<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
<TABLE>
<S> <C>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
</TABLE>
Commission File No. 0-19136 (Common Stock)
and 333-9045 (Senior Notes)
NATIONAL ENERGY GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 58-1922764
(State or other jurisdiction (IRS Employer
Identification
No.)
of incorporation or
organization)
</TABLE>
1400 ONE ENERGY SQUARE
4925 GREENVILLE AVENUE
DALLAS, TEXAS 75206
(Address of principal executive offices)
(214) 692-9211
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No
------------------------
36,301,099 shares of the registrant's Common Stock, $0.01 par value, was
outstanding on May 12, 1997.
- --------------------------------------------------------------------------------
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<PAGE>
NATIONAL ENERGY GROUP, INC.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
-------------
<S> <C> <C>
Item 1. Financial Statements
Balance Sheets at December 31, 1996 and March 31, 1997 (Unaudited)........................... 1
Statements of Operations for the three months ended March 31, 1996 and 1997 (Unaudited)...... 2
Statements of Cash Flows for the three months ended March 31, 1996 and 1997 (Unaudited)...... 3
Statement of Changes in Stockholders' Equity for the three months ended March 31, 1997
(Unaudited)................................................................................ 4
Notes to Financial Statements (Unaudited).................................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................ 14
Item 6. Exhibits and Reports on Form 8-K............................................................. 14
</TABLE>
<PAGE>
NATIONAL ENERGY GROUP, INC.
BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
-------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................................... $ 14,182,246 $ 2,367,801
Accounts receivable--oil and gas sales.......................................... 6,812,358 6,109,909
Accounts receivable--joint interest and other................................... 3,003,661 3,392,170
Other........................................................................... 1,131,736 1,406,131
-------------- --------------
Total current assets.............................................................. 25,130,001 13,276,011
Oil and gas properties, at cost (full cost method):
Proved oil and gas properties................................................... 169,863,109 190,732,795
Unproved oil and gas properties................................................. 24,682,425 25,055,057
-------------- --------------
194,545,534 215,787,852
Accumulated depreciation, depletion, and amortization............................. 15,039,999 19,863,901
-------------- --------------
Net oil and gas properties........................................................ 179,505,535 195,923,951
Other property and equipment...................................................... 2,869,227 3,359,435
Accumulated depreciation.......................................................... 347,841 408,308
-------------- --------------
Net other property and equipment.................................................. 2,521,386 2,951,127
Other assets, net................................................................. 4,878,234 5,216,889
-------------- --------------
Total assets...................................................................... $ 212,035,156 $ 217,367,978
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable--trade......................................................... $ 12,012,655 $ 13,138,223
Accounts payable--revenue and other............................................. 7,281,271 7,772,164
Accrued merger costs............................................................ 1,462,724 879,494
Accrued interest................................................................ 1,791,667 4,479,167
-------------- --------------
Total current liabilities......................................................... 22,548,317 26,269,048
Other long-term liabilities....................................................... 1,786,813 934,912
10 3/4% Senior Notes due 2006..................................................... 100,000,000 100,000,000
Deferred income taxes............................................................. 7,273,829 7,996,813
Stockholders' equity:
Convertible preferred stock, $1.00 par:
Authorized shares 1,000,000
Issued and outstanding shares--242,500
Aggregate liquidation preference--$24,250,000................................. 242,500 242,500
Common stock, $.01 par value:
Authorized shares--100,000,000
Issued and outstanding shares--35,977,140 and 36,095,359 at December 31, 1996
and March 31, 1997, respectively.............................................. 359,771 360,954
Additional paid-in capital...................................................... 110,293,386 110,629,771
Deficit......................................................................... (30,469,460) (29,066,020)
-------------- --------------
Total stockholders' equity........................................................ 80,426,197 82,167,205
-------------- --------------
Total liabilities and stockholders' equity........................................ $ 212,035,156 $ 217,367,978
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes.
1
<PAGE>
NATIONAL ENERGY GROUP, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1996 1997
------------ -------------
<S> <C> <C>
Revenue:
Oil and gas sales.................................................................. $ 3,795,203 $ 12,965,027
Well operator fees................................................................. 53,214 387,736
------------ -------------
3,848,417 13,352,763
Costs and expenses:
Lease operating.................................................................... 607,064 1,802,173
Oil and gas production taxes....................................................... 187,786 816,267
Depreciation, depletion, and amortization.......................................... 1,650,654 4,884,373
General and administrative......................................................... 508,569 1,064,707
------------ -------------
2,954,073 8,567,520
------------ -------------
Operating income..................................................................... 894,344 4,785,243
Interest expense..................................................................... (475,821) (2,853,698)
Interest income and other, net....................................................... 22,872 194,879
Loss on sale of marketable securities................................................ (8,104) --
------------ -------------
Income before income taxes........................................................... 433,291 2,126,424
Provision for income taxes........................................................... -- 722,984
------------ -------------
Net income........................................................................... $ 433,291 $ 1,403,440
------------ -------------
------------ -------------
Net income per common share.......................................................... $ .02 $ .03
------------ -------------
------------ -------------
Weighted average number of common shares outstanding................................. 12,043,247 36,094,169
------------ -------------
------------ -------------
</TABLE>
See accompanying notes.
2
<PAGE>
NATIONAL ENERGY GROUP, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1996 1997
------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income......................................................................... $ 433,291 $ 1,403,440
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion, and amortization........................................ 1,650,654 4,884,373
Amortization of debt issuance costs.............................................. 21,060 136,175
Amortization of deferred compensation............................................ 8,751 9,482
Provision for deferred income taxes.............................................. -- 722,984
Common stock, options, and warrants issued for services.......................... 7,332 50,708
Loss on sale of marketable securities............................................ 8,104 --
Changes in operating assets and liabilities:
Accounts receivable............................................................ (110,124) 313,940
Other current assets........................................................... (710,318) (246,270)
Accounts payable and accrued liabilities....................................... (440,899) 2,259,074
------------- --------------
Net cash provided by operating activities.......................................... 867,851 9,533,906
------------- --------------
INVESTING ACTIVITIES
Purchases of marketable securities................................................. (9,008) --
Proceeds from sale of marketable securities........................................ 387,871 --
Purchases of other property and equipment.......................................... (490,058) (490,208)
Oil and gas acquisition, exploration, and development expenditures................. (5,399,368) (19,779,818)
Purchases of other long-term assets................................................ -- (479,656)
Other.............................................................................. 1,065 (5,131)
------------- --------------
Net cash used by investing activities.............................................. (5,509,498) (20,754,813)
------------- --------------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt, net...................................... 3,250,000 --
Repayments of long-term debt....................................................... (3,737,000) --
Repayments of other long-term liabilities.......................................... -- (772,773)
Proceeds from exercise of stock options and warrants............................... 57,769 180,532
Payments for redemption of fractional shares....................................... (203) (1,297)
------------- --------------
Net cash used by financing activities.............................................. (429,434) (593,538)
------------- --------------
Decrease in cash and cash equivalents.............................................. (5,071,081) (11,814,445)
Cash and cash equivalents at beginning of period................................... 6,076,199 14,182,246
------------- --------------
Cash and cash equivalents at end of period......................................... $ 1,005,118 $ 2,367,801
------------- --------------
------------- --------------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid in cash.............................................................. $ 358,288 $ 3,474
------------- --------------
------------- --------------
</TABLE>
See accompanying notes.
3
<PAGE>
NATIONAL ENERGY GROUP, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
-------------------- ---------------------- PAID-IN STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
--------- --------- ----------- --------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996...... 242,500 $ 242,500 35,977,140 $ 359,771 $ 110,293,386 $ 30,469,460 $80,426,197
Common stock issued upon
exercise of options and
warrants...................... -- -- 85,365 854 179,678 -- 180,532
Common stock, options, and
warrants issued for
services...................... -- -- 32,854 329 156,707 -- 157,036
Net income...................... -- -- -- -- -- 1,403,440 1,403,440
--------- --------- ----------- --------- ------------- ------------ ------------
Balance at March 31, 1997......... 242,500 $ 242,500 36,095,359 $ 360,954 $ 110,629,771 $ 29,066,020 $82,167,205
--------- --------- ----------- --------- ------------- ------------ ------------
--------- --------- ----------- --------- ------------- ------------ ------------
</TABLE>
See accompanying notes.
4
<PAGE>
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1997
1. BASIS OF PRESENTATION
In management's opinion, the accompanying financial statements contain all
adjustments (consisting solely of normal recurring accruals) necessary to
present fairly the financial position of National Energy Group, Inc. (the
"Company") as of March 31, 1997, the results of operations for the three month
periods ended March 31, 1996 and 1997, and the cash flows for the three month
periods ended March 31, 1996 and 1997.
The accompanying unaudited financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and disclosures normally included in annual financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to those rules and regulations, although the Company believes
that the disclosures made are adequate to make the information presented not
misleading. These financial statements should be read in conjunction with the
Company's financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.
The Company capitalizes internal general and administrative costs that can
be directly identified with acquisition, exploration, and development
activities. These costs totaled $33,400 for the three months ended March 31,
1996 and $336,465 for the three months ended March 31, 1997.
Certain previously reported amounts have been reclassified to conform with
the current presentation.
The results of operations for the three months ended March 31, 1997, are not
necessarily indicative of the results expected for the full year.
Primary earnings per common and common equivalent share data is computed by
dividing net income, adjusted for preferred stock dividend requirements of
$236,250 for the three months ended March 31, 1996 and 1997, by the weighted
average number of common and common equivalent shares outstanding during each
period. Shares issuable upon exercise of options and warrants and upon
conversion of the Company's Convertible Preferred Stock Series D and Series E
are included in the computation of earnings per common and common equivalent
share to the extent they are dilutive. Fully diluted earnings per share
computations also assume conversion of the Company's Convertible Preferred
Stock, Series B and Series C, if such conversions have a dilutive effect. The
number of shares used in the per share calculations were 12,043,247 and
43,966,562 for the three months ended March 31, 1996 and 1997, respectively.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, EARNINGS PER SHARE, ("SFAS 128")
which is required to be adopted on December 31, 1997. At that time, the Company
will be required to change the method currently used to compute earnings per
share and to restate all prior periods. Under the new requirements for
calculating primary earnings per share, the dilutive effect of stock options,
warrants and the Convertible Preferred Stock, Series D and Series E, will be
excluded. Adoption of SFAS 128 will not impact primary earnings per share for
the quarters ended March 31, 1996 and 1997 because the dilutive effect of
options, warrants and the convertible preferred stock was not significant. The
impact of SFAS 128 on the calculation of fully diluted earnings per share is not
expected to be significant.
2. ACQUISITIONS
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
5
<PAGE>
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
MARCH 31, 1997
2. ACQUISITIONS (CONTINUED)
Company, and Petrotex Engineering Company (the "CA Acquisition"). The
acquisition included 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 consideration for this acquisition
consisted of $1.5 million in cash, which was funded primarily from borrowings
under a credit agreement with Bank One.
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 a credit facility with BankOne and
available cash.
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, (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. On
December 31, 1996, NEG-OK was merged into and with the Company and its separate
corporate existence ceased to exist.
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 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.
The following pro forma data presents the results of the Company for the
three months ended March 31, 1996, as if the acquisition of NEG-OK and the
issuance of the Convertible Preferred Stock, Series D and Series E, had occurred
on January 1, 1996. 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 acquisition been consummated as
presented. The following data reflect pro forma adjustments for oil and gas
revenues, production costs, depreciation, and depletion related to the
6
<PAGE>
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
MARCH 31, 1997
2. ACQUISITIONS (CONTINUED)
properties acquired, interest on borrowed funds, and the related income tax
effects (in thousands, except per share amounts).
<TABLE>
<CAPTION>
PRO FORMA
THREE MONTHS ENDED
MARCH 31, 1996
-------------------
<S> <C>
(UNAUDITED)
Total revenues (in thousands)............................................ $ 8,852
------
------
Net income (in thousands)................................................ $ 842
------
------
Net income per share..................................................... $ 0.02
------
------
</TABLE>
In September 1996, the Company acquired an approximate 87.5% working
interest in two wells and certain proved undeveloped reserves in the South Lake
Boeuf Field, La Fourche Parish, Louisiana (the "Lake Boeuf Acquisition") for
approximately $7.2 million, consisting of $1.5 million in cash and 1,758,460
shares of Common Stock.
In October 1996, the Company acquired certain leasehold interests located in
the East Bayou Sorrel Field, Iberville Parish, Louisiana, from W&T Offshore,
Inc. (the "W&T Acquisition"). The consideration paid by the Company consisted of
$3,300,000 in cash. In November 1996, the Company completed the acquisition of
oil and natural gas properties and related facilities located in the Bayou
Sorrel Field, Iberville Parish, Louisiana (the "Bayou Sorrel Acquisition"). The
consideration paid by the Company consisted of $9,025,000 cash, 477,612 shares
of the Company's Common Stock and conveyance of 3% overriding royalty interest
in the property acquired, limited to production below 11,000 feet. In December
1996, the Company acquired certain oil and natural gas properties located in the
East Bayou Sorrel Field, Iberville Parish, Louisiana (the "MCNIC Acquisition").
The consideration paid by the Company consisted of $7,000,000 in cash. The
Company funded the cash portion of these acquisitions from available cash. These
acquisitions consisted principally of proved developed nonproducing and unproved
properties and, accordingly, did not have a significant impact on the Company's
results of operations for 1996.
3. CREDIT FACILITIES
The Company has a revolving credit agreement with a group of banks (the
"Credit Facility") with an initial borrowing base of $25.0 million, limited to
$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. In May 1997, the borrowing
base was increased to $40.0 million with proceeds to be used for development
drilling expenditures and acquisition of producing oil and gas properties. 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. At March 31, 1997, the
Company had no outstanding indebtedness under the amended Credit Facility.
7
<PAGE>
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
MARCH 31, 1997
3. CREDIT FACILITIES (CONTINUED)
The Company is required to pay a commitment fee on the unused portion of the
borrowing base equal to 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 substantially all of the Company's
oil and natural gas properties, whether currently owned or hereafter acquired,
and a negative pledge on all other oil 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 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. At March 31,
1997, the Company was not in violation of any covenants of the Credit Facility
as amended.
4. 10 3/4% SENIOR NOTES DUE 2006
On November 1, 1996, the Company closed the offering of $100 million of its
Senior Notes. The net proceeds of the Senior Notes of approximately $96.1
million were used to repay approximately $62.0 million of borrowings under the
Credit Facility and to increase the Company's working capital. In 1997, the
Senior Notes were exchanged for the Exchange Notes which are substantially
identical to the Senior Notes. Collectively, the Senior Notes and Exchange Notes
are referred to as 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 restricting the Company's and its
Restricted Subsidiaries', as defined, ability to incur additional indebtedness.
8
<PAGE>
NATIONAL ENERGY GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
In the fourth quarter of 1996 the Company began an accelerated development
and exploration program (the "Drilling Program") using the net proceeds from the
Notes. The Company has budgeted $57 million for the Drilling Program during
1997, of which $45 million is designated for development drilling and $12
million is designated for exploration drilling. The Company has spent
approximately $17 million during the first quarter of 1997 related to the
Drilling Program.
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 ("LOE"), general and administrative expenses ("G&A") and depreciation,
depletion, and amortization ("DD&A") associated with the Company's oil and
natural gas sales for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
---------------------------
1996 1997
------------ -------------
<S> <C> <C>
Net production:
Oil (Bbls)..................................................... 110,541 237,321
Natural gas (Mcf).............................................. 833,490 2,884,037
Natural gas equivalent (Mcfe).................................. 1,496,736 4,307,963
Oil and natural gas sales:
Oil............................................................ $ 2,070,746 $ 5,197,815
Natural gas.................................................... 1,724,457 7,767,212
------------ -------------
Total.......................................................... $ 3,795,203 $ 12,965,027
------------ -------------
------------ -------------
Average sales price:
Oil (Bbls)..................................................... $ 18.73 $ 21.90
Natural gas (Mcf).............................................. 2.07 2.69
Natural gas equivalent (Mcfe).................................. 2.54 3.01
LOE per Mcfe..................................................... .41 .42
G&A expenses per Mcfe............................................ .34 .25
DD&A per Mcfe.................................................... 1.10 1.13
</TABLE>
THREE MONTHS ENDED MARCH 31, 1997 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1996
REVENUES
Total revenues increased by $9.6 million (252.6%) to $13.4 million for 1997
from $3.8 million in 1996. The increase in revenues is due to the increase in
production primarily from the Merger with Alexander completed in August 1996,
the development of the GAU and the production from the Schwing #1 well drilled
at East Bayou Sorrel which went on production late in December of 1996. The
Company increased its 17% working interest in the Schwing #1 to 60% as a result
of the W&T Acquisition and MCNIC Acquisition. Also contributing to the increased
production is the initial results from the Company's Drilling Program combined
with the UMC Acquisition, the CA Acquisition, the Lake Boeuf Acquisition and the
Bayou Sorrel Acquisition (hereinafter referred to as the "1996 Acquisitions")
completed during 1996. In 1997, the Company produced 237,321 barrels of oil, an
increase of 114.7% over 110,541 barrels in 1996, and 2,884,037 Mcf of natural
gas, an increase of 246.0% over 833,490 Mcf in the same period of 1996.
9
<PAGE>
NATIONAL ENERGY GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Also contributing to the increase in revenues was the increase in average
oil prices of $3.17 per barrel to $21.90 for 1997 from $18.73 for 1996, and the
increase in average natural gas prices of $.62 per Mcf to $2.69 per Mcf for 1997
from $2.07 for 1996.
COSTS AND EXPENSES
Lease operating expenses increased $1.2 million (200.0%) to $1.8 million for
1997 from $.6 million for 1996 primarily due to the Merger, the development of
the GAU, the Schwing #1 well, the Drilling Program and the 1996 Acquisitions.
However, lease operating expenses per Mcfe remained relatively unchanged at $.42
per Mcfe for 1997 compared to $.41 per Mcfe for 1996.
Production taxes increased $628,481 (334.7%) to $816,267 for 1997 compared
to $187,786 for 1996. This increase is a direct result from the increase in
total oil and natural gas revenues discussed above.
DD&A increased $3.2 million (188.2%) to $4.9 million for 1997 compared to
$1.7 million for 1996. This increase is due to the increased production from the
GAU, the Schwing #1 well, the Drilling Program, the 1996 Acquisitions, and the
Merger. The depletion rate per Mcfe was $1.13 for 1997 compared to $1.10 for
1996. This increase in the depletion rate is primarily due to the acquisition
costs associated with the Merger.
Although G&A increased $.6 million to $1.1 million for 1997, G&A per Mcfe
decreased 36.0% to $.25 for 1997 from $.34 for 1996. This decrease is
attributable to the increase in production from the GAU, the Schwing #1 well,
the Drilling Program, the 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 $2.4 million (480.0%) in interest expense to $2.9 million
for 1997 from $.5 million for 1996, was due to the issuance of the Notes. The
balance outstanding under the Notes during the first quarter of 1997 was $100.0
million as compared to average debt outstanding under credit facilities of $15.6
million for 1996. The weighted average interest rate for 1997 was 10.75%
compared to 9.44% for the same period of 1996.
NET INCOME
Net income of $1.4 million was generated for the first quarter of 1997,
compared with net income of $.4 million for 1996, resulting principally from the
increase in operating income, partially offset by the increase in interest
expense and the provision for income taxes.
LIQUIDITY AND CAPITAL RESOURCES
THREE MONTHS ENDED MARCH 31, 1997 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1996.
Net cash provided by operating activities was $9.5 million for the three
months ended March 31, 1997, compared to $.9 million for the same period in
1996. The increase in cash flow from operating activities is primarily due to
the significant increase in income from operations before DD&A resulting from
results of the Drilling Program, the 1996 Acquisitions and the Merger discussed
above.
Net cash used by investing activities was $20.8 million for 1997 compared
with $5.5 million for 1996. The cash used by investing activities for 1997
primarily consisted of oil and gas acquisition, exploration and development
expenditures related to the Company's Drilling Program.
10
<PAGE>
NATIONAL ENERGY GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Net cash used by financing activities was $.6 million for 1997 compared with
$.4 million for 1996. The cash used by financing activities during 1997
primarily consisted of repayments of long-term debt. In 1996, cash used by
financing activities consisted primarily of repayments of long-term debt offset
by proceeds from issuance of long-term debt.
The Company's working capital deficit at March 31, 1997, was $13.0 million
compared to a working capital deficit at December 31, 1996, of $2.6 million. The
deficit increase was due primarily to the expenditures of cash for oil and gas
acquisition, exploration, and development activities. The deficit includes $2.3
million related to gas imbalances and gas prepayments which were classified as
long-term in prior quarters and also includes $4.5 million of accrued interest
related to the Notes. Further, the Company had borrowing availability under the
Credit Facility of $25 million at March 31, 1997 which if drawn upon could have
eliminated such deficit.
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 consists of proved undeveloped reserves.
The Company has established an aggregate development and exploration capital
budget for its existing properties of approximately $57.0 million for 1997, of
which approximately $17 million was spent during the first quarter of 1997. The
Company is not contractually committed to expend the budgeted funds. The Company
currently expects that available cash, cash flows from operations, and available
borrowings under the Credit Facility shall be sufficient to fund planned capital
expenditures for its existing properties through 1997 in addition to funding
interest requirements on the Notes. However, the Company may need to raise
additional capital to fund any acquisitions.
For the periods following 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. There is no assurance that the Company will be able to
access additional capital 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 million of its
Senior Notes. The net proceeds of the Senior Notes of approximately $96.1
million were used to repay approximately $62.0 million of borrowings under the
Credit Facility and to increase the Company's working capital. In 1997, the
Senior Notes were exchanged for the Exchange Notes which are substantially
identical to the Senior Notes. Collectively, the Senior Notes and Exchange Notes
are referred to as 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 restricting the Company's and its
Restricted Subsidiaries', as defined, ability to incur additional indebtedness.
11
<PAGE>
NATIONAL ENERGY GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
CREDIT FACILITIES
The Company's Credit Facility is a revolving line of credit with an initial
borrowing base of $25.0 million. In May 1997, the borrowing base was increased
to $40 million with proceeds to be used for development drilling expenditures
and acquisition 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
the Financial Statements.
FINANCIAL REPORTING IMPACT OF FULL COST METHOD OF ACCOUNTING
The Company follows the full cost method of accounting for oil and natural
gas properties. Under such method, the net book value of such properties, less
related deferred income taxes, may not exceed a calculated "ceiling." The
ceiling is the estimated after-tax future net revenues from proved oil and
natural gas properties, discounted at 10% per year. In calculating future net
revenues, prices and costs in effect at the time of the calculation are held
constant indefinitely, except for changes which are fixed and determinable by
existing contracts. The net book value is compared to the ceiling on a quarterly
and yearly basis. The excess, if any, of the net book value above the ceiling is
required to be written off as a non-cash expense. At March 31, 1997, the net
book value of the Company's oil and natural gas properties did not exceed the
ceiling. Sustained decreases in oil and natural gas prices could result in write
downs during future periods.
CHANGES IN PRICES AND INFLATION
The Company's revenues and value of its oil and natural 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.
During 1996, the Company hedged 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 involved 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 wellhead 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 has been 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 counter parties, periodic settlements, and market to market
valuations. The Company has not been required to provide collateral relating to
hedging activities. At March 31, 1997, the Company had no hedging or basis swap
agreements outstanding. During the three months ended March 31, 1996, the
Company recognized a net loss of $8,104 related to hedging transactions.
12
<PAGE>
NATIONAL ENERGY GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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 three months ended March 31, 1996 and 1997.
NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, EARNINGS PER SHARE, ("SFAS 128")
which is required to be adopted on December 31, 1997. At that time, the Company
will be required to change the method currently used to compute earnings per
share and to restate all prior periods. Under the new requirements for
calculating primary earnings per share, the dilutive effect of stock options,
warrants and the Convertible Preferred Stock, Series D and Series E, will be
excluded. Adoption of SFAS 128 will not impact primary earnings per share for
the quarters ended March 31, 1996 and 1997 because the dilutive effect of
options, warrants and the convertible preferred stock was not significant. The
impact of SFAS 128 on the calculation of fully diluted earnings per share is not
expected to be significant.
13
<PAGE>
NATIONAL ENERGY GROUP, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 30, 1995, the Company filed a lawsuit in the District Court of
Ector County, Texas, 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 tortuous interference with the
Company's access to its facilities and wrongful conduct with respect to the
Company's personnel.
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 and seeks
unspecified damages. On December 19, 1996, the Court in Harris County, Texas,
signed an order transferring the R.E. Steakley claim to the court in Ector
County, Texas as a part of the Company's claim against R.E. Steakley.
Subsequently, R.E. Steakley filed a Fourth Amended Original Answer and Original
Counterclaims against the Company in Ector County District Court in which he
reasserts the claims filed in the Harris County action. 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The list of exhibits required by Item 601 of Regulation S-K and filed as
part of this report is set forth in the Index to Exhibits.
(b) No reports on Form 8-K were filed during the three months ended March
31, 1997.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NATIONAL ENERGY GROUP, INC.
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ MILES D. BENDER
- ------------------------------ President and Chief May 15, 1997
Miles D. Bender Executive Officer
/s/ ROBERT A. IMEL Chief Financial Officer
- ------------------------------ and Senior May 15, 1997
Robert A. Imel Vice President
/s/ MELISSA H. RUTLEDGE Controller and Chief
- ------------------------------ Accounting May 15, 1997
Melissa H. Rutledge Officer
15
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<C> <S>
2.1 Agreement and Plan of Merger, dated June 6, 1996, among the Company, NEG-OK, Inc.
("NEG-OK"), and Alexander Energy Corporation ("Alexander") (1)
2.2 First Amendment to Agreement and Plan of Merger, dated as of June 20, 1996, among the
Company, NEG-OK, and Alexander (2)
2.3 Mutual Waiver Agreement dated as of August 29, 1996 by and among the Company, NEG-OK
and Alexander (3)
3.1 Certificate of Incorporation of the Company, which includes the Certificate of
Incorporation of the Company 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 Company, 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 Company, 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 Company of 10% Cumulative Convertible Preferred Stock, Series B
(5), the Certificate of Designations of the Company of 10 1/2% Cumulative
Convertible Preferred Stock, Series (6), the Certificate of Designations of the
Company of Convertible Preferred Stock, Series D (3), and the Certificate of
Designations of the Company of Convertible Preferred Stock, Series E (3)
3.2 By-laws of the Company (4)
4.1 Certificate of Designations of the Company of 10% Cumulative Convertible Preferred
Stock, Series B (5)
4.2 Certificate of Designations of the Company of 10 1/2% Cumulative Convertible
Preferred Stock, Series C (6)
4.3 Certificate of Designations of the Company of Convertible Preferred Stock, Series D
(3)
4.4 Certificate of Designations of the Company 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 and John Hancock Mutual Life Insurance (10 1/2% Senior
Secured Notes) (7)
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 Indenture dated as of November 1, 1996, among the Company, National Energy Group of
Oklahoma, Inc. (the "Guarantor"), formerly NEG-OK, and BankOne, Columbus, N.A. (8)
10.1 Executive Employment Agreement, dated March 20, 1997, between the Company and Philip
D. Devlin (10)
10.2 Executive Employment Agreement dated March 20, 1997, between the Company and Gene W.
Anderson (10)
10.3 Second Amendment to Restated Loan Agreement dated October 31, 1996, among Bank One
and Credit Lyonnais and the Company, Guarantor and Boomer (10)
10.4 Third Amendment to Restated Loan Agreement dated October 31, 1996, among Bank One and
Credit Lyonnais and the Company, Guarantor and Boomer (10)
11 Computation of Earnings Per Share (10)
27.1 Financial Data Schedule (9)
99.39 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 State of Oklahoma on August 29, 1996 (3)
</TABLE>
16
<PAGE>
- ------------------------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-4 (No. 333-9045), dated July 29, 1996.
(2) Incorporated by reference to Amendment No. 1 to the Company's Registration
Statement on Form S-4 (No. 333-9045), dated August 7, 1996.
(3) Incorporated by reference to the Company's Current Report on Form 8-K,
dated August 29, 1996.
(4) Incorporated by reference to the Company's Registration Statement on Form
S-4 (No. 33-38331), dated April 23, 1991.
(5) Incorporated by reference to the Company's Current Report on Form 8-K,
dated June 17, 1994.
(6) Incorporated by reference to the Company's Current Report on Form 8-K,
dated July 18, 1995.
(7) Incorporated by reference to Alexander's Form 10-K for the fiscal year
ended December 31, 1994.
(8) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996.
(9) The Financial Data Schedule, is filed herewith for EDGAR filings only.
(10) Filed herewith.
17
<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENT
This Executive Employment Agreement (the "Agreement") is made the 20th
day of March, 1997, by and between National Energy Group, Inc., a Delaware
corporation acting by and through its hereunto duly authorized officer (the
"Company"), and Philip D. Devlin (the "Executive").
WHEREAS, the Executive is presently in the employ of the Company in the
capacity of Vice President and General Counsel, and the Company is willing to
provide certain employment assurances to the Executive in the event of a
Change of Control (as defined below) of the Company as incentive and
inducement for the Executive to continue in such employment in his present
capacity after a Change of Control; and
WHEREAS, in consideration of such employment assurances, the Executive
is willing to remain in the employ of the Company in the capacity of Vice
President and General Counsel after a Change of Control of the Company.
NOW, THEREFORE, in consideration of the premises and the mutual terms
and conditions hereof, the Company and the Executive hereby agree as follows:
1. EMPLOYMENT. In consideration of the benefits hereinafter
specified, the Executive hereby agrees to continue his employment with the
Company in the capacity of Vice President and General Counsel after a Change
of Control of the Company and to discharge his duties in such capacity during
the term of this Agreement.
2. EXCLUSIVE SERVICES. The Executive shall devote his full working
time, ability and attention to the business of the Company during the term of
this Agreement and shall not, directly or indirectly, render any services of
a business, commercial or professional nature to any other person,
corporation or organization, whether for compensation or otherwise, without
the prior knowledge and consent of the Board of Directors (the "Board") or
President and Chief Executive Officer of the Company; provided, however, that
the provisions of this Agreement shall not be construed as preventing the
Executive from investing in other non-competitive businesses or enterprises
if such investments do not require substantial services on the part of the
Executive in the affairs or operations of any such business or enterprise so
as to significantly diminish the performance by the Executive of his duties,
functions and responsibilities under this Agreement. During the term of this
Agreement, the Executive shall not, directly or indirectly, either through
any kind of ownership (other than ownership of securities of publicly held
corporations of which the Executive owns less than five percent (5%) of any
class of outstanding securities) or as a director, officer, agent, employee
or consultant engage in any business that is competitive with the Company.
3. AUTHORITY AND DUTIES. During the term of this Agreement, the
Executive shall have such authority and shall perform such duties, functions
and responsibilities as are specified by the Bylaws of the Company, the
Executive Committee, the Board of Directors, or the President of the Company
and/or as are appropriate for the office of the Vice President and General
Counsel and shall serve with the necessary power and authority commensurate
with such position and consistent with
<PAGE>
the manner with which the Executive has carried out the office in the past.
If the Company removes the Executive from the office of the Vice President
and General Counsel of the Company after a Change of Control or limits,
restricts or reassigns his authority and responsibility after a Change of
Control so as to be less significant than, or not comparable to, that to
which he held immediately preceding such Change of Control in his capacity as
Vice President and General Counsel without his prior mutual consent, the
Executive shall be entitled to resign for good reason and receive the
Severance Benefits set forth in this Agreement.
4. COMPENSATION. In consideration for the services to be rendered by
the Executive to the Company and/or its subsidiaries, the Company shall pay
to the Executive at least the gross cash compensation and shall award to the
Executive at least the bonuses as set forth below:
<TABLE>
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
ANNUAL
ANNUAL PERIOD BASE SALARY ANNUAL BONUS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
For the one year period following 100% of the average of the Executive's 100% of the average of the
effective date of a Change of Control annual base salary in effect immediately bonuses paid to the Executive for
prior to the Change in Control and of the each of the three fiscal years
Executive's annual base salary for each of before the Change in Control
the immediately preceding two years
- --------------------------------------------------------------------------------------------------------------------------
For the second year following 100% of the average of the Executive's 100% of the average of the
effective date of a Change of Control annual base salary on the date that is one bonuses paid to the Executive for
year after the Change in Control and of the the three immediately preceding
Executive's annual base salary for each of fiscal years
the immediately preceding two years
- --------------------------------------------------------------------------------------------------------------------------
For the third year following effective 100% of the average of the Executive's 100% of the average of the
date of a Change of Control annual base salary on the date that is two bonuses paid to the Executive for
years after the Change in Control and of the three immediately preceding
the Executive's annual base salary for fiscal years
each of the immediately preceding two years
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
In the event that the Executive shall not have been employed for three years
prior to the effective date of this Agreement, the Executive's annual base
compensation rate or bonus rate shall be averaged over the actual period of
employment of the Executive by the Company.
Each of the annual base salary amounts set forth above shall be paid to
the Executive in equal monthly installments, or as otherwise agreed, during
each corresponding year of the term of this Agreement, provided that for any
period of less than one (1) year, the annual base salary shall be pro-rated
accordingly. The annual bonus amount indicated above or amounts in excess of
such indicated bonus shall be awarded no later than December 31 of the
corresponding annual period. The amount set forth above is compensation to
the Executive or gross amounts due hereunder and the Company shall have the
right to deduct therefrom all taxes and other amounts which may be required
to be deducted or withheld by law (including, but not limited to income tax,
withholding, social security and medicare payments) whether such law is now
in effect or becomes effective after the execution of this Agreement.
2
<PAGE>
5. BENEFITS AND BUSINESS EXPENSES. During the term hereof:
(a) The Executive shall be entitled to continue his participation
in programs maintained by the Company for the benefit of its employees and
officers and to participate in new or amended programs, including, but not
limited to, medical, health, life, accident and disability insurance
programs, pension plans, incentive compensation plans, stock option plans,
stock appreciation rights plans, and limited stock appreciation rights
plans. The Company shall not terminate nor amend such plans to the
detriment of the Executive.
(b) To the extent that the Company has provided the Officer with an
automobile, club memberships, association and trade memberships and other
memberships prior to the change of control, the Company shall continue to
provide the Officer with such items, of a comparable nature, following a
Change of Control. The Company shall pay the expenses of such automobile,
memberships and subscriptions.
(c) The Executive shall be reimbursed for any business expenses
reasonably incurred in carrying out his duties, functions and
responsibilities upon presentation of expense reports to the Company.
6. TERM. This Agreement shall have a term of three (3) years
commencing on the effective date of a Change of Control and shall be
automatically extended on the 9th day of each and every calendar month during
the term of this Agreement for an additional calendar month so that at the
beginning of each and every month during the term of this Agreement there
shall be a remaining term of three (3) years (but in no event beyond the time
the Executive reaches age 65) unless and until the Company gives written
notice to the Executive that the term of this Agreement shall not be further
so extended, in which case the Executive shall be entitled to resign for good
reason. The provisions of this Section 6 shall apply to each Change of
Control irrespective of any Changes of Control which may have occurred
previously.
7. SEVERANCE BENEFITS AFTER CHANGE OF CONTROL. In addition to such
compensation and other benefits payable to or provided for the Executive as
authorized by the Board from time to time, Executive shall be entitled to
receive in lieu of the compensation described in paragraph 4 hereof, and the
Company shall pay or provide to the Executive the following severance
benefits (the "Severance Benefits") in the event that, during the term
hereof, the Company discharges the Executive without cause or the Executive
resigns for good reason after a Change of Control, to-wit:
(a) The Company shall pay to the Executive a lump sum cash payment
(multiplied by the applicable factor described below) payable on such
date of termination of employment equal to the Executive's "base
compensation" then in effect, which shall, and is defined to, consist of
the sum of (i) the Executive's annual base salary then in effect, (ii) the
average of the amounts of the last three annual cash bonuses paid or
granted to, or earned by, the Executive, and (iii) the average of the
total amounts of the Company's contributions to its retirement plan
allocable to the Executive on a fully vested basis for the last three
fiscal years of the retirement plan. The amount of the "base compensation"
payable to the Executive pursuant to this Section 7(a) shall be (a)
multiplied by the number three (3) for the purposes of determining the
lump sum cash severance payment due under this Section 7(a).
3
<PAGE>
(b) All stock options granted by the Company to the Executive, all
contributions made by the Executive and by the Company for the account of
the Executive to any pension, retirement or any other benefit plan, and
all other benefits or bonuses, including but not limited to net profits
interests which contain vesting or exercisability provisions conditioned
upon or subject to the continued employment of the Executive, shall become
fully vested and exercisable and shall remain fully exercisable for a
period of the later of three hundred sixty (360) days after (i) the date
of such termination of employment; or (ii) the termination of this
Agreement.
(c) The Company shall continue the participation of the Executive
in all life, accident, disability, medical, dental and all other health
and casualty insurance plans maintained by the Company for its officers
and employees for a period of one (1) year after the date of such
termination of employment or for such longer period as may be required by
applicable law.
(d) Notwithstanding any provision of this Agreement to the contrary,
if the Executive is a disqualified individual (as the term "disqualified
individual" is defined in Section 280G of the Code) and if any portion
of the Severance Benefits under this Section 7 of this Agreement would be
an excess parachute payment (as the term "excess parachute payment" is
defined in Section 280G of the Code) but for the application of this
sentence, then the amount of the Severance Benefits otherwise payable to
the Executive pursuant to this Agreement will be reduced to the minimum
extent necessary (but in no event to less than zero) so that no portion
of the Severance Benefits, as so reduced, constitutes an excess parachute
payment. The determination of whether any reduction in the amount of the
Severance Benefits is required pursuant to this Section 7(d) will be made
by the Company's independent accountants. The fact that the Executive
has his Severance Benefits reduced as a result of the limitations set
forth in this Section 7(d) will not of itself limit or otherwise affect
any rights of the Executive arising other than pursuant to this Agreement.
(e) The Company has determined that the amounts payable under this
Agreement constitute reasonable compensation for services rendered.
Accordingly, notwithstanding any other provision hereof, unless such action
would be expressly prohibited by applicable law, if any amount is paid
pursuant to this Agreement which is determined to be subject to the excise
tax imposed by Section 4999 of the Code, the Company will pay to the
Executive an additional amount in cash equal to the amount necessary to
cause the aggregate amount payable under this Agreement, including such
additional cash payment (net of all federal, state and local income taxes
and all taxes payable as the result of the application of Sections 280G
and 4999 of the Code), to be equal to the aggregate amount payable under
this Agreement, excluding such additional payment (net of all federal,
state and local income taxes), as if Sections 280G and 4999 of the Code
(and any successor provisions thereto) had not been enacted into law.
4
<PAGE>
8. PLACE OF PERFORMANCE. During the term hereof:
(a) The principal office of the Executive and the principal place
for performance by him of his duties, functions and responsibilities under
this Agreement shall be in the City or suburbs of Dallas, Texas.
(b) It is recognized that the performance of the Executive's duties
hereunder may occasionally require the Executive, on behalf of the Company,
to be away from his principal office for business reasons. Unless consent
of the Executive is obtained, such periods of being away from his principal
office on behalf of the Company shall not exceed thirty (30) calendar days
per year.
9. DEFINITION OF CHANGE OF CONTROL. For purposes of this Agreement,
"Change of Control" shall mean the occurrence of one or more of the following
events: (i) a person or entity or group (as that term is used in Section
13(d)(3) of the Exchange Act) of persons or entities shall have become the
beneficial owner of a majority of the securities of the Company ordinarily
having the right to vote in the election of directors, (ii) during any
consecutive two-year period, individuals who at the beginning of such period
constituted the Board of Directors of the Company (together with any
directors who are members of such Board of Directors of the Company on the
date hereof and any new directors whose election by such Board of Directors
of the Company or whose nomination for election by the stockholders of the
Company was approved by a vote of 66 2/3% of the directors then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for any
reason to constitute a majority of the Board of Directors of the Company then
in office, (iii) any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all, or substantially
all, the assets of the Company to any person or entity or group (as so
defined in Section 13(d)(3) of the Exchange Act) of persons or entities
(other than any wholly owned subsidiary of the Company) or (iv) the merger or
consolidation of the Company into or with another corporation or the merger
of another corporation into the Company with the effect that immediately
after such transaction any person or entity or group (as so defined in
Section 13(d)(3) of the Exchange Act) of persons or entities, or the
stockholders of any other entity, shall have become the beneficial owner of
securities of the surviving corporation of such merger or consolidation
representing a majority of the voting power of the outstanding securities of
the surviving corporation ordinarily having the right to vote in the election
of directors. The Alexander Energy Corporation merger, however it might be
structured, shall not constitute a Change of Control under this Agreement.
10. DISCHARGE WITH CAUSE. For the purposes of this Agreement, the Company
shall be deemed to have discharged the Executive for cause only if any one of
the following conditions existed:
(a) If the Executive shall have willfully breached or habitually
neglected his duties and responsibilities as the Vice President and
General Counsel of the Company; or
(b) If the Executive shall have been convicted of any felony offense
during the term of this Agreement.
5
<PAGE>
The discharge of the Executive by the Company when none of the foregoing
conditions exist shall be deemed to be a discharge without cause.
11. RESIGNATION FOR GOOD REASON. For the purposes of this Agreement,
the Executive shall have resigned for good reason if any one of the following
conditions existed at the time of his resignation:
(a) If the Company shall have assigned to the Executive authority
and responsibilities less significant than, or not comparable to, that
which he had in his capacity as Vice President and General Counsel
immediately preceding a Change of Control or shall otherwise so limit or
restrict his authority and responsibilities after a Change of Control;
(b) The Company shall have reduced the Executive's annual base
salary below his annual base salary in effect on the effective date of
a Change of Control or the Company shall have reduced the Executive's
annual cash bonus below that of his last annual cash bonus prior to the
effective date of a Change of Control; or
(c) The Company shall have taken any actions having the purpose or
intent and the effect of inducing the Executive to resign, such as
failing to provide the Executive with all personnel benefits which are
otherwise generally provided to executive officers of the Company or
reasonably necessary or appropriate for the performance by the Executive
of his duties as Vice President and General Counsel of the Company; or
(d) The Company shall have declined to extend the term of this
Agreement pursuant to Section 6 hereof.
12. TERMINATION UPON DEATH. This Agreement shall terminate immediately
upon the date of the death of the Executive.
13. REMEDIES. If the Executive shall file any judicial action for
enforcement of this Agreement and successfully recover compensation or
damages, the Executive shall be entitled to recover from the Company an
additional amount equal to interest at ten percent (10%) per annum on the
amount recovered from the date such amount was due and payable together with
all expenses and reasonable attorneys' fees incurred in obtaining legal
advice and counselling respecting his rights under this Agreement and in
prosecuting and disposing of such action. The provisions of this Section
shall be cumulative and without prejudice to any other right or remedy to
which the Executive may be entitled either at law, in equity or under this
Agreement and shall not constitute the exclusive remedy of the Executive for
breach of this Agreement.
14. GENERAL PROVISIONS.
(a) NOTICES. Any notices to be given hereunder by either party to
the other may be given either by personal delivery in writing or by fax,
or by mail, registered or certified, postage prepaid, return receipt
requested, addressed to the parties at their respective addresses set
forth below their signatures to this Agreement, or at such other
addresses as they may specify to the other in writing.
6
<PAGE>
(b) LAW GOVERNING. This Agreement shall be governed by and construed
in accordance with the laws of the State of Texas.
(c) INVALID PROVISIONS. If any provision of this Agreement is held
to be illegal, invalid or unenforceable under present or future laws
effective during the term hereof, such provision shall be fully severable
and this Agreement shall be construed and enforced as if such illegal,
invalid or unenforceable provision had never comprised a part hereof; and
the remaining provisions hereof shall remain in full force and effect and
shall not be affected by the illegal, invalid or unenforceable provision
or by its severance herefrom. Furthermore, in lieu of such illegal,
invalid or unenforceable provision there shall be added automatically as
part of this Agreement a provision as similar in terms to such illegal,
invalid or unenforceable provision as may be possible and still be legal,
valid or enforceable.
(d) ENTIRE AGREEMENT. This Agreement sets forth the entire
understanding of the parties and supersedes all prior agreements or
understandings, whether written or oral, with respect to the subject matter
hereof. No terms, conditions or warranties, other than those contained
herein, and no amendments or modifications hereto shall be binding unless
made in writing and signed by the parties hereto.
(e) BINDING EFFECT. This Agreement shall extend to and be binding
upon and inure to the benefit of the parties hereto, their respective
heirs, representatives, successors and assigns. All of the provisions of
this Agreement shall be fully applicable to any successor to the Company
resulting from a Change of Control. The Company agrees that in the event
of a tender or exchange offer, merger, consolidation or liquidation or any
such similar event involving the Company, its securities or assets, it
shall reveal the existence of this Agreement to the acquiring person or
entity. The Company further agrees that if such action is not inconsistent
with the best interests of the Company, it shall condition approval of any
transactions proposed by the acquiror upon obtaining the consent, in
writing, of the potential successor to the Company to be bound by this
Agreement. In the event the Executive dies prior to the termination of
this Agreement, any compensation or other payment due and owing to the
Executive on or before the date of the Executive's death shall be paid to
his estate, executors, administrators, heirs or legal representatives.
Since the duties and services of the Executive hereunder are special,
personal and unique in nature, the Executive may not transfer, sell or
otherwise assign his rights, obligations or benefits under this Agreement.
(f) WAIVER. The waiver by either party hereto of a breach of any
term or provision of this Agreement shall not operate or be construed as
a waiver of a subsequent breach of the same provisions by either party or
of the breach of any other term or provision of this Agreement.
(g) TITLES. Titles of the paragraphs herein are used solely for
convenience and shall not be used for interpretation or construing any
word, clause, paragraph or provision of this Agreement.
7
<PAGE>
IN WITNESS WHEREOF, the Company and the Executive have executed this
Executive Employment Agreement as of the day and year first written above,
effective as of the date specified above.
COMPANY:
NATIONAL ENERGY GROUP, INC.
By: /s/ MILES D. BENDER
-----------------------------------
Miles D. Bender
President and Chief Executive Officer
1400 One Energy Square
4925 Greenville Avenue
Dallas, Texas 75206
(214) 692-9211
(214) 692-9310 (FAX)
EXECUTIVE:
/s/ PHILIP D. DEVLIN
-----------------------------------
Philip D. Devlin
3218 Hanover
Dallas, Texas 75225
8
<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENT
This Executive Employment Agreement (the "Agreement") is made the 20th
day of March, 1997, by and between National Energy Group, Inc., a Delaware
corporation acting by and through its hereunto duly authorized officer (the
"Company"), and Gene W. Anderson (the "Executive").
WHEREAS, the Executive is presently in the employ of the Company in the
capacity of Vice President - Land, and the Company is willing to provide
certain employment assurances to the Executive in the event of a Change of
Control (as defined below) of the Company as incentive and inducement for the
Executive to continue in such employment in his present capacity after a
Change of Control; and
WHEREAS, in consideration of such employment assurances, the Executive
is willing to remain in the employ of the Company in the capacity of Vice
President - Land after a Change of Control of the Company.
NOW, THEREFORE, in consideration of the premises and the mutual terms
and conditions hereof, the Company and the Executive hereby agree as follows:
1. EMPLOYMENT. In consideration of the benefits hereinafter
specified, the Executive hereby agrees to continue his employment with the
Company in the capacity of Vice President - Land after a Change of Control of
the Company and to discharge his duties in such capacity during the term of
this Agreement.
2. EXCLUSIVE SERVICES. The Executive shall devote his full working
time, ability and attention to the business of the Company during the term of
this Agreement and shall not, directly or indirectly, render any services of
a business, commercial or professional nature to any other person,
corporation or organization, whether for compensation or otherwise, without
the prior knowledge and consent of the Board of Directors (the "Board") or
President and Chief Executive Officer of the Company; provided, however, that
the provisions of this Agreement shall not be construed as preventing the
Executive from investing in other non-competitive businesses or enterprises
if such investments do not require substantial services on the part of the
Executive in the affairs or operations of any such business or enterprise so
as to significantly diminish the performance by the Executive of his duties,
functions and responsibilities under this Agreement. During the term of this
Agreement, the Executive shall not, directly or indirectly, either through
any kind of ownership (other than ownership of securities of publicly held
corporations of which the Executive owns less than five percent (5%) of any
class of outstanding securities) or as a director, officer, agent, employee
or consultant engage in any business that is competitive with the Company.
3, AUTHORITY AND DUTIES. During the term of this Agreement, the
Executive shall have such authority and shall perform such duties, functions
and responsibilities as are specified by the Bylaws of the Company, the
Executive Committee, the Board of Directors, or the President of the Company
and/or as are appropriate for the office of the Vice President - Land and
shall serve with the necessary power and authority commensurate with such
position and consistent with the manner
<PAGE>
with which the Executive has carried out the office in the past. If the
Company removes the Executive from the office of the Vice President - Land of
the Company after a Change of Control or limits, restricts or reassigns his
authority and responsibility after a Change of Control so as to be less
significant than, or not comparable to, that to which he held immediately
preceding such Change of Control in his capacity as Vice President - Land
without his prior mutual consent, the Executive shall be entitled to resign
for good reason and receive the Severance Benefits set forth in this
Agreement.
4. COMPENSATION. In consideration for the services to be rendered by
the Executive to the Company and/or its subsidiaries, the Company shall pay
to the Executive at least the gross cash compensation and shall award to the
Executive at least the bonuses as set forth below:
<TABLE>
=================================================================================================================================
ANNUAL
ANNUAL PERIOD BASE SALARY ANNUAL BONUS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
For the one year period following 100% of the average of the Executive's 100% of the average of the
effective date of a Change of Control annual base salary in effect immediately bonuses paid to the Executive for
prior to the Change in Control and of the each of the three fiscal years
Executive's annual base salary for each of before the Change in Control
the immediately preceding two years
- ---------------------------------------------------------------------------------------------------------------------------------
For the second year following 100% of the average of the Executive's 100% of the average of the
effective date of a Change of Control annual base salary on the date that is one bonuses paid to the Executive for
year after the Change in Control and of the the three immediately preceding
Executive's annual base salary for each of fiscal years
the immediately preceding two years
- ---------------------------------------------------------------------------------------------------------------------------------
For the third year following effective 100% of the average of the Executive's 100% of the average of the
date of a Change of Control annual base salary on the date that is two bonuses paid to the Executive for
years after the Change in Control and of the three immediately preceding
the Executive's annual base salary for fiscal years
each of the immediately preceding two years
=================================================================================================================================
</TABLE>
In the event that the Executive shall not have been employed for three years
prior to the effective date of this Agreement, the Executive's annual base
compensation rate or bonus rate shall be averaged over the actual period of
employment of the Executive by the Company.
Each of the annual base salary amounts set forth above shall be paid to
the Executive in equal monthly installments, or as otherwise agreed, during
each corresponding year of the term of this Agreement, provided that for any
period of less than one (1) year, the annual base salary shall be pro-rated
accordingly. The annual bonus amount indicated above or amounts in excess of
such indicated bonus shall be awarded no later than December 31 of the
corresponding annual period. The amount set forth above is compensation to
the Executive or gross amounts due hereunder and the Company shall have the
right to deduct therefrom all taxes and other amounts which may be required
to be deducted or withheld by law (including, but not limited to income tax,
withholding, social security and medicare payments) whether such law is now
in effect or becomes effective after the execution of this Agreement.
2
<PAGE>
5. BENEFITS AND BUSINESS EXPENSES. During the term hereof:
(a) The Executive shall be entitled to continue his participation
in programs maintained by the Company for the benefit of its employees
and officers and to participate in new or amended programs, including,
but not limited to, medical, health, life, accident and disability
insurance programs, pension plans, incentive compensation plans, stock
option plans, stock appreciation rights plans, and limited stock
appreciation rights plans. The Company shall not terminate nor amend
such plans to the detriment of the Executive.
(b) To the extent that the Company has provided the Officer with
an automobile, club memberships, association and trade memberships and
other memberships prior to the change of control, the Company shall
continue to provide the Officer with such items, of a comparable nature,
following a Change of Control. The Company shall pay the expenses of
such automobile, memberships and subscriptions.
(c) The Executive shall be reimbursed for any business expenses
reasonably incurred in carrying out his duties, functions and
responsibilities upon presentation of expense reports to the Company.
6. TERM. This Agreement shall have a term of three (3) years
commencing on the effective date of a Change of Control and shall be
automatically extended on the 9th day of each and every calendar month during
the term of this Agreement for an additional calendar month so that at the
beginning of each and every month during the term of this Agreement there
shall be a remaining term of three (3) years (but in no event beyond the time
the Executive reaches age 65) unless and until the Company gives written
notice to the Executive that the term of this Agreement shall not be further
so extended, in which case the Executive shall be entitled to resign for good
reason. The provisions of this Section 6 shall apply to each Change of
Control irrespective of any Changes of Control which may have occurred
previously.
7. SEVERANCE BENEFITS AFTER CHANGE OF CONTROL. In addition to such
compensation and other benefits payable to or provided for the Executive as
authorized by the Board from time to time, Executive shall be entitled to
receive in lieu of the compensation described in paragraph 4 hereof, and the
Company shall pay or provide to the Executive the following severance
benefits (the "Severance Benefits") in the event that, during the term
hereof, the Company discharges the Executive without cause or the Executive
resigns for good reason after a Change of Control, to-wit:
(a) The Company shall pay to the Executive a lump sum cash payment
(multiplied by the applicable factor described below) payable on such
date of termination of employment equal to the Executive's "base
compensation" then in effect, which shall, and is defined to, consist of
the sum of (i) the Executive's annual base salary then in effect, (ii)
the average of the amounts of the last three annual cash bonuses paid or
granted to, or earned by, the Executive, and (iii) the average of the
total amounts of the Company's contributions to its retirement plan
allocable to the Executive on a fully vested basis for the last three
fiscal years of the retirement plan. The amount of the "base
compensation" payable to the Executive pursuant to this Section 7(a)
shall be (a) multiplied by the number three (3) for the purposes of
determining the lump sum cash severance payment due under this Section
7(a).
3
<PAGE>
(b) All stock options granted by the Company to the Executive, all
contributions made by the Executive and by the Company for the account
of the Executive to any pension, retirement or any other benefit plan,
and all other benefits or bonuses, including but not limited to net
profits interests which contain vesting or exercisability provisions
conditioned upon or subject to the continued employment of the
Executive, shall become fully vested and exercisable and shall remain
fully exercisable for a period of the later of three hundred sixty (360)
days after (i) the date of such termination of employment; or (ii) the
termination of this Agreement.
(c) The Company shall continue the participation of the Executive
in all life, accident, disability, medical, dental and all other health
and casualty insurance plans maintained by the Company for its officers
and employees for a period of one (1) year after the date of such
termination of employment or for such longer period as may be required
by applicable law.
(d) Notwithstanding any provision of this Agreement to the
contrary, if the Executive is a disqualified individual (as the term
"disqualified individual" is defined in Section 280G of the Code) and if
any portion of the Severance Benefits under this Section 7 of this
Agreement would be an excess parachute payment (as the term "excess
parachute payment" is defined in Section 280G of the Code) but for the
application of this sentence, then the amount of the Severance Benefits
otherwise payable to the Executive pursuant to this Agreement will be
reduced to the minimum extent necessary (but in no event to less than
zero) so that no portion of the Severance Benefits, as so reduced,
constitutes an excess parachute payment. The determination of whether
any reduction in the amount of the Severance Benefits is required
pursuant to this Section 7(d) will be made by the Company's independent
accountants. The fact that the Executive has his Severance Benefits
reduced as a result of the limitations set forth in this Section 7(d)
will not of itself limit or otherwise affect any rights of the Executive
arising other than pursuant to this Agreement.
(e) The Company has determined that the amounts payable under this
Agreement constitute reasonable compensation for services rendered.
Accordingly, notwithstanding any other provision hereof, unless such
action would be expressly prohibited by applicable law, if any amount is
paid pursuant to this Agreement which is determined to be subject to the
excise tax imposed by Section 4999 of the Code, the Company will pay to
the Executive an additional amount in cash equal to the amount necessary
to cause the aggregate amount payable under this Agreement, including
such additional cash payment (net of all federal, state and local income
taxes and all taxes payable as the result of the application of Sections
280G and 4999 of the Code), to be equal to the aggregate amount payable
under this Agreement, excluding such additional payment (net of all
federal, state and local income taxes), as if Sections 280G and 4999 of
the Code (and any successor provisions thereto) had not been enacted
into law.
4
<PAGE>
8. PLACE OF PERFORMANCE. During the term hereof:
(a) The principal office of the Executive and the principal place
for performance by him of his duties, functions and responsibilities
under this Agreement shall be in the City or suburbs of Dallas, Texas.
(b) It is recognized that the performance of the Executive's
duties hereunder may occasionally require the Executive, on behalf of
the Company, to be away from his principal office for business reasons.
Unless consent of the Executive is obtained, such periods of being away
from his principal office on behalf of the Company shall not exceed
thirty (30) calendar days per year.
9. DEFINITION OF CHANGE OF CONTROL. For purposes of this Agreement,
"Change of Control" shall mean the occurrence of one or more of the following
events: (i) a person or entity or group (as that term is used in Section
13(d)(3) of the Exchange Act) of persons or entities shall have become the
beneficial owner of a majority of the securities of the Company ordinarily
having the right to vote in the election of directors, (ii) during any
consecutive two-year period, individuals who at the beginning of such period
constituted the Board of Directors of the Company (together with any
directors who are members of such Board of Directors of the Company on the
date hereof and any new directors whose election by such Board of Directors
of the Company or whose nomination for election by the stockholders of the
Company was approved by a vote of 66 2/3% of the directors then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for any
reason to constitute a majority of the Board of Directors of the Company then
in office, (iii) any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all, or substantially
all, the assets of the Company to any person or entity or group (as so
defined in Section 13(d)(3) of the Exchange Act) of persons or entities
(other than any wholly owned subsidiary of the Company) or (iv) the merger or
consolidation of the Company into or with another corporation or the merger
of another corporation into the Company with the effect that immediately
after such transaction any person or entity or group (as so defined in
Section 13(d)(3) of the Exchange Act) of persons or entities, or the
stockholders of any other entity, shall have become the beneficial owner of
securities of the surviving corporation of such merger or consolidation
representing a majority of the voting power of the outstanding securities of
the surviving corporation ordinarily having the right to vote in the election
of directors. The Alexander Energy Corporation merger, however it might be
structured, shall not constitute a Change of Control under this Agreement.
10. DISCHARGE WITH CAUSE. For the purposes of this Agreement, the
Company shall be deemed to have discharged the Executive for cause only if
any one of the following conditions existed:
(a) If the Executive shall have willfully breached or habitually
neglected his duties and responsibilities as the Vice President - Land
of the Company; or
(b) If the Executive shall have been convicted of any felony
offense during the term of this Agreement.
5
<PAGE>
The discharge of the Executive by the Company when none of the foregoing
conditions exist shall be deemed to be a discharge without cause.
11. RESIGNATION FOR GOOD REASON. For the purposes of this Agreement,
the Executive shall have resigned for good reason if any one of the following
conditions existed at the time of his resignation:
(a) If the Company shall have assigned to the Executive authority
and responsibilities less significant than, or not comparable to, that
which he had in his capacity as Vice President - Land immediately
preceding a Change of Control or shall otherwise so limit or restrict
his authority and responsibilities after a Change of Control;
(b) The Company shall have reduced the Executive's annual base
salary below his annual base salary in effect on the effective date of a
Change of Control or the Company shall have reduced the Executive's
annual cash bonus below that of his last annual cash bonus prior to the
effective date of a Change of Control; or
(c) The Company shall have taken any actions having the purpose or
intent and the effect of inducing the Executive to resign, such as
failing to provide the Executive with all personnel benefits which are
otherwise generally provided to executive officers of the Company or
reasonably necessary or appropriate for the performance by the Executive
of his duties as Vice President - Land of the Company; or
(d) The Company shall have declined to extend the term of this
Agreement pursuant to Section 6 hereof.
12. TERMINATION UPON DEATH. This Agreement shall terminate immediately
upon the date of the death of the Executive.
13. REMEDIES. If the Executive shall file any judicial action for
enforcement of this Agreement and successfully recover compensation or
damages, the Executive shall be entitled to recover from the Company an
additional amount equal to interest at ten percent (10%) per annum on the
amount recovered from the date such amount was due and payable together with
all expenses and reasonable attorneys' fees incurred in obtaining legal
advice and counselling respecting his rights under this Agreement and in
prosecuting and disposing of such action. The provisions of this Section
shall be cumulative and without prejudice to any other right or remedy to
which the Executive may be entitled either at law, in equity or under this
Agreement and shall not constitute the exclusive remedy of the Executive for
breach of this Agreement.
14. GENERAL PROVISIONS.
(a) NOTICES. Any notices to be given hereunder by either party to
the other may be given either by personal delivery in writing or by fax,
or by mail, registered or certified, postage prepaid, return receipt
requested, addressed to the parties at their respective addresses set
forth below their signatures to this Agreement, or at such other
addresses as they may specify to the other in writing.
6
<PAGE>
(b) LAW GOVERNING. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas.
(c) INVALID PROVISIONS. If any provision of this Agreement is
held to be illegal, invalid or unenforceable under present or future
laws effective during the term hereof, such provision shall be fully
severable and this Agreement shall be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a part
hereof; and the remaining provisions hereof shall remain in full force
and effect and shall not be affected by the illegal, invalid or
unenforceable provision or by its severance herefrom. Furthermore, in
lieu of such illegal, invalid or unenforceable provision there shall be
added automatically as part of this Agreement a provision as similar in
terms to such illegal, invalid or unenforceable provision as may be
possible and still be legal, valid or enforceable.
(d) ENTIRE AGREEMENT. This Agreement sets forth the entire
understanding of the parties and supersedes all prior agreements or
understandings, whether written or oral, with respect to the subject
matter hereof. No terms, conditions or warranties, other than those
contained herein, and no amendments or modifications hereto shall be
binding unless made in writing and signed by the parties hereto.
(e) BINDING EFFECT. This Agreement shall extend to and be binding
upon and inure to the benefit of the parties hereto, their respective
heirs, representatives, successors and assigns. All of the provisions of
this Agreement shall be fully applicable to any successor to the Company
resulting from a Change of Control. The Company agrees that in the
event of a tender or exchange offer, merger, consolidation or
liquidation or any such similar event involving the Company, its
securities or assets, it shall reveal the existence of this Agreement to
the acquiring person or entity. The Company further agrees that if such
action is not inconsistent with the best interests of the Company, it
shall condition approval of any transactions proposed by the acquiror
upon obtaining the consent, in writing, of the potential successor to
the Company to be bound by this Agreement. In the event the Executive
dies prior to the termination of this Agreement, any compensation or
other payment due and owing to the Executive on or before the date of
the Executive's death shall be paid to his estate, executors,
administrators, heirs or legal representatives. Since the duties and
services of the Executive hereunder are special, personal and unique in
nature, the Executive may not transfer, sell or otherwise assign his
rights, obligations or benefits under this Agreement.
(f) WAIVER. The waiver by either party hereto of a breach of any
term or provision of this Agreement shall not operate or be construed as
a waiver of a subsequent breach of the same provisions by either party
or of the breach of any other term or provision of this Agreement.
(g) TITLES. Titles of the paragraphs herein are used solely for
convenience and shall not be used for interpretation or construing any
word, clause, paragraph or provision of this Agreement.
7
<PAGE>
IN WITNESS WHEREOF, the Company and the Executive have executed this
Executive Employment Agreement as of the day and year first written above,
effective as of the date specified above.
COMPANY:
NATIONAL ENERGY GROUP, INC.
By: /s/ MILES D. BENDER
-------------------------------
Miles D. Bender
President and Chief Executive Officer
1400 One Energy Square
4925 Greenville Avenue
Dallas, Texas 75206
(214) 692-9211
(214) 692-9310 (FAX)
EXECUTIVE:
/s/ GENE W. ANDERSON
----------------------------------
GENE W. ANDERSON
5990 Liudenshire #130
Dallas, Texas 75230
8
<PAGE>
SECOND AMENDMENT TO RESTATED LOAN AGREEMENT
THIS SECOND AMENDMENT TO RESTATED LOAN AGREEMENT (hereinafter referred
to as the "Agreement") executed the 7th day of March, 1997, by and among
NATIONAL ENERGY GROUP, INC., a Delaware corporation ("Borrower"), NATIONAL
ENERGY GROUP OF OKLAHOMA, INC. (formerly known as NEG-OK, Inc.), a Delaware
corporation ("OK"), BOOMER MARKETING CORPORATION, an Oklahoma corporation
("Boomer") (OK and Boomer are hereinafter collectively referred to as
"Guarantors") and BANK ONE, TEXAS, N.A., a national banking association
("Bank One") and CREDIT LYONNAIS NEW YORK BRANCH ("Credit Lyonnais") and each
of the financial institutions which may from time to time become a party
hereto or any successor or assignee thereof (hereinafter collectively
referred to as "Banks", and individually as "Bank") and Bank One, as
"Administrative Agent" and Credit Lyonnais as "Syndication Agent."
W I T N E S S E T H:
WHEREAS, Borrower, Guarantors, Banks and Agent entered into a Restated
Loan Agreement, dated as of August 29, 1996 (the "Loan Agreement") under the
terms of which the Banks agreed to provide the Borrower with a reducing
revolving line of credit facility in an amount of up to $100,000,000 and a
term loan in an amount of up to $5,000,000; and
WHEREAS, Borrower, Guarantors, Banks and Agent entered into a First
Amendment to Restated Loan Agreement dated October 31, 1996; and
WHEREAS, the Borrower, the Guarantors and the Banks have agreed to amend
the Loan Agreement to make certain changes thereto.
NOW, THEREFORE, the parties hereto agree to amend the Loan Agreement as
follows:
1. Section 1 of the Loan Agreement is hereby amended in the following
respects:
(a) By adding the following new definitions thereto:
"LETTERS OF CREDIT" is used herein as defined in
Section 2(e) hereof."
"REIMBURSEMENT OBLIGATIONS" shall mean at any time the
obligation of Borrower in respect of all Letters of Credit then
outstanding to reimburse amounts paid by any Bank in respect of
any drawing or drawings under a Letter of Credit."
(b) By deleting the definition of "Total Outstandings" and inserting
the following new definition of "Total Outstandings" in lieu thereof:
"TOTAL OUTSTANDINGS" shall mean as of any date, the sum of
(i) the total principal balance outstanding on the Notes, plus
(ii) the total face
<PAGE>
amount of all outstanding Letters of Credit plus (iii) the total
amount of all unpaid Reimbursement Obligations."
2. Section 2 of the Loan Agreement is hereby amended by the addition of
the following new subsections to the end thereof:
"(e) LETTERS OF CREDIT. On the terms and conditions hereinafter
set forth, the Agent shall from time to time during the period
beginning on the Effective Date and ending on the Maturity Date upon
request of Borrowers issue standby and/or commercial Letters of Credit
for the account of Borrowers (the "Letters of Credit") in such face
amounts as Borrowers may request, but not to exceed in the aggregate
face amount at any time outstanding the sum of Ten Million Dollars
($10,000,000.00). The face amount of all Letters of Credit issued and
outstanding hereunder shall be considered as Advances for Borrowing
Base purposes and all payments made by the Agent on such Letters of
Credit shall be considered as Advances under the Note. Each Letter of
Credit issued for the account of Borrowers hereunder shall (i) be in
favor of such beneficiaries as specifically requested by Borrowers,
(ii) have an expiration date not exceeding the Maturity Date, and
(iii) contain such other terms and provisions as may be required by
Bank. Each Bank (other than Agent) agrees that, upon issuance of any
Letter of Credit hereunder, it shall automatically acquire a
participation in the Agent's liability under such Letter of Credit in
an amount equal to such Bank's Revolving Commitment Percentage of such
liability, and each Bank (other than Agent) thereby shall absolutely,
unconditionally and irrevocably assume, as primary obligor and not as
surety, and shall be unconditionally obligated to Agent to pay and
discharge when due, its Revolving Commitment Percentage of Agent's
liability under such Letter of Credit. The Borrowers, and each of
them, hereby unconditionally agree to pay and reimburse the Agent for
the amount of each demand for payment under any Letter of Credit that
is in substantial compliance with the provisions of any such Letter of
Credit at or prior to the date on which payment is to be made by the
Agent to the beneficiary thereunder, without presentment, demand,
protest or other formalities of any kind. Upon receipt from any
beneficiary of any Letter of Credit of any demand for payment under
such Letter of Credit, the Agent shall promptly notify the Borrowers
of the demand and the date upon which such payment is to be made by
the Agent to such beneficiary in respect of such demand. Forthwith
upon receipt of such notice from the Agent, Borrowers shall advise the
Agent whether or not they intend to borrow hereunder to finance their
obligations to reimburse the Agent, and if so, submit a Notice of
Borrowing as provided in Section 2(b) hereof.
(f) PROCEDURE FOR OBTAINING LETTERS OF CREDIT. The amount and date
of issuance, renewal, extension or reissuance of a Letter of Credit
pursuant to the Banks'
-2-
<PAGE>
commitment above in Section 2(e) shall be designated by Borrowers' written
request delivered to Agent at least three (3) Business Days prior to the
date of such issuance, renewal, extension or reissuance. Concurrently with
or promptly following the delivery of the request for a Letter of Credit,
Borrowers shall execute and deliver to the Agent an application and
agreement with respect to the Letters of Credit, said application and
agreement to be in the form used by the Agent. The Agent shall not be
obligated to issue, renew, extend or reissue such Letters of Credit if
(A) the amount thereon when added to the amount of the outstanding Letters
of Credit exceeds Ten Million Dollars ($10,000,000.00) or (B) the amount
thereof when added to the Total Outstandings would exceed the Revolving
Commitment. Borrowers agree to pay the Agent for the benefit of the Banks
a commission for issuing the Letter of Credit to Applied Drilling
Technology, Inc. dated March 7, 1997 in the amount of $5,272,000 equal to
$52,720 (one percent (1%) of the face amount of such Letter of Credit).
For all other Letters of Credit, Borrowers agree to pay the Agent for the
benefit of the Banks commissions for issuing the Letters of Credit
(calculated separately for each Letter of Credit) in an amount equal to
the greater of (i) one and three-quarters percent (1-3/4%) per annum on
the maximum face amount of the Letter of Credit or (ii) $500.00. Such
commissions shall be payable prior to the issuance of each Letter of Credit
and thereafter on each anniversary date of such issuance while such Letter
of Credit is outstanding. Borrowers further agree to pay to the Agent an
amendment fee for any amendment to any Letter of Credit issued hereunder,
said fee to be in the amount of $50 per amendment and shall be due and
payable upon the issuance of any such amendment."
3. Except to the extent its provisions are specifically amended, modified
or superseded by this Agreement, the representations, warranties and affirmative
and negative covenants of the Borrower contained in the Loan Agreement are
incorporated herein by reference for all purposes as if copied herein in full.
The Borrower hereby restates and reaffirms each and every term and provision of
the Loan Agreement, as amended, including, without limitation, all
representations, warranties and affirmative and negative covenants. Except to
the extent its provisions are specifically amended, modified or superseded by
this Agreement, the Loan Agreement, as amended, and all terms and provisions
thereof shall remain in full force and effect, and the same in all respects are
confirmed and approved by the Borrower and the Banks.
4. The obligations of Banks under this Agreement shall be subject to the
following conditions precedent:
(a) EXECUTION AND DELIVERY. The Borrower and Guarantors shall have
executed and delivered this Agreement, and other required documents, all in
form and substance satisfactory to Banks;
(b) CORPORATE RESOLUTIONS. Agent shall have received appropriate
certified corporate resolutions of Borrower and Guarantors;
-3-
<PAGE>
(c) OTHER DOCUMENTS. Banks shall have received such other
instruments and documents incidental and appropriate to the transaction
provided for herein as Bank One or its counsel may reasonably request, and
all such documents shall be in form and substance satisfactory to Banks;
and
(d) LEGAL MATTERS SATISFACTORY. All legal matters incident to the
consummation of the transactions contemplated hereby shall be satisfactory
to special counsel for Banks retained at the expense of Borrower.
5. Unless otherwise defined herein, all defined terms used herein shall
have the same meaning ascribed to such terms in the Loan Agreement.
6. Each of the Guarantors hereby consents to the provisions of this
Agreement and the transactions contemplated herein, and hereby ratifies and
confirms their respective Guaranty Agreements, each dated as of August 29, 1996,
and agrees that their respective obligations and covenants thereunder are
unimpaired hereby and shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have caused this Second Amendment to
Restated Loan Agreement to be duly executed as of the date first above written.
BORROWER:
---------
NATIONAL ENERGY GROUP, INC.
a Delaware corporation
By:
-----------------------------
Miles D. Bender
President
-4-
<PAGE>
GUARANTORS:
-----------
NATIONAL ENERGY GROUP OF
OKLAHOMA, INC.
a Delaware corporation
By:
-----------------------------
Miles D. Bender
President
BOOMER MARKETING CORPORATION
an Oklahoma corporation
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
BANKS:
------
BANK ONE, TEXAS, N.A.
By:
-----------------------------
Wm. Mark Cranmer
Vice President
CREDIT LYONNAIS NEW YORK BRANCH
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
-5-
<PAGE>
ADMINISTRATIVE AGENT:
---------------------
BANK ONE, TEXAS, N.A.
By:
-----------------------------
Wm. Mark Cranmer
Vice President
SYNDICATION AGENT:
------------------
CREDIT LYONNAIS NEW YORK BRANCH
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
-6-
<PAGE>
THIRD AMENDMENT TO RESTATED LOAN AGREEMENT
THIS THIRD AMENDMENT TO RESTATED LOAN AGREEMENT (hereinafter referred to
as the "Agreement") executed the 12th day of May, 1997, by and among NATIONAL
ENERGY GROUP, INC., a Delaware corporation ("Borrower") and BOOMER MARKETING
CORPORATION, an Oklahoma corporation ("Boomer") (Boomer is hereinafter referred
to as "Guarantor") and BANK ONE, TEXAS, N.A., a national banking association
("Bank One") and CREDIT LYONNAIS NEW YORK BRANCH ("Credit Lyonnais") and each of
the financial institutions which may from time to time become a party hereto or
any successor or assignee thereof (hereinafter collectively referred to as
"Banks", and individually as "Bank") and Bank One, as "Administrative Agent" and
Credit Lyonnais as "Syndication Agent."
W I T N E S S E T H:
WHEREAS, Borrower, Guarantor, Banks and Agent entered into a Restated Loan
Agreement, dated as of August 29, 1996 (the "Loan Agreement") under the terms of
which the Banks agreed to provide the Borrower with a reducing revolving line of
credit facility in an amount of up to $100,000,000 and a term loan in an amount
of up to $5,000,000; and
WHEREAS, Borrower, Guarantor, Banks and Agent entered into a First
Amendment to Restated Loan Agreement dated October 31, 1996 and a Second
Amendment to Restated Loan Agreement dated March 7th, 1997; and
WHEREAS, the Borrower, the Guarantor and the Banks have agreed to amend the
Loan Agreement to make certain changes thereto.
NOW, THEREFORE, the parties hereto agree to amend the Loan Agreement as
follows:
1. Section 10(m) of the Loan Agreement is hereby amended by deleting the
first sentence thereof and inserting the following in lieu thereof:
"The proceeds of the Loans hereunder will be used by the Borrower
for the purposes of (i) development drilling expenditure and (ii)
acquisition of producing oil and gas property."
2. Section 13(b) of the Loan Agreement is hereby deleted in its entirety
and the following inserted in lieu thereof:
"(b) CURRENT RATIO. From and after April 1, 1997, the Borrower
will not allow its Current Ratio to be less than 1.0 to 1.0 as of the
end of any fiscal quarter."
3. Section 13(g) of the Loan Agreement is hereby deleted in its entirety
and the following inserted in lieu thereof:
<PAGE>
"(g) DIVIDENDS. Borrower will not declare or pay any cash dividends,
or purchase, redeem or otherwise acquire for value any of its stock (common
or preferred) now or hereafter outstanding, return any capital to
stockholders or make any distribution of its assets to its stockholders as
such; PROVIDED, HOWEVER, that the foregoing restriction shall not apply to
(i) cash dividends paid on preferred stock after the Term Loan is paid in
full, both principal and interest, and (ii) the repurchase by Borrower of
up to $6,000,000 in market value of its common stock; if, and only if, no
Event of Default has occurred and is continuing or would occur as a result
of the payment of such cash dividends or repurchase of such common stock."
4. Paragraph 7 of the First Amendment to Loan Agreement dated as of
October 31, 1996 is hereby amended by deleting the references in such paragraph
to "Sublimit A" and "Sublimit B".
5. As of the date of this Agreement the Borrowing Base shall be
$40,000,000 and the Monthly Commitment capital reduction shall be $0. Provided,
however, that the total market value of any common stock repurchased by the
Borrower, up to $6,000,000, shall reduce dollar for dollar the Borrowing Base.
6. Except to the extent its provisions are specifically amended, modified
or superseded by this Agreement, the representations, warranties and affirmative
and negative covenants of the Borrower contained in the Loan Agreement are
incorporated herein by reference for all purposes as if copied herein in full.
The Borrower hereby restates and reaffirms each and every term and provision of
the Loan Agreement, as amended, including, without limitation, all
representations, warranties and affirmative and negative covenants. Except to
the extent its provisions are specifically amended, modified or superseded by
this Agreement, the Loan Agreement, as amended, and all terms and provisions
thereof shall remain in full force and effect, and the same in all respects are
confirmed and approved by the Borrower and the Banks.
7. The obligations of Banks under this Agreement shall be subject to the
following conditions precedent:
(a) EXECUTION AND DELIVERY. The Borrower and Guarantor shall have
executed and delivered this Agreement, and other required documents, all in
form and substance satisfactory to Banks;
(b) CORPORATE RESOLUTIONS. Agent shall have received appropriate
certified corporate resolutions of Borrower and Guarantor;
(c) OTHER DOCUMENTS. Banks shall have received such other
instruments and documents incidental and appropriate to the transaction
provided for herein as Bank One
-2-
<PAGE>
or its counsel may reasonably request, and all such documents shall be in
form and substance satisfactory to Banks; and
(d) LEGAL MATTERS SATISFACTORY. All legal matters incident to the
consummation of the transactions contemplated hereby shall be satisfactory
to special counsel for Banks retained at the expense of Borrower.
8. Unless otherwise defined herein, all defined terms used herein shall
have the same meaning ascribed to such terms in the Loan Agreement.
9. The Guarantor hereby consents to the provisions of this Agreement and
the transactions contemplated herein, and hereby ratifies and confirms its
Guaranty Agreements, each dated as of August 29, 1996, and agrees that its
obligations and covenants thereunder are unimpaired hereby and shall remain in
full force and effect.
IN WITNESS WHEREOF, the parties have caused this Third Amendment to
Restated Loan Agreement to be duly executed as of the date first above written.
BORROWER:
---------
NATIONAL ENERGY GROUP, INC.
a Delaware corporation
By:
------------------------------
Miles D. Bender
President
GUARANTOR:
----------
BOOMER MARKETING CORPORATION
an Oklahoma corporation
By:
------------------------------
Name:
------------------------------
Title:
------------------------------
-3-
<PAGE>
BANKS:
------
BANK ONE, TEXAS, N.A.
By:
------------------------------
Wm. Mark Cranmer
Vice President
CREDIT LYONNAIS NEW YORK BRANCH
By:
------------------------------
Name:
------------------------------
Title:
------------------------------
ADMINISTRATIVE AGENT:
---------------------
BANK ONE, TEXAS, N.A.
By:
------------------------------
Wm. Mark Cranmer
Vice President
SYNDICATION AGENT:
------------------
CREDIT LYONNAIS NEW YORK BRANCH
By:
------------------------------
Name:
------------------------------
Title:
------------------------------
-4-
<PAGE>
EXHIBIT 11
NATIONAL ENERGY GROUP, INC.
COMPUTATION OF EARNINGS PER SHARE
THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
PRIMARY FULLY DILUTED
------------- -------------
<S> <C> <C>
Income applicable to common stockholders:
Net Income........................................................................ $ 1,403,440 $ 1,403,440
Preferred dividend requirements................................................... (236,250) --
------------- -------------
Income applicable to common stockholders.......................................... $ 1,167,190 $ 1,403,440
------------- -------------
------------- -------------
Common and common equivalent shares:
Weighted average number of common shares outstanding.............................. 36,094,169 36,094,169
Shares issuable upon exercise of options and warrants............................. 3,629,135 3,629,135
Less shares assumed repurchased................................................... (2,443,506) (2,443,506)
------------- -------------
1,185,629 1,185,629
Shares issuable upon conversion of Convertible Preferred Stock:
Series B and Series C........................................................... -- 5,230,769
Series D and Series E........................................................... 6,666,666 6,666,666
------------- -------------
Common and common equivalent shares............................................... 43,966,562 49,197,331
------------- -------------
------------- -------------
Net income per common and common equivalent share................................... $ 0.027 $ 0.029
------------- -------------
------------- -------------
</TABLE>
Note: Fully diluted net income per common share data is not presented because
the effect of assumed conversion of the Convertible Preferred Stock,
Series B and C, is antidilutive.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NATIONAL
ENERGY GROUP, INC'S FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<PERIOD-START> JAN-01-1997
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,367,801
<SECURITIES> 0
<RECEIVABLES> 9,502,079
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 13,276,011
<PP&E> 219,147,287
<DEPRECIATION> 20,272,209
<TOTAL-ASSETS> 217,367,978
<CURRENT-LIABILITIES> 26,269,048
<BONDS> 100,000,000
0
242,500
<COMMON> 360,954
<OTHER-SE> 81,563,751
<TOTAL-LIABILITY-AND-EQUITY> 217,367,978
<SALES> 12,965,027
<TOTAL-REVENUES> 13,352,763
<CGS> 2,618,440
<TOTAL-COSTS> 8,567,520
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,853,698
<INCOME-PRETAX> 2,126,424
<INCOME-TAX> 722,984
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,403,440
<EPS-PRIMARY> .03
<EPS-DILUTED> 0
</TABLE>
