cost accounting rules, any write-off
recorded may not be reversed even though higher oil and natural gas prices may
increase the ceiling applicable to future periods.
NEG-OK recorded natural gas sales on the entitlement method, recognizing
only its net share of production as revenues. Any amount received in excess of
NEG-OK's revenue interest was recorded as a natural gas balancing liability and
conversely any deficiency was recorded as a natural gas balancing asset. NEG-OK
had also received non-interest bearing prepayments on future natural gas
production which provide for recoupment, most of which are refundable upon the
earlier of the end of the productive life of the respective well or expiration
of the natural gas purchase contract. The natural gas prepayments will be
recognized as revenue when, and if, the natural gas is delivered.
Amortization of oil and natural gas properties was computed using a unit of
revenue method based on current gross revenues from production in relation to
estimated future gross revenues from production of proved oil and natural gas
reserves.
To manage its acquisition, exploitation and drilling activities, NEG-OK
maintained a professional staff of geologists, engineers, landmen and others.
Although maintaining such staff increased general and administrative expenses on
an absolute basis, NEG-OK's experienced technical staff has been a key to its
ability to generate sufficient drilling prospects and exploitation opportunities
to replace produced reserves. By managing operations for a substantial number of
its wells, NEG-OK had been able to maintain efficiencies in operations as well
as obtain operator and management fees which offset the majority of its general
and administrative expenses.
In 1996 and 1995, NEG-OK sold numerous nonstrategic oil and natural gas
properties, the cash proceeds of which amounted to approximately $800,000 and
$1.8 million, respectively. As discussed in further detail below in Oil and
Natural Gas Sales, Well Operator and Management Fees and Oil and Natural Gas
Operating Expenses, the 1996 and 1995 oil and natural gas property sales reduced
NEG-OK's annual 1996 operating income before amortization and depreciation by
approximately $500,000 and $300,000, respectively, from the amount reported in
1995.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1995 AND 1996
Total Revenues; Oil and Natural Gas Sales. Total revenues decreased for the
six months ended June 30, 1996 compared to the six months ended June 30, 1996.
The decrease in total revenues was comprised of increased oil and natural gas
sales and decreased well operator reimbursements resulting from the sale of
certain properties during 1995 and the first quarter of 1996. The increased oil
and natural gas sales are attributable to higher product prices for both oil and
natural gas, offset by lower production volumes for both oil and natural gas as
a result of certain wells sold during 1995 and January 1996. The 1996 and 1995
oil and
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<PAGE> 51
natural gas property sales are expected to reduce 1996 annual oil and natural
gas sales by approximately $900,000 and $300,000, respectively, from the amount
reported in 1995.
The increase in oil and natural gas sales consisted of increased prices for
both oil and natural gas, partially offset by decreased production for both oil
and natural gas. Oil revenues decreased by 34% due to a 39% decrease in
production quantities and a 8% increase in the average price per Bbl of
production for the six months ended June 30, 1996 as compared to 1995. Natural
gas revenues increased by 11% due to a 37% increase in the average price per Mcf
of natural gas produced, offset by a 19% decrease in product quantities for the
six months ended June 30, 1996 as compared to 1995.
Well Operator and Management Fees. Well operator and management fees
decreased 31% for the six months ended June 30, 1996 compared to the same period
in 1995. This decrease is attributable to a reduction in the number of operated
producing properties, due to the sale of certain properties during 1995 and the
first quarter of 1996. The 1996 and 1995 oil and natural gas property sales are
expected to reduce annual 1996 well operator fees by approximately $500,000 and
$100,000, respectively, from the amount reported in 1995. Included in the
management fees were reimbursements of overhead expense of $5,000 per month from
AEJH 1987 and $10,000 per month from the AEJH 1989 Limited Partnerships (the
"Partnerships"). In 1996, NEG-OK agreed to liquidate and terminate these
Partnerships before the end of 1996, the net income effect of which is not
expected to be significant.
Interest and Other Revenues. The increase in interest and other revenue for
the six months ended June 30, 1996 compared to 1995 resulted from interest
income on invested cash, marketing fees for both oil and natural gas and gains
recognized from the sale of certain real estate.
Oil and Natural Gas Prices. Oil prices received by NEG-OK increased 7%
during the six months ended June 30, 1996, resulting in an average price of
$18.89 per Bbl compared to the average price per Bbl of $17.59 for the same
period in 1995.
During the six months ended June 30, 1996, NEG-OK experienced an increase
in natural gas prices. In recent years, NEG-OK has sold much of its natural gas
under short-term (typically month-to-month) contracts. Natural gas prices
received by NEG-OK increased 37% during the six months ended June 30, 1996,
resulting in an average price of $2.03 per Mcf compared to an average price per
Mcf of $1.48 for the same period in 1995.
Oil and Natural Gas Production. Production and average prices received per
Bbl and Mcf are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1995 1996
--------- ---------
<S> <C> <C>
Crude oil:
Production (Bbls)............................................ 106,327 65,052
Average price received per barrel............................ $17.59 $18.89
Natural gas:
Production (Mcf)............................................. 4,881,070 3,961,596
Average price received per Mcf............................... $1.48 $2.03
</TABLE>
Oil and natural gas production volumes for the six months ended June 30,
1996 on an Mcfe basis decreased from such volumes for the same period in 1995 by
21%. This decrease in production was due to the sale of certain producing
properties during the three months ended March 31, 1996 and during the year
ended 1995. Although NEG-OK experienced some curtailments of natural gas
production, these curtailments were not material. The curtailments were
primarily attributable to excess supply and price competitiveness with oil.
Oil and natural gas production volumes for the year ended December 31, 1996
are expected to be lower than 1995. This expected decrease is primarily
attributable to a decrease in development activities in 1995 and 1996 and due to
the sale of certain properties during 1995 and the three months ended March
1996.
Total Expenses; Oil and Natural Gas Operating Expenses. Total costs and
expenses decreased for the six months ended June 30, 1996 compared to the same
period in 1995. Oil and natural gas operating expenses
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<PAGE> 52
decreased for the six month ended June 30, 1996 compared to the same period in
1995, due to reduced operating expenses attributable to a lesser number of
producing wells, which were sold during 1995 and the three months ended March
1996. The 1996 and 1995 oil and natural gas property sales are expected to
reduce annual 1996 oil and gas operating expenses by approximately $900,000 and
$100,000, respectively, from the amount reported in 1995. Oil and natural gas
operating expenses decreased on an Mcfe basis to $.55 for the six months ended
June 30, 1996 compared to $.60 for the same period in 1995.
Amortization and Depreciation. The amortization and depreciation rate per
dollar of oil and natural gas sales for the six months ended June 30, 1996
decreased to $.46 compared to $.48 for the same period in 1995. The decreased
rate for the six months ended June 30, 1996 was primarily due to the increased
estimated future gross revenues resulting from the higher product price for both
oil and natural gas for the six months ended June 30, 1996.
General and Administrative Expenses. General and administrative expenses
decreased for the six months ended June 30, 1996 compared to the same period in
1995. This decrease was primarily related to a lesser number of personnel
comprising general and administrative expenses for the six months ended June 30,
1996 compared to the same period in 1995. Well operator and management fees
offset 75% of net general and administrative expenses during the six months
ended June 30, 1996 compared to 82% during the same period in 1995.
Interest Expense. Interest expense decreased for the six months ended June
30, 1996 compared to the same period in 1995 due to a decrease in the
outstanding borrowings. NEG-OK's revolving credit facility bears interest at
LIBOR plus 2% (a rate of 7.4375% at June 30, 1996). NEG-OK's term note bore
interest at the prime rate plus 3% (an aggregate rate of 11.25% at June 30,
1996). The weighted average interest rate was 8.02% for the six months ended
June 30, 1996 and 1995.
Nonrecurring Abandoned Merger Costs. NEG-OK had no such expenses for the
six months ended June 30, 1996. On May 10, 1995, NEG-OK announced the
termination of discussions regarding the possible outstanding merger with
Abraxas and, accordingly, expensed $300,000 of related costs.
Taxes. As a result of public offerings in 1993, NEG-OK had an ownership
change pursuant to Section 382 of the Internal Revenue Code. Accordingly, in
1996 and 1995, NEG-OK's provision or benefit for income taxes approximated the
statutory federal rate.
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Total Revenues; Oil and Natural Gas Sales. Total revenues decreased for
1995 compared to 1994. The decrease in total revenues was comprised of decreased
oil and natural gas sales, a slight increase in well operator reimbursements and
decreased other revenues. The decreased oil and natural gas sales were
attributable to lower oil production and a decrease in product price for natural
gas offset by increased oil prices and higher production volumes for natural gas
as a result of the wells drilled during 1994 and 1995 and the producing natural
gas properties acquired from JMC Exploration, Inc. ("JMC") in November 1994 (the
"JMC Acquisition").
Oil revenues decreased by 13% due to a 19% decrease in production
quantities partially offset by a 7% increase in the average price per Bbl of
production for the year ended December 31, 1995 as compared to 1994. Natural gas
revenues decreased by 2% due to a 13% decrease in the average price per Mcf of
natural gas produced for the year ended December 31, 1995 as compared to 1994,
offset by a 13% increase in production quantities.
Total revenues decreased for 1994 compared to 1993. The decrease in total
revenues consisted of decreased oil and natural gas sales and a nonrecurring
item in other revenues in 1993 of approximately $1.25 million from the proceeds
of settlement of a lawsuit. The decrease in oil and natural gas sales was due to
lower product prices, partially offset by higher production volumes of natural
gas attributable to wells drilled in 1994.
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<PAGE> 53
Oil revenues decreased by 28% due to a 21% decrease in production
quantities and an 9% decrease in the average price per Bbl of production for the
year ended December 31, 1994 as compared to 1993. Natural gas revenues increased
by 8% due to a 27% increase in production quantities, offset by a 15% decrease
in the average price per Mcf of natural gas produced for the year ended December
31, 1994 as compared to 1993.
Well Operator and Management Fees. Well operator and management fees
reflect a slight increase for the year ended December 31, 1995 compared to the
same period in 1994. This slight increase was attributable to the inclusion of
the JMC Acquisition operated properties for a full year in 1995, as the JMC
Acquisition closed in mid November 1994, offset by the sale of certain operated
properties in the latter half of 1995. Included in the 1995 management fees were
reimbursements of overhead expense of $10,000 per month from each of the AEJH
1987 and AEJH 1989 Limited Partnerships.
Well operator and management fees remained fairly constant for the year
ended December 31, 1994 compared to the same period in 1993. Included in the
management fees were reimbursements of overhead expense of $10,000 per month
from each of the AEJH 1987 and AEJH 1989 Limited Partnerships and an average of
$4,750 per month for six months from the AEJH 1987-A Limited Partnership, which
ceased operations during mid 1994.
Marketing Fees, Interest and Other Revenues. The 19% increase in interest
and other revenue (excluding the gains from NEG-OK's sale of other property and
equipment of approximately $130,000 and the finalization and termination of a
take-or-pay contract of approximately $235,000 in 1994) during the year ended
December 31, 1995 compared to 1994 resulted from additional interest income on
invested cash and increased marketing fees for both oil and natural gas.
The increase in interest and other revenue (excluding the settlement of a
lawsuit of approximately $1.25 million in 1993) during the year December 31,
1994 compared to 1993 resulted from gains on the sale of real estate and the
settlement of a take-or-pay contract recorded as deferred revenue in 1993.
Oil and Natural Gas Prices. Oil prices received by NEG-OK increased 7%
during 1995, resulting in an average price of $16.57 per Bbl compared to the
average price per Bbl of $15.44 for 1994. Revenues and operating results for
future periods will continue to be impacted by price fluctuations which are
largely influenced by market conditions and the quantity of the oil sold by
OPEC.
During 1995, NEG-OK experienced a decrease in natural gas prices. In recent
years, NEG-OK has sold much of its natural gas under short-term (typically
month-to-month) contracts. Natural gas prices received by NEG-OK decreased 13%
during 1995, resulting in an average price of $1.50 per Mcf compared to an
average price per Mcf of $1.73 for 1994.
Oil prices received by NEG-OK decreased 9% during 1994, resulting in an
average price of $15.44 per Bbl compared to the average price per Bbl of $16.99
for 1993. Average natural gas price received by NEG-OK during 1994 was $1.73 per
Mcf, a decrease of 15% compared to an average natural gas price received in 1993
of $2.04 per Mcf.
Oil and Natural Gas Production. Production and average prices received per
Bbl and Mcf for each of the last three years are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Crude Oil:
Production (Bbls)............................... 283,190 224,230 181,022
Average price per Bbl........................... $16.99 $15.44 $16.57
Natural Gas:
Production (Mcf)................................ 6,332,015 8,050,688 9,067,588
Average price per Mcf........................... $2.04 $1.73 $1.50
</TABLE>
Oil and natural gas production volumes for 1995 on an Mcfe basis exceeded
such volumes for the same period in 1994 by 8% and oil and natural gas
production volumes for 1994 on an Mcfe basis exceeded such
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<PAGE> 54
volumes for 1993 by 17%. These increases in production were from participation
in new wells drilled over the past three years through NEG-OK and the AEJH 1985
and AEJH 1989 Limited Partnerships, from recompletions in the Cotton Valley
properties in 1994 by NEG-OK and from production on properties acquired in the
JMC Acquisition after closing in mid November 1994. Although NEG-OK experienced
some curtailments of natural gas production, these curtailments have not been
material. The curtailments were primarily attributable to excess supply and
price competitiveness with oil.
Total Expenses; Oil and Natural Gas Operating Expenses. Total costs and
expenses increased for 1995 compared to 1994 due in part to nonrecurring
expenses, an increase in interest expense, depreciation and amortization expense
and a provision for impairment of oil and natural gas properties. Oil and
natural gas operating expenses remained fairly constant for 1995 compared to
1994. NEG-OK recognized additional operating expenses attributable to a greater
number of producing wells and workovers in the first half of 1995, offset by
reduced operating expenses attributable to the sale of certain producing
properties during the third quarter of 1995 and reduced remedial workovers
performed during the latter half of the year. Oil and natural gas operating
expenses continue to decrease on an Mcfe basis to $.60 for 1995, compared to
$.65 per Mcfe for 1994 and $.66 per Mcfe for 1993.
Oil and natural gas operating expenses increased for 1994 compared to 1993,
due to additional operating expenses attributable to a greater number of
producing wells, which were drilled and completed during 1994 and the latter
part of 1993 and due to workover costs performed on certain properties in 1994.
Amortization and Depreciation. The oil and natural gas property
amortization and depreciation rate per dollar of oil and natural gas sales for
1995 increased to $.55 compared to $.41 for 1994. The increased rate for 1995
was due principally to the decreased estimated future gross revenues resulting
from the decreased oil and natural gas reserve volumes in 1995 as a result of
downward revisions to previous reserve estimates. The amortization and
depreciation rates for future periods will increase or decrease corresponding
with the fluctuations in oil and natural gas prices, reserve volumes and
production.
The oil and natural gas property amortization and depreciation rate per
dollar of oil and natural gas sales for 1994 increased to $.41 compared to $.32
for 1993. The increased rate for 1994 was due to the decreased estimated future
gross revenues resulting from lower product prices in 1994.
Impairment of Oil and Natural Gas Properties. As of December 31, 1995,
NEG-OK's net book value of oil and natural gas properties exceeded the ceiling
limitations prescribed under the full cost method of accounting for oil and
natural gas properties. Accordingly, a provision was recognized in the fourth
quarter of 1995 of $2.3 million ($2.0 million, net of the deferred tax credit).
The provision for impairment is primarily attributable to declines in estimated
reserves due to downward revisions to reserve estimates as discussed in Note 14
of Notes to Consolidated Financial Statements of NEG-OK.
General and Administrative Expenses. General and administrative expenses
decreased 15% for 1995 compared to 1994. This decrease was primarily related to
fewer personnel for 1995 compared to 1994, as 1994 included personnel and other
general and administrative expenses of ANEC, most of which were not retained
following the merger in July 1994. Well operator and management fees offset 77%
of general and administrative expenses during 1995 compared to 65% during 1994.
General and administrative expenses increased for 1994 compared to 1993.
This increase was primarily related to management bonuses and increased
personnel costs associated with NEG-OK's growth. Well operator and management
fees offset 65% of general and administrative expenses during 1994 compared to
69% during 1993.
Interest Expense. Interest expense increased for 1995 compared to 1994 due
to the amount of outstanding borrowings for the twelve-month period ended
December 31, 1995, as compared to 1994 due principally to the JMC Acquisition,
which closed mid November 1994. The weighted average outstanding borrowings
increased to $49.7 million in 1995, a 80.5% increase from $27.5 million in 1994.
The weighted average interest rate decreased to 8.0% in 1995 compared to 8.7% in
1994. At December 31, 1995, NEG-OK's credit facility bore interest at LIBOR plus
1.5% (a rate of 7.3125%).
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<PAGE> 55
Interest expense increased for 1994 compared to 1993 due to an increase in
the outstanding borrowings associated with property development and the JMC
Acquisition. The weighted average outstanding borrowings increased to $27.5
million in 1994, a 42.2% increase from $19.4 million in 1993. The weighted
average interest rate decreased to 8.7% in 1994 compared to 10.6% in 1993.
Nonrecurring Expenses. On May 10, 1995, NEG-OK announced the termination of
discussions regarding the possible outstanding merger with Abraxas and,
accordingly, expensed $300,000 of related costs. In August 1995, NEG-OK
postponed the offering of its senior subordinated notes and subsequent thereto
expensed $452,000 of related costs.
In connection with the merger between NEG-OK and ANEC, NEG-OK incurred
nonrecurring charges to operations in 1994 of $2.4 million. These costs include
legal, accounting, investment banking, printing and other costs.
Litigation Settlement. In the fourth quarter of 1994, in an effort to
resolve ANEC's litigation with various parties which had been ongoing since
1992, NEG-OK acquired certain creditor claims against the operator of a well in
which ANEC had an interest and agreed to mediation with the primary plaintiffs
of the outstanding litigation. Although management believed its actions against
the well operator were meritorious and believed the counterclaims of this party
were without merit, after having mediated this matter in December 1994,
management of NEG-OK believed it was in NEG-OK's best interest to resolve such
litigation and terminate the costs associated therewith. Accordingly, in late
December 1994, NEG-OK agreed to a negotiated settlement, the effect of which
resulted in a charge to 1994 operations, including legal fees, of approximately
$734,000.
Taxes. As a result of NEG-OK's and ANEC's secondary public offerings in
1993, both entities had an ownership change pursuant to Section 382 of the Code.
In 1995, NEG-OK recorded a tax credit of $1.7 million on pretax loss of $6.2
million, an effective rate of 28%. This credit was less than the combined
statutory federal and state rates due to the estimated timing of future taxable
temporary differences and limitations on the utilization of NEG-OK's net
operating loss and statutory depletion carryforwards as discussed below. In
1994, NEG-OK's provision for income taxes approximated statutory rates after
considering permanent differences. In 1993, NEG-OK sustained a nonrecurring
non-cash charge to operations of $1.2 million due to an increase in the
valuation allowance associated with the change in ownership in the first quarter
of 1993 discussed above. NEG-OK also recorded a deferred tax provision of
approximately $1.1 million on pretax income of $4.9 million, representing an
effective rate of 23%. The lower tax rate for 1993 was primarily attributable to
the reduction of a valuation allowance previously established on pre-acquisition
net operating loss carryforwards of ANEC.
In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 109, "Accounting for Income Taxes" ("SFAS
109"). NEG-OK adopted SFAS 109 on January 1, 1993. Among other changes, SFAS 109
relaxed the recognition and measurement criteria for deferred tax assets and
alternative minimum tax from that provided for under its previous method of
accounting for income taxes under Statement of Financial Accounting Standards
No. 96 ("SFAS 96"). Adoption of this standard resulted in the elimination of
deferred income taxes payable of $425,000, related entirely to alternative
minimum tax, which is reflected in the 1993 statement of operations as the
cumulative effect of a change in accounting principle.
LIQUIDITY AND CAPITAL RESOURCES
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
General. NEG-OK's capital requirements related primarily to exploitation,
development, exploration and acquisition activities. In general, because the
Company's oil and natural gas reserves are depleted by production, the success
of its business strategy is dependent upon a continuous exploitation,
development, exploration and acquisition program.
Cash Flows. For the six months ended June 30, 1996, NEG-OK's cash provided
by operating activities was approximately $4.9 million, an increase of 254%
compared to $1.4 million for the same period in 1995. In
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<PAGE> 56
1996, the net change in assets and liabilities reduced cash flows from operating
activities by $110,000 compared to $2.2 million in the comparable period in
1995. This change was due principally to NEG-OK's reduced exploration and
development activity in 1995 compared to 1994 as well as its focus on
maintenance of adequate working capital to sustain future operations. At June
30, 1996 NEG-OK had a $2.9 million natural gas balancing liability attributable
to 2.2 Bcf of natural gas production in excess of NEG-OK's entitled natural gas
volumes. The majority of these excess sales were from properties that have
natural gas balancing agreements which provide for recoupments by the
underproduced owners from 25% of volumes attributable to NEG-OK's interest. At
June 30, 1996, approximately $1.5 million was included in current liabilities
associated with such net excess sales liability.
Net cash used by investing activities for the six months ended June 30,
1996 decreased approximately $1.1 million from the same period in 1995.
Additions to oil and natural gas properties decreased by approximately $.4
million due primarily to reduced oil and natural gas property acquisitions and
development. Proceeds from the sale of properties and equipment increased in
1996 to approximately $1.1 million, resulting from the sale of oil and natural
gas properties in January 1996, as discussed above.
Net cash used by financing activities was approximately $2.8 million for
the six months ended June 30, 1996 compared to net cash provided of $2.0 million
for the corresponding period in 1995. Net cash used for the six months ended
June 30, 1996 resulted from payments on long-term debt, offset by proceeds from
the exercise of employee stock options. At June 30, 1996, NEG-OK had a working
capital deficit of $8.3 million and had no availability under its revolving line
of credit. See "Long Term Debt."
Long Term Debt. At December 31, 1995, the Company had $44.0 million
outstanding under its revolving credit facility with a bank. Subsequent to
December 31, 1995, the lender reduced the borrowing base to $33.0 million,
effective to December 31, 1995, requiring the $11.0 million excess borrowings to
be converted to a term note. In May and August 1996, NEG-OK amended the credit
agreement (the "Amended Agreement"). Under the Amended Agreement, the term note
required, among other things, monthly payments of principal of $350,000 plus
interest, beginning effective April 1996. On August 29, 1996 in connection with
the Merger and the Company's borrowings under the Credit Facility, the Company
repaid all borrowings outstanding under this financing agreement.
At June 30, 1996, NEG-OK also had $2.0 million outstanding under a term
note with a stockholder which contains various financial covenants. In May 1996,
NEG-OK obtained a waiver through April 1, 1997 from the stockholder for
noncompliance with certain covenants. Under the waiver, NEG-OK made its
scheduled principal payment of $1.0 million in June 1996. The remaining $2
million of unpaid principal has been included in long term debt due within one
year in the accompanying June 30, 1996 consolidated balance sheet. NEG-OK also
agreed to liquidate and distribute the assets of the AEJH 1985, AEJH 1987 and
AEJH 1989 Limited Partnerships. On August 29, 1996 in connection with the Merger
and the Company's borrowings under the Credit Facility, the Company repaid all
borrowings outstanding under this financing agreement.
YEARS ENDED DECEMBER 31, 1995 AND 1994
General. NEG-OK's capital requirements relate primarily to exploitation,
development, exploration and acquisition activities. In general, because
NEG-OK's oil and natural gas reserves are depleted by production, the success of
its business strategy is dependent upon a continuous exploitation, development,
exploration and acquisition program.
Cash Flows. In 1995, NEG-OK's net cash provided by operating activities was
$3.4 million, compared to $1.5 million for the year ended December 31, 1994.
This increase was primarily attributable to the decrease in nonrecurring and
litigation expenses of $2.4 million, reduced general and administrative expenses
of $592,000, an increase of $1.1 million due to net changes in operating assets
and liabilities, partially offset by reduced oil and natural gas sales of
$791,000 and increased interest expense of $1.6 million. The changes in
operating assets and liabilities were primarily attributable to the reduced oil
and natural gas property development at December 31, 1995 compared with 1994 and
events in 1994, explained below, which did not recur in 1995. At December 31,
1995, NEG-OK had a $3.4 million natural gas balancing liability attributable to
2.5 Bcf of natural gas production in excess of NEG-OK's entitled natural gas
volumes. The majority of the excess sales
55
<PAGE> 57
are from properties that have natural gas balancing agreements which provide for
recoupments by the underproduced owners from 25% of volumes attributable to
NEGOK's interest. Additionally, most natural gas prepayments are refundable upon
the end of the productive life of the respective wells. At December 31, 1995,
approximately $1.5 million were classified as due within one year.
Net cash used by investing activities in 1995 decreased by $28.1 million to
$4.2 million due primarily to reduced oil and natural gas property acquisitions
and development offset by reduced proceeds from property sales.
Net cash provided by financing activities in 1995 decreased by $28.9
million to $1.4 million due primarily to reduced long-term debt borrowings in
1995 compared to 1994.
In 1994, NEG-OK's cash provided by operating activities was $1.5 million
compared to $12.1 million for the year ended December 31, 1993. This decrease
was primarily attributable to $3.2 million of nonrecurring expenses associated
with the ANEC merger and the settlement of ANEC litigation, the nonrecurrence of
the 1993 $1.25 million natural gas contract settlement proceeds and the net
change in assets and liabilities resulting from operating activities of $4.8
million. The $4.8 million net change in assets and liabilities resulting from
operating activities in 1994 is the result of reduced drilling activities, the
availability of additional borrowing capacity associated with the new credit
facility and the nonrecurrence of a natural gas prepayment agreement at December
31, 1994, compared with December 31, 1993, all of which caused a reduction in
accounts payable, oil and natural gas proceeds due others and other liabilities
at December 31, 1994 compared with the related balances at December 31, 1993.
Net cash used by investing activities in 1994 increased approximately $15.3
million to $32.3 million from $17.0 million in 1993. Additions to oil and
natural gas properties increased by approximately $18.1 million to $36.0 million
due to the JMC acquisition of $18.2 million and the continued redirection of
activities toward exploration and development of reserves after completing the
secondary public offering in 1993. The acquisition added 25 billion cubic feet
of natural gas reserves to NEG-OK's asset base. The properties acquired are
located in the Arkoma Basin in Oklahoma and Arkansas. During 1994, NEG-OK also
sold its interest in the MFS Properties for approximately $3.2 million which
were acquired in 1990 for $3.0 million.
At December 31, 1995, NEG-OK had a working capital deficit of $6.5 million
and had no availability under its revolving line of credit. See "-- General"
above and "Existing Long-term Debt" below.
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BUSINESS AND PROPERTIES
GENERAL
For the purpose of providing comparison with the separate historical
financial statements and reserve reports of NEG and NEG-OK, the information set
forth in this "Business and Properties" section is, where specifically marked
with subheadings, disclosed separately for each of NEG and NEG-OK, and also for
the Company Pro Forma for the Merger and, where indicated, the Lake Boeuf
Acquisition and the Bayou Sorrel Acquisition.
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.
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 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 recently
initiated an exploration program concentrating primarily on prospects onshore in
southern Louisiana and in shallow state waters in offshore Nueces County, Texas.
As a result of its acquisition, exploitation, development and exploration
activities (including the Merger and the Lake Boeuf Acquisition), 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 176.2 Bcfe (74% natural
gas) and $165.2 million (56% proved developed), respectively, on a pro forma
basis at June 30, 1996 as estimated in reports prepared by Netherland & Sewell.
NEG's average net daily production has increased from 1.2 Mmcfe for 1991 to 39.0
Mmcfe for the pro forma nine months ended September 30, 1996. As a result of
increases in reserves and production, the Company has increased EBITDA from $0.3
million for 1991 to $15.6 million for Pro Forma 1995, and from $8.8 million
during the nine months ended September 30, 1996, to $17.9 million during the
same period on a Pro Forma basis.
The Company estimates it has a backlog of approximately 250 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 $47.6 million for the last three months of
1996 and for the year ending December 31, 1997 consisting of approximately $38.4
million for development and exploitation projects and approximately $9.2 million
for selective exploratory activities primarily on its offshore Gulf of Mexico
and onshore southern Louisiana properties. 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.
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,
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<PAGE> 59
(ii) acquiring oil and natural gas properties with significant exploitation,
development or exploration potential, (iii) 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 the first nine months of
1996, the Company participated in the drilling of 50 gross (43.0 net)
development wells, 49 gross (42.4 net) of which were 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 June 30, 1996, Netherland & Sewell has identified approximately 215
development opportunities (including recompletions, drilling locations and
proposed waterfloods) on the Company's existing properties, and as of December
31, 1995, had identified 35 probable and possible drilling locations on NEG-OK's
properties. NEG has a development and exploitation capital expenditure budget of
approximately $38.4 million for the last three months of 1996 and for the year
ending December 31, 1997, most of which is targeted to develop proved
undeveloped reserves.
Property Acquisitions. Acquisitions of producing oil and gas properties
have contributed significantly to the Company's historical growth in 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, to 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 September 30, 1996, and
pro forma for the Bayou Sorrel Acquisition, NEG operated 488 of the 719
producing wells in which it owns an interest. The Company also operated
approximately 85% of its aggregate PV10% as of June 30, 1996, after giving
effect to the Merger and the Lake Boeuf Acquisition.
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 41% from $0.70 per Mcfe in 1991 to $.41 per Mcfe during the nine months
ended September 30, 1996. During these same periods, the Company decreased
historical unit general and administrative expenses 51% from $0.80 per Mcfe to
$.39 per Mcfe. NEG's emphasis on reducing its unit operating expenses has
contributed to its 180% improvement in unit gross profit margins from $0.60 per
Mcfe to $1.68 per Mcfe over these same periods. The Company believes the Merger
and the Subsequent Merger will provide further opportunities to improve its unit
operating costs through planned acceleration of production from NEG-OK's
properties and economies of scale expected to be recognized in general and
administrative expenses by combining the two operations.
Selective Exploration Program. To balance its relatively lower risk
development and exploitation activities, the Company expects that exploration
drilling will become a more important, although limited, aspect of its business
in the future. The Company's recently initiated exploration program targets
prospects with significant reserve potential, focusing primarily on its
inventory of exploratory prospects onshore Texas, Louisiana, Mississippi and
Alabama and offshore Gulf of Mexico, including the Mustang Island 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 the Sandefer Exploration Venture 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. The agreement with Sandefer also involves an arrangement with
the 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
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<PAGE> 60
Sandefer. NEG also 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.
ACQUISITIONS
Since its formation in 1990, the Company has actively engaged in the
acquisition of producing oil and natural gas properties, primarily in Texas,
Oklahoma, Arkansas, Louisiana and offshore in the Gulf of Mexico.
<TABLE>
<CAPTION>
ESTIMATED
PROVED
RESERVES
AT DATE OF ACQUISITION ACQUISITION
AREAS OF PRINCIPAL ACQUISITION COST (IN COST PER
DATES PRINCIPAL SELLER PROPERTIES (BCFE)(1) MILLIONS)(2) MCFE(2)
- ----- ---------------------------- ---------------------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
1991 Big Piney Oil & Gas
Company................... Wyoming..................... 3.1 $ 1.9 $ .61
1992 TriSearch, Inc.............. GAU......................... 6.1 4.1 .67
1993 Oil Search Partnerships..... GAU......................... 1.4 .7 .50
1993 Bligh Petroleum, Inc. ...... GAU......................... 19.0 3.5 .18
1994 Various Working Interest
Owners.................... GAU......................... 7.0 .6 .09
1995 Sierra 1994 I Limited
Partnership............... Cotton Valley Trend (Oak
Hill)..................... 20.7 9.1 .44
1995 Enron Oil and Gas Company... New Mexico.................. 1.8 2.1 1.17
1995 Sierra Mineral Development
L.C....................... Mustang Island.............. 4.5 2.0 .44
1996 C/A Limited................. Mustang Island.............. 3.1 .7 .23
1996 UMC Petroleum Corporation... Mustang Island.............. 1.3 1.0 .77
1996 Araxas Energy Corporation
and O'Sullivan Oil and Gas
Company, Inc. ............ Lake Boeuf.................. 17.5 7.2 .41
1996 Alexander Energy
Corporation............... Anadarko Basin, Cotton
Valley Trend and Arkoma
Basin..................... 105.7(3) 112.4(4) 1.06
----- ------ -----
Total(5)..................................................
191.2 $145.3 $ .76
===== ====== =====
</TABLE>
- ---------------
(1) Estimated proved reserves at date of acquisition are based on reserve
reports prepared for the specific acquisition or, if one was not prepared at
the date of acquisition, are based on the first year end reserve report
prepared following the acquisition date and adjusted for production
subsequent to the date of acquisition. Acquisitions made in 1996 are based
on the applicable Updated Reserve Report and Lake Boeuf Reserve Report, as
such terms are hereinafter defined.
(2) Does not include costs to develop these properties, which properties include
a substantial amount of proved undeveloped reserves.
(3) Excludes approximately 31 Bcfe of reserves of NEG-OK reclassified by
Netherland & Sewell as of December 31, 1995 from proved undeveloped to
probable and possible reserves. See "-- Oil and Natural Gas Reserves."
(4) Acquisition cost excludes deferred income taxes of $18.6 million. See Note 2
to Notes to Consolidated Financial Statements.
(5) Excludes the East Bayou Sorrel Acquisition consummated in October and
December 1996 and the Bayou Sorrel Acquisition consummated in November 1996.
The Company continually reviews potential acquisitions, and anticipates
making additional acquisitions if such properties fit into its overall business
strategy. The Company does not have a budget specifically for acquisitions,
however, since their timing and size cannot be predicted. As of the date of this
Prospectus, the Company has no agreements with respect to any significant
acquisitions, other than the agreement in principle relating to the Pending
Acquisition.
As a result of the Merger with Alexander in August 1996, the Company added
approximately 106 Bcfe of estimated net proved reserves, as of June 30, 1996, to
its reserve base. Alexander's properties are located principally in the Anadarko
Basin of Oklahoma, the Cotton Valley Trend of Texas and the Arkoma Basin of
Oklahoma and Arkansas. The Alexander properties were attractive to NEG primarily
due to the large number
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<PAGE> 61
of identified development drilling opportunities, with approximately 37% of
Alexander's estimated net proved reserves as of June 30, 1996 classified as
proved undeveloped. The Company intends to aggressively develop and enhance the
reserves acquired in the Merger through development drilling and selective
workovers, recompletions and redrills. The Merger has also brought to the
Company additional personnel experienced in geology, exploitation and natural
gas marketing who complement the existing personnel of the Company. For the
primary purpose of achieving greater operating efficiencies following the
Merger, the Board of Directors of NEG on December 6, 1996 approved the
Subsequent Merger, and such merger was effective as of December 31, 1996.
The Merger followed ten previous acquisitions of oil and natural gas
properties by the Company since January 1, 1991 that also provided project
inventories with significant exploitation and development opportunities. From
January 1, 1991 through September 30, 1996, the Company has acquired 191 Bcfe of
estimated net proved reserves which is approximately 20 times its net production
of 9.6 Bcfe during the same period. The Company's first substantial increase in
proved reserves, production and cash flow resulted from its acquisition of a 95%
working interest in and subsequent development of the oil producing GAU acquired
in several transactions commencing in 1992. Through November 30, 1996, NEG has
drilled 52 wells in the GAU with a 98% success rate and has increased average
gross daily production attributable to the unit from approximately 450 Boe in
1992 to approximately 1,550 Boe in November 1996. The Company's continuing
development program at the GAU includes drilling an average of two wells per
month for the next two years. The Company followed the GAU acquisitions with its
1995 acquisition of a 99% working interest in the Oak Hill field located in the
Cotton Valley Trend of east Texas, in which it also implemented a drilling
program in 1996.
During 1995 and 1996, the Company expanded its operations to include
offshore oil and natural gas properties in the Mustang Island area located in
shallow state waters of Nueces County, Texas, where it has acquired, through a
series of transactions, interests in eight wells and 24 offshore lease tracts
covering 13,810 gross (11,295 net) acres. As part of its exploration program,
the Company has commissioned a 3-D seismic survey of this area and has acquired
the production infrastructure necessary to implement its present plans to
explore and develop these offshore properties.
In September 1996 the Company completed the Lake Boeuf Acquisition, in
which NEG acquired an approximate 87.5% working interest in two wells and
certain proved undeveloped reserves in South Lake Boeuf, Louisiana for
approximately $7.2 million, consisting of $1.5 million in cash and approximately
$5.7 million in shares of Common Stock of the Company. The Lake Boeuf
Acquisition added net proved reserves of 17.5 Bcfe (40% natural gas) with a
PV10% of $23.1 million as of June 30, 1996, as estimated by Netherland & Sewell,
substantially all of which are proved undeveloped reserves. In nearby Iberville
Parish, the Company recently drilled an exploration well (the Schwing No. 1)
that represents a new field discovery in East Bayou Sorrel.
In October 1996 the Company acquired an additional 14% working interest in
the Schwing No. 1 and related acreage located in Iberville Parish, Louisiana,
increasing the Company's interest in such well at that time to approximately
31%. The purchase price was approximately $3.3 million cash. In December 1996
the Company completed the second transaction of the East Bayou Sorrel
Acquisition, which included an additional 28% working interest in the Schwing #1
well and related acreage, increasing NEG's working interest in such well to
approximately 60%. The purchase price was approximately $7.0 million cash. The
East Bayou Sorrel Acquisition reduced the interest in the Bayou Sorrel
Acquisition described below that the Company was required to offer to all other
interest owners pursuant to area of mutual interest provisions contained in the
existing East Bayou Sorrel operating agreement.
In November 1996 the Company completed the Bayou Sorrel Acquisition, which
properties are located in a field adjacent to the Company's recently announced
discovery well at East Bayou Sorrel. The purchase price for the 100% working
interest was approximately $11.2 million, consisting of approximately $9.2
million cash and $2 million in shares of Common Stock. As a result of the area
of mutual interest provisions contained in the existing operating agreement for
East Bayou Sorrel, the Company's working interest in the Bayou Sorrel
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<PAGE> 62
Acquisition has been reduced to approximately 88.5%, and the Company will be
reimbursed for the portion of the cash purchase price that is commensurate to
the reduction in the working interest.
The combination of the Bayou Sorrel Acquisition and the East Bayou Sorrel
Acquisition is expected to give the Company a significant operating position in
the Bayou Sorrel area which includes interests in (i) approximately 2,600 gross
undeveloped acres related to the deeper horizons that have tested productive in
the East Bayou Sorrel discovery well, and (ii) production facilities, pipelines
and production infrastructure necessary to develop and explore the area.
Additionally a 33 square mile 3-D seismic survey is planned for this area, which
will make this part of Southern Louisiana a major focus area of the Company's
exploration program.
Pending Acquisition. In December 1996, the Company entered into an
agreement in principle relating to the Pending Acquisition with Hancock to
purchase, for $4.0 million in cash or cash and Common Stock, Hancock's limited
partnership interests in certain limited partnerships in which the Company is
the general partner. The limited partnerships own working interests in the
Anadarko and Arkoma Basin areas of Oklahoma and the Giddings area of Texas. At
January 1, 1996, engineering reports showed an aggregate PV10% of approximately
$7 million relative to Hancock's interest in such partnerships.
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<PAGE> 63
OIL AND NATURAL GAS RESERVES
The following table sets forth certain information on the total proved oil
and natural gas reserves, the estimated future net revenues therefrom, the PV10%
of estimated future net revenues, and the Standardized Measure of total proved
oil and natural gas reserves as of June 30, 1996 for NEG, NEG-OK and NEG giving
effect to the Merger and the Lake Boeuf Acquisition, based on the Netherland &
Sewell report for proved reserves as of July 1, 1996 (the "Updated Reserve
Report"), which report is attached hereto as Annex A-1, and on the Netherland &
Sewell report for proved reserves as of July 1, 1996, with respect to the Lake
Boeuf Acquisition (the "Lake Boeuf Reserve Report"), which report is attached
hereto as Annex A-2. The Updated Reserve Report includes estimates which were
"rolled forward" from the Netherland & Sewell reports dated February 15, 1996
with respect to NEG (the "NEG 1995 Reserve Report") and March 1, 1996 with
respect to NEG-OK (the "NEG-OK 1995 Reserve Report"), attached hereto as Annex B
and Annex C, respectively (collectively, the "1995 Reserve Reports"). The
estimates contained in the 1995 Reserve Reports have been updated (except for
the Lake Boeuf Acquisition, which is the subject of the Lake Boeuf Reserve
Report) in the Updated Reserve Report for the following: (1) scheduling of the
1996 and 1997 drilling and workover programs, (2) addition of new wells, and (3)
deletion of sold wells. No other engineering updates have been conducted for the
properties to prepare the Updated Reserve Report. The calculations which
Netherland & Sewell used in preparation of such reports were prepared using
standard geological and engineering methods generally accepted by the petroleum
industry and in accordance with SEC guidelines.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
----------------------------------------------------------
NATURAL
NATURAL GAS FUTURE
OIL GAS EQUIVALENT NET
(MBBLS) (MMCF) (MMCFE) REVENUE(1) PV10%
------- ------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NEG
Proved developed reserves........ 1,556 12,555 21,890 $ 32,072 $ 22,655
Proved undeveloped reserves...... 2,259 17,574 31,129 43,763 23,494
----- ------- ------- -------- --------
Total proved reserves.... 3,815 30,129 53,019 $ 75,835 $ 46,149
===== ======= ======= ======== ========
Standardized Measure............. $ 40,185
========
NEG-OK
Proved developed reserves........ 1,045 60,237 66,504 $104,618 $ 64,556
Proved undeveloped reserves...... 1,125 32,495 39,245 56,044 31,405
----- ------- ------- -------- --------
Total proved reserves.... 2,170 92,732 105,749 $160,662 $ 95,961
===== ======= ======= ======== ========
Standardized Measure............. $ 80,142
========
LAKE BOEUF ACQUISITION
Proved developed reserves........ 409 379 2,832 $ 6,590 $ 4,622
Proved undeveloped reserves...... 1,327 6,679 14,643 31,119 18,507
----- ------- ------- -------- --------
Total proved reserves.... 1,736 7,058 17,475 $ 37,709 $ 23,129
===== ======= ======= ======== ========
Standardized Measure............. $ 16,570
========
NEG PRO FORMA(2)
Proved developed reserves........ 3,010 73,171 91,226 $143,280 $ 91,833
Proved undeveloped reserves...... 4,711 56,748 85,017 130,926 73,406
----- ------- ------- -------- --------
Total proved reserves.... 7,721 129,919 176,243 $274,206 $165,239
===== ======= ======= ======== ========
Standardized Measure............. $136,897
========
</TABLE>
- ---------------
(1) The net weighted average prices, over the life of the properties, used in
the Updated Reserve Report for NEG at June 30, 1996 were $21.15 per Bbl of
oil and $2.21 per Mcf of natural gas. The net weighted average prices, over
the life of the properties, used in the Updated Reserve Report for NEG-OK at
June 30, 1996 were $20.40 per Bbl of oil and $2.27 per Mcf of natural gas.
The net weighted average prices, over the life of the properties, used in
the Lake Boeuf Reserve Report at June 30, 1996 were $20.00 per Bbl of oil
and $2.55 per Mcf of natural gas.
(2) Does not include estimated proved reserves that the Company acquired in the
East Bayou Sorrel Acquisition in October and December 1996 or in the Bayou
Sorrel Acquisition in November 1996.
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<PAGE> 64
The Company and NEG-OK engaged Netherland & Sewell as their independent
petroleum engineers to prepare year end reserve reports as of December 31, 1995
in contemplation of the Merger. The NEG 1995 Reserve Report resulted in downward
reserve revisions of approximately 13.3 Bcfe for the Company and the NEG-OK 1995
Reserve Report reclassified from proved undeveloped to probable and possible
reserves approximately 31 Bcfe of reserves for NEG-OK. The Company believes that
these revisions are the result of a more conservative application of engineering
assumptions than previously used. Additionally, in 1995 NEG-OK experienced
approximately 11 Bcfe of additional downward reserve revisions. A significant
portion of these revisions relates to certain undeveloped locations which the
Company now believes are being depleted through existing proved producing
properties, but which were previously thought to be accessible only through
recompletions and/or additional development drilling, as discussed in Note 9 of
Notes to Financial Statements of the Company and Note 14 of Notes to
Consolidated Financial Statements of NEG-OK.
The Company has not filed any estimates of proved oil and natural gas
reserves with any federal authority or agency other than with the SEC.
PRINCIPAL AREAS OF OPERATIONS
The following tables set forth the principal areas of operation and
estimated proved oil and natural gas reserves, PV10% of the estimated future net
revenues, percent of total PV10% and number of PDNP and PUD locations from such
reserves at June 30, 1996 for NEG, NEG-OK and NEG giving Pro Forma effect to the
Merger and the Lake Boeuf Acquisition:
<TABLE>
<CAPTION>
NATURAL NUMBER OF
OIL AND NATURAL GAS % OF PDNP
CONDENSATE GAS EQUIVALENT PV10% TOTAL AND PUD
FIELD (MBBLS) (MMCF) (MMCFE) (IN THOUSANDS) PV10% LOCATIONS(1)
----- ---------- ------- ---------- -------------- ----- ------------
<S> <C> <C> <C> <C> <C> <C>
NEG
Onshore:
GAU, TX.......................... 3,476 3,192 24,046 $ 24,123 15% 62
Cotton Valley Trend
(Oak Hill), TX................ 41 18,862 19,107 13,330 8 14
Other Onshore.................... 183 4,477 5,580 5,408 3 7
----- ------- ------- -------- ---- ---
Total Onshore............... 3,700 26,531 48,733 42,861 26% 83
----- ------- ------- -------- ---- ---
Offshore:
Mustang Island................... 115 3,598 4,286 3,288 2 1
----- ------- ------- -------- ---- ---
NEG Total................... 3,815 30,129 53,019 46,149 28% 84
----- ------- ------- -------- ---- ---
NEG-OK
Anadarko Basin Area, OK............ 1,435 54,672 63,283 56,049 34% 76
Cotton Valley Trend, TX............ 212 18,441 19,713 13,925 8 14
Arkoma Basin, OK and AR............ -- 15,885 15,885 16,112 10 16
Other.............................. 523 3,734 6,868 9,875 6 16
----- ------- ------- -------- ---- ---
NEG-OK Total................ 2,170 92,732 105,749 95,961 58% 122
----- ------- ------- -------- ---- ---
OTHER(2)
Lake Boeuf, LA..................... 1,736 7,058 17,475 23,129 14% 9
----- ------- ------- -------- ---- ---
NEG PRO FORMA TOTAL(2)............... 7,721 129,919 176,243 $165,239 100% 215
===== ======= ======= ======== ==== ===
</TABLE>
- ---------------
(1) Includes drilling locations, recompletions and proposed waterfloods, but
excludes 35 probable and possible drilling locations identified by
Netherland & Sewell for NEG-OK in the NEG-OK 1995 Reserve Report.
(2) Does not include estimated proved reserves that the Company acquired in the
East Bayou Sorrel Acquisition in October and December 1996 or in the Bayou
Sorrel Acquisition in November 1996.
Development and Exploitation
While acquisitions historically have been the primary focus of the
Company's business strategy, recently the Company has accelerated the
development and exploitation of its existing properties. The Company develops
and exploits its properties by drilling development wells, including many on
infill locations, engaging in increased density and forced pooling drilling and
recompleting and reworking existing wells and, where
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<PAGE> 65
appropriate, intends to develop and implement secondary recovery plans,
including waterfloods. As used in this section, quantities of the Company's
proved reserves are based upon Pro Forma proved reserves as of June 30, 1996.
Anadarko Basin. Approximately 36% (63.3 Bcfe) of the Company's proved
reserves are located in the area of the Anadarko Basin in west central Oklahoma.
The Anadarko Basin, in which Alexander has operated since 1980, is considered a
mature natural gas producing area that is characterized by multiple producing
horizons and long reserve lives. When the Company evaluated the acquisition of
Alexander, the Anadarko Basin properties were attractive to the Company
principally because of the large number of PDNP and PUD locations on which it
could drill on Alexander's existing properties. Drilling a producing well on
these locations not only gives the Company the opportunity to convert proved
undeveloped reserves to proved developed producing reserves but it also
potentially provides additional proved undeveloped drilling locations on the
Company's leasehold acreage.
The Company's Anadarko properties generally have 640 acre producing units.
NEG-OK was successful in demonstrating to Oklahoma regulators that wells in the
Anadarko Basin will not efficiently drain 640 acres and obtained authorization
for increased density drilling on smaller acreage producing units. Under the
forced pooling rules in Oklahoma, even if the Company is not the operator of the
property for which increased density drilling has been approved, the Company may
propose to drill and operate the wells, which may include spacing for up to
three additional wells. Frequently this results in the proposing party owning a
larger portion of the new wells due to other interest owners declining to
participate and occasionally results in such party becoming the operator of the
new wells as proposed. The Company intends to continue NEG-OK's increased
density drilling strategy in the Anadarko Basin.
As of June 30, 1996, the Company had identified 32 PDNP and 44 PUD
locations in the Anadarko Basin with estimated proved reserves of 23.7 Bcfe.
These locations are well suited for relatively lower risk exploitation and
development activities that should significantly increase the Company's
production and cash flow from its Anadarko Basin properties in 1997. To develop
a portion of these locations, the Company has budgeted approximately $4.7
million to drill 14 gross (5.50 net) wells in the Anadarko Basin for the
remainder of 1996 and for the year ending December 31, 1997. Wells in the
Anadarko Basin are completed at depths ranging from 2,000 to 25,000 feet,
although the Company's wells typically are completed between 7,000 and 15,000
feet in depth and cost approximately $1 million (gross) to drill and complete.
Cotton Valley Trend. Approximately 22% (38.8 Bcfe) of the Company's proved
reserves are located in the Cotton Valley Trend in Harrison and Rusk counties in
eastern Texas. The Cotton Valley producing formation is 1,500 to 2,000 feet
thick and is located at depths of 8,500 to 10,500 feet. These properties produce
from low permeability reservoirs with long life natural gas reserves. Each of
NEG and NEG-OK owned properties in the Cotton Valley Trend (the "Cotton Valley
Properties"), NEG with its Oak Hill Properties and NEG-OK with properties in the
Blocker field (the "Blocker Properties"). The Company owns more than a 95%
working interest in its Cotton Valley Properties. Of the Company's reserves
located in the Cotton Valley Trend, 19.7 Bcfe, or 51% of such reserves, were
acquired from Alexander in the Merger.
In 1996 the Company initiated a major development program for the Oak Hill
Properties. The Company has performed four workovers, completed one well that
had been drilled but not completed at the time of the Initial Offering and
successfully drilled and completed one development well, which initially
produced 1,400 Mcf a day. Through these development activities, average daily
production for the Cotton Valley Properties has increased from approximately
3,400 Mcf per day in June 1995 to an average of 7,800 Mcf per day during June
1996.
The original development of the Cotton Valley Trend was based upon 640 acre
spacing, but production results have revealed that wells drilled on this spacing
are insufficient to adequately drain the reservoir due to the low permeability
of the sandstones. New studies show developing these tight sands on 80 acre
spacing is necessary to recover all commercially producible reserves in this
formation. The Cotton Valley Properties are now subject to revised field rules
established by the Texas Railroad Commission that permit drilling on 160 acre
or, alternatively, on 80 acre spacing, without obtaining a special ruling from
the Texas Railroad Commission for each well. The Company has also been
successful in obtaining the Texas Railroad Commission's approval to indefinitely
suspend maximum production allowables for the Oak Hill Properties,
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<PAGE> 66
and intends to also seek suspension of maximum production allowables on the
Blocker Properties. Due to incentives created to drill on certain leases of the
Cotton Valley Trend, production from some of the Company's Cotton Valley
Properties should qualify for severance tax abatements.
As of June 30, 1996, the Company had identified seven PDNP and 21 PUD
locations in the Cotton Valley Trend. The typical well in this area is expected
to cost approximately $1.1 million (gross) to drill and complete. A significant
portion of the cost to complete these wells is due to the low permeability of
the interbedded sandstones and shales, which requires massive hydraulic fracture
stimulation, typically of multiple zones of the producing formation, to fracture
the rock sufficient to obtain the increased production levels necessary to make
such wells commercially viable. The Company has budgeted approximately $14.0
million to drill 13 gross (12.8 net) development wells in the Cotton Valley
Trend for the remainder of 1996 and 1997, four of which were being drilled at
November 30, 1996. All of these wells will be drilled on PUD locations where the
Company owns in excess of 95% of the interests.
GAU. Approximately 14% (24.0 Bcfe) of the Company's proved reserves are
located in the Clearfork 5600 Reservoir, which is in the middle of the Permian
Basin located in West Texas. These reserves are in the 7,880 acre Goldsmith
Adobe Unit, which the Company operates and in which it now owns approximately a
95% working interest.
Originally the unit was drilled on 40 acre spacing. Previous operators had
drilled several wells on 20 acre spacing and, based on the results of this
drilling and 20 acre spacing development on adjoining leases, the Company began
a drilling program in July 1994 to develop the unit on 20 acre spacing. The
Company drilled six wells during 1994, 22 wells during 1995 and 24 wells in 1996
through November 1996. Of the 52 wells the Company has drilled on the GAU, 51
are currently producing. Through the Company's acquisition and exploitation
activities, average daily gross production from the GAU has increased from
approximately 450 Boe in 1992 to 1,550 Boe during November 1996.
The Company plans to drill a total of 11 gross (10.5 net) additional wells
during the last three months of 1996, for which the Company has budgeted
approximately $2.9 million. In addition, the Company has budgeted approximately
$6.3 million to drill an additional 24 gross (22.8 net) wells in the GAU in
1997. The typical well drilled by the Company is drilled to depths between 5,600
and 6,000 feet and costs approximately $265,000 (gross) to drill and complete.
As of June 30, 1996, the GAU had approximately 100 infill locations left if the
unit were fully developed on 20 acre spacing, of which 62 are included in the
Company's undeveloped proved reserve volumes as of June 30, 1996. Based on past
drilling results, as the Company continues to drill producing wells in the GAU,
the Company expects that additional reserves will be proved on a substantial
number of the remaining infill locations of the GAU.
Data gained from the drilling and coring of new wells in the GAU suggest
that the reservoir has significant secondary recovery potential from a
waterflood. Waterflooding is one method of secondary recovery in which water is
injected into an oil reservoir for the purpose of forcing oil out of the
reservoir rock and into the bore of a producing well. The Company anticipates
undertaking a waterflood project of the GAU in 1998 or 1999 from which it
expects to significantly increase its recovery rate of the reserves in the GAU.
It has started a pilot waterflood project in the area and currently is making
some of the necessary expenditures for the waterflood project by adding
injection pumps and lines.
Lake Boeuf. Approximately 10% (17.5 Bcfe) of the Company's proved reserves
are located in Lafourche Parish, Louisiana, which reserves were acquired by the
Company in September 1996 for approximately $7.2 million, consisting of $1.5
million in cash and approximately $5.7 million in shares of Common Stock of the
Company. These reserves are principally proved undeveloped and relate to nine
different horizons ranging in depths from 9,500 to 15,000 feet, estimated to
contain approximately 1.7 Mmbbls of oil and 7.1 Bcf of natural gas. The Company
owns an approximate 87.5% working interest in the Lake Boeuf properties.
The Company has identified two PDNP locations which it intends to
recomplete during 1997 for approximately $250,000. Additionally, three PUD
locations have been identified for which the Company has budgeted approximately
$5.2 million as part of its 1997 capital expenditure program. The Lake Boeuf
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<PAGE> 67
properties are located in the parish adjacent to the Company's East Bayou Sorrel
properties in Iberville Parish on which it recently drilled an exploration well
that represents a new field discovery.
Arkoma Basin. Approximately 9% (15.9 Bcfe) of the Company's proved reserves
are located in the Arkoma Basin in eastern Oklahoma and western Arkansas, which
reserves were acquired by the Company as a result of the Merger with Alexander.
Most production comes from the Red Oak, Cromwell, Spiro and Wapanucka sands at
depths of 7,000 to 8,000 feet. Most of these channel sands follow structural
grain and are prolific natural gas producers when the natural gas is trapped by
faults in the grain.
As of June 30, 1996, the Company had identified two PDNP and 14 PUD
locations in the Arkoma Basin, and the Company expects that additional drill
sites will be developed once it is able to more fully evaluate the additional
reserve potential identified during its acquisition analysis. The typical Arkoma
Basin well is drilled to approximately 7,500 feet and costs approximately
$350,000 (gross) to drill and complete. In 1996, NEG-OK successfully drilled and
completed three wells and participated in two wells successfully drilled and
completed by outside operators in the Arkoma Basin. The Company has budgeted
approximately $1.4 million to drill eight gross (4.28 net) development wells in
the Arkoma Basin in 1997.
Exploration
The Company seeks to balance its strategy of acquiring and exploiting
mature but underdeveloped reserves by dedicating a portion of its capital
expenditure budget to higher risk but potentially much higher reward exploration
opportunities. The Company expects to drill two gross (.63 net) exploratory
wells in the last three months of 1996 at a cost of $656,000, one of which is in
San Patricio County, Texas and one of which is in Wayne County, Mississippi. The
Company has also budgeted approximately $9.2 million for its 1997 exploration
program, $4.7 million on prospects on the Mustang Island Properties, including a
90 square mile 3-D seismic survey of the area, $2.6 million on prospects
generated by the Sandefer Exploration Venture and $1.9 million for other
prospects. The Company expects that its exploratory projects will be
concentrated in Gulf Coast areas, both onshore and offshore.
Sandefer Exploration Venture and Southern Louisiana. To capitalize upon the
extensive geological and geophysical data base for the Upper Texas Gulf Coast,
Louisiana and Mississippi to which they have access, on January 1, 1996 the
Company entered into the Sandefer Exploration Venture to develop and promote
exploration prospects for the Company in those areas. During the term of the
agreements, which initially is two years, the venture will generate oil and
natural gas prospects in those states and will submit leasing and drilling
proposals to the Company for a monthly prospect fee. Through 1997, the Company
has budgeted $3.0 million for the Sandefer Exploration Venture, which includes
amounts payable to Sandefer, the Geologists, anticipated leasing and other costs
for prospects generated by the Sandefer Exploration Venture and five gross (.8
net) exploratory wells in 1997. If the Company accepts a drilling proposal
generated by the Sandefer Exploration Venture, Sandefer will receive an
overriding royalty interest in leases acquired by the Company in the prospect
area and, upon payout of specified costs on a prospect, may have the right to
receive a deferred leasehold interest.
At November 30, 1996, one exploratory well has been drilled on prospects
generated by the Sandefer Exploration Venture. The first prospect pursued by the
Company is the prospect on which the Schwing No. 1 well was drilled. The Schwing
No. 1 in Iberville Parish, Louisiana represents a new field discovery in the Cib
Haz formation at 13,200 feet and tested 1,026 Bbls and 980 Mcf per day on an
8/64" choke. The well was placed on production on December 20, 1996 and began
producing approximately 613 Bbls and 468 Mcf per day on a 4/64" choke through
temporary production facilities. The Company, as operator of the well, plans to
slowly increase the production rate of the well and is nearing completion of
construction of permanent production facilities. As a result of the East Bayou
Sorrell Acquisition the Company now has an approximate 60% working interest in
and operates the Schwing No. 1.
Although the leasing and drilling costs are generally higher in southern
Louisiana where the Schwing No. 1 was drilled, the Company believes that due to
the higher porosity and permeability of the producing formations, the area has
significant reserve potential which could yield much higher production rates
than the Company's Texas, Oklahoma and Arkansas properties. The Company also
believes that the generally shorter
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life properties in southern Louisiana would add diversity to its properties and
provide balance to its relatively longer life, lower risk properties in the GAU
and Anadarko Basin. As a result, the Company completed the Lake Boeuf
Acquisition, the East Bayou Sorrel Acquisition and the Bayou Sorrel Acquisition
to acquire additional reserves and acreage for exploration in southern Louisiana
and plans a 33 square mile 3-D seismic survey of this area.
Mustang Island. The Mustang Island area located in shallow state waters in
offshore Nueces County, Texas is the other principal area of focus for the
Company's exploration program. When the Company decided to implement an
exploration program, it reviewed numerous prospects, including Mustang Island.
The Company ultimately selected Mustang Island based on extensive geological and
geophysical studies that led the Company to conclude that there may be potential
for large reserves in the upper and lower Frio sands and in even lower depths in
the relatively unexplored transition zone offshore in the Gulf of Mexico. After
a comprehensive analysis, including a review of capital expenditures, markets
for production and the additional infrastructure needed to explore, develop and
market the reserves of the Mustang Island Properties, a decision was made to
commence an exploration program off Mustang Island.
In 1995 the Company initially acquired a 100% interest in one producing
well, one proved undeveloped drilling location and 770 acres of leases. In two
subsequent transactions, it acquired an approximate 72% working interest in an
additional five wells and 1,440 acres of leases, a 100% interest in
approximately 11 miles of pipeline and a shore tank facility, and a 50% working
interest in two other wells, which wells are part of a natural gas unit
including 3,840 acres. These acquisitions also included four platforms (one
four-pile, one tripod and two monopods), which the Company may use in its
exploratory drilling program. Based upon the Company's reprocessing and
extensive analysis of approximately 500 square miles of 2-D seismic data
purchased by the Company, in April 1996 it bid upon and acquired five year
leases of 17 additional tracts from the State of Texas, consisting of 7,765
acres of leases. All of such tracts are in close geographic proximity to the
offshore acreage the Company previously had acquired and the total acreage now
leased by the Company in the Mustang Island area is 13,815 gross (11,463 net)
acres. The Mustang Island area contains complex geological structures in which
the Company intends to principally drill at depths of 15,000 to 17,000 feet in
the upper and lower Frio sands at a cost of approximately $3.0 million (gross)
to drill and complete each well.
In 1996, the Company recompleted one well, which is currently shut-in
pending installation of sand control. The Company has budgeted approximately $.2
million (net) to recomplete one well in the last three months of 1996, and has
budgeted $4.7 million (net) in 1997 to recomplete the one well acquired in 1996,
to drill one PUD location and four exploratory wells and to commission a 3-D
seismic survey of the area. The 3-D seismic survey will be used to evaluate its
options for improving the recovery of the proved oil and natural gas reserves
and to determine possible locations for the exploratory wells it intends to
drill in the area in 1997. The Company intends to limit its working interests in
its Mustang Island exploratory prospects through participation by industry
partners.
Other Exploratory Drilling. Of the four exploratory wells drilled by the
Company through November 30, 1996, the Schwing No. 1 described above and the
Corbett Fryer Dobbin ("Corbett"), located in Willacy County, Texas, have been
completed as producing wells. The Corbett indicated test production rates
flowing at 1,000 Mcf per day and came on-line October 1, 1996. In addition, the
Brenner #1 in Wayne County, Mississippi has been drilled and is waiting on
completion.
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OIL AND NATURAL GAS PRODUCTION
The following tables show the approximate net oil and natural gas
production attributable to NEG on an actual and Pro Forma basis for the Merger
and to NEG-OK for the periods indicated, net of all royalties, overriding
royalties, and other third party interests:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------- -------------------------------------
1995
HISTORICAL --------------------- HISTORICAL PRO FORMA
--------------- PRO --------------- -----------------
1993 1994 HISTORICAL FORMA 1995 1996 1995 1996
----- ----- ---------- ------ ----- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NEG
Oil (Mbls)................. 49 116 283 475 177 344 335 429
Natural gas (Mmcf)......... 483 621 1,753 11,830 1,065 2,997 9,089 8,121
Natural gas equivalent
(Mmcfe).................. 776 1,315 3,454 14,680 2,125 5,060 11,097 10,696
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL
---------------------------------------------
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
NEG-OK
Oil (Mbls)................................................. 283 224 131 106 65
Natural gas (Mmcf)......................................... 6,332 8,051 9,068 4,881 3,962
Natural gas equivalent (Mmcfe)............................. 8,031 9,396 10,154 5,519 4,352
</TABLE>
PRODUCTIVE WELL SUMMARY
The following table sets forth by field the respective interests in
productive wells owned by the Company as of September 30, 1996:
<TABLE>
<CAPTION>
OIL NATURAL GAS TOTAL
---------------- ---------------- ----------------
FIELD GROSS NET GROSS NET GROSS NET
- ----------------------------------------------- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
ONSHORE:
Anadarko Basin, OK............................. 127 51.9 230 104.5 357 156.4
Cotton Valley Trend, TX 1 .7 21 20.1 22 20.8
GAU, TX........................................ 110 104.5 -- -- 110 104.5
Lake Boeuf, LA................................. -- -- 1 .9 1 .9
Arkoma Basin, OK and AR........................ -- -- 84 27.7 84 27.7
Other Onshore(1)............................... 94 40.9 47 17.2 141 58.1
--- ----- --- --- --- -----
Total Onshore......................... 332 198.0 383 170.4 715 368.4
OFFSHORE:
Mustang Island, TX............................. 1 1 3 1.7 4 2.7
--- ----- --- --- --- -----
TOTAL................................. 333 199.0 386 172.1 719 371.1
=== ===== === === === =====
</TABLE>
- ---------------
(1) Includes 31 gross (27.5 net) wells acquired in Bayou Sorrel Acquisition in
November 1996.
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<PAGE> 70
PRODUCTION ECONOMICS
The following tables set forth the average sales price per barrel of oil
and Mcf of natural gas produced, the lease operating expenses before deduction
of production taxes ("LOE"), the depletion, depreciation and amortization rates
("DD&A") and the general and administrative ("G&A") cost per Mcfe attributable
to the oil and natural gas production of NEG on an actual and Pro Forma basis
for the Merger and NEG-OK for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------- ------------------------------------
1995
HISTORICAL -------------------- HISTORICAL PRO FORMA
---------------- PRO ---------------- ----------------
1993 1994 HISTORICAL FORMA 1995 1996 1995 1996
------ ------ ---------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NEG
Average sales price:
Oil (Bbl)...................... $16.46 $16.01 $17.22 $16.95 $17.21 $20.59 $17.10 $20.31
Natural gas (Mcf).............. 2.07 2.11 1.70 1.52 1.71 2.04 1.48 2.06
Natural gas equivalent
(Mcfe)....................... 2.32 2.40 2.28 1.77 2.29 2.61 1.73 2.38
LOE per Mcfe..................... .74 .92 .50 .49 .54 .41 .49 .42
DD&A per Mcfe.................... .88 .78 .91 1.04 .79 1.02 .73 .59
G&A per Mcfe..................... 1.28 .75 .51 .35 .48 .39 .32 .34
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------------------
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------- ----------------
1993 1994 1995 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
NEG-OK
Average sales price:
Oil (Bbl)................................................. $16.99 $15.44 $16.57 $17.59 $18.89
Natural gas (Mcf)......................................... 2.04 1.73 1.50 1.48 2.03
Natural gas equivalent (Mcfe)............................. 2.20 1.85 1.63 1.65 2.13
LOE per Mcfe................................................ .51 .53 .50 .50 .42
DD&A per Mcfe............................................... .72 .77 .91 .48 .46
G&A per Mcfe................................................ .48 .43 .34 .31 .30
</TABLE>
ACREAGE
The following table shows the approximate gross and net acres in which the
Company had leasehold interests as of June 30, 1996:
<TABLE>
<CAPTION>
DEVELOPED AGREAGE UNDEVELOPED ACREAGE
-------------------- -------------------
FIELDS GROSS NET GROSS NET
- ----------------------------------------------------------- ------- ------ ------ ------
<S> <C> <C> <C> <C>
ONSHORE
Anadarko Area, OK.......................................... 106,691 42,542 7,198 4,182
Cotton Valley Trend, TX.................................... 4,761 4,410 1,567 1,455
GAU, TX.................................................... 4,720 4,482 3,160 3,007
Lake Boeuf, LA............................................. 143 125 945 827
Arkoma Basin, OK and AR.................................... 43,365 14,576 1,144 72
Other Onshore(1)........................................... 24,270 7,374 16,171 10,933
------- ------ ------ ------
Total Onshore............................................ 178,950 73,509 30,185 20,476
OFFSHORE
Mustang Island, TX......................................... 6,045 3,530 7,765 7,765
------- ------ ------ ------
TOTAL............................................. 184,995 77,039 37,950 28,241
======= ====== ====== ======
</TABLE>
- ---------------
(1) Includes acreage in Colorado, Kansas, Louisiana, Oklahoma, Nebraska, New
Mexico, and Wyoming.
Undeveloped acres are those on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of oil and natural gas, regardless of whether or not such
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<PAGE> 71
acreage contains proved reserves. The amount of acreage held by the Company
increases or decreases in the normal course of business as interests in new
acreage are acquired (including acreage by pooling), as interests are sold or
contributed to others, as wells are drilled, as properties are abandoned (if
determined not to warrant exploration or development) or as leases expire. It is
the Company's policy to formulate drilling plans for the orderly development of
undeveloped acreage within the primary terms of the leases involved.
DRILLING ACTIVITY
The following table sets forth the historical drilling activities for NEG,
NEG-OK and NEG Pro Forma for the Merger for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS
---------------------------------------------------- ENDED
SEPTEMBER 30,
1993 1994 1995 1996
-------------- -------------- -------------- --------------
GROSS NET GROSS NET GROSS NET GROSS NET
----- ---- ----- ---- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DEVELOPMENT(1)
NEG:
Productive.......................... -- -- 9 6.4 24 20.7 16 15.3
Non-productive...................... -- -- -- -- 1 .6 -- --
-- -- -- --
---- ---- ---- ----
NEG Total.................... -- -- 9 6.4 25 21.3 16 15.3
NEG-OK:
Productive.......................... 29 9.4 29 8.3 5 2.2 12 1.8
Non-productive...................... 1 1.0 4 2.2 3 1.8 1 .1
-- -- -- --
---- ---- ---- ----
NEG-OK Total................. 30 10.4 33 10.5 8 4.0 13 1.9
-- -- -- --
---- ---- ---- ----
NEG PRO FORMA TOTAL................... 30 10.4 42 16.9 33 25.3 29 17.2
== ==== == ==== == ==== == ====
EXPLORATORY(2)
NEG:
Productive.......................... -- -- -- -- -- -- 3 .8
Non-productive...................... -- -- 2 1.0 2 .8 4 1.1
-- -- -- --
---- ---- ---- ----
NEG Total.................... -- -- 2 1.0 2 .8 7 1.9
NEG-OK:
Productive.......................... 1 .3 -- -- -- -- --
Non-productive...................... -- -- 2 1.5 1 .9 -- --
-- -- -- --
---- ---- ---- ----
NEG-OK Total................. 1 .3 2 1.5 1 .9 -- --
-- -- -- --
---- ---- ---- ----
NEG PRO FORMA TOTAL................... 1 .3 4 2.5 3 1.7 7 1.9
== ==== == ==== == ==== == ====
</TABLE>
- ---------------
(1) Since September 30, 1996, the Company has commenced and/or completed 17
gross development wells.
(2) Since September 30, 1996, the Company has commenced and/or completed 2 gross
exploratory wells.
The table above only reflects those interests attributable to the
applicable party either through direct working interests or through their
respective proportionate share of their partnership's participation; i.e., the
interests shown do not include overriding royalty interests, carried working
interests, reversionary interests or partners' proportionate share of
participation.
CONTROL OVER PRODUCTION ACTIVITIES
At September 30, 1996 and pro forma for the Bayou Sorrel Acquisition, the
Company operated 488 of the 719 producing wells in which it owned an interest.
The Company also operated approximately 85% of its PV10% as of June 30, 1996 pro
forma for the Merger and the Lake Boeuf Acquisition. The non-operated properties
are being operated by unrelated third parties pursuant to operating agreements
which are, for the most part, standard to the industry. Decisions about
operations regarding non-operated properties may be determined by the outside
operator rather than the Company. If the Company declines to participate in
additional activities proposed by the outside operator, under certain operating
agreements, the Company will not receive revenues from, and/or lose its interest
in, the activity in which it declined to participate.
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<PAGE> 72
TITLE TO OIL AND NATURAL GAS PROPERTIES
The Company has acquired interests in producing and nonproducing acreage in
the form of working interests, royalty interests and overriding royalty
interests. Substantially all of the Company's property interests are held
pursuant to leases from third parties. The leases grant the lessee the right to
explore for and extract oil and natural gas from a specified area. Rentals
usually consist of fixed annual charges prior to production and, once production
has been established, a royalty based upon the gross proceeds from the sale of
oil and natural gas. Once wells are drilled, a lease generally continues as long
as production of oil and natural gas continues. In some cases, leases may be
acquired in exchange for a commitment to drill or finance the drilling of a
specified number of wells to predetermined depth. All of the Company's
non-producing acreage is held under leases from mineral owners or a government
entity which expire at varying dates. The Company is obligated to pay annual
delay rentals to the lessors of certain properties in order to prevent the
leases from terminating. Because substantially all of the Company's undeveloped
acreage is held by production, annual delay rentals generally are nominal.
Title to properties is subject to royalty, overriding royalty, carried, net
profits, working and other similar interests and contractual arrangements
customary in the oil and natural gas industry, liens incident to operating
agreements, liens relating to amounts owed to the operator, liens for current
taxes not yet due and other encumbrances. The Company believes that such burdens
neither materially detract from the value of such properties nor from the
respective interests therein, or materially interfere with their use in the
operation of its business. Updated title opinions may not be received prior to
the acquisition of a producing oil and natural gas property. It is contemplated,
however, that investigations will be made in accordance with standard practices
in the industry before the acquisition of such properties and before drilling.
PRODUCTION AND SALES PRICES
The Company's production of oil and natural gas is derived solely from the
United States. The Company is not obligated to provide a fixed and determinable
quantity of oil and/or natural gas in the future under existing contracts or
agreements. The Company does not plan to refine or process the oil and natural
gas it produces, but plans to sell the production to unaffiliated oil and
natural gas purchasing companies in the area in which it is produced. The
Company expects to sell crude oil on a market price basis and to sell natural
gas under contracts to both interstate and intrastate natural gas pipeline
companies. The Company currently sells a significant portion of its oil pursuant
to a contract with Plains Marketing and Transportation, Inc. ("Plains"). See
"-- Markets and Customers" below.
MARKETS AND CUSTOMERS
A large percentage of NEG's oil and natural gas sales are made to a small
number of purchasers. During the year ended December 31, 1995, two customers,
Plains and Energy Source, Inc., accounted for 59% and 11%, respectively, of
NEG's oil and natural gas sales. During the nine months ended September 30,
1996, Plains, Comstock Natural Gas Inc. and GPM Gas Corporation accounted for
49%, 16% and 15%, respectively, of NEG's oil and natural gas sales. In 1993, the
Company entered into agreements with Plains, pursuant to which Plains purchases
the oil produced from the major oil-producing properties that NEG operates at
West Texas Intermediate posted prices plus a premium. Such agreements with
Plains expire mid 1997, but the Company historically has periodically
renegotiated and extended the terms of such agreements.
NEG-OK's natural gas production is sold under contracts with various
purchasers. During 1995 natural gas sales to GPM Gas Corporation accounted for
13% of oil and gas sales and 17% of oil and gas sales for the six months ended
June 30, 1996.
For the year ended December 31, 1995, and the six months ended June 30,
1996, approximately one-half of NEG-OK's natural gas was sold on the spot market
or under short-term contracts (one year or less) providing for variable or
"market-sensitive" prices. The remainder of NEG-OK's natural gas is marketed
under various long-term contracts which dedicate the natural gas to a purchaser
for an extended period of time, but which still involve variable or
market-sensitive pricing of NEG-OK's natural gas.
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<PAGE> 73
The Company does not believe that the loss of any customer would have a
material and adverse effect on its business because, under prevailing market
conditions, such customer could be replaced.
OFFICE SPACE AND OTHER
The Company leases approximately 20,420 square feet of office space in
Dallas, Texas. Minimum lease payments under future operating lease commitments
under the current lease agreement dated September 30, 1996 are as follows:
1997 -- $285,880; 1998 -- $296,090; and 1999 -- $306,300. Other than oil and
natural gas properties and the securities of oil and natural gas companies, the
Company does not intend to invest in real estate, real estate mortgages or
securities of, or interests in, persons primarily engaged in real estate
activities for the foreseeable future.
On October 25, 1996, NEG-OK closed the sale of its 19,000 square foot
office building located at 701 Cedar Lake Boulevard, Oklahoma City, Oklahoma,
together with approximately 1.5 adjacent acres and office equipment, to a third
party for approximately $1 million.
EMPLOYEES
At December 12, 1996, the Company had 48 employees, all of whom are
full-time. Of the 48 employees, four are field related personnel. The Company's
professional staff includes three landmen, five geologists, four engineers, six
accountants, one division order analyst and one marketing specialist. The
Company does not have any collective bargaining agreements with employees and
believes that relations with its employees are generally good.
REGULATION
General
The Company's oil and natural gas exploration, production and related
operations are subject to extensive rules and regulations promulgated by federal
and state agencies. Failure to comply with such rules and regulations can result
in substantial penalties. The regulatory burden on the oil and natural gas
industry increases the Company's cost of doing business and affects its
profitability. Because such rules and regulations are frequently amended or
interpreted, the Company is unable to predict the future cost or impact of
complying with such laws.
Exploration and Production
The Company's exploration and development operations are subject to various
types of regulation at the federal, state and local levels. Such regulation
includes requiring permits for the drilling of wells; maintaining bonding
requirements in order to drill or operate wells; and regulating the location of
wells, the method of drilling and casing wells, the surface use and restoration
of properties upon which wells are drilled and the plugging and abandoning of
wells. The Company's operations are also subject to various conservation
regulations and rules to protect the correlative rights of subsurface owners.
These include the regulation of the size of drilling and spacing units or
proration units and the density of wells which may be drilled and the
unitization or pooling of oil and natural gas properties. In this regard, some
states allow the forced pooling or integration of tracts to facilitate
exploration while other states rely on voluntary pooling of land and leases. In
addition, state conservation laws establish maximum rates of production from oil
and natural gas wells, generally prohibit the venting or flaring of natural gas
and impose certain requirements regarding the ratability of production. The
effect of these regulations is to limit the amounts of oil and natural gas the
Company can produce from its wells and to limit the number of wells or the
locations at which the Company can drill. Legislation in Oklahoma and regulatory
action in Texas governs the methodology by which the regulatory agencies
establish permissible monthly production allowables. This action has generated
substantial controversy, especially at the federal level, and has been labeled
as an attempt to reduce the total production of natural gas in order to increase
natural gas prices. A recent attempt to enact a federal prohibition of these
recent state proration rule initiatives was defeated, but various members of
Congress and some federal
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<PAGE> 74
regulators have declared an intent to monitor the states' actions very
carefully. The Company cannot predict what effect these new prorationing
regulations will have on its production and sales of natural gas.
Certain of the Company's oil and natural gas leases are granted by the
federal government and administered by various federal agencies. Such leases
require compliance with detailed federal regulations and orders which regulate,
among other matters, drilling and operations on these leases and calculation and
disbursement of royalty payments to the federal government. The Mineral Lands
Leasing Act of 1920 places limitations on the number of acres under federal
leases that may be owned in any one state.
Environmental Protection and Occupational Safety
The Company is subject to numerous federal, state and local laws and
regulations governing the release of materials into the environment or otherwise
relating to environmental protection. These laws and regulations may require the
acquisition of a permit before drilling commences, restrict the types,
quantities and concentration of various substances that can be released into the
environment in connection with drilling and production activities, limit or
prohibit drilling activities on certain lands lying within wilderness, wetlands
and other protected areas and impose substantial liabilities for pollution
resulting from operations. Moreover, the recent trend toward stricter standards
in environmental legislation and regulation is likely to continue. For instance,
legislation has been proposed in Congress from time to time that would
reclassify certain oil and natural gas production wastes as "hazardous wastes",
which reclassification would make such wastes subject to much more stringent
handling, disposal and clean-up requirements. If such legislation were to be
enacted, it could have a significant impact on the operating costs of the
Company, as well as the oil and natural gas industry in general. It is not
anticipated that the Company will be required in the near future to expend
amounts that are material in relation to its total capital expenditure program
by reason of environmental laws and regulations, but because such laws and
regulations are frequently changed, the Company is unable to predict the
ultimate cost and effects of such compliance.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without regard
to fault or the legality of the original conduct, on certain classes of persons
who are considered to have contributed to the release of a "hazardous substance"
into the environment. These persons include the owner or operator of the
disposal site or sites where the release occurred and companies that disposed or
arranged for the disposal of the hazardous substances. Under CERCLA such persons
or companies may be subject to joint and several liability for the costs of
cleaning up the hazardous substances that have been released into the
environment and for damages to natural resources. Also, it is not uncommon for
neighboring landowners and other third parties to file claims for personal
injury, property damage and recovery of response costs allegedly caused by the
hazardous substance released into the environment.
In addition, the U.S. Oil Pollution Act of 1990 (the "OPA") and regulations
promulgated pursuant thereto impose a variety of regulations on responsible
parties related to the prevention of oil spills and liability for damages
resulting from such spills. The OPA establishes strict liability for owners of
facilities that are the site of a release of oil into "waters of the United
States." While OPA liability more typically applies to facilities near
substantial bodies of water, at least one district court has held that OPA
liability can attach if the contamination could enter waters that may flow into
navigable waters.
Stricter standards in environmental legislation may be imposed in the oil
and natural gas industry in the future, such as proposals made in Congress and
at the state level from time to time, that would reclassify certain oil and
natural gas exploration and production wastes as "hazardous wastes" and make the
reclassified wastes subject to more stringent and costly handling, disposal and
clean-up requirements. The impact of any such changes, however, would not likely
be any more burdensome to the Company than to any other similarly situated
company involved in oil and natural gas exploration and production.
The Resource Conservation and Recovery Act ("RCRA") and regulations
promulgated thereunder govern the generation, storage, transfer and disposal of
hazardous wastes. RCRA, however, excludes from the definition of hazardous
wastes "drilling fluids, produced waters, and other wastes associated with the
exploration, development, or production of crude oil, natural gas or geothermal
energy." Because of this
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<PAGE> 75
exclusion, many of the Company's operations are exempt from RCRA regulation.
Nevertheless, the Company must comply with RCRA regulations for any of its
operations that do not fall within the RCRA exclusion (such as painting
activities or use of solvents).
The Company is also subject to laws and regulations concerning occupational
safety and health. While it is not anticipated that the Company will be required
in the near future to expend amounts that are material in the aggregate to the
Company's overall operations by reason of occupational safety and health laws
and regulations, the Company is unable to predict the ultimate cost of
compliance.
Marketing and Transportation
Federal legislation and regulatory controls in the United States have
historically affected the price of the natural gas produced by the Company and
the manner in which such production is marketed. The transportation and sales
for resale of natural gas in interstate commerce are regulated pursuant to the
Natural Gas Act of 1938 (the "NGA") and the Federal Energy Regulatory Commission
("FERC") regulations promulgated thereunder. Maximum selling prices of certain
categories of natural gas, whether sold in interstate or intrastate commerce,
previously were regulated pursuant to The Natural Gas Policy Act of 1978
("NGPA"). The NGPA established various categories of natural gas and provided
for graduated deregulation of price controls of several categories of natural
gas and the deregulation of sales of certain categories of natural gas. All
price deregulation contemplated under the NGPA has already taken place.
Subsequently, the Natural Gas Wellhead Decontrol Act of 1989 (the "Decontrol
Act") terminated all remaining NGA and NGPA price and non-price controls on
wellhead sales of domestic natural gas on January 1, 1993. While natural gas
producers may currently make sales at uncontrolled market prices, Congress could
re-enact price controls in the future.
Commencing in late 1985, the FERC issued a series of orders (Order No. 436,
Order No. 500 and related orders), which promulgated regulations significantly
altering the transportation and marketing of natural gas. Among other things,
these regulations (a) required interstate pipelines that elect to transport
natural gas for others under self-implementing authority to provide
transportation services to all shippers on a non-discriminatory basis, and (b)
permitted each exiting firm sales customer of any such pipeline to modify over
at least a five-year period, its existing purchase obligations. Although the
regulations do not directly regulate natural gas producers such as the Company,
the availability of non-discriminatory transportation services and the ability
of pipeline customers to modify their existing purchase obligations under these
regulations has greatly enhanced the ability of producers to market their
natural gas directly to end users and local distribution companies. In this
regard, access to markets through interstate pipelines is critical to the
Company's marketing initiatives.
In April 1992, the FERC issued its restructuring rule, known as Order No.
636 ("Order No. 636"), that has had a major impact on pipeline operations,
services and rates. The most significant provisions of Order No. 636: (a)
required interstate pipelines to provide firm and interruptible transportation
solely on an "unbundled" basis, separate from their sales service, and to
convert each pipeline's bundled firm sales service into unbundled firm
transportation service; (b) provided for the issuance of blanket certificates to
pipelines to provide unbundled sales service giving all utility customers a
chance to purchase their firm supplies from non-pipeline merchants; (c) required
that pipelines provide firm and interruptible transportation service on a basis
that is equal in quality for all natural gas supplies, whether purchased from
the pipeline or elsewhere; (d) required that pipelines provide a new,
non-discriminatory "no-notice" transportation service that largely replicates
the "bundled" sales service previously provided by pipelines; (e) established
two new, generic programs for the reallocation of firm pipeline capacity; (f)
required that all pipelines offer access to their storage facilities on a firm
and interruptible basis; (g) provided for pregranted abandonment of pipeline
sales agreements, interruptible and firm short-term (defined as one year or
less) transportation agreements and conditional pregranted abandonment of firm
long-term transportation service; (h) modified transportation rate design by
requiring that all fixed costs related to transportation be recovered through
the reservation charge; and (i) provided mechanisms for the recovery by
pipelines of certain transition costs occurring from implementation of Order No.
636.
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<PAGE> 76
The rules contained in Order No. 636, as amended by Order No. 636-A (issued
in August 1992) and Order No. 636-B (issued in November 1992) (collectively,
"Order No. 636") are far reaching and complex. In addition, Order No. 636 and
individual orders in restructuring proceedings are currently subject to court
challenges. While Order No. 636 does not directly regulate natural gas producers
such as the Company, the FERC has stated that Order No. 636 is intended to
foster increased competition within the natural gas industry.
OPERATIONAL HAZARDS AND INSURANCE
The Company's operations are subject to all of the risks inherent in oil
and natural gas exploration, drilling and production. See "Risk
Factors -- Operating Hazards and Uninsured Risks." These hazards can result in
substantial losses to the Company due to personal injury and loss of life,
severe damage to and destruction of property and equipment, pollution or
environmental damage or suspension of operations. The Company maintains
insurance of various types customary in the industry to cover its operations.
The Company believes it is insured prudently against certain of these risks. In
addition, the Company maintains operator's extra expense coverage that provides
coverage for the care, custody and control of wells drilled by the Company. The
Company's insurance does not cover every potential risk associated with the
drilling and production of oil and natural gas. The Company does, however,
maintain levels of insurance customary in the industry to limit its financial
exposure in the event of a substantial environmental claim resulting from sudden
and accidental discharges; however, 100% coverage is not maintained.
Unreimbursed expenditures for environmental claims in 1993, 1994, 1995 and the
first three quarters of 1996 were immaterial. The occurrence of a significant
adverse event, the risks of which are not fully covered by insurance, could have
a material adverse effect on the Company's financial condition and results of
operations. Moreover, no assurance can be given that the Company will be able to
maintain adequate insurance in the future at rates it considers reasonable. The
Company believes that it operates in compliance with government regulations and
in accordance with safety standards which meet or exceed industry standards.
COMPETITION
The oil and natural gas industry is intensely competitive in all of its
phases, particularly with respect to the acquisition of desirable producing oil
and natural gas leases, proved undeveloped acreage and oil and natural gas
companies with production. The Company, which is a minor competitive factor in
the industry, encounters strong competition from major oil companies,
independent oil and natural gas concerns, and individual producers and
operators, many of which have financial resources, staffs, facilities and
experience substantially greater than those of the Company. Furthermore, in
times of high drilling activity, exploration for and production of oil and
natural gas may be affected by the availability of equipment, labor, supplies
and by competition for drilling rigs. The Company cannot predict the effect
these factors will have on its operations. The Company owns no drilling rigs,
and it is anticipated that its drilling will be conducted by third parties.
Furthermore, the oil and natural gas industry also competes with other
industries in supplying the energy and fuel requirements of industrial,
commercial and individual consumers.
LEGAL PROCEEDINGS
On August 30, 1995, the Company filed a lawsuit against R.E. Steakley in
which the Company seeks to enjoin Mr. Steakley from interfering with its
operations on the surface property controlled by Mr. Steakley. The lawsuit
alleges that Mr. Steakley is interfering with the Company's access to its
operations and is also harassing the Company's personnel. On August 31, 1995, in
a matter involving the same property, R.E. Steakley and N.M. Steakley filed a
lawsuit in the District Court of Harris County, Texas against Amoco Production
Company, Phillips Petroleum Company, the Company and others. The lawsuit alleges
certain environmental claims and related tortious and contractual claims. The
plaintiffs seek unspecified damages which include remediation and various
tortious and contractual damages. The Company believes that it is operating in
compliance with applicable environmental laws and regulations and believes,
based on advice from legal counsel, that the ultimate resolution of the lawsuit
will not have material effect on the Company's financial condition or results of
operations.
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<PAGE> 77
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table lists the names, ages and present position with the
Company for all of the Company's directors and executive officers:
<TABLE>
<CAPTION>
NAME AGE PRESENT POSITION WITH THE COMPANY(1)
---- --- ------------------------------------
<S> <C> <C>
George B. McCullough.......... 71 Chairman of the Board of Directors
Norman C. Miller.............. 76 Director and Chairman of the Executive
Committee
Miles D. Bender............... 59 President, Chief Executive Officer and Director
Robert H. Kite................ 41 Director
George N. McDonald............ 63 Director
Robert V. Sinnott............. 47 Director
Elwood W. Schafer............. 68 Director
Jim L. David.................. 56 Vice President -- Exploitation and Director
Bob G. Alexander.............. 63 Director
Robert A. West................ 57 Director
Robert J. Mitchell............ 48 Director
Robert A. Imel................ 38 Chief Financial Officer and Senior Vice
President
R. Thomas Fetters, Jr......... 57 Senior Vice President -- Exploration
William T. Jones.............. 51 Senior Vice President -- Operations
David E. Grose................ 44 Vice President -- Finance and Treasurer
Sue Barnard................... 52 Vice President -- Administration and Human
Resources and Secretary
Melissa H. Rutledge........... 30 Controller and Chief Accounting Officer
</TABLE>
- ---------------
(1) Messrs. McCullough, Miller, Bender, Kite, and McDonald have been Directors
of the Company since December 17, 1990. Mr. Sinnott was appointed to the
Board on June 3, 1994 and Mr. Schafer was appointed to the Board effective
September 26, 1995. Messrs. Alexander, David, West and Mitchell were
appointed to the Board on August 29, 1996. Pursuant to the terms of the
Series B Preferred Stock, the Series C Preferred Stock and Series D
Preferred Stock, the holders of a majority of the outstanding shares of each
series have the right to appoint one member to the Company's Board of
Directors at all times while such series are outstanding. Directors
generally serve for a term of one year (until the next annual meeting of
shareholders) and until their successors are duly elected and qualified, or
until their death, resignation or removal.
George B. McCullough. Effective December 17, 1990, Mr. McCullough was
appointed Chairman of the Board of Directors of the Company. From July 20, 1990
to June 11, 1991, Mr. McCullough was a Director of Big Piney. From October 1986
to June 11, 1991, Mr. McCullough served as Chairman of the Board of Directors of
VP Oil, Inc. ("VP"). From 1948 to 1986, Mr. McCullough worked for Exxon
Corporation ("Exxon"). Mr. McCullough was elected as a Vice President of Exxon
in 1980. He was responsible for all employee relations for Exxon. Mr. McCullough
holds B.A. and M.B.A. degrees from Tulane University.
Norman C. Miller. Effective December 17, 1990, Mr. Miller was appointed a
Director of the Company and to the office of Chairman of the Executive Committee
of the Company. Mr. Miller had been a Director of Big Piney and Chairman of its
Executive Committee from July 20, 1990 until June 11, 1991. From September 1988
to June 11, 1991, Mr. Miller had been a Director of and Chairman of the
Executive Committee of VP. Mr. Miller was President and CEO of Delhi
International Oil Corporation from 1974 to 1981. Delhi was listed on the
American Stock Exchange and had operations in the United States, Australia,
Canada, Columbia, Guatemala and Panama. Mr. Miller was a Director of Woodbine
Petroleum, a public company, from 1983 to 1985. He received his B.S. degree in
Geology from the University of Oklahoma.
Miles D. Bender. Since December 17, 1990, Mr. Bender has been President,
Chief Executive Officer and a Director of the Company. From July 20, 1990 to
June 11, 1991, Mr. Bender served as President, Chief
76
<PAGE> 78
Executive Officer, Treasurer and a Director of Big Piney. Mr. Bender was
President, Chief Executive Officer, Treasurer and a Director of VP from its
inception in July, 1986 until June 11, 1991. He was also President and a
Director of Tierra Energy, Inc., from 1984 until 1990. From 1981 to 1984, he was
general partner of Rio Colorado Mining, Ltd., which was engaged in the minerals
and natural resources businesses. From 1970 to 1980, Mr. Bender was President
and Chairman of the Board of Syncom Incorporated ("Syncom"), a publicly-held
company that manufactured magnetic computer supplies. Syncom was listed on the
Boston Stock Exchange. Mr. Bender received his B.A. degree from and attended law
school at the University of Buffalo, and attended the advanced management
program of Harvard University Business School.
Robert H. Kite. Effective December 17, 1990, Mr. Kite was appointed a
Director of the Company. From November 1987 until June 11, 1991, Mr. Kite served
as a Director of VP. Since 1980, Mr. Kite has been Chief Operating Officer of
KFT, Ltd., a family-owned company with operations which include land holdings,
industrial and commercial developments, and equity and commodity investments. He
has also been Chief Executive Officer of Roamin' Korp., Inc. since 1982, which
is engaged in the businesses of construction, recording, mining and equity
investments. Mr. Kite graduated from Southern Methodist University with a B.S.
degree in Psychology and Political Science.
George N. McDonald. Effective December 17, 1990, Mr. McDonald was appointed
a Director of the Company. For more than five years prior to June 11, 1991, Mr.
McDonald was a Director of Big Piney, and, from 1982 to July 20, 1990, he served
as Vice President of Big Piney. From July 20, 1990 until June 11, 1991, Mr.
McDonald was a Director of VP. From 1973 to present, Mr. McDonald has been the
President and Owner of Canyon Courts, Inc. From 1985 to present, Mr. McDonald
has also been a Director of Ion Laser Technology, Inc. Mr. McDonald was also
President of Ion Laser Technology from 1985 to 1988, Chairman of the Board from
1985 to 1992 and Secretary from 1990 to 1992. Since 1988, Mr. McDonald has also
been President/Owner of Medical Alignment Systems. From 1960 to 1972, Mr.
McDonald was an account executive with Merrill Lynch, Pierce, Fenner and Smith,
Inc. and certain predecessor firms. Mr. McDonald holds B.S. and M.B.A. degrees
from the University of Utah.
Robert V. Sinnott. Effective June 3, 1994, Mr. Sinnott was appointed a
Director of the Company. Mr. Sinnott has been Senior Vice President and Senior
Investment Officer of L.P. since 1992. From 1986 to 1992, Mr. Sinnott was Vice
President and Senior Securities Officer of Citicorp. From 1981 to 1986, Mr.
Sinnott was Director of Corporate Finance at United Energy Resources. From 1976
to 1981, he was Vice President at Bank of America. Mr. Sinnott is on the Board
of Directors of Glacier Water Services, an AMEX listed vended water company, and
Plains Resources, Inc., an AMEX listed oil and natural gas company. Mr. Sinnott
received a Bachelor of Arts from the University of Virginia, and a MBA from the
Graduate School of Business Administration at Harvard University.
Elwood W. Schafer. Effective September 26, 1995, Mr. Schafer was appointed
a Director of the Company. Mr. Schafer has been a consultant to KAIM since
January 1993. Mr. Schafer was Managing Director and Chief Petroleum Engineer of
Chemical Bank from December 1991 (when Chemical Bank and Manufacturers Hanover
Trust merged) until July 1992. From 1974 until December 1991, Mr. Schafer worked
for Manufacturers Hanover Trust and reached the position of Managing Director
and Chief Petroleum Engineer. Mr. Schafer was Vice President and head of the oil
department at the Bank of New York from 1970 until he joined Manufacturers
Hanover Trust. From 1955 to 1970, Mr. Schafer worked at General American Oil
Company. Prior to that he spent four years with Core Labs doing Rocky Mountain
well-site geology. Mr. Schafer graduated from University of Illinois with a B.S.
in geology.
Jim L. David, a founder of Alexander, was appointed a Director and Vice
President -- Exploitation of the Company when Alexander merged into NEG-OK on
August 29, 1996. From 1980 until the Merger, Mr. David served as Executive Vice
President of Alexander. From 1977 to 1980, Mr. David was employed as exploration
manager for Reserve Oil, Inc., Northern Division. Mr. David served as Alaska
chief geologist and senior staff geologist for Texas International from 1973 to
1976. Mr. David graduated with a bachelor of arts degree in geology from
Louisiana Tech University and obtained a master of arts in geology from the
University of Missouri.
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<PAGE> 79
Bob G. Alexander, a founder of Alexander, was appointed a Director of the
Company when Alexander merged into NEG-OK on August 29, 1996. From 1980 until
the Merger, Mr. Alexander served as Chairman of the Board, President and Chief
Executive Officer of Alexander. From 1976 to 1980, Mr. Alexander was Vice
President and General Manager of the Northern Division of Reserve Oil, Inc. and
President of Basin Drilling Corp. (subsidiaries of Reserve Oil and Gas Company).
Mr. Alexander attended the University of Oklahoma and graduated with a bachelor
of science degree in geological engineering.
Robert A. West, was appointed a Director of the Company when Alexander
merged into NEG-OK on August 29, 1996. Since 1973, Mr. West has owned and/or
invested in various energy industry service companies including Alexander Well
Services, Inc. and Beacon Fluid Services (formerly Beacon Well Services, Inc.).
Since 1989, he has served as president and majority shareholder of The West
Group, Inc., a vacuum transport and completion fluids service company. Mr. West
is a graduate of The University of Tulsa.
Robert J. Mitchell. Effective August 29, 1996, Mr. Mitchell was appointed a
Director of the Company. Mr. Mitchell has been Senior Vice President -- Finance
of ACF Industries Inc. since March 1995 and was Treasurer of ACF Industries Inc.
from December 1984 to March 1995. Mr. Mitchell has also served as President and
Treasurer of ACF Industries Holdings Inc. since August 1993 and as Vice
President, Liaison Officer of Icahn & Co., Inc. since November 1984. From 1987
to January 1993, Mr. Mitchell served as Treasurer of TransWorld Airlines, Inc.
and was the Treasurer of TransWorld Airlines, Inc. when it filed for
reorganization under Chapter 11 of the United States Bankruptcy Code, as
amended, in January 1992. Mr. Mitchell is also a director of Cadus
Pharmaceutical Corporation, a Nasdaq National Market listed pharmaceutical
company.
Robert A. Imel. Effective October 1, 1996, Mr. Imel became the full-time
Chief Financial Officer and Senior Vice President of the Company. From September
1993 to October 1996, Mr. Imel served as Chief Financial Officer of the Company
on a contract basis. From May 1992 to October 1996, Mr. Imel was President of
Imel and Hayes, P.C. and its predecessor. From March 1991 to January 1993, Mr.
Imel was President and Chief Financial Officer of Murexco Petroleum, Inc.,
Dallas, Texas. In May, 1992, Murexco Petroleum, Inc. filed a voluntary
bankruptcy petition and in January 1993 it was converted to a Chapter 7
liquidation. In addition, from March 1988 to February 1991, Mr. Imel served as
Vice President and Chief Financial Officer of Phoenix Operating Company in
Dallas. From September 1984 until February 1988, Mr. Imel was Vice President and
Chief Financial Officer of Murexco Petroleum, Inc. and from February 1983 to
August 1984 he was Controller of Atlas Energy Corporation in Dallas. He was
Senior Accountant with Peat, Marwick, Mitchell & Co. in Dallas from June 1980
until January 1983. Mr. Imel received his B.S. degree in Accounting and Finance
from Oklahoma State University and is currently licensed as a CPA in the State
of Texas.
R. Thomas Fetters, Jr. Mr. Fetters was appointed Senior Vice
President -- Offshore Operations and Exploration of the Company effective
September 18, 1995 and Senior Vice President -- Exploration of the Company
effective August 29, 1996. Mr. Fetters was President and Chief Operating Officer
of XCL Exploration and Production, Inc. and XCL-China Ltd. (both wholly owned
subsidiaries of XCL Ltd., formerly The Exploration Company of Louisiana, Inc.),
from February 1990 until September 1995. From March 1989 to February 1990 Mr.
Fetters held the position of Chairman of Independent Energy Corporation which
was acquired by The Exploration Company of Louisiana. From May 1983 to March
1989, Mr. Fetters served as President and Chief Executive Officer of CNG
Producing Company in New Orleans and, from August 1966 to May 1983, held various
positions, from Geologist to Exploration Manager with several divisions of
Exxon, primarily in the Gulf Coast region and offshore Gulf of Mexico of the
U.S., and in Malaysia and Australia. At Exxon USA, Mr. Fetters held the
positions of Division Manager of Production Research and Exploration Planning
Manager. Mr. Fetters holds B.S. and M.S. degrees in geology from the University
of Tennessee.
William T. Jones. Effective August 29, 1996, Mr. Jones was appointed Senior
Vice President -- Operations of the Company. Prior to such appointment, Mr.
Jones was Vice President -- Production and Engineering of the Company since July
1994. From April 1991 to July 1994, Mr. Jones was Chief Operating Officer for
Ard Drilling Company in Abilene, Texas. From July 1989 to April 1991, Mr. Jones
was Senior
78
<PAGE> 80
Petroleum Engineer for Snyder Oil Company in Fort Worth, Texas. Mr. Jones also
worked at Shell Oil Company as an Engineer from June 1968 to May 1973. Mr. Jones
received a B.S. in Petroleum Engineering from Mississippi State University.
David E. Grose, joined Alexander at its inception in March 1980 as a
financial accountant and served as Assistant Treasurer from October 1983 until
his election in 1987 as a director and Vice President, Treasurer and Chief
Financial Officer of Alexander. Effective August 29, 1996, Mr. Grose was elected
Vice President -- Finance and Treasurer of the Company. From 1977 to 1980, he
held a position in the corporate accounting department of Reserve Oil and Gas
Company and was the rig accountant for Basin Drilling Corporation. Mr. Grose
received a bachelor of arts degree in political science from Oklahoma State
University and a masters degree in business administration from University of
Central Oklahoma.
Sue Barnard, has served as Vice President -- Administration and Human
Resources and Secretary of the Company since August 29, 1996. Since 1986 she had
served Alexander in the capacities of Risk Manager and Manager of Human
Resources and Corporate Secretary from 1985 until the Merger. Ms. Barnard joined
Alexander in June 1982 as assistant to the Vice President -- Administration and
as Assistant Corporate Secretary.
Melissa H. Rutledge. Effective August 15, 1994, Ms. Rutledge was appointed
Controller and Chief Accounting Officer of the Company. From September 1991 to
August 1994, Ms. Rutledge was a Senior Auditor for Ernst & Young LLP in Dallas.
Ms. Rutledge received her B.B.A. degree in Accounting from Texas Tech University
and is currently licensed as a CPA in the State of Texas.
The Company has the following committees: Executive, consisting of Messrs.
Miller, Bender, Alexander and McCullough; Finance, consisting of Messrs.
Sinnott, Mitchell, Bender, Schafer and David; Audit, consisting of Messrs. Kite,
McDonald, Mitchell, Alexander, West and Schafer; Compensation, (formerly
Personnel and Compensation), consisting of Messrs. McCullough, Miller, Bender,
Sinnott, Kite and Mitchell; and NEG-OK Asset, consisting of Messrs. Alexander,
David, Kite, McDonald, West and Miller. The Compensation Committee includes a
subcommittee formed for the purpose of administering the Company's 1996
Incentive Compensation Plan, consisting of Messrs. McCullough, Miller, Sinnott,
Kite and Mitchell.
The executive officers of the Company are elected annually at the first
meeting of the Company's Board of Directors held after each annual meeting of
shareholders. Each executive officer will hold office until the first meeting of
the Board after the annual meeting of shareholders next succeeding his or her
election and until his or her successor is duly elected and qualified, or until
his or her death or resignation or until he or she shall have been removed in
the manner provided in the Company's by-laws.
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<PAGE> 81
EXECUTIVE COMPENSATION
The following tables set forth the cash compensation received by the
Company's Chief Executive Officer, Chief Financial Officer and Vice
President -- Production & Engineering during the fiscal years ended December 31,
1995, 1994 and 1993, and aggregate option/SAR exercises during the last fiscal
year and year end option/SAR values. None of the other executive officers' cash
compensation for all services rendered in all capacities to the Company exceeded
$100,000 during 1995, 1994 or 1993.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS
-------------------------
ANNUAL RESTRICTED
COMPENSATION(1) STOCK SECURITIES OTHER
--------------------- AWARDS UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($) OPTIONS(#) ($)
------------------ ---- --------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Miles D. Bender................. 1995 179,448 50,000 -- 200,000 78,971(5)
President and 1994 136,187 15,000 3,871(4) --
Chief Executive Officer 1993 125,000 -- -- --
Robert A. Imel.................. 1995 87,500 -- 26,000(4) 110,000 --
Chief Financial Officer(2) 1994 86,792 -- 21,575(4) -- --
1993 42,476 -- -- -- --
William T. Jones................ 1995 97,992 10,000 -- 110,000 --
Vice President, Production
and Engineering(3)
</TABLE>
- ---------------
(1) Excludes the aggregate, incremental cost to the Company of perquisites and
other personal benefits, securities or property, the aggregate amount of
which, with respect to the named individual, does not exceed the lesser of
$50,000 or 10% of reported annual salary and bonus for such person.
(2) Effective October 1, 1996, Mr. Imel became employed full time by the Company
as Chief Financial Officer and Senior Vice President. During the periods
covered by this table, Mr. Imel was employed by the Company on a contract
basis.
(3) Mr. Jones was appointed Senior Vice President -- Operations effective August
29, 1996.
(4) At December 31, 1995, Mr. Bender held 247,500 shares of restricted Common
Stock, with a value of $804,375, Mr. Imel held 80,500 shares of restricted
Common Stock, with a value of $261,625 and Mr. Jones held 50,000 shares of
restricted Common Stock, with a value of $162,500.
(5) During 1995, the Board of Directors approved payment of $78,971 to Mr.
Bender for services rendered without pay in prior years, and for
reimbursement of certain other expenses.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE VALUE AT
---------------------------------------------------------------- ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM
OPTIONS EMPLOYEES IN OR BASE -------------------
GRANTED(#) FISCAL YEAR PRICE($/SH) EXPIRATION DATE 5%($) 10%($)
---------- -------------- ----------- ----------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Miles D. Bender..... 100,000(1) 13% 1.625 January 4, 1999 207,396 261,708
100,000(2) 13% 2.81 December 1, 2000 376,567 497,809
Robert A. Imel...... 60,000(1) 8% 1.625 January 4, 1999 124,437 147,025
50,000(2) 7% 2.81 December 1, 2000 188,283 248,904
William T. Jones.... 60,000(1) 8% 1.625 January 4, 1999 124,437 157,025
50,000(2) 7% 2.81 December 1, 2000 188,283 248,904
</TABLE>
- ---------------
(1) These option grants became 100% exercisable on January 4, 1996.
(2) These option grants became 50% exercisable on December 1, 1996 and are 100%
exercisable on December 1, 1997.
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<PAGE> 82
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FY-END(#) FY-END($)(1)
---------------- ------------------
SHARES VALUE EXERCISABLE/ EXERCISABLE/
NAME ACQUIRED REALIZED($) UNEXERCISABLE UNEXERCISABLE
---- -------- ----------- ---------------- ------------------
<S> <C> <C> <C> <C>
Miles D. Bender(2).................. -- -- 100,000/150,000 $237,500/$162,750
Robert A. Imel...................... 25,000 60,938 30,000/ 80,000 $56,250/$ 90,750
William T. Jones(2)................. -- -- 30,000/ 80,000 $56,250/$ 90,750
</TABLE>
- ---------------
(1) Based on the closing price of Common Stock on December 29, 1995 of $3.50.
(2) Mr. Bender and Mr. Jones did not exercise any options during the fiscal year
ended December 31, 1995.
The Company does not have any long-term incentive plans or defined benefit
or actuarial plans. Therefore, the tables on long-term incentive plan awards and
pension plans are omitted.
Compensation of Directors
The Company compensates non-employee Board of Directors members in the
amount of $1,000 for each official Board of Directors' meeting and $1,000 for
each Board of Directors' committee meeting unless such committee meeting is held
at the time of, or in conjunction with, an official Board of Directors' meeting.
In addition, members of the Board of Directors are generally granted stock
options each year. In December 1996 each outside director and inside director
received options for 25,000 and 37,500 shares, respectively, of Common Stock,
which options vest over a two year period.
During 1995, the Directors received options to purchase Common Stock for
services rendered to the Company. The number of options granted were as follows:
Miles D. Bender -- 100,000 and 100,000 at exercise prices of $1.625 and $2.81,
respectively; George McCullough -- 20,000 and 30,000 at exercise prices of
$1.625 and $2.81, respectively; Norman C. Miller -- 20,000 and 30,000 at
exercise prices of $1.625 and $2.81, respectively; Robert H. Kite -- 20,000 and
15,000 at exercise prices of $1.625 and $2.81, respectively; George N.
McDonald -- 20,000 and 15,000 at exercise prices of $1.625 and $2.81,
respectively; Elwood W. Schafer -- 15,000 at an exercise price of $2.81; and
Robert Sinnott -- 20,000 and 15,000 at exercise prices of $1.625 and $2.81,
respectively.
Mr. Norman Miller received $22,500 in 1995 for work performed for the
Company. In 1994, Mr. Miller received a bonus of $5,000 for work on Company
matters and effective November 11, 1994, Mr. Miller began to receive $500 for
each day he works on Company matters.
In addition, the Company pays other incidental compensation to executive
officers and directors from time to time, consisting primarily of reimbursement
for travel and entertainment expenses on behalf of the Company.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
In January 1996, the Company executed employment agreements that have a
term of three years from the effective date of a change in control of the
Company (the "Employment Agreements") with Miles D. Bender, President and Chief
Executive Officer, William T. Jones, Senior Vice President -- Operations, and
certain other officers of the Company. The Employment Agreements each provide
that the three-year term will be rolling (so that at any time during the term of
such agreements there is a remaining term of three years, but in no event beyond
the time the executive and/or officer reaches age 65).
The Employment Agreements define the "change in control" to have occurred
when (i) a person, entity or group becomes the beneficial owner of a majority of
the securities of the Company ordinarily having the right to vote for election
of directors, (ii) during any consecutive two year period, the directors at the
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beginning of the period, (together with directors approved by a vote of 66 2/3%
of such initial directors plus directors previously approved by such 66 2/3%
margin) cease to constitute a majority of the Company's Board of Directors,
(iii) any sale, lease, exchange or transfer of all, or substantially all, of the
Company's assets occurs, or (iv) a merger or consolidation occurs with the
effect that any person, entity or group, or the shareholders thereof, become the
owner of securities of the surviving corporation representing a majority of the
voting power of such surviving corporation for the election of directors.
The Employment Agreements provide for a three year employment period during
which the executive and/or officer receives for each year (i) 100% of the
average of the executive's annual base salary at the time in question and the
executive's annual base salary for each of the preceding two years, and (ii)
100% of the average of the bonuses paid to the executive and/or officer for each
of the preceding three fiscal years. If the executive and/or officer is
discharged without cause or resigns for "good reason" (as defined therein) after
a change in control then, in lieu of the compensation described in the preceding
sentence, the executive and/or officer is entitled to a lump sum cash severance
payment equal to three times the sum of (i) the executive's annual base salary
then in effect, (ii) the average of cash bonuses for each of the three previous
years, and (ii) the average of fully-vested contributions to retirement plans
for such executive and/or officer for each of the three preceding years. In
addition, at such time, all options and all other retirement or pension
contributions or benefits become fully vested and remain fully exercisable for
360 days.
Compensation Committee Interlocks and Insider Participation
Miles D. Bender served both as a member of the Personnel and Compensation
Committee of the Board of Directors of the Company (the "Compensation
Committee") and as the President and CEO of the Company during 1995. Robert V.
Sinnott served as a member of Compensation Committee during 1995 and as a
director of Plains Resources, Inc., the parent company of Plains to whom the
Company sold 59% of its total oil and natural gas sales during 1995. See
"Certain Relationships and Related Transactions."
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SECURITY OWNERSHIP
The following table sets forth the total number of shares of the Company's
Common Stock and Preferred Stock beneficially owned by (a) each person who, to
the knowledge of the Company, is the beneficial owner of five percent or more of
the outstanding shares of a class of the Company's capital stock, (b) each of
the Company's present directors and named executive officers and certain other
parties, and (c) the directors and officers of the Company as a group, all as
reported by each such person, as of January 8, 1997. Except as otherwise
indicated, ownership of shares by the persons named below includes sole voting
and investment power held by such persons.
<TABLE>
<CAPTION>
AMOUNT
AND NATURE
OF BENEFICIAL PERCENT OF
NAME OF BENEFICIAL OWNER OWNERSHIP CLASS(1)
------------------------ ------------- ----------
<S> <C> <C>
COMMON STOCK
Carl C. Icahn........................................................ 8,212,544(2) 20.0%
Kayne, Anderson Investment Mgmt., Inc................................ 6,825,548(3) 15.9
Croft-Leominster, Inc. .............................................. 2,161,710(4) 6.0
Miles D. Bender...................................................... 1,320,244(5) 3.6
Bob G. Alexander..................................................... 479,602(6) 1.3
Jim L. David......................................................... 462,889(7) 1.3
George B. McCullough................................................. 406,852(8) 1.1
Robert H. Kite....................................................... 376,955(9) 1.0
Norman C. Miller..................................................... 339,860(10) (11)
Robert A. Imel....................................................... 240,500(12) (11)
George N. McDonald................................................... 130,523(13) (11)
William T. Jones..................................................... 135,000(14) (11)
Robert V. Sinnott.................................................... 27,500(15) (11)
Robert A. West....................................................... 12,012(16) (11)
Elwood W. Schafer.................................................... 9,500(17) (11)
Robert J. Mitchell................................................... --(18) --
All directors and officers as a group (17 people).................... 4,215,421(19) 11.5
SERIES B PREFERRED STOCK
Kayne, Anderson Investment Mgmt., Inc................................ 52,500(20) 100.0%
Arbco Associates L.P................................................. 18,900(20) 36.0
Offense Group Associates L.P......................................... 15,750(20) 30.0
Kayne, Anderson Nontraditional Investments, L.P...................... 14,700(20) 28.0
Opportunity Associates L.P........................................... 3,150(20) 6.0
All directors and officers as a group (17 people).................... -- --
SERIES C PREFERRED STOCK
Kayne, Anderson Investment Mgmt., Inc................................ 40,000(21) 100.0%
Arbco Associates L.P................................................. 14,400(21) 36.0
Offense Group Associates L.P......................................... 12,000(21) 30.0
Kayne, Anderson Nontraditional Investments, L.P...................... 11,200(21) 28.0
Opportunity Associates L.P........................................... 2,400(21) 6.0
All directors and officers as a group (17 people).................... -- --
SERIES D PREFERRED STOCK
Carl C. Icahn........................................................ 100,000(2) 100.0%
All directors and officers as a group (17 people).................... -- --
</TABLE>
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<TABLE>
<CAPTION>
AMOUNT
AND NATURE
OF BENEFICIAL PERCENT OF
NAME OF BENEFICIAL OWNER OWNERSHIP CLASS(1)
------------------------ ------------- ----------
<S> <C> <C>
SERIES E PREFERRED STOCK
Kayne, Anderson Investment Mgmt., Inc................................ 31,000(22) 62.0%
Foremost Insurance Company........................................... 15,000(23) 30.0
Arbco Associates L.P................................................. 13,750(22) 27.5
Offense Group Associates L.P......................................... 6,750(22) 13.5
Kayne, Anderson Nontraditional Investments, L.P...................... 8,000(22) 16.0
Topa Insurance Company............................................... 4,000(23) 8.0
Kayne, Anderson Offshore Limited..................................... 2,500(22) 5.0
All directors and officers as a group (17 people).................... -- --
</TABLE>
- ---------------
(1) Based upon the 36,175,242 shares of Common Stock, 52,500 shares of issued
and outstanding Series B Preferred Stock, 40,000 shares of issued and
outstanding Series C Preferred Stock, 100,000 shares of issued and
outstanding Series D Preferred Stock and 50,000 shares of issued and
outstanding Series E Preferred Stock that are outstanding as of January 8,
1997. For each person or group the percentages, are calculated on the basis
of the amount of outstanding securities of the particular class plus any
securities that such person or group has the right to acquire within 60
days pursuant to options, warrants, conversion privileges or other rights.
(2) High River, the record owner of these shares, is a Delaware limited
partnership. Riverdale Investors Corp., Inc. is a Delaware corporation and
is the general partner of High River. Mr. Carl C. Icahn is the sole
shareholder and a director of Riverdale. Riverdale's principal business
address is 90 South Bedford Road, Mount Kisco, New York 10549 and Mr.
Icahn's principal business address is c/o Icahn Associates Corp., 114 West
47th Street, 19th Floor, New York, New York 10036. The ownership figures in
the table assume that all the shares of Series D Preferred Stock are
converted, warrants for 700,000 shares of Common Stock are exercised and
5,144,444 shares of Common Stock are added to the shares of Common Stock
outstanding. Riverdale and Mr. Icahn, by virtue of their relationships to
High River, may be deemed to beneficially own (as that term is defined in
Rule 13d-3 under the Exchange Act) the shares which High River directly
beneficially owns. Each of Riverdale and Mr. Icahn disclaims beneficial
ownership of such shares for all other purposes. Mr. Robert J. Mitchell has
been appointed a director of the Company as the representative of the
holders of the Series D Preferred Stock. Mr. Mitchell does not have
dispositive or voting power over any of the shares owned by High River.
(3) Richard A. Kayne ("Kayne") is President, Chief Executive Officer and
Director of KAIM, a registered investment advisor, and of Kayne, Anderson
Associates, Inc. a registered broker/dealer. KAIM is the general partner of
KAIM Non-Traditional L.P. ("L.P.") which is the general partner of and
investment advisor to the investment partnerships referred to in this
footnote. The address for Kayne, KAIM and the investment partnerships
referred to in this footnote is 1800 Avenue of the Stars, Suite 1424, Los
Angeles, California 90067. Mr. Kayne is also a limited partner in each
investment partnership and a general partner of one of them. Mr. Kayne and
KAIM have shared dispositive and voting power through investment
partnerships for 52,500 shares of Series B Preferred Stock, 40,000 shares
of Series C Preferred Stock, and 31,000 shares of Series E Preferred Stock,
which may be converted at anytime into 3,230,769 shares, 2,000,000 shares
and 1,377,779 shares of Common Stock, respectively, and for warrants to
purchase 217,000 shares of Common Stock. The percentage ownership figures
in the table assume that all shares of Series B Preferred Stock, Series C
Preferred Stock and Series E Preferred Stock are converted, the warrants to
purchase 217,000 shares of Common Stock are exercised and 6,825,548 shares
of Common Stock are issued, and such shares are added to the shares of
Common Stock outstanding. For additional information on the record
ownership of the Series B Preferred Stock, Series C Preferred Stock and
Series E Preferred Stock and the shares of Common Stock into which they
convert, see footnotes (20), (21) and (22) below. Mr. Kayne disclaims
beneficial ownership of the shares held by the investment partnerships in
excess of the amount attributable to him by virtue of his direct interest
as a limited or general partner and by virtue of his indirect interest in
KAIM's interest in the investment partnerships. KAIM and L.P. disclaim
beneficial ownership of the shares held by the investment partnerships in
excess of the amount attributable to them by virtue of their percentage
interest in the investment partnerships. Mr. Robert V. Sinnott is Senior
Vice President and Senior Investment Officer of L.P. and Mr. Elwood W.
Schafer is a consultant to KAIM. Both are Directors of the Company; neither
Mr. Sinnott nor Mr. Schafer have dispositive or voting power over any of
these shares.
(4) Croft-Leominster, Inc., the record owner of the shares, is a Maryland
corporation whose principal business address is 207 E. Redwood St., Suite
802, Baltimore, Maryland 21202.
(5) Mr. Bender's shares include the following: 1,170,244 shares held directly
by Mr. Bender, 7,000 shares held by a trust for Mr. Bender's minor child
and options to purchase 150,000 shares; does not include options to
purchase 950,000 shares which are not yet exercisable. The figures in the
table do not include 28,000 shares owned by Mr. Bender's grown children,
for which Mr. Bender disclaims beneficial ownership.
(6) The amount shown owned by Mr. Alexander includes 139,602 shares owned by
Mr. Alexander's wife, Donna Ports Alexander, but does not include options
to purchase 25,000 shares which are not yet exercisable. Mr. Alexander
disclaims any beneficial interest in the shares owned by his wife.
(7) Does not include options to purchase 25,000 shares which are not yet
exercisable.
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<PAGE> 86
(8) Includes 371,852 shares held directly by Mr. McCullough and immediately
exercisable options to purchase 35,000 shares, but does not include options
to purchase 40,000 shares which are not yet exercisable. The figures in the
table do not include 5,405 shares owned by Mr. McCullough's sons, for which
Mr. McCullough disclaims beneficial ownership.
(9) Robert H. Kite is Chief Operating Officer and 33.0% beneficial owner of
KFT, Ltd. and may be deemed to be the beneficial owner of shares held by
KFT, Ltd. KFT, Ltd. holds 176,297 shares and Mr. Kite holds 173,158 shares
directly. The share figure in the table also includes options to purchase
27,500 shares, but does not include options to purchase 32,500 shares which
are not yet exercisable.
(10) Mr. Miller owns 254,860 shares directly, and 50,000 shares through Incorp,
Inc., of which Mr. Miller is owner. Includes options to purchase 35,000
shares, but does not include options to purchase 40,000 shares which are
not yet exercisable.
(11) Less than one percent.
(12) Includes 115,250 shares held directly by Mr. Imel (as to which he has sole
voting and dispositive power), 40,250 shares held directly by Mr. Imel (as
to which he shares voting and dispositive power), options to purchase
42,500 shares (as to which he has sole dispositive power) and options to
purchase 42,500 shares (as to which he shares dispositive power); does not
include options to purchase 112,500 shares (as to which he has sole
dispositive power) and 12,500 shares (as to which he shares dispositive
power) which are not yet exercisable. Mr. Imel disclaims beneficial
ownership of 40,250 shares as to which he shares voting and dispositive
powers and options to purchase 55,000 shares as to which he shares
dispositive power.
(13) Includes 123,023 shares held directly by Mr. McDonald and options to
purchase 7,500 shares, but does not include options to purchase 32,500
shares which are not yet exercisable.
(14) Includes 50,000 shares held directly by Mr. Jones and options to purchase
85,000 shares, but does not include options to purchase 50,000 shares which
are not yet exercisable.
(15) Includes options to purchase 27,500 shares held by Mr. Sinnott, but does
not include options to purchase 32,500 shares which are not yet
exercisable. See footnote (3) above, footnotes (17), (20), (21) and (22)
below.
(16) Does not include options to purchase 25,000 shares which are not yet
exercisable.
(17) Includes 2,000 shares held directly by Mr. Schafer and options to purchase
7,500 shares, but does not include options to purchase 32,500 shares which
are not yet exercisable. See footnotes (3) and (15) above, footnotes (20),
(21) and (22) below.
(18) Does not include options to purchase 25,000 shares which are not yet
exercisable.
(19) Includes a total of 3,630,341 shares held directly or indirectly by the
executive officers and directors and options to purchase 585,080 shares
which are exercisable within 60 days.
(20) For information on Richard A. Kayne, KAIM and L.P., see footnote (3) above.
Arbco Associates L.P. has shared dispositive and voting power with Mr.
Kayne, KAIM and L.P. of 18,900 shares of Series B Preferred Stock, which
converts into 1,163,077 shares of Common Stock. Offense Group Associates
has shared dispositive and voting power with Mr. Kayne, KAIM and L.P. for
15,750 shares of Series B Preferred Stock, which converts into 969,231
shares of Common Stock. Kayne, Anderson Non-Traditional Investments has
shared dispositive and voting power with Mr. Kayne, KAIM and L.P. for
14,700 shares of Series B Preferred Stock, which converts into 904,615
shares of Common Stock. Opportunity Associates L.P. has shared dispositive
and voting power with Mr. Kayne, KAIM and L.P. of 3,150 shares of Series B
Preferred Stock, which converts into 193,846 shares of Common Stock.
(21) For information on Richard A. Kayne, KAIM and L.P., see footnote (3) above.
Arbco Associates L.P. has shared dispositive and voting power with Mr.
Kayne, KAIM and L.P. of 14,400 shares of Series C Preferred Stock, which
converts into 720,000 shares of Common Stock. Offense Group Associates has
shared dispositive and voting power with Mr. Kayne, KAIM and L.P. for
12,000 shares of Series C Preferred Stock, which converts into 600,000
shares of Common Stock. Kayne, Anderson Non-Traditional Investments has
shared dispositive and voting power with Mr. Kayne, KAIM and L.P. for
11,200 shares of Series C Preferred Stock, which converts into 560,000
shares of Common Stock. Opportunity Associates L.P. has shared dispositive
and voting power with Mr. Kayne, KAIM and L.P. of 2,400 shares of Series C
Preferred Stock, which converts into 120,000 shares of Common Stock.
(22) For information on Richard A. Kayne, KAIM and L.P., see footnote (3) above.
Arbco Associates L.P. shares dispositive and voting power with Mr. Kayne,
KAIM and L.P. of 13,750 shares of Series E Preferred Stock, which converts
into 611,110 shares of Common Stock, and warrants for 96,250 shares of
Common Stock. Offense Group Associates shares dispositive and voting power
with Mr. Kayne, KAIM and L.P. for 6,750 shares of Series E Preferred Stock,
which converts into 300,000 shares of Common Stock, and warrants for 47,250
shares of Common Stock. Kayne, Anderson Non-Traditional Investments shares
dispositive and voting power with Mr. Kayne, KAIM and L.P. for 8,000 shares
of Series E Preferred Stock, which converts into 355,555 shares of Common
Stock, and warrants for 56,000 shares of Common Stock. Kayne, Anderson
Offshore Limited shares dispositive and voting power with Mr. Kayne, KAIM
and L.P. for 2,500 shares of Series E Preferred Stock, which converts into
111,111 shares of Common Stock, and warrants for 17,500 shares of Common
Stock.
(23) Foremost Insurance Company, whose address is 5230 33rd Street S.E., Grand
Rapids, Michigan 49512, has dispositive and voting power for 15,000 shares
of Series E Preferred Stock, which converts into 666,666 shares of Common
Stock, and warrants for 105,000 shares of Common Stock. Topa Insurance
Company, whose address is 1800 Avenue of the Stars, Suite 1200, Los
Angeles, California 90067, has dispositive and voting power for 4,000
shares of Series E Preferred Stock, which converts into 177,777 shares of
Common Stock, and warrants for 28,000 shares of Common Stock.
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<PAGE> 87
Under the terms of the Series D Preferred Stock, a change in control of the
Company may occur if any of the events occur that trigger the Series D Preferred
Stock Contingent Voting Rights (as defined) to elect one-half of the Board of
Directors of the Company plus one member and if such rights are exercised by
such holders. See "Description of Capital Stock -- Series D Preferred Stock;"
and "Risk Factors -- Control by Certain Equity Shareholders in the Case of
Certain Insolvency and Other Events."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In the Equity Private Placement closed in connection with the Merger, the
Company issued securities and entered into certain other agreements with
investors who beneficially owned or were affiliates of persons or entities who
owned more than five percent of the Common Stock (assuming conversion of the
Preferred Stock). See "Security Ownership;" and "Risk Factors -- Control by
Certain Equity Shareholders in the Case of Certain Insolvency and Other Events."
On August 29, 1996, the Company consummated the sale of $10.0 million of 100,000
shares of Series D Preferred Stock and 700,000 warrants to purchase Common Stock
at $2.50 a share which was privately placed with High River. On August 29, 1995,
the Company also consummated the sale of $5.0 million of 50,000 shares of Series
E Preferred Stock and 350,000 warrants to purchase Common Stock at $2.50 a share
which was privately placed with four investment partnerships associated with
KAIM and two insurance companies (the "Series E Investors"). See "Security
Ownership" and footnotes (2), (3), (22) and (23) thereto. Both the Series D
Preferred Stock and the Series E Preferred Stock are convertible into shares of
the Common Stock at a conversion price of $2.25 per share of Common Stock.
In connection with the Merger and the Equity Private Placement, the Company
extended the period during which the Series B Preferred Stock and the Series C
Preferred Stock cannot be redeemed by the Company from June 14, 1997 to June 14,
1999 and amended the Company's Certificate of Incorporation to so prohibit such
redemption. As a result, dividends at a rate of 10% and 10 1/2% per annum,
respectively, or $525,000 and $420,000 per year, respectively, will accrue and
be payable to holders of such Preferred Stock. Such holders are KAIM affiliates.
See "Description of Capital Stock -- Series B Preferred Stock;" and "Description
of Capital Stock -- Series C Preferred Stock."
During the year ended December 31, 1995, the Company sold $4,618,136 of oil
and natural gas, or 59% of the Company's total oil and natural gas sales, to
Plains. During the year ended December 31, 1994, the Company sold $1,614,711 of
oil and natural gas, or 51% of its total oil and natural gas sales, to Plains.
KAIM and investment partnerships associated with KAIM, and other accounts
managed by affiliates of KAIM, own on a fully diluted basis, 2,751,173 shares of
Common Stock of Plains Resources, Inc., or approximately 18.6% of the issued and
outstanding shares of Common Stock of Plains Resources, Inc. The Company has
agreements with Plains pursuant to which Plains purchases oil produced from the
major oil-producing properties which the Company operates, at West Texas
Intermediate posted prices plus a small premium. The premium is based on Plains
purchasing substantially all the production of the Company. If the agreements
continue throughout 1996, sales to Plains will account for a significant
percentage of the Company's total oil and natural gas sales in 1996. For
information on the ownership of the Company's securities by KAIM and investment
partnerships associated with KAIM, see the table, and footnotes (3), (20), (21)
and (22) thereto under "Security Ownership."
On June 14, 1995, the Company consummated the sale of $4.0 million of
Series C Preferred Stock to investment partnerships managed by KAIM. 40,000
shares of Series C Preferred Stock were sold by the Company at $100 per share,
and the Series C Preferred Stock is convertible into shares of the Common Stock
at a conversion price of $2.00 per share of Common Stock. For more information
on the purchasers, see "Security Ownership" and footnotes (3) and (21) thereto.
On June 3, 1994, the Company consummated the sale of $5.0 million of Series
B Preferred Stock which was privately placed with the same investment
partnerships managed by KAIM as purchased the Series C Preferred Stock. 50,000
shares of Series B Preferred Stock were sold by the Company at $100 per share,
and the Series B Preferred Stock is convertible into shares of the Common Stock
at a conversion price of $1.625
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<PAGE> 88
per share of Common Stock. For more information on the purchasers, see "Security
Ownership" and footnotes (3) and (20) thereto.
In December 1993, the Company acquired a 63.8% working interest in the GAU
from Bligh Petroleum, Inc. (the "Bligh Acquisition"). In connection with the
Bligh Acquisition, the Company borrowed funds from three directors in the form
of subordinated notes, and sold Common Stock to two directors (one of which is
also an officer). The Company borrowed the following amounts from the following
directors of the Company: $100,000 -- George B. McCullough; $80,000 -- KFT Ltd.,
which is 33.0% owned by Robert H. Kite; and $50,000 -- Norman C. Miller. In
April 1994, KFT Ltd. converted $30,000 in principal amount of its subordinated
note into 48,000 shares of Common Stock. In June 1994, KFT Ltd. converted an
additional $38,750 of its subordinated note into 62,000 shares of Common Stock,
and Mr. McCullough converted $62,500 of his subordinated note into 100,000
shares of Common Stock and the remaining $37,500 was paid in cash. Also in June
1994, Mr. Miller converted the full $50,000 principal amount of his subordinated
note into 80,000 shares of Common Stock and in July 1994, the remaining $11,250
owed to KFT, Ltd. was paid in cash.
In addition, in connection with the Bligh Acquisition, the Company issued
792,000 shares of Common Stock at a purchase price of $.625 per share. Robert H.
Kite, a director, bought 32,000 shares, for a total purchase price of $20,000.
Miles D. Bender, President and Chief Executive Officer of the Company and a
director, subscribed for 200,000 shares, for a total purchase price of $125,000,
and completed his transaction in April 1994.
DESCRIPTION OF AMENDED CREDIT FACILITY
The following summary of the Amended Credit Facility does not purport to be
complete and is subject to, and qualified in its entirety by reference to, the
applicable agreements. On October 31, 1996, Bank One consented to the terms of
the Indenture and the issuance of the Notes and entered into the Amended Credit
Facility.
The Amended Credit Facility consists of a reducing revolving line of
credit, with an initial borrowing base of $25 million. Borrowings under the
Amended Credit Facility are limited to up to $15.0 million for general corporate
purposes and up to $10.0 million for acquisitions of producing oil and gas
properties. The Borrowing Base will be redetermined at least semi-annually and
will be reduced monthly by an amount determined by the Banks from time to time.
No reduction amount will be determined until the next Borrowing Base
redetermination scheduled for April 1, 1997. 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 Amended Credit Facility.
The Company is required to pay an unused commitment fee on the unused
portion of the Borrowing Base equal to 3/8ths of 1% per annum and will also pay
a facility fee equal to 3/4% of the initial Borrowing Base on the facility.
Under the Amended Credit Facility, the Company granted to the Banks liens
on a minimum of 90% of the present worth of NEG-OK's oil and natural gas
properties, liens on certain of the Company's oil and natural gas properties,
whether currently owned or hereafter acquired, and a negative pledge on all
other oil and natural gas properties. The facility requires, among other things,
semi-annual engineering reports covering oil and natural gas properties, and
maintenance of certain financial ratios including a current ratio and interest
coverage ratio and maintenance of minimum tangible net worth.
The Amended 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 become due, the Borrowing Base is subject to reduction. See
"Risk Factors -- Repurchase of Notes upon a Change of Control."
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<PAGE> 89
DESCRIPTION OF THE EXCHANGE NOTES
The Exchange Notes will be issued pursuant to the Indenture dated as of
November 1, 1996 among the Company, NEG-OK, as initial Guarantor, and Bank One,
Columbus, National Association, as trustee (the "Trustee"). The following
summaries of certain provisions of the Notes and the Indenture do not purport to
be complete and are subject to, and are qualified in their entirety by reference
to, the Notes and the Indenture, including the definitions therein of certain
capitalized terms used but not defined herein.
GENERAL
The aggregate principal amount of the Notes will be limited to $100
million. Each 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 original issuance, payable
semiannually in arrears on May 1 and November 1 of each year, commencing May 1,
1997, to the Person in whose name the 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. 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.
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 Amended 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 Notes. To the extent of
pledged collateral, such indebtedness will have priority over the Notes. As of
September 30, 1996, on a pro forma basis after giving effect to the Initial
Offering and the application of the estimated proceeds therefrom, the Company
and NEG-OK would have had approximately $1.4 million of secured indebtedness
that effectively would rank senior to 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 Outstanding Notes were initially unconditionally guaranteed by NEG-OK,
a wholly-owned subsidiary of the Company and successor to Alexander in the
Merger. However, upon consummation of the Subsequent Merger, NEG-OK's
obligations under the Guarantee were assumed by the Company, together with all
property, assets and rights of NEG-OK and all other debts, liabilities and
obligations of NEG-OK, and NEG-OK ceased to exist. Prior to the Subsequent
Merger, NEG-OK was the only Subsidiary of the Company (other than Boomer
Marketing Corporation and Energy Environmental Services Limited Partnership, an
Oklahoma limited partnership, which each own less than $250,000 in assets, none
of which consist of oil and gas properties). As a result of the Subsequent
Merger, there is currently no Restricted Subsidiary of the Company and no
outstanding Guarantee of the Notes. The Indenture provides that each Person that
is or 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. 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
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all future Subordinated Indebtedness of the Guarantor. To the extent a Guarantor
pledges oil and gas collateral to secure other senior indebtedness, 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 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 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
---- ----------
<S> <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
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to November 1, 1999, the Company, at its option, may redeem up to $35.0 million
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
$65.0 million of the aggregate principal amount of the Notes remains
outstanding.
Except as set forth under "Change of Control" "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 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
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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 Amended 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 "Amended 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.
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 Issue Date or (b) 2.50-to-1.0 with respect to any date
of incurrence of additional Indebtedness occurring after the first anniversary
date of the 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 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
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(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 or 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.
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 Issue Date in accordance
with the terms of such Preferred Stock in effect at the 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.
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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 (and any other Senior Indebtedness 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 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.
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
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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 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; and (d) customary non-assignment
provisions in leases, purchase money financings and any encumbrance or
restriction due to applicable law.
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
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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.
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.
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
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end of the Company's most recently completed fiscal year (or for the initial
periods prior to the availability of such reserve report for December 31, 1996,
the reserve reports of Netherland, Sewell & Associates, Inc. included as Annexes
A-1 and A-2 hereto, 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 initial or 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 initial or year-end reserve
reports which, in the case of sub-clauses (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 initial or
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 initial or 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 initial or 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
initial or 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 initial or
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 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 (i) the net book value on
a date no earlier than the date of the Company's latest annual or quarterly
financial statements and (ii) 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 initial or 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 initial or
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 initial or
year-end reserve reports), attributable to reserves subject to participation
interests, overriding royalty interests or other interests of third
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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
saleable 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 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
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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.
"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 Amended 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.
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"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 Corporation 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 NEGOK 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 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
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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 Notes and the prepayment of any of the 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.
"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
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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
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 Issue Date.
"Guarantee" or "Guarantees" means (i) initially, the Guarantee given by
NEG-OK in the Indenture and (ii) thereafter, any Guarantee issued by existing or
future Restricted Subsidiaries pursuant to Article X of the Indenture.
"Guarantor" means (i) initially, NEG-OK, (ii) each of the Subsidiaries that
becomes a guarantor of the Notes in compliance with the provisions of Article X
of the Indenture and (iii) 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 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
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(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-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 (or
from June 30, 1996, in the case of a date prior to the availability of the
reserve report for December 31, 1996) 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
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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.
"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.
"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 considera-
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tion 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, 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 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 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 Issue Date; (ii) Indebtedness of
the Company and its Restricted Subsidiaries under a Bank Credit Facility as the
same may be amended, refinanced or replaced, 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
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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 (x) Indebtedness of a
Subsidiary pursuant to a Guarantee of the Notes pursuant to Article X of the
Indenture.
"Permitted Investments" means Permitted Business Investments and Permitted
Financial Investments.
"Permitted Liens" means (i) Liens outstanding as of the 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 any Refinancing Indebtedness
of the Company 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 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
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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, 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.
"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
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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." NEG-OK shall be the sole Restricted Subsidiary on the Issue Date.
"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 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 date hereof or hereafter incurred), unless
such Indebtedness is contractually subordinate or junior in right of payment of
principal, premium and interest to the Guarantees.
"Subordinated Indebtedness of a Guarantor" means any Indebtedness of such
Guarantor (whether outstanding on the date hereof or hereafter 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 date hereof or hereafter 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.
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"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 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.
"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
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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
(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 will require 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
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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 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
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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 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, Columbus, National Association 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 and as the Exchange Agent for the Exchange
Offer.
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.
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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.
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 Exchange 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
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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.
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.
Subject to the restrictions on the transferability of the Outstanding
Notes, an Outstanding Note in definitive form will be issued upon the resale,
pledge or other transfer of any Outstanding Note or interest therein to any
person or entity that is not a Qualified Institutional Buyer or that does not
participate in DTC. Outstanding Notes sold to Accredited Investors within the
meaning of Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities
Act will be issued in registered, certified form without interest coupons. Such
Outstanding Notes will be subject to certain restrictions on transfer.
DESCRIPTION OF CAPITAL STOCK
CAPITAL STOCK
The authorized capital stock of the Company consists of 100,000,000 shares
of Common Stock, par value $.01 per share; and 1,000,000 shares of Preferred
Stock, par value $1.00 per share.
SERIES B PREFERRED STOCK
The Series B Preferred Stock is convertible into shares of Common Stock at
a conversion price of $1.625 per share. The Series B Preferred Stock has a
liquidation and dividend preference over the Common Stock. The Series B
Preferred Stock has a 10% dividend, payable semi-annually, and requires the
dividends be paid on the Series B Preferred Stock before any dividends are paid
on Common Stock. The Company has the option to make dividend payments in shares
of Series B Preferred Stock; after the sixth such payment, the holders of Series
B Preferred Stock have the option to receive additional dividends in shares of
Series B Preferred Stock or to accrue such dividends in cash. If the Company
pays dividends in shares of Series B Preferred Stock, or does not pay dividends
in either stock or cash, for four dividend payments, the holders of Series B
Preferred Stock have the right to appoint one-third of the members of the
Company's Board of Directors.
The Series B Preferred Stock is redeemable by the Company, between June 14,
1999 and June 14, 2000, at $110 per share and thereafter at $100 per share, plus
accrued and unpaid dividends; however, the Company cannot redeem any shares of
Series B Preferred Stock unless and until all outstanding shares of the Series C
Preferred Stock have been redeemed by the Company. See "-- Series C Preferred
Stock."
The holders of Series B Preferred Stock currently have the right to appoint
one member to the Company Board of Directors. The holders of Series B Preferred
Stock are entitled to one vote for each share as to matters upon which by law
they are entitled to vote as a class, and the approval of a majority of the
Series B
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Preferred Stock, voting separately as a class, is required to make changes to
the Company's Certificate of Incorporation or By-Laws which adversely affect the
Series B Preferred Stock, to authorize or issue additional shares of Series B
Preferred Stock or to issue preferred stock equal to or senior to the Series B
Preferred Stock as to dividends or liquidation, to effect a reclassification of
the Series B Preferred Stock or, subject to certain exceptions, to effect an
extraordinary transaction that requires a vote of the Company's shareholders. As
a result, a class vote of the holders of Series B Preferred Stock would be
required for the Company to merge or be acquired and may therefore delay, deter,
or prevent a change in control of the Company. See "Risk Factors -- Control by
Certain Equity Shareholders in the Case of Certain Insolvency and Other Events."
SERIES C PREFERRED STOCK
The Series C Preferred Stock is convertible into shares of Common Stock at
a conversion price of $2.00 per share. The Series C Preferred Stock has a
liquidation and dividend preference over the Common Stock, and is parity stock
to the Series B Preferred Stock. The Series C Preferred Stock has a 10 1/2%
dividend, payable semi-annually. The Company has the option to make dividend
payments in shares of Series C Preferred Stock; after the sixth such payment,
the holders of Series C Preferred Stock have the option to receive additional
dividends in shares of Series C Preferred Stock or to accrue such dividends in
cash. If the Company pays dividends in shares of Series C Preferred Stock, or
does not pay dividends in either stock or cash, for four dividend payments, the
holders of Series C Preferred Stock (voting as a class with other affected
series of preferred stock with similar voting rights) have the right to appoint
one-third of the members of the Company's Board of Directors; however, if the
holders of Series B Preferred Stock are presently entitled to a similar right,
then the holders of Series C Preferred Stock shall have no such right until the
right of the holders of Series B Preferred Stock terminates.
The Series C Preferred Stock is redeemable by the Company between June 14,
1999 and June 14, 2000, at $110 per share, and thereafter, at $100 per share,
plus accrued and unpaid dividends; however, no shares of Series C Preferred
Stock may be redeemed until all the shares of Series B Preferred Stock have been
redeemed. See "-- Series B Preferred Stock."
The holders of the Series C Preferred Stock currently have the right to
appoint one member to the Board of Directors. The holders of Series C Preferred
Stock are entitled to one vote for each share as to matters upon which by law
they are entitled to vote as a class, and the approval of a majority of the
Series C Preferred Stock, voting separately as a class, is required to make
changes to the Certificate of Incorporation or By-Laws which adversely affect
the Series C Preferred Stock, to authorize or issue additional shares of Series
C Preferred Stock or to issue preferred stock equal to or senior to the Series C
Preferred Stock as to dividends or liquidation, to effect a reclassification of
the Series C Preferred Stock, or, subject to certain exceptions, to effect an
extraordinary transaction that requires a vote of the shareholders of the
Company. As a result, a class vote of the holders of Series C Preferred Stock,
as well as the Series B Preferred Stock, would be required for the Company to
merge or be acquired and may therefore delay, deter, or prevent a change in
control of the Company. See "Risk Factors -- Control by Certain Equity
Shareholders in the Case of Certain Insolvency and Other Events."
SERIES D PREFERRED STOCK
The Series D Preferred Stock immediately is convertible into shares of
Common Stock initially at a conversion price of $2.25 per share, entitling the
holders to receive 4,444,444 shares of Common Stock. Such conversion price is
subject to certain anti-dilution adjustments, including adjustments that may
occur if shares of Common Stock are issued by the Company below the conversion
price of the Series D Preferred Stock. The Series D Preferred Stock has a
liquidation preference over the Common Stock, but each of the Series B Preferred
Stock and the Series C Preferred Stock has a liquidation preference over the
Series D Preferred Stock. The Series D Preferred Stock liquidation preference
ranks pari passu with the Series E Preferred Stock liquidation preference. See
"-- Series E Preferred Stock." The Series D Preferred Stock does not require the
payment of any dividends but will participate with the Common Stock in any
dividends or distributions to the Common Stock on an as converted basis.
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The holders of Series D Preferred Stock are entitled to one vote for each
share when entitled to vote as described below and as to matters upon which by
law they are entitled to vote as a class. The holders of Series D Preferred
Stock have the right to appoint one member to the Company's Board of Directors.
The Company may not, without the consent of the director appointed by the
holders of the Series D Preferred Stock, voluntarily file for protection under
federal or other bankruptcy laws. In addition, the holders of the Series D
Preferred Stock will have the right to choose to appoint one-half of the members
of Board of Directors plus one member (including the member appointed by the
Series D Preferred Stock holders) if the Series D Preferred Stock contingent
voting rights are triggered and the holders of the Series D Preferred Stock
exercise their rights. Thereafter, such holders will control the Company's Board
of Directors. See "Risk Factors -- Control by Certain Equity Shareholders in the
Case of Certain Insolvency and Other Events."
The right of the holders of Series D Preferred Stock (the "Series D
Preferred Stock Contingent Voting Rights") to choose to appoint one-half of the
Board of Directors of the Company plus one member (including the member
appointed by the holders of the Series D Preferred Stock) is triggered by the
following events: (i) if an involuntary case under federal bankruptcy laws or
other applicable federal or state insolvency laws is commenced against the
Company (including a case for the appointment of a receiver, liquidator,
custodian, trustee or similar official for the Company or its assets) which does
not seek emergency or expedited relief if such case is not dismissed or stayed
within 15 days or, if such case seeks emergency or expedited relief against the
Company, permanent relief is granted or, if temporary relief is granted, the
Company does not provide to the holders of Series D Preferred Stock an opinion
of counsel which states that the Company, without condition, will prevail on the
petition for permanent relief, or (ii) if a default shall have occurred under
notes or other evidences of indebtedness of the Company where the aggregate
outstanding principal amount exceeds $10.0 million, and one of the following
three circumstances exists. First, such indebtedness is due in full by reason of
failure to pay such indebtedness and the default is not cured within 30 days.
Second, such indebtedness is accelerated and such acceleration is not rescinded
within 15 days. Third, notice of foreclosure on collateral securing such
indebtedness has been given to the Company and has not been rescinded after five
days or the proposed date of the sale of the collateral is less than five days
away.
The approval of a majority of the Series D Preferred Stock, voting
separately as a class, is required to make changes to the Certificate of
Incorporation or By-Laws which adversely affect the Series D Preferred Stock, or
to authorize or issue additional shares of Series D Preferred Stock or to issue
preferred stock equal to or senior to the Series D Preferred Stock as to
liquidation.
The Series D Preferred Stock automatically will be converted into Common
Stock if High River and its affiliates own less than 7.5% of the Common Stock on
a fully diluted basis. To determine the percentage of Common Stock on a fully
diluted basis that High River and its affiliates own as of any day, the number
of shares owned by High River and its affiliates on a fully diluted basis
(assuming conversion of all preferred stock and exercise of all outstanding
options and warrants owned by High River and its affiliates) as of such date
will be divided by 49,322,275 (as adjusted by any anti-dilution adjustments made
with respect to the shares of Common Stock owned by High River and its
affiliates after the date of the issuance of the Series D Preferred Stock).
Until July 19, 2001, High River will have a right of first refusal with respect
to equity sold by NEG for cash in private placement transactions.
The Common Stock currently is listed for trading on The Nasdaq National
Market. The Nasdaq has a voting rights policy that prohibits continued listing
of securities of issuers that disenfranchise public common stockholders by any
corporate action or issuance that disparately reduces or restricts the voting
rights of existing common stock shareholders (the "Voting Rights Policy"). If
rights similar to the Series D Preferred Stock Contingent Voting Rights were to
be granted to holders of common stock of an issuer and such holders had not paid
for their proportionate share of the vote, the Nasdaq would deem the exercise of
such rights a violation of the Voting Rights Policy.
The Voting Rights Policy does not apply, however, to any class of security
having a preference or priority over the issuer's common stock as to dividends,
interest payments, redemption or payments on liquidation, if the voting rights
of such securities only become effective as a result of specified events which
reasonably can be expected to jeopardize the issuer's financial ability to meet
its payment obligations to that class of
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securities. The Company believes that the Series D Preferred Stock falls within
this exclusion from the Voting Rights Policy, as it has a liquidation preference
over Common Stock and the events triggering the Series D Preferred Stock
Contingent Voting Rights reasonably can be expected to jeopardize the Company's
ability to pay the liquidation preference. The Nasdaq has advised the Company,
however, that while it does not consider the grant of the Series D Preferred
Stock Contingent Voting Rights a violation of the Voting Rights Policy which
would cause the Nasdaq to take any action, any exercise of those rights would
constitute a violation of the Voting Rights Policy as currently interpreted by
the Nasdaq. As a result, the Nasdaq may exclude the Common Stock from trading on
The Nasdaq National Market. If that happens, no market may exist for the Common
Stock. The Company would explore other options to provide a means to trade
shares of Common Stock, including trading the Common Stock in the over the
counter market or in the pink sheets or providing other means by which potential
sellers and buyers of Common Stock may contact each other for purposes of
trading in the Common Stock. There can be no assurance these means will provide
a market for, or not adversely affect the price of, the Common Stock.
SERIES E PREFERRED STOCK
The Series E Preferred Stock immediately is convertible into shares of
Common Stock initially at a conversion price of $2.25 per share, entitling the
holders to receive 2,222,222 shares of Common Stock. Such conversion price is
subject to certain anti-dilution adjustments, including adjustments that may
occur if shares of Common Stock are issued by the Company below the conversion
price of the Series E Preferred Stock. The Series E Preferred Stock has a
liquidation preference over the Common Stock, but each of the Series B Preferred
Stock and the Series C Preferred Stock has a liquidation preference over the
Series E Preferred Stock. The Series E Preferred Stock liquidation preference
ranks pari passu with the Series D Preferred Stock liquidation preference. The
Series E Preferred Stock does not require the payment of any dividends but will
participate with the Common Stock in any dividends or distributions to the
Common Stock on an as converted basis.
The holders of Series E Preferred Stock are entitled to one vote for each
share as to matters upon which by law they are entitled to vote as a class. The
approval of a majority of the Series E Preferred Stock, voting separately as a
class, is required to make changes to the Certificate of Incorporation or
By-Laws which adversely affect the Series E Preferred Stock, or to authorize or
issue additional shares of Series E Preferred Stock or to issue preferred stock
equal to or senior to the Series E Preferred Stock as to liquidation. The
holders of Series E Preferred Stock will be entitled to vote with the Common
Stock on all matters submitted to the holders of Common Stock, and such holders
will have the number of votes per share of Series E Preferred Stock as is equal
to the number of shares of Common Stock into which such share is convertible on
the record date for such vote.
The Series E Preferred Stock automatically will be converted into Common
Stock if investment partnerships or accounts managed by KAIM own less than 7.5%
of the Common Stock on a fully diluted basis. To determine the percentage of
Common Stock on a fully diluted basis that investment partnerships or accounts
managed by KAIM own as of any day, the number of shares owned by investment
partnerships or accounts managed by KAIM on a fully diluted basis (assuming
conversion of all preferred stock and exercise of all outstanding options and
warrants owned by investment partnerships or accounts managed by KAIM) as of
such date will be divided by 49,322,275 (as adjusted by any anti-dilution
adjustments made with respect to the shares of Common Stock owned by investment
partnerships or accounts managed by KAIM after the date of the issuance of the
Series E Preferred Stock).
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on all matters voted on by shareholders. The shares of the Common Stock
do not have cumulative voting rights with respect to election of directors.
Subject to the Series D Preferred Stock Contingent Voting Rights, the holders of
more than 50% of the shares of the Common Stock (including the number of shares
of Common Stock into which the Series E Preferred Stock is converted for
purposes of voting with the Common Stock) voting for the election of the
directors can elect all of the directors to be elected by holders of the Common
Stock and
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Series E Preferred Stock, in which case the holders of the remaining shares of
Common Stock and remaining shares of Series E Preferred Stock will not be able
to elect any directors. Upon any liquidation, dissolution, or winding-up of the
affairs of the Company, holders of the Common Stock would be entitled to
receive, pro rata, all of the assets of the Company available for distribution
to shareholders, after payment of any liquidation preference of any Preferred
Stock that may be issued and outstanding at the time. Holders of the Common
Stock have no subscription, redemption, sinking fund, or preemptive rights.
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
Notes which may be relevant to a holder or prospective purchaser of one or more
of such Notes. This summary does not purport to cover all the material tax
consequences of the acquisition, ownership and disposition of 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 has
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 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.
EXCHANGE OF OUTSTANDING NOTES FOR EXCHANGE NOTES
The Exchange Notes will be identical in all material respects to the
Outstanding Notes. Because the Exchange Notes will not be considered to differ
materially in kind or extent from the Outstanding Notes an exchange of
Outstanding Notes for Exchange Notes as described under "The Exchange Offer"
will be treated as a "non-event" for federal income tax purposes. As a result,
no material federal income tax consequences will result to holders exchanging
Outstanding Notes for Exchange Notes. The holder will have an initial adjusted
tax basis and holding period for the Exchange Notes equal to its adjusted tax
basis and holding period in the exchanged Outstanding Notes.
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.
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OPTIONAL REDEMPTION
The Company, as 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, plus accrued and unpaid interest to the date of redemption,
or for the Make-Whole Price plus accrued and unpaid interest to the date of
redemption if redeemed prior to November 1, 2001. In addition, the Company may,
at its option, redeem up to $35 million 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. 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.
MARKET DISCOUNT
If a holder purchases a Note for less than the "Note Issue Price," 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). In general, the "Note Issue Price" for a Note is its stated
redemption price at maturity. 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 or the portion attributable to the partial principal payment. 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 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.
ACQUISITION PREMIUM
If a subsequent holder acquires a Note for an amount which is greater than
the Note Issue Price, 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
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<PAGE> 120
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.
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 for an Exchange Note (see
"Exchange of Outstanding Notes for Exchange Notes" above), 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 will be long-term capital gain or loss if the Note has a
holding period of more than one year 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 percent 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.
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
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<PAGE> 121
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 Strasburger &
Price, L.L.P., Dallas, Texas.
EXPERTS
The financial statements of the Company at December 31, 1995 and 1994, and
for each of the three years in the period ended December 31, 1995 included in
this Prospectus, and the statements of operating revenues and direct operating
expenses of the Mustang Island Interest, the Oak Hill Interest and the Enron
Interest for the years ended December 31, 1994 and 1993 appearing in the
Company's Form 8-K/A No. 1 dated June 30, 1995, have been audited by Ernst &
Young LLP independent auditors, as set forth in their reports thereon appearing
elsewhere herein or incorporated herein by reference. Such financial statements
and statements of operating revenues and direct operating expenses are included
and incorporated herein by reference, respectively, in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
The consolidated financial statements of Alexander (subsequently NEG-OK) 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 ANEC for the year ended December 31, 1993 (not presented herein), prior to
the merger of ANEC and NEG-OK, 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 Summary Reserve and Appraisal Report of Netherland & Sewell,
independent petroleum engineers, containing estimates of the Company's proved
oil and natural gas reserves and related future net revenues and the present
value thereof, set forth as Annex A-1 hereto, and the estimates of proved oil
and natural gas reserves and related future net revenues and the present value
thereof as of June 30, 1996 included in this Prospectus have been derived from
the reserve report of such firm. All of such information has been so included
herein in reliance upon the authority of such firm as experts in such matters.
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The Summary Reserve and Appraisal Report of Netherland & Sewell,
independent petroleum engineers, containing estimates of the Company's proved
oil and natural gas reserves and related future net revenues and the present
value thereof relating to the Lake Boeuf Acquisition, set forth as Annex A-2
hereto, and the estimates of proved oil and natural gas reserves and related
future net revenues and the present value thereof as of June 30, 1996 included
in this Prospectus have been derived from the reserve report of such firm. All
of such information has been so included herein in reliance upon the authority
of such firm as experts in such matters.
The Summary Reserve and Appraisal Report of Netherland & Sewell containing
estimates of NEG's proved oil and natural gas reserves and related future net
revenues and the present value thereof, set forth as Annex B hereto, and the
estimates of proved oil and natural gas reserves and related future net revenues
and the present value thereof as of December 31, 1995 included in this
Prospectus have been derived from the reserve report of such firm. All of such
information has been so included herein in reliance upon the authority of such
firm as experts in such matters.
The Summary Reserve and Appraisal Report of Netherland & Sewell containing
estimates of NEG-OK's proved oil and natural gas reserves and related future net
revenues and the present value thereof, set forth as Annex C hereto, and the
estimates of proved oil and natural gas reserves and related future net revenues
and the present value thereof as of December 31, 1995 included in this
Prospectus have been derived from the reserve report of such firm. All of such
information has been so included herein in reliance upon the authority of such
firm as experts in such matters.
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GLOSSARY
Wherever used herein, the following terms shall have the meanings
specified.
Bbl -- One stock tank barrel, or 42 US gallons liquid volume, used herein
in reference to crude oil or other liquid hydrocarbons.
Bcf -- One billion cubic feet.
Bcfe -- One billion cubic feet of natural gas equivalent.
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 but 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. 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.
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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.
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.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Pro Forma Combined Condensed Financial Statements (unaudited):
Pro Forma Combined Condensed Statements of Operations............................ F-3
Pro Forma Combined Condensed Balance Sheet at September 30, 1996................. F-6
Notes to Pro Forma Combined Condensed Financial Statements....................... F-7
Historical Consolidated Financial Statements:
The Company:
Report of Independent Auditors................................................... F-12
Consolidated Balance Sheets at December 31, 1994 and 1995 and September 30, 1996
(unaudited)..................................................................... F-13
Consolidated Statements of Operations for the years ended December 31, 1993, 1994
and 1995 and the nine months ended September 30, 1995 and 1996 (unaudited)...... F-14
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994
and 1995 and the nine months ended September 30, 1995 and 1996 (unaudited)...... F-15
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1993, 1994 and 1995 and the nine months ended September 30, 1996
(unaudited)..................................................................... F-16
Notes to Consolidated Financial Statements....................................... F-17
NEG-OK:
The following financial statements of NEG-OK are incorporated herein by reference
and can be found on pages F-31 through F-53 in the Proxy Statement filed with the
Commission, as part of, or in conjunction with, the Registration Statement on
Form S-4 (Registration No. 333-9045), as amended, originally filed with the
Commission on July 29, 1996, and declared effective August 8, 1996:
Audited Consolidated Balance Sheets of Alexander Energy Corporation
(subsequently National Energy Group of Oklahoma, Inc.) as of December 31, 1994
and 1995 and the related Consolidated Statements of Operations, Stockholders'
Equity and Cash Flows for each of the three years in the period ended December
31, 1995.
The following financial statements of NEG-OK are incorporated herein by reference
and can be found on pages 1 through 4 in the Quarterly Report on Form 10-Q of
Alexander Energy Corporation, for the quarter ended June 30, 1996 filed with the
Commission on August 14, 1996:
Unaudited Condensed Consolidated Balance Sheet of Alexander Energy Corporation
(subsequently National Energy Group of Oklahoma, Inc.) as of June 30, 1996, and
the related Unaudited Condensed Consolidated Statements of Operations for the
three and six-month periods ended June 30, 1995 and 1996 and the Unaudited
Condensed Consolidated Statements of Cash Flows for the six-month periods ended
June 30, 1995 and 1996.
</TABLE>
F-1
<PAGE> 126
PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The accompanying Pro Forma Combined Condensed Financial Statements reflect
the historical financial position and results of operations of the Company
adjusted for certain historical acquisitions of the Company using the purchase
method of accounting, including the Merger and Related Transactions (the Equity
Private Placement and borrowings under the Credit Facility to refinance certain
indebtedness of the Company and NEG-OK), the Lake Boeuf Acquisition, the Initial
Offering (including the sale of the Notes and the application of the net
proceeds thereof) and the Exchange Offer. Because the Exchange Notes are being
issued under the same financial terms and conditions as the Outstanding Notes,
the Exchange Offer has no impact on the pro forma data. The Pro Forma Combined
Condensed Financial Statements are based on the historical financial statements
of the Company included in this Prospectus, and the historical statements of
operating revenues and direct operating expenses of certain oil and gas
properties previously acquired by the Company (the "NEG Acquisitions") included
in the Company's Current Reports on Form 8-K and Form 8-K/A dated June 30, 1995.
The Pro Forma Combined Condensed Financial Statements are also based on
historical financial statements of NEG-OK for the year ended December 31, 1995
included in the Company's current reports on Form 8-K and Form 8-K/A dated
August 29, 1996 and certain other unaudited financial information of NEG-OK.
The Pro Forma Combined Condensed Balance Sheet as of September 30, 1996
assumes the Initial Offering had been consummated on that date. The Pro Forma
Combined Condensed Statements of Operations for the nine months ended September
30, 1995 and 1996 and the year ended December 31, 1995 have been prepared
assuming the Merger and Related Transactions, the Lake Boeuf Acquisition, and
the Initial Offering had been consummated on January 1, 1995. The Pro Forma
Combined Condensed Statements of Operations for the nine months ended September
30, 1995 and for the year ended December 31, 1995, have been prepared with
additional pro forma adjustments for the NEG Acquisitions, assuming such
acquisitions had been consummated on January 1, 1995.
The pro forma adjustments are based upon available information and
assumptions that management of the Company believes are reasonable. The Pro
Forma Combined Condensed Financial Statements do not purport to represent the
financial position or results of operations which would have occurred had such
transactions been consummated on the dates indicated or the Company's financial
position or results of operations for any future date or period. These Pro Forma
Combined Condensed Financial Statements and notes thereto should be read in
conjunction with the historical financial statements and notes thereto described
above.
F-2
<PAGE> 127
NATIONAL ENERGY GROUP, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NEG ACQUISITIONS
---------------------------------------------------------
MUSTANG OAK HILL ENRON
ISLAND INTEREST INTEREST INTEREST
THREE MONTHS FIVE MONTHS FIVE MONTHS NEG
NEG ENDED MARCH 31, ENDED MAY ENDED MAY PRO FORMA PRO NEG-OK
HISTORICAL 1995 31, 1995 31, 1995 ADJUSTMENTS FORMA HISTORICAL
---------- --------------- ----------- ----------- ----------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Oil and gas sales................. $ 7,858 $ 127 $ 868 $ 401 $ -- $ 9,254 $ 16,599
Well operator and management fees:
Related parties................. -- -- -- -- -- -- 308
Others.......................... 137 -- -- -- -- 137 2,334
------- ---- ---- ---- ------- ------- -------
7,995 127 868 401 -- 9,391 19,241
Cost and expenses:
Lease operating................... 1,732 57 212 145 -- 2,146 5,031
Oil and gas production taxes...... 416 7 3 30 -- 456 1,077
Depreciation, depletion, and
3,149 -- -- -- 870(1) 4,019 9,252
amortization....................
Provision for impairment of oil
and
gas properties.................. -- -- -- -- -- -- 2,300
Abandoned merger and note
offering expenses............... -- -- -- -- -- -- 752
General and administrative........ 1,772 -- -- -- -- 1,772 3,442
------- ---- ---- ---- ------- ------- -------
7,069 64 215 175 870 8,393 21,854
------- ---- ---- ---- ------- ------- -------
Operating income (loss)............. 926 63 653 226 (870) 998 (2,613)
Interest expense:
Stockholder....................... -- -- -- -- -- -- (447)
Others............................ (1,032) -- -- -- (278)(2) (1,310) (3,513)
Gain (loss) on securities........... 221 -- -- -- -- 221 --
Interest income and other........... 91 -- -- -- -- 91 370
------- ---- ---- ---- ------- ------- -------
Income (loss) before income taxes
and extraordinary item............ 206 63 653 226 (1,148) -- (6,203)
Income tax benefit.................. -- -- -- -- -- -- 1,744
------- ---- ---- ---- ------- ------- -------
Income (loss) before extraordinary
item.............................. $ 206 $ 63 $ 653 $ 226 $(1,148) $ -- $ (4,459)
======= ==== ==== ==== ======= ======= =======
Loss per common share before
extraordinary item................ $ (0.05) $ (0.06)(15) $ (0.36)
======= ======= =======
Weighted average number of
common and common equivalent
shares outstanding................ 10,702 1,065(3) 11,767 12,345
======= ======= ======= =======
<CAPTION>
PRO FORMA ADJUSTMENTS PRO FORMA
----------------------------- ADJUSTMENTS
FOR THE MERGER FOR THE FOR THE
AND RELATED LAKE BOEUF PRO INITIAL AS
TRANSACTIONS ACQUISITION FORMA OFFERING ADJUSTED
-------------- ------------ ------- ----------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and gas sales................. $ 158(4) $ -- $26,011 -- $ 26,011
Well operator and management fees:
Related parties................. -- -- 308 -- 308
Others.......................... -- -- 2,471 -- 2,471
------- ------ ------- ------- --------
158 -- 28,790 -- 28,790
Cost and expenses:
Lease operating................... -- -- 7,177 -- 7,177
Oil and gas production taxes...... 11(4) -- 1,544 -- 1,544
Depreciation, depletion, and
63(4)
amortization.................... 1,871(5) -- 15,205 -- 15,205
Provision for impairment of oil
and
gas properties.................. -- -- 2,300 -- 2,300
Abandoned merger and note
offering expenses............... -- -- 752 -- 752
General and administrative........ (105)(6) -- 5,109 -- 5,109
------- ------ ------- ------- --------
1,840 -- 32,087 -- 32,087
------- ------ ------- ------- --------
Operating income (loss)............. (1,682) -- (3,297) -- (3,297)
Interest expense:
Stockholder....................... 350(6) -- (97) -- (97)
Others............................ (1,240)(6) -- (6,063) (5,034)(11) (11,097)
Gain (loss) on securities........... -- -- 221 -- 221
Interest income and other........... -- -- 461 -- 461
------- ------ ------- ------- --------
Income (loss) before income taxes
and extraordinary item............ (2,572) -- (8,775) (5,034) (13,809)
Income tax benefit.................. 900(8) -- 2,644 1,762(12) 4,406
------- ------ ------- ------- --------
Income (loss) before extraordinary
item.............................. $ (1,672) $ -- $(6,131) $(3,272) $ (9,403)
======= ====== ======= ======= ========
Loss per common share before
extraordinary item................ $ (0.20)(16) $ (0.30)(16)
======= ========
Weighted average number of
common and common equivalent
shares outstanding................ 8,702(9) 1,758(10) 34,572 34,572
======= ====== ======= ========
</TABLE>
See accompanying notes to pro forma combined condensed financial statements.
F-3
<PAGE> 128
NATIONAL ENERGY GROUP, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1995
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NEG ACQUISITIONS
---------------------------------------------------------
MUSTANG OAK HILL ENRON
ISLAND INTEREST INTEREST INTEREST
THREE MONTHS FIVE MONTHS FIVE MONTHS
NEG ENDED MARCH 31, ENDED MAY ENDED MAY PRO FORMA NEG NEG-OK
HISTORICAL 1995 31, 1995 31, 1995 ADJUSTMENTS PRO FORMA HISTORICAL
---------- --------------- ----------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Oil and gas sales.............. $4,861 $ 127 $ 868 $ 401 $ -- $ 6,257 $ 12,793
Well operator and management
fees:
Related parties.............. -- -- -- -- -- -- 217
Others....................... 101 -- -- -- -- 101 1,865
------ ---- ---- ---- ------- ------- -------
4,962 127 868 401 -- 6,358 14,875
Cost and expenses:
Lease operating................ 1,138 57 212 145 -- 1,552 3,844
Oil and gas production taxes... 261 7 3 30 -- 301 785
Depreciation, depletion, and
amortization................. 1,711 -- -- -- 870(1) 2,581 6,387
Abandoned merger and note
offering expenses........... -- -- -- -- -- -- 731
General and administrative.... 1,015 -- -- -- -- 1,015 2,494
------ ---- ---- ---- ------- ------- -------
4,125 64 215 175 870 5,449 14,241
------ ---- ---- ---- ------- ------- -------
Operating income (loss)......... 837 63 653 226 (870) 909 634
Interest expense:
Stockholder................... -- -- -- -- -- -- (348)
Others........................ (653) -- -- -- (278)(2) (931) (2,634)
Gain (loss) on securities....... 221 -- -- -- -- 221 --
Interest income and other....... 81 -- -- -- -- 81 268
------ ---- ---- ---- ------- ------- -------
Income (loss) before income
taxes and extraordinary
item.......................... 486 63 653 226 (1,148) 280 (2,080)
Income tax benefit.............. -- -- -- -- -- -- 770
------ ---- ---- ---- ------- ------- -------
Income (loss) before
extraordinary item............ $ 486 $ 63 $ 653 $ 226 $(1,148) $ 280 $ (1,310)
====== ==== ==== ==== ======= ======= =======
Loss per common share before
extraordinary item............ $(0.00) $ (0.02)(15) $ (0.11)
====== ======= =======
Weighted average number of
common and common equivalent
shares outstanding............ 10,307 1,065(3) 11,372 12,309
====== ======= ======= =======
<CAPTION>
PRO FORMA
ADJUSTMENTS
------------------------------- PRO FORMA
FOR THE MERGER FOR THE ADJUSTMENTS FOR
AND RELATED LAKE BOEUF PRO THE INITIAL AS
TRANSACTIONS ACQUISITION FORMA OFFERING ADJUSTED
-------------- ------------ ------- --------------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and gas sales.............. $ 119(4) $ $19,169 $ -- $19,169
Well operator and management
fees:
Related parties.............. -- -- 217 -- 217
Others....................... -- 1,966 -- 1,966
------- ----- ------- ------- -------
119 -- 21,352 -- 21,352
Cost and expenses:
Lease operating................ -- -- 5,396 -- 5,396
Oil and gas production taxes... 9(4) -- 1,095 -- 1,095
Depreciation, depletion, and
amortization................. 59(4)
-- 11,382 -- 11,382
2,355(5)
Abandoned merger and note
offering expenses........... -- -- 731 -- 731
General and administrative.... -- -- 3,509 -- 3,509
------- ----- ------- ------- -------
2,423 -- 22,113 -- 22,113
------- ----- ------- ------- -------
Operating income (loss)......... (2,304) -- (761) -- (761)
Interest expense:
Stockholder................... 275(6) -- (73) -- (73)
Others........................ (1,224)(6) -- (4,789) (3,664)(11) (8,453)
Gain (loss) on securities....... -- -- 221 -- 221
Interest income and other....... -- -- 349 -- 349
------- ----- ------- ------- -------
Income (loss) before income
taxes and extraordinary
item.......................... (3,253) -- (5,053) (3,664) (8,717)
Income tax benefit.............. 999(8) -- 1,769 1,282(12) 3,051
------- ----- ------- ------- -------
Income (loss) before
extraordinary item............ $ (2,254) $ -- $(3,284) $(2,382) $(5,666)
======= ===== ======= ======= =======
Loss per common share before
extraordinary item............ $ (0.12 (16) $ (0.19) (16)
======= =======
Weighted average number of
common and common equivalent
shares outstanding............ 8,616(9) 1,758(10) 34,055 34,055
======= ===== ======= =======
</TABLE>
See accompanying notes to pro forma combined condensed financial statements.
F-4
<PAGE> 129
NATIONAL ENERGY GROUP, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NEG NEG-OK PRO FORMA ADJUSTMENTS
HISTORICAL HISTORICAL ---------------------------- PRO FORMA
FOR NINE FOR 242 FOR THE ADJUSTMENTS
MONTHS ENDED DAYS ENDED MERGER FOR THE FOR THE
SEPTEMBER 30, AUGUST 29, AND RELATED LAKE BOEUF PRO INITIAL AS
1996 1996 TRANSACTIONS ACQUISITION FORMA OFFERING ADJUSTED
------------- ---------- ------------ ----------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Oil and gas sales....... $ 13,181 $ 12,415 $ (116)(4) $ -- $ 25,480 $ -- $25,480
Well operator and
management fees:
Related parties....... -- 122 -- -- 122 -- 122
Others................ 314 1,191 -- -- 1,505 -- 1,505
-------- -------- -------- ------- -------- ------- -------
13,495 13,728 (116) -- 27,107 -- 27,107
Cost and expenses:
Lease operating......... 2,096 2,460 -- -- 4,556 -- 4,556
Oil and gas production
taxes................. 663 761 (7)(4) -- 1,417 -- 1,417
Depreciation, depletion,
and amortization...... 5,444 5,564 (52)(4)
-- 10,994 -- 10,994
38(5)
Writedown of oil and gas
properties............ 43,497 -- (43,497)(7) -- -- -- --
General and
administrative........ 1,957 1,672 -- -- 3,629 -- 3,629
-------- -------- -------- ------- -------- ------- -------
53,657 10,457 (43,518) -- 20,596 -- 20,596
-------- -------- -------- ------- -------- ------- -------
Operating income (loss)... (40,162) 3,271 43,402 -- 6,511 -- 6,511
Interest expense:
Stockholder............. (30) (239) 200(6) -- (69) -- (69)
Others.................. (1,796) (2,332) 684(6) -- (3,444) (5,004)(11) (8,448)
Loss on securities........ (118) -- -- -- (118) -- (118)
Interest income and
other................... 154 377 -- -- 531 -- 531
-------- ------- -------- ------ -------- ------- -------
Income (loss) before
income taxes............ (41,952) 1,077 44,286 -- 3,411 (5,004) (1,593)
Benefit (provision) for
income taxes............ 15,146 (366) (15,224)(7) -- (1,194) 1,751(12) 557
(750)(8)
-------- ------- -------- ------ -------- ------- -------
Net income (loss)......... $(26,806) $ 711 $ 28,312 $ -- $ 2,217 $(3,253) $(1,036)
======== ======= ======== ====== ======== ======= =======
Income (loss) per common
share................... $ (1.87) $ 0.06 $ 0.03(16) $ (0.05) (16)
======== ======= ======== =======
Weighted average number of
common and common
equivalent shares
outstanding............. 14,693 12,501 15,634(9) 1,758(10) 44,586 (6,925)(13) 37,661
======== ======= ======== ====== ======= ======= =======
</TABLE>
See accompanying notes to pro forma combined condensed financial statements.
F-5
<PAGE> 130
NATIONAL ENERGY GROUP, INC.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS FOR PRO FORMA
NEG THE INITIAL AS
HISTORICAL OFFERING ADJUSTED
---------- ---------------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 8,650 $ 96,000(14) $ 39,650
(65,000)(14)
Accounts receivable............................................................... 6,953 -- 6,953
Prospect inventory held for resale................................................ 1,300 -- 1,300
Other............................................................................. 1,389 -- 1,389
---------- -------- --------
Total current assets................................................................ 18,292 31,000 49,292
Oil and gas properties
Proved............................................................................ 149,351 -- 149,351
Unproved.......................................................................... 7,726 -- 7,726
---------- -------- --------
157,077 -- 157,077
Accumulated depletion, depreciation and amortization.............................. 10,289 -- 10,289
---------- -------- --------
Net oil and gas properties.......................................................... 146,788 -- 146,788
Other property and equipment........................................................ 1,506 -- 1,506
Accumulated depreciation.......................................................... 747 -- 747
---------- -------- --------
759 -- 759
Other assets........................................................................ 995 4,000(14) 4,408
(587)(14)
---------- -------- --------
Total assets........................................................................ $ 166,834 $ 34,413 $201,247
========== ======== ========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C> <C>
Current liabilities:
Accounts payable.................................................................. $ 6,905 $ -- $ 6,905
Accrued merger costs.............................................................. 2,520 -- 2,520
Gas balancing, deferred revenue and oil and gas proceeds.......................... 4,103 -- 4,103
Note payable and current portion of long-term debt................................ 3,016 (3,000)(14) 16
---------- -------- --------
Total current liabilities........................................................... 16,544 (3,000) 13,544
Long-term debt, less current portion................................................ 63,337 (62,000)(14)
101,337
100,000(14)
Long-term liabilities............................................................... 3,180 -- 3,180
Deferred income taxes............................................................... 6,631 -- 6,631
Stockholders' equity:
Convertible preferred stock....................................................... 243 -- 243
Common stock...................................................................... 352 -- 352
Additional paid-in capital........................................................ 107,791 -- 107,791
Deficit........................................................................... (31,244) (587)(14) (31,831)
---------- -------- --------
Total stockholders' equity.......................................................... 77,142 (587) 76,555
---------- -------- --------
Total liabilities and stockholders' equity.......................................... $ 166,834 $ 34,413 $201,247
========== ======== ========
Shares of common stock outstanding.................................................. 35,222 35,222
========== ========
</TABLE>
See accompanying notes to pro forma combined condensed financial statements.
F-6
<PAGE> 131
NATIONAL ENERGY GROUP, INC.
NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A -- PRO FORMA ADJUSTMENTS FOR THE NEG ACQUISITIONS
In April 1995, the Company acquired a producing oil and gas property in the
Mustang Island Field in offshore Nueces County, Texas ("Mustang Island
Interest") from Sierra Mineral Development, L.C. and LLOG Production Company
(the Company assumed Sierra Mineral's contractual rights and obligations with
LLOG). In June 1995, the Company completed the acquisition of producing gas
properties in the Oak Hill Field in Rusk County, Texas ("Oak Hill Interest")
from Sierra 1994 I Limited Partnership ("Sierra"). In June 1995, the Company
also completed the acquisition of producing oil and gas properties in Eddy
County, New Mexico, from Enron Oil and Gas Company ("Enron Interest").
Collectively, these properties are referred to as the NEG Acquisitions.
The consideration given for the acquisition of the Mustang Island Interest
consisted on $900,000 in cash and 352,500 shares of the Company's Common Stock.
The Company funded the cash portion of the Mustang Island acquisition with
available cash balances. The consideration paid by the Company to Sierra for the
Oak Hill Interest consisted of $7.2 million in cash, 612,301 shares of the
Company's Common Stock and warrants to purchase 200,000 shares of the Company's
Common Stock at a price per share of $2.00. The cash portion of the acquisition
was funded primarily by the Company's reducing, revolving credit facility with
Bank One, Texas, N.A. ("Prior Credit Facility"). The consideration given for the
acquisition of the Enron Interest was approximately $2.1 million in cash. This
acquisition was funded by borrowings under the Company's Prior Credit Facility
and available cash balances.
The results of operations of the NEG Acquisitions are included in the
historical results of operations of the Company for periods subsequent to their
respective dates of acquisition. The accompanying Pro Forma Combined Condensed
Statements of Operations for the year ended December 31, 1995 and the nine
months ended September 30, 1995 have been prepared as if the NEG Acquisitions
had occurred on January 1, 1995, and reflect the following adjustments:
(1) To adjust depletion, depreciation, and amortization to reflect the
effect of the NEG Acquisitions. Depletion, depreciation, and amortization
of the oil and gas properties is computed using the unit-of-production
method.
(2) To adjust interest expense to reflect $9.3 million additional
borrowings under the Company's Prior Credit Facility directly related to
the acquisition of the Oak Hill interest and the Enron Interest. The
adjustment was computed using the actual interest rate applicable to
borrowings under such agreement during the periods presented. The
acquisition of the Mustang Island Interest was funded with available cash
balances.
(3) To adjust the weighted average number of common shares outstanding
for shares of the Company's Common Stock issued as a result of the
acquisition of the Mustang Island Interest and the Oak Hill Interest and to
reduce Texas Gas Fund I's NPI interest in the GAU.
NOTE B -- PRO FORMA ADJUSTMENTS FOR THE MERGER AND RELATED TRANSACTIONS
On August 29, 1996, the Company completed the acquisition of Alexander
Energy Corporation ("Alexander"). The transaction consisted of a merger (the
"Merger") of Alexander with and into National Energy Group of Oklahoma, Inc.,
formerly known as NEG-OK, Inc., a wholly-owned subsidiary of the Company
("NEG-OK"). The Merger has been accounted for using the purchase method of
accounting. In completing the Merger, the Company issued approximately 21.1
million shares of Common Stock in exchange for all of the issued and outstanding
NEG-OK common stock, based on the exchange ratio of 1.7 shares of the Company's
Common Stock for each outstanding share of NEG-OK Common Stock and the number of
shares of NEG-OK Common Stock outstanding at the Effective Time of the Merger.
F-7
<PAGE> 132
NATIONAL ENERGY GROUP, INC.
NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
The cost of acquiring NEG-OK was approximately $69.4 million, consisting of
the following (in thousands):
<TABLE>
<S> <C>
Fair value of 21.1 million shares of the Company's Common Stock issued.......... $ 63,404
Cost of 105,740 shares of NEG-OK common stock owned by the Company.............. 288
NEG-OK stock options and warrants assumed....................................... 340
Estimated fair value of 122,324 shares of the Company's Common Stock and 800,000
warrants issued for services provided by investment advisors.................. 1,322
Other investment advisor, legal and accounting professional fees and other
Merger related costs.......................................................... 4,009
-------
$ 69,393
=======
</TABLE>
The fair value of the securities issued in connection with the Merger has
been calculated using the price of the Company's Common Stock at the time the
Merger was announced to the public of $3.00 per share.
The accompanying Pro Forma Combined Condensed Statements of Operations
reflect the following adjustments for the Merger:
(4) To conform NEG-OK's method of accounting for natural gas
imbalances with the method utilized by the Company.
(5) To adjust depletion, depreciation, and amortization to reflect the
Company's purchase price allocated to property and equipment using the unit
of production method utilized by the Company.
(6) To adjust interest expense and amortization of loan origination
costs to reflect $65.0 million of initial borrowings under the Credit
Facility and repayment of $67.1 million of certain indebtedness of the
Company and NEG-OK. The calculation of interest expense assumes repayment
of the initial borrowings beginning in January 1995 in accordance with the
terms of the Credit Facility. The interest on borrowings under the Credit
Facility was computed using the applicable bank base rate in effect during
the periods presented. An increase of .125% in the assumed interest rate
would increase pro forma interest expense by $78,000, $57,000 and $35,000
for the year ended December 31, 1995 and the nine months ended September
30, 1995 and 1996, respectively.
(7) To eliminate the writedown of oil and gas properties resulting
from the Merger and the income tax effect related thereto. Under the full
cost method of accounting, the carrying value of oil and gas properties
(net of related deferred taxes) is generally not permitted to exceed the
sum of the present value (10% discount rate) of estimated future net cash
flows, after tax, from proved reserves, based on current prices and costs,
plus the lower of cost or estimated fair value of unproved properties (the
"cost center ceiling"). Based upon the combined cost center ceiling at
August 29, 1996 and the preliminary allocation of the Company's purchase
price, the purchase price allocated to oil and gas properties was in excess
of the cost center ceiling using oil and natural gas prices being received
by the Company and NEG-OK in August 1996 of $20.75 per Bbl and $2.21 per
Mcf. The amount of such excess ($28.3 million, net of $15.2 million of
income tax benefit) was charged to expense in the third quarter of 1996.
See Note 2 of Notes to Consolidated Financial Statements.
(8) To adjust the provision for income taxes for the change in
financial taxable income as a result of entries (4), (5) and (6).
(9) To reflect the issuance of 100,000 shares of the Company's Series
D Preferred and 50,000 shares of the Company's Series E Preferred pursuant
to the Equity Private Placement and the incremental effect of the issuance
of shares of the Company's Common Stock pursuant to the Merger, including
122,324 shares issued for services provided by investment advisors.
F-8
<PAGE> 133
NATIONAL ENERGY GROUP, INC.
NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- PRO FORMA ADJUSTMENTS FOR THE ACQUISITION OF THE SOUTH LAKE BOEUF
PROPERTIES (THE "LAKE BOEUF ACQUISITION")
In September 1996, the Company completed the Lake Boeuf Acquisition, in
which the Company acquired 87.5% of the working interests in two wells and
certain proved undeveloped reserves in LaFourche Parish, Louisiana. The purchase
price consisted of $1.5 million in cash and 1,758,460 shares of the Company's
Common Stock. The accompanying Pro Forma Combined Condensed Statements of
Operations have been prepared as if the Lake Boeuf Acquisition had been
consummated on January 1, 1995 and reflects the following adjustment:
(10) To reflect the issuance of 1,758,460 shares of the Company's
Common Stock in the Lake Boeuf Acquisition. The historical results of the
one producing well were not significant and are excluded from the pro forma
results of operations.
NOTE D -- PRO FORMA ADJUSTMENTS FOR THE INITIAL OFFERING
The accompanying Pro Forma Combined Condensed Statements of Operations have
been prepared as if the Offering had occurred on January 1, 1995 and reflects
the following adjustments:
(11) To record an estimated increase in interest expense resulting
from (i) the application of $65.0 million of the net proceeds to the
Company from the Initial Offering to reduce indebtedness under the Credit
Facility, (ii) interest on the $100.0 million of Notes at a 10.75% interest
rate, (iii) elimination of amortization of loan origination costs
associated with the $65.0 million Credit Facility and (iv) amortization of
the capitalized issuance and related costs of $4.0 million. An increase of
.125% in the assumed interest rate would increase pro forma interest
expense by $125,000 for the year ended December 31, 1995 and $93,750 for
each of the nine months ended September 30, 1995 and 1996.
(12) To adjust the provision for income taxes for the change in
financial taxable income resulting from adjustment (19).
(13) To eliminate the effect of the issuance of the Company's Series D
Preferred and Series E Preferred from the loss per share computation for
the nine months ended September 30, 1996 because the effect was
antidilutive.
The accompanying unaudited pro forma combined condensed statements of
operations do not include any interest income from the investment of the cash
available after reduction of the outstanding borrowings or results of investing
such available cash in interest bearing instruments, the exploitation and
development of the Company's PDNP and PUD locations or oil and gas property
acquisitions.
The accompanying Pro Forma Combined Condensed Balance Sheet at September
30, 1996 has been prepared as if the Initial Offering had been consummated on
that date and includes the following adjustment:
(14) To record (i) the issuance of $100.0 million of Notes generating
net proceeds of $96.0 million (net of $4.0 million of discount and
associated costs of the Initial Offering), (ii) the reduction of
indebtedness outstanding under the Credit Facility of $65.0 million, and
(iii) the write-off of the Credit Facility loan origination costs.
F-9
<PAGE> 134
NATIONAL ENERGY GROUP, INC.
NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE E -- PRO FORMA EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share information is computed as follows:
(15) The pro forma loss per common share information for NEG adjusted
for the NEG Acquisitions is computed by dividing the net loss, adjusted for
preferred stock dividend requirements of $735,000 for the year ended
December 31, 1995 and $498,750 for the nine months ended September 30,
1995, by the pro forma weighted average common shares outstanding.
(16) Pro forma net income (loss) per common share information adjusted
for the Merger and related transactions and the Lake Boeuf Acquisition, and
as further adjusted for the Initial Offering, computed by dividing net
income (loss), adjusted for preferred stock dividend requirements of
$945,000 for the year ended December 31, 1995 and $708,750 for the nine
months ended September 30, 1995 and 1996 by the pro forma weighted average
common and common equivalent shares outstanding. Shares issuable upon
exercise of options and warrants and upon the conversion of preferred stock
are included in the computations of pro forma income per common and common
equivalent share if the effect is dilutive.
NOTE F -- PRO FORMA COMBINED SUPPLEMENTAL OIL AND GAS RESERVE AND STANDARDIZED
MEASURE INFORMATION
The following is a summary of the pro forma combined quantities of proved
reserves prepared by combining the historical information of the Company and
NEG-OK, derived from estimates prepared by the Company's and NEG-OK's respective
independent engineers, adjusted for the NEG Acquisitions, the Lake Boeuf
Acquisition, and conforming NEG-OK's method of accounting for natural gas
imbalances to the method utilized by the Company. See the historical financial
statements of the Company and NEG-OK, contained elsewhere herein.
<TABLE>
<CAPTION>
OIL GAS
(MBBL) (MMCF)
------ -------
(IN THOUSANDS)
<S> <C> <C>
December 31, 1994..................................................... 11,002 192,866
Purchases of reserves in place...................................... 21 360
Sales of minerals in place.......................................... (374) (4,384)
Extensions, discoveries, and other additions........................ 78 2,042
Revisions of previous estimates..................................... (2,287) (43,789)
Production.......................................................... (475) (11,830)
------ -------
December 31, 1995..................................................... 7,965 135,265
====== =======
June 30, 1996......................................................... 7,721 129,919
====== =======
Proved developed reserves:
December 31, 1994................................................... 3,804 106,754
December 31, 1995................................................... 3,257 78,649
June 30, 1996....................................................... 3,009 73,171
</TABLE>
The following is a summary of the pro forma combined standardized measure
of discounted net cash flows related to the proved crude oil and natural gas
reserves of the Company, NEG-OK and those acquired in the Lake Boeuf
Acquisition. For these calculations, estimated future cash flows from estimated
future production of proved reserves were computed using crude oil and natural
gas prices as of the end of each period presented. Future development and
production costs attributable to the proved reserves were estimated assuming
that existing conditions would continue over the economic lives of the
individual leases and costs were not escalated for the future. Estimated future
income tax expenses were calculated by applying future statutory tax rates
(based on the current tax law adjusted for permanent differences and tax
credits) to the estimated future pretax net cash flows related to proved crude
oil and natural gas reserves, less the tax basis of the properties involved.
F-10
<PAGE> 135
NATIONAL ENERGY GROUP, INC.
NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
The Company cautions against using this data to determine the fair value of
its crude oil and natural gas properties. To obtain the best estimate of fair
value of the crude oil and natural gas properties, forecasts of future economic
conditions, varying discount rates, and consideration of other than proved
reserves would have to be incorporated into the calculation. In addition, there
are significant uncertainties inherent in estimating quantities of proved
reserves and in projecting rates of production that impair the usefulness of the
data.
The pro forma combined standardized measure of discounted future net cash
flows relating to proved crude oil and natural gas reserves is summarized as
follows (in thousands):
<TABLE>
<S> <C>
December 31, 1995:
Future cash inflows........................................................ $ 413,385
Future production and development costs.................................... (179,612)
Future income tax expense.................................................. (37,843)
---------
Future net cash flows...................................................... 195,930
10% annual discount for estimated timing of cash flows..................... (67,167)
---------
Standardized measure of discounted future net cash flows................... $ 128,763
=========
June 30, 1996
Standardized measure of discounted future net cash flows................... $ 136,897
=========
</TABLE>
The following are the principal sources of change in the pro forma combined
standardized measure of discounted future net cash flows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
------------
<S> <C>
Balance at beginning of year................................................. $143,616
Sales and transfers of oil and gas produced, net of production costs......... (17,302)
Net changes in prices and production cost.................................... 26,000
Purchases of reserves in place............................................... 400
Extensions and discoveries, less related costs............................... 2,394
Revisions of previous quantity estimates..................................... (47,028)
Sales of reserves in place................................................... (3,723)
Accretion of discount........................................................ 11,339
Previously estimated development costs incurred during the year and change
future development costs................................................... 2,681
Net change in income taxes................................................... 11,923
Change in production rates and other......................................... (1,537)
--------
Net change................................................................... (14,853)
--------
Balance at end of year....................................................... $128,763
========
</TABLE>
F-11
<PAGE> 136
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
National Energy Group, Inc.
We have audited the accompanying balance sheets of National Energy Group,
Inc., as of December 31, 1994 and 1995, and the related statements of
operations, changes in stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of National Energy Group, Inc.,
at December 31, 1994 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
March 27, 1996
F-12
<PAGE> 137
NATIONAL ENERGY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- SEPTEMBER 30,
1994 1995 1996
----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.............................................. $ 2,593,645 $ 6,076,199 $ 8,650,146
Marketable securities.................................................. 1,182,150 1,824,724 --
Accounts receivable -- oil and gas sales............................... 344,972 1,407,349 5,042,829
Accounts receivable -- joint interest and other........................ 543,771 262,619 1,910,129
Accounts receivable -- related parties................................. 23,999 -- --
Prospect inventory held for resale..................................... -- -- 1,299,769
Other.................................................................. 267,731 335,751 1,389,143
----------- ----------- -----------
Total current assets............................................. 4,956,268 9,906,642 18,292,016
Oil and gas properties, at cost (full cost method):
Proved oil and gas properties.......................................... 15,284,453 37,493,394 149,351,545
Unproved oil and gas properties........................................ -- 707,913 7,725,683
----------- ----------- -----------
15,284,453 38,201,307 157,077,228
Accumulated depreciation, depletion, and amortization.................. 2,320,378 5,366,293 10,288,816
----------- ----------- -----------
Net oil and gas properties............................................... 12,964,075 32,835,014 146,788,412
Other property and equipment............................................. 329,445 372,395 1,506,177
Accumulated depreciation............................................... 180,669 236,278 747,760
----------- ----------- -----------
Net other property and equipment......................................... 148,776 136,117 758,417
Other assets............................................................. 677,056 613,593 995,157
----------- ----------- -----------
Total assets..................................................... $18,746,175 $43,491,366 $166,834,002
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable -- trade.............................................. $ 820,377 $ 3,630,603 $ 6,744,218
Accounts payable -- revenue and other.................................. 495,178 984,299 4,103,336
Accounts payable -- broker margin...................................... -- 978,656 161,159
Accrued merger costs................................................... -- -- 2,519,422
Accrued interest....................................................... 79,917 128,938 --
Note payable and current portion of long-term debt..................... -- 6,500,000 3,016,361
----------- ----------- -----------
Total current liabilities........................................ 1,395,472 12,222,496 16,544,496
Long-term debt, less current portion..................................... 6,000,000 13,475,000 63,336,996
Other long-term liabilities.............................................. 23,189 19,303 3,180,000
Deferred income taxes.................................................... -- -- 6,631,184
Stockholders' equity:
Convertible preferred stock, $1.00 par:
Authorized shares 1,000,000
Issued shares -- 52,500, 92,500 and 242,500 at December 31, 1994 and
1995 and September 30, 1996, respectively
Aggregate liquidation preference -- $5,250,000, $9,250,000 and
$24,250,000 at December 31, 1994 and 1995 and September 30, 1996,
respectively....................................................... 52,500 92,500 242,500
Class A common stock $.01 par value:
Authorized shares -- 50,000,000 at December 31, 1994 and 1995 and
100,000,000 at September 30, 1996, respectively
Issued shares -- 8,875,892, 11,880,125 and 35,221,928 at December 31,
1994 and 1995 and September 30, 1996, respectively................... 88,778 118,801 352,219
Class B common stock $.01 par value:
Authorized convertible shares -- 200,000
Issued shares -- 129,644 at December 31, 1994........................ 1,296 -- --
Common stock issuable under asset acquisition agreement................ 136,035 -- --
Additional paid-in capital............................................. 13,626,117 21,485,224 107,791,053
Unrealized gain (loss) on marketable securities, net................... 136,285 (247,492) --
Deficit................................................................ (2,713,497) (3,674,466) (31,244,446)
----------- ----------- -----------
Total stockholders' equity............................................... 11,327,514 17,774,567 77,141,326
----------- ----------- -----------
Total liabilities and stockholders' equity............................... $18,746,175 $43,491,366 $166,834,002
=========== =========== ===========
</TABLE>
See accompanying notes.
F-13
<PAGE> 138
NATIONAL ENERGY GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- --------------------------
1993 1994 1995 1995 1996
---------- ---------- ----------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Oil and gas sales............... $1,803,284 $3,158,716 $ 7,858,316 $4,861,176 $ 13,181,450
Well operator fees.............. 427,165 157,845 136,943 100,534 313,475
---------- ---------- ----------- ---------- -----------
2,230,449 3,316,561 7,995,259 4,961,710 13,494,925
Costs and expenses:
Lease operating................. 575,697 1,207,251 1,732,124 1,138,244 2,095,955
Oil and gas production taxes.... 109,876 176,320 415,867 260,494 662,596
Depreciation, depletion, and
amortization................. 679,159 1,029,986 3,149,464 1,711,035 5,444,375
Writedown of oil and gas
properties................... -- -- -- -- 43,497,000
General and administrative...... 994,271 984,304 1,771,372 1,015,200 1,956,242
---------- ---------- ----------- ---------- -----------
2,359,003 3,397,861 7,068,827 4,124,973 53,656,168
---------- ---------- ----------- ---------- -----------
Operating income (loss)........... (128,554) (81,300) 926,432 836,737 (40,161,243)
Interest expense.................. (188,140) (517,086) (1,032,096) (652,914) (1,826,214)
Interest income and other, net.... 27,266 109,017 90,875 81,493 154,064
Gain (loss) on sale of marketable
securities...................... (10,065) -- 220,582 220,582 (117,955)
---------- ---------- ----------- ---------- -----------
Income (loss) before income
taxes........................... (299,493) (489,369) 205,793 485,898 (41,951,348)
Benefit for income taxes.......... -- -- -- -- 15,146,240
---------- ---------- ----------- ---------- -----------
Income (loss) before extraordinary
item............................ (299,493) (489,369) 205,793 485,898 (26,805,108)
Extraordinary loss on early
extinguishments of debt......... -- (121,917) (431,762) (431,762) (292,372)
---------- ---------- ----------- ---------- -----------
Net income (loss)................. $ (299,493) $ (611,286) $ (225,969) $ 54,136 $(27,097,480)
========== ========== =========== ========== ===========
Income (loss) per common share:
Income (loss) before
extraordinary item........... $ (.05) $ (.09) $ (.05) $ .00 $ (1.87)
========== ========== =========== ========== ===========
Net income (loss)............... $ (.05) $ (.10) $ (.09) $ (.04) $ (1.89)
========== ========== =========== ========== ===========
Weighted average number of common
and common equivalent shares
outstanding..................... 6,121,025 8,476,821 10,701,635 10,306,685 14,693,456
========== ========== =========== ========== ===========
</TABLE>
See accompanying notes.
F-14
<PAGE> 139
NATIONAL ENERGY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------ ----------------------------
1993 1994 1995 1995 1996
----------- ----------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)..................................... $ (299,493) $ (611,286) $ (225,969) $ 54,136 $(27,097,480)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, depletion and amortization............ 679,159 1,029,986 3,149,464 1,711,035 5,444,375
Writedown of oil and gas properties................. -- -- -- -- 43,497,000
Amortization of loan costs.......................... -- 19,114 21,060 16,500 71,075
Amortization of deferred compensation............... 39,808 41,694 39,809 31,232 34,785
Benefit for deferred income taxes................... -- -- -- -- (15,146,240)
Extraordinary loss on early extinguishments of
debt.............................................. -- 121,917 431,762 431,762 292,372
Common stock, options and warrants issued for
services.......................................... 25,000 64,290 104,614 3,499 137,705
Loss on sale of real estate......................... 10,065 -- -- -- --
Changes in operating assets and liabilities:
Accounts receivable............................... (80,602) (217,192) (784,668) (1,093,942) (1,107,496)
Accounts receivable from related parties.......... 63,761 -- 23,999 23,999 --
Other current assets.............................. (40,980) (101,530) (108,615) (194,307) (821,579)
Accounts payable and accrued liabilities.......... 122,168 26,299 425,626 1,505,966 (523,572)
----------- ----------- ------------ ------------ ------------
Net cash provided by operating activities............. 518,886 373,292 3,077,082 2,489,880 4,780,945
----------- ----------- ------------ ------------ ------------
INVESTING ACTIVITIES
Purchases of marketable securities.................... -- (1,081,041) (2,917,659) (2,917,659) (9,008)
Proceeds from sale of marketable securities........... -- 35,176 1,891,308 1,892,447 1,750,270
Proceeds from broker margin........................... -- -- 978,656 1,011,355 --
Purchases of furniture, fixtures, and equipment....... (12,570) (48,632) (42,950) (38,618) (163,112)
Oil and gas acquisition, exploration, and development
expenditures........................................ (3,335,469) (2,849,508) (16,912,919) (15,146,741) (15,038,767)
Acquisition of Alexander Energy Corporation........... -- -- -- -- (1,489,444)
Proceeds from sales of oil and gas properties......... 30,766 90,500 69,306 69,306 --
Purchase of prospect inventory held for resale........ -- -- -- -- (1,299,769)
Purchases of long-term assets and other............... (53,087) 41,471 (11,963) (15,281) (600,002)
----------- ----------- ------------ ------------ ------------
Net cash used in investing activities................. (3,370,360) (3,812,034) (16,946,221) (15,145,191) (16,849,832)
----------- ----------- ------------ ------------ ------------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt, net......... 4,580,000 5,691,366 17,514,077 13,185,498 72,035,921
Proceeds from issuance of note payable................ -- -- 3,000,000 -- --
Repayments of long-term debt.......................... (2,315,000) (4,200,000) (6,875,000) (6,597,282) (69,010,233)
Repayments of note payable............................ -- -- -- -- (3,059,997)
Repayments of other long-term liabilities............. -- (77,571) -- -- --
Proceeds from sale of common stock.................... 370,000 -- -- -- --
Proceeds from exercise of stock options and
warrants............................................ 32,500 35,938 467,987 455,799 150,013
Proceeds from issuance of Convertible Preferred Stock,
net................................................. -- 4,436,372 3,980,343 3,980,343 15,000,000
Preferred stock dividends............................. (17,502) (14,705) (735,000) (262,500) (472,500)
Payments for redemption of fractional shares.......... (325) (477) (714) -- (370)
Other................................................. (2,647) -- -- -- --
----------- ----------- ------------ ------------ ------------
Net cash provided by financing activities............. 2,647,026 5,870,923 17,351,693 10,761,858 14,642,834
----------- ----------- ------------ ------------ ------------
Increase (decrease) in cash and cash equivalents...... (204,448) 2,432,181 3,482,554 (1,893,453) 2,573,947
Cash and cash equivalents at beginning of period...... 365,912 161,464 2,593,645 2,593,645 6,076,199
----------- ----------- ------------ ------------ ------------
Cash and cash equivalents at end of period............ $ 161,464 $ 2,593,645 $ 6,076,199 $ 700,192 $ 8,650,146
=========== =========== ============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid in cash................................. $ 166,313 $ 457,949 $ 983,075 $ 716,331 $ 1,927,474
=========== =========== ============ ============ ============
</TABLE>
See accompanying notes.
F-15
<PAGE> 140
NATIONAL ENERGY GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
----------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
------ -------- ---------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1992.......................................................... -- $ -- 5,517,732 $ 55,177
Common stock issuable under asset acquisition agreement............................... -- -- -- --
Common stock issued for acquisition of certain limited partnership interests.......... -- -- 700,000 7,000
Common stock issued in litigation settlement.......................................... -- -- 15,000 150
Common stock issued upon exercise of options.......................................... -- -- 80,000 800
Stock issued for services............................................................. -- -- 40,000 400
Sale of common stock for cash......................................................... -- -- 592,000 5,920
Common stock issued for acquisition of Goldsmith Adobe Unit working interest.......... -- -- 900,000 9,000
Preferred stock dividends............................................................. -- -- -- --
Other................................................................................. -- -- -- --
Net loss.............................................................................. -- -- -- --
------ ------- ---------- --------
Balance at December 31, 1993.......................................................... -- -- 7,844,732 78,447
Common stock issued upon exercise of options.......................................... -- -- 62,500 625
Common stock issued or issuable under asset acquisition agreements.................... -- -- 200,000 2,000
Issuance of Series B Preferred Stock.................................................. 50,000 50,000 -- --
Common stock issued for services...................................................... -- -- 60,250 602
Common stock issued upon conversion of Series A Preferred Stock....................... -- -- 425,000 4,250
Common stock issued on conversion of long-term debt................................... -- -- 415,054 4,151
Unrealized gain on marketable securities.............................................. -- -- -- --
Preferred stock dividends............................................................. 2,500 2,500 -- --
Net loss.............................................................................. -- -- -- --
------ ------- ---------- --------
Balance at December 31, 1994.......................................................... 52,500 52,500 9,007,536 90,075
Common stock issued upon exercise of options and warrants............................. -- -- 327,992 3,280
Common stock issued under asset acquisition agreement................................. -- -- 300,000 3,000
Common stock and warrants issued for services......................................... -- -- 13,000 130
Common stock issued upon conversion of Class B Common Stock........................... -- -- 1,166,796 11,668
Common stock and warrants issued to acquire interests in oil and gas properties....... -- -- 1,064,801 10,648
Issuance of Series C Preferred Stock.................................................. 40,000 40,000 -- --
Preferred stock dividends............................................................. -- -- -- --
Unrealized loss on marketable securities.............................................. -- -- -- --
Net loss.............................................................................. -- -- -- --
------ ------- ---------- --------
Balance at December 31, 1995.......................................................... 92,500 92,500 11,880,125 118,801
Common stock issued upon exercise of options and warrants (unaudited)................. -- -- 113,045 1,131
Common stock, options and warrants issued for services (unaudited).................... -- -- 50,000 500
Common stock issued to acquire interests in oil and gas properties (unaudited)........ -- -- 1,899,317 18,993
Issuance of Series D and E Convertible Preferred Stock and related warrants to
purchase common stock (unaudited).................................................... 150,000 150,000 -- --
Common stock, stock options and warrants issued or assumed in acquisition of Alexander
Energy Corporation (unaudited)....................................................... -- -- 21,279,441 212,794
Preferred stock dividends (unaudited)................................................. -- -- -- --
Change in unrealized gain on marketable securities (unaudited)........................ -- -- -- --
Net loss (unaudited).................................................................. -- -- -- --
------ ------- ---------- --------
Balance at September 30, 1996 (unaudited)............................................. 242,500 $242,500 35,221,928 $352,219
====== ======= ========== ========
<CAPTION>
COMMON STOCK UNREALIZED
ISSUABLE GAIN (LOSS)
UNDER ASSET ADDITIONAL ON AVAILABLE
ACQUISITION PAID-IN FOR-SALE
AGREEMENT CAPITAL SECURITIES
------------ ------------ -------------
<S> <C> <C> <C>
Balance at December 31, 1992.......................................................... $ 33,960 $ 6,295,633 $ --
Common stock issuable under asset acquisition agreement............................... 63,950 -- --
Common stock issued for acquisition of certain limited partnership interests.......... -- 699,601 --
Common stock issued in litigation settlement.......................................... -- 14,850 --
Common stock issued upon exercise of options.......................................... -- 31,700 --
Stock issued for services............................................................. -- 24,600 --
Sale of common stock for cash......................................................... -- 364,080 --
Common stock issued for acquisition of Goldsmith Adobe Unit working interest.......... -- 553,500 --
Preferred stock dividends............................................................. -- -- --
Other................................................................................. -- (2,972) --
Net loss.............................................................................. -- -- --
--------- ----------- ---------
Balance at December 31, 1993.......................................................... 97,910 7,980,992 --
Common stock issued upon exercise of options.......................................... -- 35,313 --
Common stock issued or issuable under asset acquisition agreements.................... 38,125 123,000 --
Issuance of Series B Preferred Stock.................................................. -- 4,386,372 --
Common stock issued for services...................................................... -- 51,908 --
Common stock issued upon conversion of Series A Preferred Stock....................... -- 420,720 --
Common stock issued on conversion of long-term debt................................... -- 380,311 --
Unrealized gain on marketable securities.............................................. -- -- 136,285
Preferred stock dividends............................................................. -- 247,500 --
Net loss.............................................................................. -- -- --
--------- ----------- ---------
Balance at December 31, 1994.......................................................... 136,035 13,626,116 136,285
Common stock issued upon exercise of options and warrants............................. -- 464,707 --
Common stock issued under asset acquisition agreement................................. (136,035) 133,035 --
Common stock and warrants issued for services......................................... -- 79,203 --
Common stock issued upon conversion of Class B Common Stock........................... -- (11,668) --
Common stock and warrants issued to acquire interests in oil and gas properties....... -- 3,269,003 --
Issuance of Series C Preferred Stock.................................................. -- 3,924,828 --
Preferred stock dividends............................................................. -- -- --
Unrealized loss on marketable securities.............................................. -- -- (383,777)
Net loss.............................................................................. -- -- --
--------- ----------- ---------
Balance at December 31, 1995.......................................................... -- 21,485,224 (247,492)
Common stock issued upon exercise of options and warrants (unaudited)................. -- 179,806 --
Common stock, options and warrants issued for services (unaudited).................... -- 174,986 --
Common stock issued to acquire interests in oil and gas properties (unaudited)........ -- 6,174,005 --
Issuance of Series D and E Convertible Preferred Stock and related warrants to
purchase common stock (unaudited).................................................... -- 14,850,000 --
Common stock, stock options and warrants issued or assumed in acquisition of Alexander
Energy Corporation (unaudited)....................................................... -- 64,927,032 --
Preferred stock dividends (unaudited)................................................. -- -- --
Change in unrealized gain on marketable securities (unaudited)........................ -- -- 247,492
Net loss (unaudited).................................................................. -- -- --
--------- ----------- ---------
Balance at September 30, 1996 (unaudited)............................................. $ -- $107,791,053 $ --
========= =========== =========
<CAPTION>
TOTAL
STOCKHOLDERS'
DEFICIT EQUITY
------------ -------------
Balance at December 31, 1992.......................................................... $ (1,520,511) $ 4,864,259
Common stock issuable under asset acquisition agreement............................... -- 63,950
Common stock issued for acquisition of certain limited partnership interests.......... -- 706,601
Common stock issued in litigation settlement.......................................... -- 15,000
Common stock issued upon exercise of options.......................................... -- 32,500
Stock issued for services............................................................. -- 25,000
Sale of common stock for cash......................................................... -- 370,000
Common stock issued for acquisition of Goldsmith Adobe Unit working interest.......... -- 562,500
Preferred stock dividends............................................................. (17,502) (17,502)
Other................................................................................. -- (2,972)
Net loss.............................................................................. (299,493) (299,493)
----------- -----------
Balance at December 31, 1993.......................................................... (1,837,506) 6,319,843
Common stock issued upon exercise of options.......................................... -- 35,938
Common stock issued or issuable under asset acquisition agreements.................... -- 163,125
Issuance of Series B Preferred Stock.................................................. -- 4,436,372
Common stock issued for services...................................................... -- 52,510
Common stock issued upon conversion of Series A Preferred Stock....................... -- 424,970
Common stock issued on conversion of long-term debt................................... -- 384,462
Unrealized gain on marketable securities.............................................. -- 136,285
Preferred stock dividends............................................................. (264,705) (14,705)
Net loss.............................................................................. (611,286) (611,286)
----------- -----------
Balance at December 31, 1994.......................................................... (2,713,497) 11,327,514
Common stock issued upon exercise of options and warrants............................. -- 467,987
Common stock issued under asset acquisition agreement................................. -- --
Common stock and warrants issued for services......................................... -- 79,333
Common stock issued upon conversion of Class B Common Stock........................... -- --
Common stock and warrants issued to acquire interests in oil and gas properties....... -- 3,279,651
Issuance of Series C Preferred Stock.................................................. -- 3,964,828
Preferred stock dividends............................................................. (735,000) (735,000)
Unrealized loss on marketable securities.............................................. -- (383,777)
Net loss.............................................................................. (225,969) (225,969)
----------- -----------
Balance at December 31, 1995.......................................................... (3,674,466) 17,774,567
Common stock issued upon exercise of options and warrants (unaudited)................. -- 180,937
Common stock, options and warrants issued for services (unaudited).................... -- 175,486
Common stock issued to acquire interests in oil and gas properties (unaudited)........ -- 6,192,998
Issuance of Series D and E Convertible Preferred Stock and related warrants to
purchase common stock (unaudited).................................................... -- 15,000,000
Common stock, stock options and warrants issued or assumed in acquisition of Alexander
Energy Corporation (unaudited)....................................................... -- 65,139,826
Preferred stock dividends (unaudited)................................................. (472,500) (472,500)
Change in unrealized gain on marketable securities (unaudited)........................ -- 247,492
Net loss (unaudited).................................................................. (27,097,480) (27,097,480)
----------- -----------
Balance at September 30, 1996 (unaudited)............................................. $(31,244,446) $ 77,141,326
=========== ===========
</TABLE>
See accompanying notes.
F-16
<PAGE> 141
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
National Energy Group, Inc. (the "Company") was incorporated under the laws
of the State of Delaware on November 20, 1990. The Company is engaged in the
acquisition, development, and production of crude oil and natural gas.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits and money-market
investments with maturities of three months or less when purchased. At December
31, 1995 and September 30, 1996 all cash and cash equivalents were invested with
Bank One, Texas, N.A. ("Bank One").
Marketable Securities
The Company's marketable securities are classified as available-for-sale.
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses, net of tax, reported as a separate component of stockholders'
equity. Realized gains and losses and declines in value judged to be
other-than-temporary are included in interest income. The cost of securities
sold is based on the specific identification method.
The marketable securities are comprised of other independent oil and gas
companies. The common stock of one oil and gas company accounted for 86% and 62%
of the estimated fair market value of the total marketable securities held at
December 31, 1994 and 1995, respectively.
The following is a summary of available-for-sale securities at December 31,
1994 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
----------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Common stocks........................... $1,045,864 $ 138,178 $1,893 $1,182,149
========== ======== ====== ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Common stocks........................... $2,072,216 $ 1,026 $ 248,518 $1,824,724
========== ====== ======== ==========
</TABLE>
During the years ended December 31, 1994 and 1995, available-for-sale
securities with a fair value at the date of sale of $51,156 and $2,111,890,
respectively, were sold. The gross realized gains on such sales totaled $14,954
and $224,443, respectively. The gross realized losses on such sales totaled
$3,861 during 1995, and there were no realized losses during 1994.
F-17
<PAGE> 142
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
Accounts Receivable
The Company sells crude oil and natural gas to various customers. In
addition, the Company participates with other parties in the operation of crude
oil and natural gas wells. Substantially all of the Company's accounts
receivable are due from either purchasers of crude oil and natural gas or
participants in crude oil and natural gas wells for which the Company serves as
the operator. Generally, operators of crude oil and natural gas properties have
the right to offset future revenues against unpaid charges related to operated
wells. Crude oil and natural gas sales are generally unsecured.
Natural Gas Production Imbalances
The Company accounts for natural gas production imbalances using the sales
method, whereby the Company recognizes revenue on all natural gas sold to its
customers notwithstanding the fact that its ownership may be less than 100% of
the natural gas sold.
Crude Oil and Natural Gas Properties
The Company utilizes the full cost method of accounting for its crude oil
and natural gas properties. Under the full cost method, all productive and
nonproductive costs incurred in connection with the acquisition, exploration,
and development of crude oil and natural gas reserves are capitalized and
amortized on the units-of-production method based upon total proved reserves.
The costs of unproven properties are excluded from the amortization calculation
until the individual properties are evaluated and a determination is made as to
whether reserves exist. Capitalized costs are limited to the aggregate of the
present value of future net reserves plus the lower of cost or fair market value
of unproved properties. Conveyances of properties, including gains or losses on
abandonments of properties, are treated as adjustments to the cost of crude oil
and natural gas properties, with no gain or loss recognized. The Company does
not believe that future costs related to dismantlement, site restoration, and
abandonment costs, net of estimated salvage values, will have a significant
effect on its results of operations or financial position because the salvage
value of equipment and related facilities should approximate or exceed any
future expenditures for dismantlement, restoration, or abandonment. The Company
has not incurred any net expenditures for costs of this nature during the last
two years.
The Company has capitalized internal costs of $117,379, $158,961 and
$141,516 for the years ended December 31, 1993, 1994 and 1995, respectively, and
$85,616 and $173,033 for the nine months ended September 30, 1995 and 1996,
respectively. Such capitalized costs include salaries and related benefits of
individuals directly involved in the Company's acquisition, exploration and
development activities based on percentage of their time devoted to such
activities.
Furniture, Fixtures, and Equipment
Furniture, fixtures, and equipment are recorded at cost and are depreciated
over their estimated useful lives using the straight-line method.
Maintenance and repairs are charged against income when incurred; and
renewals and betterments, which extend the useful lives of furniture, fixtures,
and equipment, are capitalized.
Income Taxes
The Company uses the liability method in accounting for income taxes. Under
the liability method, deferred tax assets and liabilities are determined based
on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
F-18
<PAGE> 143
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
Earnings (Loss) Per Share
Primary earnings (loss) per common and common equivalent share data is
computed by dividing net income (loss), adjusted for preferred stock dividend
requirements of $17,500, $264,705 and $735,000 in 1993, 1994, and 1995,
respectively, and $512,000, and $708,750 for the nine months ended September 30,
1995 and 1996, respectively, by the weighted average number of common and common
equivalent shares outstanding during each period. Shares issuable upon exercise
of options and warrants are included in the computation of earnings per common
and common equivalent share to the extent that they are dilutive. Fully diluted
earnings (loss) per share computations also assume the conversion of the
Company's preferred stock (Note 5) if such conversion has a dilutive effect.
For the years ended December 31, 1993, 1994 and 1995, and the nine months
ended September 30, 1995 and 1996, neither the common equivalent shares nor the
assumed conversion of the preferred stock had a dilutive effect on the loss per
share calculations. Accordingly, the loss per share calculations for such
periods are based on the weighted average number of common shares outstanding
during each year.
Natural Gas Hedging Activities
In December 1995, the Company began hedging natural gas prices through the
use of commodity price swap agreements, in an effort to reduce the effects of
the volatility of the price of natural gas on the Company's operations. These
agreements involve the receipt of fixed-price amounts in exchange for variable
payments based on NYMEX prices and specific volumes. In connection with the
commodity price swap agreements, the Company may also enter into basis swap
agreements to reduce the effects of unusual fluctuations between prices actually
received at the well head and NYMEX prices. Through the use of commodity price
and basis swap agreements the Company can fix the price to be received for
specified volumes of production to the commodity swap price less the basis swap
price. The differential to be paid or received under the swap agreement is
accrued in the month of the related production and recognized as an adjustment
to oil and gas sales. The Company does not hold or issue financial instruments
for trading purposes.
New Accounting Pronouncement
In October 1995, the Financial Accounting Standards Board ("FASB") issued
its statement No. 123, "Accounting for Stock Based Compensation" ("FAS 123")
which establishes an alternative method of accounting for stock based
compensation to the method set forth in Accounting Principles Board Opinion No.
25 ("APB 25"). FAS 123 encourages, but does not require, adoption of a fair
value based method of accounting for stock options and similar equity
instruments granted to employees. The Company will continue to account for such
grants under the provisions of APB 25 and will adopt the disclosure provisions
of FAS 123 in the first quarter of 1996. Accordingly, adoption of FAS 123 will
not affect the Company's financial statements for the year ended December 31,
1995.
Interim Financial Information
In management's opinion, the accompanying interim financial statements
contain all adjustments (consisting solely of normal recurring accruals)
necessary to present fairly the financial position of the Company as of
September 30, 1996, the related results of operations for the nine month periods
ended September 30, 1996 and 1995 and cash flows for the nine month periods
ended September 30, 1996 and 1995. The results of operations for the nine months
ended September 30, 1996 are not necessarily indicative of the results expected
for the full year.
F-19
<PAGE> 144
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
Reclassifications
Certain previously reported amounts have been reclassified to conform with
the current presentation.
2. ACQUISITIONS
Effective January 1, 1993, the Company acquired all of the limited
partnership interests of OilSearch Leasing Partners, Ltd., and OilSearch
Acquisition Group One, Ltd., and the crude oil and natural gas assets related to
the limited partnership interests. The consideration paid by the Company to the
limited partners consisted of 700,000 shares of Class A Common Stock ("Common
Stock"). The impact of this acquisition was not material to the Company's
results of operations or financial position.
In December 1993, the Company completed the acquisition of a 63.8% working
interest in the Goldsmith Adobe Unit ("GAU"), located in the Permian Basin of
West Texas, from Bligh Petroleum, Inc. ("Bligh"). This acquisition added
approximately 3.0 million barrels of crude oil and 2.5 billion cubic feet of
natural gas to the Company's proved reserves.
The consideration paid by the Company to Bligh for the acquisition
consisted of $2,775,000 in cash and 900,000 shares of Common Stock. The cash
portion of the acquisition was funded primarily by $2,150,000 increase in
borrowings under the Company's former credit agreement with Bank One. The
Company also used the proceeds from the issuance of 10% subordinated notes, with
a principal amount of $230,000, and 792,000 shares of Common Stock, of which
200,000 restricted shares of Common Stock were issued in 1994, to fund the
acquisition.
During 1994, the Company acquired an additional 17.0% working interest in
the GAU. Such interests were acquired for $584,095 in cash. The Company is the
operator of the GAU and holds a 91.8% working interest in the GAU.
In April 1995, the Company purchased a 100% working interest (77% net
revenue interest) in State of Texas Lease No. 69153 and the State Tract 901-S
Field, Nueces County, Texas ("Mustang Island") for $900,000 in cash and 352,500
shares of Common Stock. The cash portion of the acquisition was funded from
available cash.
In June 1995, the Company completed the acquisition of producing gas
properties in the Oak Hill Field in Rusk County, Texas ("Oak Hill"). The
consideration paid by the Company for Oak Hill consisted of $7,200,000 in cash,
612,301 shares of Common Stock and warrants to purchase 200,000 shares of Common
Stock at a price per share of $2.00. The cash portion of the acquisition was
funded primarily by borrowings under the Company's current credit facility with
Bank One. See Note 3.
In addition, in June 1995, the Company completed the acquisition of
producing oil and gas properties in Eddy County, New Mexico from Enron Oil and
Gas Company (the "Enron Properties") for $2,119,295 in cash. This acquisition
was funded by borrowings under the credit facility with Bank One and available
cash.
F-20
<PAGE> 145
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
The following pro forma data presents the results of the Company for the
years ended December 31, 1994 and 1995, as if the acquisition of Mustang Island,
Oak Hill and the Enron Properties had occurred on January 1, 1994. The pro forma
results of operations are presented for comparative purposes only and are not
necessarily indicative of the results which would have been obtained had the
acquisitions been consummated as presented. The following data reflect pro forma
adjustments for the oil and gas revenues, production costs, and depreciation and
depletion related to the properties and additional interest on borrowed funds.
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED DECEMBER 31
-------------------------
1994 1995
---------- ----------
(UNAUDITED)
<S> <C> <C>
Revenues.................................................... $5,051,222 $9,253,803
========== ==========
Loss before extraordinary item.............................. $ (573,522) $ (73)
========== ==========
Loss before extraordinary item per common share............. $ (.06) $ (.06)
========== ==========
</TABLE>
In January 1996, the Company completed the acquisition of oil and gas
properties in offshore Nueces County, Texas, adjacent to the Company's Mustang
Island property, from C/A Limited, Chartex Petroleum Company and Petrotex
Engineering Company. The acquisition includes interests in five wells, a
pipeline and separation facility related to Mustang Island. The consideration
for this acquisition consisted of 140,857 shares of the Company's Common Stock
and $675,000 in cash.
In February 1996, the Company completed the acquisition of two oil and gas
wells on one offshore block, interests in five other offshore blocks, and a
related production platform and equipment in offshore Nueces County, Texas,
adjacent to the Company's Mustang Island property, from UMC Petroleum
Corporation (the "UMC Acquisition). The Company paid UMC Petroleum Corporation
$1,500,000 in cash.
In April 1996, the Company won exploration rights on 16 offshore tracts
(covering 7,765 acres) in the Mustang Island area in offshore Nueces County,
Texas through successful bids with the State of Texas ("Offshore Lease
Acquisition"). The Company paid $1,437,302 in cash for these rights and the
purchase was funded by borrowings under the credit facility with BankOne and
available cash. A portion of the exploration rights associated with the Offshore
Lease Acquisition are expected to be sold within the next year and the related
costs have been classified as prospect inventory held for sale in the
accompanying balance sheet as of June 30, 1996.
On August 29, 1996, the Company completed the acquisition of Alexander
Energy Corporation ("Alexander"). The transaction consisted of a merger (the
"Merger") of Alexander with and into National Energy Group of Oklahoma, Inc.,
formerly known as NEG-OK, Inc., a wholly-owned subsidiary of the Company
("NEG-OK"). Pursuant to the Merger, (a) the separate corporate existence of
Alexander terminated and NEG-OK, as the surviving corporation of the Merger,
continues as a wholly-owned subsidiary of the Company with the combined assets
and liabilities of Alexander and NEG-OK, (b) each share of Alexander common
stock, par value $.03 per share ("Alexander Common Stock"), together with
certain rights associated with the Alexander Common Stock outstanding
immediately before the Merger, were converted into 1.7 shares of the Company's
Common Stock and (c) all outstanding options and warrants to purchase Alexander
Common Stock were assumed by the Company and converted into options and warrants
to purchase Common Stock. In lieu of fractional shares, Alexander shareholders
otherwise entitled to receive fractional shares of Common Stock were paid in
cash an amount equal to $4.375 multiplied by the fraction of a share of Common
Stock to be received.
In connection with the Merger, on August 29, 1996, the Company, NEG-OK and
Boomer Marketing Corporation ("Boomer Marketing"), a wholly-owned subsidiary of
NEG-OK, entered into a new credit
F-21
<PAGE> 146
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
facility. See Note 3. On August 29, 1996, the Company also closed the sale of
100,000 shares of its Convertible Preferred Stock, Series D, $1.00 par value per
share, the sale of 50,000 shares of its Convertible Preferred Stock, Series E,
$1.00 par value per share, and warrants to purchase 1,050,000 shares of Common
Stock. See Note 5.
The cost of acquiring NEG-OK was approximately $69.4 million, consisting of
the following (in thousands):
<TABLE>
<S> <C>
Fair value of 21.1 million shares of the Company's Common Stock
issued........................................................... $63,404
Cost of 105,740 shares of NEG-OK common stock owned by the
Company.......................................................... 288
NEG-OK stock options and warrants assumed.......................... 340
Estimated fair value of 122,324 shares of the Company's Common
Stock and 800,000 warrants issued for services provided by
investment advisors.............................................. 1,322
Other investment advisor, legal and accounting professional fees
and other Merger related costs................................... 4,009
-------
$69,363
=======
</TABLE>
The fair value of the securities issued in connection with the Merger has
been calculated using the price of the Company's Common Stock at the time the
Merger was announced to the public of $3.00 per share.
The Company's purchase price has been allocated to the consolidated assets
and liabilities of NEG-OK based on preliminary estimates of fair values with the
remaining purchase price allocated to proved oil and gas properties. No goodwill
has been recorded in this transaction.
The preliminary allocation of the purchase price is summarized as follows
(in thousands):
<TABLE>
<S> <C>
Working capital (deficit) assumed, excluding current portion of long-term
debt.................................................................... $ (87)
Oil and gas properties:
Proved.................................................................. 132,756
Unproved................................................................ 6,319
Other property and equipment.............................................. 970
Other non-current assets.................................................. 198
Long-term debt assumed.................................................... (45,853)
Other non-current liabilities assumed..................................... (3,163)
Deferred income taxes..................................................... (21,777)
--------
$ 69,363
========
</TABLE>
Under the full cost method of accounting, the carrying value of oil and gas
properties (net of related deferred taxes) is generally not permitted to exceed
the sum of the present value (10% discount rate) of estimated future net cash
flows, after tax, from proved reserves, based on current prices and costs, plus
the lower of cost or estimated fair value of unproved properties (the "cost
center ceiling"). Based upon the combined cost center ceiling at August 29, 1996
and the preliminary allocation of the Company's purchase price, the purchase
price allocated to oil and gas properties was in excess of the cost center
ceiling using oil and natural gas prices being received by the Company and
NEG-OK in August 1996 of $20.75 per Bbl and $2.21 per Mcf. The amount of such
excess was charged to expense in the third quarter of 1996 broken down as
follows (in thousands):
F-22
<PAGE> 147
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
<TABLE>
<S> <C>
Writedown of oil and gas properties....................................... $ 43,497
Deferred income tax benefit............................................... (15,224)
--------
$ 28,273
========
</TABLE>
In September 1996, the Company acquired an approximate 87.5% working
interest in two wells and certain proved undeveloped reserves in South Lake
Boeuf, Louisiana (the "Lake Boeuf Acquisition") for approximately $7.2 million,
consisting of $1.5 million in cash and approximately $5.7 million in shares of
Common Stock.
The following pro forma data presents the results of the Company for the
nine months ended September 30, 1995 and 1996, as if the acquisitions of Mustang
Island, Oak Hill, the Enron Properties, NEG-OK, and the Lake Boeuf Acquisition
had occurred on January 1, 1995. The historical results of the CA Acquisition,
the UMC Acquisition were not significant. The pro forma results of operations
are presented for comparative purposes only and are not necessarily indicative
of the results which would have been obtained had the acquisitions been
consummated as presented. The following data reflect pro forma adjustments for
oil and gas revenues, production costs, depreciation and depletion related to
the properties and businesses acquired, interest on borrowed funds, additional
preferred stock dividend requirements and the related income tax effects (in
thousands, except per share amounts).
<TABLE>
<CAPTION>
PRO FORMA
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1995 1996
------- -------
<S> <C> <C>
Total revenues................................................... $21,352 $27,107
======= ======
Income (loss) before extraordinary item.......................... $(3,284) $ 2,217
======= ======
Income (loss) before extraordinary item per common share......... $ (.12) $ .03
======= ======
</TABLE>
3. NOTE PAYABLE AND LONG-TERM DEBT
Note payable and long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1994 1995 1996
---------- ----------- -------------
<S> <C> <C> <C>
Credit facility.............................. $ -- $ -- $ 65,000,000
Prior credit facility........................ -- 19,975,000 --
Other credit facility........................ 6,000,000 -- 1,353,357
---------- ----------- -----------
6,000,000 19,975,000 66,353,357
Less current maturities:
Note payable and other long-term debt...... -- 6,500,000 3,016,361
---------- ----------- -----------
$6,000,000 $13,475,000 $ 63,336,996
========== =========== ===========
</TABLE>
Borrowings of $6,000,000 were outstanding at December 31, 1994, under the
credit facility with Texas Gas Fund I. A portion of the proceeds from the Texas
Gas Fund I facility were used to repay the Company's previous loan with Bank One
which resulted in an extraordinary charge of $121,917, or $.01 per common share,
in 1994. Borrowings under the Texas Gas Fund I facility were repaid using
proceeds from the Prior Credit Facility, resulting in an extraordinary charge of
$431,762 or $.04 per common share, in 1995.
F-23
<PAGE> 148
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
Effective June 9, 1994, the full principal amount and accrued interest on
the 8.5% subordinated notes payable, which were issued in connection with the
acquisition of certain oil and gas assets in 1992, were converted into 125,054
shares of Common Stock.
In connection with the acquisition of the GAU working interest in December
1993, the Company borrowed $230,000 from three directors in the form of 10%
subordinated notes. During 1994, $181,250 principal amount of the subordinated
notes were converted into 290,000 shares of Common Stock and the remaining
$48,750 principal amount was retired for cash.
In June 1995, the Company consummated a $33,000,000 reducing revolving line
of credit facility (the "Prior Credit Facility") with Bank One. The initial
advance under the Facility of $12,500,000 was used to pay off the Company's
credit facility with Texas Gas Fund I, to purchase Oak Hill and the Enron
Properties (Note 2), and for closing fees. Subsequent advances have been used
for development of the GAU, other acquisitions of oil and gas properties (Note
2), and exploration activities.
At December 31, 1995, the Prior Credit Facility consisted of a revolving
note of up to $30,000,000, subject to a borrowing base, and an advance note of
up to $3,000,000 (primarily for the development of GAU). Interest on the
revolving note is at a rate of prime plus 1% (subject to reduction in certain
circumstances) or LIBOR plus 3.75% (subject to reduction in certain
circumstances), at the Company's option. Interest on the advance note is at a
rate of prime plus 4%. Payments of interest and principal were made monthly. The
Facility was secured by all of the Company's principal oil and gas properties
and related equipment, oil and gas inventory, and related receivables.
Prepayments were allowed at any time. At December 31, 1995, the Company had
$16,975,000 outstanding under the revolving note and $3,000,000 outstanding
under the advance note.
The revolving note had a maturity date of June 30, 1999, and the advance
note had a maturity date of June 30, 1996. The Company's ability to borrow under
the revolving note was dependent upon the reserve value of its oil and gas
properties. At December 31, 1995, the borrowing base was $17.0 million. The
borrowing base was subject to adjustment quarterly based on the reserve value.
Bank One had substantial discretion in determining the reserve value and
borrowing base. In addition, the borrowing base was reduced monthly by an amount
redetermined semiannually by Bank One. The amount of such automatic reduction
was $175,000 per month for the period July 31, 1995 through January 31, 1996.
Effective February 1, 1996 the amount of the monthly reduction was adjusted to
$256,000. If the amount outstanding under the revolving note exceeded the
borrowing base, the Company was required to repay such excess. In January 1996,
the Company repaid $3.5 million of borrowings outstanding under the revolving
note.
In April 1996, a new advance note of up to $3,000,000 was issued to the
Company with a maturity date of March 31, 1997 and the borrowing base was
increased to $21,500,000. Effective May 1, 1996, the amount of the monthly
reduction of the borrowing base was adjusted to $315,000.
The Prior Credit Facility contained restrictive and affirmative covenants,
and maintenance of required financial ratios. In addition, the Company could not
pay any dividends on or redeem common stock. However, cash dividends on and
redemptions of preferred stock were allowed, so long as no event of default, as
defined, had occurred and was continuing or would occur as a result of such
payment. At December 31, 1995, the Company was not in violation of any covenants
of the Facility.
On August 29, 1996, the Company, NEG-OK and Boomer Marketing, entered into
a credit facility (the "Credit Facility") with BankOne, as Bank and
Administrative Agent, and the Credit Lyonnais New York Branch, as Bank and
Syndication Agent (collectively, the "Banks"). The Credit Facility consisted of
a $100.0 million reducing revolving line of credit, with an initial borrowing
base of $60.0 million, and a $5.0 million term loan. Interest under the reducing
revolving line of credit was payable monthly at the
F-24
<PAGE> 149
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
BankOne base rate. The proceeds from the Credit Facility were used to refinance
existing indebtedness of the Company and NEG-OK.
On November 1, 1996, the Company repaid the outstanding borrowings under
the Credit Facility with a portion of proceeds from the issuance of $100 million
principal amount of 10 3/4% Notes due 2006 ("Outstanding Notes" and collectively
with the Exchange Notes ("Notes")). See Note 12.
In connection with the issuance of the Outstanding Notes, the Company
amended the Credit Facility. The borrowing base, pursuant to the amended Credit
Facility, was reduced to $25.0 million, comprised of $15.0 million for general
corporate purposes and $10.0 million for acquisitions 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. No principal reductions will be required before the
next borrowing base redetermination scheduled for April 1, 1997. The principal
is due at maturity, August 29, 2000. Interest is payable monthly and is
calculated at the BankOne base rate, as determined from time to time by BankOne
(which increases by .25% if the outstanding loan balance is greater than 75% of
the borrowing base). The Company may elect to calculate interest under the
EuroDollar Rate, as defined in the Credit Facility.
The Company is required to pay a commitment fee on the unused portion of
the borrowing base equal to 3/8ths of 1% per annum and paid a facility fee
equal to 3/4% of the initial borrowing base under the Credit Facility.
The Company granted to the Banks liens on a minimum of 90% of the present
worth of NEG-OK's oil and natural gas properties, liens on certain of the
Company's oil and natural gas properties, whether currently owned or hereafter
acquired, and a negative pledge on all other oil and natural gas properties. The
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 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 result of the payment thereof. In addition, if the Company is required
to purchase or redeem any portion of the Outstanding Notes, or if any portion of
the Outstanding Notes become due, the borrowing base is subject to reduction.
The carrying value of the Company's note payable and long-term debt
approximates their fair values.
4. LEASE
The Company leases office space under an operating lease. Rental expense
charged to operations was approximately $70,851, $80,132 and $100,493 during the
years ended December 31, 1993, 1994 and 1995, respectively. Minimum lease
payments under future operating lease commitments at December 31, 1995, are as
follows:
<TABLE>
<S> <C>
1996.............................................. $147,792
1997.............................................. 156,551
1998.............................................. 53,491
--------
$357,834
========
</TABLE>
F-25
<PAGE> 150
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
5. STOCKHOLDERS' EQUITY
Capital Stock
At December 31, 1995 the authorized capital stock of the Company consisted
of 50,000,000 shares of Class A common stock, par value $.01 per share's
("Common Stock"); 200,000 shares of Class B common stock ("Class B"), par value
$.01 per share; and 1,000,000 shares of convertible preferred stock par value
$1.00 per share. No shares of Class B were outstanding at December 31, 1995.
In connection with the Merger, the Company's shareholders approved an
amendment to the Company's Certificate of Incorporation to eliminate the
authorization of the Class B Common Stock, to change the name of Class A Common
Stock to "Common Stock," and to increase the number of authorized shares of
Common Stock from 50,000,000 to 100,000,000 shares.
Preferred Stock
At September 30, 1996, the Company has authorized 330,000 shares of $1.00
par value convertible preferred stock designated in four series B through E:
<TABLE>
<CAPTION>
SERIES B SERIES C SERIES D SERIES E
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Number of authorized shares.......... 100,000 80,000 100,000 50,000
Number of shares issued and
outstanding:
December 31, 1994 52,500 -- -- --
December 31, 1995 52,500 40,000 -- --
September 30, 1996 52,500 40,000 100,000 50,000
Conversion price per common share.... $ 1.625 $ 2.00 $ 2.25 $ 2.25
Liquidation preference value per
share.............................. $100.00 $100.00 $100.00 $100.00
Dividend rights...................... 10% payable 10 1/2% Participation Participation
semi- payable with with
annually semi- common common
(cumulative) annually stock stock
(cumulative)
</TABLE>
In connection with the acquisition of certain oil and gas assets in 1992,
the Company's Board of Directors authorized the issuance of up to 5,000 shares
of redeemable convertible preferred stock designated as 5% Redeemable
Convertible Preferred Stock, Series A, par value, $1.00 per share ("Series A
Preferred Stock"). The Series A Preferred Stock was converted into 425,000
shares of Common Stock during 1994.
On June 3, 1994, the Company consummated the sale of $5,000,000 of the
Company's 10% Cumulative Convertible Preferred Stock, Series B ("Series B").
Fifty thousand shares of Series B were sold by the Company at $100.00 per share.
The Series B is convertible into shares of Common Stock at a conversion price of
$1.625 per share. The Series B has a liquidation and dividend preference over
the Common Stock. The Series B has a 10% dividend, payable semi-annually. The
Company has the option to make six dividend payments in shares of Series B;
after the sixth such payment, the holders of Series B have the option to receive
additional dividends in shares of Series B or to accrue such dividends in cash.
If the Company makes four dividend payments in shares of Series B, the holders
of Series B have the right to appoint one-third of the members of the Company's
Board of Directors. The Series B would be redeemable by the Company, until June
3, 1997, at $110.00 per share and, thereafter, at $100.00 per share, plus
accrued and unpaid dividends; provided, however, that the Company cannot redeem
any shares of Series B unless and until all outstanding shares of the Series C
have been redeemed by the Company. As a result, no shares of Series B can be
redeemed before June 14, 1997. The holders of Series B currently have the right
to appoint one member to the
F-26
<PAGE> 151
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
Company's Board of Directors. The Series B requires that dividends be paid on
the Series B before any dividends are paid on Common Stock.
The holders of Series B are entitled to one vote for each share as to
matters upon which by law they are entitled to vote as a class, and the approval
of a majority of the Series B, voting separately as a class, is required to make
changes to the Company's Certificate of Incorporation or By-Laws which adversely
affect the Series B, to authorize or issue additional shares of Series B or to
issue preferred stock equal to or senior to the Series B as to dividends or
liquidation, or, subject to certain exceptions, to effect an extraordinary
transaction that requires a vote of the Company's stockholders. As a result, a
class vote of the holders of Series B would be required for the Company to merge
or be acquired and may therefore delay, deter, or prevent a change in control of
the Company.
In June 1995, the Company consummated the sale of $4,000,000 of the
Company's 10 1/2% Cumulative Convertible Preferred Stock, Series C ("Series C").
Forty thousand shares of Series C were sold by the Company at $100.00 per share.
The Series C is convertible into shares of Common Stock at a conversion price of
$2.00 per share.
The Series C has a liquidation and dividend preference over the Common
Stock, and is parity stock to the previously issued Series B. The Series C has a
10 1/2% dividend, payable semi-annually. The Company has the option to make six
dividend payments in shares of Series C; after the sixth such payment, the
holders of Series C have the option to receive additional dividends in shares of
Series C or to accrue such dividends in cash.
If the Company makes four dividend payments in shares of Series C, the
holders of Series C (voting as a class with other affected series of preferred
stock with similar voting rights) have the right to appoint one-third of the
members of the Company's Board of Directors; provided, however, that if the
holders of Series B are presently entitled to a similar right, then the holders
of Series C shall have no such right until the right of the holders of Series B
terminates. The Series C is redeemable by the Company between June 14, 1997 and
June 14, 1998, at $110.00 per share and, thereafter, at $100.00 per share, plus
accrued and unpaid dividends. No shares of Series B may be redeemed until all
the shares of Series C have been redeemed. The holders of the Series C currently
have the right to appoint one member to the Company's Board of Directors. The
holders of Series C are entitled to one vote for each share as to matters upon
which by law they are entitled to vote as a class, and the approval of a
majority of the Series C, voting separately as a class, is required to make
changes to the Company's Certificate of Incorporation or By-Laws which adversely
affect the Series C, to authorize or issue additional shares of Series C or to
issue preferred stock equal to or senior to the Series C as to dividends or
liquidation, or, subject to certain exceptions, to effect an extraordinary
transaction that requires a vote of the Company stockholders. As a result, a
class vote of the holders of Series C, as well as the Series B, would be
required for the Company to merge or be acquired and may therefore delay, deter,
or prevent a change in control of the Company.
In connection with the Merger and Related Transactions, the date the
Company may first redeem its 10% Cumulative Convertible Preferred Stock Series B
("Series B") and its 10 1/2% Cumulative Convertible Preferred Stock, Series C
("Series C") was extended from June 14, 1997 to June 14, 1999.
On August 29, 1996, the Company closed the sale for $10.0 million to High
River Limited Partnership ("High River") of 100,000 shares of its Convertible
Preferred Stock, Series D, $1.00 par value per share ("Series D") and warrants
to purchase 700,000 shares of Common Stock exercisable immediately at $2.50 per
share, which warrants expire five years from their date of issuance. The rights
and preferences of the Series D are described in the Certificate of Designations
of the Series D and include the immediate right to convert all the shares of the
Series D into 4,444,444 shares of Common Stock, based upon the initial
conversion price of $2.25 per share.
F-27
<PAGE> 152
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
The holders of the Series D are entitled to one vote for each share when
entitled to vote as described below and as to matters upon which by law they are
entitled to vote as a class. The holders of Series D will have the right to
appoint one member to the Board of Directors. The Company may not, without the
consent of the director appointed by the holders of Series D, voluntarily file
for protection under federal or other bankruptcy laws. In addition, the holders
of Series D will have the right to choose to appoint one-half of the members of
the Board of Directors plus one member (including the member appointed by the
Series D) if the Series D contingent voting rights are triggered and the holders
of the Series D exercise their rights.
On August 29, 1996, simultaneously with the closing of the sale for $10.0
million of the Series D to High River, the Company also closed the sale for $5.0
million to two insurance companies and four affiliates of Kayne, Anderson
Investment Management, Inc. ("KAIM"), a registered investment adviser, of 50,000
shares of Convertible Preferred Stock, Series E, $1.00 par value per share
("Series E") and warrants to purchase 350,000 shares of the Common Stock
exercisable immediately at $2.50 per share, which warrants expire five years
from their date of issuance. The Series E has the rights and preferences
described in the Certificate of Designations of the Series E which include the
immediate right to convert all of the shares of the Series E into 2,222,222
shares of the Common Stock, based upon the initial conversion price of $2.25 per
share. The Series E will vote together with the Common Stock on all matters
submitted to the holders of Common Stock and shall have that number of votes per
share equal to the number of shares of Common Stock into which such share is
convertible as of the record date for the vote.
Common Stock
Holders of Common Stock are entitled to one vote for each share held of
record on all matters voted on by stockholders. The shares of the Common Stock
do not have cumulative voting rights, which means that the holders of more than
50% of the shares of the Common Stock voting for the election of the directors
can elect all of the directors to be elected by holders of the Common Stock, in
which event the holders of the remaining shares of Common Stock will not be able
to elect any director. Upon any liquidation, dissolution, or winding-up of the
affairs of the Company, holders of the Common Stock would be entitled to
receive, pro rata, all of the assets of the Company available for distribution
to stockholders, after payment of any liquidation preference of any Preferred
Stock that may be issued and outstanding at the time. Holders of the Common
Stock have no subscription, redemption, sinking fund, or preemptive rights.
The Class B was entitled to special conversion rights. In June 1995, as a
result of the Company's proven crude oil and natural gas reserves reaching a
value in excess of $25,000,000, the 129,644 shares of Class B common stock which
were outstanding at December 31, 1994, were converted into 1,296,440 shares of
Common Stock, in accordance with the terms of the Class B. Under the terms of
the Class B, such shares cannot be reissued.
In connection with the repayment of borrowings under the Texas Gas Fund I
credit facility, the Company issued 100,000 shares of Common Stock to reduce a
net profits interest in the GAU held by Texas Gas Fund I.
Common Stock issuable under asset acquisition agreement at December 31,
1993 and 1994, represents additional consideration related to the acquisition of
certain oil and gas assets in 1992. In January 1995, 300,000 shares of Common
Stock were issued in satisfaction of this obligation.
Warrants
In June 1994, in connection with the sale of the Series B Preferred Stock,
the Company issued warrants to purchase 307,692 shares of Common Stock at a
price of $1.625 per share. During 1995, 255,492 of these warrants were
exercised. These warrants expire June 3, 1997.
F-28
<PAGE> 153
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
In 1995, the Company granted warrants to purchase 300,000 shares of Common
Stock at a price of $1.625 per share, pursuant to a consulting agreement. The
first 100,000 warrants were exercisable immediately and expire July 31, 1997,
the next 100,000 became exercisable on July 31, 1995 and expire July 31, 1998,
and the remaining 100,000 become exercisable on July 31, 1996 and expire July
31, 1999. The estimated fair value of the warrants was deferred at the date of
grant and is being charged to general and administrative expenses over the
vesting period.
In June 1995, in connection with the acquisition of Oak Hill (Note 2), the
Company issued warrants to purchase 200,000 shares of Common Stock at a price of
$2.00 per share. These warrants will become exercisable on June 28, 1996 and
expire June 30, 1998.
The following table summarizes warrants outstanding at December 31, 1995:
<TABLE>
<CAPTION>
NUMBER OF SHARES EXPIRATION WARRANTS EXERCISE
UNDER WARRANT DATE EXERCISABLE PRICE
- ---------------- ------------- ----------- --------
<S> <C> <C> <C> <C>
52,200............................................ June 3, 1997 52,200 $1.625
100,000............................................ July 31, 1997 100,000 $1.625
100,000............................................ July 31, 1998 100,000 $1.625
100,000............................................ July 31, 1999 -- $1.625
200,000............................................ June 30, 1998 -- $2.00
------- -------
552,200 252,200
======= =======
</TABLE>
In connection with the Merger, the Company issued warrants to purchase
800,000 shares of Common Stock to two investment advisors. Warrants to purchase
700,000 shares provide for an exercise price of $2 7/8 per share and are
exercisable for a period of five years while warrants to purchase 100,000 shares
provide for an exercise price of $4.09 per share and are exercisable for a
period of ten years. The Company also assumed 396,015 warrants to purchase
Common Stock at prices ranging from $2.07 to $3.00 in the Merger.
Stock Options
During 1992, the Company's Board of Directors and stockholders approved the
Company's 1992 Stock Option Plan (the "Plan"). Awards may be granted to key
employees or nonemployee directors of the Company. Awards may consist of options
to purchase shares of Common Stock or stock appreciation rights ("SARs") or a
combination thereof. The aggregate number of shares that the Company may issue
under the Plan will not, at the time of the grant, exceed an amount equal to 10%
of the number of then-outstanding shares of Common Stock. Furthermore, no more
than 30% of the shares of Common Stock for which awards may be granted under the
Plan may be granted to the Company's directors, and no one director may be
granted awards covering more than 75,000 shares of Common Stock. No more than
50% of the shares of Common Stock for which awards may be granted under the Plan
may be granted to officers of the Company who are not directors, and no one
officer who is not a director may be granted awards covering more than 125,000
shares. The exercise price of an option or SAR may not be less than the fair
market value of Common Stock on the date of grant. All options granted under the
Plan expire no later than the tenth anniversary of the date of grant. At
December 31, 1995, 15,000 options had been granted pursuant to the Plan. At
present, the Company does not plan to issue further options under the Plan.
In addition, during 1993, 1994 and 1995, the Company's Board of Directors
issued options to purchase 272,500, 40,000 and 765,000 shares of Common Stock,
respectively, to certain officers and directors. These options were issued
outside of the Plan.
F-29
<PAGE> 154
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
Option transactions are summarized below:
<TABLE>
<CAPTION>
NUMBER OF OPTION
SHARES PRICE RANGE
--------- -------------
<S> <C> <C>
Outstanding (90,000 options exercisable) at December 31,
1992....................................................... 105,000 $ .25 -$ .50
Granted...................................................... 272,500 $ .625-$1.06
Exercised.................................................... (80,000) $ .25 -$1.06
-------
Outstanding (297,500 options exercisable) at December 31,
1993....................................................... 297,500 $ .50 -$1.06
Granted...................................................... 40,000 $1.625
Canceled..................................................... (35,000) $ .625-$1.06
Exercised.................................................... (62,500) $ .50 -$ .625
-------
Outstanding (200,000 options exercisable) at December 31,
1994....................................................... 240,000 $ .625-$1.625
Granted...................................................... 765,000 $1.625-$2.81
Exercised.................................................... (72,500) $ .625-$1.625
-------
Outstanding (347,500 options exercisable) at December 31,
1995....................................................... 932,500 $ .625-$2.81
=======
</TABLE>
As a result of the Merger, the Company assumed 129,501 outstanding stock
option previously issued pursuant to three stock option plans of Alexander. No
additional stock options will be granted pursuant to such plans. The stock
options assumed may be exercised to purchase shares of Common Stock at prices
ranging from $0.88 to $2.94 per share.
On August 30, 1996, the Board of Directors approved the issuance of options
to purchase 700,000 shares of Common Stock to the Company's chief executive
officer. The options have an exercise price of $4 1/16 per share. The options
become exercisable when the price of the Common Stock reaches and remains at or
above $8 1/8 for a period of 30 days. If the price target is not met within five
years, the options expire.
6. INCOME TAXES
The reconciliation of income taxes computed at the U.S. federal statutory
tax rates to the benefit for income taxes on the income (loss) before
extraordinary item is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1993 1994 1995
--------- --------- --------
<S> <C> <C> <C>
Income tax (benefit) at statutory rate........... $(100,380) $(166,385) $ 69,970
Utilization of net operating loss carryforward... -- -- (69,970)
Benefit of net operating loss not recognized..... 100,380 166,385 --
--------- --------- -------
$ -- $ -- $ --
========= ========= =======
</TABLE>
F-30
<PAGE> 155
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
The computation of the net deferred tax (liability) follows:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1994 1995
--------- ---------
<S> <C> <C>
Deferred tax liabilities:
Property and equipment..................................... $(357,330) $(198,790)
Other...................................................... (14,677) (8,378)
Deferred tax assets:
Net operating loss carryforward............................ 915,268 823,319
Other...................................................... 6,499 --
--------- ---------
549,760 616,151
Less valuation allowance..................................... (549,760) (616,151)
--------- ---------
$ -- $ --
========= =========
</TABLE>
At December 31, 1995, the Company had net operating loss carryforwards
available for federal income tax purposes of approximately $2,424,000, which
expire beginning in the year 2003. As a result of an asset acquisition in April
1992, utilization of $1,447,000 of the net operating loss carryforward for
income tax purposes is restricted to approximately $160,000 per year because of
a change in ownership, as defined by the Tax Reform Act of 1986.
7. GAS HEDGING ACTIVITIES AND COMMITMENTS
While the use of hedging arrangements limits the downside risk of adverse
price movements, it may also limit future gains from favorable movements. All
hedging is accomplished pursuant to swap agreements based upon standard forms.
The Company addresses market risk by selecting instruments whose value
fluctuations correlate strongly with the underlying commodity being hedged.
Credit risk related to hedging activities is managed by requiring minimum credit
standards for counterparties, periodic settlements, and mark to market
valuations. The Company has not been required to provide collateral relating to
its hedging activities.
In December 1995, the Company had entered into various swap agreements to
fix the selling prices for natural gas at a weighted average NYMEX price of
$2.805 per Mcf for 225,000 Mcf of natural gas to be produced during 1996. The
Company closed the positions prior to December 31, 1995, resulting in a deferred
gain of approximately $70,875 which will be recognized in 1996.
At September 30, 1996, the Company had a basis swap agreement with a basis
differential of $.205 covering 300,000 Mcf of natural gas to be produced during
the last three months of 1996.
During the nine months ended September 30, 1996, the Company recognized a
net gain of $20,315 related to hedging transactions.
F-31
<PAGE> 156
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
8. CRUDE OIL AND NATURAL GAS PRODUCING ACTIVITIES
Capitalized costs relating to crude oil and natural gas producing
activities and related accumulated depreciation, depletion, and amortization are
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Proved crude oil and natural gas properties... $12,015,897 $15,284,453 $37,493,394
Unproved crude oil and natural gas
properties.................................. -- -- 707,913
Accumulated depreciation, depletion, and
amortization................................ (1,400,618) (2,320,378) (5,366,293)
----------- ----------- -----------
$10,615,279 $12,964,075 $32,835,014
=========== =========== ===========
</TABLE>
The unproven properties are excluded from the amortization base and consist
primarily of acreage, acquisition costs, and related geological and geophysical
costs. These costs are expected to be evaluated during the Company's 1996
drilling program.
Costs incurred in crude oil and natural gas producing activities for the
years ended December 31, 1993, 1994 and 1995, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------
1993 1994 1995
---------- ---------- -----------
<S> <C> <C> <C>
Acquisitions of properties:
Proved........................................ $4,283,855 $1,153,548 $13,657,383
Unproved...................................... $ -- $ 134,512 $ 707,913
Exploration costs............................... $ -- $ 130,182 $ 73,034
Development costs............................... $ 371,550 $2,006,183 $ 8,595,363
Amortization rate per equivalent barrel......... $ 4.08 $ 4.20 $ 5.29
</TABLE>
Depletion, depreciation and amortization increased $351,964 for the fourth
quarter of 1995 due to downward revisions in estimated proved reserves at
December 31, 1995.
Revenues from individual customers exceed 10% of total crude oil and
natural gas sales are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1993 1994 1995
-------- ---------- ----------
<S> <C> <C> <C>
Plains Marketing and Transportation............... $542,502 $1,614,711 $4,618,136
Energy Source, Inc................................ -- -- $ 870,285
GPM Natural Gas Corporation....................... $296,894 $ 553,613 $ --
</TABLE>
The Company believes that the loss of these customers would not have a
significant impact on the Company's results of operations or financial
condition.
9. SUPPLEMENTARY CRUDE OIL AND NATURAL GAS RESERVE INFORMATION (UNAUDITED)
The Company has interests in crude oil and natural gas properties that are
principally located in Texas, Oklahoma, New Mexico, Wyoming and offshore Texas.
The Company does not own or lease any crude oil and natural gas properties
outside the United States.
The Company retains independent engineering firms to provide annual
year-end estimates of the Company's future net recoverable crude oil, natural
gas, and natural gas liquids reserves. Estimated proved net
F-32
<PAGE> 157
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
recoverable reserves as shown below include only those quantities that can be
expected to be commercially recoverable at prices and costs in effect at the
balance sheet dates under existing regulatory practices and with conventional
equipment and operating methods.
Proved developed reserves represent only those reserves expected to be
recovered through existing wells. Proved undeveloped reserves include those
reserves expected to be recovered from new wells on undrilled acreage or from
existing wells on which a relatively major expenditure is required for
recompletion.
Net quantities of proved developed and undeveloped reserves of natural gas
and crude oil, including condensate and natural gas liquids, are summarized as
follows:
<TABLE>
<CAPTION>
NATURAL GAS
CRUDE OIL (THOUSAND
(BARRELS) CUBIC FEET)
----------- -----------
<S> <C> <C>
December 31, 1992......................................... 955,519 7,784,592
Purchase of reserves in place........................... 2,861,349 3,310,747
Extensions and discoveries.............................. 10,808 997,422
Revisions of previous estimates......................... (57,773) (562,127)
Production.............................................. (48,819) (483,241)
---------- ----------
December 31, 1993......................................... 3,721,084 11,047,393
Purchase of reserves in place........................... 1,035,137 1,858,271
Extensions and discoveries.............................. 906,526 1,996,771
Revisions of previous estimates......................... (387,840) (879,838)
Production.............................................. (115,642) (620,843)
Sales of reserves in place.............................. (3,524) (21,280)
---------- ----------
December 31, 1994......................................... 5,155,741 13,380,474
Purchase of reserves in place........................... 190,063 25,785,458
Revisions of previous estimates......................... (1,141,288) (6,453,623)
Production.............................................. (283,440) (1,752,990)
Sales of reserves in place.............................. -- (90,207)
---------- ----------
December 31, 1995......................................... 3,921,076 30,869,112
========== ==========
Proved developed reserves:
December 31, 1992....................................... 671,619 7,258,287
December 31, 1993....................................... 1,641,800 8,781,785
December 31, 1994....................................... 1,532,470 9,205,784
December 31, 1995....................................... 1,632,404 13,304,031
</TABLE>
The Company's principal properties are the GAU and Oak Hill, both of which
are located onshore in Texas, and Mustang Island located in offshore Nueces
County, Texas. As of December 31, 1993, 1994 and 1995, the Company's net
interest in the proved reserves of the GAU was approximately 3,613,000 BOE,
5,422,000 BOE and 4,167,000 BOE, respectively. As of December 31, 1995, the
Company's net interests in the proved reserves of Oak Hill and Mustang Island
were 3,342,632 BOE and 721,313 BOE, respectively.
The following is a summary of a standardized measure of discounted net cash
flows related to the Company's proved crude oil and natural gas reserves. For
these calculations, estimated future cash flows from estimated future production
of proved reserves were computed using crude oil and natural gas prices as of
the end of each period presented. Future development and production costs
attributable to the proved reserves were estimated assuming that existing
conditions would continue over the economic lives of the individual leases and
costs were not escalated for the future. Estimated future income tax expenses
were calculated by
F-33
<PAGE> 158
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
applying future statutory tax rates (based on the current tax law adjusted for
permanent differences and tax credits) to the estimated future pretax net cash
flows related to proved crude oil and natural gas reserves, less the tax basis
of the properties involved.
The Company cautions against using this data to determine the fair value of
its crude oil and natural gas properties. To obtain the best estimate of fair
value of the crude oil and natural gas properties, forecasts of future economic
conditions, varying discount rates, and consideration of other than proved
reserves would have to be incorporated into the calculation. In addition, there
are significant uncertainties inherent in estimating quantities of proved
reserves and in projecting rates of production that impair the usefulness of the
data.
The standardized measure of discounted future net cash flows relating to
proved crude oil and natural gas reserves are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------
1994 1995
------------ ------------
<S> <C> <C>
Future cash inflows...................................... $107,208,656 $132,218,400
Future production and development costs.................. (55,049,902) (71,109,500)
Future income tax expenses............................... (12,687,965) (7,123,405)
----------- ------------
Future net cash flows.................................... 39,470,789 53,985,495
10% annual discount for estimated timing of cash flows... (18,631,286) (21,858,394)
----------- ------------
Standardized measure of discounted future net cash
flows.................................................. $ 20,839,503 $ 32,127,101
=========== ============
</TABLE>
The following are the principal sources of change in the standardized
measure of discounted future net cash flows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
1993 1994 1995
----------- ----------- ------------
<S> <C> <C> <C>
Sales and transfers of crude oil and natural
gas produced, net of production costs....... $(1,117,711) $(1,775,145) $ (5,710,325)
Net changes in prices and production costs.... (1,662,230) 14,785,630 14,654,096
Development costs incurred during the period
and changes in estimated future development
costs....................................... -- (119,443) (11,886,400)
Purchases of reserves in place................ 6,570,174 3,414,926 15,455,400
Sales of reserves in place.................... -- (30,585) (97,210)
Extensions and discoveries, less related
costs....................................... 1,447,183 4,605,206 --
Revisions of previous quantity estimates...... (390,769) (1,985,978) (8,871,208)
Accretion of discount......................... 1,437,375 1,439,950 2,744,504
Net change in income taxes.................... (1,079,408) (6,952,217) 5,564,560
Changes in production rates (timing) and
other....................................... (2,238,430) (4,221,647) (565,819)
----------- ----------- ------------
Net change.................................... $ 2,966,184 $ 9,160,697 $ 11,287,598
=========== =========== ============
</TABLE>
During recent years, there have been significant fluctuations in the prices
paid for crude oil in the world markets. This situation has had a destabilizing
effect on crude oil posted prices in the United States, including the posted
prices paid by purchasers of the Company's crude oil. The net weighted average
prices of crude oil and natural gas at December 31, 1993, 1994 and 1995 used in
the above table were $13.03, $16.59 and $18.71 per barrel of crude oil,
respectively, and $1.86, $1.62 and $1.91 per thousand cubic feet of natural gas,
respectively.
F-34
<PAGE> 159
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
10. LEGAL PROCEEDINGS AND CLAIMS
On August 31, 1995, R.E. Steakley and N.M. Steakley filed a lawsuit in the
District Court of Harris County, Texas, against Amoco Production Company,
Phillips Petroleum Company, the Company and others. The lawsuit alleges certain
environmental claims and related tortuous and contractual claims. The plaintiffs
seek unspecified damages which include remediation and various tortuous and
contractual damages.
The Company believes that it is operating in compliance with applicable
environmental laws and regulations and believes, based on the advice of counsel,
that the ultimate resolution of the lawsuit will not have a material effect on
the Company's financial condition or results of operations.
11. MERGER WITH ALEXANDER
On December 29, 1995, the Company and Alexander signed a letter of intent
providing for the Merger. The letter of intent was subject to, among other
conditions, the execution of a definitive merger agreement. On March 25, 1996,
the Company and Alexander modified the terms of the letter of intent to reduce
the original exchange ratio from 1.8 to 1.7 shares of the Company's Common Stock
for each share of Alexander's common stock. See Note 2.
12. SUBSEQUENT EVENT (UNAUDITED)
On November 1, 1996, the Company completed the sale of $100 million
principal amount of 10 3/4% Senior Notes due 2006. The net proceeds of the
Outstanding Notes of approximately $96.0 million were used to repay
approximately $62 million of borrowings outstanding under the Credit Facility
and to increase the Company's working capital. The Outstanding Notes bear
interest at an annual rate of 10 3/4%, payable semiannually in arrears on May 1
and November 1 of each year. The Outstanding Notes are 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. Subject to certain limitations set
forth in the indenture covering the Outstanding Notes (the "Indenture"), the
Company and its subsidiaries may incur additional senior indebtedness and other
indebtedness.
The Indenture contains certain covenants limiting the Company and its
Restricted Subsidiaries, as defined, with respect to the following: (i) assets
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; and (ix)
transactions with affiliates.
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
-------------------------------------------------------------------------- ----------
<S> <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, as defined, plus accrued and unpaid interest to the date of
redemption. In addition, in the event the Company consummates one or more Equity
Offerings, as defined, on or prior to November 1, 1999, the Company, at its
option, may redeem up to $35.0 million of
F-35
<PAGE> 160
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
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
$65.0 million of the aggregate principal amount of the Notes remains
outstanding.
Upon a Change of Control, as defined, the Company will be required, subject
to certain conditions, to offer to repurchase all Notes at 101% of the principal
amount thereof, plus accrued and unpaid interest to the date of purchase.
The Indenture provides that the Notes will be unconditionally guaranteed
(the "Guarantee") by any subsidiary designated by the Company as a Restricted
Subsidiary (a "Guarantor"). As a result of the Subsequent Merger of NEG-OK into
NEG, the Company has no Restricted Subsidiaries at or subsequent to December 31,
1996.
F-36
<PAGE> 161
[NETHERLAND, SEWELL & ASSOCIATES LETTERHEAD]
LOGO
INTERNATIONAL PETROLEUM CONSULTANTS
ENGINEERING, GEOLOGY, GEOPHYSICS
ANNEX A-1
September 20, 1996
Mr. William T. Jones
National Energy Group, Inc.
1400 One Energy Square
4925 Greenville Avenue
Dallas, Texas 75206
Dear Mr. Jones:
In accordance with your request, we have "rolled forward" from December 31,
1995, to July 1, 1996, our estimates of the proved reserves and future revenue
to the interests of National Energy Group, Inc. (NEG) and Alexander Energy
Corporation (AEC) in certain oil and gas properties located in the United
States. Our December 31, 1995 estimates are set forth in our reports dated
February 15, 1996, to the NEG interest and March 1, 1996, to the AEC interest.
As requested, these estimates have been updated for the following: (1)
rescheduling of the 1996 and 1997 drilling and workover programs, (2) addition
of new wells, and (3) deletion of sold wells. No other engineering updates have
been conducted for these properties since the reports as of December 31, 1995.
This report has been prepared using constant prices and costs in accordance with
the guidelines of the Securities and Exchange Commission (SEC).
As presented in the accompanying summary projections, Tables I through IV,
we estimate the net reserves and future net revenue to the combined NEG and AEC
interest, as of July 1, 1996, to be:
<TABLE>
<CAPTION>
NET RESERVES FUTURE NET REVENUE
------------------------ -----------------------------
OIL GAS PRESENT WORTH
CATEGORY (BARRELS) (MCF) TOTAL AT 10%
- ----------------------------------------- --------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Proved Developed Producing............... 2,381,668 62,935,327 $118,871,700 $ 76,680,100
Non-Producing.......................... 218,824 9,856,232 17,818,700 10,530,500
Proved Undeveloped....................... 3,384,120 50,069,062 99,806,700 54,899,100
--------- ----------- ------------ ------------
Total Proved................... 5,984,612 122,860,621 $236,497,100 $ 142,109,700
</TABLE>
The oil reserves shown include crude oil, condensate, and gas plant
liquids. Oil volumes are expressed in barrels which are equivalent to 42 United
States gallons. Gas volumes are expressed in thousands of standard cubic feet
(MCF) at the contract temperature and pressure bases.
The estimated reserves and future revenue shown in this report are for
proved developed producing, proved developed non-producing, and proved
undeveloped reserves. In accordance with SEC guidelines, our estimates do not
include any value for probable or possible reserves which may exist for these
properties. This report does not include any value which could be attributed to
interests in undeveloped acreage beyond those tracts for which undeveloped
reserves have been estimated.
[NETHERLAND, SEWELL & ASSOCIATES ADDRESS]
A-1-1
<PAGE> 162
[NETHERLAND, SEWELL & ASSOCIATES LETTERHEAD]
Future gross revenue to the combined interests of NEG and AEC is prior to
deducting state production taxes and ad valorem taxes. Future net revenue is
after deducting these taxes, future capital costs, and operating expenses, but
before consideration of federal income taxes. In accordance with SEC guidelines,
the future net revenue has been discounted at an annual rate of 10 percent to
determine its "present worth." The present worth is shown to indicate the effect
of time on the value of money and should not be construed as being the fair
market value of the properties.
For the purposes of this report, a field inspection of the properties has
not been performed nor has the mechanical operation or condition of the wells
and their related facilities been examined. We have not investigated possible
environmental liability related to the properties; therefore, our estimates do
not include any costs which may be incurred due to such possible liability.
Also, our estimates do not include any salvage value for the lease and well
equipment nor the cost of abandoning the properties.
For the purposes of this report, the oil and gas prices used in the reports
dated February 15 1996, and March 1, 1996, have been adjusted to reflect the
July 1, 1996 effective date. Oil prices for the Goldsmith Adobe Unit have been
increased $2.50 per barrel to reflect the increase in actual prices received.
All other oil prices have been increased $2.00 per barrel based on a July 1,
1996 West Texas Intermediate posted price of $20.00 per barrel. Gas prices have
been increased $0.30 to adjust to a July 1996 regional spot market price. Oil
and gas prices are held constant in accordance with SEC guidelines.
Lease and well operating costs are based on operating expense records of
NEG and AEC. For non-operated properties, these costs include the per-well
overhead expenses allowed under joint operating agreements along with costs
estimated to be incurred at and below the district and field levels. As
requested, lease and well operating costs for the operated properties include
only direct lease and field level costs. Headquarters general and administrative
overhead expenses of NEG and AEC are not included. Lease and well operating
costs are held constant in accordance with SEC guidelines. Capital costs are
included as required for workovers, new development wells, and production
equipment.
We have made no investigation of potential gas volume and value imbalances
which may have resulted from overdelivery or underdelivery to the combined
interests of NEG and AEC. Therefore, our estimates of reserves and future
revenue do not include adjustments for the settlement of any such imbalances;
our projections are based on NEG and AEC receiving their net revenue interest
share of estimated future gross gas production.
The reserves included in this report are estimates only and should not be
construed as exact quantities. They may or may not be recovered; if recovered,
the revenues therefrom and the costs related thereto could be more or less than
the estimated amounts. The sales rates, prices received for the reserves, and
costs incurred in recovering such reserves may vary from assumptions included in
this report due to governmental policies and uncertainties of supply and demand.
Also, estimates of reserves may increase or decrease as a result of future
operations.
In evaluating the information at our disposal concerning this report, we
have excluded from our consideration all matters as to which legal or
accounting, rather than engineering and geological, interpretation may be
controlling. As in all aspects of oil and gas evaluation, there are
uncertainties inherent in the interpretation of engineering and geological data;
therefore, our conclusions necessarily represent only informed professional
judgments.
The titles to the properties have not been examined by Netherland, Sewell &
Associates, Inc., nor has the actual degree or type of interest owned been
independently confirmed. The data used in our estimates were obtained from
National Energy Group, Inc., Alexander Energy Corporation, other interest
owners, various operators of the properties, and the nonconfidential files of
Netherland, Sewell & Associates, Inc. and were accepted as accurate. We are
independent petroleum engineers, geologists, and geophysicists; we do not own
A-1-2
<PAGE> 163
[NETHERLAND, SEWELL & ASSOCIATES LETTERHEAD]
an interest in these properties and are not employed on a contingent basis.
Basic geologic and field performance data together with our engineering work
sheets are maintained on file in our office.
Very truly yours,
LOGO
TJQ:JAB
A-1-3
<PAGE> 164
[NETHERLAND, SEWELL & ASSOCIATES LETTERHEAD]
INTERNATIONAL PETROLEUM CONSULTANTS LOGO
ENGINEERING, GEOLOGY, GEOPHYSICS
ANNEX A-2
October 8, 1996
Mr. William T. Jones
National Energy Group, Inc.
1400 One Energy Square
4925 Greenville Avenue
Dallas, Texas 75206
Dear Mr. Jones:
In accordance with your request, we have estimated the proved reserves and
future revenue, as of July 1, 1996, to the National Energy Group, Inc. (NEG)
interest in certain oil and gas properties located in the South Lake Boeuf
Field, Lafourche Parish, Louisiana, as listed in the accompanying tabulations.
This interest was recently purchased by NEG, and the reserve estimates presented
in this report are the same as those used in our sales report dated April 24,
1996, prepared for O'Sullivan Oil & Gas Company, Inc. (O'Sullivan) to the 100
percent working interest. This report has been prepared using constant prices
and costs in accordance with the guidelines of the Securities and Exchange
Commission (SEC).
As presented in the accompanying summary projections, Tables I through IV,
we estimate the net reserves and future net revenue to the NEG interest, as of
July 1, 1996, to be:
<TABLE>
<CAPTION>
NET RESERVES FUTURE NET RESERVES
---------------------- ----------------------------
OIL GAS PRESENT WORTH
CATEGORY (BARRELS) (MCF) TOTAL AT 10%
------------------------------------- --------- --------- ----------- -------------
<S> <C> <C> <C> <C>
Proved Developed
Producing.......................... 6,436 7,079 $ 98,600 $ 96,200
Non-Producing...................... 402,412 372,094 6,491,900 4,525,800
Proved Undeveloped................... 1,327,337 6,678,997 31,118,500 18,507,100
--------- --------- ----------- -----------
Total Proved............... 1,736,185 7,058,170 $37,709,000 $23,129,100
========= ========= =========== ===========
</TABLE>
The oil reserves shown include crude oil and condensate. Oil volumes are
expressed in barrels which are equivalent to 42 United States gallons. Gas
volumes are expressed in thousands of standard cubic feet (MCF) at the contract
temperature and pressure bases.
The estimated reserves and future revenue shown in this report are for
proved developed producing, proved developed non-producing, and proved
undeveloped reserves. In accordance with SEC guidelines, our estimates do not
include any value for probable or possible reserves which may exist for these
properties. This report does not include any value which could be attributed to
interests in undeveloped acreage beyond those tracts for which undeveloped
reserves have been estimated.
[NETHERLAND, SEWELL & ASSOCIATES ADDRESS]
A-2-1
<PAGE> 165
[NETHERLAND, SEWELL & ASSOCIATES LETTERHEAD]
Future gross revenue to the NEG interest is prior to deducting state
production taxes. Future net revenue is after deducting these taxes, future
capital costs, and operating expenses, but before consideration of federal
income taxes. In accordance with SEC guidelines, the future net revenue has been
discounted at an annual rate of 10 percent to determine its "present worth." The
present worth is shown to indicate the effect of time on the value of money and
should not be construed as being the fair market value of the properties.
For the purposes of this report, a field inspection of the properties has
not been performed nor has the mechanical operation or condition of the wells
and their related facilities been examined. We have not investigated possible
environmental liability related to the properties; therefore, our estimates do
not include any costs which may be incurred due to such possible liability.
Also, our estimates do not include any salvage value for the lease and well
equipment nor the cost of abandoning the properties.
Oil prices used in this report are based on a July 1, 1996 West Texas
Intermediate posted price of $20.00 per barrel. Gas prices used in this report
are based on a July 1996 Gulf Coast spot market price of $2.55 per MCF. Oil and
gas prices are held constant in accordance with SEC guidelines.
Lease and well operating costs are based on operating expense records of
O'Sullivan. These costs include the per-well overhead expenses allowed under
joint operating agreements along with costs estimated to be incurred at and
below the district and field levels. Headquarters general and administrative
overhead expenses of NEG are not included. Lease and well operating costs are
held constant in accordance with SEC guidelines. Capital costs are included as
required for workovers, new development wells, and production equipment.
We have made no investigation of potential gas volume and value imbalances
which may have resulted from overdelivery or underdelivery to the NEG interest.
Therefore, our estimates of reserves and future revenue do not include
adjustments for the settlement of any such imbalances; our projections are based
on NEG receiving its net revenue interest share of estimated future gross gas
production.
The reserves included in this report are estimates only and should not be
construed as exact quantities. They may or may not be recovered; if recovered,
the revenues therefrom and the costs related thereto could be more or less than
the estimated amounts. A substantial portion of these reserves are for
behind-pipe zones and undeveloped locations. Therefore, these reserves are based
on estimates of reservoir volumes and recovery efficiencies along with analogies
to similar production. As such reserve estimates are usually subject to greater
revision than those based on substantial production and pressure data, it may be
necessary to revise these estimates up or down in the future as additional
performance data become available. The sales rates, prices received for the
reserves, and costs incurred in recovering such reserves may vary from
assumptions included in this report due to governmental policies and
uncertainties of supply and demand. Also, estimates of reserves may increase or
decrease as a result of future operations.
In evaluating the information at our disposal concerning this report, we
have excluded from our consideration all matters as to which legal or
accounting, rather than engineering and geological, interpretation may be
controlling. As in all aspects of oil and gas evaluation, there are
uncertainties inherent in the interpretation of engineering and geological data;
therefore, our conclusions necessarily represent only informed professional
judgments.
A-2-2
<PAGE> 166
[NETHERLAND, SEWELL & ASSOCIATES LETTERHEAD]
The titles to the properties have not been examined by Netherland, Sewell &
Associates, Inc., nor has the actual degree or type of interest owned been
independently confirmed. The data used in our estimates were obtained from
National Energy Group, Inc., O'Sullivan Oil & Gas Company, Inc., and the
nonconfidential files of Netherland, Sewell & Associates, Inc. and were accepted
as accurate. We are independent petroleum engineers, geologists, and
geophysicists; we do not own an interest in these properties and are not
employed on a contingent basis. Basic geologic and field performance data
together with our engineering work sheets are maintained on file in our office.
Very truly yours,
LOGO
A-2-3
<PAGE> 167
[NETHERLAND, SEWELL & ASSOCIATES LETTERHEAD]
LOGO
INTERNATIONAL PETROLEUM CONSULTANTS
ENGINEERING, GEOLOGY, GEOPHYSICS
ANNEX B
February 15, 1996
Mr. William T. Jones
National Energy Group, Inc.
1400 One Energy Square
4925 Greenville Avenue
Dallas, Texas 75206
Dear Mr. Jones:
In accordance with your request, we have estimated the proved reserves and
future revenue, as of December 31, 1995, to the National Energy Group, Inc.
(NEG) interest in certain oil and gas properties located in the United States as
listed in the accompanying tabulations. This report has been prepared using
constant prices and costs in accordance with the guidelines of the Securities
and Exchange Commission (SEC).
As presented in the accompanying summary projections, Tables I through IV,
we estimate the net reserves and future net revenue to the NEG interest, as of
December 31, 1995, to be:
<TABLE>
<CAPTION>
FUTURE NET REVENUE
NET RESERVES --------------------------
------------------------ PRESENT
OIL GAS WORTH
CATEGORY (BARRELS) (MCF) TOTAL AT 10%
- -------------------------------------------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Proved Developed
Producing................................. 1,630,373 11,854,030 $27,880,900 $20,562,700
Non-Producing............................. 2,031 1,450,001 1,410,000 776,200
Proved Undeveloped.......................... 2,288,672 17,565,081 31,818,000 14,939,700
--------- ---------- ----------- -----------
Total Proved...................... 3,921,076 30,869,112 $61,108,900 $36,278,600
</TABLE>
The oil reserves shown include crude oil, condensate, and gas plant
liquids. Oil volumes are expressed in barrels which are equivalent to 42 United
States gallons. Gas volumes are expressed in thousands of standard cubic feet
(MCF) at the contract temperature and pressure bases.
As shown in the Table of Contents, this report includes summary projections
of reserves and revenue for each reserve category along with one-line summaries
of reserves, economics, and basic data by lease. For the purposes of this
report, the term "lease" refers to a single economic projection.
The estimated reserves and future revenue shown in this report are for
proved developed producing, proved developed non-producing, and proved
undeveloped reserves. In accordance with SEC guidelines, our estimates do not
include any value for probable or possible reserves which may exist for these
properties. This
[NETHERLAND, SEWELL & ASSOCIATES ADDRESS]
B-1
<PAGE> 168
[NETHERLAND, SEWELL & ASSOCIATES LETTERHEAD]
report does not include any value which could be attributed to interests in
undeveloped acreage beyond those tracts for which undeveloped reserves have been
estimated.
Future gross revenue to the NEG interest is prior to deducting state
production taxes and ad valorem taxes. Future net revenue is after deducting
these taxes, future capital costs, and operating expenses, but before
consideration of federal income taxes. In accordance with SEC guidelines, the
future net revenue has been discounted at an annual rate of 10 percent to
determine its "present worth." The present worth is shown to indicate the effect
of time on the value of money and should not be construed as being the fair
market value of the properties.
For the purposes of this report, a field inspection of the properties has
not been performed nor has the mechanical operation or condition of the wells
and their related facilities been examined. We have not investigated possible
environmental liability related to the properties; therefore, our estimates do
not include any costs which may be incurred due to such possible liability.
Also, our estimates do not include any salvage value for the lease and well
equipment nor the cost of abandoning the properties.
Oil prices used in this report are based on a December 31, 1995 West Texas
Intermediate posted price of $18.00 per barrel, adjusted by lease for gravity,
transportation fees, and regional posted price differentials. Gas prices used in
this report are the December 1995 prices received for each lease. Oil and gas
prices are held constant in accordance with SEC guidelines.
Lease and well operating costs are based on operating expense records of
NEG. For non-operated properties, these costs include the per-well overhead
expenses allowed under joint operating agreements along with costs estimated to
be incurred at and below the district and field levels. As requested, lease and
well operating costs for the operated properties include only direct lease and
field level costs. Headquarters general and administrative overhead expenses of
NEG are not included. Lease and well operating costs are held constant in
accordance with SEC guidelines. Capital costs are included as required for
workovers, new development wells, and production equipment.
We have made no investigation of potential gas volume and value imbalances
which may have resulted from overdelivery or underdelivery to the NEG interest.
Therefore, our estimates of reserves and future revenue do not include
adjustments for the settlement of any such imbalances; our projections are based
on NEC receiving its net revenue interest share of estimated future gross gas
production.
The reserves included in this report are estimates only and should not be
construed as exact quantities. They may or may not be recovered; if recovered,
the revenues therefrom and the costs related thereto could be more or less than
the estimated amounts. The sales rates, prices received for the reserves, and
costs incurred in recovering such reserves may vary from assumptions included in
this report due to governmental policies and uncertainties of supply and demand.
Also, estimates of reserves may increase or decrease as a result of future
operations.
In evaluating the information at our disposal concerning this report, we
have excluded from our consideration all matters as to which legal or
accounting, rather than engineering and geological, interpretation may be
controlling. As in all aspects of oil and gas evaluation, there are
uncertainties inherent in the interpretation of engineering and geological data;
therefore, our conclusions necessarily represent only informed professional
judgments.
B-2
<PAGE> 169
[NETHERLAND, SEWELL & ASSOCIATES LETTERHEAD]
The titles to the properties have not been examined by Netherland, Sewell &
Associates, Inc., nor has the actual degree or type of interest owned been
independently confirmed. The data used in our estimates were obtained from
National Energy Group, Inc. and the nonconfidential files of Netherland, Sewell
& Associates, Inc. and were accepted as accurate. We are independent petroleum
engineers, geologists, and geophysicists; we do not own an interest in these
properties and are not employed on a contingent basis. Basic geologic and field
performance data together with our engineering work sheets are maintained on
file in our office.
Very truly yours,
LOGO
B-3
<PAGE> 170
[NETHERLAND, SEWELL & ASSOCIATES LETTERHEAD]
LOGO
INTERNATIONAL PETROLEUM CONSULTANTS
ENGINEERING, GEOLOGY, GEOPHYSICS
ANNEX C
March 1, 1996
Mr. Bob G. Alexander
Alexander Energy Corporation
701 Cedar Lake Boulevard
Oklahoma City, Oklahoma 73114
Dear Mr. Alexander:
In accordance with your request, we have estimated the proved, probable,
and possible reserves and future revenue, as of January 1, 1996, to the
Alexander Energy Corporation (Alexander) corporate interest in certain oil and
gas properties located in the United States as listed in the accompanying
tabulations. This interest includes directly owned interest and General Partner
interest derived from 3 limited partnerships managed by Alexander. This report
has been prepared using constant prices and costs in accordance with the
guidelines of the Securities and Exchange Commission (SEC). However, inasmuch as
the SEC does not recognize probable and possible reserves, the sections of this
report dealing with such reserves should not be used in filings with the SEC.
As presented in the accompanying summary projections, Tables I through VI,
we estimate the net reserves and future net revenue to the Alexander interest,
as of January 1, 1996, to be:
<TABLE>
<CAPTION>
NET RESERVES FUTURE NET REVENUE
------------------------ ----------------------------
OIL GAS PRESENT
CATEGORY (BARRELS) (MCF) TOTAL WORTH AT 10%
- ------------------------------------------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Proved Developed
Producing................................ 1,036,340 58,201,146 $ 84,342,800 $ 53,597,300
Non-Producing............................ 179,576 8,496,600 13,286,800 7,776,900
Proved Undeveloped......................... 1,092,056 32,372,429 45,353,100 24,073,400
--------- ---------- ------------ ------------
Total Proved..................... 2,307,972 99,070,175 $142,982,700 $ 85,447,600
Probable(1)................................ 558,499 14,765,057 $ 19,451,600 $ 9,119,800
Possible(1)................................ 466,167 10,118,921 $ 15,060,500 $ 6,643,800
</TABLE>
- ---------------
(1) These reserves and future revenue are not risk weighted.
The oil reserves shown include crude oil and condensate. Oil volumes are
expressed in barrels which are equivalent to 42 United States gallons. Gas
volumes are expressed in thousands of standard cubic feet (MCF) at the contract
temperature and pressure bases.
[NETHERLAND, SEWELL & ASSOCIATES ADDRESS]
C-1
<PAGE> 171
[NETHERLAND, SEWELL & ASSOCIATES LETTERHEAD]
As shown in the Table of Contents, this report includes summary projections
of reserves and revenue for each reserve category along with one-line summaries
of reserves, economics, and basic data by lease. For the purposes of this
report, the term "lease" refers to a single economic projection.
The estimated reserves and future revenue shown in this report are for
proved developed producing, proved developed non-producing, proved undeveloped,
probable, and possible reserves. This report does not include any value which
could be attributed to interests in undeveloped acreage beyond those tracts for
which undeveloped reserves have been estimated.
Future gross revenue to the Alexander corporate interest is prior to
deducting state production taxes and ad valorem taxes. Future net revenue is
after deducting these taxes, future capital costs, and operating expenses, but
before consideration of federal income taxes. In accordance with SEC guidelines,
the future net revenue has been discounted at an annual rate of 10 percent to
determine its "present worth." The present worth is shown to indicate the effect
of time on the value of money and should not be construed as being the fair
market value of the properties.
For the purposes of this report, a field inspection of the properties has
not been performed nor has the mechanical operation or condition of the wells
and their related facilities been examined. We have not investigated possible
environmental liability related to the properties; therefore, our estimates do
not include any costs which may be incurred due to such possible liability.
Also, our estimates do not include any salvage value for the lease and well
equipment nor the cost of abandoning the properties.
Oil prices used in this report are based on a December 31, 1995 West Texas
Intermediate posted price of $18.00 per barrel, adjusted by lease for gravity,
transportation fees, and regional posted price differentials. Gas prices used in
this report are based on either the most current price available for each lease,
adjusted to a December 1995 regional spot market price, or the contract price.
Oil and gas prices are held constant in accordance with SEC guidelines.
Lease and well operating costs are based on operating expense records of
Alexander. For non-operated properties, these costs include the per-well
overhead expenses allowed under joint operating agreements along with costs
estimated to be incurred at and below the district and field levels. As
requested, lease and well operating costs for the operated properties include
only direct lease and field level costs. Headquarters general and administrative
overhead expenses of Alexander are not included. Lease and well operating costs
are held constant in accordance with SEC guidelines. Capital costs are included
as required for workovers, new development wells, and production equipment.
We have made no investigation of potential gas volume and value imbalances
which may have resulted from overdelivery or underdelivery to the Alexander
corporate interest. Therefore, our estimates of reserves and future revenue do
not include adjustments for the settlement of any such imbalances; our
projections are based on Alexander receiving its net revenue interest share of
estimated future gross gas production.
The reserves included in this report are estimates only and should not be
construed as exact quantities. They may or may not be recovered; if recovered,
the revenues therefrom and the costs related thereto could be more or less than
the estimated amounts. The sales rates, prices received for the reserves, and
costs incurred in recovering such reserves may vary from assumptions included in
this report due to governmental policies and uncertainties of supply and demand.
Also, estimates of reserves may increase or decrease as a result of future
operations.
In evaluating the information at our disposal concerning this report, we
have excluded from our consideration all matters as to which legal or
accounting, rather than engineering and geological, interpretation may be
controlling. As in all aspects of oil and gas evaluation, there are
uncertainties inherent in the interpretation of engineering and geological data;
therefore, our conclusions necessarily present only informed professional
judgments.
C-2
<PAGE> 172
[NETHERLAND, SEWELL & ASSOCIATES LETTERHEAD]
The titles to the properties have not been examined by Netherland, Sewell &
Associates, Inc., nor has the actual degree or type of interest owned been
independently confirmed. The data used in our estimates were obtained from
Alexander Energy Corporation, other interest owners, various operators of the
properties, and the nonconfidential files of Netherland, Sewell & Associates,
Inc. and were accepted as accurate. We are independent petroleum engineers,
geologists, and geophysicists; we do not own an interest in these properties and
are not employed on a contingent basis. Basic geologic and field performance
data together with our engineering work sheets are maintained on file in our
office.
Very truly yours,
LOGO
C-3
<PAGE> 173
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ALL TENDERED OUTSTANDING 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, COLUMBUS, N.A.
235 WEST SCHROCK ROAD
WESTERVILLE, OHIO 43271-0184
ATTENTION: CORPORATE TRUST OPERATIONS
BY OVERNIGHT MAIL OR HAND DELIVERY:
BANK ONE, COLUMBUS, N.A.
235 WEST SCHROCK ROAD
WESTERVILLE, OHIO 43081
ATTENTION: CORPORATE TRUST OPERATIONS
BY FACSIMILE:
BANK ONE, COLUMBUS, N.A.
ATTENTION: CORPORATE TRUST OPERATIONS
(614) 248-5088
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.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
$100,000,000
[NATIONAL ENERGY LOGO]
NATIONAL ENERGY GROUP, INC.
10 3/4% SENIOR NOTES
DUE 2006
PROSPECTUS
JANUARY 13, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Available Information........................... 3
Information Incorporated by Reference........... 4
Special Note Regarding Forward-Looking
Statements.................................... 4
Prospectus Summary.............................. 5
Risk Factors.................................... 16
The Exchange Offer.............................. 23
Use of Proceeds................................. 29
Capitalization.................................. 29
Selected Pro Forma Combined Financial, Operating
and Oil and Natural Gas Reserve Data.......... 30
Management's Discussion and Analysis of Pro
Forma Financial Condition and Results of
Operations.................................... 33
Selected NEG Historical Financial and Operating
Data.......................................... 38
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 40
Selected NEG-OK Historical Financial and
Operating
Data.......................................... 47
NEG-OK Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 49
Business and Properties......................... 57
Management...................................... 76
Security Ownership.............................. 83
Certain Relationships and Related
Transactions.................................. 86
Description of Amended Credit Facility.......... 87
Description of the Exchange Notes............... 88
Description of Capital Stock.................... 113
Certain Federal Income Tax Consequences......... 117
Plan of Distribution............................ 119
Legal Matters................................... 120
Experts......................................... 120
Glossary........................................ 122
Index to Financial Statements................... F-1
Annex A-1 through C -- Reports of Independent
Petroleum Engineers........................... A-1-1
</TABLE>
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<PAGE> 174
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, a
copy of which is filed as Exhibit 3.1 to this Registration Statement, 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 By-laws of the
Registrant, a copy of which is filed as Exhibit 3.2 hereto, 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.
II-1
<PAGE> 175
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<C> <S>
3.1 -- Certificate of Incorporation of the Registrant, which includes the
Certificate of Incorporation of the Registrant filed with the
Secretary of State of Delaware on November 20, 1990(4), the
Certificate of Elimination of the Redeemable Convertible Preferred
Stock, Series A of the Registrant, filed with the office of the
Secretary of State of the State of Delaware on June 2, 1994(3), the
Certificate of Amendment of Certificate of Incorporation of the
Registrant, filed with the office of the Secretary of State of the
State of Delaware on August 29, 1996(3), the Certificate of
Designations of the Registrant of 10% Cumulative Convertible
Preferred Stock, Series B(5), the Certificate of Designations of the
Registrant of 10 1/2% Cumulative Convertible Preferred Stock, Series
C(6), the Certificate of Designations of the Registrant of
Convertible Preferred Stock, Series D(3), and the Certificate of
Designations of the Registrant of Convertible Preferred Stock, Series
E(3)
3.2 -- By-laws of the Registrant(4)
4.1 -- Certificate of Designations of the Registrant of 10% Cumulative
Convertible Preferred Stock, Series B(5)
4.2 -- Certificate of Designations of the Registrant of 10 1/2% Cumulative
Convertible Preferred Stock, Series C(6)
4.3 -- Certificate of Designations of the Registrant of Convertible
Preferred Stock, Series D(3)
4.4 -- Certificate of Designations of the Registrant of Convertible
Preferred Stock, Series E(3)
4.5 -- 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 (10 1/2% Senior Secured Notes)(8)
4.6 -- Letter dated August 29, 1996 between Alexander and John Hancock
Mutual Life Insurance Company relating to the payment of the 1989
Notes(3)
4.7 -- Specimen Common Stock Certificate(9)
4.8 -- 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.(10)
4.9 -- Registration Rights Agreement dated October 29, 1996, by and among
the Registrant, Guarantor and the Initial Purchasers(10)
4.10 -- Specimen Global Note Certificate dated November 1, 1996(10)
4.11 -- Specimen Global Exchange Note Certificate(11)
5.1 -- Opinion of Strasburger & Price, L.L.P. regarding legality of
securities being issued(11)
10.1 -- Crude Oil Purchase Contract, dated November 30, 1992, between the
Registrant and Plains Liquids Transport Inc.(12)
10.2 -- Amendment to Crude Oil Purchase Contract, dated November 17, 1993,
between the Registrant and Plains Liquids Transport, Inc.(5)
10.3 -- Crude Oil Purchase Contract, dated February 8, 1993, between the
Registrant and Plains Marketing and Transportation Inc. and the
predecessor contract, the Crude Oil Purchase Contract, dated November
12, 1991, between Sunnybrook Transmission, Inc. and TriSearch
Inc.(12)
</TABLE>
II-2
<PAGE> 176
<TABLE>
<C> <S>
10.4 -- Stock Purchase Agreement, dated as of June 2, 1994, among the
Registrant, Arbco Associates L.P., Offense Group Associates L.P.,
Kayne, Anderson Nontraditional Investments L.P., and Opportunity
Associates L.P.(5)
10.5 -- Gaines Berland, Inc. Warrant, dated January 27, 1995(1)
10.11 -- Purchase and Sale Agreement, dated as of March 29, 1995, between the
Registrant and Enron Oil and Gas Company(6)
10.12 -- Agreement for Purchase and Sale (Oak Hill), dated April 12, 1995,
between the Registrant and Sierra 1994 I Limited Partnership(6)
10.13 -- Agreement for Purchase and Sale (Mustang Island), dated April 20,
1995, between the Registrant and Sierra Mineral Development, L.C.(6)
10.14 -- Stock Purchase Agreement, dated as of June 14, 1995, among the
Registrant, Arbco Associates L.P., Offense Group Associates L.P.,
Kayne, Anderson Nontraditional Investments L.P., and Opportunity
Associates L.P.(6)
10.15 -- Executive Employment Agreement, dated January 1, 1996, between the
Registrant and Miles D. Bender(13)
10.16 -- Executive Employment Agreement, dated January 1, 1996, between the
Registrant and R. Thomas Fetters, Jr.(13)
10.17 -- Agreement, dated January 1, 1996, between the Registrant and Randall
A. Carter(13)
10.19 -- Executive Employment Agreement, dated January 1, 1996, between the
Registrant and Melissa Rutledge(13)
10.20 -- Executive Employment Agreement, dated January 1, 1996, between the
Registrant and William T. Jones(13)
10.22 -- Executive Employment Agreement, dated June 6, 1996, between the
Registrant and David E. Grose(1)
10.23 -- Executive Employment Agreement, dated June 5, 1996, between the
Registrant and Sue Barnard(1)
10.24 -- Executive Employment Agreement, dated June 6, 1996, between the
Registrant and Jim L. David(1)
10.25 -- Employment Agreement, dated June 6, 1996, between the Registrant and
Bob G. Alexander(1)
10.26 -- Employment Agreement, dated June 6, 1996, between the Registrant and
Roger G. Alexander(1)
10.29 -- Prudential Securities Incorporated Warrant to Purchase 100,000 Shares
of the Registrant's Common Stock(3)
10.30 -- Gaines Berland, Inc. Warrant to Purchase 300,000 Shares of the
Registrant's Common Stock(3)
10.31 -- Gaines Berland, Inc. Warrant to Purchase 700,000 Shares of the
Registrant's Common Stock(3)
10.32 -- Agreement dated January 1, 1996 between the Registrant and Sandefer
Oil & Gas, Inc.(1)
10.33 -- Consulting Agreement dated January 1, 1996 between the Sandefer Oil &
Gas, Inc. and Potosky Oil & Gas, Inc. and Atocha Exploration, Inc.(1)
10.34 -- Stock Purchase Agreement dated August 7, 1996 between the Registrant
and High River Limited Partnership(2)
10.35 -- High River Limited Partnership Warrant to purchase 700,000 Shares of
Common Stock, dated August 29, 1996(3)
</TABLE>
II-3
<PAGE> 177
<TABLE>
<C> <S>
10.36 -- Stock Purchase Agreement dated as of August 26, 1996, between the
Registrant and Foremost Insurance Company, Arbco Associates, L.P.,
Kayne, Anderson Nontraditional Investments L.P., Offense Group
Associates, L.P., Topa Insurance Company and Kayne, Anderson Offshore
Limited (the "Series E Investors")(3)
10.37 -- Form of Series E Investors' Warrants to purchase an aggregate 350,000
Shares of Common Stock, dated August 29, 1996(3)
10.38 -- Agreement dated as of August 29, 1996 by and between the Registrant
and Prudential Securities Incorporated(3)
10.40 -- Restated Loan Agreement dated August 29, 1996 among Bank One, Texas,
N.A. ("Bank One") and Credit Lyonnais New York Branch ("Credit
Lyonnais") and the Registrant, NEG-OK and Boomer Marketing
Corporation ("Boomer")(3)
10.41 -- $50,000,000 Revolving Note dated August 29, 1996 payable to Bank
One(3)
10.42 -- $50,000,000 Revolving Note dated August 29, 1996 payable to Credit
Lyonnais(3)
10.43 -- $2,500,000 Term Note dated August 29, 1996 payable to Bank One(3)
10.44 -- $2,500,000 Term Note dated August 29, 1996 payable to Credit
Lyonnais(3)
10.47 -- Unlimited Guaranty of Boomer dated August 29, 1996 for the benefit of
Bank One(3)
10.48 -- Unlimited Guaranty of Boomer dated August 29, 1996 for the benefit of
Credit Lyonnais(3)
10.49 -- Form of Deeds of Trust, Mortgages, Security Agreements, Assignments
of Production and Financing Statements covering oil and gas
properties of the Registrant and NEG-OK, dated August 29, 1996(3)
10.50 -- Sale and Purchase Agreement dated September 26, 1994 by and among JMC
Exploration, Inc., Ted Bowman, Chris Webb and John Abrahamson and
Alexander(14)
10.51 -- First Amendment to Sale and Purchase Agreement dated October 26, 1994
by and among JMC Exploration, Inc., Ted Bowman, Chris Webb and John
Abrahamson and Alexander(14)
10.52 -- Alexander Energy Corporation 1986 Incentive Stock Option Plan, as
amended(15)
10.53 -- Alexander Energy Corporation 1993 Stock Option Plan(16)
10.54 -- Agreement of Limited Partnership of AEJH 1985 Limited Partnership by
and between Alexander and John Hancock Mutual Life Insurance Company,
together with all amendments thereto(17)
10.55 -- Agreement of Limited Partnership of AEJH 1987 Limited Partnership by
and between Alexander and John Hancock Mutual Life Insurance Company,
together with all amendments thereto(17)
10.56 -- Agreement of Limited Partnership of AEJH 1989 Limited Partnership by
and between Alexander and John Hancock Mutual Life Insurance Company
dated April 25, 1989(8)
10.57 -- Limited Partnership Agreement of Energy and Environmental Services
Limited Partnership dated May 15, 1991 by and between Energy and
Environmental Services, Inc., as general partner, and Alexander
Energy Corporation and REP, Inc., as limited partners(17)
10.58 -- Warrant Purchase Agreement among Alexander, Hanifen, Imhoff Inc. and
The Principal/Eppler, Guerin & Turner, Inc.(18)
10.59 -- Purchase Option Agreement (warrants) between American Natural Energy
Corporation and Gaines, Berland, Inc. dated September 14, 1993(8)
</TABLE>
II-4
<PAGE> 178
<TABLE>
<C> <S>
10.62 -- Asset Purchase and Sale Agreement dated September 30, 1996 by and
between the Registrant and Araxas Energy Corporation, Araxas SPV-1,
Inc., Araxas Exploration, Inc. and O'Sullivan Oil and Gas Company,
Inc.(10)
10.63 -- Purchase Agreement dated October 29, 1996, by and among the
Registrant, NEG-OK and Bear, Stearns & Co. Inc., Smith Barney Inc.
and Jefferies & Company, Inc. (the "Initial Purchasers")(10)
10.64 -- First Amendment to Restated Loan Agreement dated as of October 31,
1996 among Bank One and Credit Lyonnais and the Registrant, NEG-OK
and Boomer(10)
10.65 -- Agreement and Plan of Merger, dated June 6, 1996, among the
Registrant, NEG-OK and Alexander(1)
10.66 -- First Amendment to Agreement and Plan of Merger, dated as of June 20,
1996, among the Registrant, NEG-OK and Alexander(2)
10.67 -- Mutual Waiver Agreement dated as of August 29, 1996 by and among the
Registrant, NEG-OK and Alexander(3)
10.68 -- Purchase and Sale Agreement dated October 15, 1996 between W & T
Offshore, Inc. and the Registrant(11)
10.69 -- Purchase and Sale Agreement dated November 11, 1996 between Panaco,
Inc. and the Registrant(11)
10.70 -- National Energy Group, Inc. 1996 Incentive Compensation Plan(11)
12.1 -- Statements Regarding Computation of Ratios(11)
21.1 -- Subsidiaries of the Registrant(19)
23.1 -- Consent of Ernst & Young LLP, independent auditors(11)
23.2 -- Consent of Coopers & Lybrand L.L.P., independent accountants(11)
23.3 -- Consent of Netherland, Sewell & Associates, Inc., independent
petroleum engineers(11)
23.4 -- Consent of Strasburger & Price, L.L.P. (included in Exhibit 5.1)
24.1 -- Powers of Attorney(11)
25.1 -- Form T-1 of Bank One, Columbus, N.A.(11)
99.1 -- Certificate of Merger with respect to the merger of Alexander with
and into NEG-OK, filed with the offices of the Secretary of State of
the State of Delaware and the Secretary of State of the State of
Oklahoma on August 29, 1996(3)
99.2 -- Form of Certificate of Ownership and Merger with respect to the
merger of NEG-OK with and into NEG(11)
99.3 -- Letter of Transmittal(19)
99.4 -- Notice of Guaranteed Delivery(19)
</TABLE>
- ---------------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-4 (No. 333-9045), dated July 29, 1996.
(2) Incorporated by reference to Amendment No. 1 to the Registrant's
Registration Statement on Form S-4 (No. 333-9045), dated August 7, 1996.
(3) Incorporated by reference to the Registrant's Current Report on Form 8-K,
dated August 29, 1996.
(4) Incorporated by reference to the Registrant's Registration Statement on
Form S-4 (No. 33-38331), dated April 23, 1991.
(5) Incorporated by reference to the Registrant's Current Report on Form 8-K,
dated June 17, 1994.
(6) Incorporated by reference to the Registrant's Current Report on Form 8-K,
dated July 17, 1995.
II-5
<PAGE> 179
(7) Incorporated by reference to the Registrant's Registration Statement on
Form S-3 (No. 33-81172), dated July 27, 1994.
(8) Incorporated by reference to Alexander's Form 10-K for the fiscal year
ended December 31, 1994.
(9) Incorporated by reference to the Registrant's Current Report on Form 8-K/A
No. 1, dated August 29, 1996.
(10) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the three months ended September 30, 1996.
(11) Incorporated by reference to the Registrant's Registration Statement on
Form S-4 (No. 333-17817), dated December 13, 1996, which this Amendment No.
1 amends.
(12) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB
for the year ended December 31, 1992.
(13) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB
for the year ended December 31, 1995.
(14) Incorporated by reference to Alexander's Current Report on Form 8-K, dated
November 14, 1994.
(15) Incorporated by reference to Alexander's Registration Statement (No.
33-20425), dated March 22, 1988.
(16) Incorporated by reference to Alexander's Proxy Statement for the 1993
Annual Meeting of Stockholders.
(17) Incorporated by reference to Alexander's Form 10-K for the fiscal year
ended December 31, 1991.
(18) Incorporated by reference to Alexander's Amendment No. 1 to Registration
Statement (No. 33-57142), dated February 26, 1993.
(19) Filed herewith
(b) Financial Statement Schedules:
None.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by section 10(a)(3) of the
Securities Act of 1933 (the "Securities Act");
(ii) to reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent
post-effective amendment hereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Securities and Exchange Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no more than
a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in this Registration Statement
when it becomes effective;
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in this Registration Statement
or any material change to such information in this Registration
Statement;
II-6
<PAGE> 180
Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if this
Registration Statement is on Form S-3 or Form S-8, and the information required
to be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed by the Registrant pursuant to Section 13 or Section 15(d)
of the Securities Exchange Act of 1934 (the "Exchange Act") that are
incorporated by reference in this Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment 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 thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act 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 in 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 Exchange Act; and, whether
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.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of Form S-4, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of this Registration Statement through the date
of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in this Registration Statement when it became effective.
II-7
<PAGE> 181
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 13th day of January, 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 persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ---------------------------- ------------------
<C> <S> <C>
/s/ MILES D. BENDER President, Chief Executive January 13, 1997
- --------------------------------------------- Officer and Director
Miles D. Bender (Principal Executive
Officer)
/s/ ROBERT A. IMEL Chief Financial Officer and January 13, 1997
- --------------------------------------------- Senior Vice President
Robert A. Imel (Principal Financial
Officer)
/s/ MELISSA H. RUTLEDGE Controller (Chief Accounting January 13, 1997
- --------------------------------------------- Officer)
Melissa H. Rutledge
/s/ GEORGE B. MCCULLOUGH* Chairman of the Board and January 13, 1997
- --------------------------------------------- Director
George B. McCullough
/s/ NORMAN C. MILLER* Chairman, Executive January 13, 1997
- --------------------------------------------- Committee and Director
Norman C. Miller
/s/ ROBERT H. KITE* Director January 13, 1997
- ---------------------------------------------
Robert H. Kite
/s/ GEORGE MCDONALD* Director January 13, 1997
- ---------------------------------------------
George McDonald
/s/ ROBERT V. SINNOTT* Director January 13, 1997
- ---------------------------------------------
Robert V. Sinnott
/s/ ELWOOD W. SCHAFER* Director January 13, 1997
- ---------------------------------------------
Elwood W. Schafer
/s/ JIM L. DAVID* Vice January 13, 1997
- --------------------------------------------- President -- Exploitation
Jim L. David and Director
</TABLE>
<PAGE> 182
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ---------------------------- ------------------
<C> <S> <C>
/s/ BOB G. ALEXANDER* Director January 13, 1997
- ---------------------------------------------
Bob G. Alexander
/s/ ROBERT A. WEST* Director January 13, 1997
- ---------------------------------------------
Robert A. West
Director January , 1997
- ---------------------------------------------
Robert J. Mitchell
</TABLE>
* Signed by Miles D. Bender, Attorney-in-fact
<PAGE> 183
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO.
- --------------------
<C> <S>
3.1 -- Certificate of Incorporation of the Registrant, which includes the
Certificate of Incorporation of the Registrant filed with the
Secretary of State of Delaware on November 20, 1990(4), the
Certificate of Elimination of the Redeemable Convertible Preferred
Stock, Series A of the Registrant, filed with the office of the
Secretary of State of the State of Delaware on June 2, 1994(3), the
Certificate of Amendment of Certificate of Incorporation of the
Registrant, filed with the office of the Secretary of State of the
State of Delaware on August 29, 1996(3), the Certificate of
Designations of the Registrant of 10% Cumulative Convertible
Preferred Stock, Series B(5), the Certificate of Designations of the
Registrant of 10 1/2% Cumulative Convertible Preferred Stock, Series
C(6), the Certificate of Designations of the Registrant of
Convertible Preferred Stock, Series D(3), and the Certificate of
Designations of the Registrant of Convertible Preferred Stock, Series
E(3)
3.2 -- By-laws of the Registrant(4)
4.1 -- Certificate of Designations of the Registrant of 10% Cumulative
Convertible Preferred Stock, Series B(5)
4.2 -- Certificate of Designations of the Registrant of 10 1/2% Cumulative
Convertible Preferred Stock, Series C(6)
4.3 -- Certificate of Designations of the Registrant of Convertible
Preferred Stock, Series D(3)
4.4 -- Certificate of Designations of the Registrant of Convertible
Preferred Stock, Series E(3)
4.5 -- 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 (10 1/2% Senior Secured Notes)(8)
4.6 -- Letter dated August 29, 1996 between Alexander and John Hancock
Mutual Life Insurance Company relating to the payment of the 1989
Notes(3)
4.7 -- Specimen Common Stock Certificate(9)
4.8 -- 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.(10)
4.9 -- Registration Rights Agreement dated October 29, 1996, by and among
the Registrant, Guarantor and the Initial Purchasers(10)
4.10 -- Specimen Global Note Certificate dated November 1, 1996(10)
4.11 -- Specimen Global Exchange Note Certificate(11)
5.1 -- Opinion of Strasburger & Price, L.L.P. regarding legality of
securities being issued(11)
10.1 -- Crude Oil Purchase Contract, dated November 30, 1992, between the
Registrant and Plains Liquids Transport Inc.(12)
10.2 -- Amendment to Crude Oil Purchase Contract, dated November 17, 1993,
between the Registrant and Plains Liquids Transport, Inc.(5)
10.3 -- Crude Oil Purchase Contract, dated February 8, 1993, between the
Registrant and Plains Marketing and Transportation Inc. and the
predecessor contract, the Crude Oil Purchase Contract, dated November
12, 1991, between Sunnybrook Transmission, Inc. and TriSearch
Inc.(12)
</TABLE>
<PAGE> 184
<TABLE>
<CAPTION>
EXHIBIT
NO.
- --------------------
<C> <S>
10.4 -- Stock Purchase Agreement, dated as of June 2, 1994, among the
Registrant, Arbco Associates L.P., Offense Group Associates L.P.,
Kayne, Anderson Nontraditional Investments L.P., and Opportunity
Associates L.P.(5)
10.5 -- Gaines Berland, Inc. Warrant, dated January 27, 1995(1)
10.11 -- Purchase and Sale Agreement, dated as of March 29, 1995, between the
Registrant and Enron Oil and Gas Company(6)
10.12 -- Agreement for Purchase and Sale (Oak Hill), dated April 12, 1995,
between the Registrant and Sierra 1994 I Limited Partnership(6)
10.13 -- Agreement for Purchase and Sale (Mustang Island), dated April 20,
1995, between the Registrant and Sierra Mineral Development, L.C.(6)
10.14 -- Stock Purchase Agreement, dated as of June 14, 1995, among the
Registrant, Arbco Associates L.P., Offense Group Associates L.P.,
Kayne, Anderson Nontraditional Investments L.P., and Opportunity
Associates L.P.(6)
10.15 -- Executive Employment Agreement, dated January 1, 1996, between the
Registrant and Miles D. Bender(13)
10.16 -- Executive Employment Agreement, dated January 1, 1996, between the
Registrant and R. Thomas Fetters, Jr.(13)
10.17 -- Agreement, dated January 1, 1996, between the Registrant and Randall
A. Carter(13)
10.19 -- Executive Employment Agreement, dated January 1, 1996, between the
Registrant and Melissa Rutledge(13)
10.20 -- Executive Employment Agreement, dated January 1, 1996, between the
Registrant and William T. Jones(13)
10.22 -- Executive Employment Agreement, dated June 6, 1996, between the
Registrant and David E. Grose(1)
10.23 -- Executive Employment Agreement, dated June 5, 1996, between the
Registrant and Sue Barnard(1)
10.24 -- Executive Employment Agreement, dated June 6, 1996, between the
Registrant and Jim L. David(1)
10.25 -- Employment Agreement, dated June 6, 1996, between the Registrant and
Bob G. Alexander(1)
10.26 -- Employment Agreement, dated June 6, 1996, between the Registrant and
Roger G. Alexander(1)
10.29 -- Prudential Securities Incorporated Warrant to Purchase 100,000 Shares
of the Registrant's Common Stock(3)
10.30 -- Gaines Berland, Inc. Warrant to Purchase 300,000 Shares of the
Registrant's Common Stock(3)
10.31 -- Gaines Berland, Inc. Warrant to Purchase 700,000 Shares of the
Registrant's Common Stock(3)
10.32 -- Agreement dated January 1, 1996 between the Registrant and Sandefer
Oil & Gas, Inc.(1)
10.33 -- Consulting Agreement dated January 1, 1996 between the Sandefer Oil &
Gas, Inc. and Potosky Oil & Gas, Inc. and Atocha Exploration, Inc.(1)
10.34 -- Stock Purchase Agreement dated August 7, 1996 between the Registrant
and High River Limited Partnership(2)
</TABLE>
<PAGE> 185
<TABLE>
<CAPTION>
EXHIBIT
NO.
- --------------------
<C> <S>
10.35 -- High River Limited Partnership Warrant to purchase 700,000 Shares of
Common Stock, dated August 29, 1996(3)
10.36 -- Stock Purchase Agreement dated as of August 26, 1996, between the
Registrant and Foremost Insurance Company, Arbco Associates, L.P.,
Kayne, Anderson Nontraditional Investments L.P., Offense Group
Associates, L.P., Topa Insurance Company and Kayne, Anderson Offshore
Limited (the "Series E Investors")(3)
10.37 -- Form of Series E Investors' Warrants to purchase an aggregate 350,000
Shares of Common Stock, dated August 29, 1996(3)
10.38 -- Agreement dated as of August 29, 1996 by and between the Registrant
and Prudential Securities Incorporated(3)
10.40 -- Restated Loan Agreement dated August 29, 1996 among Bank One, Texas,
N.A. ("Bank One") and Credit Lyonnais New York Branch ("Credit
Lyonnais") and the Registrant, NEG-OK and Boomer Marketing
Corporation ("Boomer")(3)
10.41 -- $50,000,000 Revolving Note dated August 29, 1996 payable to Bank
One(3)
10.42 -- $50,000,000 Revolving Note dated August 29, 1996 payable to Credit
Lyonnais(3)
10.43 -- $2,500,000 Term Note dated August 29, 1996 payable to Bank One(3)
10.44 -- $2,500,000 Term Note dated August 29, 1996 payable to Credit
Lyonnais(3)
10.47 -- Unlimited Guaranty of Boomer dated August 29, 1996 for the benefit of
Bank One(3)
10.48 -- Unlimited Guaranty of Boomer dated August 29, 1996 for the benefit of
Credit Lyonnais(3)
10.49 -- Form of Deeds of Trust, Mortgages, Security Agreements, Assignments
of Production and Financing Statements covering oil and gas
properties of the Registrant and NEG-OK, dated August 29, 1996(3)
10.50 -- Sale and Purchase Agreement dated September 26, 1994 by and among JMC
Exploration, Inc., Ted Bowman, Chris Webb and John Abrahamson and
Alexander(14)
10.51 -- First Amendment to Sale and Purchase Agreement dated October 26, 1994
by and among JMC Exploration, Inc., Ted Bowman, Chris Webb and John
Abrahamson and Alexander(14)
10.52 -- Alexander Energy Corporation 1986 Incentive Stock Option Plan, as
amended(15)
10.53 -- Alexander Energy Corporation 1993 Stock Option Plan(16)
10.54 -- Agreement of Limited Partnership of AEJH 1985 Limited Partnership by
and between Alexander and John Hancock Mutual Life Insurance Company,
together with all amendments thereto(17)
10.55 -- Agreement of Limited Partnership of AEJH 1987 Limited Partnership by
and between Alexander and John Hancock Mutual Life Insurance Company,
together with all amendments thereto(17)
10.56 -- Agreement of Limited Partnership of AEJH 1989 Limited Partnership by
and between Alexander and John Hancock Mutual Life Insurance Company
dated April 25, 1989(8)
10.57 -- Limited Partnership Agreement of Energy and Environmental Services
Limited Partnership dated May 15, 1991 by and between Energy and
Environmental Services, Inc., as general partner, and Alexander
Energy Corporation and REP, Inc., as limited partners(17)
</TABLE>
<PAGE> 186
<TABLE>
<CAPTION>
EXHIBIT
NO.
- --------------------
<C> <S>
10.58 -- Warrant Purchase Agreement among Alexander, Hanifen, Imhoff Inc. and
The Principal/Eppler, Guerin & Turner, Inc.(18)
10.59 -- Purchase Option Agreement (warrants) between American Natural Energy
Corporation and Gaines, Berland, Inc. dated September 14, 1993(8)
10.62 -- Asset Purchase and Sale Agreement dated September 30, 1996 by and
between the Registrant and Araxas Energy Corporation, Araxas SPV-1,
Inc., Araxas Exploration, Inc. and O'Sullivan Oil and Gas Company,
Inc.(10)
10.63 -- Purchase Agreement dated October 29, 1996, by and among the
Registrant, NEG-OK and Bear, Stearns & Co. Inc., Smith Barney Inc.
and Jefferies & Company, Inc. (the "Initial Purchasers")(10)
10.64 -- First Amendment to Restated Loan Agreement dated as of October 31,
1996 among Bank One and Credit Lyonnais and the Registrant, NEG-OK
and Boomer(10)
10.65 -- Agreement and Plan of Merger, dated June 6, 1996, among the
Registrant, NEG-OK and Alexander(1)
10.66 -- First Amendment to Agreement and Plan of Merger, dated as of June 20,
1996, among the Registrant, NEG-OK and Alexander(2)
10.67 -- Mutual Waiver Agreement dated as of August 29, 1996 by and among the
Registrant, NEG-OK and Alexander(3)
10.68 -- Purchase and Sale Agreement dated October 15, 1996 between W & T
Offshore, Inc. and the Registrant(11)
10.69 -- Purchase and Sale Agreement dated November 11, 1996 between Panaco,
Inc. and the Registrant(11)
10.70 -- National Energy Group, Inc. 1996 Incentive Compensation Plan(11)
12.1 -- Statements Regarding Computation of Ratios(11)
21.1 -- Subsidiaries of the Registrant(19)
23.1 -- Consent of Ernst & Young LLP, independent auditors(11)
23.2 -- Consent of Coopers & Lybrand L.L.P., independent accountants(11)
23.3 -- Consent of Netherland, Sewell & Associates, Inc., independent
petroleum engineers(11)
23.4 -- Consent of Strasburger & Price, L.L.P. (included in Exhibit 5.1)
24.1 -- Powers of Attorney(11)
25.1 -- Form T-1 of Bank One, Columbus, N.A.(11)
99.1 -- Certificate of Merger with respect to the merger of Alexander with
and into NEG-OK, filed with the offices of the Secretary of State of
the State of Delaware and the Secretary of State of the State of
Oklahoma on August 29, 1996(3)
99.2 -- Form of Certificate of Ownership and Merger with respect to the
merger of NEG-OK with and into NEG(11)
99.3 -- Letter of Transmittal(19)
99.4 -- Notice of Guaranteed Delivery(19)
</TABLE>
- ---------------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-4 (No. 333-9045), dated July 29, 1996.
(2) Incorporated by reference to Amendment No. 1 to the Registrant's
Registration Statement on Form S-4 (No. 333-9045), dated August 7, 1996.
<PAGE> 187
(3) Incorporated by reference to the Registrant's Current Report on Form 8-K,
dated August 29, 1996.
(4) Incorporated by reference to the Registrant's Registration Statement on
Form S-4 (No. 33-38331), dated April 23, 1991.
(5) Incorporated by reference to the Registrant's Current Report on Form 8-K,
dated June 17, 1994.
(6) Incorporated by reference to the Registrant's Current Report on Form 8-K,
dated July 17, 1995.
(7) Incorporated by reference to the Registrant's Registration Statement on
Form S-3 (No. 33-81172), dated July 27, 1994.
(8) Incorporated by reference to Alexander's Form 10-K for the fiscal year
ended December 31, 1994.
(9) Incorporated by reference to the Registrant's Current Report on Form 8-K/A
No. 1, dated August 29, 1996.
(10) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the three months ended September 30, 1996.
(11) Incorporated by reference to the Registrant's Registration Statement on
Form S-4 (No. 333-17817), dated December 13, 1996, which this Amendment No.
1 amends.
(12) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB
for the year ended December 31, 1992.
(13) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB
for the year ended December 31, 1995.
(14) Incorporated by reference to Alexander's Current Report on Form 8-K, dated
November 14, 1994.
(15) Incorporated by reference to Alexander's Registration Statement (No.
33-20425), dated March 22, 1988.
(16) Incorporated by reference to Alexander's Proxy Statement for the 1993
Annual Meeting of Stockholders.
(17) Incorporated by reference to Alexander's Form 10-K for the fiscal year
ended December 31, 1991.
(18) Incorporated by reference to Alexander's Amendment No. 1 to Registration
Statement (No. 33-57142), dated February 26, 1993.
(19) Filed herewith
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES
<TABLE>
<CAPTION>
Conducts Business State of
Name Under the Name Incorporation
---- -------------- -------------
<S> <C> <C>
Boomer Marketing, Inc. Boomer Marketing, Inc. Oklahoma
</TABLE>
<PAGE> 1
EXHIBIT 99.3
LETTER OF TRANSMITTAL
To Tender
Unregistered 10 3/4% Senior Notes due 2006
of
NATIONAL ENERGY GROUP, INC.
Pursuant to the Exchange Offer and Prospectus dated January 13, 1997
***************************************************************************
* *
* THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., *
* E.S.T., ON FEBRUARY 17, 1997 (THE "EXPIRATION DATE"), UNLESS THE *
* EXCHANGE OFFER IS EXTENDED BY THE COMPANY. *
* *
***************************************************************************
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
BANK ONE, COLUMBUS, N.A.
<TABLE>
<S> <C> <C>
By Registered or Certified Mail: By Overnight Courier or by Hand: By Facsimile:
Bank One, Columbus, N.A. Bank One, Columbus, N.A. (614) 248-5088
Attn: Corporate Trust Operations Attn: Corporate Trust Operations Attn: Lora E. Marsch,
235 West Schrock Road 235 West Schrock Road Corporate Trust Operations
Westerville, Ohio 43271-0184 Westerville, Ohio 43081 Confirm by Telephone:
(614) 248-4856
(Originals of all documents sent by facsimile should be sent promptly by registered
or certified mail, by hand, or by overnight delivery service.)
</TABLE>
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OR TRANSMISSION
OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE
A VALID DELIVERY.
IF YOU WISH TO EXCHANGE UNREGISTERED 10 3/4% SENIOR NOTES DUE 2006 FOR
AN EQUAL AGGREGATE PRINCIPAL AMOUNT OF REGISTERED 10 3/4% SENIOR NOTES DUE 2006
PURSUANT TO THE EXCHANGE OFFER, YOU MUST VALIDLY TENDER (AND NOT WITHDRAW)
OUTSTANDING NOTES TO THE EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE.
DESCRIPTION OF TENDERED OUTSTANDING NOTES
<TABLE>
<CAPTION>
=============================================================================================================
Aggregate
Name(s) and Address(es) of Registered Owner(s) Certificate Principal Amount
(Please fill in, if blank) Number(s) Tendered
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
----------------------------------------------
----------------------------------------------
----------------------------------------------
----------------------------------------------
Total Principal
Amount of Notes
Tendered
=============================================================================================================
</TABLE>
SIGNATURES MUST BE PROVIDED.
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY.
<PAGE> 2
<PAGE> 2
LADIES AND GENTLEMEN:
1. The undersigned hereby tenders to National Energy Group, Inc.,
a Delaware corporation (the "Company"), the 10 3/4% Senior Notes due 2006 (the
"Outstanding Notes") described above pursuant to the Company's offer of $1,000
principal amount of 10 3/4% Senior Notes due 2006 (the "Exchange Notes") in
exchange for each $1,000 principal amount of the Outstanding Notes, upon the
terms and conditions contained in the Prospectus dated January 13, 1997 (the
"Prospectus"), receipt of which is hereby acknowledged, and in this Letter of
Transmittal (which together constitute the "Exchange Offer"). The term
"Holder" with respect to the Exchange Offer means any person in whose name the
Outstanding 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.
2. The undersigned hereby represents and warrants that it has
full authority to tender the Outstanding Notes described above. The
undersigned will, upon request, execute and deliver any additional documents
deemed by the Company to be necessary or desirable to complete the tender of
Outstanding Notes.
3. The undersigned understands that the tender of the Outstanding
Notes pursuant to all of the procedures set forth in the Prospectus will
constitute an agreement between the undersigned and the Company as to the terms
and conditions set forth in the Prospectus.
4. By tendering in the Exchange Offer, the undersigned hereby
represents and warrants that:
(i) the Exchange Notes acquired pursuant to the Exchange
Offer are being obtained in the ordinary course of
business of the undersigned, whether or not the
undersigned is the Holder;
(ii) neither the undersigned nor any such other person has
an arrangement or understanding with any person to
participate in the distribution of such Exchange
Notes;
(iii) if the undersigned participates in the Exchange Offer
for the purpose of distributing the Exchange Notes,
(a) the undersigned must, in the absence of an
exemption therefrom, comply with the registration and
prospectus delivery requirements of the Securities
Act of 1933, as amended (the "Securities Act") in
connection with any resale of the Exchange Notes and
cannot rely on the no-action letters referenced in
the Prospectus and (b) failure to comply with such
requirements in such instance could result in the
undersigned incurring liability under the Securities
Act for which the undersigned is not indemnified by
the Company; and
<PAGE> 3
(iv) neither the Holder nor any such other person is an
"affiliate," as such term is defined under Rule 405
promulgated under the Securities Act, of the Company.
5. If the undersigned is not a broker-dealer, the undersigned
represents that it is not engaged in, and does not intend to engage in, a
distribution of Exchange Notes. If the undersigned is a broker-dealer that
will receive Exchange Notes for its own account in exchange for Outstanding
Notes that were acquired as a result of market-making activities or other
trading activities, it acknowledges that it will deliver a prospectus in
connection with any resale of such Exchange Notes; however, by so acknowledging
and delivering a prospectus, the undersigned will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act. If the
undersigned may be deemed to be an "affiliate," as such term is defined under
Rule 405 of the Securities Act, of the Company, the undersigned understands and
acknowledges that the Exchange Notes may not be offered for resale, resold or
otherwise transferred by the undersigned without registration under the
Securities Act or an exemption therefrom.
6. Any obligation of the undersigned hereunder shall be binding
upon the successors, assigns, executors, administrators, trustees in bankruptcy
and legal and personal representatives of the undersigned.
7. Unless otherwise indicated herein under "Special Delivery
Instructions," please issue the certificates for the Exchange Notes in the name
of the undersigned.
================================================================================
SPECIAL DELIVERY INSTRUCTIONS
(See Instruction 3 below)
To be completed ONLY IF the Exchange Notes are to be issued or sent to
someone other than the undersigned or to the undersigned at an address other
than that provided above.
Mail [ ] Issue [ ] (check appropriate boxes) certificates to:
Name:
-------------------------------------------------------------------------
(PLEASE PRINT)
Address:
----------------------------------------------------------------
----------------------------------------------------------------
----------------------------------------------------------------
(INCLUDING ZIP CODE)
================================================================================
================================================================================
SPECIAL BROKER-DEALER INSTRUCTIONS
(See Item 5 above)
[ ] Check here if you are a broker-dealer and wish to receive 10
additional copies of the Prospectus and 10 copies of any amendments or
supplements thereto.
Name:
-------------------------------------------------------------------------
(PLEASE PRINT)
Address:
----------------------------------------------------------------
----------------------------------------------------------------
----------------------------------------------------------------
(INCLUDING ZIP CODE)
================================================================================
<PAGE> 4
================================================================================
SIGNATURE
TO BE COMPLETED BY EXCHANGING HOLDERS. MUST BE SIGNED BY REGISTERED HOLDER
EXACTLY AS NAME APPEARS ON OUTSTANDING NOTES. IF SIGNATURE IS BY TRUSTEE,
EXECUTOR, ADMINISTRATOR, GUARDIAN, ATTORNEY-IN-FACT, OFFICER OF A CORPORATION
OR OTHER PERSON ACTING IN A FIDUCIARY OR REPRESENTATIVE CAPACITY, PLEASE SET
FORTH FULL TITLE. SEE INSTRUCTION 2 BELOW.
X
----------------------------------------------------------------------------
X
----------------------------------------------------------------------------
SIGNATURE(S) OF REGISTERED HOLDER(S) OR AUTHORIZED SIGNATURE
Dated:
------------------------------------------------------------------------
Name(s):
----------------------------------------------------------------------
------------------------------------------------------------------------------
(PLEASE TYPE OR PRINT)
Capacity:
---------------------------------------------------------------------
Address:
----------------------------------------------------------------
----------------------------------------------------------------
----------------------------------------------------------------
(INCLUDING ZIP CODE)
Area Code and Telephone No.:
-------------------------------------------------
SIGNATURE GUARANTEE (IF REQUIRED BY INSTRUCTION 3 BELOW)
Certain Signatures Must be Guaranteed by an Eligible Institution
------------------------------------------------------------------------------
(NAME OF ELIGIBLE INSTITUTION GUARANTEEING SIGNATURES)
------------------------------------------------------------------------------
(ADDRESS (INCLUDING ZIP CODE) AND TELEPHONE
NUMBER (INCLUDING AREA CODE) OF FIRM)
------------------------------------------------------------------------------
(AUTHORIZED SIGNATURE)
------------------------------------------------------------------------------
(PRINTED NAME)
------------------------------------------------------------------------------
(TITLE)
Dated:
------------------------------------------------------------------------
================================================================================
PLEASE READ THE INSTRUCTIONS ON THE FOLLOWING PAGE,
WHICH FORM A PART OF THIS LETTER OF TRANSMITTAL.
<PAGE> 5
INSTRUCTIONS
1. DELIVERY OF LETTER OF TRANSMITTAL AND OUTSTANDING NOTES. The
Outstanding Notes, together with a properly completed and duly executed Letter
of Transmittal (or copy thereof), should be mailed or delivered to the Exchange
Agent at the address set forth above.
THE METHOD OF DELIVERY OF OUTSTANDING NOTES AND THIS 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.
2. SIGNATURE ON LETTER OF TRANSMITTAL, BOND POWERS AND
ENDORSEMENTS. If this Letter of Transmittal is signed by a person other than a
registered Holder of any Outstanding Notes, such Outstanding Notes must be
endorsed or accompanied by appropriate bond powers, signed by such registered
Holder exactly as such registered Holder's name appears on such Outstanding
Notes with the signature thereon guaranteed 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 promulgated under the Securities Exchange
Act of 1934, as amended (an "Eligible Institution").
If this Letter of Transmittal or any Outstanding Notes or bond powers
are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers or 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 this Letter of Transmittal.
3. GUARANTEE OF SIGNATURES. Signatures on this Letter of
Transmittal must be guaranteed by an Eligible Institution, unless the box
titled "Special Delivery Instructions" above has not been completed or the
Outstanding Notes described above are tendered for the account of an Eligible
Institution.
4. BOOK-ENTRY TRANSFER. Any beneficial owner whose Outstanding
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.
<PAGE> 6
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 The Depositary Trust Company ("DTC") for the purpose
of facilitating the Exchange Offer, and subject to the establishment thereof,
any financial institution that is a participant in DTC's system may make
book-entry delivery of the Outstanding Notes by causing DTC to transfer such
Outstanding Notes into the Exchange Agent's account with respect to the
Outstanding Notes in accordance with DTC's procedures for such transfer.
Although delivery of the Outstanding Notes may be effected through book-entry
transfer into the Exchange Agent's account at DTC, 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 above
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 this Letter of Transmittal. Delivery of documents to DTC does not
constitute delivery to the Exchange Agent.
5. COMPLETE OR PARTIAL TENDER. Holders may tender some or all of
their Outstanding Notes pursuant to the Exchange Offer. However, Outstanding
Notes may be tendered only in integral multiples of $1,000.
6. TRANSFER TAXES. 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 this Letter of Transmittal, or if a transfer tax
is imposed for any reason other than the exchange of the Outstanding Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered Holder or any other person) must be paid by
the tendering Holder.
7. WITHDRAWAL. Except as otherwise provided herein, tenders of
Outstanding Notes may be withdrawn at any time prior to 5:00 p.m., E.S.T., on
the Expiration Date by following the procedures set forth in section of the
Prospectus titled "The Exchange Offer -- Withdrawal of Tenders." Any
Outstanding 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 so withdrawn are validly
retendered. Properly withdrawn Outstanding Notes may be retendered by
following one of the procedures described above for tendering Outstanding Notes
under this Letter of Transmittal at any time prior to the Expiration Date.
8. GUARANTEED DELIVERY PROCEDURES. Holders who wish to tender
their Outstanding Notes and (i) whose Outstanding Notes are not immediately
available, (ii) who cannot deliver their Outstanding Notes, this Letter of
Transmittal or any other required documents to the
<PAGE> 7
Exchange Agent or (iii) who cannot complete the procedures for book-entry
transfer, prior to the Expiration Date, may effect a tender if they follow the
guaranteed delivery procedures set forth in the section of the Prospectus
titled "The Exchange Offer -- Guaranteed Delivery Procedures." Upon request to
the Exchange Agent, a Notice of Guaranteed Delivery will be sent to Holders who
wish to tender their Outstanding Notes according to such guaranteed delivery
procedures.
9. MISCELLANEOUS. All questions as to the validity, form,
eligibility (including time of receipt), acceptance, and withdrawal of tendered
Outstanding Notes will be resolved by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute
right to reject any or all Outstanding Notes not properly tendered or any
Outstanding 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. The Company's interpretation of the terms and conditions of
the Exchange Offer (including the instructions in this Letter of Transmittal)
will be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Outstanding Notes must be cured
within such time as the Company shall determine. Although the Company intends
to notify Holders of defects of irregularities with respect to tenders of
Outstanding 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 will not be deemed to have been made until such
defects or irregularities have been cured or waived. Any Outstanding Notes
received by the Exchange Agent that are withdrawn or 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 Holder thereof,
unless otherwise provided in this Letter of Transmittal, as soon as practicable
after withdrawal or following the Expiration Date.
<PAGE> 1
EXHIBIT 99.4
NOTICE OF GUARANTEED DELIVERY
To Tender
Unregistered 10 3/4% Senior Notes due 2006
of
NATIONAL ENERGY GROUP, INC.
Pursuant to the Exchange Offer and Prospectus dated January 13, 1997
As set forth in the Exchange Offer (as defined in the Prospectus (as
defined below)), holders of unregistered 10 3/4% Senior Notes due 2006 (the
"Outstanding Notes") of National Energy Group, Inc. (i) whose Outstanding Notes
are not immediately available, (ii) who cannot deliver their Outstanding 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 (as defined), must use this form or one
substantially equivalent hereto if they to wish to tender their Outstanding
Notes to accept the Exchange Offer. This form may be delivered by facsimile
transmission, by registered or certified mail, by hand, or by overnight
delivery service to the Exchange Agent. See "The Exchange Offer -- Procedures
for Tendering" and "-- Guaranteed Delivery Procedures" in the Prospectus.
***************************************************************************
* *
* THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., *
* E.S.T., ON FEBRUARY 17, 1997 (THE "EXPIRATION DATE"), UNLESS THE *
* EXCHANGE OFFER IS EXTENDED BY THE COMPANY. *
* *
***************************************************************************
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
BANK ONE, COLUMBUS, N.A.
By Registered or Certified Mail:
Bank One, Columbus, N.A.
Attention: Corporate Trust Operations
235 West Schrock Road
Westerville, Ohio 43271-0184
By Overnight Courier or by Hand:
Bank One, Columbus, N.A.
Attention: Corporate Trust Operations
235 West Schrock Road
Westerville, Ohio 43081
By Facsimile:
(614) 248-5088
Attention: Lora E. Marsch, Corporate Trust Operations
Confirm by Telephone: (614) 248-4856
(Originals of all documents sent by facsimile should be sent promptly by
registered or certified mail, by hand, or by overnight delivery service.)
DELIVERY OF THIS NOTICE TO AN ADDRESS OR TRANSMISSION OF INSTRUCTIONS
VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID
DELIVERY.
<PAGE> 2
<PAGE> 2
Ladies and Gentlemen:
The undersigned hereby tenders to National Energy Group, Inc., a
Delaware corporation (the "Company"), in accordance with the Company's offer,
upon the terms and subject to the conditions set forth in the Prospectus dated
January 13, 1997 (the "Prospectus"), and in the accompanying Letter of
Transmittal, receipt of which is hereby acknowledged, the aggregate principal
amount of Outstanding Notes set forth below pursuant to the guaranteed delivery
procedures described in the Prospectus.
================================================================================
Name of Registered Holder(s):
-------------------------------------------------
(Please Type or Print)
Address:
----------------------------------------------------------------------
------------------------------------------------------------------------------
Area Code & Telephone No.:
---------------------------------------------------
Certificate Number(s) for
Outstanding Notes (if available):
---------------------------------------------
Total Principal Amount
Tendered and Represented
by Certificate(s): $
----------------------------------------------------------
Signature of Registered Holder(s):
-------------------------------------------
Dated:
------------------------------------------------------------------------
[ ] Cede & Co., as nominee for The Depository Trust Company
(Check if Outstanding Notes will be tendered
by book-entry transfer)
Account Number:
---------------------------------------------------------------
================================================================================
THE GUARANTEE OF DELIVERY ON THE FOLLOWING PAGE MUST BE COMPLETED
<PAGE> 3
GUARANTEE OF DELIVERY
(Not to be used for signature guarantee)
The undersigned, being a member firm of a registered national
securities exchange, a member of the National Association of Securities
Dealers, Inc., or a commercial bank or trust company having an office in the
United States, hereby guarantees (a) that the above named person(s) "own(s)"
the Outstanding Notes tendered hereby within the meaning of Rule 14e-4 ("Rule
14e-4") under the Securities Exchange Act of 1934, as amended, (b) that such
tender of such Outstanding Notes complies with Rule 14e-4, and (c) to deliver
to the Exchange Agent the certificates representing the Outstanding Notes
tendered hereby or confirmation of book-entry transfer of such Outstanding
Notes into the Exchange Agent's account at Cede & Co., as nominee for The
Depository Trust Company, in proper form for transfer, together with the Letter
of Transmittal (or facsimile thereof), properly completed and duly executed,
with any required signature guarantees and any other required documents, within
five Nasdaq Stock Market trading days after the Expiration Date.
================================================================================
Name of Firm:
-----------------------------------------------------------------
Address:
----------------------------------------------------------------------
------------------------------------------------------------------------------
Area Code and Telephone No.:
--------------------------------------------------
Authorized Signature:
---------------------------------------------------------
Name:
-------------------------------------------------------------------------
Time:
-------------------------------------------------------------------------
Dated:
------------------------------------------------------------------------
================================================================================
NOTE: DO NOT SEND CERTIFICATES OF OUTSTANDING NOTES WITH THIS FORM.
CERTIFICATES OF OUTSTANDING NOTES SHOULD BE SENT ONLY WITH A LETTER OF
TRANSMITTAL.
