<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 24, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
NATIONAL ENERGY GROUP, INC.
(Exact name of Registrant as specified in its charter)
---------------------
<TABLE>
<C> <C>
DELAWARE 58-1922764
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
4925 GREENVILLE AVENUE
SUITE 1400
DALLAS, TEXAS 75206
(214) 692-9211
(Address, including zip code, and telephone number,
including area code of Registrant's principal executive offices)
MILES D. BENDER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
4925 GREENVILLE AVENUE, SUITE 1400
DALLAS, TEXAS 75206
(214) 692-9211
(Name, address, including zip code, and telephone number,
including area code of agent for service)
---------------------
Copies to:
<TABLE>
<C> <C>
DIANE B. MUSE WILLIAM L. BOEING
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. HAYNES AND BOONE, LLP
1700 PACIFIC AVENUE, SUITE 4100 901 MAIN STREET, SUITE 3100
DALLAS, TEXAS 75201-4675 DALLAS, TEXAS 75202-3789
(214) 969-2800 (214) 651-5553
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is to be made pursuant to Rule 434, please
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
======================================================================================================================
PROPOSED MAXIMUM
AMOUNT TO OFFERING PRICE PROPOSED MAXIMUM AMOUNT OF
TITLE OF SHARES TO BE REGISTERED BE REGISTERED PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Depositary Shares Representing %
Convertible Preferred Stock, Series F,
par value $1.00 per share............. 2,300,000(2) $50.00 $115,000,000 $34,849
- ------------------------------------------------------------------------------------------------------------------
% Convertible Preferred Stock, Series
F, par value $1.00 per share.......... 230,000 -- -- --
- ------------------------------------------------------------------------------------------------------------------
Common Stock, par value $0.01 per
share................................. -- (3) -- -- --
==================================================================================================================
</TABLE>
(1) Estimated pursuant to Rule 457 solely for the purpose of calculating the
amount of the registration fee.
(2) Includes 300,000 Depositary Shares which may be purchased by the
Underwriters pursuant to an over-allotment option.
(3) Represents an indeterminate number of shares of Common Stock issuable upon
the conversion or redemption of the Preferred Stock, Series F, in accordance
with the terms thereof. No additional consideration will be received for
Common Stock issuable upon the conversion or redemption of the Preferred
Stock, Series F, and accordingly pursuant to Rule 457(i) no registration fee
is required in connection with such stock.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This Prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
SUBJECT TO COMPLETION, DATED NOVEMBER 24, 1997
PROSPECTUS
2,000,000 DEPOSITARY SHARES
[LOGO] NATIONAL ENERGY GROUP, INC.
DEPOSITARY SHARES EACH REPRESENTING A ONE-TENTH
INTEREST IN ONE SHARE OF % CONVERTIBLE PREFERRED STOCK, SERIES F
------------------------
Each of the 2,000,000 depositary shares (the "Depositary Shares") offered
hereby (the "Offering") represents a one-tenth interest in one share of %
Convertible Preferred Stock, Series F, par value $1.00 per share (the "Series F
Preferred Stock"), of National Energy Group, Inc. (the "Company"), to be
deposited with , as Depositary, and entitles its holder to all
proportional rights and preferences of the Series F Preferred Stock (including
dividend, voting, redemption and liquidation rights). The Depositary Receipts
(as defined) evidence the Depositary Shares. See "Description of Depositary
Shares." Each Depositary Share has a liquidation preference of $50, plus accrued
and unpaid dividends. Dividends will be cumulative from the date of original
issuance, and will be payable quarterly, in arrears, commencing March 31, 1998,
at an annual rate of % in cash. The Series F Preferred Stock is (and related
Depositary Shares are) convertible, at any time prior to redemption at the
option of the holder, into shares of the Company's common stock, par value $.01
per share (the "Common Stock"), at a conversion rate equal to the aggregate
liquidation preference of the shares of Series F Preferred Stock surrendered for
conversion, divided by the conversion price of $ (the "Conversion
Price"), subject to adjustment under certain circumstances. On November 21,
1997, the last reported sales price of the Common Stock on The Nasdaq National
Market ("Nasdaq") was $4.75 per share. The Depositary Shares and the Series F
Preferred Stock will not be listed on any securities exchange or on Nasdaq and
will be traded only in the over-the-counter market.
The Series F Preferred Stock is (and related Depositary Shares are)
redeemable by the Company, in whole or in part, from time to time, on or after
January 2, 2001 at the prices set forth herein (the "Redemption Price"), plus
cumulative unpaid dividends through the date of redemption.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
========================================================================================================================
PRICE TO DISCOUNT TO PROCEEDS TO
PUBLIC(1) UNDERWRITERS(2) COMPANY(3)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Depositary Share.................. $ $ $
- ------------------------------------------------------------------------------------------------------------------------
Total(4).............................. $ $ $
========================================================================================================================
</TABLE>
(1) Plus accrued dividends, if any, from the date of original issuance.
(2) The Company has agreed to indemnify the Underwriters (as defined) against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended (the "Securities Act"). See "Underwriting."
(3) Before deducting expenses of the Offering payable by the Company, estimated
at $ .
(4) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional 300,000 Depositary Shares at the Price to Public, less
the Discount to Underwriters, solely for the purpose of covering
over-allotments, if any. If the Underwriters exercise such option in full,
the Price to Public, the Discount to Underwriters and Proceeds to Company
will be $ , $ and $ , respectively. See "Underwriting."
------------------------
The Depositary Shares are being offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by the Underwriters and
subject to the Underwriters' right to reject orders in whole or part. It is
expected that delivery of the Depositary Shares will be made on or about
, 1997 through the facilities of The Depositary Trust Company on
such date.
RAYMOND JAMES & ASSOCIATES, INC. FORUM CAPITAL MARKETS L.P.
The date of this Prospectus is , 1997.
<PAGE> 3
[MAP]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE DEPOSITARY SHARES
AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THE SERIES F PREFERRED STOCK,
INCLUDING OVERALLOTMENTS, ENTERING OF STABILIZING BIDS, EFFECTING SYNDICATE
SHORT COVERING TRANSACTIONS OR IMPOSING OF PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THE OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE "UNDERWRITING."
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in connection with, the more detailed information and financial statements and
notes thereto included elsewhere or incorporated by reference in this
Prospectus. Unless the context otherwise requires, all references to "NEG" or
the "Company" refer to National Energy Group, Inc. Except as otherwise
indicated, the information in this Prospectus assumes that the Underwriters'
over-allotment option will not be exercised. Certain industry terms are
capitalized in this Prospectus and defined in the Glossary.
THE COMPANY
NEG is an independent energy company engaged in the acquisition,
exploitation, development, exploration and production of oil and natural gas
properties in major producing basins in Texas, Oklahoma, Arkansas, Mississippi,
Alabama and offshore in the Gulf of Mexico. By acquiring properties with
significant reserve and production enhancement potential primarily in these
areas and focusing its efforts on the subsequent exploitation and development of
those properties, the Company has substantially increased its reserves,
production and cash flow from operations. The Company generally seeks to acquire
properties where it can act as operator and that have a balance between oil and
natural gas with a mix of both short and long reserve lives. As a result of
several acquisitions in 1996, which substantially increased its reserve and
property base, the Company has implemented a comprehensive capital expenditure
program to enhance existing production and convert Proved Undeveloped Reserves
to Proved Developed Producing Reserves through development drilling, workovers,
recompletions and other production enhancement activities. As a complement to
these efforts, the Company has also developed an exploration program that, in
conjunction with other industry partners, is concentrating primarily on onshore
prospects in Texas, Louisiana, Mississippi and Alabama, and offshore Gulf of
Mexico prospects in shallow state waters in Texas.
At December 31, 1996, the Company had estimated Proved Reserves, as
determined from reserve reports prepared by Netherland, Sewell & Associates,
Inc., independent petroleum engineers ("Netherland & Sewell"), of 181.7 Bcfe
with a PV10% at that date of approximately $292 million. The reserves were
approximately 71% natural gas and approximately 57% Proved Developed Reserves.
At September 30, 1997, the Company estimates that approximately 62% of its
reserves were natural gas.
As a result of its acquisition, exploitation, development and exploration
activities, the Company has achieved substantial growth as evidenced by:
- An increase in estimated net Proved Reserves from 6.8 Bcfe at December
31, 1991 to 181.7 Bcfe at December 31, 1996.
- An increase in PV10% from approximately $6 million at December 31, 1991
to approximately $292 million at December 31, 1996.
- An increase in average daily production from 1.2 Mmcfe for the year ended
1991 to 24.1 Mmcfe for the year ended 1996, and 58.2 Mmcfe for the
quarter ended September 30, 1997.
- An increase in EBITDA from approximately $0.3 million for 1991 to
approximately $17 million for 1996, and approximately $28 million for the
nine months ended September 30, 1997.
- An increase in cash flow from operations before changes in operating
assets and liabilities from $0.2 million for 1991 to approximately $14
million for 1996, and approximately $21 million for the nine months ended
September 30, 1997.
BUSINESS STRATEGY
The Company's strategy is to increase reserves, production, per share cash
flow from operations and earnings through the Company's balanced program of
acquisitions, exploitation and development drilling on its substantial property
inventory, and a growing exploration program pursued in conjunction with
industry partners. Management believes that the Company's recent acquisitions
have provided a significant number of exploitation and development projects and
will continue to provide it with additional exploration opportunities.
3
<PAGE> 5
The Company believes its emphasis on the factors described below enhance
its ability to achieve its long-term goals and objectives.
Selective Acquisitions. The Company's primary source of growth to date has
been its ability to identify and acquire properties or entities that allow it to
increase reserves, production and cash flow from operations and provide
continuing exploitation opportunities. From January 1, 1991 through September
30, 1997, the Company acquired 206.3 Bcfe of net Proved Reserves (estimated at
the time of their respective purchases) at an average cost per Mcfe of
approximately $0.84. The Company's merger (the "Merger") with Alexander Energy
Corporation ("Alexander") in 1996 added a significant amount of reserves and
allowed the Company to expand its Mid-Continent and East Texas presence. The
Company's acquisitions, including its purchase of the Bayou Sorrel properties
where the Company has experienced recent exploration success, have provided the
Company with a substantial inventory of exploitation, development and
exploration opportunities. Consistent with its historical acquisition strategy,
the Company expects to continue to focus on purchases of underdeveloped
properties in its core areas of interest either through negotiated property
acquisitions or acquisitions of other energy companies. As a result of its
increased reserves, cash flow and operating base, the Company may seek to make
larger acquisitions which meet its criteria.
Exploitation and Development. During 1994, 1995 and 1996, the Company
participated in the drilling of 63 Gross (54 Net) Development Wells. The Company
has drilled 53 Gross (45 Net) Development Wells in the first nine months of
1997. All but five of the Development Wells drilled since 1993 were completed as
commercially productive which represents a 96% success rate. The Company has
increased its focus on the exploitation and development of its properties
through development drilling, workovers, redrills, recompletions, potential
waterfloods and other production enhancement techniques to maximize its reserves
and production. As a result, the Company recently increased its 1997 budget to
spend approximately $9 million in the last quarter and an estimated $50 million
for 1998 for development and exploitation activities, a major portion of which
is targeted to develop Proved Undeveloped Reserves.
Significant Operating Control. The Company generally prefers to operate
and, except for its exploratory prospects, own a majority Working Interest in
its oil and natural gas properties. This operating philosophy enables the
Company to control the nature, timing and costs of exploration and development
of its properties, as well as the marketing of the resulting production. At
September 30, 1997, the Company operated approximately 568 of the 895 producing
wells in which it owns an interest. In November 1997, the Company agreed to sell
for approximately $6 million, Working Interests in 274 nonstrategic producing
wells, 103 of which were operated by the Company, bringing its total percentage
of operated wells to approximately 75%.
Low Operating Cost Structure. The Company seeks to increase its cash flow
from operations by maintaining a low unit operating cost structure through its
focus on increasing production while reducing nonstrategic interests and
limiting its field operating and corporate overhead expenses. Through these
efforts, the Company has reduced historical lease operating expenses per unit of
production by approximately 46% from $0.70 per Mcfe produced for the year ended
December 31, 1991 to $0.38 per Mcfe for the nine months ended September 30,
1997. During this same period, the Company decreased general and administrative
expenses per unit of production by approximately 68% from $0.80 per Mcfe
produced to $0.26 per Mcfe.
Exploration Projects. To balance its relatively lower risk development and
exploitation activities and to enhance its opportunities for growth, the Company
will continue to emphasize exploratory drilling as an important aspect of its
business. The Company seeks to reduce the greater risks normally associated with
exploratory drilling by (i) allocating only a limited portion of its capital
expenditure budget to exploration activities, (ii) limiting its Working
Interests in exploratory prospects through participation by industry partners,
(iii) obtaining operational control of its exploratory prospects and (iv)
utilizing advanced seismic and drilling technologies, including 3-D seismic
surveys, where cost-effective. The Company's exploration program targets
prospects with significant reserve potential, focusing primarily on its
inventory of exploratory prospects in onshore Texas, Louisiana, Mississippi and
Alabama and offshore Gulf of Mexico. During the years ended December 31, 1994,
1995 and 1996, the Company participated in drilling 12 Gross (4.3 Net)
Exploratory Wells. During the nine months ended September 30, 1997, the Company
participated in drilling 7 Gross (2.6 Net) Exploratory Wells. From 1994 through
September 30, 1997, 5 gross (2.2 net) exploratory
4
<PAGE> 6
wells have been completed as commercially productive. This represents a 26%
success rate for the Company's exploratory drilling. To supplement its internal
prospect generation activities and to provide additional expertise in prospect
generation and analysis for its exploration program, as well as to control
prospect generation costs, the Company has entered into an agreement with
Sandefer Oil and Gas, Inc. ("Sandefer") under which prospects in Louisiana,
Texas and Mississippi are generated for NEG's consideration and Sandefer
participates with the Company in the evaluation, marketing and sale of such
prospects ("Sandefer Exploration Venture"). The Company has budgeted
approximately $5.5 million for the fourth quarter of 1997 and approximately $20
million in 1998 for exploration projects.
Experienced Incentivized Management Team. The Company's board of directors
(the "Board of Directors"), executive officers and technical staff have
considerable industry expertise. As of November 19, 1997 the Board of Directors
and executive officers collectively owned approximately 8% of the outstanding
shares of Common Stock. All of the Company's directors, executive officers and
key employees either own, or hold options to acquire, shares of Common Stock.
DEVELOPMENT AND EXPLORATION EXPENDITURES
In recent years, the Company has significantly increased its drilling
capital expenditures to implement its strategy of actively developing and
exploiting its properties. Currently, the Company estimates it has a backlog of
approximately 200 development projects (including recompletions, drilling
locations and proposed secondary recovery projects), primarily on its onshore
Texas, Louisiana, Mississippi, Alabama and offshore Gulf of Mexico properties,
which the Company believes will provide at least a three-year inventory of
development projects. To balance its relatively lower risk development and
exploitation activities and to enhance its growth potential, the Company has
also initiated an exploratory drilling program in which it seeks to include
other industry partners. Actual amounts to be expended by the Company for its
drilling activities and the number of wells to be drilled will be dependent upon
a number of factors, including oil and natural gas prices, seismic and contract
service costs, future drilling results and the availability of capital. The
following table summarizes the Company's historical and estimated exploration
and development activities and expenditures, including redrills, reworks,
recompletions and other production enhancement activities:
<TABLE>
<CAPTION>
NET CAPITAL
EXPENDITURES(1) GROSS NET
(IN MILLIONS) WELLS WELLS
--------------- ----- -----
<S> <C> <C> <C>
1994
Development............................................... $ 2.0 9 6.4
Exploratory............................................... 0.1 2 1.0
----- -- ----
Total............................................... $ 2.1 11 7.4
===== == ====
1995
Development............................................... $ 8.6 25 21.3
Exploratory............................................... 0.1 2 0.8
----- -- ----
Total............................................... $ 8.7 27 22.1
===== == ====
1996
Development............................................... $19.3 29 25.8
Exploratory............................................... 4.4 8 2.5
----- -- ----
Total............................................... $23.7 37 28.3
===== == ====
1997 (estimated)(2)
Development............................................... $45.0 61 51.3
Exploratory............................................... 12.0 11 3.5
----- -- ----
Total............................................... $57.0 72 54.8
===== == ====
1998 (estimated)
Development............................................... $50.0 86 58.7
Exploratory............................................... 20.0 7 4.0
----- -- ----
Total............................................... $70.0 93 62.7
===== == ====
</TABLE>
- ---------------
(1) Capital expenditures may include drilling costs, production
enhancement expenditures, leasehold acquisition costs, and seismic
data acquisition and other geological and geophysical costs.
(2) Includes development expenditures of approximately $42 million and
exploration expenditures of approximately $9 million incurred
through September 30, 1997, but does not include the fourth quarter
increases for development and exploratory spending of approximately
$6 million and $2.5 million, respectively.
5
<PAGE> 7
THE OFFERING
Issuer..................... National Energy Group, Inc.
Securities Offered......... 2,000,000 Depositary Shares, each representing a
one-tenth interest in one share of %
Convertible Preferred Stock, Series F, par value
$1.00 per share, at an offering price of $50.00 per
Depositary Share.
Ranking.................... The Series F Preferred Stock (and related
Depositary Shares) will rank senior in right of
payment of dividends and upon liquidation to the
Common Stock. The Series F Preferred Stock will
rank junior in right of payment of dividends and
upon liquidation to the Series B Preferred Stock
(as defined) and Series C Preferred Stock (as
defined) and pari passu in right of payment of
dividends and upon liquidation to the Series D
Preferred Stock (as defined) and Series E Preferred
Stock (as defined). Subject to certain limitations,
the Series F Preferred Stock will rank pari passu
in right of payment of dividends and upon
liquidation to any convertible preferred stock
hereafter issued by the Company and subordinate to
any non-convertible preferred stock hereafter
issued by the Company. At November 19, 1997 there
were approximately $3.9 million and $2.3 million
liquidation amounts of Series B Preferred Stock and
Series C Preferred Stock, respectively. See
"Description of the Series F Preferred
Stock -- Ranking."
Dividends.................. Cumulative from the date of issuance and payable
quarterly in arrears at an annual rate of % in
cash. See "Description of the Series F Preferred
Stock -- Dividends."
Aggregate Liquidation
Preference............... Upon liquidation, dissolution or winding up of the
Company, holders of the Depositary Shares are
entitled to receive liquidation distributions equal
to $50.00 per Depositary Share, plus cumulative
unpaid dividends on the underlying Series F
Preferred Stock. See "Description of the Series F
Preferred Stock -- Liquidation Rights."
Conversion................. The Series F Preferred Stock is (and related
Depositary Shares are) convertible into Common
Stock, at the holder's option, at any time, unless
previously redeemed, at a conversion rate equal to
the aggregate liquidation preference of the shares
of Series F Preferred Stock surrendered for
conversion, divided by the Conversion Price (as
defined), subject to adjustment under certain
circumstances. See "Description of the Series F
Preferred Stock -- Conversion Rights."
Special Conversion
Rights..................... The Conversion Price will be reduced for a limited
period in the event a Change of Control (as
defined) occurs at a time that the market price of
the Common Stock is less than the Conversion Price.
Upon such occurrence, the Conversion Price then in
effect will be reduced for a period of 45 days to
the market price of the Common Stock immediately
prior to such occurrence, but not to less than
$ (66 2/3% of the Conversion Price). The
special conversion right is subject to important
limitations and qualifications as described under
"Description of the Series F Preferred
Stock -- Special Conversion Rights."
Optional Redemption........ The Series F Preferred Stock is (and related
Depositary Shares are) redeemable by the Company,
in whole or in part, from time to time, on or after
January 2, 2001 at the Redemption Price, plus
cumulative
6
<PAGE> 8
unpaid dividends through the date of redemption.
See "Description of the Series F Preferred
Stock -- Company's Right of Redemption."
Use of Proceeds............ The net proceeds from the sale of the Series F
Preferred Stock will be added to the Company's
working capital and will be available for general
corporate purposes, including the Company's
development and exploration program and
acquisitions. Pending such use, the proceeds will
be invested in short-term interest-bearing
instruments and/or marketable securities, including
treasury securities. See "Use of Proceeds."
Voting Rights.............. The holders of the Series F Preferred Stock (and
thereby the Depositary Shares), as a class, may
vote on matters adversely affecting the Series F
Preferred Stock, including the creation and/or
issuance of any preferred stock senior to the
Series F Preferred Stock other than non-convertible
preferred stock or the refinancing of certain
senior preferred stock. In all other matters,
except as otherwise required by law, the holders of
the Series F Preferred Stock will vote with the
holders of Common Stock (one vote per Depositary
Share).
Non-payment of Dividends... In the event that the Company misses payments on
six quarterly dividends payable on the Series F
Preferred Stock, which dividend payments remain
unpaid, or if holders of any class of preferred
stock are entitled to elect at least 50% of the
Board of Directors, the number of directors of the
Company shall be increased to such number necessary
to enable the holders of Series F Preferred Stock,
voting as a single class, to elect two directors of
the Company. Such rights will be subject to certain
limitations. See "Description of the Series F
Preferred Stock -- Voting Rights."
Nasdaq National Market
Common Stock Symbol...... NEGX
RISK FACTORS
Prospective purchasers should carefully consider all of the information
contained in this Prospectus before making an investment in the Depositary
Shares. In particular, prospective purchasers should consider the factors set
forth under "Risk Factors," including (i) the Company's substantial indebtedness
and the restrictions imposed by the instruments governing such indebtedness,
(ii) the Company's future capital requirements, (iii) the increase in the scope
of the Company's operations, (iv) the financial reporting impact of the full
cost method of accounting, (v) the volatility of oil and natural gas prices and
markets, (vi) the uncertainty of estimates of reserves and future net revenues
and the Company's significant undeveloped reserves, (vii) exploration and
development risks, (viii) operational hazards and uninsured risks, (ix) reserve
replacement risks, (x) acquisition risks, (xi) hedging risks, (xii) government
regulation, (xiii) competition, (xiv) the Company's dependence on key personnel,
(xv) the number of shares of Common Stock eligible for future sale, (xvi)
certain anti-takeover provisions affecting the Company, (xvii) control by
certain equity stockholders in the case of certain insolvency and other events
and the Nasdaq Voting Rights Policy and (xviii) the lack of a public market for
the Depositary Shares and the Series F Preferred Stock.
7
<PAGE> 9
SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL
OPERATING AND RESERVE DATA
(IN THOUSANDS, EXCEPT FOR RATIOS AND PER UNIT DATA)
The summary historical financial information presented below has been
derived from the Financial Statements of the Company for each of the three years
in the period ended December 31, 1996 and from the unaudited Financial
Statements of the Company for the nine months ended September 30, 1996 and 1997.
Operating results for the nine months ended September 30, 1997 are not
necessarily indicative of the results for the entire year ended December 31,
1997, and the pro forma combined financial data are not necessarily indicative
of the operating results or financial position that would have been achieved had
the transactions to which they give pro forma effect been effective at the date
or during the periods presented or of the results that may be obtained in the
future. The summary historical and pro forma data set forth below should be read
in conjunction with "Selected Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the Company's
financial statements and the notes thereto included elsewhere herein and the
separate historical financial statements of Alexander, the pro forma combined
condensed statements of operations and the notes thereto, incorporated herein by
reference.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------- ----------------------------------
HISTORICAL HISTORICAL
----------------------------- PRO FORMA(1) ------------------- PRO FORMA(1)
1994 1995 1996 1996 1996 1997 1996
------- -------- -------- ------------ -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Oil and natural gas sales.............. $ 3,159 $ 7,858 $ 24,319 $36,618 $ 13,181 $ 38,151 $25,480
Well operator and management fees...... 158 137 876 2,189 314 994 1,627
------- -------- -------- ------- -------- -------- -------
Total revenues................... 3,317 7,995 25,195 38,807 13,495 39,145 27,107
Costs and expenses:
Lease operating expenses............... 1,207 1,732 3,741 6,201 2,096 5,551 4,556
Oil and natural gas production taxes... 176 416 1,285 2,039 663 2,087 1,417
General and administrative expenses.... 985 1,772 3,034 4,706 1,957 3,807 3,629
Depreciation, depletion and
amortization......................... 1,030 3,149 9,795 15,345 5,444 16,741 10,994
Writedown of oil and natural gas
properties(2)........................ -- -- 43,497 -- 43,497 -- --
------- -------- -------- ------- -------- -------- -------
Total costs and expenses......... 3,398 7,069 61,352 28,291 53,657 28,186 20,596
------- -------- -------- ------- -------- -------- -------
Operating income (loss).................. (81) 926 (36,157) 10,516 (40,162) 10,959 6,511
Interest expense......................... (517) (1,032) (4,212) (5,899) (1,826) (8,259) (3,513)
Other income............................. 109 312 308 685 36 507 413
------- -------- -------- ------- -------- -------- -------
Income (loss) before income taxes and
extraordinary item..................... (489) 206 (40,061) 5,302 (41,952) 3,207 3,411
Income tax benefit (provision) .......... -- -- 14,503 (1,837) 15,146 (1,079) (1,194)
------- -------- -------- ------- -------- -------- -------
Income (loss) before extraordinary
item................................... (489) 206 (25,558) 3,465 (26,806) 2,128 2,217
Extraordinary loss....................... (122) (432) (292) -- (292) -- --
------- -------- -------- ------- -------- -------- -------
Net income (loss)........................ (611) (226) (25,850) 3,465 (27,098) 2,128 2,217
Preferred stock dividends................ (265) (735) (945) (945) (709) (709) (709)
------- -------- -------- ------- -------- -------- -------
Net income (loss) applicable to common
stockholders........................... $ (876) $ (961) $(26,795) $ 2,520 $(27,807) $ 1,419 $ 1,508
======= ======== ======== ======= ======== ======== =======
Net income (loss) per common share....... $ (.10) $ (.09) $ (1.34) $ .06 $ (1.89) $ .03 $ .03
======= ======== ======== ======= ======== ======== =======
Weighted average common shares
outstanding............................ 8,477 10,702 19,940 44,181 14,693 43,886 44,586
CASH FLOW DATA:
Net cash provided by operating
activities............................. 373 2,857 11,788 4,780 15,026
Net cash used in investing activities.... (3,812) (16,726) (49,277) (16,850) (59,275)
Net cash provided by financing
activities............................. 5,871 17,352 45,595 14,644 65,682
OTHER FINANCIAL DATA:
EBITDA(3)................................ $ 1,058 $ 4,387 $ 17,443 $26,546 $ 8,815 $ 28,207 $17,918
Ratio of EBITDA to interest expense...... 2.0x 4.3x 4.1x 4.5x 4.8x 3.4x 5.1x
Ratio of EBITDA to combined fixed charges
and preferred stock dividends.......... 1.3x 2.5x 3.3x 1.6x 3.0x 2.6x 1.5x
Ratio of earnings to combined fixed
charges and preferred stock
dividends(4)........................... -- -- -- 1.5x -- 1.1x 1.5x
Acquisitions of oil and natural gas
properties(5).......................... $ 584 $ 13,219 $150,696 $129,191 $ 4,000
</TABLE>
8
<PAGE> 10
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
---------------------------
HISTORICAL AS ADJUSTED(6)
---------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities............ $ 36,157 $132,157
Working capital............................................. 30,219 126,219
Oil and natural gas properties, net......................... 217,055 217,055
Total assets................................................ 285,125 381,125
Long-term debt.............................................. 166,436 166,436
Stockholders' equity........................................ 82,990 178,990
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------- -------------------------------
HISTORICAL HISTORICAL
------------------------ PRO FORMA(1) ---------------- PRO FORMA(1)
1994 1995 1996 1996 1996 1997 1996
------ ------ ------ ------------ ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Production:
Oil (Mbbls).................................... 116 283 522 606 344 790 429
Natural gas (Mmcf)............................. 621 1,753 5,681 10,805 2,997 9,853 8,121
Natural gas equivalent (Mmcfe)................. 1,315 3,454 8,811 14,441 5,060 14,594 10,696
Average sales prices:
Oil (per Bbl).................................. $16.01 $17.22 $21.70 $ 21.70 $20.62 $ 19.70 $ 20.31
Natural Gas (per Mcf).......................... 2.11 1.70 2.29 2.29 2.04 2.29 2.06
Unit economics (per Mcfe):
Average sales price............................ $ 2.40 $ 2.28 $ 2.75 $ 2.75 $ 2.60 $ 2.61 $ 2.38
Lease operating expenses....................... .92 .50 .42 .43 .41 .38 .42
Oil and natural gas production taxes........... .13 .12 .15 .14 .13 .14 .13
Depreciation, depletion and amortization....... .70 .91 1.11 1.06 1.02 1.13 1.03
General and administrative expenses............ .75 .51 .34 .33 .38 .26 .34
------ ------ ------ ------- ------ ------- -------
Operating income (loss)...................... $ (.10) $ .24 $ .73 $ .79 $ .66 $ .70 $ .46
====== ====== ====== ======= ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------
1994 1995 1996
---------- ------- --------
<S> <C> <C> <C>
RESERVE DATA:(7)
Proved Reserves:
Oil (Mbbls)............................................... 5,156 3,921 8,803
Natural gas (Mmcf)........................................ 13,380 30,869 128,870
Total Proved Reserves (Mmcfe)............................. 44,316 54,395 181,688
% Natural gas............................................. 30.2% 56.7% 70.9%
Proved Developed Reserves (Mmcfe)......................... 18,401 23,098 103,800
% Proved Developed Reserves............................... 41.5% 42.5% 57.1%
Estimated undiscounted future net cash flows before income
taxes..................................................... $ 52,159 $61,109 $481,935
PV10%(8).................................................... $ 27,445 $36,279 $291,673
Standardized Measure........................................ $ 20,840 $32,127 $229,780
</TABLE>
- ---------------
(1) The pro forma statement of operations data, other financial data and
operating data have been prepared as if the Merger and related transactions
and the Lake Boeuf Acquisition (as defined herein) had been consummated on
January 1, 1996. The pro forma results of operations exclude a non-cash
write down of oil and natural gas properties of approximately $28.3 million
(net of deferred income taxes), in accordance with the full cost method of
accounting, which was charged to expense in the third quarter of 1996, when
the Merger was consummated.
(2) The historical results of operations for the year ended December 31, 1996
and the nine months ended September 30, 1996 include a non-cash write down
of oil and natural gas properties of approximately $28.3 million (net of
deferred taxes), in accordance with the full cost method of accounting,
which was charged to expense in the third quarter of 1996, the period in
which the Merger was consummated.
(3) See the Glossary included elsewhere in this Prospectus for the definition of
EBITDA. EBITDA is not a measure of cash flow as determined by generally
accepted accounting principles. The Company has included information
concerning EBITDA because EBITDA is a measure used by certain investors in
determining the Company's historical ability to service its indebtedness;
however, this measure may not be comparable to similarly titled measures of
other companies. EBITDA should not be considered as an alternative to, or
more meaningful than, net income or cash flows as determined in accordance
with generally accepted accounting principles as an indicator of the
Company's operating performance or liquidity.
9
<PAGE> 11
(4) For the purposes of calculating the ratio of earnings to, or deficiency of
earnings over, combined fixed charges and preferred stock dividends,
earnings consist of income before extraordinary items and income taxes plus
fixed charges, excluding capitalized interest. Fixed charges consist of
interest expense, capitalized interest, the interest component of rent
expense, amortization of debt premium, discount and financing costs, and
preferred stock dividend requirements. Preferred stock dividend requirements
consist of an amount equal to income, before income tax, which would be
required to meet the dividend requirements of outstanding preferred stock.
The deficiency of earnings over combined fixed charges and preferred stock
dividends for the years ended December 31, 1994, 1995 and 1996 and for the
nine months ended September 30, 1996 were approximately $0.8 million, $0.5
million, $41.2 million and $43.0 million, respectively.
(5) Includes the costs of acquiring Alexander in August 1996 for approximately
$118.5 million, including the assumption of debt and liabilities of
approximately $49.0 million and excluding deferred income taxes of
approximately $21.8 million.
(6) Reflects the issuance of $100.0 million of Series F Preferred Stock pursuant
to the Offering, resulting in net proceeds to the Company of approximately
$96.0 million. See "Use of Proceeds" and "Capitalization."
(7) Represents Proved Reserves based on estimates prepared by Netherland &
Sewell as of December 31, 1995 and December 31, 1996 and estimates prepared
by other independent engineers as of December 31, 1994. See "Business and
Properties -- Oil and Natural Gas Properties."
(8) The Company believes that PV10%, while not determined in accordance with
generally accepted accounting principles, is an important financial measure
used by investors in independent oil and natural gas producing companies for
evaluating the relative significance of oil and natural gas properties and
acquisitions. PV10% should not be construed as an alternative to the
Standardized Measure, as determined in accordance with generally accepted
accounting principles.
10
<PAGE> 12
RISK FACTORS
In addition to the other information set forth elsewhere in this Prospectus
and incorporated by reference herein, the following factors relating to the
Company and the Offering should be considered by prospective investors when
evaluating an investment in the Depositary Shares offered hereby.
SUBSTANTIAL INDEBTEDNESS; RESTRICTIONS IMPOSED BY INSTRUMENTS GOVERNING
INDEBTEDNESS
At September 30, 1997, the Company had approximately $166 million of
indebtedness as compared to the Company's stockholders' equity, on a pro forma
basis, after giving effect to the Offering, of approximately $179 million. See
"Use of Proceeds" and "Capitalization." The Company may incur additional
indebtedness under the Company's Revised Credit Facility (as defined). See
"Description of Certain Indebtedness -- Revised Credit Facility."
The instruments governing the indebtedness of the Company impose
significant operating and financial restrictions on the Company. Such
restrictions, and the fact that a substantial portion of the Company's cash flow
from operations is dedicated to the payment of interest on its indebtedness and
is not available for other purposes, will affect, and in many respects
significantly limit or prohibit, among other things, the ability of the Company
to pay dividends, incur additional indebtedness, repay indebtedness prior to its
stated maturity, sell assets or engage in mergers or acquisitions. Under the
terms of the Notes (as defined), on a pro forma basis, after giving effect to
the Offering, the Company anticipates that it will be permitted to pay cash
dividends on the Outstanding Preferred Stock (as defined) and the Series F
Preferred Stock for the immediate future. However, the Revised Credit Facility
specifically prohibits the payment of cash dividends, except that cash dividends
on Preferred Stock (as defined) are allowed so long as no event of default
exists or would exist as a result of such payment.
These restrictions could also limit the ability of the Company to effect
future financings, make needed capital expenditures, withstand a future downturn
in the Company's business or the economy in general, or otherwise conduct
necessary corporate activities. A failure by the Company to comply with these
restrictions could lead to a default under the terms of such indebtedness,
including the Revised Credit Facility and the Notes. In the event of default,
the holders of such indebtedness could elect to declare all of the funds
borrowed pursuant thereto to be due and payable together with accrued and unpaid
interest. In such event, there can be no assurance that the Company would be
able to make such payments, as the Company's ability to meet its financial
covenants and to make scheduled payments of principal and interest to repay its
indebtedness is dependent upon its operating results and its ability to obtain
financing. There can be no assurance that the Company's business will generate
sufficient cash flow from operations or that future bank credit will be
available in an amount sufficient to enable the Company to service its
indebtedness or make necessary capital expenditures. In such event, the Company
would be required to obtain such financing from the sale of equity securities or
debt financing. There can be no assurance that any such financing will be
available on terms acceptable to the Company. In addition, the Company's
indebtedness under the Revised Credit Facility is secured by substantially all
of the Company's oil and natural gas properties. The pledge of such collateral
to existing lenders could also impair the Company's ability to obtain favorable
financing. See "Description of Certain Indebtedness."
The Revised Credit Facility also requires maintenance of a Minimum Current
Ratio, Minimum Tangible Net Worth and Minimum Interest Coverage Ratio, all as
defined therein. The failure to satisfy these covenants or any of the other
covenants in the Revised Credit Facility would constitute an event of default
thereunder and, subject to certain grace periods, may permit the lenders to
accelerate the indebtedness then outstanding under the Revised Credit Facility
and demand immediate repayment thereof. See "Description of Certain
Indebtedness -- Revised Credit Facility."
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 43% of the Proved Reserves of the Company at
December 31, 1996 consisted of Proved Undeveloped Reserves, which require
substantial
11
<PAGE> 13
capital expenditures to develop. The Company had budgeted approximately $57
million for exploration, development and exploitation activities for the year
ended December 31, 1997, of which approximately $51 million was spent during the
first nine months of 1997. The Company's aggregate development and exploration
capital expenditure budget for its existing properties for 1998 is approximately
$70 million, consisting of approximately $50 million for development and
exploitation projects and approximately $20 million for selective exploratory
activities primarily on its onshore Texas, Louisiana, Mississippi, Alabama and
offshore Gulf of Mexico properties. The Company is not contractually committed
to expend the budgeted funds. The Company currently expects that available cash,
cash flows from operations, available borrowings under the Revised Credit
Facility and a portion of the proceeds from the Offering will be sufficient to
fund planned capital expenditures for its existing properties through December
31, 1998. However, the Company may need to raise additional capital to fund
acquisitions and the development of such acquisitions.
For periods following 1998, the Company may seek additional capital, if
required, through traditional reserve-base borrowings, equity and debt offerings
or joint ventures to further develop and explore its properties and to acquire
additional properties. The Company's ability to access additional capital will
depend on its continued success in exploring for and developing its oil and
natural gas reserves and the status of the capital markets at the time such
capital is sought. Accordingly, there can be no assurance that capital will be
available to the Company from any source or that, if available, it will be at
prices or on terms acceptable to the Company. Should the Company be unable to
access the capital markets or should sufficient capital not be available, the
development and exploration of the Company's properties could be delayed or
reduced and, accordingly, oil and natural gas revenues and operating results may
be adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Future Capital Requirements."
INCREASE IN SCOPE OF OPERATIONS
The Company believes that the completion of several acquisitions during
1996, including the Merger, offer opportunities for long-term efficiencies in
operations that should positively affect future operating results of the
Company. However, the increased scope of operations will continue to present
challenges to the Company due to the increased time and resources required in
the management effort. Management and the Board of Directors believe that the
combinations will continue to be effected in a manner that will achieve the
maximum value to the Company's stockholders. However, although a majority of the
members of management and the Board of Directors individually have had
experience in combinations of this size, the Company has not. Accordingly, there
can be no assurance that the operations of the merged companies can be
effectively managed to realize the operational efficiencies anticipated to
result from the Merger. In addition, the continued growth and expansion of the
Company will depend, among other factors, on the Company's ability to recruit
and retain skilled and experienced management and technical personnel. There can
be no assurance that the Company will be successful in such efforts. See
"Business and Properties -- Acquisitions" and "Business and
Properties -- Competition."
FINANCIAL REPORTING IMPACT OF FULL COST METHOD OF ACCOUNTING
The Company follows the full cost method of accounting for oil and natural
gas properties. Under such method, the net book value of such properties, less
related deferred income taxes, may not exceed a calculated "ceiling." The
ceiling is the estimated after-tax future net revenues from proved oil and
natural gas properties, discounted at 10% per year. In calculating future net
revenues, prices and costs in effect at the time of the calculation are held
constant indefinitely, except for changes which are fixed and determinable by
existing contracts. The net book value is compared to the ceiling on a quarterly
and yearly basis. The excess, if any, of the net book value above the ceiling is
required to be written off as a non-cash expense. As a result of allocating
additional cost, under the purchase method of accounting, to the oil and natural
gas properties in connection with the Merger, the Company recognized a non-cash
writedown of its oil and natural gas properties of approximately $28 million,
net of deferred taxes, which was charged to expense in the third quarter of 1996
when the Merger was consummated. At September 30, 1997, the carrying value of
the Company's oil and natural gas properties did not exceed the ceiling.
However, there can be no assurance that there will not be any writedowns in
future periods under the full cost method of accounting as a result of
12
<PAGE> 14
sustained decreases in oil and natural gas prices or other factors. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Reporting Impact of Full Cost Method of Accounting" and
Note 2 of Notes to the Financial Statements.
VOLATILITY OF OIL AND NATURAL GAS PRICES AND MARKETS
The Company's profitability will be substantially dependent on prevailing
prices for oil and natural gas. Although demand for oil is steady, there are
seasonal variations in the demand for natural gas. The amounts of and prices
obtainable for the Company's oil and natural gas production will be affected by
market factors beyond the Company's control, the exact effects of which cannot
be accurately predicted. Such factors may include war in countries other than
the United States, the extent of domestic and international production,
production by and agreements among OPEC members, the availability of adequate
pipeline and other transportation facilities, government regulation of prices,
production, transportation and marketing, the level of imports of foreign oil
and natural gas, the general level of market demand on a regional, national and
worldwide basis, weather, the price and availability of alternative fuels,
domestic and foreign economic conditions that determine levels of industrial
production, political events in foreign oil-producing regions, and variations in
governmental regulations and tax laws or the imposition of new governmental
requirements upon the oil and gas industry. Prices for oil and natural gas are
subject to wide fluctuation in response to relatively minor changes in supply of
and demand for oil and natural gas, market uncertainty and a variety of
additional factors that are beyond the control of the Company. The occurrence of
any factor which affects a ready market for the Company's oil and natural gas or
reduces the price obtained for such oil and natural gas may adversely affect the
Company. The Company's production is predominantly weighted toward natural gas,
making earnings and cash flow more sensitive to natural gas price fluctuations.
A substantial and prolonged decline in oil and natural gas prices could have a
material adverse effect upon the Company, including the inability of the Company
to fund planned operations and capital expenditures, writedowns of the carrying
value of its oil and natural gas properties, and the inability of the Company to
meet debt service requirements resulting in defaults under the Revised Credit
Facilities and the indentures governing the Notes, as well as defaults in the
payment of dividends on the Outstanding Preferred Stock and the Series F
Preferred Stock (collectively, the "Preferred Stock"). In addition, the
marketability of the Company's production will depend in part upon the
availability, proximity and capacity of gathering systems, pipelines and
processing facilities. See "Business and Properties -- Factors Beyond the
Company's Control" and "Business and Properties -- Markets and Customers."
A large percentage of the Company's oil and natural gas sales are made to a
small number of purchasers. During 1996, Plains Marketing and Transportation,
Inc. ("Plains") accounted for 83% of the Company's oil sales, while Crosstex
Energy, Inc. ("Crosstex") and GPM Natural Gas Corporation ("GPM") accounted for
23% and 22%, respectively, of the Company's natural gas sales. For the nine
months ending September 30, 1997, Plains accounted for 89% of the Company's oil
sales while Crosstex, GPM and Fina Natural Gas Company accounted for 23%, 16%
and 11%, respectively of the Company's natural gas sales. The agreement with
Plains, entered into in 1993, provides for Plains to purchase the Company's oil
pursuant to West Texas Intermediate posted prices plus a small premium. The
Company does not believe that the loss of any customer would have a material and
adverse effect on its business because, under prevailing market conditions, such
customer could be replaced. See "Business and Properties -- Markets and
Customers."
A portion of the Company's natural gas production is sold pursuant to long
term net-back contracts. Under net-back contracts, gas purchasers buy gas from a
number of producers, process the gas for natural gas liquids and sell the
liquids and residue gas. Each producer receives a fixed portion of the proceeds
from the sale of the liquids and residue gas. The gas purchasers pay for
transportation, processing and marketing of the gas and liquids and assume the
risk of contracting pipelines and processing plants in return for a portion of
the proceeds of the sale of the gas and liquids. Many times, because the
purchasers are marketing large volumes of hydrocarbons gathered from multiple
producers, higher prices may be obtained for the gas and liquids. Further, a
portion is sold on the spot market under short term (30 day or less) contracts.
The remainder is sold under forward sales contracts (see "-- Hedging Risks").
The Company normally sells its oil under six month contracts. Accordingly, the
Company's oil and natural gas sales expose it to the commodities risks
associated
13
<PAGE> 15
with changes in market prices. See "-- Hedging Risks" and "Business and
Properties -- Markets and Customers."
UNCERTAINTY OF ESTIMATES OF RESERVES AND FUTURE NET REVENUES; SIGNIFICANT
UNDEVELOPED RESERVES
There are numerous uncertainties inherent in estimating quantities of
Proved Reserves, including many factors beyond the control of the Company. The
reserve information set forth or incorporated by reference in this Prospectus
represents estimates based on reports prepared by the Company's independent
petroleum engineers, as well as internally generated reports. Petroleum
engineering is not an exact science. Information relating to the Company's
Proved Reserves of oil and natural gas is based upon engineering estimates.
Estimates of economically recoverable oil and natural gas reserves and of future
net cash flows necessarily depend upon a number of variable factors and
assumptions, such as historical production from the area compared with
production from other producing areas, the assumed effects of regulations by
governmental agencies and assumptions concerning future oil and natural gas
prices, future operating costs, severance and excise taxes, capital
expenditures, the availability of funds and workover and remedial costs, all of
which may in fact vary considerably from actual results. For these reasons,
estimates of the economically recoverable quantities of oil and natural gas
attributable to any particular group of properties, classifications of such
reserves based on risk of recovery and estimates of the future net cash flows
expected therefrom prepared by different engineers or by the same engineers at
different times may vary substantially. Actual production, revenues and
expenditures with respect to the Company's reserves will likely vary from
estimates, and such variances could materially affect the estimated quantity and
value of reserves set forth in this Prospectus. Additionally, the Company's
reserves may be subject to downward or upward revision based upon actual
production performance, results of future development and exploration,
prevailing oil and natural gas prices and other factors, many of which are
beyond the Company's control. Approximately 43% of the Company's estimated
Proved Reserves are classified as Proved Undeveloped Reserves. Either
inaccuracies in estimates of Proved Undeveloped Reserves or the inability to
fund development could result in substantially reduced reserves. In addition,
the timing of receipt of estimated future net revenues from Proved Undeveloped
Reserves will be dependent upon the timing and implementation of drilling and
development activities estimated by the Company for purposes of the reserve
report. See "Business and Properties -- Oil and Natural Gas Properties."
The present value of Proved Reserves referred to in this Prospectus should
not be construed as the current market value of the estimated Proved Reserves of
oil and natural gas attributable to the Company's properties. In accordance with
applicable requirements of the Securities and Exchange Commission (the
"Commission"), the estimated discounted future net cash flows from Proved
Reserves are generally based on prices and costs as of the date of the estimate,
whereas actual future prices and costs may be materially higher or lower. The
calculation of the present value of the Company's oil and natural gas reserves
contained in the Summary Reserve and Appraisal Report of Netherland & Sewell is
based on average prices received by the Company at December 31, 1996, which were
$25.36 per Bbl and $3.72 per Mcf. These prices were higher than historical
prices used in recent years to estimate the present value of the Company's
reserves. Actual average prices received by the Company in September 1997 were
$18.66 per Bbl and $2.39 per Mcf. Actual future net reserves also will be
affected by the factors listed in the preceding paragraph. In addition, the
calculation of the present value of the future net reserves using a 10% discount
factor as required by the Commission is not necessarily the most appropriate
discount factor based on interest rates in effect from time to time and risks
associated with the Company's reserves or the oil and gas industry in general.
EXPLORATION AND DEVELOPMENT RISKS
Exploration and development of oil and natural gas properties involve a
high degree of risk that no commercial production will be obtained or that the
production will be insufficient to recover drilling and completion costs. The
cost of drilling, completing and operating wells is often uncertain. The
Company's drilling operations may be curtailed, delayed or canceled as a result
of numerous factors, including title problems, weather conditions, compliance
with governmental requirements and shortages or delays in the delivery of
equipment. Furthermore, completion of a well does not assure a profit on the
investment or a
14
<PAGE> 16
recovery of drilling, completion and operating costs. The Company intends to
engage consultants with experience in the particular areas targeted for
exploration by the Company. The Company has entered into the Sandefer
Exploration Venture for such purpose in the Louisiana, Mississippi and Texas
Gulf Coast region. See "Business and Properties -- Drilling Activity" and
"Business and Properties -- Principal Areas of Operations -- Exploration."
The Company may from time to time engage in Secondary Recovery operations,
and there are certain risks associated with such activities. The degree of
success, if any, of any Secondary Recovery operations depends on a large number
of factors, including but not limited to the porosity and permeability of the
producing reservoir, the techniques used and the locations of injector wells.
OPERATIONAL HAZARDS AND UNINSURED RISKS
In addition to the substantial risk that wells drilled will not be
productive, the Company's operations are subject to all of the risks inherent in
oil and natural gas exploration, drilling and production including unusual or
unexpected geologic formations, pressures, downhole fires, mechanical failures,
blowouts, cratering, explosions, uncontrollable flows of oil, natural gas or
well fluids, pollution and other physical and environmental risks. These hazards
can result in substantial losses to the Company due to personal injury and loss
of life, severe damage to and destruction of property and equipment, pollution
or environmental damage or suspension of operations. The Company maintains
insurance of various types customary in the industry to cover its operations.
The Company believes it is insured prudently against certain of these risks. In
addition, the Company maintains operator's extra expense coverage that provides
coverage for the care, custody and control of wells drilled by the Company. The
Company's insurance does not cover every potential risk associated with the
drilling and production of oil and natural gas. The Company does, however,
maintain levels of insurance customary in the industry to limit its financial
exposure in the event of a substantial environmental claim resulting from sudden
and accidental discharges; however, 100% coverage is not maintained, either
because such insurance is not available or because the cost thereof is
considered prohibitive. The occurrence of a significant adverse event, the risks
of which are not fully covered by insurance, could have a material adverse
effect on the Company's financial condition and results of operations. Moreover,
no assurance can be given that the Company will be able to maintain adequate
insurance in the future at rates it considers reasonable. The Company believes
that it operates in compliance with government regulations and in accordance
with safety standards which meet or exceed industry standards. See "Business and
Properties -- Operational Hazards and Insurance."
From time to time, due primarily to contract terms, pipeline interruptions
or weather conditions, the producing wells in which the Company owns an interest
have been subject to production curtailments. The curtailments range from
production being partially restricted to wells being completely shut-in. The
duration of curtailments varies from a few days to several months. In most cases
the Company is provided only limited notice as to when production will be
curtailed and the duration of such curtailments. The Company is not currently
experiencing any material curtailment on its production. See "Business and
Properties -- Operational Hazards and Insurance."
REPLACEMENT OF RESERVES
The Company's success will be largely dependent on its ability to replace
and expand its oil and natural gas reserves through the acquisition of producing
properties and the exploration for and development of oil and natural gas
reserves, both of which involve substantial risks. Without successful
acquisitions or drilling ventures, the Company will be unable to replace the
reserves being depleted by production, and its assets and revenues, including
the reserves, will decline. There can be no assurance that the Company's
acquisition and exploration and development activities will result in the
replacement of, or additions to, the Company's reserves. Similarly, there can be
no assurance that the Company will have sufficient capital to engage in its
acquisition, exploration or development activities. To the extent cash flow from
operations is reduced and external sources of capital become limited or
unavailable, the Company's ability to make the necessary capital investments to
maintain or expand its asset base would be impaired. Without such investment,
the Company's oil and natural gas reserves would decline. Successful acquisition
of producing properties generally requires
15
<PAGE> 17
accurate assessments of recoverable reserves, future oil and natural gas prices
and operating costs, potential environmental and other liabilities and other
factors. Such assessments are necessarily inexact, and, as estimates, their
accuracy is inherently uncertain.
ACQUISITION RISKS
Acquisitions of producing oil and natural gas properties have contributed
significantly to the Company's historical growth in reserves. During the period
from January 1, 1991 through September 30, 1997, the Company has acquired,
through sixteen transactions, approximately 206.3 Bcfe of net Proved Reserves
(estimated at the dates of such acquisitions). While the Company expects to
generate future growth in reserves and production through its increased emphasis
on development and exploratory drilling, the Company continues to seek to
opportunistically acquire properties that complement and enhance its inventory
of development, exploitation and exploration projects. Consistent with its
historical acquisition strategy, the Company expects to focus on purchases of
underdeveloped properties in its core areas of expertise either through
negotiated property acquisitions or acquisitions of companies with oil and
natural gas properties. There can be no assurance that the Company will be able
to acquire properties or oil and gas companies at prices which make continuing
this strategy desirable.
The Company may seek to make larger acquisitions than in the past. Such
acquisitions may involve substantially higher costs and may pose additional
issues regarding operations and management. There can be no assurance that oil
and natural gas properties acquired by the Company will be successfully
integrated into the Company's operations or will achieve desired profitability
objectives.
Although the Company performs a review of the properties proposed to be
acquired, such reviews are subject to uncertainties. It generally is not
feasible to review in detail every individual property involved in an
acquisition. Ordinarily, review efforts are focused on the higher-valued
properties. However, even a detailed review of all properties and records may
not reveal existing or potential problems; nor will it permit the Company to
become sufficiently familiar with the properties to assess fully their
deficiencies and capabilities. Inspections are not always performed on every
well, and potential problems, such as mechanical integrity of equipment and
environmental conditions that may require significant remedial expenditures, are
not necessarily observable even when an inspection is undertaken.
HEDGING RISKS
During 1995 and 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 September 30, 1997, the Company had no financial hedging
or basis swap agreements outstanding. During the twelve months ended December
31, 1996 and the nine months ended September 30,
16
<PAGE> 18
1997, the Company recognized a net gain of $20,315 and $0, respectively, related
to financial hedging transactions.
At September 30, 1997, the Company had entered into forward sales contracts
with three purchasers covering approximately 15 Mmcf of natural gas per day,
which represented approximately 25% of its average daily production at this
time. Contracts covering 8 Mmcf per day expire in March 1998 and contracts
covering 7 Mmcf per day expire in March 1999. Deliveries under these contracts
are priced based on NYMEX prices less a differential whereby the Company may fix
the price for deliveries under these contracts at any time three days prior to
the close of the then current contract based on the NYMEX prices at that time.
The Company pays the cost of transportation of the natural gas to the delivery
point specified in the contracts. At September 30, 1997 the Company had fixed
the prices of a total of approximately 921 Mmcf of natural gas to be delivered
in October and November 1997 at an average price of $3.014 per Mcf.
The Company's hedging activities, while intended to reduce the Company's
sensitivity to changes in market prices of oil and natural gas, are subject to a
number of risks including, but not limited to, instances in which the Company or
the other parties to its forward sales contracts could fail to take delivery and
pay the contracted quantities of oil or natural gas. Additionally, the fixed
price sales and hedging contracts limit the benefits the Company will realize if
actual prices rise above the contract prices. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Changes in Prices
and Inflation."
GOVERNMENTAL REGULATION
The Company's oil and natural gas exploration, production and related
operations are affected by extensive regulation pursuant to various federal,
state and local laws and regulations relating to the exploration for and
development, production, gathering and marketing of oil and natural gas and the
release of material into the environment or otherwise relating to protection of
the environment. Failure to comply with such rules and regulations can result in
substantial penalties. The regulatory burden on the oil and gas industry
increases the Company's cost of doing business and affects its profitability.
Because such rules and regulations are frequently amended or interpreted, the
Company is unable to predict the future cost or impact of complying with such
laws. Matters subject to regulation include discharge permits for drilling
operations, drilling and abandonment bonds or other financial responsibility
requirements, reports concerning operations, the spacing of wells, unitization
and pooling of properties and taxation. From time to time regulatory agencies
have imposed price controls and limitations on production by restricting the
rate of flow of oil and natural gas wells below actual production capacity in
order to conserve supplies of oil and natural gas. In particular, the Company's
oil and natural gas exploration, development and production, and its activities
in connection with storage and transportation of liquid hydrocarbons are subject
to stringent environmental regulation by governmental authorities in the United
States and in foreign jurisdictions. The effect of such regulation is to limit
the amounts of oil and natural gas the Company can produce from its wells and to
limit the number of wells or the locations at which the Company can drill as
well as increasing the costs of planning, designing, drilling, installing,
operating and abandoning oil and natural gas wells and other related facilities.
Operations of the Company are also subject to numerous environmental laws,
including but not limited to, those governing management of waste, protection of
water, air quality, the discharge of materials into the environment, and
preservation of natural resources. Non-compliance with environmental laws and
the discharge of oil, natural gas, or other materials into the air, soil or
water may give rise to liabilities to the government and third parties,
including civil and criminal penalties, and may require the Company to incur
costs to remedy the discharge. Laws and regulations protecting the environment
have become more stringent in recent years, and may in certain circumstances
impose retroactive, strict, and joint and several liability rendering entities
liable for environmental damage without regard to negligence or fault. The
Company has expended significant resources, both financial and managerial, to
comply with environmental regulations and permitting requirements and
anticipates that it will continue to do so in the future. Although the Company
believes that its operations are in general compliance with all such laws and
regulations, including applicable environmental laws and regulations, risks of
substantial costs and liabilities are inherent in oil and natural gas
operations. From time to time the Company has agreed to indemnify sellers of
producing properties from
17
<PAGE> 19
whom the Company has acquired reserves against certain liabilities for
environmental claims associated with such properties. There can be no assurance
that new laws or regulations, or modifications of or new interpretations of
existing laws and regulations, will not increase substantially the cost of
compliance or otherwise adversely affect the Company's oil and natural gas
operations and financial condition or that material indemnity claims will not
arise against the Company with respect to properties acquired by or from the
Company. While the Company does not anticipate incurring material costs in
connection with environmental compliance and remediation, it cannot guarantee
that material costs will not be incurred. See "Business and
Properties -- Regulation."
COMPETITION
The oil and gas industry is intensely competitive in all of its phases,
particularly with respect to the acquisition of desirable producing Oil and
Natural Gas Leases and oil and natural gas companies with production. The
Company, which is a small competitive factor in the industry, encounters strong
competition from major oil companies, independent oil and natural gas concerns,
and individual producers and operators, many of which have financial resources,
staffs, facilities and experience substantially greater than those of the
Company. Furthermore, in times of high drilling activity, exploration for and
production of oil and natural gas may be affected by the availability of
equipment, labor, supplies and by competition for drilling rigs. The Company
cannot predict the effect these factors will have on its operations. The Company
owns no drilling rigs, and it is anticipated that its drilling will be conducted
by third parties. Furthermore, the oil and gas industry also competes with other
industries in supplying the energy and fuel requirements of industrial,
commercial and individual consumers. See "Business and
Properties -- Competition."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the services of its senior management. There
can be no assurance that the Company will be able to retain such personnel. See
"Management -- Directors and Executive Officers."
SHARES ELIGIBLE FOR FUTURE SALE
The Company is authorized to issue up to 100,000,000 shares of Common
Stock. As of November 19, 1997, 40,106,320 shares were issued and outstanding,
and 11,726,463 shares were reserved for issuance upon the conversion of shares
of the Outstanding Preferred Stock and upon the exercise of all outstanding
warrants and options. See "Description of Capital Stock." The issuance of
additional shares of Common Stock pursuant to such conversion rights and
outstanding warrants and options would reduce the proportionate ownership and
voting rights of the Common Stock then outstanding. At November 19, 1997, the
Company's existing management and their affiliates owned 3,585,325 shares,
including exercisable options, of Common Stock that may in the future be sold in
compliance with Rule 144 adopted under the Securities Act. The possibility that
substantial amounts of Common Stock may be sold in public market may adversely
affect prevailing and future market prices for the Common Stock and could impair
the Company's ability to raise capital through the sale of its equity securities
in the future.
ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation and Bylaws include certain
provisions that may have the effect of encouraging persons considering
unsolicited tender offers or other unilateral takeover proposals to negotiate
with the Board of Directors rather than pursue non-negotiated takeover attempts.
These provisions include authorized "blank check" Preferred Stock and the
availability of authorized but unissued Common Stock. The issuance of Preferred
Stock may have the effect of delaying or preventing a change in control of the
Company without further stockholder action and may adversely affect the rights
and powers, including voting rights, of the holders of Common Stock. In certain
circumstances the issuance of Preferred Stock could depress the market price of
the Common Stock. In addition, a change of control would entitle the holders of
the Notes to put the Notes to the Company under the Indentures and the lenders
to accelerate payment of outstanding indebtedness under the Revised Credit
Facility, both of which events could have the effect of
18
<PAGE> 20
discouraging a takeover of the Company by making such an attempt potentially
more expensive. See "Description of Capital Stock" and "Description of Certain
Indebtedness."
CONTROL BY CERTAIN EQUITY STOCKHOLDERS IN THE CASE OF CERTAIN INSOLVENCY AND
OTHER EVENTS; NASDAQ VOTING RIGHTS POLICY
As the holder of the Convertible Preferred Stock, Series D, of the Company
(the "Series D Preferred Stock"), High River Limited Partnership ("High River"),
and its affiliates Riverdale Investors Corp., Inc. and Carl C. Icahn, will have
certain rights if certain events occur that may indicate that the Company is
insolvent or is financially distressed. The member of the Board of Directors
appointed by the holders of the Series D Preferred Stock has the right to veto
any voluntary bankruptcy filing by the Company. The holders of the Series D
Preferred Stock also have the right to choose to elect one-half of the members
of the Board of Directors plus one member if certain events occur indicating
insolvency of the Company, such as an involuntary bankruptcy filing or a default
on indebtedness of the Company in excess of $10 million which is not cured
within certain time periods of less than 30 days.
Nasdaq has advised the Company that while it does not consider the grant of
the Series D Preferred Stock contingent voting rights a violation of the Nasdaq
Voting Rights Policy which would cause Nasdaq to take any action, any exercise
of those rights would constitute a violation of the Nasdaq Voting Rights Policy
as currently interpreted by Nasdaq. As a result, Nasdaq may exclude the Common
Stock from trading on Nasdaq. If that happens, no market may exist for the
Common Stock. The Company would explore other options to provide a means to
trade shares of Common Stock, including trading the Common Stock in the over the
counter market or in the pink sheets or providing other means by which potential
sellers and buyers of Common Stock may contact each other for purposes of
trading in the Common Stock. There can be no assurance these means will provide
a market for, or not adversely affect the price of, the Common Stock. See
"Description of Capital Stock -- Series D Preferred Stock."
The owners of the 10% Cumulative Convertible Preferred Stock, Series B, of
the Company (the "Series B Preferred Stock") and the 10 1/2% Cumulative
Convertible Preferred Stock, Series C, of the Company (the "Series C Preferred
Stock") each have the right to elect one-third of the Board of Directors if,
with respect to four dividend payments for that series, the Company does not pay
dividends or pays the dividends in shares of Series B Preferred Stock or Series
C Preferred Stock, as the case may be. If the holders of the Series B Preferred
Stock and Series C Preferred Stock are each entitled to exercise this right, the
holders of Series C Preferred Stock may not exercise their rights until the
rights of the holders of the Series B Preferred Stock terminate. One payment on
the Series B Preferred Stock was paid in shares of Series B Preferred Stock in
1994.
The holders of the Convertible Preferred Stock, Series E (the "Series E
Preferred Stock") of the Company have the same voting rights as holders of the
Common Stock with respect to the election of the Board of Directors.
If the Company experiences financial difficulties for a prolonged period of
time so that all of these voting rights are triggered and exercised, the holders
of the Series B Preferred Stock, the Series C Preferred Stock, the Series D
Preferred Stock and the Series E Preferred Stock (collectively, the "Outstanding
Preferred Stock"), will have the right to elect at least 83% of the Board of
Directors.
LACK OF PUBLIC MARKET
The Depositary Shares will constitute a new issue of securities with no
established trading market. There can be no assurance regarding the future
development of a market for the Depositary Shares or the Series F Preferred
Stock, the ability of holders of the Depositary Shares or the Series F Preferred
Stock to sell their Series F Preferred Stock or the price at which such holders
may be able to sell their Depositary Shares or the Series F Preferred Stock.
Future trading prices of the Depositary Shares and Series F Preferred Stock will
depend on many factors, including, among others, prevailing interest rates, the
Company's operating results and the market for similar securities. The
Underwriters have advised the Company that each of them currently intends to
make a market in the Depositary Shares. The Underwriters are not obligated to do
so,
19
<PAGE> 21
however, and any market-making with respect to the Depositary Shares may be
discontinued at any time without notice. Therefore, there can be no assurance as
to the liquidity of any trading market for the Depositary Shares or the Series F
Preferred Stock or that an active public market for the Depositary Shares or the
Series F Preferred Stock will develop. Neither the Depositary Shares nor the
Series F Preferred Stock will be listed on any securities exchange or on Nasdaq.
The Depositary Shares will only be traded in the over-the-counter market.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus and the documents incorporated by reference herein include
"forward-looking statements" within the meaning of various provisions of the
Securities Act and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The words "expect," "estimate," "anticipate," "predict,"
"believe," and similar expressions and variations thereof are intended to
identify forward-looking statements. All statements, other than statements of
historical facts, included in this Prospectus and the documents incorporated by
reference herein that address activities, events or developments that the
Company expects or anticipates will or may occur in the future, including such
things as estimated future net revenues from oil and natural gas reserves and
the present value thereof, future capital expenditures (including the amount and
nature thereof), business strategy and measures to implement strategy,
competitive strengths, goals, expansion and growth of the Company's business and
operations, plans, references to future success, references to intentions as to
future matters and other such matters are forward-looking statements and include
statements regarding the interest, belief or current expectations of the
Company, its directors, or its officers regarding such matters. These statements
are based on certain assumptions and analyses made by the Company in light of
its experience and its perception of historical trends, current conditions and
expected future developments as well as other factors it believes are
appropriate under the circumstances. However, whether actual results and
developments will conform with the Company's expectations and predictions is
subject to a number of risks and uncertainties, including the risk factors
discussed in this Prospectus, general economic, market or business conditions,
the opportunities (or lack thereof) that may be presented to and pursued by the
Company, competitive actions by other oil and natural gas companies, changes in
laws or regulations, and other factors, many of which are beyond the control of
the Company. Consequently, all of the forward-looking statements made in this
Prospectus and the documents incorporated by reference herein are qualified by
these cautionary statements and there can be no assurance that the actual
results or developments anticipated by the Company will be realized or, even if
substantially realized, that they will have the expected consequences to or
effects on the Company or its business or operations. See "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
20
<PAGE> 22
USE OF PROCEEDS
The net proceeds to the Company from the Offering will be approximately $96
million ($110 million assuming exercise of the Underwriters' over-allotment
option) after deducting underwriting discounts and estimated expenses of the
Offering payable by the Company. The net proceeds will be added to the Company's
working capital and will be available for general corporate purposes and for the
development, exploration and acquisition of oil and natural gas properties. The
Company's development and exploration capital expenditure budget of
approximately $70 million for 1998 includes $50 million for exploitation and
development activities and $20 million for exploration activities. Actual
expenditures by the Company are discretionary and will depend upon future events
that cannot be predicted, including the actual results and costs of future
exploration and development drilling and other activities, the availability and
cost of oil and natural gas properties meeting the Company's acquisition
criteria and other matters beyond the control of the Company. The Company is
continually evaluating and pursuing potential property acquisitions and business
acquisitions or combinations. The Company has no commitments, contracts,
understandings or arrangements at the present time with respect to any material
acquisition. Pending such uses, the proceeds will be invested in short-term
interest-bearing instruments and/or marketable securities, including treasury
securities. See "Business and Properties -- Development and Exploitation" and
"Business and Properties -- Exploration."
PRICE RANGE OF THE COMMON STOCK AND DIVIDENDS
MARKET INFORMATION
The Common Stock has traded on Nasdaq since September 1, 1995 under the
symbol "NEGX." The following table sets forth, for the periods indicated, the
high and low closing sales prices for the Common Stock as reported on Nasdaq.
For periods prior to September 1, 1995, during which the Common Stock traded on
the Nasdaq Small Cap Market, the table indicates the high and low bid prices for
the Common Stock on the Nasdaq Small Cap Market. The quotations represent prices
between dealers in securities and may not include retail mark-up, mark-down or
commission and may not represent actual transactions.
<TABLE>
<CAPTION>
CALENDAR YEARS BY QUARTER HIGH LOW
------------------------- ----- -----
<S> <C> <C>
1997
First..................................................... $4.56 $3.13
Second.................................................... 3.69 2.94
Third..................................................... 5.63 2.94
Fourth (through November 19, 1997)........................ 6.50 4.63
1996
First..................................................... $3.50 $2.63
Second.................................................... 3.88 2.50
Third..................................................... 4.56 3.06
Fourth.................................................... 4.75 3.25
1995
First..................................................... $2.50 $1.75
Second.................................................... 3.38 2.56
Third..................................................... 4.00 3.00
Fourth.................................................... 4.00 3.06
</TABLE>
On November 19, 1997 the last sales price for the Common Stock as reported
by Nasdaq was $4.625, and there were 40,106,320 shares of Common Stock
outstanding and approximately 10,500 record holders of the Common Stock,
including several nominee holders for an undetermined number of beneficial
owners.
The Company has not paid cash dividends on the Common Stock and does not
expect to declare cash dividends in the foreseeable future. Furthermore, any
future dividends on the Common Stock will be limited by (i) the terms of the
Outstanding Preferred Stock and the Series F Preferred Stock, which prohibit
cash dividends on the Common Stock unless all accrued and unpaid dividends on
the Preferred Stock have been paid, (ii) the terms of the Company's Revised
Credit Facility, which does not permit dividends on the Common Stock and (iii)
the terms of the Indentures which limit dividends on the Common Stock. See
"Description of Capital Stock" and "Description of Certain Indebtedness."
21
<PAGE> 23
CAPITALIZATION
The following table sets forth the historical cash, cash equivalents and
marketable securities and capitalization of the Company as of September 30,
1997, and as adjusted to give effect to the sale of the Depositary Shares
offered by the Company hereby and the application of the proceeds therefrom. The
table should be read in conjunction with the historical Financial Statements and
Interim Financial Statements of the Company and the notes thereto, and the other
financial information appearing elsewhere in this Prospectus or incorporated by
reference herein. See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------------
HISTORICAL AS ADJUSTED(1)
---------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents and marketable securities............ $ 36,157 $132,157
======== ========
Long-term debt.............................................. $ -- $ --
10 3/4% Senior Notes due 2006............................... 166,436 166,436
Stockholders' equity:
Convertible preferred stock, $1.00 par value:
Authorized shares -- 1,000,000
Outstanding Preferred Stock:
242,500 issued and outstanding shares
$24,250 aggregate liquidation preference.......... 243 243
Series F Preferred Stock:
200,000 issued and outstanding shares as adjusted
$100,000 aggregate liquidation preference......... -- 200
Common stock, $.01 par value(2):
Authorized shares -- 100,000,000
Issued and outstanding shares -- 36,275,669............ 363 363
Additional paid-in capital................................ 111,170 206,970
Unrealized gain on marketable securities.................. 27 27
Deficit................................................... (28,813) (28,813)
-------- --------
Total stockholders' equity........................ 82,990 178,990
-------- --------
Total capitalization.............................. $249,426 $345,426
======== ========
</TABLE>
- ---------------
(1) Does not reflect conversion of 68,813 shares of Outstanding Preferred Stock
into 3,388,915 shares of Common Stock which occurred in October 1997, nor
does it reflect the potential conversion, by certain holders, of the
remaining outstanding shares of the Series E Preferred Stock convertible to
533,333 shares of Common Stock subsequent to the Offering. See "Security
Ownership of Certain Beneficial Owners and Management -- Security Ownership
of Certain Beneficial Owners."
(2) As of September 30, 1997 there were 3,246,085 shares of Common Stock subject
to issuance upon the exercise of outstanding options and warrants.
22
<PAGE> 24
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT FOR RATIOS AND PER UNIT DATA)
The following table sets forth selected historical financial and operating
data with respect to the Company as of and for each of the five years in the
period ended December 31, 1996, and as of and for the nine month periods ended
September 30, 1996 and 1997. The Company acquired significant producing oil and
natural gas properties in all the periods presented which affects the
comparability of the historical financial and operating data for the periods
presented. The financial data was derived from the historical financial
statements of the Company. This information is not necessarily indicative of the
Company's future performance. The financial data set forth below should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and the related notes
thereto of the Company included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------ -------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:(1)
Oil and natural gas sales..................... $ 1,626 $ 1,803 $ 3,159 $ 7,858 $ 24,319 $ 13,181 $ 38,151
Well operator fees............................ 537 427 158 137 876 314 994
------- ------- ------- ------- -------- -------- --------
Total revenues........................ 2,163 2,230 3,317 7,995 25,195 13,495 39,145
Costs and expenses:
Lease operating expenses.................... 670 575 1,207 1,732 3,741 2,096 5,551
Oil and natural gas production taxes........ 109 110 176 416 1,285 663 2,087
General and administrative expenses......... 964 994 985 1,772 3,034 1,957 3,807
Writedown of oil and natural gas
properties(2)............................. -- -- -- -- 43,497 43,497 --
Depreciation, depletion and amortization.... 466 679 1,030 3,149 9,795 5,444 16,741
------- ------- ------- ------- -------- -------- --------
Total costs and expenses.............. 2,209 2,358 3,398 7,069 61,352 53,657 28,186
------- ------- ------- ------- -------- -------- --------
Operating income (loss)....................... (46) (128) (81) 926 (36,157) (40,162) 10,959
Interest expense.............................. (175) (188) (517) (1,032) (4,213) (1,826) (8,259)
Other income (expenses)....................... -- 17 109 312 308 36 507
------- ------- ------- ------- -------- -------- --------
Income (loss) before income taxes and
extraordinary item.......................... (221) (299) (489) 206 (40,062) (41,952) 3,207
Income tax benefit (provision)................ -- -- -- -- 14,504 15,146 (1,079)
------- ------- ------- ------- -------- -------- --------
Income (loss) before extraordinary item....... $ (221) $ (299) $ (489) $ 206 $(25,558) $(26,806) $ 2,128
Extraordinary loss............................ -- -- (122) (432) (292) (292) --
------- ------- ------- ------- -------- -------- --------
Net income (loss)............................. $ (221) $ (299) $ (611) $ (226) $(25,850) $(27,098) $ 2,128
======= ======= ======= ======= ======== ======== ========
Income (loss) per common share before
extraordinary item.......................... $ (0.05) $ (0.05) $ (0.09) $ (0.05) $ (1.33) $ (1.87) $ 0.03
======= ======= ======= ======= ======== ======== ========
Net income (loss) per common share............ $ (0.05) $ (0.05) $ (0.10) $ (0.09) $ (1.34) $ (1.89) $ 0.03
======= ======= ======= ======= ======== ======== ========
CASH FLOW DATA:
Net cash provided by operating activities..... $ 642 $ 519 $ 373 $ 2,857 $ 11,788 $ 4,780 $ 15,026
Net cash used in investing activities......... (3,370) (1,473) (3,812) (16,726) (49,277) (16,850) (59,275)
Net cash provided by financing activities..... 802 2,647 5,871 17,352 45,595 14,644 65,682
OTHER FINANCIAL DATA:
EBITDA(3)..................................... $ 420 $ 568 $ 1,058 $ 4,387 $ 17,443 $ 8,815 $ 28,207
Ratio of EBITDA to interest expense........... 2.4x 3.0x 2.0x 4.3x 4.1x 4.8x 3.4x
Ratio of EBITDA to combined fixed charges and
preferred stock dividends................... 2.2x 2.8x 1.3x 2.5x 3.3x 3.0x 2.6x
Ratio of earnings to combined fixed charges
and preferred stock dividends(4)............ -- -- -- -- -- -- 1.1x
Acquisitions of oil and natural gas
properties(5)............................... 3,547 4,108 584 13,219 150,696 129,191 4,000
BALANCE SHEET DATA (AT PERIOD END):(1)
Cash and cash equivalents..................... $ 366 $ 161 $ 2,594 $ 6,076 $ 14,182 $ 8,650 $ 35,615
Working capital (deficit)..................... (2,155) (1,213) 3,561 (2,335) 2,582 1,748 30,219
Total assets.................................. 8,742 12,710 18,746 43,491 212,035 166,834 285,125
Long-term debt................................ 120 3,799 6,000 13,475 100,000 63,337 166,436
Stockholders' equity.......................... 4,864 6,320 11,328 17,775 80,426 77,142 82,990
</TABLE>
23
<PAGE> 25
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------ -------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:(1)
Production:
Oil (Mbls).................................. 40 49 116 283 522 344 790
Natural Gas (Mmcf).......................... 420 483 621 1,753 5,681 2,997 9,853
Natural Gas Equivalent (Mmcfe).............. 661 776 1,315 3,454 8,811 5,060 14,594
Average sale prices:
Oil (per Bbl)............................... $ 20.43 $ 16.46 $ 16.01 $ 17.22 $ 21.70 $ 20.62 $ 19.70
Natural gas (per Mcf)....................... 1.92 2.07 2.11 1.70 2.29 2.04 2.29
Unit economics (per Mcfe):
Average sale prices......................... 2.46 2.32 2.40 2.28 2.75 2.60 2.61
Lease operating expenses.................... 1.01 .74 .92 .50 .42 .41 .38
Oil and natural gas production taxes........ .16 .14 .13 .12 .15 .13 .14
Depreciation, depletion and amortization.... .71 .88 .70 .91 1.11 1.02 1.13
General and administrative.................. 1.46 1.28 .75 .51 .34 .38 .26
------- ------- ------- ------- -------- -------- --------
Operating income (loss)............... $ (.88) $ (.72) $ (.10) $ .24 $ .73 $ .66 $ .70
======= ======= ======= ======= ======== ======== ========
</TABLE>
- ---------------
(1) Reflects the revenues, results of operations and production subsequent to
the dates of acquisitions of various oil and natural gas properties that
affect the comparability of the data presented. In April 1992, the Company
acquired substantially all of the assets of TriSearch, Inc. The Company
acquired a 63.8% Working Interest in the GAU in December 1993 and an
additional interest of 17% in the GAU during 1994. During 1995, the Company
acquired interests in producing oil and natural gas properties in the
Mustang Island area, the Oak Hill Field, and in Eddy County, New Mexico. In
addition, on August 29, 1996, the Company completed the Merger. See Note 2
of Notes to Consolidated Financial Statements of the Company.
(2) The historical results of operations for the nine months ended September 30,
1996 include a noncash writedown of oil and natural gas properties of
approximately $28.3 million (net of deferred taxes), in accordance with the
full cost method of accounting, which resulted from the Merger. See Note 2
of Notes to Consolidated Financial Statements.
(3) See the Glossary included elsewhere in this Prospectus for the definition of
EBITDA. EBITDA is not a measure of cash flow as determined by generally
accepted accounting principles. The Company has included information
concerning EBITDA because EBITDA is a measure by certain investors in
determining the Company's historical ability to service its indebtedness;
however, this measure may not be comparable to similarly titled measures of
other companies. EBITDA should not be considered as an alternative to, or
more meaningful than, net income or cash flows as determined in accordance
with generally accepted accounting principles as an indicator of the
Company's operating performance or liquidity.
(4) For the purposes of calculating the ratio of earnings to, or deficiency of
earnings over, combined fixed charges and preferred stock dividends,
earnings consist of income before extraordinary items and income taxes plus
fixed charges, excluding capitalized interest. Fixed charges consist of
interest expense, capitalized interest, the interest component of rent
expense, amortization of debt premium, discount and financing costs, and
preferred stock dividend requirements. Preferred stock dividend requirements
consist of an amount equal to income, before income tax, which would be
required to meet the dividend requirements of outstanding preferred stock.
The deficiency of earnings over combined fixed charges and preferred stock
dividends for the years ended December 31, 1992, 1993, 1994, 1995 and 1996
and for the nine months ended September 30, 1996 were approximately $0.2
million, $0.3 million, $0.8 million, $0.5 million, $41.2 million and $43.0
million, respectively.
(5) Includes the costs of acquiring Alexander in August 1996 for approximately
$118.5 million, including the assumption of debt and liabilities of
approximately $49 million and excluding deferred income taxes of
approximately $21.8 million.
24
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Financial Statements and "Selected Historical Financial and Operating Data" and
respective notes thereto, included elsewhere herein. The information below
should not be construed to imply that the results discussed herein will
necessarily continue into the future or that any conclusion reached herein will
necessarily be indicative of actual operating results in the future. Such
discussion represents only the best present assessment by management of the
Company. Because of the size and scope of the Company's recent acquisitions and
the relatively small scale of the Company's operations prior to 1996, the
results of operations from period to period are not necessarily comparative.
OVERVIEW
During 1995, 1996 and 1997, the Company acquired an estimated 27.0 Bcfe,
134.9 Bcfe and 7.8 Bcfe in Proved Reserves, respectively (based on reserve
estimates at the date of acquisition) including the Merger with Alexander in
August 1996 whereby the Company acquired 102.1 Bcfe. See "Business and
Properties -- Acquisitions." As a result of acquisitions and efforts to increase
production from the Goldsmith Adobe Unit (the "GAU") and Cotton Valley trend,
Proved Reserves, as estimated by Netherland & Sewell, increased to 54.4 Bcfe and
181.7 Bcfe at December 31, 1995 and December 31, 1996, respectively. See
"Business and Properties -- Acquisitions."
The Company's increased reserve base and production volumes, combined with
more efficient operations, lowered lease operating expenses ("LOE") and general
and administrative expenses ("G&A"), all on a per unit of production basis. As a
result, the Company recognized net income of $2.1 million for the nine months
ended September 30, 1997, net income of $2.4 million (excluding the $28.3
million write-down of oil and natural gas properties) for the year ended
December 31, 1996 and recognized net income before extraordinary item of $0.2
million for 1995 after recording losses from operations in each year from 1992
through 1994.
In the fourth quarter of 1996, the Company began an accelerated development
and exploration program (the "Drilling Program") on its increased inventory of
properties using the net proceeds from the Series A/B Notes (as defined). The
Company had budgeted $57 million for the Drilling Program during 1997, of which
$45 million was designated for development drilling, a significant portion of
which is to convert Proved Undeveloped Reserves to Proved Developed Producing
Reserves, and $12 million was designated for exploration drilling. The Company
recently increased its development and exploratory budget by approximately $6
million and $2.5 million, respectively for the fourth quarter of 1997. As of
September 30, 1997, the Company had spent approximately $50.8 million during
1997 related to the Drilling Program of which $42.2 million was for development
drilling and $8.6 million was for exploratory drilling. An additional $4.0
million was spent for acquisitions in the same period. The success of the
Drilling Program, combined with the Company's historical acquisitions, have been
the primary cause of the increase in the Company's production.
25
<PAGE> 27
RESULT OF OPERATIONS
Overview of Production and Sales
The following table sets forth certain information regarding the production
volumes, oil and natural gas sales, average sales price, LOE, depreciation,
depletion and amortization ("DD&A") and G&A associated with the Company's oil
and natural gas sales for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------- ------------------
1994 1995 1996 1996 1997
------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Production:
Oil (Mbbls).............................. 116 283 522 344 790
Natural Gas (Mmcf)....................... 621 1,753 5,681 2,997 9,853
Natural Gas Equivalent (Mmcfe)........... 1,315 3,454 8,811 5,060 14,594
Oil and natural gas sales (in thousands):
Oil...................................... $1,852 $4,880 $11,320 $ 7,077 $15,566
Natural gas.............................. 1,307 2,978 12,999 6,104 22,585
------ ------ ------- ------- -------
Total.................................... $3,159 $7,858 $24,319 $13,181 $38,151
====== ====== ======= ======= =======
Average Sales Price:
Oil (per Bbl)............................ $16.01 $17.22 $ 21.70 $ 20.62 $ 19.70
Natural gas (per Mcf).................... 2.11 1.70 2.29 2.04 2.29
Natural gas equivalent (per Mcfe)........ 2.40 2.28 2.75 2.60 2.61
LOE (per Mcfe)............................. .92 .50 .42 .41 .38
DD&A (per Mcfe)............................ .70 .91 1.11 1.02 1.13
G&A (per Mcfe)............................. .75 .51 .34 .38 .26
</TABLE>
Nine months ended September 30, 1997 compared with nine months ended September
30, 1996
Revenues. Total revenues increased by $25.6 million (189.6%) to $39.1
million for 1997 from $13.5 million in 1996. The increase in revenues is due to
the increase in production primarily from the Merger with Alexander completed in
August 1996, and the success of the Drilling Program. Also contributing to the
increased production is the UMC Acquisition, the CA Acquisition, the Lake Boeuf
Acquisition, the W&T Acquisition, the MCNIC Acquisition and the Bayou Sorrel
Acquisition (each as defined in the Notes to the Financial Statements) completed
during 1996 (collectively, the "1996 Acquisitions"). In 1997, the Company
produced 790 Mbbls of oil, an increase of 129.7% over 344 Mbbls in 1996, and
9,853 Mmcf of natural gas, an increase of 228.8% over 2,997 Mmcf in the same
period of 1996.
Also contributing to the increase in revenues was the increase in average
natural gas prices of $0.25 per Mcf to $2.29 per Mcf for 1997 from $2.04 for
1996, offset by the decrease in average oil prices of $0.92 per barrel to $19.70
for 1997 from $20.62 for 1996.
Costs and Expenses. Lease operating expenses increased $3.5 million
(166.7%) to $5.6 million for 1997 from $2.1 million for 1996 primarily due to
the Merger, the Drilling Program and the 1996 Acquisitions. Although total lease
operating expenses increased, lease operating expenses per Mcfe decreased to
$.38 for 1997 from $.41 for 1996.
Production taxes increased $1.4 million (200.0%) to $2.1 million for 1997
compared to $0.7 million for 1996. This increase is a direct result from the
increase in total oil and natural gas revenues discussed above.
DD&A increased $11.3 million (209.3%) to $16.7 million for 1997 compared to
$5.4 million for 1996. This increase is due to the increased production from the
Drilling Program, the 1996 Acquisitions, and the Merger. The depletion rate per
Mcfe was $1.13 for 1997 compared to $1.02 for 1996. This increase in the
depletion rate is primarily due to the acquisition costs associated with the
Merger.
G&A increased $1.8 million (90.0%) to $3.8 million for 1997 although G&A
per Mcfe decreased 31.6% to $.26 for 1997 from $.38 for 1996. This decrease per
Mcfe is attributable to the increase in production from
26
<PAGE> 28
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 $6.5 million (361.1%) in
interest expense to $8.3 million for 1997 from $1.8 million for 1996, was due to
the issuance of the Notes offset by $1.5 million of interest costs related to
the Company's unproved oil and natural gas properties which was capitalized in
1997. The average balance outstanding under the Notes during 1997 was $113
million as compared to average debt outstanding under credit facilities of $26
million for 1996. The weighted average interest rate for 1997 was 10.47%
compared to 8.92% for the same period of 1996.
Net Income. Net income of $2.1 million was generated for 1997, compared
with net loss of $27.1 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. The net loss for 1996 included a net non-cash
write down of $28.3 million to the Company's oil and gas properties due to the
Merger.
Year ended December 31, 1996 compared with year ended December 31, 1995
Revenues. Total revenues increased by $17.2 million (215.1%) to $25.2
million for 1996 from $8.0 million in 1995. The increase in revenues is due to
the increase in production from the Merger with Alexander completed in the third
quarter of 1996, the continued development of the GAU, the full year inclusion
in 1996 of the 1995 acquisitions of Mustang Island, Oak Hill and the Enron
Properties (collectively, the "1995 Acquisitions") and the 1996 Acquisitions. In
1996, the Company produced 522 Mbbls of oil, an increase of 84.1% over 283 Mbbls
in 1995, and 5,681 Mmcf of natural gas, an increase of 224.1% over 1,753 Mmcf in
1995.
Also contributing to the increase in revenues was the increase in average
oil prices of $4.48 per barrel to $21.70 for 1996 from $17.22 for 1995, and the
increase in average natural gas prices of $.58 per Mcf to $2.28 per Mcf for 1996
from $1.70 for 1995.
Costs and Expenses. Total costs and expenses, excluding the write-down
described below, increased $10.8 million (152.6%) to $17.9 million for 1996 from
$7.1 million for 1995. Lease operating expenses and production taxes increased
$2.9 million (138.1%) to $5.0 million for 1996 from $2.1 million for 1995
primarily due to the development of the GAU, the 1995 Acquisitions, the 1996
Acquisitions and the Merger. Lease operating expenses per Mcfe decreased by $.08
to $.42 per Mcfe for 1996 from $.50 per Mcfe for 1995. This decrease is a result
of the lower operating costs of the acquired properties combined with reductions
in costs at the GAU obtained through economies of scale resulting from the
additional wells drilled during 1995 and 1996.
DD&A increased $6.6 million (211.0%) to $9.8 million for 1996 compared to
$3.1 million for 1995. This increase is due to the increased production from the
GAU, the 1995 Acquisitions, the 1996 Acquisitions and the Merger. The depletion
rate per Mcfe was $1.11 for 1996 compared to $0.91 for 1995. This increase in
the depletion rate is primarily due to downward revisions in estimated Proved
Reserves at December 31, 1995 and the acquisition costs associated with the
Merger with Alexander.
At August 29, 1996, as a result of allocating the cost of the Merger with
Alexander, under the purchase method of accounting, to the proved oil and
natural gas properties acquired in connection with the Merger, the Company
recognized a non-cash write-down of the oil and natural gas properties, net of
related deferred income taxes of $28.3 million, based on prices received in
August 1996 of $20.75 per Bbl and $2.21 per Mcf. See Note 2 of Notes to
Financial Statements.
Although G&A increased $1.2 million to $3.0 million for 1996, G&A per Mcfe
decreased to $0.34 (33.3%) for 1996 from $0.51 for 1995. This decrease is
attributable to the increase in production from the GAU, the 1995 and 1996
Acquisitions and to a lesser extent the Merger, without a proportionate increase
in the G&A costs to the Company.
Other Income and Expenses. The increase of $3.2 million (320.0%) in
interest expense to $4.2 million for 1996 from $1.0 million for 1995, was due to
the increase in the amount of outstanding debt as a result of
27
<PAGE> 29
borrowings under a prior credit facility and the Revised Credit Facility to fund
the 1996 Acquisitions and the Merger during 1996, and was partially offset by
the decline in weighted average interest rates. Also contributing to the
increase was the issuance of the Series A/B Notes. The average debt outstanding
for 1996 was $41.4 million, including the Series A/B Notes, as compared to $10.6
million for 1995. The weighted average interest rate for 1996 was 8.64% compared
to 9.66% for 1995.
Net Loss. A net loss of $25.8 million was generated for 1996, compared with
a net loss of $0.2 million for 1995. The loss for 1995 includes an extraordinary
charge resulting from the write-off of unamortized loan costs attributable to a
prior credit facility which was paid off out of proceeds from the Revised Credit
Facility. The net loss for 1996 includes a net non-cash write-down of $28.3
million to the Company's oil and natural gas properties, partially offset by the
increased operating income generated by the Merger with Alexander, the GAU, the
1995 Acquisitions, the 1996 Acquisitions and the Merger. Also included in the
net loss was a loss on sale of marketable securities of $0.1 million for 1996 as
compared to a gain of $0.2 million for 1995.
Year ended December 31, 1995 compared with year ended December 31, 1994
Revenues. Total revenues increased by $4.7 million (141.0%) to $8.0 million
for 1995 from $3.3 million for 1994. The increase in revenues is principally due
to the continued development of the GAU and the increase in production due to
the 1995 Acquisitions. In 1995, the Company produced 283 Mbbls of oil, an
increase of 145.1% over 116 Mbbls in 1994, and 1,753 Mmcf of natural gas, an
increase of 182.4% over 621 Mmcf in 1994. The increase in oil production is
almost entirely a result of the GAU's increased oil production resulting from
the development since August 1994. The 1995 Acquisitions accounted for the
increased natural gas production. Also contributing to the increase in revenues
was the increase in average oil prices of $1.21 per barrel to $17.22 for 1995
from $16.01 for 1994. The decline in average natural gas prices of $0.41 per Mcf
to $1.70 for 1995 down from $2.11 for 1994 was offset by the 182.4% increase in
natural gas production.
Costs and Expenses. Total costs and expenses increased $3.7 million
(108.0%) to $7.1 million for 1995 from $3.4 million for 1994. Lease operating
expenses and production taxes increased $0.7 million (55.3%) to $2.1 million for
1995 from $1.4 million for 1994 primarily due to the development of the GAU and
the 1995 Acquisitions. Lease operating expenses and production taxes
attributable to the GAU increased $0.3 million from 1994 to 1995, representing
37.2% of the total increase for the Company. Lease operating expenses and
production taxes attributable to the 1995 Acquisitions totaled $0.3 million for
1995, representing 33.5% of the total increase for the Company since those
properties were not purchased until 1995. Lease operating expenses as a percent
of oil and natural gas sales decreased to 22.0% for 1995 from 38.2% for 1994.
This decrease is a result of the lower operating costs of the acquired
properties, reductions in costs at the GAU obtained through economies of scale
resulting from the additional wells drilled since August 1994 and fewer
workovers performed during 1995 than during 1994.
DD&A increased $2.1 million (205.8%) to $3.1 million for 1995 compared to
$1.0 million for 1994. This increase, was, in part, related to the increased
production from the GAU and the 1995 Acquisitions. In addition, the depletion
rate on oil and natural gas properties increased to $1.05 per Mcfe for the
fourth quarter from $0.79 per Mcfe due to downward revisions in estimated Proved
Reserves at December 31, 1995.
Although G&A increased $0.8 million to $1.8 million for 1995, G&A per Mcfe
decreased to $0.51 (32.0%) for 1995 from $0.75 for 1994. This decrease is
attributable to the increase in production from the GAU and the 1995
Acquisitions, without proportionate increase in G&A costs to the Company.
Other Income and Expenses. The increase of $0.5 million (99.6%) in interest
expense to $1.0 million for 1995 from $0.5 million for 1994, was due to the
increase in the amount of outstanding debt as a result of borrowings under a
prior credit facility with Bank One obtained by the Company in 1994 (the "1994
Credit Facility") and was partially offset by a decline in weighted average
interest rates. The average debt outstanding for 1995 was $10.6 million as
compared to only $5.2 million for 1994. The weighted average interest rate for
1995 was 9.66% as compared to 11.24% for 1994. During 1995, the Company realized
a gain of $0.2 million on the sale of marketable securities.
28
<PAGE> 30
Net Loss. Income before extraordinary item of $0.2 million was generated
for 1995, compared with a loss before extraordinary item of $0.5 million for
1994. This increase is directly the result of the increased production on the
GAU and the increase in production resulting from the 1995 Acquisitions. Also
contributing to this increase was a realized gain of $0.2 million on the sale of
marketable securities in 1995.
A net loss of $0.2 million, after an extraordinary charge of $0.4 million,
was generated for 1995, compared with a net loss of $0.6 million, after an
extraordinary charge of $0.1 million, in 1994. The extraordinary charge in 1995
resulting from the write-off of unamortized loan costs attributable to Texas Gas
Fund I credit facility obtained by the Company in June 1994 ("Texas Gas Fund
I"), which was paid off with proceeds from the 1994 Credit Facility. The
extraordinary charge in 1994 was in connection with the write-off of unamortized
loan costs attributable to the Company's credit facility with Bank One obtained
in 1992, which was paid off in 1994 with proceeds from the credit facility with
Texas Gas Fund I.
LIQUIDITY AND CAPITAL RESOURCES
Nine months ended September 30, 1997 compared with nine months ended September
30, 1996
Net cash provided by operating activities was $15.0 million for the nine
months ended September 30, 1997, compared to $4.8 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, due to results
of the Drilling Program, the 1996 Acquisitions and the Merger discussed above,
partially offset by the increase in working capital requirements due to the
Company's growth.
Net cash used by investing activities was $59.3 million for 1997 compared
with $16.9 million for 1996. The cash used by investing activities for 1997
included $4 million for oil and gas acquisitions and $50.8 million for
exploration and development expenditures related to the Company's Drilling
Program.
Net cash provided by financing activities was $65.7 million for 1997
compared with $14.6 million for the same period in 1996. The net cash provided
by financing activities during 1997 primarily consisted of proceeds from the
issuance of the Series C Notes. In 1996, cash provided by financing activities
consisted primarily of proceeds from the issuance of the Series A Notes and
proceeds from the issuance preferred stock offset by repayments of long-term
debt.
The Company's working capital surplus at September 30, 1997, was $30.1
million compared to a working capital surplus at December 31, 1996, of $2.6
million. The surplus increase was due primarily to the issuance of the Series C
Notes partially offset by the expenditures of cash for oil and gas acquisition,
exploration, and development activities.
Year ended December 31, 1996 compared with year ended December 31, 1995
Net cash provided by operating activities was $11.8 million for the year
ended December 31, 1996, compared to $2.9 million for the same period in 1995.
The increase in cash flow from operating activities is primarily due to the
significant increase in income from operations before DD&A resulting from the
1995 Acquisitions, the 1996 Acquisitions and the Merger discussed above.
Net cash used in investing activities was $49.3 million for 1996 compared
with $16.7 million for 1995. This increase was principally due to increased
expenditures for oil and natural gas property acquisitions, the 1996
Acquisitions, the Merger, and exploration and development costs.
Net cash provided by financing activities was $45.6 million for 1996
compared with $17.4 million for 1995. The cash provided by financing activities
during 1996 primarily consisted of borrowings under credit facilities of $69.0
million, net proceeds from issuance of the Series A/B Notes of $96.1 million,
and proceeds from the issuance of the Series D Preferred Stock and the Series E
Preferred Stock of an aggregate of $15.0 million, partially offset by repayments
of borrowings under various credit facilities and debt assumed in the Merger
aggregating $141.5 million. Borrowings under credit facilities in 1995 were used
to fund acquisitions, development of the GAU and working capital.
29
<PAGE> 31
The Company's working capital at December 31, 1996 was $2.6 million
compared to a deficit at December 31, 1995 of $2.3 million. The improvement was
due primarily to refinancing of borrowings under a credit facility.
Year ended December 31, 1995 compared with year ended December 31, 1994
At December 31, 1995, the Company had existing cash and cash equivalents of
$6.1 million. Net cash provided by operating activities was $2.9 million for
1995, compared to $0.4 million for 1994. The increase in cash flow from
operating activities is primarily due to the significant increase in income from
operations before DD&A.
Net cash used in investing activities was $16.7 million for 1995 compared
with $3.8 million for 1994. This increase was principally due to expenditures
for development of the GAU and the cash used in the 1995 Acquisitions.
Net cash provided by financing activities was $17.4 million for 1995
compared with $5.9 million for 1994. The cash provided by financing activities
during 1995 primarily consisted of increased borrowings under a credit facility
of $20.5 million and the net proceeds from the issuance of the Series C
Preferred Stock of $4.0 million. Borrowings under the credit facility were used
to repay outstanding borrowings under the Texas Gas Fund I of $6.0 million and
to fund acquisitions, development of the GAU and working capital.
The Company's working capital deficit at December 31, 1995 was $2.3
million. This deficit was primarily attributable to the inclusion of then
current portion of the borrowings under a credit facility which totaled $6.5
million, which was offset in part by an increased cash and accounts receivable
position. Also contributing to the working capital deficit was the increase in
accounts payable resulting from the increased development activities during
1995.
FUTURE CAPITAL REQUIREMENTS
The Company has made, and will continue to make, substantial capital
expenditures for acquisition, development, and exploration 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 $50.8 million was spent during the first nine
months of 1997. The Company recently increased its development and exploratory
budget by approximately $6 million and $2.5 million, respectively, for the
fourth quarter of 1997. The Company is not contractually committed to expend the
budgeted funds. In 1998, the Company has established an aggregate development
and exploration capital budget for its existing properties of approximately $70
million of which approximately $50 million was for exploitation and development
activities and approximately $20 million was for exploration projects.
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 1998 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 1998, 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.
30
<PAGE> 32
10 3/4% SENIOR NOTES DUE 2006
On November 1, 1996, the Company closed the offering of, and issued $100
million aggregate principal amount of unregistered 10 3/4% Series A Notes due
2006. The net proceeds of the Series A Notes of approximately $96.1 million were
used to repay approximately $62.0 million of borrowings under the predecessor to
the Revised Credit Facility and to increase the Company's working capital. In
1997, the Series A Notes were exchanged for the registered 10 3/4% Series B
Notes due 2006 which are substantially identical to the Series A Notes.
Collectively, the Series A Notes and Series B Notes are referred to as the
"Series A/B Notes." On August 21, 1997, the Company closed the offering of $65.0
million aggregate principal amount of its unregistered 10 3/4% Series C Notes.
The net proceeds of the Series C Notes of approximately $64.8 million were used
to repay approximately $23.0 million of borrowings under the Revised Credit
Facility and to increase the Company's working capital. In November 1997, the
Company commenced an exchange offer (the "Exchange Offer") of the Series A/B
Notes and the Series C Notes for registered 10 3/4% Series D Notes due 2006. The
Series D Notes are substantially identical to the Series A/B Notes and the
Series C Notes. Collectively, the Series A/B Notes, the Series C Notes and the
Series D 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. The Notes
mature November 1, 2006, but may be redeemed after November 1, 2001, at the
Company's option. The Indentures governing the Notes contain certain covenants,
including, but not limited to covenants restricting the Company's and its
Restricted Subsidiaries' (as defined), ability to incur additional indebtedness.
See "Description of Certain Indebtedness -- Series A/B Notes and Series C/D
Notes," Note 4 to the Financial Statements and Note 4 to the Interim Financial
Statements.
CREDIT FACILITIES
On August 29, 1996, in connection with the Merger with Alexander, the
Company entered into a credit facility (as amended, the "Revised Credit
Facility") with Bank One, as Bank and Administrative Agent, and the Credit
Lyonnais New York Branch, as Bank and Syndication Agent (collectively, the
"Banks"). The Revised Credit Facility initially consisted of a $100.0 million
reducing revolving line of credit, with an initial borrowing base of $60.0
million and a $5.0 million term loan. Interest under the reducing line of credit
was payable monthly at the Bank One base rate. The proceeds from the Revised
Credit Facility were used to repay the Prior Credit Facility and the existing
indebtedness of a subsidiary formed in connection with the Merger with
Alexander, resulting in an extraordinary charge of $292,372 or $.01 per common
share.
On November 1, 1996, the Company repaid the outstanding borrowings under
the Revised Credit Facility with a portion of proceeds from the issuance of
$100.0 million principal amount of Series A/B Notes. See Note 4 of Notes to the
Financial Statements.
In connection with the issuance of the Series A/B Notes, the Company
amended the Revised Credit Facility. The borrowing base, pursuant to the amended
Revised Credit Facility, was reduced to $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. No principal reductions will be
required before the next borrowing base redetermination scheduled for the first
quarter of 1998. The principal is due at August 29, 2000. Interest is payable
monthly and is calculated at the Bank One base rate, as determined from time to
time by Bank One (which increases by 0.25% if the outstanding loan balance is
greater than 75% of the borrowing base). The Company may elect to calculate
interest under the EuroDollar Rate, as defined in the Revised Credit Facility.
At September 30, 1997, the Company had no outstanding indebtedness under the
amended Revised Credit Facility.
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 Revised Credit Facility.
The Company granted to the Banks liens on substantially all of the
Company's oil and natural gas properties, whether currently owned or hereafter
acquired, and a negative pledge on all other oil and natural gas properties. The
Revised Credit Facility requires, among other things, semiannual engineering
reports
31
<PAGE> 33
covering oil and natural gas properties, and maintenance of certain financial
ratios, including the maintenance of a minimum interest coverage, a current
ratio, and a minimum tangible net worth.
The Revised Credit Facility includes other covenants prohibiting cash
dividends, distributions, loans, or advances to third parties, except that cash
dividends on preferred stock will be allowed so long as no event of default
exists or would exist as 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
September 30, 1997, the Company was not in violation of any covenants of the
Revised Credit Facility. See "Description of Certain Indebtedness -- Revised
Credit Facility," Note 3 of Notes to the Financial Statements and Note 3 of
Notes to the Interim Financial Statements.
OUTSTANDING PREFERRED STOCK
In June 1994, the Company consummated the sale of $5.0 million of the
Series B Preferred Stock. Fifty thousand shares of the Series B Preferred Stock
were sold by the Company at $100 per share. The Series B Preferred Stock is
convertible into shares of the Common Stock at a conversion price of $1.625 per
share. In October 1997, 13,813 shares of the Series B Preferred Stock were
converted into Common Stock, leaving 38,087 shares of the Series B Preferred
Stock outstanding.
In June 1995, the Company consummated the sale of $4.0 million of the
Series C Preferred Stock. Forty thousand shares of the Series C Preferred Stock
were sold by the Company at $100 per share. The Series C Preferred Stock is
convertible into shares of the Common Stock at a conversion rate of $2.00 per
share. The Series B Preferred Stock and Series C Preferred Stock require that
dividends be paid on the Series B Preferred Stock and Series C Preferred Stock
before any dividends are paid on the Common Stock. In October 1997, 17,000
shares of the Series C Preferred Stock were converted into Common Stock, leaving
23,000 shares of the Series C Preferred Stock outstanding.
In August 1996, the Company completed the sale of 100,000 shares of the
Series D Preferred Stock for $10.0 million and 50,000 shares of the Series E
Preferred Stock for $5.0 million. The Series D Preferred Stock and Series E
Preferred Stock are convertible into shares of the Common Stock at a conversion
price of $2.25 per share. In conjunction therewith, the Company agreed to extend
the date at which it may first redeem the Series B Preferred Stock and Series C
Preferred Stock from June 14, 1997 to June 14, 1999. In October 1997, 38,000
shares of the Series E Preferred Stock were converted into Common Stock, leaving
12,000 shares of the Series E Preferred Stock outstanding.
See "Description of Capital Stock," Note 6 of Notes to the Financial
Statements and Note 5 of Notes to Interim 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 charges which are fixed and determinable by
existing contracts. The net book value is compared to the ceiling on a quarterly
and yearly basis. The excess, if any, of the net book value above the ceiling is
required to be written off as a non-cash expense. As a result of allocating
additional cost, under the purchase method of accounting, to the oil and natural
gas properties in connection with the Merger, the Company recognized a non-cash
writedown of its oil and natural gas properties of approximately $28.3 million,
net of deferred taxes. The amount of the actual writedown was charged to expense
in the third quarter of 1996, the period in which the Merger was consummated. At
December 31, 1996 and September 30, 1997 the ceiling exceeded the net book value
of the Company's oil and natural gas properties based on the weighted average
prices of crude oil and natural gas, received by the Company on those dates.
However, there can be no assurance that there will not be any writedowns in
future periods under the full cost method of accounting as a result of sustained
decreases in oil and natural gas prices or other factors.
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<PAGE> 34
RECENT ACCOUNTING PRONOUNCEMENTS
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, the
Outstanding Preferred Stock and the Series F, will be excluded. Adoption of SFAS
128 will not impact primary earnings per share for the years ended December 31,
1994, 1995 and 1996 and the nine months ended September 30, 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 the
fully diluted earnings per share is not expected to be significant.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income ("SFAS 130"). SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. SFAS 130 is effective for
fiscal years beginning after December 15, 1997. The adoption of SFAS 130 will
require additional disclosures in the Company's financial statements, but will
not have any impact on the financial position or results of operations of the
Company.
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 1995 and 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 September 30, 1997, the Company had no hedging or basis
swap agreements outstanding. During the twelve months ended December 31, 1996
and the nine months ended September 30, 1997, the Company recognized a net gain
of $20,315 and $0, respectively, related to hedging transactions.
At September 30, 1997, the Company had entered into forward sales contracts
with three purchasers covering approximately 15 Mmcf of natural gas per day
which represented approximately 25% of its average daily production at that
time. Contracts covering 8 Mmcf per day expire in March 1998 and contracts
covering 7 Mmcf per day expire in March 1999. Deliveries under these contracts
are priced based on NYMEX prices less a differential whereby the Company may fix
the price for deliveries under these contracts at any time three days prior to
the close of the then current contract based on the NYMEX prices at that time.
The Company pays the cost of transportation of the natural gas to the delivery
point specified in the contracts. At September 30, 1997 the Company had fixed
the prices of a total of approximately 921 Mmcf of natural gas to be delivered
in October and November 1997 at an average price of $3.014 per Mcf.
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<PAGE> 35
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 September 30, 1997 and 1996.
YEAR 2000 MODIFICATIONS
The Company has reviewed its computer systems in order to evaluate
necessary modifications for the year 2000 and expects that it will not incur
material expenditures to complete any such modifications.
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<PAGE> 36
BUSINESS AND PROPERTIES
GENERAL
The Company was incorporated under the laws of the State of Delaware on
November 20, 1990. Effective June 11, 1991, Big Piney Oil and Gas Company ("Big
Piney") and VP Oil, Inc. ("VP") merged with and into the Company. On August 29,
1996, Alexander was merged with and into a wholly-owned subsidiary of the
Company, which subsidiary was merged with and into the Company on December 31,
1996.
NEG is an independent energy company engaged in the acquisition,
exploitation, development, exploration and production of oil and natural gas
properties in major producing basins in Texas, Oklahoma, Arkansas, Mississippi,
Alabama and offshore in the Gulf of Mexico. By acquiring properties with
significant reserve and production enhancement potential primarily in these
areas and focusing its efforts on the subsequent exploitation and development of
those properties, the Company has substantially increased its reserves,
production and cash flow from operations. The Company generally seeks to acquire
properties where it can act as operator and that have a balance between oil and
natural gas with a mix of both short and long reserve lives. As a result of
several acquisitions in 1996, which substantially increased its reserve and
property base, the Company has implemented a comprehensive capital expenditure
program to enhance existing production and convert Proved Undeveloped Reserves
to Proved Developed Producing Reserves through development drilling, workovers,
recompletions and other production enhancement activities. As a complement to
these efforts, the Company has also developed an exploration program that, in
conjunction with other industry partners, is concentrating primarily on onshore
prospects in Texas, Louisiana, Mississippi and Alabama, and offshore Gulf of
Mexico prospects in shallow state waters in Texas.
At December 31, 1996, the Company had estimated Proved Reserves, as
determined from reserve reports prepared by Netherland & Sewell, of 181.7 Bcfe
with a PV10% at that date of approximately $292 million. The reserves were
approximately 71% natural gas and approximately 57% Proved Developed Reserves.
At September 30, 1997, the Company estimates that approximately 62% of its
reserves were natural gas.
As a result of its acquisition, exploitation, development and exploration
activities, the Company has achieved substantial growth as evidenced by:
- An increase in estimated net Proved Reserves from 6.8 Bcfe at December
31, 1991 to 181.7 Bcfe at December 31, 1996.
- An increase in PV10% from approximately $6 million at December 31, 1991
to approximately $292 million at December 31, 1996.
- An increase in average daily production from 1.2 Mmcfe for the year ended
1991 to 24.1 Mmcfe for the year ended 1996, and 58.2 Mmcfe for the
quarter ended September 30, 1997.
- An increase in EBITDA from approximately $0.3 million for 1991 to
approximately $17 million for 1996, and approximately $28 million for the
nine months ended September 30, 1997.
- An increase in cash flow from operations before changes in operating
assets and liabilities from $0.2 million for 1991 to approximately $14
million for 1996, and approximately $21 million for the nine months ended
September 30, 1997.
BUSINESS STRATEGY
The Company's strategy is to increase reserves, production, per share cash
flow from operations and earnings through the Company's balanced program of
acquisitions, exploitation and development drilling on its substantial property
inventory, and a growing exploration program pursued in conjunction with
industry partners. Management believes that the Company's recent acquisitions
have provided a significant number of exploitation and development projects and
will continue to provide it with additional exploration opportunities.
The Company believes its emphasis on the factors described below will
enhance its ability to achieve its long-term goals and objectives.
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<PAGE> 37
Selective Acquisitions. The Company's primary source of growth to date has
been its ability to identify and acquire properties or entities that allow it to
increase reserves, production and cash flow from operations and provide
continuing exploitation opportunities. From January 1, 1991 through September
30, 1997, the Company acquired approximately 206.3 Bcfe of net Proved Reserves
(estimated at the time of their respective purchases) at an average cost per
Mcfe of approximately $0.84. The Company's Merger with Alexander in 1996 added a
significant amount of reserves and allowed the Company to expand its
Mid-Continent and East Texas presence. The Company's acquisitions, including its
purchase of the Bayou Sorrel properties where the Company has experienced recent
exploration success, have provided the Company with a substantial inventory of
exploitation, development and exploration opportunities. Consistent with its
historical acquisition strategy, the Company expects to continue to focus on
purchases of underdeveloped properties in its core areas of interest either
through negotiated property acquisitions or acquisitions of other energy
companies. As a result of its increased reserves, cash flow and operating base,
the Company may seek to make larger acquisitions which meet its criteria.
Exploitation and Development. During 1994, 1995 and 1996, the Company
participated in the drilling of 63 Gross (54 Net) Development Wells. The Company
has drilled 52 Gross (45 Net) Development Wells in the first nine months of
1997. All but five of the Development Wells drilled since 1993 were completed as
commercially productive. The Company has increased its focus on the exploitation
and development of its properties through development drilling, workovers,
redrills, recompletions, potential waterfloods and other production enhancement
techniques to maximize its reserves and production. As a result, the Company
recently increased its 1997 budget to spend approximately $9 million in the last
quarter of 1997 and an estimated $50 million for 1998 for development and
exploitation activities, a major portion of which is targeted to develop Proved
Undeveloped Reserves.
Significant Operating Control. The Company generally prefers to operate
and, except for its exploratory prospects, own a majority Working Interest in
its oil and natural gas properties. This operating philosophy enables the
Company to control the nature, timing and costs of exploration and development
of its properties, as well as the marketing of the resulting production. At
September 30, 1997, the Company operated approximately 568 of the 895 producing
wells in which it owns an interest. In November 1997, the Company agreed to
sell, for approximately $6 million, Working Interests in 274 nonstrategic
producing wells, 103 of which were operated by the Company, bringing its total
percentage of operated wells to approximately 75%.
Low Operating Cost Structure. The Company seeks to increase its cash flow
from operations by maintaining a low unit operating cost structure through its
focus on increasing production while reducing nonstrategic interests and
limiting its field operating and corporate overhead expenses. Through these
efforts, the Company has reduced historical lease operating expenses per unit of
production by approximately 46% from $0.70 per Mcfe produced for the year ended
December 31, 1991 to $0.38 per Mcfe for the nine months ended September 30,
1997. During this same period, the Company decreased general and administrative
expenses per unit of production by approximately 68% from $0.80 per Mcfe
produced to $0.26 per Mcfe.
Exploration Projects. To balance its relatively lower risk development and
exploitation activities and to enhance its opportunities for growth, the Company
will continue to emphasize exploratory drilling as an important aspect of its
business. The Company seeks to reduce the greater risks normally associated with
exploratory drilling by (i) allocating only a limited portion of its capital
expenditure budget to exploration activities, (ii) limiting its Working
Interests in exploratory prospects through participation by industry partners,
(iii) obtaining operational control of its exploratory prospects and (iv)
utilizing advanced seismic and drilling technologies, including 3-D seismic
surveys, where cost-effective. The Company's exploration program targets
prospects with significant reserve potential, focusing primarily on its
inventory of exploratory prospects in onshore Texas, Louisiana, Mississippi and
Alabama and offshore Gulf of Mexico. During the years ended 1994, 1995 and 1996,
the Company participated in drilling 12 Gross (4.3 Net) Exploratory Wells.
During the nine months ended September 30, 1997, the Company participated in
drilling 7 Gross (2.6 Net) Exploratory Wells. From 1994 through September 30,
1997, 5 Gross (2.2 Net) Exploratory Wells have been completed as commercially
productive. This represents a 26% success rate for the Company's exploratory
drilling. To supplement its internal prospect generation activities and to
provide additional expertise in prospect generation and analysis for its
exploration program, as well as to control prospect generation costs, the
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<PAGE> 38
Company has entered into the Sandefer Exploration Venture under which prospects
in Louisiana, Texas and Mississippi are generated for NEG's consideration and
Sandefer participates with the Company in the evaluation, marketing and sale of
such prospects. The Company has budgeted approximately $5.5 million for the
fourth quarter of 1997 and approximately $20 million in 1998 for exploration
projects.
Experienced Incentivized Management Team. The Company's Board of Directors,
executive officers and technical staff have considerable industry expertise. As
of November 19, 1997 the Board of Directors and executive officers collectively
owned approximately 8% of the outstanding shares of Common Stock. All of the
Company's directors, executive officers and key employees either own, or hold
options to acquire, shares of Common Stock.
ACQUISITIONS
Since its formation in 1990, the Company has actively engaged in the
acquisition of producing oil and natural gas properties, primarily in Texas,
Oklahoma, Arkansas, Louisiana and offshore in the Gulf of Mexico. See Note 2 to
Notes to the Financial Statements.
<TABLE>
<CAPTION>
ESTIMATED
PROVED
RESERVES AT ESTIMATED
DATE OF ACQUISITION ACQUISITION
LOCATION OF ACQUISITION COST COST
DATES PRINCIPAL SELLER PRINCIPAL PROPERTIES (BCFE)(1) (IN MILLIONS)(2) PER MCFE(2)
- ----- ---------------- -------------------- ----------- ---------------- -----------
<C> <S> <C> <C> <C> <C>
1991 Big Piney Oil & Gas Company.......... Wyoming 3.1 $ 1.9 $ 0.61
1992 TriSearch, Inc....................... GAU 6.1 4.1 0.67
1993 Oil Search Partnerships.............. GAU 1.4 0.7 0.50
1993 Bligh Petroleum, Inc................. GAU 19.0 3.5 0.18
1994 Various Working Interest Owners...... GAU 7.0 0.6 0.09
1995 Sierra 1994 Limited Partnership...... Cotton Valley trend 20.7 9.1 0.44
1995 Enron Oil and Gas Company............ New Mexico 1.8 2.1 1.17
1995 Sierra Mineral Development L.C....... Mustang Island 4.5 2.0 0.44
1996 C/A Limited.......................... Mustang Island 3.1 0.7 0.23
1996 UMC Petroleum Corporation(3)......... Mustang Island 1.3 1.0(3) 0.77
1996 Araxas Energy Corporation and
O'Sullivan Oil and Gas Company,
Inc................................ Lake Boeuf 17.5 7.2 0.41
1996 Alexander Energy Corporation......... Anadarko Basin,
Cotton Valley trend,
Arkoma Basin 102.1 118.5(4) 1.16
1996 Panaco, Inc.......................... Bayou Sorrel 10.0 8.0(5) 0.80
1996 W & T Offshore, Inc.................. East Bayou Sorrel 0.3 3.4 *
1996 MCNIC Oil & Gas Company.............. East Bayou Sorrel 0.6 7.0 *
1997 John Hancock Mutual Life Insurance
Company............................ Anadarko Basin,
Cotton Valley trend,
Arkoma Basin 7.8 4.0 0.51
----- ------- ------
Total................................ 206.3 $173.8 $ 0.84(6)
===== ======= ======
</TABLE>
- ---------------
* Not material.
(1) Estimated Proved Reserves at date of acquisition are based on reserve
reports prepared for the specific acquisition or, if one was not prepare at
the date of acquisition, are based on the first year end reserve report
prepared following the acquisition date and adjusted for production
subsequent to the date of acquisition.
(2) Does not include costs to develop these properties, which properties include
a substantial amount of Proved Undeveloped Reserves.
(3) Acquisition cost does not include approximately $500,000 allocated to the
related production facilities.
(4) Acquisition cost includes assumed indebtedness of approximately $49.0
million attributable to Alexander and excludes deferred income taxes of
$21.8 million. See Note 2 to Notes to Consolidated Financial Statements.
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<PAGE> 39
(5) Acquisition cost does not include approximately $3.5 million allocated to
the related production facilities the rights to produce hydrocarbons from
depths below feet.
(6) Represents weighted average cost per Mcfe for all acquisitions shown.
The Company continually reviews potential acquisitions and anticipates
making additional acquisitions if such properties fit into its overall business
strategy. The Company does not have a budget specifically for acquisitions,
however, since their timing and size cannot be predicted. As of the date of this
Prospectus, the Company has no commitments, contracts, understanding or
arrangements at the present time with respect to any material acquisitions.
DEVELOPMENT AND EXPLOITATION
While acquisitions historically have been the primary focus of the
Company's business strategy, the Company has accelerated the development and
exploitation of its existing properties by drilling Development Wells,
recompleting and reworking existing wells and, where appropriate, the potential
implementation of Secondary Recovery projects, including waterfloods.
Anadarko Basin. At December 31, 1996, approximately 40% (72.2 Bcfe) of the
Company's Proved Reserves were located in the Anadarko Basin in west central
Oklahoma. The Anadarko Basin is considered a mature natural gas producing
province that is characterized by multiple producing horizons and relatively
long reserve lives. Drilling a Producing Well on these locations not only gives
the Company the opportunity to convert Proved Undeveloped Reserves to Proved
Developed Producing reserves but it also potentially provides additional PUD
locations on the Company's leasehold acreage.
The Company's Anadarko properties have generally been drilled on 640 acre
producing units. The Company was successful in demonstrating to Oklahoma
regulators that deeper wells in the Anadarko Basin will not efficiently drain
640 acres and obtained authorization for increased density drilling on smaller
acreage units. Further, under the forced pooling rules in Oklahoma, even if the
Company is not the operator of the property for which increased density drilling
has been approved, the Company may propose to drill and operate additional wells
on the original production unit. Frequently this results in the proposing party
owning a larger portion of newly drilled wells because other Working Interest
owners may decline to participate and forced pooling occasionally results in the
proposing party becoming the operator of the newly proposed wells. The Company
intends to continue its increased density drilling strategy in the Anadarko
Basin.
As of December 31, 1996, the Company had identified 34 PDNP and 55 PUD
drilling locations in the Anadarko Basin. The Company had budgeted to drill
approximately 23 Gross (12.3 Net) Wells in the Anadarko Basin for the year
ending December 31, 1997. During the nine months ended September 30, 1997, 12.0
Gross (8.0 Net) Wells have been drilled. The Company's 1998 capital expenditure
budget provides for further development activity in the Anadarko Basin. The
Company anticipates drilling at least 30 Gross (15.0 Net) Wells in the Anadarko
Basin in 1998. These wells may produce in zones at depths ranging from 2,000 to
25,000 feet, although the Company's wells typically are completed in horizons
ranging in depth between 7,000 and 15,000 feet.
Cotton Valley Trend. At December 31, 1996, approximately 20% (36.7 Bcfe) of
the Company's Proved Reserves were located in the Cotton Valley trend in
Harrison and Rusk counties in East Texas. The Cotton Valley formation is
generally 1,500 to 2,000 feet thick and is found at depths of 8,500 to 10,500
feet in the Company's area of interest. These properties produce from low
permeability reservoirs that generally contain relatively long life natural gas
reserves.
The original development of the Cotton Valley trend was based upon 640 acre
drilling spacing units, but historical production results have revealed that
wells drilled on this spacing are generally insufficient to adequately drain the
reservoir due to the low permeability of the formation. New studies have
indicated that developing these tight formations on 80 acre spacing units more
efficiently recovers reserves in this region. The Cotton Valley trend properties
are now subject to revised field rules established by the Texas Railroad
Commission that permit drilling on 160 acre or, alternatively, on 80 acre
spacing units, without obtaining a special ruling from the Texas Railroad
Commission for each well. The Company has also been successful in
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<PAGE> 40
obtaining the Texas Railroad Commission's approval to indefinitely suspend
maximum allowable production rates. Due to incentives created to drill on
certain leases of the Cotton Valley trend, production from some of the Company's
Cotton Valley trend properties has qualified for severance tax abatements.
As of December 31, 1996, the Company had identified 4 PDNP and 19 PUD
locations in the Cotton Valley trend and had budgeted to drill and complete 12
Gross (12.0 Net) Wells for the year ended December 31, 1997. During the nine
months ended September 30, 1997, the Company had drilled 10 Gross (9.8 Net)
Wells. A significant portion of the cost to complete these wells is incurred due
to the low permeability of interbedded sandstones and shales, which requires
large hydraulic fracture stimulation, typically of multiple zones of the
producing formation, to obtain the increased production levels necessary to make
such wells commercially viable. The Company anticipates drilling 4 Gross (3.3
Net) wells in the Cotton Valley trend in 1998. All of these wells will be
drilled on PUD locations where the Company owns in excess of 95% of the Working
Interests in the drilling units.
Goldsmith Adobe Unit. At December 31, 1996, approximately 14% (25.0 Bcfe)
of the Company's Proved Reserves were located in the 7,880 acre GAU, which is in
the Permian Basin located in West Texas. This production unit is operated by the
Company and it owns approximately a 95% Working Interest in the GAU.
Originally the GAU was drilled on 40 acre spacing units. Previous operators
had drilled several wells on 20 acre spacing units and, based on the results of
this drilling and 20 acre spacing development on adjoining leases, the Company
began a drilling program in July 1994 to develop the GAU on 20 acre spacing
units. The Company drilled six wells during 1994, 22 wells during 1995 and 28
wells in 1996.
The Company had budgeted to drill an additional 29 Gross (27.5 Net) Wells
in the GAU for the year ending December 31, 1997. During the nine months ended
September 30, 1997, 19 Gross (18.0 Net) wells have been drilled. The Company's
1998 development and exploration capital expenditure budget provides for
drilling 24 Gross (22.0 Net) Wells in the GAU in 1998. Typically, wells drilled
by the Company in the GAU in 1997 were drilled to depths between 5,600 and 6,000
feet. As of September 30, 1997, the GAU had approximately 57 Infill Well
locations if the unit were to be fully developed on 20 acre spacing.
Data gained from the drilling and coring of new wells in the GAU suggest
that the reservoir has Secondary Recovery potential. Waterflooding is one method
of Secondary Recovery in which water is injected into an oil reservoir for the
purpose of forcing oil out of the reservoir rock and into the bore of a
producing well. The Company anticipates undertaking a waterflood project within
the GAU in 1998 or 1999.
Lake Boeuf. At December 31, 1996, approximately 8% (15.2 Bcfe) of the
Company's Proved Reserves were located in the Lake Boeuf Field, Lafourche
Parish, Louisiana, which reserves were acquired by the Company in September
1996. These reserves are principally Proved Undeveloped Reserves and are found
in nine different horizons ranging in depths from 9,500 to 15,000 feet. The
Company owns an approximate 87.5% Working Interest in the Lake Boeuf properties.
The Company has drilled one PUD location in 1997 which appears to have
commercially productive reserves in three different horizons. The well is
currently being completed in the deepest of those horizons. One additional PUD
location in the Lake Boeuf area is scheduled to be drilled in 1998.
Arkoma Basin. At December 31, 1996, approximately 8% (14.9 Bcfe) of the
Company's Proved Reserves were located in the Arkoma Basin in Eastern Oklahoma
and Western Arkansas. These properties were acquired by the Company as a result
of the Merger with Alexander. Most Arkoma Basin reserves are produced from
formations at depths ranging from 3,000 to 8,000 feet.
As of December 31, 1996, the Company had identified three PDNP and eleven
PUD locations in the Arkoma Basin and had budgeted to drill and complete 8 Gross
(3.7 Net) Wells for the year ended December 31, 1997. During the nine months
ended September 30, 1997, the Company had drilled 7 Gross (4.0 Net) Wells. The
Company's 1998 capital expenditure budget provides for drilling at least 7 Gross
(4.0 Net) Wells in 1998. The typical Arkoma Basin well is drilled to a total of
approximately 7,500 feet.
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<PAGE> 41
East Bayou Sorrel. The East Bayou Sorrel area is located approximately
eighty miles west of New Orleans, in Iberville Parish, Louisiana, in the
Atchafalaya River Basin. The topography of the surface is river swamp and all
work must be done with barge mounted drilling rigs and boats. Production
platforms are mounted on pilings. The Company became involved in this area in
January 1996, through the Sandefer Exploration Venture, when it participated in
the successful exploratory test of the Schwing #1 well. This discovery well was
drilled to a total depth of approximately 14,000 feet on the eastern flank of
the old Bayou Sorrel Field which was discovered by Shell Oil Company in 1954
(the "Shell Bayou Sorrel Field"). The Shell Bayou Sorrel Field was drilled in
the 1950s and 1960s, with a total of 87 wells drilled and produced in twenty-
eight different horizons ranging in depths from 7,000 to 11,100 feet and in
geological age from the Lower Miocene to the Upper Oligocene. The target
formations of the Company's exploration prospects in this area range from 11,000
to 14,000 feet and include the Marg Vag, Marg Howeii, Cib Haz, and Marg Tex
zones and range in geological age from the Upper Oligocene to the Lower
Oligocene.
Following the successful test of the East Bayou Sorrel, Schwing #1, the
Company increased its original 17% Working Interest in the well to 60% through a
series of acquisitions in 1996 from two other Working Interest owners. In
October 1996, the Company acquired a 14% Working Interest in the Schwing #1 from
W&T Offshore, Inc. In December 1996, the Company acquired a 29% Working Interest
in the Schwing #1 from MCNIC Oil & Gas, increasing the Company's Working
Interest in this well to 60%.
In November 1996, the Company acquired 100% of the Shell Bayou Sorrel
Field, adjacent to the Schwing #1 discovery well, from Panaco, Inc., who had
acquired the field from Shell. The Bayou Sorrel Acquisition included 10 wells
producing approximately 325 barrels of oil per day and 18 shut in wells, along
with approximately 2,000 leasehold acres held by production and production
facilities capable of handling 20,000 barrels of oil per day, 50,000 Mcf of
natural gas per day and salt water disposal capacity of 30,000 barrels of water
per day.
In addition, the Company has acquired leases adjacent to the Bayou Sorrel
and East Bayou Sorrel Fields which, in total, give the Company a current
leasehold position of 5,727 Gross (5,265 Net) Acres in the area. The Company has
undertaken a complete geologic and engineering study of the Bayou Sorrel area,
which includes a proprietary 3-D seismic survey of at least fifty square miles
encompassing the Bayou Sorrel lease position. For the year ended December 31,
1997, the Company had budgeted to drill two wells in the East Bayou Sorrel
prospect offsetting the Schwing #1 and one new Exploratory Well on the adjacent
leases. During the nine months ended September 30, 1997, 1 Gross (.6 Net) Well
had been successfully drilled and completed. The additional well planned was
spudded in October 1997 and the Company anticipates this well will be completed
before the end of 1997. The Company's 1998 capital expenditure budget provides
for further activities in the Bayou Sorrel area.
EXPLORATION
The Company seeks to balance its strategy of acquiring and exploiting
mature but underdeveloped reserves by dedicating a portion of its capital
expenditure budget to higher potential, higher risk exploration opportunities.
During the years ended 1994, 1995 and 1996, the Company participated in drilling
12 Gross (4.3 Net) Exploratory Wells. During the nine months ended September 30,
1997, the Company participated in drilling 7 Gross (2.6 Net) Exploratory Wells.
From 1994 through September 30, 1997, 5 Gross (2.2 Net) Exploratory Wells have
been completed as commercially productive. This represents a 26% success rate
for the Company's exploratory drilling. The Company has budgeted approximately
$5.5 million for the fourth quarter of 1997 and approximately $20 million for
its 1998 exploration program. The Company expects that its exploratory projects
will be concentrated in Gulf Coast areas, both onshore and offshore.
Sandefer Exploration Venture. On January 1, 1996 the Company entered into
the Sandefer Exploration Venture to develop exploration prospects for the
Company in certain areas. During the term of the agreement the venture will
generate exploration prospects and will submit leasing and drilling proposals to
the Company for a monthly retainer fee. Of the 7 Gross (2.5 Net) Exploratory
Wells drilled during the nine months ended September 30, 1997 the Company had
drilled 2 Gross (.9 Net) Wells as part of the Sandefer Exploration Venture. Of
the 2 wells drilled, 1 Gross (.4 Net) Well was completed as commercially
productive. In
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<PAGE> 42
addition, the Company is currently drilling 2 Gross (.9 Net) Wells as part of
the Sandefer Exploration Venture. The Company's 1998 drilling budget includes
amounts for further exploration activities on Sandefer-related prospects. When
the Company accepts a drilling proposal generated by the Sandefer Exploration
Venture, Sandefer receives an Overriding Royalty Interest in leases acquired by
the Company in the defined prospect area and, upon payout of specified costs
incurred on a prospect, may have the right to receive a deferred leasehold
interest.
Greater Bayou Sorrel Area. In addition to the development and exploratory
projects in East Bayou Sorrel, discussed above, the Company has three other
exploration prospects in the Greater Bayou Sorrel area; Northeast Bayou Sorrel,
Berry Bayou and Northwest Bayou Sorrel. The Company is currently shooting a 3-D
seismic survey over the Greater Bayou Sorrel area. The interpretations of the
3-D seismic data allow the Company to finalize drilling locations for these
three prospects. The Greater Bayou Sorrel area has produced and continues to
produce significant oil and gas. Because of the difficult topography very little
seismic data has been acquired before the Company's 3-D survey and the Company
believes there could be several other prospects identified by the 3-D survey.
The Company has approximately 34,000 acres either under lease, seismic option to
lease or seismic permit within the Greater Bayou Sorrel area.
Mustang Island. The Mustang Island area located in shallow state waters in
offshore Nueces County, Texas is another principal area of focus for the
Company's exploration program. The Company purchased, processed and interpreted
500 line miles of 2-D seismic data which was used in assessing and acquiring
acreage and production in the area. As a result, the Company has acquired 100%
of approximately 18,000 acres of leases, majority interests in 7 producing
wells, 11 miles of pipeline and an onshore tank facility. In addition, the
Company is participating in a 3-D seismic survey over the area which will
provide 90 square miles of data in early 1998. An extensive drilling program is
anticipated following the Company's analysis of the 3-D data.
Other Exploratory Activities
The Company has several other exploration prospects in its inventory. The
prospects are in various stages of development with two wells scheduled for
drilling during the first and second quarters of 1998.
OIL AND NATURAL GAS PROPERTIES
The estimated reserves and related future net revenues are based upon
reports prepared by independent petroleum engineers. For the year December 31,
1996 the reports were prepared by Netherland & Sewell. All of the Company's
reserves are located in the continental United States. Each of the reserve
reports was prepared using constant prices and costs in accordance with the
published guidelines of the Commission. Substantially all of the Company's oil
and natural gas properties are subject to liens, and the remaining oil and
natural gas properties are subject to a negative pledge pursuant to the Revised
Credit Facility.
The net weighted average prices used in the Company's reserve reports at
December 31, 1994, 1995 and 1996 were $16.59, $18.71 and $25.36 per barrel of
oil, respectively, and $1.62, $1.91 and $3.72 per Mcf of natural gas,
respectively.
All reserves are evaluated at contract temperature and pressure which can
affect the measurement of natural gas reserves. Operating costs, development
costs and certain production-related and ad valorem taxes were deducted in
arriving at the estimated future net cash flows. No provision was made for
income taxes. The following estimates set forth reserves considered to be
economically recoverable under normal operating methods and existing conditions
at the prices and operating costs prevailing at the dates indicated above. The
estimates of the PV10% from future net cash flows differ from the Standardized
Measure of discounted future net cash flows set forth in the notes to the
Financial Statements of the Company, which is calculated after provision for
future income taxes. There can be no assurance that these estimates are accurate
predictions of future net cash flows from oil and natural gas reserves or their
present value.
Reservoir engineering is a subjective process of estimating the sizes of
underground accumulations of oil and natural gas that cannot be measured in an
exact way. The accuracy of any reserve estimates is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Reserve reports
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<PAGE> 43
of other engineers might differ from the reports contained herein. Results of
drilling, testing, and production subsequent to the date of the estimate may
justify revision of such estimate. Future prices received for the sale of oil
and natural gas may be different from those used in preparing these reports. The
amounts and timing of future operating and development costs may also differ
from those used. Accordingly, reserve estimates are often different from the
quantities of oil and natural gas that are ultimately recovered. See "Risk
Factors -- Uncertainty of Estimates of Reserves and Future Net Revenues;
Significant Undeveloped Reserves."
No estimates of Proved Reserves of oil and natural gas have been filed by
the Company with, or included in any report to, any United States authority or
agency (other than the Commission) since December 31, 1996.
The following table sets forth certain information for the Company's total
Proved Reserves of oil and natural gas and the PV10% of estimated future net
revenues from such reserves, at December 31, 1996, as prepared by Netherland &
Sewell. Also presented is the Standardized Measure of the Company's total Proved
Reserves of oil and natural gas.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996,
--------------------------------------------------
NATURAL
NATURAL GAS
OIL GAS EQUIVALENT PV10%
(MBBLS) (MMCF) (MMCFE) (IN THOUSANDS)
------- ------- ---------- --------------
<S> <C> <C> <C> <C>
Proved Developed Reserves..................... 4,384 77,497 103,801 $179,571
Proved Undeveloped Reserves................... 4,419 51,373 77,887 112,102
----- ------- ------- --------
Total Proved Reserves......................... 8,803 128,870 181,688 $291,673
===== ======= ======= ========
Standardized Measure.......................... $229,780
========
</TABLE>
PRINCIPAL AREAS OF OPERATIONS
The following table sets forth for the Company's principal areas of
operation, the Company's Proved Reserves of oil and natural gas and PV10% of the
estimated future net revenue from such reserves at December 31, 1996.
<TABLE>
<CAPTION>
NATURAL
OIL AND NATURAL GAS
CONDENSATE GAS EQUIVALENT PV10% % OF
FIELD (MBBLS) (MMCF) (MMCFE) (IN THOUSANDS) TOTAL
----- ---------- ------- ---------- -------------- ------
<S> <C> <C> <C> <C> <C>
Onshore:
Anadarko Basin, OK.............. 2,270 58,547 72,168 $111,214 38.13%
Cotton Valley Trend, TX......... 244 35,239 36,701 50,666 17.37
Goldsmith Adobe Unit, TX........ 3,538 3,804 25,035 34,575 11.85
Lake Boeuf, LA.................. 1,510 6,141 15,200 30,850 10.58
Arkoma Basin, OK and AR......... -- 14,894 14,894 25,016 8.58
Bayou Sorrel, LA................ 573 1,848 5,288 13,899 4.77
Other Onshore................... 495 4,433 7,399 16,727 5.73
----- ------- ------- -------- ------
Total Onshore........... 8,630 124,906 176,685 282,947 97.01
----- ------- ------- -------- ------
Offshore:
Mustang Island.................. 173 3,964 5,003 8,726 2.99
----- ------- ------- -------- ------
Total................... 8,803 128,870 181,688 $291,673 100.00%
===== ======= ======= ======== ======
</TABLE>
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<PAGE> 44
OIL AND NATURAL GAS PRODUCTION AND PRODUCTION ECONOMICS
The following table shows the approximate net production attributable to
the Company's oil and natural gas interests, the average sales price per barrel
of oil and Mcf of natural gas produced, the average LOE and DD&A rates and the
G&A costs attributable to the Company's oil and natural gas production for the
periods indicated. Except for pro forma data, production and sales information
relating to properties acquired or disposed of is reflected in this table only
since or up to the closing date of their respective acquisition or sale and may
affect the comparability of the data between the periods presented.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- -----------------
1994 1995 1996 1996 1997
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Net Production:
Oil (Mbbls)................................ 116 283 522 344 790
Natural gas (Mmcf)......................... 621 1,753 5,681 2,997 9,853
Natural gas equivalent (Mmcfe)............. 1,315 3,454 8,811 5,060 14,594
Average sales price:
Oil (per Bbl).............................. $16.01 $17.22 $21.70 $20.62 $ 19.70
Natural gas (per Mcf)...................... 2.11 1.70 2.29 2.04 2.29
Natural Gas Equivalent (per Mcfe).......... 2.40 2.28 2.75 2.60 2.61
LOE (per Mcfe)............................... .92 .50 .42 .41 .38
DD&A (per Mcfe).............................. .70 .91 1.11 1.02 1.13
G&A (per Mcfe)............................... .75 .51 .34 .38 .26
</TABLE>
PRODUCTIVE WELL SUMMARY
The Company's production of oil and natural gas is primarily derived from
wells located in Texas, Oklahoma and New Mexico. The following table sets forth
the Company's interests in Productive Wells, by state, as of December 31, 1996:
<TABLE>
<CAPTION>
OIL NATURAL GAS TOTAL
-------------- -------------- --------------
FIELD GROSS NET GROSS NET GROSS NET
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Onshore:
Anadarko Basin, OK......................... 204 96.1 268 115.7 472 211.8
Cotton Valley Trend, TX.................... 2 1.4 25 21.4 27 22.8
GAU, TX.................................... 114 108.2 -- -- 114 108.2
Lake Boeuf, LA............................. 1 .9 -- -- 1 .9
Arkoma Basin, OK and AR.................... -- -- 119 35.7 119 35.7
Bayou Sorrel, LA........................... 16 15.3 -- -- 16 15.3
Other Onshore.............................. 50 20.4 30 6.1 80 26.5
--- ----- --- ----- --- -----
Total Onshore...................... 387 242.3 442 178.9 829 421.2
Offshore:
Mustang Island, TX......................... 1 1 3 1.7 4 2.7
--- ----- --- ----- --- -----
Total......................... 388 243.3 445 180.6 833 423.9
=== ===== === ===== === =====
</TABLE>
In November 1997, the Company agreed to sell, for approximately $6 million,
its Working Interest in 274 nonstrategic producing wells, 103 of which were
operated by the Company, bringing its total percentage of operated properties to
approximately 75%.
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<PAGE> 45
LEASEHOLD ACREAGE
The following table shows the approximate Gross and Net Acres in which the
Company had a leasehold interest as of December 31, 1996:
<TABLE>
<CAPTION>
DEVELOPED ACREAGE UNDEVELOPED ACREAGE
----------------- --------------------
FIELD GROSS NET GROSS NET
----- ------- ------ -------- --------
<S> <C> <C> <C> <C>
Onshore:
Anadarko Basin, OK........................... 106,771 42,622 8,990 4,935
Cotton Valley Trend, TX...................... 4,761 4,410 1,567 1,455
GAU, TX...................................... 4,720 4,482 3,160 3,007
Lake Boeuf, LA............................... 143 125 945 827
Arkoma Basin, OK and AR...................... 43,365 14,576 1,144 72
Bayou Sorrel, LA............................. 2,426 2,426 1,654 1,553
Other Onshore (1)............................ 21,856 5,209 29,936 24,498
------- ------ ------ ------
Total Onshore........................ 184,042 73,850 47,396 36,347
Offshore:
Mustang Island, TX........................... 6,045 3,530 7,765 7,765
------- ------ ------ ------
Total................................ 190,087 77,380 55,161 44,112
======= ====== ====== ======
</TABLE>
- ---------------
(1) Includes acreage in Colorado, Kansas, Louisiana, Oklahoma, Nebraska,
New Mexico and Wyoming.
During 1997, the Company purchased additional leaseholds in 4,000 Gross and
Net Acres in the Mustang Island area for approximately $1.1 million, and in
1,647 Gross (1286 Net) Acres in the Greater Bayou Sorrel Area for approximately
$8.3 million and 4,435 Gross (4,107 Net) Acres in four other exploratory
prospects for approximately $1.5 million.
Substantially all of the Company's producing oil and natural gas properties
are located on leases held by the Company for an indeterminate number of years
for so long as production is maintained. All of the Company's non-producing
acreage is held under leases from mineral owners or a government entity which
expire at varying dates. The Company is obligated to pay annual delay rentals to
the lessors of certain properties in order to prevent the leases from
terminating. Because substantially all of the Company's Undeveloped Acreage was
held by production, annual delay rentals for 1996 were nominal; however, such
delay rentals were approximately $1.5 million for the nine months ended
September 30, 1997, and could increase in future periods due to the Company's
accelerated lease acquisition activities.
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<PAGE> 46
DRILLING ACTIVITY
The following table sets forth development and exploration drilling results
for the years ended December 31, 1994, 1995 and 1996. Since December 31, 1996
through September 30, 1997 the Company has drilled 53 Gross (44.3 Net)
Development Wells and 7 Gross (2.6 Net) Exploratory Wells.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1994 1995 1996
------------ ------------- -------------
GROSS NET GROSS NET GROSS NET
----- --- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Development
Productive..................................... 9 6.4 24 20.7 28 25.6
Non-productive................................. -- -- 1 .6 1 .2
-- --- -- ---- -- ----
Total.................................. 9 6.4 25 21.3 29 25.8
Exploratory
Productive..................................... -- -- -- -- 3 1.4
Non-productive................................. 2 1.0 2 .8 5 1.1
-- --- -- ---- -- ----
Total.................................. 2 1.0 2 .8 8 2.5
-- --- -- ---- -- ----
Combined Total................................... 11 7.4 27 22.1 37 28.3
== === == ==== == ====
</TABLE>
TITLE TO OIL AND NATURAL GAS PROPERTIES
The Company has acquired interests in producing and non-producing acreage
in the form of Working Interests, Royalty Interests and Overriding Royalty
Interests. To reduce the Company's financial exposure in any one exploratory
prospect, the Company often acquires less than 100% of the Working Interest in a
prospect. Working Interests held by the Company may, from time to time, become
subject to minor liens. Furthermore, updated title opinions may not be received
prior to the acquisition of a producing oil and natural gas property. It is
contemplated, however, that investigations will be made in accordance with
standard practices in the industry before the acquisition of such properties and
before drilling.
The Company generally acquires a leasehold interest in the properties to be
explored. The leases grant the lessee the right to explore for and extract oil
and natural gas from a specified area. Rentals usually consists of fixed annual
charges prior to production and, once production has been established, a royalty
based upon the gross proceeds from the sale of oil and natural gas. Once wells
are drilled, a lease generally continues as long as production of oil and
natural gas continues. In some cases, leases may be acquired in exchange for a
commitment to drill or finance the drilling of a specified number of wells to
predetermined depths.
PRODUCTION AND SALES PRICES
The Company's production of oil and natural gas is derived solely from its
activities in the continental United States. The Company is not obligated to
provide a fixed and determinable quantity of oil and/or natural gas in the
future under existing contracts or agreements. The Company does not plan to
refine or process the oil and natural gas it produces, but plans to sell the
production to unaffiliated oil and natural gas purchasing companies in the area
in which it is produced. The Company expects to sell crude oil on a market price
basis and to sell natural gas under contracts to both interstate and intrastate
natural gas pipeline companies. The Company currently sells a significant
portion of its oil pursuant to a contract with Plains. See "-- Markets and
Customers."
CONTROL OVER PRODUCTION ACTIVITIES
The Company operated 568 of the 895 producing wells in which it owns an
interest as of December 31, 1996. In November 1997, the Company agreed to sell,
for approximately $6 million, its Working Interest in 274 nonstrategic producing
wells, 103 of which were operated by the Company, bringing its total percentage
of operated properties to approximately 75%. The non-operated properties are
operated by unrelated third parties pursuant to operating agreements which are
generally standard in the industry. Significant decisions about
45
<PAGE> 47
operations regarding non-operated properties may be determined by the outside
operator rather than by the Company. If the Company declines to participate in
additional activities proposed by the outside operator under certain operating
agreements, the Company will not receive revenues from, and/or will lose its
interest in the activity in which it declined to participate.
FACTORS BEYOND THE COMPANY'S CONTROL
Although demand for oil is steady, there are seasonal variations in the
demand for natural gas. The Company's oil and natural gas business is also
affected by factors which are beyond its control and the exact effects of which
cannot be accurately predicted. These factors may include war in countries other
than the United States, the extent of domestic production, imports of crude oil,
production by and agreements among OPEC members, the availability of adequate
pipeline and other transportation facilities, the marketing of competitive fuel,
government regulation of prices, production, transportation and marketing,
fluctuating supply and demand, regulation and other matters affecting the supply
and demand for crude oil and natural gas.
MARKETS AND CUSTOMERS
The availability of a ready market for any oil and natural gas produced by
the Company and the prices obtained for such oil and natural gas depends upon
numerous factors beyond its control, including the demand for and supply of oil
and natural gas, fluctuations in production and seasonal demand, proximity of
the wells to adequate transmission facilities, weather conditions, economic
conditions, and the effects of state and federal governmental regulations on the
import, production, transportation and sale of oil and natural gas. The
occurrence of any factor which affects a ready market for the Company's oil and
natural gas or reduces the price obtained for such oil and natural gas may
adversely affect the Company.
A large percentage of the Company's oil and natural gas sales are made to a
small number of purchasers. During the year ended December 31, 1995, two
suppliers, Plains and Energy Source, Inc., accounted for approximately 59% of
the Company's oil sales and 11% of its natural gas sales. During 1996, Plains
accounted for 83% of the Company's oil sales, while Crosstex and GPM accounted
for 23% and 22%, respectively, of the Company's natural gas sales. For the nine
months ending September 30, 1997 Plains accounted for 89% of the Company's oil
sales and Crosstex, GPM and Fina Natural Gas Company accounted for 23%, 16% and
11%, respectively, of the Company's oil sales. The agreement with Plains,
entered into in 1993, provides for Plains to purchase the Company's oil pursuant
to West Texas Intermediate posted prices plus a small premium. The Company does
not believe that the loss of any customer would have a material and adverse
effect on its business because, under prevailing market conditions, such
customer could be replaced.
A portion of the Company's natural gas production is sold pursuant to long
term net-back contracts. Under net-back contracts, gas purchasers buy gas from a
number of producers, process the gas for natural gas liquids and sell the
liquids and residue gas. Each producer receives a fixed portion of the proceeds
from the sale of the liquids and residue gas. The gas purchasers pay for
transportation, processing and marketing of the gas and liquids and assumes the
risk of contracting pipelines and processing plants in return for a portion of
the proceeds of the sale of the gas and liquids. Many times, because the
purchasers are marketing large volumes of hydrocarbons gathered from multiple
producers, higher prices may be obtained for the gas and liquids. Further, a
portion is sold on the spot market under short term (30 day or less) contracts.
The remainder is sold under forward sales contracts (see "-- Hedging Risks").
The Company normally sells its oil under six month contracts. See "Risk
Factors -- Hedging Risks."
REGULATION
General. The Company's oil and natural gas exploration, production and
related operations are subject to extensive rules and regulations promulgated by
federal and state agencies. Failure to comply with such rules and regulations
can result in substantial penalties. The regulatory burden on the oil and gas
industry increases the Company's cost of doing business and affects its
profitability. Because such rules and regulations are frequently amended or
interpreted, the Company is unable to predict the future cost or impact of
complying with such laws.
46
<PAGE> 48
Exploration and Production. The Company's exploration and development
operations are subject to various types of regulation at the federal, state and
local levels. Such regulation includes requiring permits for the drilling of
wells; maintaining bonding requirements in order to drill or operate wells; and
regulating the location of wells, the method of drilling and casing wells, the
surface use and restoration of properties upon which wells are drilled and the
plugging and abandoning of wells. The Company's operations are also subject to
various conservation regulations and rules to protect the correlative rights of
subsurface owners. These include the regulation of the size of drilling and
spacing units or proration units and the density of wells which may be drilled
and the unitization or pooling of oil and natural gas properties. In this
regard, some states allow the forced pooling or integration of tracts to
facilitate exploration while other states rely on voluntary pooling of land and
leases. In addition, state conservation laws establish maximum rates of
production from oil and natural gas wells, generally prohibit the venting or
flaring of natural gas and impose certain requirements regarding the ratability
of production. The effect of these regulations is to limit the amounts of oil
and natural gas the Company can produce from its wells and to limit the number
of wells or the locations at which the Company can drill. Legislation in
Oklahoma and regulatory action in Texas governs the methodology by which the
regulatory agencies establish permissible monthly production allowables. This
action has generated substantial controversy, especially at the federal level,
and has been labeled as an attempt to reduce the total production of natural gas
in order to increase natural gas prices. A recent attempt to enact a federal
prohibition of these recent state proration rule initiatives was defeated, but
various members of Congress and some federal regulators have declared an intent
to monitor the states' actions very carefully. The Company cannot predict what
effect possible change in prorationing regulations will have on its production
and sales of natural gas.
Certain of the Company's Oil and Natural Gas Leases are granted by the
federal government and administered by various federal agencies. Such leases
require compliance with detailed federal regulations and orders which regulate,
among other matters, drilling and operations on these leases and calculation and
disbursement of royalty payments to the federal government. The Mineral Lands
Leasing Act of 1920 places limitations on the number of acres under federal
leases that may be owned in any one state.
Environmental Protection and Occupational Safety. The Company is subject to
numerous federal, state and local laws and regulations governing the release of
materials into the environment or otherwise relating to environmental
protection. These laws and regulations may require the acquisition of a permit
before drilling commences, restrict the types, quantities and concentration of
various substances that can be released into the environment in connection with
drilling and production activities, limit or prohibit drilling activities on
certain lands lying within wilderness, wetlands and other protected areas and
impose substantial liabilities for pollution resulting from operations.
Moreover, the recent trend toward stricter standards in environmental
legislation and regulation is likely to continue. For instance, legislation has
been proposed in Congress from time to time that would reclassify certain oil
and natural gas production wastes as "hazardous wastes", which reclassification
would make such wastes subject to much more stringent handling, disposal and
clean-up requirements. If such legislation were to be enacted, it could have a
significant impact on the operating costs of the Company, as well as the oil and
gas industry in general. It is not anticipated that the Company will be required
in the near future to expend amounts that are material in relation to its total
capital expenditure program by reason of environmental laws and regulations, but
because such laws and regulations are frequently changed, the Company is unable
to predict the ultimate cost and effects of such compliance.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without regard
to fault or the legality of the original conduct, on certain classes of persons
who are considered to have contributed to the release of a "hazardous substance"
into the environment. These persons include the owner or operator of the
disposal site or sites where the release occurred and companies that disposed or
arranged for the disposal of the hazardous substances. Under CERCLA such persons
or companies may be subject to joint and several liability for the costs of
cleaning up the hazardous substances that have been released into the
environment and for damages to natural resources. Also, it is not uncommon for
neighboring landowners and other third parties to file claims for personal
injury, property damage and recovery of response costs allegedly caused by the
hazardous substance released into the environment.
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<PAGE> 49
In addition, the U.S. Oil Pollution Act of 1990 (the "OPA") and regulations
promulgated pursuant thereto impose a variety of regulations on responsible
parties related to the prevention of oil spills and liability for damages
resulting from such spills. The OPA establishes strict liability for owners of
facilities that are the site of a release of oil into "waters of the United
States." While OPA liability more typically applies to facilities near
substantial bodies of water, at least one district court has held that OPA
liability can attach if the contamination could enter waters that may flow into
navigable waters.
Stricter standards in environmental legislation may be imposed in the oil
and gas industry as the result of the reclassification of certain oil and
natural gas exploration and production wastes as "hazardous oil and gas wastes,"
which could make the reclassified wastes subject to more stringent and costly
handling, disposal and clean-up requirements. The impact of any such
requirements, however, would not likely be any more burdensome to the Company
than to any other similarly situated company involved in oil and natural gas
exploration and production.
The Resource Conservation and Recovery Act ("RCRA") and regulations
promulgated thereunder govern the generation, storage, transfer and disposal of
hazardous wastes. RCRA, however, excludes from the definition of hazardous
wastes "drilling fluids, produced waters, and other wastes associated with the
exploration, development, or production of crude oil, natural gas or geothermal
energy." Because of this exclusion, many of the Company's operations are exempt
from RCRA regulation. Nevertheless, the Company must comply with RCRA
regulations for any of its operations that do not fall within the RCRA exclusion
(such as painting activities or use of solvents).
Because oil and natural gas exploration and production, and possibly other
activities, have been conducted at some of the Company's properties by previous
owners and operators, materials from these operations remain on some of the
properties and in some instances require remediation. In addition, the Company
has agreed to indemnify sellers of producing properties from whom the Company
has acquired reserves against certain liabilities for environmental claims
associated with such properties. While the Company does not believe that costs
to be incurred by the Company for compliance and remediating previously or
currently owned or operated properties will be material, there can be no
guarantee that such costs will not result in material expenditures.
Additionally, in the course of the Company's routine oil and natural gas
operations, surface spills and leaks, including casing leaks, of oil or other
materials occur, and the Company incurs costs for waste handling and
environmental compliance. Moreover, the Company is able to control directly the
operations of only those wells for which it acts as the operator.
Notwithstanding the Company's lack of control over wells owned by the Company
but operated by others, the failure of the operator to comply with applicable
environmental regulations may, in certain circumstances, be attributable to the
Company.
The Company is also subject to laws and regulations concerning occupational
safety and health. While it is not anticipated that the Company will be required
in the near future to expend amounts that are material in the aggregate to the
Company's overall operations by reason of occupational safety and health laws
and regulations, the Company is unable to predict the ultimate cost of
compliance.
Marketing and Transportation. Federal legislation and regulatory controls
in the United States have historically affected the price of the natural gas
produced by the Company and the manner in which such production is marketed. The
transportation and sales for resale of natural gas in interstate commerce are
regulated pursuant to the Natural Gas Act of 1938 (the "NGA") and the Federal
Energy Regulatory Commission ("FERC") regulations promulgated thereunder.
Maximum selling prices of certain categories of natural gas, whether sold in
interstate or intrastate commerce, previously were regulated pursuant to The
Natural Gas Policy Act of 1978 ("NGPA"). The NGPA established various categories
of natural gas and provided for graduated deregulation of price controls of
several categories of natural gas and the deregulation of sales of certain
categories of natural gas. All price deregulation contemplated under the NGPA
has already taken place. Subsequently, the Natural Gas Wellhead Decontrol Act of
1989 (the "Decontrol Act") terminated all remaining NGA and NGPA price and
non-price controls on wellhead sales of domestic natural gas on January 1, 1993.
While natural gas producers may currently make sales at uncontrolled market
prices, Congress could re-enact price controls in the future.
48
<PAGE> 50
Commencing in late 1985, the FERC issued a series of orders (Order No. 436,
Order No. 500 and related orders) that significantly altered the transportation
and marketing of natural gas. Among other things, these regulations (i) required
interstate pipelines that elect to transport natural gas for others under self-
implementing authority to provide transportation services to all shippers on a
non-discriminatory basis, and (ii) permitted each exiting firm sales customer of
any such pipeline to modify over at least a five-year period, its existing
purchase obligations. Although the regulations do not directly regulate natural
gas producers such as the Company, the availability of non-discriminatory
transportation services and the ability of pipeline customers to modify their
existing purchase obligations under these regulations has greatly enhanced the
ability of producers to market their natural gas directly to end users and local
distribution companies. In this regard, access to markets through interstate
pipelines is critical to the Company's marketing initiatives.
In April 1992, the FERC issued its restructuring rule, known as Order No.
636 ("Order No. 636"), that has had a major impact on pipeline operations,
services and rates. The most significant provisions of Order No. 636: (i)
required interstate pipelines to provide firm and interruptible transportation
solely on an "unbundled" basis, separate from their sales service, and to
convert each pipeline's bundled firm sales service into unbundled firm
transportation service; (ii) provided for the issuance of blanket certificates
to pipelines to provide unbundled sales service giving all utility customers a
chance to purchase their firm supplies from non-pipeline merchants; (iii)
required that pipelines provide firm and interruptible transportation service on
a basis that is equal in quality for all natural gas supplies, whether purchased
from the pipeline or elsewhere; (iv) required that pipelines provide a new,
non-discriminatory "no-notice" transportation service that largely replicates
the "bundled" sales service previously provided by pipelines; (v) established
two new, generic programs for the reallocation of firm pipeline capacity; (vi)
required that all pipelines offer access to their storage facilities on a firm
and interruptible basis; (vii) provided for pregranted abandonment of pipeline
sales agreements, interruptible and firm short-term (defined as one year or
less) transportation agreements and conditional pregranted abandonment of firm
long-term transportation service; (viii) modified transportation rate design by
requiring that all fixed costs related to transportation be recovered through
the reservation charge; and (ix) provided mechanisms for the recovery by
pipelines of certain transition costs occurring from implementation of Order No.
636.
The rules contained in Order No. 636, as amended by Order No. 636-A (issued
in August 1992) and Order No. 636-B (issued in November 1992) (collectively,
"Order No. 636") are far reaching and complex. In addition, Order No. 636 and
individual orders in restructuring proceedings are currently subject to court
challenges. While Order No. 636 does not directly regulate natural gas producers
such as the Company, the FERC has stated that Order No. 636 is intended to
foster increased competition within the gas industry.
OPERATIONAL HAZARDS AND INSURANCE
The Company's operations are subject to all of the risks inherent in oil
and natural gas exploration, drilling and production. These hazards can result
in substantial losses to the Company due to personal injury and loss of life,
severe damage to and destruction of property and equipment, pollution or
environmental damage or suspension of operations. The Company maintains
insurance of various types customary in the industry to cover its operations.
The Company believes it is insured prudently against certain of these risks. In
addition, the Company maintains operator's extra expense coverage that provides
coverage for the care, custody and control of wells drilled by the Company. The
Company's insurance does not cover every potential risk associated with the
drilling and production of oil and natural gas. The Company does, however,
maintain levels of insurance customary in the industry to limit its financial
exposure in the event of a substantial environmental claim resulting from sudden
and accidental discharges; however, 100% coverage is not maintained. The
occurrence of a significant adverse event, the risks of which are not fully
covered by insurance, could have a material adverse effect on the Company's
financial condition and results of operations. Moreover, no assurance can be
given that the Company will be able to maintain adequate insurance in the future
at rates it considers reasonable. The Company believes that it operates in
compliance with government regulations and in accordance with safety standards
which meet or exceed industry standards.
49
<PAGE> 51
COMPETITION
The oil and gas industry is intensely competitive in all of its phases,
particularly with respect to the acquisition of desirable producing Oil and
Natural Gas Leases and oil and natural gas companies with production. The
Company, which is a small competitive factor in the industry, encounters strong
competition from major oil companies, independent oil and natural gas concerns,
and individual producers and operators, many of which have financial resources,
staffs, facilities and experience substantially greater than those of the
Company. Furthermore, in times of high drilling activity, exploration for and
production of oil and natural gas may be affected by the availability of
equipment, labor, supplies and by competition for drilling rigs. The Company
cannot predict the effect these factors will have on its operations. The Company
owns no drilling rigs, and it is anticipated that its drilling will be conducted
by third parties. Furthermore, the oil and gas industry also competes with other
industries in supplying the energy and fuel requirements of industrial,
commercial and individual consumers.
OFFICE SPACE
The Company leases approximately 20,420 square feet of office space in
Dallas, Texas. The Company also leases a small amount of office space in
Houston, Texas for its business activities.
EMPLOYEES
At November 10, 1997, the Company had 63 full-time employees Of the 63
employees, 9 are field related personnel. The Company does not have any
collective bargaining agreements with employees and believes that relations with
its employees are generally satisfactory.
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 tortious interference with the
Company's access to its facilities and wrongful conduct with respect to the
Company's personnel.
On August 31, 1995, in a matter involving the same property described
above, R.E. Steakley and N.M. Steakley filed a lawsuit in the District Court of
Harris County, Texas, against Amoco Production Company, Phillips Petroleum
Company, the Company and others. The lawsuit alleges certain environmental
claims and related tortious and contractual claims and sought 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 Mr. Steakley
reasserts the claims filed in the Harris County Court action. The Company
intends to vigorously defend against the suit and believes that it is operating
the property in compliance with applicable environmental laws and regulations
and believes, based on advice from legal counsel, that the ultimate resolution
of the lawsuit will not have a material or adverse effect on the Company's
financial condition or results of operations when taken as a whole.
The Company is not a defendant in any additional pending legal proceedings
other than routine litigation incidental to its business. While the ultimate
results of these proceedings cannot be predicted with certainty, the Company
does not believe that the outcome of these matters will have a material adverse
effect on the Company.
50
<PAGE> 52
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table lists the name, age (as of November 1, 1997) and
present position with the Company for each of the Company's directors and
executive officers:
<TABLE>
<CAPTION>
NAME AGE PRESENT POSITION WITH THE COMPANY(1)
---- --- ------------------------------------
<S> <C> <C>
George B. McCullough......................... 72 Director, Chairman of the Board of
Directors
Norman C. Miller............................. 77 Director, Chairman of the Executive
Committee
Miles D. Bender.............................. 60 Director, President and Chief Executive
Officer
Robert H. Kite............................... 43 Director
George N. McDonald........................... 64 Director
Robert V. Sinnott............................ 58 Director
Elwood W. Schafer............................ 69 Director
Jim L. David................................. 57 Director, Vice President, Exploration
Bob G. Alexander............................. 64 Director
Robert J. Mitchell........................... 50 Director
William T. Jones............................. 52 Senior Vice President, Operations
Gene W. Anderson............................. 54 Vice President, Land
Philip D. Devlin............................. 53 Vice President, General Counsel and
Secretary
Dewayne Cravens.............................. 50 Vice President, Production and Engineering
Melissa H. Rutledge.......................... 31 Chief Financial Officer, Chief Accounting
Officer and Controller
</TABLE>
- ---------------
(1) Messrs. McCullough, Miller, Bender, Kite and McDonald have been Directors of
the Company since December 17, 1990. Mr. Sinnott was appointed to the Board
of Directors on June 3, 1994, and Mr. Schafer was appointed to the Board of
Directors effective September 26, 1995. Messrs. Alexander, David and
Mitchell were appointed to the Board of Directors on August 29, 1996.
Pursuant to the terms of the Series B Preferred Stock, Series C Preferred
Stock and Series D Preferred Stock, the holders of a majority of the
outstanding shares of each series have the right to appoint one member of
the Board of Directors at all times while such series are outstanding.
Messrs. Mitchell, Schafer and Sinnott are the appointees to the Board of
Directors of the holders of certain of the Outstanding Preferred Stock.
Directors generally serve for a term of one year (until the next annual
meeting of stockholders) and until their successors are duly elected and
qualified, or until their death, resignation or removal.
George B. McCullough. Effective December 17, 1990, Mr. McCullough was
appointed Chairman of the Board of Directors. From July 20, 1990 to June 11,
1991, Mr. McCullough was a Director of Big Piney. From October 1986 to June 11,
1991, Mr. McCullough served as Chairman of the Board of Directors of VP. From
1948 to 1986, Mr. McCullough worked for Exxon Corporation ("Exxon"). Mr.
McCullough was elected as a Vice President of Exxon in 1980. He was responsible
for all employee relations for Exxon. Mr. McCullough holds B.A. and M.B.A.
degrees from Tulane University.
Norman C. Miller. Effective December 17, 1990, Mr. Miller was appointed a
Director of the Company and to the office of Chairman of the Executive Committee
of the Company. Mr. Miller is the President and owner of Incorp, Inc., a
petroleum consulting firm. Mr. Miller had been a Director of Big Piney and
Chairman of its Executive Committee from July 20, 1990 until June 11, 1991. From
September 1988 to June 11, 1991, Mr. Miller had been a Director and Chairman of
the Executive Committee of VP. Mr. Miller was President and CEO of Delhi
International Oil Corporation ("Delhi") from 1974 to 1981. Delhi was listed on
the American Stock Exchange and had operations in the United States, Australia,
Canada, Columbia, Guatemala and Panama. Mr. Miller was a Director of Woodbine
Petroleum, a public company, from 1983 to 1985. He received his B.S. degree in
Geology from the University of Oklahoma.
51
<PAGE> 53
Miles D. Bender. Since December 17, 1990, Mr. Bender has been President,
Chief Executive Officer and a Director of the Company. From July 20, 1990 to
June 11, 1991, Mr. Bender served as President, Chief Executive Officer,
Treasurer and a Director of Big Piney. Mr. Bender was President, Chief Executive
Officer, Treasurer and a Director of VP from its inception in July 1986 until
June 11, 1991. He was also President and a Director of Tierra Energy, Inc. from
1984 until 1990. From 1981 to 1984, he was general partner of Rio Colorado
Mining, Ltd., which was engaged in the minerals and natural resources
businesses. From 1970 to 1980, Mr. Bender was President and Chairman of the
Board of Syncom Incorporated ("Syncom"), a publicly-held company that
manufactured magnetic computer supplies. Syncom was listed on the Boston Stock
Exchange. Mr. Bender received his B.A. degree from and attended law school at
the University of Buffalo.
Robert H. Kite. Effective December 17, 1990, Mr. Kite was appointed a
Director of the Company. From November 1987 until June 11, 1991, Mr. Kite served
as a Director of VP. Since 1980, Mr. Kite has been President and Chief Operating
Officer of KFT, Ltd., a family-owned company with operations which include land
holdings, industrial and commercial developments, and equity and commodity
investments. He has also been Chief Executive Officer of Roamin' Korp., Inc.
since 1982, which is engaged in the businesses of construction, recording,
mining and equity investments. Mr. Kite graduated from Southern Methodist
University with a B.S. degree in Psychology and Political Science.
George N. McDonald. Effective December 17, 1990, Mr. McDonald was appointed
a Director of the Company. For more than five years prior to June 11, 1991, Mr.
McDonald was a Director of Big Piney, and, from 1982 to July 20, 1990, he served
as Vice President of Big Piney. From July 20, 1990 until June 11, 1991, Mr.
McDonald was a Director of VP. From 1973 to present, Mr. McDonald has been the
President and Owner of Canyon Courts, Inc. From 1985 to present, Mr. McDonald
has also been a Director of Ion Laser Technology, Inc. Mr. McDonald was also
President of Ion Laser Technology, Inc. from 1985 to 1988, Chairman of the Board
from 1985 to 1992 and Secretary from 1990 to 1992. Since 1988, Mr. McDonald has
also been President/Owner of Medical Alignment Systems. From 1960 to 1972, Mr.
McDonald was an account executive with Merrill Lynch Pierce Fenner and Smith
Inc. and certain predecessor firms. Mr. McDonald holds B.S. and M.B.A. degrees
from the University of Utah.
Robert V. Sinnott. Effective June 3, 1994, Mr. Sinnott was appointed a
Director of the Company. Mr. Sinnott has been Senior Vice President and Senior
Investment Officer of KAIM Non-Traditional L.P. ("KAIM") since 1992. From 1986
to 1992, Mr. Sinnott was Vice President and Senior Securities Officer of
Citicorp. From 1981 to 1986, Mr. Sinnott was Director of Corporate Finance at
United Energy Resources. From 1976 to 1984, he was Vice President at Bank of
America. Mr. Sinnott is on the Board of Directors of Glacier Water Services,
Inc. vended water company listed on the American Stock Exchange ("AMEX"), and
Plains, an AMEX listed oil and natural gas company. Mr. Sinnott received a
Bachelor of Arts from the University of Virginia, and an MBA from the Graduate
School of Business Administration at Harvard University.
Elwood W. Schafer. Effective September 26, 1995, Mr. Schafer was appointed
a Director of the Company. Mr. Schafer has been a consultant to KAIM since
January 1993. Mr. Schafer was Managing Director and Chief Petroleum Engineer of
Chemical Bank and its affiliate, Texas Commerce Bank, from December 1991 (when
Chemical Bank and Manufacturers Hanover Trust merged) until July 1992. From 1974
until December 1991, Mr. Schafer worked for Manufacturers Hanover Trust and
reached the position of Managing Director and Chief Petroleum Engineer. Mr.
Schafer was Vice President and head of the oil department at the Bank of New
York from 1970 until he joined Manufacturers Hanover Trust. From 1955 to 1970,
Mr. Schafer worked at General American Oil Company. Prior to that he spent four
years with Core Labs doing Rocky Mountain well-site geology. Mr. Schafer
graduated from University of Illinois with a B.S. in geology.
Jim L. David. Mr. David, a founder of Alexander, was appointed a Director
and Vice President, Exploration of the Company when the Merger occurred on
August 29, 1996. From 1980 until the Merger, Mr. David served as Executive Vice
President of Alexander. From 1977 to 1980, Mr. David was employed as exploration
manager for Reserve Oil, Inc., Northern Division. Mr. David served as Alaska
chief geologist and senior staff geologist for Texas International from 1973 to
1976. Mr. David graduated with a bachelor of arts
52
<PAGE> 54
degree in geology from Louisiana Tech University and obtained a master of arts
in geology from the University of Missouri.
Bob G. Alexander. Mr. Alexander, a founder of Alexander, was appointed a
Director of the Company when the Merger occurred on August 29, 1996. From 1980
until the Merger, Mr. Alexander served as Chairman of the Board, President and
Chief Executive Officer of Alexander. From 1976 to 1980, Mr. Alexander was Vice
President and General Manager of the Northern Division of Reserve Oil, Inc. and
President of Basin Drilling Corp. (subsidiaries of Reserve Oil and Gas Company).
Mr. Alexander attended the University of Oklahoma and graduated with a bachelor
of science degree in geological engineering.
Robert J. Mitchell. Effective August 29, 1996, Mr. Mitchell was appointed a
Director of the Company. Mr. Mitchell has been Senior Vice President -- Finance
of ACF Industries, Inc. since March 1995 and was Treasurer of ACF Industries
Inc. from December 1984 to March 1995. Mr. Mitchell has also served as President
and Treasurer of ACF Industries Holdings Inc. since August 1993 and as Vice
President, Liaison Officer of Icahn & Co., Inc. since November 1984. From 1987
to January 1993, Mr. Mitchell served as Treasurer of TransWorld Airlines, Inc.
and was the Treasurer of TransWorld Airlines, Inc. when it filed for
reorganization under Chapter 11 of the United States Bankruptcy Code, as
amended, in January 1992. Mr. Mitchell is also a director of Cadus
Pharmaceutical Corporation, a Nasdaq listed pharmaceutical company, Marvel
Holding, Marvel Entertainment and TOY BIZ.
William T. Jones. Effective August 29, 1996, Mr. Jones was appointed Senior
Vice President, Operations of the Company. From 1994 until such appointment, Mr.
Jones was Vice President, Production and Engineering of the Company. After
receiving a B.S. degree in Petroleum Engineering at Mississippi State
University, Mr. Jones began his career with Shell Oil Company in June 1968 in
Houston, Texas. In May 1973, Mr. Jones joined Tenneco Oil Company in Denver,
Colorado. After Tenneco Oil, Mr. Jones held various engineering and management
positions with several independent oil companies in Dallas and Ft. Worth, Texas
before moving to Abilene to become Chief Operating Officer of Ard Drilling
Company from July 1992 to June 1994.
Gene W. Anderson. Mr. Anderson was appointed Vice President, Land effective
March 17, 1997. Mr. Anderson has 29 years of land experience, both domestic and
foreign. Most recently, Mr. Anderson was responsible for Enserch Exploration's
land activities in South Louisiana. Prior to that he held the position of
Onshore Land Manager at both Total Minatome Corporation in Houston and PG&E
Resources (DALEN) in Dallas. He held these positions from 1989 through 1995.
From 1975 to 1989, Mr. Anderson held various Land Management positions in
Denver, including Vice President -- Land at Energetics Inc. from 1980 to 1984.
Mr. Anderson's career began with Chevron in 1968 and continued until 1975. While
at Chevron, Mr. Anderson held various land positions in both the Rockies and Mid
Continent areas as well as three years on the land/legal staff of Chevron
Overseas Petroleum. Mr. Anderson holds B.S. and J.D. degrees from the University
of North Dakota.
Philip D. Devlin. Effective March 1, 1997, Mr. Devlin was appointed Vice
President and General Counsel of the Company and, effective March 20, 1997, the
Board of Directors appointed him Secretary of the Company. From September 1984
to October 1994, Mr. Devlin served as Executive Vice President, General Counsel
and Secretary for Sunrise Energy Services, Inc., a publicly-held natural gas
marketing company. From October 1994 through February 1997, Mr. Devlin acted as
President and Chief Executive Officer of Sunrise Energy Services, Inc. In July
1995, Sunrise Energy Services, Inc. filed to reorganize under Chapter 11 of the
Bankruptcy Code and in February 1997 a Plan of Reorganization was confirmed by
the Bankruptcy Court. Mr. Devlin is licensed by the State Bar of Texas, admitted
to practice before the Supreme Court of the United States and is a past
President and Director of the Natural Gas and Electric Power Association of
North Texas. Mr. Devlin holds a B.A. degree and an M.A. degree from the
University of California and J.D. degree with honors from California Western
School of Law, San Diego, California.
Dewayne Cravens. Effective August 25, 1997, Mr. Cravens was appointed Vice
President, Production and Engineering. Prior to this appointment, Mr. Cravens
was the Assistant Director of Permitting Services in the Oil and Gas Division of
the Railroad Commission of Texas in Austin since 1996. After receiving a B.S.
degree in General Engineering from Oklahoma State University in January 1970,
Mr. Cravens began his
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<PAGE> 55
career with Amoco Production Company in Hobbs, New Mexico. In February 1978, Mr.
Cravens joined Andover Oil Company in Tulsa, Oklahoma, which was purchased by
Santa Fe International Corporation in August 1982. Mr. Cravens was with Santa Fe
Minerals, Inc. from 1982 through 1995. At the time of the sale of all their oil
and gas assets by Santa Fe Minerals, Inc., Mr. Cravens was Senior Manager U.S.
Operation.
Melissa H. Rutledge. Effective November 1, 1997, Ms. Rutledge was appointed
Chief Financial Officer of the Company. From August 1994 to the present time,
Ms. Rutledge has acted as Controller and Chief Accounting Officer of the
Company. From September 1991 to August 1994, Ms. Rutledge was a Senior Auditor
for Ernst & Young LLP in Dallas. Ms. Rutledge received her B.B.A. degree in
Accounting from Texas Tech University and is currently licensed as a CPA in the
State of Texas.
The executive officers of the Company are elected annually at the first
meeting of the Board of Directors held after each annual meeting of
stockholders. Each executive officer will hold office until the first meeting of
the Board of Directors after the annual meeting of stockholders next succeeding
his or her election and until his or her successor is duly elected and
qualified, or until his or her death or resignation or until he or she shall
have been removed in the manner provided in the Company's bylaws.
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<PAGE> 56
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth, to the best knowledge of the Company,
information as to the ownership of the Company's Common Stock and all series of
Outstanding Preferred Stock held by (i) each person or entity who owns of record
or who is known by the Company to own beneficially 5% or more of the outstanding
shares of such class of stock, (ii) directors, and (iii) all directors and
officers as a group, as of November 15, 1997. Except as otherwise indicated,
ownership of shares by the persons named below includes sole voting and
investment power held by such persons.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth as of November 15, 1997, the individuals or
entities known to the Company to own more than 5% of the Company's outstanding
shares of capital stock as set forth in certain filings made by such individuals
or entities filed with the Commission.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER % OF
OF BENEFICIAL OWNER TITLE OF CLASS OF SHARES CLASS (1)
------------------- -------------- --------- ---------
<S> <C> <C> <C>
Carl C. Icahn.......................................... Common Stock 8,512,544(2) 18.7%
114 West 47th Street
19th Floor
New York, NY 10036
KAIM Non-Traditional, L.P.............................. Common Stock 4,414,068(3) 9.9%
1800 Avenue of Stars
Second Floor
Los Angeles, CA 90067
Croft-Leominster, Inc.................................. Common Stock 2,161,710(4) 5.4%
207 E. Redwood St.
Suite 802
Baltimore, MD 21202
KAIM Non-Traditional, L.P.............................. Series B 38,687(5) 100%
Preferred
1800 Avenue of Stars Stock
Second Floor
Los Angeles, CA 90067
Arbco Associates, L.P.................................. Series B 13,928(6) 36%
Preferred
1800 Avenue of Stars Stock
Second Floor
Los Angeles, CA 90067
Offense Group Associates, L.P.......................... Series B 11,607(5) 30%
Preferred
1800 Avenue of Stars Stock
Second Floor
Los Angeles, CA 90067
Kayne, Anderson Non-Traditional Investments, L.P....... Series B 10,832(5) 28%
Preferred
1800 Avenue of Stars Stock
Second Floor
Los Angeles, CA 90067
Opportunity Associates L.P............................. Series B 2,320(5) 6%
Preferred
1800 Avenue of Stars Stock
Second Floor
Los Angeles, CA 90067
</TABLE>
55
<PAGE> 57
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER % OF
OF BENEFICIAL OWNER TITLE OF CLASS OF SHARES CLASS (1)
------------------- -------------- --------- ---------
<S> <C> <C> <C>
KAIM Non-Traditional, L.P.............................. Series C 23,000(6) 100%
Preferred
1800 Avenue of Stars Stock
Second Floor
Los Angeles, CA 90067
Arbco Associates, L.P.................................. Series C 8,280(6) 36%
Preferred
1800 Avenue of Stars Stock
Second Floor
Los Angeles, CA 90067
Offense Group Associates, L.P.......................... Series C 7,240(6) 32%
Preferred
1800 Avenue of Stars Stock
Second Floor
Los Angeles, CA 90067
Kayne, Anderson Non-Traditional Investments, L.P....... Series C 6,100(6) 27%
Preferred
1800 Avenue of Stars Stock
Second Floor
Los Angeles, CA 90067
Opportunity Associates L.P............................. Series C 1,380(6) 6%
Preferred
1800 Avenue of Stars Stock
Second Floor
Los Angeles, CA 90067
Carl C. Icahn.......................................... Series D 100,000(2) 100%
Preferred
114 West 47th Street Stock
19th Floor
New York, NY 10036
KAIM Non-Traditional, L.P.............................. Series E 2,500(7) 21%
Preferred
1800 Avenue of Stars Stock
Second Floor
Los Angeles, CA 90067
Foremost Insurance Company............................. Series E 7,500(8) 63%
Preferred
5230 33rd Street, S.E. Stock
Grand Rapids, MI 49512
Topa Insurance Company................................. Series E 2,000(8) 17%
Preferred
c/o Kayne, Anderson Investment Management, Inc. Stock
1800 Avenue of Stars
Second Floor
Los Angeles, CA 90067
Kayne, Anderson Offshore Ltd........................... Series E 2,500(7) 21%
c/o KAIM Non-Traditional, L.P.
Preferred
1800 Avenue of Stars Stock
Second Floor
Los Angeles, CA 90067
</TABLE>
- ---------------
(1) Based upon the 40,106,320 shares of Common Stock, 38,687 shares of issued
and outstanding Series B Preferred Stock, 23,000 shares of issued and
outstanding Series C Preferred Stock, 100,000 shares of issued and
outstanding Series D Preferred Stock and 12,000 shares of issued and
outstanding Series E Preferred Stock that are outstanding as of November 19,
1997. For each person or group, the percentages are calculated on the basis
of the amount of outstanding securities of the particular class plus any
securities that such person or group has the right to acquire within 60 days
of November 15, 1997 pursuant to options, warrants, conversion privileges or
other rights.
56
<PAGE> 58
(2) High River, the record owner of these shares, is a Delaware limited
partnership, and has pledged these shares to ING Capital. Riverdale
Investors Corp., Inc. is a Delaware corporation and is the general partner
of High River. Mr. Carl C. Icahn is the sole stockholder and a director of
Riverdale. Riverdale's principal business address is 90 South Bedford Road,
Mount Kisco, New York 10549, and Mr. Icahn's principal business address is
c/o Icahn Associates Corp., 114 West 47th Street, 19th Floor, New York, New
York 10036. Gascon Partners, a New York general partnership, an affiliate of
Mr. Icahn, High River and Riverdate holds warrants to purchase 300,000
shares of Common Stock. The ownership figures in the table assume that all
the shares of Series D Preferred Stock are converted and warrants for
1,000,000 shares of Common Stock are exercised. Riverdale and Mr. Icahn, by
virtue of their relationships to High River and Gascon, may be deemed to
beneficially own (as that term is defined in Rule 13d-3 under the Exchange
Act) the shares which High River directly beneficially owns and the shares
which Gascon has warrants to purchase. Each of Riverdale and Mr. Icahn
disclaims beneficial ownership of such shares for all other purposes. Mr.
Robert J. Mitchell has been appointed a director of the Company as the
representative of the holders of the Series D Preferred Stock. Mr. Mitchell
does not have dispositive or voting power over any of the shares owned by
High River.
(3) Richard A. Kayne ("Kayne") is President, Chief Executive Officer and
Director of Kayne Anderson Investment Management Inc. ("KAIM") and of KA
Associates, Inc., a registered broker/dealer. KAIM is the general partner of
KAIM Non-Traditional, L.P. ("KAIM N-T"), a registered investment advisor
which is the general partner of and investment advisor to the investment
partnerships referred to in this footnote. Mr. Kayne is also a limited
partner in each investment partnership and a general partner on one of them.
Mr. Kayne and KAIM N-T have shared dispositive and voting power through
investment partnerships for 38,687 shares of Series B Preferred Stock,
23,000 shares of Series C Preferred Stock, and 2,500 shares of Series E
Preferred Stock, which may be converted at anytime into 2,380,738, 1,150,000
and 111,111 shares of Common Stock, respectively, and for warrants to
purchase 217,000 shares of Common Stock. The percentage ownership figures in
the table assume that all shares of Series B Preferred Stock, Series C
Preferred Stock and Series E Preferred Stock are converted, the warrants to
purchase 217,000 shares of Common Stock are exercised and 3,858,849 shares
of Common Stock are issued, and such shares are added to the shares of
Common Stock outstanding. Mr. Kayne disclaims beneficial ownership of the
shares held by the investment partnerships in excess of the amount
attributable to him by virtue of his direct interest as a limited or general
partner and by virtue of his indirect interest in KAIM N-T's interest in the
investment partnerships. KAIM N-T disclaims beneficial ownership of the
shares held by the investment partnerships in excess of the amount
attributable to them by virtue of their percentage interest in the
investment partnerships. Mr. Robert V. Sinnott is Senior Vice President and
Senior Investment Officer of KAIM N-T, and Mr. Elwood W. Schafer is a
consultant to KAIM. Both are Directors of the Company; neither Mr. Sinnott
nor Mr. Schafer have dispositive or voting power over any of these shares.
(4) Croft-Leominster, Inc. the record owner of the shares, is a Maryland
corporation.
(5) For information on Richard A. Kayne, KAIM and KAIM N-T, see footnote (3)
above. Arbco Associates L.P. has shared dispositive and voting power with
Mr. Kayne, and KAIM N-T of 13,928 shares of Series B Preferred Stock, which
is convertible at any time into 857,107 shares of Common Stock. Offense
Group Associates has shared dispositive and voting power with Mr. Kayne, and
KAIM N-T for 11,607 shares of Series B Preferred Stock, which is convertible
at any time into 714,276 shares of Common Stock. Kayne, Anderson
Non-Traditional Investments has shared dispositive and voting power with Mr.
Kayne, and KAIM N-T for 10,832 shares of Series B Preferred Stock, which is
convertible at any time into 666,584 shares of Common Stock. Opportunity
Associates L.P. has shared dispositive and voting power with Mr. Kayne, and
KAIM N-T of 2,320 shares of Series B Preferred Stock, which is convertible
at any time into 142,769 shares of Common Stock.
(6) For information on Richard A. Kayne, KAIM and KAIM N-T, see footnote (3)
above. Arbco Associates L.P. has shared dispositive and voting power with
Mr. Kayne, and KAIM N-T of 8,280 shares of Series C Preferred Stock, which
is convertible at any time into 414,000 shares of Common Stock. Offense
Group Associates has shared dispositive and voting power with Mr. Kayne, and
KAIM N-T for 7,240 shares of Series C Preferred Stock, which is convertible
at any time into 362,000 shares of
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Common Stock. Kayne, Anderson Non-Traditional Investments has shared
dispositive and voting power with Mr. Kayne, and KAIM N-T for 6,100 shares
of Series C Preferred Stock, which is convertible at any time into 305,000
shares of Common Stock. Opportunity Associates L.P. has shared dispositive
and voting power with Mr. Kayne, and KAIM N-T of 1,380 shares of Series C
Preferred Stock, which is convertible at any time into 69,000 shares of
Common Stock.
(7) For information on Richard A. Kayne, KAIM and KAIM N-T, see footnote (3)
above. Arbco Associates, L.P. has shared dispositive and voting power with
Mr. Kayne, and KAIM N-T of warrants for 96,250 shares of Common Stock.
Offense Group Associates, L.P. has shared dispositive and voting power with
Mr. Kayne, and KAIM N-T for warrants for 47,250 shares of Common Stock.
Kayne, Anderson Non-Traditional Investments, L.P. has shared dispositive and
voting power with Mr. Kayne, and KAIM N-T for warrants for 56,000 shares of
Common Stock. Kayne, Anderson Offshore Limited has shared dispositive and
voting power with Mr. Kayne, and KAIM N-T for 2,500 shares of Series E
Preferred Stock, which is convertible at any time into 111,111 shares of
Common Stock, and warrants for 17,500 shares of Common Stock.
(8) Foremost Insurance Company has dispositive and voting power for 7,500 shares
of Series E Preferred Stock, which is convertible at any time into 333,333
shares of Common Stock, and warrants for 105,000 shares of Common Stock.
Topa Insurance Company has dispositive and voting power for 2,000 shares of
Series E Preferred Stock, which is convertible at any time into 88,888
shares of Common Stock, and warrants for 28,000 shares of Common Stock.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information concerning the beneficial
ownership of the Company's capital stock as of November 15, 1997 by each of the
Company's present directors and executive officers and certain other parties,
and the directors and executive officers of the Company as a group, all as
reported by each such person as of November 15, 1997.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER % OF
OF BENEFICIAL OWNER TITLE OF CLASS OF SHARES CLASS(1)
------------------- -------------- --------- --------
<S> <C> <C> <C>
Miles D. Bender............................ Common Stock 1,248,244(1) 3.1%
Bob G. Alexander........................... Common Stock 400,002(2) 1.0%
Jim L. David............................... Common Stock 432,889(3) 1.1%
George B. McCullough....................... Common Stock 406,852(4) 1.0%
Robert H. Kite............................. Common Stock 374,955(5) --(7)
Norman C. Miller........................... Common Stock 339,860(6) --(7)
William T. Jones........................... Common Stock 135,000(8) --(7)
George N. McDonald......................... Common Stock 125,523(9) --(7)
Philip D. Devlin........................... Common Stock 50,000(10) --(7)
Melissa H. Rutledge........................ Common Stock 35,000(11) --(7)
Robert V. Sinnott.......................... Common Stock 27,500(12) --(7)
Elwood W. Schafer.......................... Common Stock 9,500(13) --(7)
Robert J. Mitchell......................... Common Stock --(14) --(7)
Gene Anderson.............................. Common Stock --(15) --(7)
Dewayne Cravens............................ Common Stock --(16) --(7)
All officers and directors as a group
(15 people).............................. Common Stock 3,585,325(17) 8.9%
All officers and directors as a group
(15 people).............................. Outstanding Preferred Stock -- --
</TABLE>
- ---------------
(1) Includes 1,098,244 shares held directly by Mr. Bender, 12,500 shares held
in a trust for Mr. Bender's minor child and options to purchase 150,000
shares, but does not include options to purchase 950,000 shares which are
not yet exercisable.
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<PAGE> 60
(2) Includes 60,002 shares owned by Mr. Alexander's wife, Donna Ports
Alexander, but does not include options to purchase 37,500 shares which are
not yet exercisable. Mr. Alexander disclaims any beneficial interest in the
shares owned by his wife.
(3) Does not include options to purchase 30,000 shares which are not yet
exercisable.
(4) Includes 371,852 shares held directly by Mr. McCullough and immediately
exercisable options to purchase 35,000 shares, but does not include options
to purchase 52,500 shares which are not yet exercisable. Also does not
include 5,405 shares owned by Mr. McCullough's sons, for which Mr.
McCullough disclaims beneficial ownership.
(5) Robert H. Kite is Chief Operating Officer and 33.0% beneficial owner of
KFT, Ltd. and may be deemed to be the beneficial owner of shares held by
KFT, Ltd. KFT, Ltd. holds 176,297 shares and Mr. Kite holds 171,158 shares
directly. The share figure in the table also includes options to purchase
27,500 shares, but does not include options to purchase 32,500 shares which
are not yet exercisable.
(6) Mr. Miller owns 274,860 shares directly, and 50,000 shares through Incorp,
Inc., of which Mr. Miller is owner. Includes options to purchase 15,000
shares, but does not include options to purchase 52,500 shares which are
not yet exercisable.
(7) Less than one percent.
(8) Includes 50,000 shares held directly by Mr. Jones and options to purchase
85,000 shares, but does not include options to purchase 125,000 shares
which are not yet exercisable.
(9) Includes 118,023 shares held directly by Mr. McDonald and options to
purchase 7,500 shares, but does not include options to purchase 32,500
shares which are not yet exercisable.
(10) Includes 50,000 shares of restricted Common Stock granted to Mr. Devlin,
but does not include options to purchase 10,000 shares which are not yet
exercisable.
(11) Includes 10,000 shares held directly by Ms. Rutledge and options to
purchase 25,000 shares, but does not include options to purchase 35,000
shares which are not yet exercisable.
(12) Includes options to purchase 27,500 shares held by Mr. Sinnott, but does
not include options to purchase 32,500 shares which are not yet
exercisable.
(13) Includes 2,000 shares held directly by Mr. Schafer and options to purchase
7,500 shares, but does not include options to purchase 32,500 shares which
are not yet exercisable.
(14) Does not include options to purchase 25,000 shares which are not yet
exercisable.
(15) Does not include options to purchase 25,000 shares which are not yet
exercisable.
(16) Does not include options to purchase 25,000 shares which are not yet
exercisable.
(17) Includes a total of 3,205,325 shares held directly or indirectly by the
executive officers and directors and options and warrants to purchase
380,000 shares which are exercisable within 60 days of November 19, 1997.
Under the terms of the Series D Preferred Stock, a change in control of the
Company may occur if any of the events occur that trigger the Series D Preferred
Stock Contingent Voting Rights (as defined) to elect one-half of the Board of
Directors plus one member and if such rights are exercised by such holder. See
"Description of Capital Stock -- Series D Preferred Stock."
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<PAGE> 61
CERTAIN TRANSACTIONS
The Company has entered into an agreement (the "IAC Agreement") with Icahn
Associates Corp. ("IAC"), an affiliate of Carl C. Icahn, who is a beneficial
owner of more than 5% of the Company's Common Stock. Pursuant to the IAC
Agreement, IAC has agreed to commit $10 million to participate for specified
interests in each of the prospects generated or acquired by the Company through
September 30, 1998. Each party is entitled to certain rights of first refusal in
the event that the other party decides to sell all or part of its participation
interest in a prospect in which both parties are participating. As partial
consideration for IAC's obligations under the participation agreement, the
Company has also granted Gascon Partners, an affiliate of IAC, certain warrants,
which will become exercisable no later than December 31, 1997 and will expire
July 11, 2002, to purchase 300,000 shares of Common Stock at an exercise price
of three dollars ($3.00) per share. See "Security Ownership of Certain
Beneficial Owners and Management -- Security Ownership of Certain Beneficial
Owners."
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<PAGE> 62
DESCRIPTION OF THE SERIES F PREFERRED STOCK
The following is a summary of certain terms of the Series F Preferred
Stock. This summary is not intended to be complete and is subject to, and
qualified in its entirety by reference to, the Certificate of Incorporation of
the Company and Certificate of Designations to be filed with the Secretary of
State of the State of Delaware setting forth the rights, preferences and
limitations of the Series F Preferred Stock (the "Certificate of Designations"),
a copy of which has been filed with the Commission as an exhibit to the
Registration Statement of which this Prospectus is a part.
GENERAL
Under its Certificate of Incorporation, the Company has authority to issue
1,000,000 shares of preferred stock, par value $1.00 per share, and the Board of
Directors is authorized to establish and designate the classes, series, voting
powers, designations, preferences and relative, participating, optional or other
rights, and such qualifications, limitations and restrictions of the preferred
stock as the Board of Directors, in its sole discretion, may determine without
further vote or action by the stockholders. The Board of Directors has approved
the issuance of the Series F Preferred Stock and the filing of the Certificate
of Designations substantially in accordance with the terms described below. As
of November 15, 1997, 38,687, 23,000, 100,000 and 12,000 shares of the Company's
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and
Series E Preferred Stock, respectively, were outstanding, with liquidation
amounts of $100 per share for each series, plus any accrued but unpaid dividends
at such time.
RANKING
The Series F Preferred Stock will rank senior to the Common Stock in right
of payment of dividends and upon liquidation, dissolution or winding up of the
Company. The Series F Preferred Stock will rank junior in the right of payment
of dividends and upon liquidation to the Series B Preferred Stock and Series C
Preferred Stock and will rank pari passu to the Series D Preferred Stock and
Series E Preferred Stock and any convertible preferred stock hereafter issued by
the Company (except to the extent any such convertible preferred stock may be
designated as junior to the Series F Preferred Stock with respect to the payment
of dividends or upon liquidation, dissolution or winding up of the Company) and
will rank pari passu to any non-convertible preferred stock hereafter issued by
the Company (except to the extent any such non-convertible preferred stock is
designated as ranking senior to the Series F Preferred Stock with respect to the
payment of dividends or upon liquidation, dissolution or winding up of the
Company). The Company may not, without the consent of the holders of at least a
majority of the Series F Preferred Stock, create, authorize or issue, or
reclassify any authorized stock of the Company into, or create, authorize or
issue any obligation or security convertible or exchangeable into or evidencing
a right to purchase, any shares of any class of capital stock of the Company
ranking senior to the Series F Preferred Stock, except for non-convertible
preferred stock, which may be authorized and issued without such consent. The
Company may issue additional series of preferred stock ranking on parity with
the Series F Preferred Stock without the consent of the holders of the Series F
Preferred Stock.
DIVIDENDS
Holders of the Series F Preferred Stock are entitled to receive if, when
and as declared by the Board of Directors out of funds legally available
therefor, cash dividends at the rate per share stated on the cover of this
Prospectus, payable quarterly in arrears on March 31, June 30, September 30 and
December 31 of each year, commencing March 31, 1998. Dividends on the Series F
Preferred Stock will be cumulative from the date of initial issuance, and will
payable to holders of record as of such record dates as shall be fixed by the
Board of Directors, which record dates shall not be more than 60 nor less than
10 days preceding the dividend payment date. Accrued but unpaid dividends will
not bear interest.
No dividends or other cash distributions may be set aside or paid with
respect to any shares of capital stock ranking junior or pari passu to the
Series F Preferred Stock (including the Common Stock) nor may any such capital
stock be redeemed, repurchased or otherwise acquired for cash consideration by
the Company
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unless and until all accumulated and unpaid dividends on the Series F Preferred
Stock have been paid, except as provided below.
Whenever all accrued dividends are not paid in full on the Series F
Preferred Stock or any parity dividend stock, all dividends declared on the
Series F Preferred Stock and such parity dividend stock will be declared and
made pro rata so that the amount of dividends declared per share on the Series F
Preferred Stock and such parity dividend stock will bear the same ratio that
accrued and unpaid dividends per share on the Series F Preferred Stock and such
parity dividend stock bear to each other.
Any accrued, but unpaid dividends in arrearage past the payment date shall
be added to the liquidation preference until paid (the "Aggregate Liquidation
Preference").
CONVERSION RIGHTS
The Series F Preferred Stock will be convertible into shares of the Common
Stock at the option of the holder, at any time prior to redemption, at a
conversion rate equal to the Aggregate Liquidation Preference of the shares of
Series F Preferred Stock surrendered for conversion, divided by the Conversion
Price. Notwithstanding the foregoing, if shares of the Series F Preferred Stock
are called for redemption, the conversion right will terminate at the close of
business on the date fixed for redemption.
The initial Conversion Price set forth on the cover page of this Prospectus
is subject to adjustment (under formulas set forth in the Certificate of
Designations) in certain events, including (i) Common Stock dividends or
distributions, (ii) subdivisions, splits and combinations of outstanding shares
of Common Stock, (iii) the issuance or distribution of Common Stock of the
Company or of any subsidiary of the Company which is not wholly owned or the
issuance, distribution or re-pricing of options, rights, warrants or convertible
or exchangeable securities ("Options") entitling the holder thereof to subscribe
for, purchase, convert into or exchange for Common Stock of the Company at less
than the current market price on the date of issuance, distribution or
re-pricing of the Options, but in each case only if such issuance, distribution
or re-pricing is made generally to or for the benefit of holders of Common Stock
or capital stock of any subsidiary of the Company which is not wholly owned or
of a class or series of outstanding capital stock convertible into or
exchangeable or exercisable for Common Stock or capital stock of any subsidiary
of the Company which is not wholly owned, (iv) the dividend or distribution of
assets, properties, or evidences of indebtedness (with certain exclusions) to
holders of Common Stock and holders of other capital stock convertible into
Common Stock, and (v) distributions of cash (other than in connection with the
liquidation or dissolution of the Company) to holders of Common Stock, or of a
class or series of capital stock convertible into or exchangeable or exercisable
for Common Stock (but not including any distribution to holders of the Series F
Preferred Stock or any other preferred stock senior to the Series F Preferred
Stock), generally to the extent the amount of such cash, combined with all such
cash distributions made within the preceding 12 months with respect to which no
adjustment has been made, exceeds 10% of the Company's market capitalization
(being the product of the current market price of the Common Stock multiplied by
the number of Shares of Common Stock then outstanding) on the record date for
such distribution.
Notwithstanding the foregoing, (i) if Options are exercisable only upon the
occurrence of certain triggering events, then the Conversion Price will not be
adjusted until such triggering events occur; (ii) if Options expire unexercised,
the Conversion Price will be readjusted to take into account only the actual
number of Options which were exercised; (iii) there shall be no adjustment for
the issuance of Common Stock upon the conversion or exercise of Series F
Preferred Stock or Options; and (iv) there shall be no adjustment for the
declaration, setting aside or issuance of Common Stock, warrants or rights to
acquire Common Stock or securities convertible into Common Stock to the holders
of the Series F Preferred Stock or any other preferred stock that is senior to
the Series F Preferred Stock hereafter issued by the company. In addition, the
provisions of the preceding paragraph will not apply to (a) the granting of
Options, or the issuance of Common Stock upon the exercise of such Options, in
each case under any stock-based incentive compensation plan now existing or
hereafter adopted by the Board of Directors or a committee thereunder (b) Common
Stock issued pursuant to an employee stock purchase plan, or (c) employee Common
Stock grants made to new employees of the Company, which have been approved by
the Board of Directors.
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In case of any reclassification or change of outstanding shares of the
Common Stock or the Company's consolidation with, or merger with or into, any
other entity that results in a reclassification, change, conversion, or
cancellation of outstanding shares of the Common Stock (with certain exceptions)
or any sale or transfer of all or substantially all the assets of the Company,
whereby the Common Stock is converted into other securities, cash or other
properties, the entity resulting from such reclassification, change or merger,
or formed by such consolidation, or which acquires such assets, as the case may
be, will be required to provide in its articles or certificate of incorporation
such that the holders of the Series F Preferred Stock after the
reclassification, change consolidation, merger, sale, or transfer will have the
right to convert their shares of the Series F Preferred Stock into the kind and
amount of securities, cash and other property which the holders would have been
entitled to receive upon the reclassification, change, consolidation, merger,
sale or transfer if the holders had held the Common Stock issuable upon
conversion of their shares of the Series F Preferred Stock immediately prior to
the reclassification, change, consolidation, merger, sale or transfer.
No adjustment in the Conversion Price will be required unless the
adjustment would require a change of at least two percent in the Conversion
Price then in effect; provided, however, that any adjustment that would
otherwise be required to be made will be carried forward and taken into account
in any subsequent adjustment. The Company reserves the right to make such
reduction in the Conversion Price, in addition to those required under the
provisions described above, as the Company in its discretion may determine to be
advisable in order that certain stock-related distributions which may be made by
the Company to its stockholders will not be taxable.
No fractional share or securities representing fractional shares of Common
Stock will be issued upon conversion; instead, any fractional shares resulting
from conversion will be paid in cash based on the closing sales price of the
Common Stock at the close of business on the date of conversion.
The holder of record of a share of the Series F Preferred Stock on a record
date with respect to the payment of a dividend on the Series F Preferred Stock
will be entitled to receive the dividend on that share of the Series F Preferred
Stock on the corresponding dividend payment date notwithstanding the conversion
of the share after the record date or any default by the Company in the payment
of the dividend payable on that dividend payment date. Except as described above
for accrued, but unpaid dividends in arrearage, no payment or adjustment is to
be made on conversion for accrued and unpaid dividends on the shares of the
Series F Preferred Stock or for dividends on the Common Stock issued on
conversion.
SPECIAL CONVERSION RIGHTS
The Series F Preferred Stock has a special conversion right that becomes
effective upon the occurrence of certain types of significant transactions
affecting ownership or control of the Company or the market for the Common Stock
or the Series F Preferred Stock. The purpose of the special conversion rights is
to provide partial loss protection upon the occurrence of a Change of Control
(as defined) at a time when the market value of the Common Stock is less than
the then prevailing Conversion Price. In such situation, the special conversion
right would, for a 45-day period, reduce the then prevailing Conversion Price to
the market value of the Common Stock, except that the Conversion Price will not
be reduced below $ per share of Common Stock (which is 66 2/3% of the
Conversion Price), subject to certain adjustments described below (the "Special
Conversion Price"). Consequently, to the extent that the market value of the
Common Stock is less than the minimum Special Conversion Price, a holder of the
Series F Preferred Stock will not be fully protected from loss upon exercise of
a special conversion right.
The special conversion right is intended to provide limited loss protection
to investors in certain circumstances while not giving holders a veto power over
significant transactions affecting ownership or control of the Company. Although
the special conversion right may render more costly or otherwise inhibit certain
proposed transactions, its primary purpose is not to inhibit or discourage
takeovers or other business combinations.
Each holder of the Series F Preferred Stock will be entitled to a special
conversion right if a Change of Control occurs as set forth below. Upon a Change
of Control, the special conversion right will permit each holder of the Series F
Preferred Stock, at the holder's option during the 45-day period described
below, to
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convert all, but not less than all, of the holder's Series F Preferred Stock at
the Special Conversion Price. Upon such conversion, the holder will receive
Common Stock or the kind and amount of cash, securities or other assets
receivable upon such Change of Control by a holder of the number of shares of
Common Stock into which the Series F Preferred Stock of the holder exercising
the special conversion right would have been convertible immediately prior to
the Change of Control at the Special Conversion Price. However, the Company or
its successor may, at its option, elect to provide the holder with cash equal to
the market value of the number of shares of Common Stock into which the holder's
Series F Preferred Stock would have been convertible immediately prior to such
Change of Control at the Special Conversion Price, but only if the Company, in
its notice to holders that a Change of Control has occurred, has notified such
holder of the election to provide cash in lieu of other consideration.
The Company will mail to each registered holder of the Series F Preferred
Stock a notice setting forth details of any special conversion right occasioned
by a Change of Control, together with all information required by applicable
securities laws related thereto, within 30 days after the event occurs. A
special conversion right may be exercised only within the 45-day period after
the notice is mailed and will expire at the end of that period. Exercise of a
special conversion right is revocable by the holder at any time prior to the
conversion date by notice of withdrawal to the conversion agent, and all the
Series F Preferred Stock tendered for conversion will be converted at the end of
the 45-day period mentioned in the preceding sentence. In the event that a
Change of Control occurs, the Company will comply with all applicable provisions
of the Exchange Act and the rules and regulations issued thereunder including,
without limitation, Sections 13(e) and 14(e) under the Exchange Act and the
rules thereunder, including Rule 13e-4. The Series F Preferred Stock that is not
converted pursuant to a special conversion right will continue to be convertible
pursuant to the general conversion rights described above under " -- Conversion
Rights."
The special conversion right is not intended to, and does not, protect
holders of the Series F Preferred Stock in all circumstances that might affect
ownership or control of the Company or the market for the Common Stock or the
Series F Preferred Stock, or otherwise adversely affect the value of an
investment in the Series F Preferred Stock. The ability to control the Company
may be obtained by a person even if that person does not acquire the right to
vote a majority of the Company's voting stock or to elect a majority of the
Board of Directors. In addition, the Company and the market for the Common Stock
or Series F Preferred Stock may be affected by various transactions that do not
constitute a Change of Control. In particular, transactions involving transfer
or conversion of less than a majority of the Common Stock or the Series F
Preferred Stock may have a significant effect on the Company, the market for the
Common Stock or the Series F Preferred Stock, as could other transactions which
are exempted from the definitions of Change of Control, as described below. If
the special conversion right does arise as the result of a Change of Control,
the special conversion right will allow a holder exercising such right to
receive the same type of consideration received by holders of the Common Stock
and, accordingly, the degree of protection afforded by the special conversion
right may be affected by the type of consideration received.
As used herein, a "Change of Control" means the occurrence of the following
events after the date of issuance of the Series F Preferred Stock: (i) any
person (including, without limitation, any "person" within the meaning of
Section 13(d) or 14(d) of the Exchange Act, but excluding the Company, any
subsidiary controlled by the Company and any incentive compensation plan or
employee benefit plan of the Company or any such subsidiary) becomes the direct
or indirect beneficial owner of shares of Capital Stock representing greater
than 50% of the combined voting power of all outstanding shares of capital stock
entitled to vote in the election of directors under ordinary circumstances
("Voting Stock"); (ii) the Company consolidates with or merges into any other
Person and the outstanding Common Stock is changed or exchanged as a result;
(iii) the Company sells, conveys, transfers or otherwise disposes of all or
substantially all of the collective assets of the Company and its subsidiaries
to any other entity; (iv) at any time Continuing Directors (as defined) do not
constitute 50% of the Board of Directors then in office; or (v) on any day the
Company makes any distribution or distributions of cash, property or securities
(other than regular quarterly dividends, Common Stock, preferred stock which is
substantially equivalent to Common Stock or rights to acquire Common Stock or
rights to acquire preferred stock which is substantially equivalent to Common
Stock) to holders of Common Stock generally, or the Company or any of its
subsidiaries purchases or otherwise acquires
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Common Stock, and the sum of the fair market value of such distribution or
purchase on the date the same is made, plus the fair market value, when made, of
all other such distributions and purchases which have occurred during the 12
month period ending on such date, in each case expressed as a percentage of the
aggregate current market price of all of the shares of Common Stock outstanding
at the close of business on the last trading day prior to the date of each such
distribution or purchase, exceeds 50%. A "Change of Control" shall not be deemed
to occur in (i) above if as a result of a consolidation or merger or purchase of
assets or capital stock (the "Event") (x) the corporation's Common Stock is
publicly traded on a nationally recognized exchange, (y) immediately following
such Event, the Continuing Directors constitute at least 50% of the Board of
Directors, and (z) the Company's market capitalization plus the fully-diluted
effect, if any, of all capital stock issued to such person immediately following
the Event is at least 85% of the market capitalization immediately prior to the
Event, and in (ii) above if at least 85% of the consideration received by the
holders of Common Stock is in the form of capital stock that is publicly traded
on a nationally recognized exchange. "Continuing Director" means at any date any
member of the Corporation's Board of Directors who (A) is a member of the Board
of Directors on the date of issuance of the Series F Preferred Stock or (B) was
nominated for election or elected to the Board of Directors with the affirmative
vote of at least a majority of the directors who were Continuing Directors at
the time of such nomination or election or whose election to the Board of
Directors was recommended or endorsed by the affirmative vote of at least a
majority of the directors who were Continuing Directors at the time of such
election.
The Special Conversion Price will be adjusted each time the Conversion
Price is adjusted, so that the ratio of such amount to the Conversion Price,
after giving effect to any such adjustment, shall always be the same as the
ratio of $ to the initial Conversion Price, without giving effect to
any such adjustment.
As used herein, "market value" of the Common Stock, the Series F Preferred
Stock, or any other security is the average of the last reported sale price of
the Common Stock or such other security, as the case may be, for the five
trading days ending on the last business day preceding the date of the Change of
Control.
Adjustments to the Conversion Price of the Series F Preferred Stock may be
taxable to the holders of the Series F Preferred Stock as a dividend for federal
income tax purposes.
VOTING RIGHTS
The holders of the Series F Preferred Stock will vote in all matters with
the Common Stock (one vote per Depositary Share). In addition without the
affirmative vote or consent of the holders of at least a majority of the number
of shares of the Series F Preferred Stock then outstanding, the Company may not
(i) create or issue or increase the authorized number of shares of any class of
classes or series of stock ranking senior to the Series F Preferred Stock either
as to dividends or upon liquidation, except for the authorization and/or
issuance of non-convertible preferred stock which shall be permitted without
such vote, or (ii) amend or alter or repeal any of the provisions of the
Certificate of Incorporation of the Company so as to affect adversely the
preferences or rights of the Series F Preferred Stock.
In the event the Company misses payments on six quarterly dividends payable
on the Series F Preferred Stock, which dividend payments remain unpaid, or if
any holders of Outstanding Preferred Stock or any future class of preferred
stockholders are entitled to elect a majority of the Directors, the number of
Directors of the Company shall be increased, if necessary, to such number as may
be necessary to enable the holders of Series F Preferred Stock and all such
other future preferred stockholders, voting as a class, to elect two additional
Directors of the Company. Upon any termination of such rights to vote for
Directors by such other holders of Outstanding Preferred Stock or any future
class of preferred stockholders, or upon the payment of all dividends in
arrears, the term of office of all Directors so elected shall terminate.
COMPANY'S RIGHT OF REDEMPTION
The Series F Preferred Stock is not subject to any mandatory redemption or
sinking fund provision. The Series F Preferred Stock will not be redeemable by
the Company prior to January 1, 2001. On and after
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January 1, 2002, the Series F Preferred Stock will be redeemable at the option
of the Company, in whole or in part, at any time at the redemption prices set
forth below, plus accumulated and unpaid dividends:
<TABLE>
<CAPTION>
DURING THE 12 MONTH PERIOD
COMMENCING JANUARY 2, REDEMPTION PRICE
- -------------------------- ----------------
<S> <C>
2001........................................................ $525.00
2002........................................................ $
2003........................................................ $
2004 and thereafter......................................... $500.00
</TABLE>
If fewer than all of the shares of Series F Preferred Stock are to be
redeemed, the shares to be redeemed shall be selected by lot or pro rata or in
some other equitable manner determined by the Company in its sole discretion. In
the event that the Company has failed to pay accrued and unpaid dividends on the
Series F Preferred Stock, it may not redeem any of the then outstanding shares
of the Series F Preferred Stock until all such accrued and unpaid dividends and
the then current quarterly dividends have been paid in full.
Notice of redemption must be mailed to each holder of the Series F
Preferred Stock to be redeemed at his last address as it appears upon the
Company's registry books at least 30 days prior to the record date of such
redemption. On and after the redemption date, dividends will cease to accumulate
on shares of the Series F Preferred Stock called for redemption.
On or after the redemption date, holders of shares of the Series F
Preferred Stock which have been redeemed shall surrender their certificates
representing such shares to the Company at its principal place of business or as
otherwise specified and thereupon the redemption price of such shares shall be
payable to the order of the person whose name appears on such certificate or
certificates as the owner thereof; provided, however, that a holder of the
Series F Preferred Stock may elect to convert such shares into Common Stock at
any time prior to the close of business on the date fixed for redemption.
From and after the redemption date, all rights of the holders of the Series
F Preferred Stock so redeemed shall cease with respect to such shares and such
shares shall not thereafter be transferred on the books of the Company or be
deemed to be outstanding for any purpose whatsoever.
LIQUIDATION RIGHTS
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of the Series F Preferred Stock will be
entitled to receive, out of the assets of the Company available for distribution
to stockholders, a liquidating distribution of $500 per share, plus any
accumulated and unpaid dividends (whether or not earned or declared) before any
payment or distribution of the assets of the Company (whether capital or
surplus), or the proceeds thereof, may be made or set apart for the holders of
the Common Stock or any other stock ranking junior to the Series F Preferred
Stock. If upon any voluntary or involuntary liquidation, dissolution or winding
up of the Company, the assets of the Company are insufficient to pay in full the
amount payable with respect to the Series F Preferred Stock and any other class
of capital stock ranking on a parity with the Series F Preferred Stock upon
liquidation, the holders of the Series F Preferred Stock and shares of such
other parity stock will share ratably in any such distribution of the Company's
assets in proportion to the full respective distributable amounts to which they
are entitled. After payment of the full amount of the liquidation preference to
which they are entitled, the holders of shares of the Series F Preferred Stock
will not be entitled to any further participation in any distribution of assets
of the Company.
LIMITATION ON DIVIDEND RESTRICTIONS AFFECTING SUBSIDIARIES
The Company may not, and may not permit any of its subsidiaries to, create
or otherwise cause or suffer to exist or become effective any encumbrance or
restriction of any kind on the ability of any subsidiary of the Company to (a)
pay to the Company dividends or make to the Company any other distribution on
its capital stock, (b) pay any debt owed to the Company or any of its
subsidiaries, (c) make loans or advances to the Company or any of its
subsidiaries or (d) transfer any of its property or assets to the Company or any
of its
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subsidiaries, other than such encumbrances or restrictions existing or created
under or by reason of (i) applicable law, (ii) covenants or restrictions
contained in any instrument governing debt of the Company or any of its
subsidiaries existing on the date of this Prospectus, (iii) customary provisions
restricting subletting, assignment and transfer of any lease governing a
leasehold interest of the Company or any of its subsidiaries or in any license
or other agreement entered into in the ordinary course of business, or (iv) any
agreement governing debt of a person acquired by the Company or any of its
subsidiaries in existence at the time of such acquisition (but not created in
contemplation thereof, except for acquisition debt which by its terms matures
within twelve months of creation), which encumbrances or restrictions are not
applicable to any person, or the property or assets of any person, other than
the person, or the property or assets of the person so acquired.
MISCELLANEOUS
The holders of the Series F Preferred Stock are not entitled to preemptive
rights to subscribe for or to purchase any shares or securities of any class
which may at any time be issued, sold or offered for sale by the Company. Shares
of Series F Preferred Stock redeemed or otherwise reacquired by the Company may
be put in Treasury by the Company and shall be available for subsequent issuance
upon a vote of the Board of Directors, or such other transfer agent then
employed by the Company, will be the transfer agent for the Series F Preferred
Stock.
DESCRIPTION OF DEPOSITARY SHARES
The description set forth below and in any supplement hereto or amendment
hereof of certain provisions of the Deposit Agreement (as defined) and of the
Depositary Shares and Depositary Receipts does not purport to be complete and is
subject to and qualified in its entirety by reference to the forms of Deposit
Agreement and Depositary Receipts relating to the Series F Preferred Stock which
have been or will be filed with the Commission at or prior to the time of the
Offering.
GENERAL
Each Depositary Share represents a one-tenth interest in one share of
Series F Preferred Stock. The shares of the Series F Preferred Stock underlying
the Depositary Shares will be deposited under a separate Deposit Agreement (the
"Deposit Agreement") between the Company and (the "Depositary") and
the holders from time to time of the depositary receipts (the "Depositary
Receipts") issued by the Depositary. The Depositary Receipts evidence the
Depositary Shares. Subject to the terms of the Deposit Agreement, each owner of
a Depositary Share will be entitled, proportionally, to all the rights and
preferences of and subject to all the limitations of the interest in the Series
F Preferred Stock underlying such Depositary Share (including, as applicable,
dividend, voting, redemption, conversion and liquidation rights and
preferences).
Pending the preparation of definitive engraved Depositary Receipts, the
Depositary may, upon the written order of the Company, issue temporary
Depositary Receipts substantially identical to (and entitling the holders
thereof to all the rights pertaining to) the definitive Depositary Receipts but
not in definitive form. Definitive Depositary Receipts will be prepared
thereafter without unreasonable delay, and temporary Depositary Receipts will be
exchangeable for definitive Depositary Receipts at the Company's expense.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Depositary will distribute all cash dividends or other cash
distributions received in respect of the Series F Preferred Stock to the record
holders of Depositary Shares relating to such Series F Preferred Stock in
proportion to the number of such Depositary Shares owned by such holders on the
relevant record date. The Depositary shall distribute only such amount, however,
as can be distributed without attributing to any holder of Depositary Shares a
fraction of one cent and any balance not so distributed shall be rounded to the
next highest whole cent.
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<PAGE> 69
In the event of a distribution other than in cash, the Depositary will
distribute property received by it to the record holders of Depositary Shares
entitled thereto, in proportion, as nearly as practicable, to the number of
Depositary Shares owned by such holders on the relevant record date, unless the
Depositary determines, after consultation with the Company, that it is not
feasible to make such distribution, in which case the Depositary may, with the
approval of the Company, adopt such method of distribution as it deems equitable
and appropriate, including the sale of such property and distribution of the net
proceeds from such sale to such holders.
The Deposit Agreement also contains provisions relating to the method by
which any subscription or similar rights offered by the Company to holders of
the Series F Preferred Stock will be made available to holders of Depositary
Shares.
REDEMPTION OF DEPOSITARY SHARES
Upon any redemption of the Series F Preferred Stock underlying the
Depositary Shares, the Depositary Shares will be redeemed from the proceeds
received by the Depositary resulting from the redemption, in whole or in part,
of the Series F Preferred Stock held by the Depositary. The Depositary will mail
notice of redemption not less than 30 and not more than 60 days prior to the
date fixed for redemption to the record holders of the Depositary Shares to be
so redeemed at their respective addresses appearing in the Depositary's books.
The redemption price per Depositary Share will be equal to 1/10 of the
redemption price per share payable with respect to such series of the Series F
Preferred Stock. Whenever the Company redeems shares of Series F Preferred Stock
held by the Depositary, the Depositary will redeem as of the same redemption
date the number of Depositary Shares relating to shares of the Series F
Preferred Stock so redeemed. If less than all of the Depositary Shares are to be
redeemed, the Depositary Shares to be redeemed will be selected by lot, pro rata
or any other equitable method as may be determined by the Company.
After the date fixed for redemption, the Depositary Shares so called for
redemption will no longer be deemed to be outstanding and all rights of the
holders of the Depositary Shares will cease, except the right to receive the
moneys payable upon such redemption and any money or other property to which the
holders of such Depositary Shares were entitled upon such redemption upon
surrender to the Depositary of the Depositary Receipts evidencing such
Depositary Shares.
LIQUIDATION PREFERENCE
In the event of the liquidation, dissolution or winding up of the affairs
of the Company, whether voluntary or involuntary, the holders of each Depositary
Share will be entitled to 1/10 of the liquidation preference accorded each share
of the Series F Preferred Stock.
VOTING THE SERIES F PREFERRED STOCK
Upon receipt of notice of any meeting at which the holders of the Series F
Preferred Stock are entitled to vote, the Depositary will mail the information
contained in such notice of meeting to the record holders of the Depositary
Shares relating to such Series F Preferred Stock. Each record holder of any of
such Depositary Shares on the record date (which will be the same date as the
record date for the Series F Preferred Stock) will be entitled to instruct the
Depositary as to the exercise of the voting rights pertaining to the number of
shares of Series F Preferred Stock underlying such holder's Depositary Shares in
accordance with such instructions, and the Company will agree to take all action
which may be deemed necessary by the Depositary in order to enable the
Depositary to do so. The Depositary will abstain from voting shares of Series F
Preferred Stock to the extent it does not receive specific instructions from the
holders of Depositary Shares relating to such Series F Preferred Stock.
CONVERSION
Depositary Receipts, evidencing Depositary Shares may be surrendered with
written instructions to the Depositary to instruct the Company to cause the
conversion of any specified number of whole shares of Series F Preferred Stock
represented by whole Depositary Shares evidenced by such Depositary Receipts,
into
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<PAGE> 70
whole shares of Common Stock and cash for any fractional share amount, at the
conversion price then in effect pursuant to the Series F Preferred Stock
Certificate of Designations.
Upon receipt by the Depositary of a Depositary Receipt or Depositary
Receipts, together with a notice of conversion, duly completed and executed,
directing the Depositary to instruct the Company to cause the conversion of a
specified number of shares of Series F Preferred Stock, and an assignment of
such Depositary Receipt or Depositary Receipts to the Company or in blank, duly
completed and executed, the Depositary shall instruct the Company (i) to cause
the conversion of the number of whole shares of Series F Preferred Stock
represented by the Depositary Shares evidenced by the Depositary Receipts so
surrendered, as specified in the written notice to the Depositary and (ii) to
cause the delivery to the holders of such Depositary Receipts a certificate or
certificates evidencing the number of whole shares of Common Stock received upon
conversion of the Series F Preferred Stock, along with the amount of money, if
any, to be delivered to the holders of the Depositary Receipts surrendered for
conversion in lieu of fractional shares of Common Stock otherwise issuable. The
conversion of the shares of Series F Preferred Stock represented by the
Depositary Shares is subject to certain terms and provisions as set forth in the
Series F Preferred Stock Certificate of Designations. See "Description of Series
F Preferred Stock -- Conversion Rights" and "Description of Series F Preferred
Stock -- Special Conversion Rights."
WITHDRAWAL OF PREFERRED STOCK
Upon surrender of Depositary Receipts at the principal office of the
Depositary, upon payment of any unpaid amount due the Depositary, and subject to
the terms of the Deposit Agreement, the owner of the Depositary Shares evidenced
thereby is entitled to delivery of the number of whole shares of Series F
Preferred Stock and all money and other property, if any, represented by such
Depositary Shares. Fractional shares of Preferred Stock will not be issued. If
the Depositary Receipts delivered by the holder evidence a number of Depositary
Shares in excess of the number of Depositary Shares representing the number of
whole shares of Series F Preferred Stock to be withdrawn, the Depositary will
deliver to such holder at the same time a new Depositary Receipt evidencing such
excess number of Depositary Shares. Holders of Series F Preferred Stock thus
withdrawn will not thereafter be entitled to deposit such shares under the
Deposit Agreement or to receive Depositary Receipts evidencing Depositary Shares
therefor.
AMENDMENT AND TERMINATION OF THE DEPOSITARY AGREEMENT
The form of Depositary Receipt evidencing the Depositary Shares and any
provision of the Deposit Agreement may at any time be amended by agreement
between the Company and the Depositary. However, any amendment which imposes
certain fees, taxes or charges, or that otherwise prejudices any substantial
existing rights of the existing holders of Depositary Shares will not be
effective unless such amendment has been approved by the record holders of at
least 66 2/3% of the Depositary Shares then outstanding. Whenever so directed by
the Company, the Depositary will terminate the Deposit Agreement after mailing
notice of such termination to the record holders of all Depositary Receipts then
outstanding at least 30 days prior to the date fixed in such notice for such
termination. The Depositary may likewise terminate the Deposit Agreement if at
any time 60 days shall have expired after the Depositary shall have delivered to
the Company a written notice of its election to resign and a successor
depositary shall not have been appointed and accepted its appointment. If any
Depositary Receipts remain outstanding after the date of termination, the
Depositary thereafter will discontinue the transfer of Depositary Receipts, will
suspend the distribution of dividends to the holders thereof, and will not give
any further notices (other than notice of such termination) or perform any
further acts under the Deposit Agreement except as provided below and except
that the Depositary will continue (i) to collect dividends on the shares of
Series F Preferred Stock and any other distributions with respect thereto and
(ii) to deliver the shares of Series F Preferred Stock together with such
dividends and distributions and the net proceeds of any sales of rights,
preferences, privileges or other property, without liability for interest
thereon, in exchange for Depositary Receipts surrendered. At any time after the
expiration of two years from the date of termination, the Depositary may sell
the shares of Series F Preferred Stock then held by it at public or private
sale, at such place or places and upon such terms as it deems proper and may
thereafter hold the net proceeds of any such sale, together with any money and
other property then held by it,
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without liability for interest thereon, for the pro rata benefit of the holders
of Depositary Receipts which have not been surrendered. The Company does not
intend to terminate the Deposit Agreement or to permit the resignation of the
Depositary without appointing a successor depositary. In the event the Deposit
Agreement is terminated and a sufficient number of shares of Series F Preferred
Stock remain outstanding, the Company will use its best efforts to list the
shares of Series F Preferred Stock on the Nasdaq National Market (unless the
holders of a majority of the outstanding shares of Series F Preferred Stock
shall consent to the Company not affecting such listing).
CHARGES OF DEPOSITARY
The Company will pay all transfer and other taxes and governmental charges
arising solely from the existence of the depositary arrangements. The Company
will pay charges of the Depositary in connection with the initial deposit of the
Series F Preferred Stock and any redemption of the Series F Preferred Stock.
Holders of Depositary Shares will pay other transfer and other taxes and
governmental charges and such other charges as are expressly provided in the
Deposit Agreement to be for their accounts. In certain circumstances, the
Depositary may refuse to transfer Depositary Shares, may withhold dividends and
distributions and sell the Depositary Shares evidenced by such Depositary
Receipt if such charges are not paid.
MISCELLANEOUS
The Depositary will forward to the holders of Depositary Shares all reports
and communications from the Company which are delivered to the Depositary and
which the Company is required to furnish to the holders of the Series F
Preferred Stock. In addition, the Depositary will make available for inspection
by holders of Depositary Receipts at the principal office of the Depositary, and
at such other places as it may from time to time deem advisable, any reports and
communications received from the Company which are received by the Depositary as
the holder of Series F Preferred Stock.
Neither the Depositary nor the Company will be liable if they are prevented
or delayed by law or any circumstances beyond their control in performing their
obligations under the Deposit Agreement. The obligations of the Company and the
Depositary under the Deposit Agreement will be limited to performance in good
faith of their duties thereunder and they will not be obligated to prosecute or
defend any legal proceeding in respect of any Depositary Shares or Series F
Preferred Stock unless satisfactory indemnity is furnished. They may rely upon
written advice of counsel or accountants, or information provided by persons
presenting Series F Preferred Stock for deposit, holders of Depositary Shares or
other persons believed to be competent and on documents believed to be genuine.
RESIGNATION AND REMOVAL OF DEPOSITARY
The Depositary may resign at any time by delivering to the Company notice
of its election to do so, and the Company may at any time remove the Depositary,
any such resignation or removal to take effect upon the appointment of a
successor Depositary and its acceptance of such appointment. Such successor
Depositary must be appointed within 60 days after delivery of the notice of
resignation or removal and must be a bank or trust company having its principal
office in the United States and having a combined capital and surplus of at
least $150 million.
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DESCRIPTION OF CAPITAL STOCK
CAPITAL STOCK
The authorized capital stock of the Company consists of 100,000,000 shares
of Common Stock, par value $.01 per share; and 1,000,000 shares of Preferred
Stock, par value $1.00 per share. As of November 19, 1997, 40,106,320 shares of
Common Stock were issued and outstanding, and 11,726,463 shares of Common Stock
were reserved for issuance upon the conversion of shares of the Outstanding
Preferred Stock and upon the exercise of all outstanding warrants and options.
The issuance of additional shares of Common Stock pursuant to such conversion
rights and outstanding warrants and options would reduce the proportionate
ownership and voting rights of the Common Stock then outstanding.
SERIES B PREFERRED STOCK
The Series B Preferred Stock is convertible into shares of Common Stock at
a conversion price of $1.625 per share, entitling the holders to receive
2,226,892 shares of the Common Stock. The Series B Preferred Stock has a
liquidation and dividend preference over the Common Stock. The Series B
Preferred Stock has a 10% dividend, payable semiannually, and requires the
dividends be paid on the Series B Preferred Stock before any dividends are paid
on Common Stock. The Company has the option to make dividend payments in shares
of Series B Preferred Stock; after the sixth such payment, the holders of Series
B Preferred Stock have the option to receive additional dividends in shares of
Series B Preferred Stock or to accrue such dividends in cash. If the Company
pays dividends in shares of Series B Preferred Stock, or does not pay dividends
in either stock or cash, for four dividend payments, the holders of Series B
Preferred Stock have the right to appoint one-third of the members of the Board
of Directors.
The Series B Preferred Stock is redeemable by the Company, between June 14,
1999 and June 14, 2000, at $110 per share and thereafter at $100 per share, plus
accrued and unpaid dividends; however, the Company cannot redeem any shares of
Series B Preferred Stock unless and until all outstanding shares of the Series C
Preferred Stock have been redeemed by the Company. See " -- Series C Preferred
Stock."
The holders of Series B Preferred Stock currently have the right to appoint
one member to the Board of Directors. The holders of Series B Preferred Stock
are entitled to one vote for each share as to matters upon which by law they are
entitled to vote as a class, and the approval of a majority of the Series B
Preferred Stock, voting separately as a class, is required to make changes to
the Company's Certificate of Incorporation or By-Laws which adversely affect the
Series B Preferred Stock, to authorize or issue additional shares of Series B
Preferred Stock or to issue preferred stock equal to or senior to the Series B
Preferred Stock as to dividends or liquidation, to effect a reclassification of
the Series B Preferred Stock or, subject to certain exceptions, to effect an
extraordinary transaction that requires a vote of the Company's Stockholders. As
a result, a class vote of the holders of Series B Preferred Stock would be
required for the Company to merge or be acquired and may therefore delay, deter
or prevent a change in control of the Company. See "Risk Factors -- Control by
Certain Equity Stockholders in the Case of Certain Insolvency and Other Events."
SERIES C PREFERRED STOCK
The Series C Preferred Stock is convertible into shares of Common Stock at
a conversion price of $2.00 per share entitling the holders to receive 1,150,000
shares of the Common Stock. The Series C Preferred Stock has a liquidation and
dividend preference over the Common Stock, and is parity stock to the Series B
Preferred Stock. The Series C Preferred Stock has a 10 1/2% dividend, payable
semi-annually. The Company has the option to make dividend payments in shares of
Series C Preferred Stock; after the sixth such payment, the holders of Series C
Preferred Stock have the option to receive additional dividends in shares of
Series C Preferred Stock or to accrue such dividends in cash. If the Company
pays dividends in shares of Series C Preferred Stock, or does not pay dividends
in either stock or cash, for four dividend payments, the holders of Series C
Preferred Stock (voting as a class with other affected series of preferred stock
with similar voting rights) have the right to appoint one-third of the members
of the Board of Directors; however, if the holders of
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Series B Preferred Stock are presently entitled to a similar right, then the
holders of Series C Preferred Stock shall have no such right until the right of
the holders of Series B Preferred Stock terminates.
The Series C Preferred Stock is redeemable by the Company between June 14,
1999 and June 14, 2000, at $110 per share, and thereafter at $100 per share,
plus accrued and unpaid dividends; however, no shares of Series C Preferred
Stock may be redeemed until all the shares of Series B Preferred Stock have been
redeemed. See " -- Series B Preferred Stock."
The holders of Series C Preferred Stock currently have the right to appoint
one member to the Board of Directors. The holders of Series C Preferred Stock
are entitled to one vote for each share as to matters upon which by law they are
entitled to vote as a class, and the approval of a majority of the Series C
Preferred Stock, voting separately as a class, is required to make changes to
the Company's Certificate of Incorporation or By-Laws which adversely affect the
Series C Preferred Stock, to authorize or issue additional shares of Series C
Preferred Stock or to issue preferred stock equal to or senior to the Series C
Preferred Stock as to dividends or liquidation, to effect a reclassification of
the Series C Preferred Stock or, subject to certain exceptions, to effect an
extraordinary transaction that requires a vote of the Company's stockholders. As
a result, a class vote of the holders of Series C Preferred Stock would be
required for the Company to merge or be acquired and may therefore delay, deter
or prevent a change in control of the Company. See "Risk Factors -- Control by
Certain Equity Stockholders in the Case of Certain Insolvency and Other Events."
SERIES D PREFERRED STOCK
The Series D Preferred Stock is convertible into shares of Common Stock
initially at a conversion price of $2.25 per share, entitling the holders to
receive 4,444,444 shares of Common Stock. Such conversion price is subject to
certain anti-dilution adjustments, including adjustments that may occur if
shares of Common Stock are issued by the Company below the conversion price of
the Series D Preferred Stock. The Series D Preferred Stock has a liquidation
preference over the Common Stock, but each of the Series B Preferred Stock and
the Series C Preferred Stock has a liquidation preference over the Series D
Preferred Stock. The Series D Preferred Stock liquidation preference ranks pari
passu with the Series E Preferred Stock liquidation preference. See "-- Series E
Preferred Stock." The Series D Preferred Stock does not require the payment of
any dividends but will participate with the Common Stock in any dividends or
distributions to the Common Stock on an as converted basis.
The holders of Series D Preferred Stock are entitled to one vote for each
share when entitled to vote as described below and as to matters upon which by
law they are entitled to vote as a class. The holders of Series D Preferred
Stock have the right to appoint one member to the Board of Directors. The
Company may not, without the consent of the director appointed by the holders of
the Series D Preferred Stock, voluntarily file for protection under federal or
other bankruptcy laws. In addition, the holders of the Series D Preferred Stock
will have the right to choose to appoint one-half of the members of Board of
Directors plus one member (including the member appointed by the Series D
Preferred Stockholders) if the Series D Preferred Stock contingent voting rights
are triggered and the holders of the Series D Preferred Stock exercise their
rights. Thereafter, such holders will control the Board of Directors. See "Risk
Factors -- Control by Certain Equity Stockholders in the Case of Certain
Insolvency and Other Events."
The right of the holders of Series D Preferred Stock (the "Series D
Preferred Stock Contingent Voting Rights") to choose to appoint one-half of the
Board of Directors plus one member (including the member appointed by the
holders of the Series D Preferred Stock) is triggered by the following events:
(i) if an involuntary case under federal bankruptcy laws or other applicable
federal or state insolvency laws is commenced against the Company (including a
case for the appointment of a receiver, liquidator, custodian, trustee or
similar official for the Company or its assets) which does not seek emergency or
expedited relief if such case is not dismissed or stayed within 15 days or, if
such case seeks emergency or expedited relief against the Company, permanent
relief is granted or, if temporary relief if granted, the Company does not
provide to the holders of Series D Preferred Stock an opinion of counsel which
states that the Company, without condition, will prevail on the petition for
permanent relief, or (ii) if a default shall have occurred under notes or other
evidences of indebtedness of the Company where the aggregate outstanding
principal amount exceeds
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$10.0 million, and one of the following three circumstances exists. First, such
indebtedness is due in full by reason of failure to pay such indebtedness and
the default is not cured within 30 days. Second, such indebtedness is
accelerated and such acceleration is not rescinded within 15 days. Third, notice
of foreclosure on collateral securing such indebtedness has been given to the
Company and has not be rescinded after five days or the proposed date of the
sale of the collateral is less than five days away.
The approval of a majority of the Series D Preferred Stock, voting
separately as a class, is required to make changes to the Company's Certificate
of Incorporation or By-Laws which adversely affect the Series D Preferred Stock,
or to authorize or issue additional shares of Series D Preferred Stock or to
issue preferred stock equal to or senior to the Series D Preferred Stock as to
liquidation.
The Series D Preferred Stock automatically will be converted into Common
Stock if High River and its affiliates own less than 7.5% of the Common Stock on
a fully diluted basis. To determine the percentage of Common Stock on a fully
diluted basis that High River and its affiliates own as of any day, the number
of shares owned by High River and its affiliates on a fully diluted basis
(assuming conversion of all preferred stock and exercise of all outstanding
options and warrants owned by High River and its affiliates) as of such date
will be divided by 49,322,275 (as adjusted by any anti-dilution adjustments made
with respect to the shares of Common Stock owned by High River and its
affiliates after the date of the issuance of the Series D Preferred Stock).
Until July 19, 2001, High River will have a right of first refusal with respect
to equity sold by NEG for cash in private placement transactions.
The Common Stock currently is listed for trading on Nasdaq. Nasdaq has a
voting rights policy that prohibits continued listing of securities of issuers
that disenfranchise public common stockholders by any corporate action or
issuance that disparately reduces or restricts the voting rights of existing
common stock shareholders (the "Voting Rights Policy"). If rights similar to the
Series D Preferred Stock Contingent Voting Rights were to be granted to holders
of common stock of an issuer and such holders had not paid for their
proportionate share of the vote, Nasdaq would deem the exercise of such rights a
violation of the Voting Rights Policy.
The Voting Rights Policy does not apply, however, to any class of security
having a preference or priority over the issuer's common stock as to dividends,
interest payments, redemption or payments on liquidation, if the voting rights
of such securities only become effective as a result of specified events which
reasonably can be expected to jeopardize the issuer's financial ability to meet
its payment obligations to that class of securities. The Company believes that
the Series D Preferred Stock falls within this exclusion from the Voting Rights
Policy, as it has a liquidation preference over the Common Stock and the events
triggering the Series D Preferred Stock Contingent Voting Rights reasonably can
be expected to jeopardize the Company's ability to pay the liquidation
preference. Nasdaq has advised the Company, however, that while it does not
consider the grant of the Series D Preferred Stock Contingent Voting Rights a
violation of the Voting Rights Policy which would cause Nasdaq to take any
action, any exercise of those rights would constitute a violation of the Voting
Rights Policy as currently interpreted by Nasdaq. As a result, Nasdaq may
exclude the Common Stock from trading on Nasdaq. If that happens, no market may
exist for the Common Stock. The Company would explore other options to provide a
means to trade shares of the Common Stock, including trading the Common Stock in
the over the counter market or in the pink sheets or providing other means by
which potential sellers and buyers of the Common Stock may contact each other
for purposes of trading in the Common Stock. There can be no assurance these
means will provide a market for, or not adversely affect the price of, the
Common Stock.
SERIES E PREFERRED STOCK
The Series E Preferred Stock is convertible at the option of the holders at
any time into shares of the Common Stock initially at a conversion price of
$2.25 per share, entitling the holders to receive 533,333 shares of Common
Stock. Such conversion price is subject to certain anti-dilution adjustments,
including adjustments that may occur if shares of Common Stock are issued by the
Company below the conversion price of the Series E Preferred Stock. The Series E
Preferred Stock has a liquidation preference over the Common Stock, but each of
the Series B Preferred Stock and the Series C Preferred Stock has a liquidation
preference over the Series E Preferred Stock. The Series E Preferred Stock
liquidation preference ranks pari passu with
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<PAGE> 75
the Series D Preferred Stock liquidation preference. The Series E Preferred
Stock does not require the payment of any dividends but will participate with
the Common Stock in any dividends or distributions to the Common Stock on an as
converted basis.
The holders of Series E Preferred Stock are entitled to one vote for each
share as to matters upon which by law they are entitled to vote as a class. The
approval of a majority of the Series E Preferred Stock, voting separately as a
class, is required to make changes to the Company's Certificate of Incorporation
or By-Laws which adversely affect the Series E Preferred Stock, or to authorize
or issue additional shares of Series E Preferred Stock or to authorize or issue
preferred stock equal to or senior to the Series E Preferred Stock as to
liquidation, dissolution or winding up of the Company. The holders of Series E
Preferred Stock will be entitled to vote with the Common Stock on all matters
submitted to the holders of the Common Stock, and such holders will have the
number of votes per share of Series E Preferred Stock as is equal to the number
of shares of the Common Stock into which such share is convertible on the record
date for such vote.
The Series E Preferred Stock automatically will be converted into Common
Stock if investment partnerships or accounts managed by KAIM own less than 7.5%
of the Common Stock on a fully diluted basis. To determine the percentage of the
Common Stock on a fully diluted basis that investment partnerships or accounts
managed by KAIM own as of any day, the number of shares owned by investment
partnerships or accounts managed by KAIM on a fully diluted basis (assuming
conversion of all preferred stock and exercise of all outstanding options and
warrants owned by investment partnerships or accounts managed by KAIM) as of
such date will be divided by 49,322,275 (as adjusted by any anti-dilution
adjustments made with respect to the shares of the Common Stock owned by
investment partnerships or accounts managed by KAIM after the date of the
issuance of the Series E Preferred Stock).
COMMON STOCK
Holders of the Common Stock are entitled to one vote for each share held of
record on all matters voted on by stockholders. The shares of the Common Stock
do not have cumulative voting rights with respect to election of directors.
Subject to the Series D Preferred Stock Contingent Voting Rights, the holders of
more than 30% of the shares of the Common Stock (including the number of shares
of the Common Stock into which the Series E Preferred Stock is converted for
purposes of voting with the Common Stock) voting for the election of the
directors can elect all of the directors to be elected by holders of the Common
Stock and Series E Preferred Stock, in which case the holders of the remaining
shares of the Common Stock and remaining shares of Series E Preferred Stock will
not be able to elect any directors. Upon any liquidation, dissolution or
winding-up of the affairs of the Company, holders of the Common Stock would be
entitled to receive, pro rata, all of the assets of the Company available for
distribution to stockholders, after payment of any liquidation preference of any
Preferred Stock that may be issued and outstanding at the time. Holders of the
Common Stock have no subscription, redemption, sinking fund or preemptive
rights.
DESCRIPTION OF CERTAIN INDEBTEDNESS
The following summaries of the Revised Credit Facility, the Series A/B
Indenture and the Series C/D Indenture do not purport to be complete and are
subject to, and qualified in their entirety by reference to, the applicable
agreements.
REVISED CREDIT FACILITY
The Company has a revolving credit agreement (the "Revised Credit
Facility") with Bank One, Texas, N.A., as Bank and Administrative Agent, and the
Credit Lyonnais New York Branch, as Bank and Syndication Agent (collectively,
the "Banks"). The current borrowing base under the Revised Credit Facility is
$40.0 million. Borrowings under the Revised Credit Facility are to be used for
development drilling expenditures and acquisition of producing oil and natural
gas properties. The borrowing base will be redetermined at least semiannually
and may require mandated monthly principal reductions by an amount determined by
the Banks from time to time. The principal is due at maturity, August 29, 2000.
Interest is payable monthly and is calculated at the Bank One Base Rate, as
determined from time to time by Bank One
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<PAGE> 76
(which increases by 0.25% if the outstanding loan balance is greater than 75% of
the borrowing base). The Company may elect to calculate interest under the
EuroDollar Rate (as defined in the Revised Credit Facility) which increases by
(i) 0.50% if the outstanding loan balance is greater than 75% of the borrowing
base, and (ii) 0.25% plus 1.75% if the outstanding loan balance is greater than
50% but less than 75% of the borrowing base. At June 30, 1997, the Company had
approximately $33.0 million of outstanding indebtedness under the Revised Credit
Facility of which $10.0 million was repaid on July 3, 1997 and the remaining
$23.0 million was repaid with the proceeds from the offering of the Series C
Notes in August 1997.
The Company is required to pay a commitment fee on the unused portion of
the borrowing base equal to 1% per annum under the Revised Credit Facility.
The Company granted to the Banks liens on substantially all of the
Company's oil and natural gas properties, whether currently owned or hereafter
acquired, and a negative pledge on all other oil and natural gas properties. The
Revised Credit Facility requires, among other things, semiannual engineering
reports covering oil and natural gas properties, and maintenance of certain
financial ratios, including the maintenance of a Minimum Current Ratio, a
Minimum Tangible Net Worth and Minimum Interest Coverage Ratio, all as defined
therein.
The Revised Credit Facility includes other covenants prohibiting cash
dividends, distributions, loans or advances to third parties, except that cash
dividends on Preferred Stock will be allowed so long as no event of default
exists or would exist as a result of the payment thereof. In addition, if the
Company is required to purchase or redeem any portion of the Notes, or if any
portion of the Notes becomes due, the borrowing base is automatically reduced to
zero, provided that certain redemptions of the Notes related to the sale of
assets or a change in control will result in only a proportionate reduction in
the borrowing base. At September 30, 1997, the Company was not in violation of
any covenants of the Revised Credit Facility.
SERIES A/B NOTES AND SERIES C/D NOTES
In November 1996, the Company issued $100.0 million aggregate principal
amount of the Series A Notes, which were exchanged for the Series B Notes in an
exchange offering commenced in January 1997. In August 1997, the Company issued
$65.0 million aggregate principal amount of the Series C Notes, the terms of
which were substantially identical to the terms of the Series A/B Notes. In
November 1997, the Company commenced the Exchange Offer of the Series D Notes
for the Series B Notes and the Series C Notes. The Exchange Offer extends
through November 25, 1997, unless extended.
The Notes bear interest at an annual rate of 10 3/4%, payable semiannually
in arrears on May 1 and November 1 of each year. The Notes are senior, unsecured
obligations of the Company, ranking pari passu to all future subordinated
indebtedness of the Company. Subject to certain limitations set forth in the
Indenture covering the Notes, the Company and its subsidiaries may incur
additional senior indebtedness and other indebtedness.
The Indenture contains certain covenants limiting the Company, including,
but not limited to, restrictions with respect to the following: (i) asset sales;
(ii) restricted payments; (iii) the incurrence of additional indebtedness and
the issuance of certain redeemable preferred stock; (iv) liens; (v) sale and
leaseback transactions; (vi) lines of business; (vii) dividend and other payment
restrictions affecting subsidiaries; (viii) mergers and consolidations; and (ix)
transactions with affiliates.
At any time on or after November 1, 2001, the Company may, at its option,
redeem all or any portion of the Notes at the redemption prices expressed as
percentages of the principal amount of the Notes set forth below, plus, in each
case, accrued and unpaid interest thereon to the applicable redemption date, if
redeemed during the 12-month period beginning November 1 of the year indicated
below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2001........................................................ 105.375%
2002........................................................ 102.688%
2003 and thereafter......................................... 105.000%
</TABLE>
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<PAGE> 77
Notwithstanding the foregoing, at any time prior to November 1, 2001, the
Company may, at its option, redeem all or any portion of the Notes at the
Make-Whole Price (as defined) plus accrued and unpaid interest to the date of
redemption. In addition, in the event the Company consummates one or more Equity
Offerings (as defined) on or prior to November 1, 1999, the Company, at its
option, may redeem up to $35.0 million of the aggregate principal amount of the
Notes with all or a portion of the aggregate net proceeds received by the
Company from such Equity Offering or Equity Offerings at a redemption price of
10.75% of the aggregate principal amount of the Notes so redeemed, plus accrued
and unpaid interest thereon to the redemption date; provided, however, that
following such redemption, at least $65.0 million of the aggregate principal
amount of the Notes remains outstanding.
Upon a Change of Control (as defined) the Company will be required, subject
to certain conditions, to offer to repurchase all Notes at 101% of the principal
amount thereof, plus accrued and unpaid interest to the date of purchase.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of certain of the United States
federal income tax consequences of the purchase, ownership and disposition of
the Series F Preferred Stock by investors who hold the Series F Preferred Stock
as capital assets. This discussion does not purport to be a complete analysis of
the purchase, ownership and disposition of the Series F Preferred Stock and does
not address all of the tax considerations that may be relevant to particular
investors in light of their individual circumstances or to holders subject to
special treatment under United States federal income tax laws, such as dealers
in securities, insurance companies, foreign persons, tax-exempt organizations
and financial institutions. In addition, this discussion does not address the
application or effect of any state, local, foreign or other tax laws. This
discussion is based on the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury regulations promulgated thereunder, and Internal Revenue
Service ("IRS") rulings and judicial decisions, all of which are subject to
change, possibly with retroactive effect.
DISTRIBUTIONS ON THE SERIES F PREFERRED STOCK
Distributions on the Series F Preferred Stock will be taxable as ordinary
income to the extent of the Company's current or accumulated "earnings and
profits" (as determined for federal income tax purposes). Distributions to
corporate holders of the Series F Preferred Stock out of such earnings and
profits generally will qualify, subject to the limitations under Sections 246(c)
and 246A of the Code, for the 70% dividends received deduction allowable to
corporations (although the benefits of such deduction may be reduced or
eliminated by the corporate alternative minimum tax). Under Section 246(c) of
the Code, a corporate holder would not be eligible for the dividends received
deduction (i) on any share of stock which is held 45 days or less during the
90-day period beginning on the date that is 45 days before the date on which
such share becomes ex-dividend with respect to such dividend and (ii) in the
case of any dividend attributable to a period or periods aggregating more than
366 days in respect of any share of such Series F Preferred Stock which is held
90 days or less during the 180-day period beginning on the date that is 90 days
before the date on which such share becomes ex-dividend with respect to such
dividend. A taxpayer's holding period for these purposes is suspended during any
period in which the taxpayer has an option to sell, is under a contractual
obligation to sell, has made (and not closed) a short sale of, or has granted an
option to buy, substantially identical stock or securities or holds one or more
other positions with respect to substantially similar or related property that
diminish the risk of loss from holding such stock. Under Section 246A of the
Code, the dividends received deduction may be reduced or eliminated if a
corporate holder's shares of the Series F Preferred Stock are debt financed.
Section 1059 of the Code requires a corporate stockholder to reduce its tax
basis (but not below zero) in the Series F Preferred Stock by the non-taxed
portion (generally the portion eligible for the dividends received deduction
described above) of any "extraordinary dividend" if the Series F Preferred Stock
has not been held for more than two years before the date of announcement or
agreement with respect to such dividend. The non-taxed portion of an
extraordinary dividend in excess of basis shall be treated as gain from the sale
or
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exchange of stock in the taxable year in which the extraordinary dividend is
received. An "extraordinary dividend" generally is a dividend that (i) equals or
exceeds 5 percent in the case of preferred stock, or 10 percent in the case of
common stock, of the holder's tax basis in such stock, treating all dividends
having dividend dates within an 85-day period as one dividend or (ii) exceeds 20
percent of the holder's basis in such stock, treating all dividends having
ex-dividend dates within a 365-day period as one dividend, provided that in
either case fair market value, if it can be established by the holder, may be
substituted for stock basis. In addition, an amount treated as a dividend in the
case of a redemption of the Series F Preferred Stock that is (i) non-pro rata as
to all stockholders, (ii) in partial liquidation, or (iii) would not have been
treated as a dividend if any options had not been taken into account under Code
Section 318(a)(4) or if Section 304(a) had not been applicable, would also
constitute an "extraordinary dividend" without regard to the length of time the
Series F Preferred Stock has been held. Application of the extraordinary
dividend rule is limited somewhat if the redemption proceeds that are treated as
dividends constitute "qualified preferred dividends" within the meaning of Code
Section 1059(e)(3)(C). The length of time that a taxpayer is deemed to have held
stock for purposes of Section 1059 is determined under principles generally
comparable to those described in the preceding paragraph with respect to the
dividends received deduction.
To the extent, if any, that a distribution on the Series F Preferred Stock
which would otherwise constitute a dividend for federal income tax purposes
exceeds the current or accumulated earnings and profits of the Company, such
distribution will be treated first as a tax-free return of capital, reducing a
holder's adjusted tax basis in the Series F Preferred Stock. The reduction in
basis will increase any gain, or reduce any loss, realized by the holder on any
subsequent sale, redemption or other disposition of the Series F Preferred
Stock. Any such distribution in excess of a holder's adjusted tax basis in the
Series F Preferred Stock will be treated as short-term or long-term capital
gain, depending on the period for which the shares of the Series F Preferred
Stock have been held. For a corporate holder, treatment of a distribution as a
capital gain rather than as a dividend will result in an increase in the maximum
effective federal income tax rate on any amount so treated.
REDEMPTION OF THE SERIES F PREFERRED STOCK
A redemption of the Series F Preferred Stock for cash will result in
capital gain or loss equal to the difference between the amount of cash
received, except to the extent received for accrued, but unpaid dividends, and
the stockholder's basis in such Series F Preferred Stock. Such gain or loss will
be long term gain or loss depending on the holding period. Under the rules of
Code Section 302, however, a redemption of Series F Preferred Stock by the
Company for cash will be treated as a distribution taxable as a dividend to the
redeemed stockholders, to the extent of the Company's current or accumulated
earnings and profits, unless the redemption (i) results in a "complete
termination" of the stockholder's stock interest in the Company under Section
302(b)(3) of the Code; (ii) is "substantially disproportionate" with respect to
the stockholder under Section 302(b)(2) of the Code; or (iii) is "not
essentially equivalent to a dividend" under Section 302(b)(1) of the Code. In
determining whether any of these tests has been met, shares considered to be
owned by the stockholder by reason of certain constructive ownership rules in
Section 302(c) and 318 of the Code, as well as shares actually owned, must be
taken into account. If any of these tests are met, the redemption of the Series
F Preferred Stock for cash would be treated as a sale or exchange for federal
income tax purposes.
A redemption will be treated as "not essentially equivalent to a dividend"
as to a particular stockholder if it results in a "meaningful reduction" in that
stockholder's interest in the Company. If, as a result of the redemption of the
Series F Preferred Stock, a stockholder of the Company, whose relative stock
interest in the Company is minimal and who exercises no control over corporate
affairs, suffers a reduction in his proportionate interest in the Company
(taking into account shares owned by the stockholder under Sections 302(c) and
318 of the Code and, in certain events, dispositions of the stock which occur
contemporaneously with the redemption) then, based upon published IRS rulings,
that stockholder may be regarded as having suffered a meaningful reduction in
his interest in the Company.
Under Code Section 302(b)(2), a redemption will be treated as
"substantially disproportionate" to a stockholder if the ratio which the voting
stock of the Company owned by such stockholder immediately after the redemption
bears to all of the voting stock of the Company at such time is less than 80% of
the ratio which
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the voting stock of the Company owned by such stockholder immediately before the
redemption bears to all of the voting stock of the Company at such time.
Because the provisions of Section 302 of the Code are separately applied to
each stockholder based upon the particular facts and circumstances at the time
of the redemption (and the applicable law at such time, which may be different
from that currently in effect), no assurance can be given that the redemption of
the Series F Preferred Stock in exchange for cash of the Company will be treated
as a sale or exchange rather than as a distribution taxable as a dividend. Each
holder of the Series F Preferred Stock is advised to consult his own tax
advisors at the time of any redemption of its Series F Preferred Stock to
determine the consequences of such exchange.
A distribution to a corporate stockholder in redemption of the Series F
Preferred Stock that is treated as a dividend may also be considered an
"extraordinary dividend" under Section 1059 of the Code. See "-- Distributions
on the Series F Preferred Stock." Application of this rule is limited somewhat
by a special rule that provides that dividends with respect to a share of stock
which is not in arrears as to dividends at the time the holder acquires such
stock that do not exceed an actual rate of return of 15 percent of the lower of
the holder's adjusted tax basis or the liquidation preference (excluding
dividend arrearages, if any) of the Series F Preferred Stock will be treated as
extraordinary only (i) if the holder disposes of the Series F Preferred Stock
before it has held the stock for more than five years and (ii) only to the
extent that the actual rate of return to the holder exceeds the stated rate of
return on the Series F Preferred Stock, as determined under Section 1059(e)(3)
of the Code.
SALE, EXCHANGE OR OTHER DISPOSITION OF THE SERIES F PREFERRED STOCK
Generally, any sale or exchange of the Series F Preferred Stock, will
result in taxable gain or loss equal to the difference between the amount of
cash plus the fair market value of any property received and the holder's
adjusted tax basis in the Series F Preferred Stock. Generally, such gain or loss
will be (i) subject to a maximum tax rate of 28%, if such holder has held the
Series F Preferred Stock for more than 12 months, (ii) 20%, if such holder has
held the Series F Preferred Stock for more than 18 months, and (iii) 18% if with
respect to transactions occurring after December 31, 2000, such holder has held
the Series F Preferred Stock for more than five years.
REDEMPTION PREMIUM ON THE SERIES F PREFERRED STOCK
Under Section 305 of the Code and applicable Treasury regulations, if the
redemption price of redeemable Series F Preferred Stock exceeds its issue price
and part (or all) of such excess is considered an unreasonable redemption
premium, the entire amount of such excess may be treated as constructively
distributed over the period during which the Series F Preferred Stock cannot be
redeemed. The amount treated as constructively distributed each year would be
determined under principles similar to the principles for the accrual of
original issue discount. Any such constructive distribution would be classified
as a dividend, non-taxable recovery of basis or an amount received in exchange
for the Series F Preferred Stock pursuant to the rules summarized under
"Distributions on the Series F Preferred Stock" above. A premium is considered
to be reasonable if it is in the nature of a penalty for a premature redemption
and if such premium does not exceed the amount which the issuer would be
required to pay for such redemption under market conditions existing at the time
of issuance of the Series F Preferred Stock.
CONVERSION OF THE SERIES F PREFERRED STOCK INTO COMMON STOCK
In general, no gain or loss will be recognized for federal income tax
purposes on conversion of the Series F Preferred Stock solely into shares of the
Common Stock. (If dividends on the Series F Preferred Stock were in arrears at
the time of conversion, however, a portion of the Common Stock received in
exchange for the Series F Preferred Stock could be viewed under Section 305(c)
of the Code as a distribution with respect to the Series F Preferred Stock,
taxable as a dividend). Gain realized upon receipt of cash paid in lieu of
fractional shares of the Common Stock (i.e., the excess of the cash received
over the portion of adjusted tax basis allocable to the fractional shares) will
be taxed immediately. In general, the adjusted tax basis for the
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Common Stock received on conversion will be equal to the adjusted tax basis of
the Series F Preferred Stock converted, reduced by the portion of tax basis
allocable to any fractional share exchanged for cash. The holding period of the
shares of Common Stock will include the holding period of such Series F
Preferred Stock.
ADJUSTMENT OF CONVERSION PRICE
Section 305 of the Code and applicable Treasury regulations treat holders
of convertible preferred stock and convertible securities as having received a
constructive distribution, taxable as described in "Distributions on the Series
F Preferred Stock" above, due to certain adjustments in conversion ratios
(generally adjustments other than those that take account of a stock split or
stock dividend with respect to the stock into which such convertible stock or
securities are convertible). The conversion rate of the Series F Preferred Stock
is subject to adjustment under certain circumstances that provide anti-dilution
protection. Adjustments pursuant to antidilution protection provisions generally
should not give rise to constructive distributions. Any adjustment in conversion
ratio pursuant to special conversion rights could cause the holders of the
Series F Preferred Stock to be viewed under Section 305 of the Code as receiving
a constructive distribution taxable as described in "Distributions on the Series
F Preferred Stock."
BACKUP WITHHOLDING
Under Section 3406 of the Code and applicable Treasury regulations, a
holder of the Series F Preferred Stock may be subject to backup withholding at
the rate of 31 percent with respect to dividends or interest paid, or proceeds
received from a sale, exchange or redemption of the Series F Preferred Stock.
The payor will be required to deduct and withhold a tax if (i) the payee fails
to furnish a taxpayer identification number ("TIN") to the payor or establish an
exemption from backup withholding, (ii) the IRS notifies the payor that the TIN
furnished by the payee is incorrect, (iii) there has been a notified payee
underreporting with respect to interest, dividends or original issue discount
described in Section 3406(c) of the Code or (iv) there has been a failure of the
payee to certify under the penalty of perjury that the payee is not subject to
backup withholding under Section 3406(a)(1)(C) of the Code. As a result, if any
one of the events discussed above occurs, the Company will be required to
withhold a tax equal to 31 percent from any dividend, interest or redemption
payment made with respect to the Series F Preferred Stock. Any amount withheld
from a payment to a holder under the backup withholding rules is creditable
against the holder's federal income tax liability, provided the required
information is furnished to the IRS. Backup withholding will not apply, however,
with respect to payments made to certain holders, including corporations,
provided their exemption from backup withholding is properly established. The
Company will report to holders of the Series F Preferred Stock and to the IRS
the amount of any "reportable payments" required to be reported by the Company
under applicable Treasury regulations for each calendar year and the amount of
tax withheld, if any, with respect to such payments.
STATE AND LOCAL INCOME TAXES
Holders of the Series F Preferred Stock may be liable for state and local
income taxes with respect to dividends or interest paid, or gain from the sale,
exchange or redemption of the Series F Preferred Stock. Many states and
localities do not allow corporations a deduction analogous to the federal
dividends received deduction. Prospective investors are advised to consult their
own tax advisors as to the state, local and other tax consequences of
purchasing, owning and disposing of the Series F Preferred Stock.
THE U.S. FEDERAL INCOME TAX DISCUSSION ABOVE IS INTENDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE TO A PARTICULAR HOLDER. PROSPECTIVE
PURCHASERS OF SERIES F PREFERRED STOCK SHOULD CONSULT THEIR OWN TAX ADVISORS
WITH RESPECT TO THE APPLICATION TO THEM OF FEDERAL, STATE, LOCAL AND FOREIGN TAX
LAWS RELEVANT TO THEIR PARTICULAR CIRCUMSTANCES.
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UNDERWRITING
Subject to the terms and conditions of an underwriting agreement (the
"Underwriting Agreement") among the Company and the Underwriters named below
(the "Underwriters"), the Company has agreed to sell to each of the Underwriters
named below, and each of such Underwriters for whom Raymond James & Associates,
Inc. and Forum Capital Markets, L.P. are acting as representatives (the
"Representatives"), has severally agreed to purchase from the Company, the
respective number of Depositary Shares set forth opposite its name below.
<TABLE>
<S> <C>
Raymond James & Associates, Inc.............................
Forum Capital Markets, L.P..................................
---------
Total............................................. 2,000,000
=========
</TABLE>
In the Underwriting Agreement, the several Underwriters have agreed,
subject to the terms and conditions set forth therein, to purchase all the
Depositary Shares hereby if any of such shares are purchased. In the event of a
default by an Underwriter, the Underwriting Agreement provides that, in certain
circumstances, such commitments of the non-defaulting Underwriters may be
increased or the Underwriting Agreement may be terminated.
The Representatives have advised the Company that they propose initially to
offer the Depositary Shares to the public at the public offering price set forth
on the cover page of this Prospectus and to certain dealers at such price less a
concession not in excess of $ per share. The Underwriters may allow,
and such dealers may reallow, a discount not in excess of $ per share
on sales to certain other dealers. After the Offering, the initial public
offering price, concession and discount may be changed.
The Company has granted the Underwriters an option, which may be exercised
within 30 days of the date of this Prospectus, to purchase up to an additional
300,000 Depositary Shares to cover over-allotments, if any, at the initial
public offering price, less the underwriting discount. To the extent that the
Underwriters exercise the option, each of the Underwriters will have a firm
commitment, subject to certain conditions, to purchase approximately the same
percentage of such shares that the number of Depositary Shares to be purchased
by it shown on the foregoing table bears to the total number of shares initially
offered hereby.
The Depositary Shares and the Series F Preferred Stock will not be listed
on any securities exchange or Nasdaq. The Underwriters have advised the Company
that they intend to make a market in the Depositary Shares and the Series F
Preferred Stock. The Underwriters are not obligated, however, to make a market
in the Depositary Shares and the Series F Preferred Stock, and any such market
making may be discontinued at any time at the sole discretion of the
Underwriters without notice.
The Underwriters, may engage in over-allotment transactions, stabilizing
transactions, syndicate covering transactions and penalty bids in accordance
with Regulation M under the Exchange Act. Over-allotment transactions involve
syndicate sales in excess of the offering size, which creates a syndicate short
position. Stabilizing transactions permit bids to purchase shares of Depositary
Shares or Common Stock so long as the stabilizing bids do not exceed a specified
maximum. Syndicate covering transactions involve purchases of Depositary Shares,
shares of the Series F Preferred Stock or Common Stock in the open market after
the distribution has been completed in order to cover syndicate short positions.
Penalty bids permit Raymond James & Associates, Inc., on behalf of the
Underwriters, to reclaim a selling concession from a syndicate member when the
Depositary Shares originally sold by such syndicate member are purchased in a
syndicate covering transaction to cover syndicate short positions. Such
over-allotment transactions, stabilizing transactions, syndicate covering
transaction and penalty bids may cause the price of the Depositary Shares or the
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Common Stock to be higher than it would otherwise be in the absence of such
transaction. These transactions may be effected in the over-the-counter market
or otherwise and, if commenced, may be discontinued at any time.
In connection with this Offering, certain Underwriters and selling group
members who are qualifying registered market makers on the Nasdaq may engage in
passive market making transactions in the Common Stock on the Nasdaq in
accordance with Rule 103 of Regulation M under the Exchange Act during the two
business day period before commencement of the offers or sales of the Depositary
Shares offered hereby. Passive market making transactions must comply with
certain volume and price limitations and be identified as such. In general, a
passive market maker may not display its bid price not in excess of the highest
independent bid for the security, and if all independent bids are lowered below
the passive market makers bid, then such bid must be lowered when certain
purchase limits are exceeded.
The Company has agreed to indemnify the Underwriters against certain civil
liabilities, including liabilities under the Securities Act, or to contribute to
payments the Underwriters may be required to make in respect thereof.
Prior to this Offering, there has been no market for the Depositary Shares
and the Series F Preferred Stock. Accordingly, the initial public offering price
will be determined by negotiation among the Company and the Representatives.
Among the factors to be considered in determining the initial public offering
price are the Company's record of operations, the Company's current financial
condition, its future prospects, the present state of the Company's industry in
general, the experience of its management, the general condition of the equity
securities market and the demand for similar securities of companies considered
comparable to the Company and other relevant factors. The initial public
offering price set forth on the cover page of this prospectus should not,
however, be considered an indication of the actual value of the Depositary
Shares and the Series F Preferred Stock. Such price is subject to change as a
result of market conditions and other factors. There can be no assurance that an
active trading market will develop for the Depositary Shares and the Series F
Preferred Stock or that the Depositary Shares and the Series F Preferred Stock
will trade in the public market subsequent to the offering at or above the
initial public offering price.
LEGAL MATTERS
The validity of the Depositary Shares and the Series F Preferred Stock
offered hereby and certain other legal matters will be passed upon for the
Company by Akin, Gump, Strauss, Hauer & Feld, L.L.P., Dallas, Texas. Certain
legal matters in connection with the Offering will be passed upon for the
Underwriters by Haynes and Boone, LLP, Dallas, Texas.
EXPERTS
The financial statements of the Company at December 31, 1996 and 1995 and
for each of the three years in the period ended December 31, 1996, included in
this Prospectus and Registration Statement, have been audited by Ernst & Young
LLP, independent auditors, to the extent indicated in their report thereon
appearing elsewhere herein and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Alexander at December 31, 1995 and
1994 and for each of the three years in the period ended December 31, 1995,
incorporated by reference in this Prospectus and Registration Statement, have
been audited by Ernst & Young LLP, independent auditors, to the extent indicated
in their report incorporated by reference herein. The separate financial
statements of American National Energy Corporation ("ANEC") for the year ended
December 31, 1993 (not presented herein), prior to the merger of ANEC and
Alexander, were audited by Coopers & Lybrand LLP independent accountants, to the
extent indicated in their report incorporated herein by reference. The financial
statements referred to above are incorporated by reference herein in reliance
upon such reports given upon the authority of such firms as experts in
accounting and auditing.
81
<PAGE> 83
The estimates of the Company's Proved Reserves of oil and natural gas and
related future net revenues and the present value thereof as of December 31,
1995 and December 31, 1996 included and/or incorporated by reference in this
Prospectus have been derived from the reserve report of Netherland and Sewell.
All of such information has been so included herein in reliance upon the
authority of such firm as experts in such matters.
The estimates of the Company's Proved Reserves of oil and natural gas and
the related future net revenues and the present value thereof as of December 31,
1994 included and/or incorporated by reference in this Prospectus have been
derived from the reserve report of Roebuck Associates, Inc. All of such
information has been so included herein in reliance upon the authority of such
firm as experts in such matters.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission in
Washington, D.C., a Registration Statement on Form S-3 (the "Registration
Statement") under the Securities Act, with respect to the securities offered by
this Prospectus. Certain of the information contained in the Registration
Statement is omitted from this Prospectus, and reference is hereby made to the
Registration Statement and exhibits and schedules relating thereto for further
information with respect to the Company and the securities offered by this
Prospectus. The Company is subject to the informational requirements of the
Exchange Act, and, in accordance therewith, files reports, proxy statements and
other information with the Commission. Such reports, proxy statements and other
information are available for inspection at, and copies of such materials may be
obtained upon payment of the fees prescribed therefor by the rules and
regulations of the Commission from the Commission at its principal offices
located at Judiciary Plaza, 450 Fifth Street, Room 1024, Washington, D.C. 20549,
and at the Regional Offices of the Commission located at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and at 7 World
Trade Center, Suite 1300, New York, New York 10048. The Commission maintains a
World Wide Web site on the Internet at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants,
including the Company, that file electronically with the Commission. In
addition, the Common Stock is traded on The Nasdaq National Market under the
symbol NEGX, and such reports, proxy statements and other information may be
inspected at the offices of The Nasdaq National Market, 9513 Key West Avenue,
Rockville, Maryland 20850.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by the Company with the Commission pursuant
to the Exchange Act (File No. 0-19136) are incorporated herein by reference as
of their respective dates:
(i) Current Report on Form 8-K dated August 29, 1996, as amended by
Form 8-K/A filed September 27, 1996 and Form 8-K/A No. 2 filed
November 24, 1997.
(ii) Annual Report on Form 10-K for the fiscal year ended December 31,
1996.
(iii) Proxy Statement on Schedule 14A dated April 25, 1997.
(iv) Quarterly Report on Form 10-Q for the quarter ended March 31,
1997.
(v) Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
(vi) Quarterly Report on Form 10-Q for the quarter ended September 30,
1997.
All reports and other documents filed by the Company pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering of the Series F
Preferred Stock shall be deemed to be incorporated by reference herein. Any
statement contained in a document incorporated or deemed to be incorporated by
reference shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which is also incorporated or deemed to be
incorporated by reference herein
82
<PAGE> 84
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a Prospectus
is delivered, upon the written or oral request of such person, a copy of any or
all of the information incorporated by reference in this Prospectus, other than
exhibits to such information (unless such exhibits are specifically incorporated
by reference into the information that this Prospectus incorporates). Requests
for such copies should be directed to Secretary, National Energy Group, Inc.,
4925 Greenville Avenue, Suite 1400, Dallas, Texas 75206, telephone (214)
692-9211.
83
<PAGE> 85
GLOSSARY
Wherever used herein, the following terms shall have the meaning specified.
Bbl -- One stock tank barrel, or 42 US gallons liquid volume, used herein
in reference to crude oil or other liquid hydrocarbons.
Bcf -- One billion cubic feet.
Bcfe -- One billion cubic feet of Natural Gas Equivalent.
Behind the Pipe -- Hydrocarbons in a potentially producing horizon
penetrated by a well bore the production of which has been postponed pending the
production of hydrocarbons from another formation penetrated by the well bore.
The hydrocarbons are classified as proved but non-producing reserves.
Developed Acreage -- Acres which are allocated or assignable to producing
wells or wells capable of production.
Development Well -- A well drilled within the proved area of an oil and
natural gas reservoir to the depth of stratigraphic horizon known to be
productive.
Dry Well -- A well found to be incapable of producing either oil or natural
gas in sufficient quantities to justify completion as an oil or natural gas
well.
EBITDA -- Earnings (including interest income and excluding discontinued
operations, extraordinary items, charges resulting from changes in accounting
and significant nonrecurring revenues and expenses) before interest expense,
income taxes, depletion, depreciation and amortization, and the provision for
impairment of oil and natural gas properties. EBITDA is not a measure of cash
flow as determined by generally accepted accounting principles. EBITDA
information has been included in this Prospectus because EBITDA is a measure
used by certain investors in determining historical ability to service
indebtedness. EBITDA should not be considered as an alternative to, or more
meaningful than, net income or cash flows as determined in accordance with
generally accepted accounting principles as an indicator of operating
performance or liquidity.
Exploratory Well -- A well drilled to find and product oil or natural gas
in an unproved area, to find a new reservoir in a field previously found to be
productive of oil or natural gas in another reservoir, or to extend a known
reservoir.
Gross Acres or Gross Wells -- The total acres or wells, as the case may be,
in which a Working Interest is owned.
Infill Well -- A well drilled between known producing wells.
Mbbl -- One thousand Bbl.
Mmbbl -- One million Bbl.
Mboe -- One thousand barrels of oil equivalent.
Mcf -- One thousand cubic feet.
Mcfe -- One thousand cubic feet of Natural Gas Equivalent.
Mmcf -- One million cubic feet.
Mmcfe -- One million cubic feet of Natural Gas Equivalent.
Natural Gas Equivalent -- The ratio of one Bbl of crude oil to six Mcf of
natural gas.
Net Acres or Net Wells -- The sum of the fractional Working Interests owned
in Gross Acres or Gross Wells.
NYMEX -- New York Mercantile Exchange.
84
<PAGE> 86
Oil and Natural Gas Lease -- An instrument by which a mineral fee owner
grants to a lessee the right for a specific period of time to explore for oil
and natural gas underlying the lands covered by the lease and the right to
produce any oil and natural gas so discovered generally for so long as there is
production in economic quantities from such lands.
OPEC -- Organization of Petroleum Exporting Countries.
Overriding Royalty Interest -- A fractional undivided interest in an oil
and natural gas property entitling the owner of a share of oil and natural gas
production, in addition to the usual royalty paid to the owner, free of costs of
production.
PDNP -- Proved developed, nonproducing or Behind the Pipe reserves.
Productive Well -- A well that is producing oil or natural gas or that is
capable of production.
Proved Developed Producing Reserves -- Proved reserves that can be expected
to be recovered from currently producing zones under the continuation of present
operating methods.
Proved Developed Reserves -- Reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.
Proved Reserves -- The estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
Proved Undeveloped Reserves -- Reserves that are expected to be recovered
from new wells on undrilled acreage, or from existing wells where a relatively
major expenditure is required for completion.
PUD -- See Proved Undeveloped Reserves.
PV 10% -- The discounted future net cash flows for Proved Reserves of oil
and natural gas computed on the same basis as the Standardized Measure, but
without deducting income taxes, which is not in accordance with generally
accepted accounting principles. PV 10% is an important financial measure for
evaluating the relative significance of oil and natural gas properties and
acquisitions, but should not be construed as an alternative to the Standardized
Measure (as determined in accordance with generally accepted accounting
principles).
Royalty Interest -- An interest in an oil and natural gas property
entitling the owner to a share of oil and natural gas production free of costs
of production.
Secondary Recovery -- A method of oil and natural gas extraction in which
energy sources extrinsic to the reservoir are utilized.
Standardized Measure -- The estimated future net cash flows from Proved
Reserves of oil and natural gas computed using prices and costs, at the date
indicated, after income taxes and discounted at 10%.
Undeveloped Acreage -- Lease acreage on which wells have not been drilled
or completed to a point that would permit the production of commercial
quantities of oil and natural gas regardless of whether such acreage contains
Proved Reserves.
Working Interest -- The operating interest which gives the owner the right
to drill, produce and conduct operating activities on the property and a share
of production, subject to all royalties, overriding royalties and other burdens
and to all costs of exploration, development and operations and all risks in
connection therewith.
85
<PAGE> 87
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Historical Financial Statements of the Company
Financial Statements:
Report of Independent Auditors......................... F-2
Balance Sheets at December 31, 1995 and 1996........... F-3
Statements of Operations for the years ended December
31, 1994, 1995 and 1996............................... F-4
Statements of Cash Flows for the years ended December
31, 1994, 1995 and 1996............................... F-5
Statements of Changes in Stockholders' Equity for the
years ended December 31, 1994, 1995 and 1996.......... F-6
Notes to Financial Statements.......................... F-7
Interim Financial Statements (unaudited):
Balance Sheet at September 30, 1997.................... F-26
Statements of Operations for the nine months ended
September 30, 1996 and 1997........................... F-27
Statements of Cash Flows for the nine months ended
September 30, 1996 and 1997........................... F-28
Statements of Changes in Stockholders' Equity for the
nine months ended
September 30, 1997................................... F-29
Notes to Interim Financial Statements.................. F-30
</TABLE>
F-1
<PAGE> 88
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
National Energy Group, Inc.
We have audited the accompanying balance sheets of National Energy Group,
Inc., as of December 31, 1995 and 1996, and the related statements of
operations, changes in stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of National Energy Group, Inc.,
at December 31, 1995 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
March 18, 1997
F-2
<PAGE> 89
NATIONAL ENERGY GROUP, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1996
----------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 6,076,199 $ 14,182,246
Marketable securities..................................... 1,824,724 --
Accounts receivable oil and gas sales..................... 1,407,349 6,812,358
Accounts receivable joint interest and other.............. 262,619 3,003,661
Other..................................................... 335,751 1,131,736
----------- ------------
Total current assets.............................. 9,906,642 25,130,001
Oil and gas properties, at cost (full cost method):
Proved oil and gas properties............................. 37,493,394 169,863,109
Unproved oil and gas properties........................... 707,913 24,682,425
----------- ------------
38,201,307 194,545,534
Accumulated depreciation, depletion, and amortization....... 5,366,293 15,039,999
----------- ------------
Net oil and gas properties.................................. 32,835,014 179,505,535
Other property and equipment................................ 372,395 2,869,227
Accumulated depreciation.................................... 236,278 347,841
----------- ------------
Net other property and equipment............................ 136,117 2,521,386
Other assets, net........................................... 613,593 4,878,234
----------- ------------
Total assets...................................... $43,491,366 $212,035,156
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable trade.................................... $ 3,649,906 $ 12,012,655
Accounts payable revenue and other........................ 984,299 7,281,271
Accounts payable broker margin............................ 978,656 --
Accrued merger costs...................................... -- 1,462,724
Accrued interest.......................................... 128,938 1,791,667
Note payable and current portion of long-term debt........ 6,500,000 --
----------- ------------
Total current liabilities......................... 12,241,799 22,548,317
Other long-term liabilities................................. -- 1,786,813
Long-term debt, less current portion........................ 13,475,000 --
10 3/4% Senior Notes due 2006............................... -- 100,000,000
Deferred income taxes....................................... -- 7,273,829
Stockholders' equity:
Convertible preferred stock, $1.00 par:
Authorized shares 1,000,000
Issued and outstanding shares 92,500 and 242,500 at
December 31, 1995 and 1996, respectively
Aggregate liquidation preference $9,250,000 and
$24,250,000 at December 31, 1995 and 1996,
respectively......................................... 92,500 242,500
Common stock, $.01 par value:
Authorized shares 50,000,000 and 100,000,000 at
December 31, 1995 and 1996, respectively
Issued and outstanding shares 11,880,125 and 35,977,140
at December 31, 1995 and 1996, respectively.......... 118,801 359,771
Additional paid-in capital................................ 21,485,224 110,293,386
Unrealized loss on marketable securities, net............. (247,492) --
Deficit................................................... (3,674,466) (30,469,460)
----------- ------------
Total stockholders' equity........................ 17,774,567 80,426,197
----------- ------------
Total liabilities and stockholders' equity........ $43,491,366 $212,035,156
=========== ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 90
NATIONAL ENERGY GROUP, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1994 1995 1996
---------- ---------- ------------
<S> <C> <C> <C>
Revenue:
Oil and gas sales................................... $3,158,716 $7,858,316 $ 24,319,398
Well operator fees.................................. 157,845 136,943 876,247
---------- ---------- ------------
3,316,561 7,995,259 25,195,645
Costs and expenses:
Lease operating..................................... 1,207,251 1,732,124 3,740,525
Oil and gas production taxes........................ 176,320 415,867 1,285,410
Depreciation, depletion, and amortization........... 1,029,986 3,149,464 9,795,283
Writedown of oil and gas properties................. -- -- 43,497,000
General and administrative.......................... 984,304 1,771,372 3,034,146
---------- ---------- ------------
3,397,861 7,068,827 61,352,364
---------- ---------- ------------
Operating income (loss)............................... (81,300) 926,432 (36,156,719)
Interest expense...................................... (517,086) (1,032,096) (4,212,564)
Interest income and other, net........................ 109,017 90,875 426,021
Gain (loss) on sale of marketable securities.......... -- 220,582 (117,955)
---------- ---------- ------------
Income (loss) before income taxes..................... (489,369) 205,793 (40,061,217)
Benefit for income taxes.............................. -- -- (14,503,595)
---------- ---------- ------------
Income (loss) before extraordinary item............... (489,369) 205,793 (25,557,622)
Extraordinary loss on early extinguishments of debt... (121,917) (431,762) (292,372)
---------- ---------- ------------
Net loss.................................... $ (611,286) $ (225,969) $(25,849,994)
========== ========== ============
Loss per common share:
Loss before extraordinary item...................... $ (.09) $ (.05) $ (1.33)
========== ========== ============
Net loss............................................ $ (.10) $ (.09) $ (1.34)
========== ========== ============
Weighted average number of common and common
equivalent shares outstanding....................... 8,476,821 10,701,635 19,939,975
========== ========== ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 91
NATIONAL ENERGY GROUP, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1994 1995 1996
----------- ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss........................................... $ (611,286) $ (225,969) $(25,849,994)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation, depletion, and amortization........ 1,029,986 3,149,464 9,795,283
Writedown of oil and gas properties.............. -- -- 43,497,000
Amortization of loan costs....................... 19,114 21,060 151,063
Amortization of deferred compensation............ 41,694 39,809 36,083
Benefit for deferred income taxes................ -- -- (14,503,595)
Extraordinary loss on early extinguishment of
debt.......................................... 121,917 431,762 292,372
Common stock, options, and warrants issued for
services...................................... 64,290 104,614 216,206
Loss (gain) on sale of marketable securities..... -- (220,582) 117,955
Changes in operating assets and liabilities
excluding effects of business acquisitions:
Accounts receivable........................... (217,192) (784,668) (4,729,262)
Accounts receivable from related parties...... -- 23,999 --
Other current assets.......................... (101,530) (108,615) (320,601)
Accounts payable and accrued liabilities...... 26,299 425,626 3,085,455
----------- ------------ ------------
Net cash provided by operating
activities............................. 373,292 2,856,500 11,787,965
----------- ------------ ------------
INVESTING ACTIVITIES
Purchases of marketable securities................. (1,081,041) (2,917,659) (9,008)
Proceeds from sale of marketable securities........ 35,176 2,111,890 1,675,669
Proceeds from broker margin........................ -- 978,656 --
Purchases of other property and equipment.......... (48,632) (42,950) (1,553,355)
Oil and gas acquisition, exploration, and
development expenditures......................... (2,849,508) (16,912,919) (46,945,872)
Acquisition of Alexander Energy Corporation, net of
cash acquired of $1,332,444...................... -- -- (2,455,993)
Proceeds from sales of oil and gas properties...... 90,500 69,306 --
Other.............................................. 41,471 (11,963) 11,638
----------- ------------ ------------
Net cash used in investing activities.... (3,812,034) (16,725,639) (49,276,921)
----------- ------------ ------------
FINANCING ACTIVITIES
Proceeds from issuance of 10 3/4% Notes due 2006,
net.............................................. -- -- 96,059,119
Proceeds from issuance of long-term debt, net...... 5,691,366 17,514,077 69,026,613
Proceeds from issuance of note payable............. -- 3,000,000 8,000,000
Repayments of long-term debt....................... (4,200,000) (6,875,000) (130,510,233)
Repayments of note payable......................... -- -- (11,000,000)
Repayments of other long-term liabilities.......... (77,571) -- (534,815)
Proceeds from exercise of stock options and
warrants......................................... 35,938 467,987 499,704
Proceeds from issuance of convertible preferred
stock, net....................................... 4,436,372 3,980,343 15,000,000
Preferred stock dividends.......................... (14,705) (735,000) (945,000)
Payments for redemption of fractional shares....... (477) (714) (385)
----------- ------------ ------------
Net cash provided by financing
activities............................. 5,870,923 17,351,693 45,595,003
----------- ------------ ------------
Increase in cash and cash equivalents.............. 2,432,181 3,482,554 8,106,047
Cash and cash equivalents at beginning of period... 161,464 2,593,645 6,076,199
----------- ------------ ------------
Cash and cash equivalents at end of period......... $ 2,593,645 $ 6,076,199 $ 14,182,246
=========== ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid in cash.............................. $ 457,949 $ 983,075 $ 2,549,835
=========== ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE> 92
NATIONAL ENERGY GROUP, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON
STOCK
ISSUABLE GAIN
CONVERTIBLE UNDER (LOSS) ON
PREFERRED STOCK COMMON STOCK ASSET ADDITIONAL AVAILABLE
------------------ --------------------- ACQUISITION PAID-IN FOR SALE
SHARES AMOUNT SHARES AMOUNT AGREEMENT CAPITAL SECURITIES
------- -------- ---------- -------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993....... -- $ -- 7,844,732 $ 78,447 $ 97,910 $ 7,980,992 $ --
Common stock issued upon exercise
of options...................... -- -- 62,500 625 -- 35,313 --
Common stock issued or issuable
under asset acquisition
agreements...................... -- -- 200,000 2,000 38,125 123,000 --
Issuance of Series B Preferred
Stock........................... 50,000 50,000 -- -- -- 4,386,372 --
Common stock issued for
services........................ -- -- 60,250 602 -- 51,908 --
Common stock issued upon
conversion of Series A Preferred
Stock........................... -- -- 425,000 4,250 -- 420,720 --
Common stock issued on conversion
of long-term debt............... -- -- 415,054 4,151 -- 380,311 --
Unrealized gain on marketable
securities...................... -- -- -- -- -- -- 136,285
Preferred stock dividends......... 2,500 2,500 -- -- -- 247,500 --
Net loss.......................... -- -- -- -- -- -- --
------- -------- ---------- -------- --------- ------------ ---------
Balance at December 31, 1994....... 52,500 52,500 9,007,536 90,075 136,035 13,626,116 136,285
Common stock issued upon exercise
of options and warrants......... -- -- 327,992 3,280 -- 464,707 --
Common stock issued under asset
acquisition agreement........... -- -- 300,000 3,000 (136,035) 133,035 --
Common stock and warrants issued
for services.................... -- -- 13,000 130 -- 79,203 --
Common stock issued upon
conversion of Class B Common
Stock........................... -- -- 1,166,796 11,668 -- (11,668) --
Common stock and warrants issued
to acquire interests in oil and
gas properties.................. -- -- 1,064,801 10,648 -- 3,269,003 --
Issuance of Series C Preferred
Stock........................... 40,000 40,000 -- -- -- 3,924,828 --
Preferred stock dividends......... -- -- -- -- -- -- --
Unrealized loss on marketable
securities...................... -- -- -- -- -- -- (383,777)
Net loss.......................... -- -- -- -- -- -- --
------- -------- ---------- -------- --------- ------------ ---------
Balance at December 31, 1995....... 92,500 92,500 11,880,125 118,801 -- 21,485,224 (247,492)
Common stock issued upon exercise
of options and warrants......... -- -- 351,242 3,513 -- 496,191 --
Common stock, options, and
warrants issued for services.... -- -- 50,000 500 -- 215,706 --
Common stock issued to acquire
interests in oil and gas
properties...................... -- -- 2,416,332 24,163 -- 8,319,203 --
Issuance of Series D and E
Convertible Preferred Stock and
related warrants to purchase
common stock.................... 150,000 150,000 -- -- -- 14,850,000 --
Common stock, stock options, and
warrants issued or assumed in
acquisition of Alexander Energy
Corporation..................... -- -- 21,279,441 212,794 -- 64,927,062 --
Preferred stock dividends......... -- -- -- -- -- -- --
Change in unrealized gain on
marketable securities........... -- -- -- -- -- -- 247,492
Net loss.......................... -- -- -- -- -- -- --
------- -------- ---------- -------- --------- ------------ ---------
Balance at December 31, 1996....... 242,500 $242,500 35,977,140 $359,771 $ -- $110,293,386 $ --
======= ======== ========== ======== ========= ============ =========
<CAPTION>
TOTAL
STOCKHOLDERS'
DEFICIT EQUITY
------------ -------------
<S> <C> <C>
Balance at December 31, 1993....... $ (1,837,506) $ 6,319,843
Common stock issued upon exercise
of options...................... -- 35,938
Common stock issued or issuable
under asset acquisition
agreements...................... -- 163,125
Issuance of Series B Preferred
Stock........................... -- 4,436,372
Common stock issued for
services........................ -- 52,510
Common stock issued upon
conversion of Series A Preferred
Stock........................... -- 424,970
Common stock issued on conversion
of long-term debt............... -- 384,462
Unrealized gain on marketable
securities...................... -- 136,285
Preferred stock dividends......... (264,705) (14,705)
Net loss.......................... (611,286) (611,286)
------------ ------------
Balance at December 31, 1994....... (2,713,497) 11,327,514
Common stock issued upon exercise
of options and warrants......... -- 467,987
Common stock issued under asset
acquisition agreement........... -- --
Common stock and warrants issued
for services.................... -- 79,333
Common stock issued upon
conversion of Class B Common
Stock........................... -- --
Common stock and warrants issued
to acquire interests in oil and
gas properties.................. -- 3,279,651
Issuance of Series C Preferred
Stock........................... -- 3,964,828
Preferred stock dividends......... (735,000) (735,000)
Unrealized loss on marketable
securities...................... -- (383,777)
Net loss.......................... (225,969) (225,969)
------------ ------------
Balance at December 31, 1995....... (3,674,466) 17,774,567
Common stock issued upon exercise
of options and warrants......... -- 499,704
Common stock, options, and
warrants issued for services.... -- 216,206
Common stock issued to acquire
interests in oil and gas
properties...................... -- 8,343,366
Issuance of Series D and E
Convertible Preferred Stock and
related warrants to purchase
common stock.................... -- 15,000,000
Common stock, stock options, and
warrants issued or assumed in
acquisition of Alexander Energy
Corporation..................... -- 65,139,856
Preferred stock dividends......... (945,000) (945,000)
Change in unrealized gain on
marketable securities........... -- 247,492
Net loss.......................... (25,849,994) (25,849,994)
------------ ------------
Balance at December 31, 1996....... $(30,469,460) $ 80,426,197
============ ============
</TABLE>
See accompanying notes.
F-6
<PAGE> 93
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
National Energy Group, Inc. (the "Company") was incorporated under the laws
of the State of Delaware on November 20, 1990. The Company is engaged in the
acquisition, development, and production of crude oil and natural gas.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits and money-market
investments with maturities of three months or less when purchased. At December
31, 1995 and 1996, all cash and cash equivalents were invested with Bank One,
Texas, N.A. ("Bank One").
Marketable Securities
The Company's marketable securities are classified as available-for-sale.
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses, net of tax, reported as a separate component of stockholders'
equity. Realized gains and losses and declines in value judged to be
other-than-temporary are included in interest income. The cost of securities
sold is based on the specific identification method.
The following is a summary of available-for-sale securities at December 31,
1995 (none in 1996):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Common stocks......................... $2,072,216 $ 1,026 $248,518 $1,824,724
========== ========== ======== ==========
</TABLE>
The marketable securities were comprised of securities of other independent
oil and gas companies. The common stock of one oil and gas company accounted for
62% of the estimated fair market value of the total marketable securities held
at December 31, 1995.
During the years ended December 31, 1995 and 1996, the Company sold
available-for-sale securities with a fair value at the date of sale of
$2,111,890 and $1,675,669, respectively. The gross realized gains on such sales
totaled $224,443 in 1995 and $9,765 in 1996. The gross realized losses on such
sales totaled $3,861 and $127,720 during 1995 and 1996, respectively.
Accounts Receivable
The Company sells crude oil and natural gas to various customers. In
addition, the Company participates with other parties in the operation of crude
oil and natural gas wells. Substantially all of the Company's accounts
receivable are due from either purchasers of crude oil and natural gas or
participants in crude oil and natural gas wells for which the Company serves as
the operator. Generally, operators of crude oil and natural gas properties have
the right to offset future revenues against unpaid charges related to operated
wells. Crude oil and natural gas sales are generally unsecured.
F-7
<PAGE> 94
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Natural Gas Production Imbalances
The Company accounts for natural gas production imbalances using the sales
method, whereby the Company recognizes revenue on all natural gas sold to its
customers notwithstanding the fact that its ownership may be less than 100% of
the natural gas sold.
Oil and Gas Properties
The Company utilizes the full cost method of accounting for its crude oil
and natural gas properties. Under the full cost method, all productive and
nonproductive costs incurred in connection with the acquisition, exploration,
and development of crude oil and natural gas reserves are capitalized and
amortized on the units-of-production method based upon total proved reserves.
The costs of unproven properties are excluded from the amortization calculation
until the individual properties are evaluated and a determination is made as to
whether reserves exist. Capitalized costs are limited to the aggregate of the
present value of future net reserves plus the lower of cost or fair market value
of unproved properties. Conveyances of properties, including gains or losses on
abandonments of properties, are treated as adjustments to the cost of crude oil
and natural gas properties, with no gain or loss recognized. The Company does
not believe that future costs related to dismantlement, site restoration, and
abandonment costs, net of estimated salvage values, will have a significant
effect on its results of operations or financial position because the salvage
value of equipment and related facilities should approximate or exceed any
future expenditures for dismantlement, restoration, or abandonment. The Company
has not incurred any net expenditures for costs of this nature during the last
two years.
The Company has capitalized internal costs of $158,961, $141,516, and
$487,835 for the years ended December 31, 1994, 1995, and 1996, respectively.
Such capitalized costs include salaries and related benefits of individuals
directly involved in the Company's acquisition, exploration, and development
activities based on the percentage of their time devoted to such activities.
Other Property and Equipment
Other property and equipment includes gas processing and field production
facilities, furniture, fixtures, and other equipment. Such assets are recorded
at cost and are depreciated over their estimated useful lives using the
straight-line method.
Maintenance and repairs are charged against income when incurred; and
renewals and betterments, which extend the useful lives of property and
equipment, are capitalized.
Income Taxes
The Company uses the liability method in accounting for income taxes. Under
the liability method, deferred tax assets and liabilities are determined based
on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
Natural Gas Hedging Activities
In 1995 and 1996, the Company hedged natural gas prices through the use of
commodity price swap agreements in an effort to reduce the effects of the
volatility of the price of natural gas on the Company's operations. These
agreements involve the receipt of fixed-price amounts in exchange for variable
payments based on NYMEX prices and specific volumes. In connection with the
commodity price swap agreements, the Company may also enter into basis swap
agreements to reduce the effects of unusual fluctuations between prices actually
received at the wellhead and NYMEX prices. Through the use of commodity price
and basis
F-8
<PAGE> 95
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
swap agreements, the Company can fix the price to be received for specified
volumes of production to the commodity swap price less the basis swap price. The
differential to be paid or received under the swap agreement is accrued in the
month of the related production and recognized as an adjustment to oil and gas
sales. The Company does not hold or issue financial instruments for trading
purposes.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) in accounting for its
employee stock options. Under APB 25, if the exercise price of an employee's
stock options equals or exceeds the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Earnings (Loss) Per Share
Primary earnings (loss) per common and common equivalent share data is
computed by dividing net income (loss), adjusted for preferred stock dividend
requirements of $264,705, $735,000, and $945,000 for 1994, 1995, and 1996,
respectively, by the weighted average number of common and common equivalent
shares outstanding during each period. Shares issuable upon exercise of options
and warrants are included in the computation of earnings per common and common
equivalent share to the extent that they are dilutive. Fully diluted earnings
(loss) per share computations also assume the conversion of the Company's
preferred stock (Note 5) if such conversion has a dilutive effect.
For the years ended December 31, 1994, 1995, and 1996, neither the common
equivalent shares nor the assumed conversion of the preferred stock had a
dilutive effect on the loss per share calculations. Accordingly, the loss per
share calculations for such periods are based on the weighted average number of
common shares outstanding during each year.
Reclassifications
Certain previously reported amounts have been reclassified to conform with
the current presentation.
2. ACQUISITIONS
During 1994, the Company acquired an additional 17.0% working interest in
the Goldsmith Adobe Unit ("GAU"). Such interest was acquired for $584,095 in
cash. The Company is the operator of the GAU and holds a 91.8% working interest
in the GAU.
In April 1995, the Company purchased a 100% working interest (77% net
revenue interest) in State of Texas Lease No. 69153 and the State Tract 901-S
Field, Nueces County, Texas ("Mustang Island") for $900,000 in cash and 352,500
shares of Common Stock. The cash portion of the acquisition was funded from
available cash.
In June 1995, the Company completed the acquisition of producing gas
properties in the Oak Hill Field ("Oak Hill") in Rusk County, Texas, which is a
component of the Cotton Valley Trend. The consideration paid by the Company for
Oak Hill consisted of $7,200,000 in cash, 612,301 shares of Common Stock and
warrants to purchase 200,000 shares of Common Stock at a price per share of
$2.00. The cash portion of the acquisition was funded primarily by borrowings
under a credit facility with Bank One.
In addition, in June 1995, the Company completed the acquisition of
producing oil and gas properties in Eddy County, New Mexico from Enron Oil and
Gas Company (the "Enron Properties") for $2,119,295 in cash. This acquisition
was funded by borrowings under a credit facility with Bank One and available
cash.
F-9
<PAGE> 96
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITIONS -- (CONTINUED)
The following pro forma data presents the results of the Company for the
years ended December 31, 1994 and 1995, as if the acquisition of Mustang Island,
Oak Hill, and the Enron Properties had occurred on January 1, 1994. The pro
forma results of operations are presented for comparative purposes only and are
not necessarily indicative of the results which would have been obtained had the
acquisitions been consummated as presented. The following data reflect pro forma
adjustments for the oil and gas revenues, production costs, and depreciation and
depletion related to the properties and additional interest on borrowed funds
(in thousands, except per share amounts).
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED
DECEMBER 31,
----------------
1994 1995
------ ------
(UNAUDITED)
<S> <C> <C>
Revenues.................................................... $5,051 $9,254
====== ======
Loss before extraordinary item.............................. $ (573) $ --
====== ======
Loss before extraordinary item per common share............. $ (.06) $ (.06)
====== ======
</TABLE>
In January 1996, the Company completed the acquisition of oil and gas
properties in offshore Nueces County, Texas, adjacent to the Company's Mustang
Island property, from C/A Limited, Chartex Petroleum Company, and Petrotex
Engineering Company. The acquisition includes interests in five wells, a
pipeline and separation facility related to Mustang Island. The consideration
for this acquisition consisted of 140,857 shares of the Company's Common Stock
and $675,000 in cash.
In February 1996, the Company completed the acquisition of two oil and gas
wells on one offshore block, interests in five other offshore blocks, and a
related production platform and equipment in offshore Nueces County, Texas,
adjacent to the Company's Mustang Island property, from UMC Petroleum
Corporation (the "UMC Acquisition"). The 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
F-10
<PAGE> 97
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITIONS -- (CONTINUED)
facility. See Note 3. On August 29, 1996, the Company also closed the sale of
100,000 shares of its Convertible Preferred Stock, Series D, $1.00 par value per
share, the sale of 50,000 shares of its Convertible Preferred Stock, Series E,
$1.00 par value per share, and warrants to purchase 1,050,000 shares of Common
Stock. See Note 6.
The cost of acquiring Alexander was approximately $69.4 million, consisting
of the following (in thousands):
<TABLE>
<S> <C>
Fair value of 21.1 million shares of the Company's Common
Stock issued.............................................. $63,404
Cost of 105,740 shares of NEG-OK common stock owned by the
Company................................................... 288
Alexander stock options and warrants assumed................ 340
Fair value of 122,324 shares of the Company's Common Stock
and 800,000 warrants issued for services provided by
investment advisors....................................... 1,322
Other investment advisor, legal, and accounting professional
fees and other Merger related costs....................... 4,009
-------
$69,363
=======
</TABLE>
The fair value of the securities issued in connection with the Merger was
calculated using the price of the Company's Common Stock at the time the Merger
was announced to the public of $3.00 per share.
The Company's purchase price has been allocated to the consolidated assets
and liabilities of NEG-OK based on preliminary estimates of fair values with the
remaining purchase price allocated to proved oil and gas properties. No goodwill
has been recorded in this transaction.
The preliminary allocation of the purchase price is summarized as follows
(in thousands):
<TABLE>
<S> <C>
Working capital (deficit) assumed, excluding current portion
of long-term debt......................................... $ (87)
Oil and gas properties:
Proved.................................................... 132,756
Unproved.................................................. 6,319
Other property and equipment................................ 970
Other non-current assets.................................... 198
Long-term debt assumed...................................... (45,853)
Other non-current liabilities assumed....................... (3,163)
Deferred income taxes....................................... (21,777)
--------
$ 69,363
========
</TABLE>
Under the full cost method of accounting, the carrying value of oil and gas
properties (net of related deferred taxes) is generally not permitted to exceed
the sum of the present value (10% discount rate) of estimated future net cash
flows, after tax, from proved reserves, based on current prices and costs, plus
the lower of cost or estimated fair value of unproved properties (the "cost
center ceiling"). Based upon the combined cost center ceiling at August 29,
1996, and the preliminary allocation of the Company's purchase price, the
purchase price allocated to oil and gas properties was in excess of the cost
center ceiling using oil and natural gas prices being received by the Company
and NEG-OK in August 1996 of $20.75 per Bbl and
F-11
<PAGE> 98
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITIONS -- (CONTINUED)
$2.21 per Mcf. Such excess was written off at the date of acquisition, resulting
in a charge to the Company's results of operations of $28.3 million as follows
(in thousands):
<TABLE>
<S> <C>
Writedown of oil and gas properties......................... $ 43,497
Deferred income tax benefit................................. (15,224)
--------
$ 28,273
========
</TABLE>
In September 1996, the Company acquired an approximate 87.5% working
interest in two wells and certain proved undeveloped reserves in 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.
The following pro forma data presents the results of the Company for the
years ended December 31, 1995 and 1996, as if the acquisitions of Mustang
Island, Oak Hill, the Enron Properties, NEG-OK, and the Lake Boeuf Acquisition
had occurred on January 1, 1995. The historical results of the CA Acquisition
and the UMC Acquisition were not significant. The pro forma results of
operations are presented for comparative purposes only and are not necessarily
indicative of the results which would have been obtained had the acquisitions
been consummated as presented. The following data reflect pro forma adjustments
for oil and gas revenues, production costs, depreciation, and depletion related
to the properties and businesses acquired, interest on borrowed funds,
additional preferred stock dividend requirements, and the related income tax
effects (in thousands, except per share amounts).
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996
-------- -------------
(UNAUDITED)
<S> <C> <C>
Total revenues.............................................. $ 28,790 $38,807
======== =======
Income (loss) before extraordinary item..................... $ (6,131) $ 3,465
======== =======
Income (loss) before extraordinary item per share........... $ (.20) $ .06
======== =======
</TABLE>
In October 1996, the Company acquired certain leasehold interests located
in the Easy Bayou Sorrel Field, Iberville Parish, Louisiana from W&T Offshore,
Inc. 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 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 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
Borrowings of $6,000,000 were outstanding at December 31, 1994, under a
credit facility with Texas Gas Fund I. A portion of the proceeds from the Texas
Gas Fund I facility were used to repay the Company's previous loan with Bank One
which resulted in an extraordinary charge of $121,917, or $.01 per common share.
F-12
<PAGE> 99
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. CREDIT FACILITIES -- (CONTINUED)
In June 1995, the Company consummated a $33,000,000 reducing revolving line
of credit facility (the "Prior Credit Facility") with Bank One. The initial
advance under the Facility of $12,500,000 was used to pay off the Company's
credit facility with Texas Gas Fund I, to purchase Oak Hill and the Enron
Properties (Note 2), and for closing fees. The repayment of borrowings under the
Texas Gas Fund I facility resulted in an extraordinary charge of $431,762 or
$.04 per common share.
At December 31, 1995, the Prior Credit Facility consisted of a revolving
note of up to $30,000,000, subject to a borrowing base, and an advance note of
up to $3,000,000 (primarily for the development of GAU). Interest on the
revolving note was at a rate of prime plus 1% (subject to reduction in certain
circumstances) or LIBOR plus 3.75% (subject to reduction in certain
circumstances), at the Company's option. Interest on the advance note was at a
rate of prime plus 4%. Payments of interest and principal were made monthly. The
Facility was secured by all of the Company's principal oil and gas properties
and related equipment, oil and gas inventory, and related receivables.
Prepayments were allowed at any time. At December 31, 1995, the Company had
$16,975,000 outstanding under the revolving note and $3,000,000 outstanding
under the advance note.
On August 29, 1996, the Company, NEG-OK and Boomer Marketing, entered into
a credit facility (the "Credit Facility") with Bank One, as Bank and
Administrative Agent, and the Credit Lyonnais New York Branch, as Bank and
Syndication Agent (collectively, the "Banks"). The Credit Facility consisted of
a $100.0 million reducing revolving line of credit, with an initial borrowing
base of $60.0 million and a $5.0 million term loan. Interest under the reducing
revolving line of credit was payable monthly at the Bank One base rate. The
proceeds from the Credit Facility were used to repay the Prior Credit Facility
and the existing indebtedness of NEG-OK, resulting in an extraordinary charge of
$292,372 or $.01 per common share.
On November 1, 1996, the Company repaid the outstanding borrowings under
the Credit Facility with a portion of proceeds from the issuance of $100.0
million principal amount of 10 3/4% Senior Notes due 2006 (the "Senior Notes").
See Note 4.
In connection with the issuance of the Senior Notes, the Company amended
the Credit Facility. The borrowing base, pursuant to the amended Credit
Facility, was reduced to $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. No principal reductions will be required before the
next borrowing base redetermination scheduled for April 1, 1997. The principal
is due at maturity, August 29, 2000. Interest is payable monthly and is
calculated at the Bank One base rate, as determined from time to time by Bank
One (which increases by .25% if the outstanding loan balance is greater than 75%
of the borrowing base). The Company may elect to calculate interest under the
EuroDollar Rate, as defined in the Credit Facility. At December 31, 1996, the
Company had no outstanding indebtedness under the amended Credit Facility.
The Company is required to pay a commitment fee on the unused portion of
the borrowing base equal to this of 1% per annum and paid a facility fee equal
to 3/4% of the initial borrowing base under the Credit Facility.
The Company granted to the Banks liens on 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.
F-13
<PAGE> 100
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. CREDIT FACILITIES -- (CONTINUED)
The Credit Facility includes other covenants prohibiting cash dividends,
distributions, loans, or advances to third parties, except that cash dividends
on preferred stock will be allowed so long as no event of default exists or
would exist as result of the payment thereof. In addition, if the Company is
required to purchase or redeem any portion of the Notes, or if any portion of
the Notes become due, the borrowing base is subject to reduction. At December
31, 1996, the Company was not in violation of any covenants of the Credit
Facility.
4. 10 3/4% SENIOR NOTES DUE 2006
On November 1, 1996, the Company completed the sale of $100.0 million
principal amount of Senior Notes. The net proceeds of the Senior Notes of
approximately $96.0 million were used to repay approximately $62 million of
borrowings outstanding under the Credit Facility and to increase the Company's
working capital. In 1997, the Senior Notes were exchanged for an equal principal
amount of the Company's 10 3/4% Senior Notes due 2006 ("Exchange Notes") which
are substantially identical to the Senior Notes. Collectively, the Senior Notes
and the Exchange Note are referred to as the "Notes." The Notes bear interest at
an annual rate of 10 3/4%, payable semiannually in arrears on May 1 and November
1 of each year. The Notes are senior, unsecured obligations of the Company,
ranking pari passu with all existing and future senior indebtedness of the
Company, and senior in right of payment to all future subordinated indebtedness
of the Company. Subject to certain limitations set forth in the indenture
covering the Notes (the "Indenture"), the Company and its subsidiaries may incur
additional senior indebtedness and other indebtedness.
The Indenture provides that the Notes will be unconditionally guaranteed
(the "Guarantee") by any subsidiary designated by the Company as a Restricted
Subsidiary (a "Guarantor"). As a result of the merger of NEG-OK into the Company
on December 31, 1996, the Company has no Restricted Subsidiaries.
The Indenture contains certain covenants limiting the Company and any
Restricted Subsidiaries, with respect to the following: (i) assets sales; (ii)
restricted payments; (iii) the incurrence of additional indebtedness and the
issuance of certain redeemable preferred stock; (iv) liens; (v) sale and
leaseback transactions; (vi) lines of business; (vii) dividend and other payment
restrictions affecting subsidiaries; (viii) mergers and consolidations; and (ix)
transactions with affiliates.
At any time on or after November 1, 2001, the Company may, at its option,
redeem all or any portion of the Notes at the redemption prices expressed as
percentages of the principal amount of the Notes set forth below, plus, in each
case, accrued and unpaid interest thereon to the applicable redemption date, if
redeemed during the 12-month period beginning November 1 of the years indicated
below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2001........................................................ 105.375%
2002........................................................ 102.688%
2003 and thereafter......................................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to November 1, 2001, the
Company may, at its option, redeem all or any portion of the Notes at the
Make-Whole Price, as defined, plus accrued and unpaid interest to the date of
redemption. In addition, in the event the Company consummates one or more Equity
Offerings, as defined, on or prior to November 1, 1999, the Company, at its
option, may redeem up to $35.0 million of the aggregate principal amount of the
Notes with all or a portion of the aggregate net proceeds received by the
Company from such Equity Offering or Equity Offerings at a redemption price of
110.75% of the aggregate principal amount of the Notes so redeemed, plus accrued
and unpaid interest thereon to the redemption date; provided, however, that
following such redemption, at least $65.0 million of the aggregate principal
amount of the Notes remains outstanding.
F-14
<PAGE> 101
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. 10 3/4% SENIOR NOTES DUE 2006 -- (CONTINUED)
Upon a Change of Control, as defined, the Company will be required, subject
to certain conditions, to offer to repurchase all Notes at 101% of the principal
amount thereof, plus accrued and unpaid interest to the date of purchase.
The carrying value of the Notes approximates their fair value.
5. COMMITMENTS AND CONTINGENCIES
The Company leases office space under an operating lease. Rental expense
charged to operations was approximately $80,000, $101,000, and $117,000 during
the years ended December 31, 1994, 1995, and 1996, respectively. Minimum lease
payments under future operating lease commitments at December 31, 1996, are as
follows:
<TABLE>
<S> <C>
1997........................................................ $269,164
1998........................................................ 317,089
1999........................................................ 317,723
Thereafter.................................................. 14,660
--------
$918,636
========
</TABLE>
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 and 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.
The Company is not a defendant in any additional pending legal proceedings
other than routine litigation incidental to its business. While the ultimate
results of these proceedings cannot be predicted with certainty, the Company
does not believe that the outcome of these matters will have a material adverse
effect on the Company.
6. STOCKHOLDERS' EQUITY
Capital Stock
In connection with the Merger, the Company's shareholders approved an
amendment to the Company's Certificate of Incorporation to eliminate the
authorization of the Class B Common Stock, to change the name of Class A Common
Stock to "Common Stock," and to increase the number of authorized shares of
Common Stock from 50,000,000 to 100,000,000 shares.
F-15
<PAGE> 102
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCKHOLDERS' EQUITY -- (CONTINUED)
Preferred Stock
At December 31, 1996, the Company has authorized 330,000 shares of $1.00
par value convertible preferred stock designated in four series B through E:
<TABLE>
<CAPTION>
SERIES B SERIES C SERIES D SERIES E
------------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
Number of authorized
shares.................. 100,000 80,000 100,000 50,000
Number of shares issued
and outstanding:
December 31, 1994....... 52,500 -- -- --
December 31, 1995....... 52,500 40,000 -- --
December 31, 1996....... 52,500 40,000 100,000 50,000
Conversion price per
common share............ $ 1.625 $ 2.00 $ 2.25 $ 2.25
Liquidation preference
value per share......... $100.00 $100.00 $100.00 $100.00
Dividend rights........... 10 1/2%
10% payable payable Participation Participation
semi-annually semi-annually with common with common
(cumulative) (cumulative) stock stock
</TABLE>
In connection with the acquisition of certain oil and gas assets in 1992,
the Company's Board of Directors authorized the issuance of up to 5,000 shares
of redeemable convertible preferred stock designated as 5% Redeemable
Convertible Preferred Stock, Series A, par value, $1.00 per share ("Series A
Preferred Stock"). The Series A Preferred Stock was converted into 425,000
shares of Common Stock during 1994.
On June 3, 1994, the Company consummated the sale of $5,000,000 of the
Company's 10% Cumulative Convertible Preferred Stock, Series B ("Series B").
Fifty thousand shares of Series B were sold by the Company at $100.00 per share.
The Series B is convertible into shares of Common Stock at a conversion price of
$1.625 per share. The Series B has a liquidation and dividend preference over
the Common Stock. The Series B has a 10% dividend, payable semi-annually. The
Company has the option to make six dividend payments in shares of Series B;
after the sixth such payment, the holders of Series B have the option to receive
additional dividends in shares of Series B or to accrue such dividends in cash.
If the Company makes four dividend payments in shares of Series B, the holders
of Series B have the right to appoint one-third of the members of the Company's
Board of Directors. As of December 31, 1996 all dividend payments were current.
The Series B is redeemable by the Company beginning June 14, 1999, at $100.00
per share, plus accrued and unpaid dividends; provided, however, that the
Company cannot redeem any shares of Series B unless and until all outstanding
shares of the Series C have been redeemed by the Company. The holders of Series
B currently have the right to appoint one member to the Company's Board of
Directors. The Series B requires that dividends be paid on the Series B before
any dividends are paid on Common Stock.
The holders of Series B are entitled to one vote for each share as to
matters upon which by law they are entitled to vote as a class, and the approval
of a majority of the Series B, voting separately as a class, is required to make
changes to the Company's Certificate of Incorporation or By-Laws which adversely
affect the Series B, to authorize or issue additional shares of Series B or to
issue preferred stock equal to or senior to the Series B as to dividends or
liquidation, or, subject to certain exceptions, to effect an extraordinary
transaction that requires a vote of the Company's stockholders. As a result, a
class vote of the holders of
F-16
<PAGE> 103
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCKHOLDERS' EQUITY -- (CONTINUED)
Series B would be required for the Company to merge or be acquired and may
therefore delay, deter, or prevent a change in control of the Company.
In June 1995, the Company consummated the sale of $4,000,000 of the
Company's 10 1/2% Cumulative Convertible Preferred Stock, Series C ("Series C").
Forty thousand shares of Series C were sold by the Company at $100.00 per share.
The Series C is convertible into shares of Common Stock at a conversion price of
$2.00 per share.
The Series C has a liquidation and dividend preference over the Common
Stock and is parity stock to the previously issued Series B. The Series C has a
10 1/2% dividend, payable semi-annually. The Company has the option to make six
dividend payments in shares of Series C; after the sixth such payment, the
holders of Series C have the option to receive additional dividends in shares of
Series C or to accrue such dividends in cash.
If the Company makes four dividend payments in shares of Series C, the
holders of Series C (voting as a class with other affected series of preferred
stock with similar voting rights) have the right to appoint one-third of the
members of the Company's Board of Directors; provided, however, that if the
holders of Series B are presently entitled to a similar right, then the holders
of Series C shall have no such right until the right of the holders of Series B
terminates. As of December 31, 1996, all dividend payments are current and have
been made in cash. The Series C is redeemable by the Company beginning June 14,
1999, at $100.00 per share, plus accrued and unpaid dividends. The holders of
the Series C currently have the right to appoint one member to the Company's
Board of Directors. The holders of Series C are entitled to one vote for each
share as to matters upon which by law they are entitled to vote as a class, and
the approval of a majority of the Series C, voting separately as a class, is
required to make changes to the Company's Certificate of Incorporation or
By-Laws which adversely affect the Series C, to authorize or issue additional
shares of Series C or to issue preferred stock equal to or senior to the Series
C as to dividends or liquidation, or, subject to certain exceptions, to effect
an extraordinary transaction that requires a vote of the Company stockholders.
As a result, a class vote of the holders of Series C, as well as the Series B,
would be required for the Company to merge or be acquired and may therefore
delay, deter, or prevent a change in control of the Company.
On August 29, 1996, the Company closed the sale for $10.0 million to High
River Limited Partnership ("High River") of 100,000 shares of its Convertible
Preferred Stock, Series D, $1.00 par value per share ("Series D") and warrants
to purchase 700,000 shares of Common Stock exercisable immediately at $2.50 per
share, which warrants expire five years from their date of issuance. The rights
and preferences of the Series D are described in the Certificate of Designations
of the Series D and include the immediate right to convert all the shares of the
Series D into 4,444,444 shares of Common Stock, based upon the initial
conversion price of $2.25 per share.
The holders of the Series D are entitled to one vote for each share when
entitled to vote as described below and as to matters upon which by law they are
entitled to vote as a class. The holders of Series D will have the right to
appoint one member to the Board of Directors. The Company may not, without the
consent of the director appointed by the holders of Series D, voluntarily file
for protection under federal or other bankruptcy laws. In addition, the holders
of Series D will have the right to choose to appoint one-half of the members of
the Board of Directors plus one member (including the member appointed by the
Series D) if the Series D contingent voting rights are triggered and the holders
of the Series D exercise their rights.
On August 29, 1996, simultaneously with the closing of the sale for $10.0
million of the Series D to High River, the Company also closed the sale for $5.0
million to two insurance companies and four affiliates of Kayne, Anderson
Investment Management, Inc. ("KAIM"), a registered investment adviser, of 50,000
shares of Convertible Preferred Stock, Series E, $1.00 par value per share
("Series E") and warrants to purchase
F-17
<PAGE> 104
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCKHOLDERS' EQUITY -- (CONTINUED)
350,000 shares of the Common Stock exercisable immediately at $2.50 per share,
which warrants expire five years from their date of issuance. The Series E has
the rights and preferences described in the Certificate of Designations of the
Series E which include the immediate right to convert all of the shares of the
Series E into 2,222,222 shares of the Common Stock, based upon the initial
conversion price of $2.25 per share. The Series E will vote together with the
Common Stock on all matters submitted to the holders of Common Stock and shall
have that number of votes per share equal to the number of shares of Common
Stock into which such share is convertible as of the record date for the vote.
Common Stock
Holders of Common Stock are entitled to one vote for each share held of
record on all matters voted on by stockholders. The shares of the Common Stock
do not have cumulative voting rights, which means that the holders of more than
50% of the shares of the Common Stock voting for the election of the directors
can elect all of the directors to be elected by holders of the Common Stock, in
which event the holders of the remaining shares of Common Stock will not be able
to elect any director. Upon any liquidation, dissolution, or winding-up of the
affairs of the Company, holders of the Common Stock would be entitled to
receive, pro rata, all of the assets of the Company available for distribution
to stockholders, after payment of any liquidation preference of any Preferred
Stock that may be issued and outstanding at the time. Holders of the Common
Stock have no subscription, redemption, sinking fund, or preemptive rights.
The Class B Common Stock ("Class B") was entitled to special conversion
rights. In June 1995, as a result of the Company's proven crude oil and natural
gas reserves reaching a value in excess of $25,000,000, the 129,644 shares of
Class B common stock which were outstanding at December 31, 1994, were converted
into 1,296,440 shares of Common Stock, in accordance with the terms of the Class
B. Under the terms of the Class B, such shares cannot be reissued.
Warrants
In June 1994, in connection with the sale of the Series B Preferred Stock,
the Company issued warrants to purchase 307,692 shares of Common Stock at a
price of $1.625 per share. During 1995, 255,492 of these warrants were exercised
and the remainder were exercised in 1996. In 1995, the Company granted warrants
to purchase 300,000 shares of Common Stock at a price of $1.625 per share,
pursuant to a consulting agreement. The estimated fair value of the warrants was
deferred at the date of grant and charged to general and administrative expenses
over the vesting period. In June 1995, in connection with the acquisition of Oak
Hill (Note 2), the Company issued warrants to purchase 200,000 shares of Common
Stock at a price of $2.00 per share. During 1996, 100,000 of these warrants were
exercised.
During 1996, the Company issued warrants to purchase 1,050,000 shares of
Common Stock with exercise prices of $2.50 per share to the purchasers of the
Series D and Series E and issued warrants to purchase 300,000 shares of Common
Stock with exercise prices of $2.875 per share to financial advisors in
connection with this transaction. In connection with the Merger, the Company
issued warrants to purchase 800,000 shares of Common Stock to two financial
advisors. Warrants to purchase 700,000 shares have an exercise prices of $2.875
per share while warrants to purchase 100,000 shares have an exercise prices of
$4.09 per share. In the Merger, the Company also assumed 396,015 warrants to
purchase Common Stock at prices ranging from $2.07 to $3.00 in the Merger.
F-18
<PAGE> 105
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCKHOLDERS' EQUITY -- (CONTINUED)
The following table summarizes warrants outstanding at December 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF SHARES EXPIRATION WARRANTS EXERCISE
UNDER WARRANT DATE EXERCISABLE PRICES
- ---------------- ---------- ----------- --------
<C> <S> <C> <C>
100,000 July 31, 1997................................... 100,000 $1.625
100,000 July 31, 1998................................... 100,000 1.625
100,000 July 31, 1999................................... 100,000 1.625
100,000 June 30, 1998................................... 100,000 2.00
1,050,000 August 29, 2001................................. 1,050,000 2.50
300,000 August 29, 2001................................. 300,000 2.875
700,000 August 29, 2001................................. 700,000 2.875
100,000 August 29, 2001................................. 100,000 4.09
127,500 March 10, 1998.................................. 127,500 3.00
268,515 September 14, 1998.............................. 268,515 2.07
--------- ---------
2,946,015 2,946,015
========= =========
</TABLE>
Stock Options
During 1992, the Company's Board of Directors and stockholders approved the
Company's 1992 Stock Option Plan (the "1992 Plan"). At December 31, 1996, 15,000
options had been granted pursuant to the 1992 Plan. At present, the Company does
not plan to issue further options under the 1992 Plan.
During 1994, 1995, and 1996, the Company's Board of Directors granted
options to purchase 40,000, 765,000, and 5,000 shares of Common Stock,
respectively, to certain officers and directors. These options were issued
outside of the 1992 Plan.
As a result of the Merger, the Company assumed 135,028 outstanding stock
options previously issued pursuant to three stock option plans of Alexander. No
additional stock options will be granted pursuant to such plans. The stock
options assumed may be exercised to purchase shares of Common Stock at prices
ranging from $0.88 to $2.94 per share.
F-19
<PAGE> 106
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCKHOLDERS' EQUITY -- (CONTINUED)
A summary of the Company's stock option activity, and related information
for the years ended December 31, 1994, 1995, and 1996, follows:
<TABLE>
<CAPTION>
1994 1995 1996
------------------ ------------------ -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year..................... 297,500 $ .64 240,000 $ .79 932,500 $2.02
Granted.................. 40,000 1.62 765,000 1.93 5,000 3.00
Assumed in merger with
Alexander............. -- -- -- -- 135,028 2.25
Exercised................ (62,500) .58 (72,500) .72 (199,042) 1.08
Cancelled................ (35,000) .81 -- -- --
------- ------- --------
Outstanding at end of
year..................... 240,000 .79 932,500 2.02 873,486 2.28
======= ======= ========
Exercisable at end of
year..................... 200,000 .63 347,500 1.24 503,484 2.24
======= ======= ========
Weighted-average fair value
of options granted or
assumed during the
year..................... $ 1.31 $ 2.15
======= ========
</TABLE>
At December 31, 1996, the exercise prices of outstanding options ranged
from $0.625 to $3.00 per share. The weighted average remaining contractual life
of such options was 3.4 years.
On August 30, 1996 the Board of Directors approved the issuance of options
to purchase 700,000 shares of Common Stock to the Company's chief executive
officer. The options have an exercise price of $4.0625 per share. The options
become exercisable when the price of the Common Stock reaches and remains at or
above $8.125 for a period of 30 days. If the price target is not met within five
years, the options expire. In December 1996, the Company's Board of Directors
approved grants of options to purchase 966,500 shares of Common Stock for $3.75
per share. Both grants are subject to approval of a new stock option plan by the
stockholders of the Company and, therefore, are not included in the above table.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation," (SFAS 123) requires the disclosure of pro forma net income
and earnings per share information computed as if the Company had accounted for
its employee stock options granted subsequent to December 31, 1994, under the
fair value method set forth in SFAS 123. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for 1995 and 1996, respectively: a
risk-free interest rate of 6%, a dividend yield of 0%, and a volatility factor
of .54. In addition, the fair value of these options was estimated based on an
expected life of three years for options granted by the Company and one year for
the options assumed in the merger with Alexander.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. In addition,
because SFAS 123 is applicable only to options granted
F-20
<PAGE> 107
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCKHOLDERS' EQUITY -- (CONTINUED)
subsequent to December 31, 1994, the pro forma information does not reflect the
pro forma effect of all previous stock option grants of the Company, and thus
the pro forma information is not necessarily indicative of future amounts until
SFAS 123 is applied to all outstanding stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except for earnings per share
information):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996
--------- ------------
<S> <C> <C>
Pro forma net loss........................................ $(321,559) $(26,380,771)
========= ============
Pro forma net loss per common share....................... $ (.10) $ (1.37)
========= ============
</TABLE>
7. INCOME TAXES
The reconciliation of income taxes computed at the U.S. federal statutory
tax rates to the benefit for income taxes on the income (loss) before
extraordinary item is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
--------- -------- ------------
<S> <C> <C> <C>
Income tax (benefit) at statutory rate........... $(166,385) $ 69,970 $(14,021,426)
Utilization of net operating loss carryforward... -- (69,970) (414,177)
Benefit of net operating loss not recognized..... 166,385 -- --
Other............................................ -- -- (67,992)
--------- -------- ------------
$ -- $ -- $(14,503,595)
========= ======== ============
</TABLE>
The computation of the net deferred tax asset (liability) follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1996
----------- ------------
<S> <C> <C>
Deferred tax liabilities:
Property and equipment................................. $(1,778,045) $(19,948,392)
Other.................................................. (8,378) (38,549)
Deferred tax assets:
Net operating loss carryforwards....................... 2,402,574 14,564,346
Statutory depletion carryforwards...................... -- 1,340,763
Other.................................................. -- 1,812,635
----------- ------------
616,151 (2,269,197)
Less valuation allowance................................. (616,151) (5,004,632)
----------- ------------
$ -- $ (7,273,829)
=========== ============
</TABLE>
At December 31, 1996, the Company had net operating loss carryforwards
available for federal income tax purposes of approximately $42 million which
expire beginning in 1997. Utilization of substantially all of the net operating
loss carryforwards is subject to various limitations because of previous changes
in stock ownership (as defined in the Internal Revenue Code) of the Company and
Alexander. Additional net operating loss limitations may be imposed as a result
of subsequent changes in stock ownership of the Company. For federal income tax
purposes, the Company also has statutory depletion carryforwards of
F-21
<PAGE> 108
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES -- (CONTINUED)
$3.8 million, which do not expire. As a result of the limitations on the
utilization of net operating loss carryforwards, the Company has established a
valuation allowance to reduce deferred tax assets to amounts that are more
likely than not to be realized.
8. GAS HEDGING ACTIVITIES AND COMMITMENTS
While the use of hedging arrangements limits the downside risk of adverse
price movements, it may also limit future gains from favorable movements. All
hedging is accomplished pursuant to swap agreements based upon standard forms.
The Company addresses market risk by selecting instruments whose value
fluctuations correlate strongly with the underlying commodity being hedged.
Credit risk related to hedging activities is managed by requiring minimum credit
standards for counterparties, periodic settlements, and mark to market
valuations. The Company has not been required to provide collateral relating to
its hedging activities.
In December 1995, the Company had entered into various swap agreements to
fix the selling prices for natural gas at a weighted average NYMEX price of
$2.805 per Mcf for 225,000 Mcf of natural gas to be produced during 1996. The
Company closed the positions prior to December 31, 1995, resulting in a deferred
gain of approximately $70,875 which was recognized in 1996.
During the year ended December 31, 1996, the Company recognized a net gain
of $20,315 related to hedging transactions. At December 31, 1996, the Company
has no hedging agreements outstanding.
9. CRUDE OIL AND NATURAL GAS PRODUCING ACTIVITIES
The unproven properties are excluded from the amortization base and consist
primarily of acreage, acquisition costs, and related geological and geophysical
costs. These costs are expected to be evaluated during the Company's drilling
program during the next three to five years.
Costs incurred in connection with acquisition, development, exploitation
and exploration of crude oil and natural gas properties for the years ended
December 31, 1994, 1995, and 1996, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1994 1995 1996
---------- ----------- ------------
<S> <C> <C> <C>
Acquisitions of properties:
Proved...................................... $1,153,548 $13,657,383 $151,511,108
Unproved.................................... 134,512 707,913 24,534,610
Exploration costs............................. 130,182 73,034 4,406,015
Development costs............................. 2,006,183 8,595,363 19,389,494
Amortization rate per Mcfe.................... .70 .91 1.11
</TABLE>
The acquisitions of properties in 1996 include $132.8 million of proved
properties and $6.3 million of unproved properties acquired in the Merger. See
Note 2.
Depletion, depreciation, and amortization increased $351,964 for the fourth
quarter of 1995 due to downward revisions in estimated proved reserves at
December 31, 1995.
F-22
<PAGE> 109
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. CRUDE OIL AND NATURAL GAS PRODUCING ACTIVITIES -- (CONTINUED)
Revenues from individual customers that exceed 10% of total crude oil and
natural gas sales are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Plains Marketing and Transportation.............. $1,614,711 $4,618,136 $9,382,466
Crosstex Energy.................................. -- -- 2,919,944
GPM Natural Gas Corporation...................... 553,613 -- 2,832,049
Energy Source, Inc............................... -- 870,285 --
</TABLE>
The Company believes that the loss of these customers would not have a
significant impact on the Company's results of operations or financial
condition.
10. SUPPLEMENTARY CRUDE OIL AND NATURAL GAS RESERVE INFORMATION (UNAUDITED)
The Company has interests in crude oil and natural gas properties that are
principally located in Texas, Oklahoma, New Mexico, Wyoming, and offshore Texas.
The Company does not own or lease any crude oil and natural gas properties
outside the United States.
The Company retains independent engineering firms to provide annual
year-end estimates of the Company's future net recoverable crude oil, natural
gas, and natural gas liquids reserves. Estimated proved net recoverable reserves
as shown below include only those quantities that can be expected to be
commercially recoverable at prices and costs in effect at the balance sheet
dates under existing regulatory practices and with conventional equipment and
operating methods.
Proved developed reserves represent only those reserves expected to be
recovered through existing wells. Proved undeveloped reserves include those
reserves expected to be recovered from new wells on undrilled acreage or from
existing wells on which a relatively major expenditure is required for
recompletion.
F-23
<PAGE> 110
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. SUPPLEMENTARY CRUDE OIL AND NATURAL GAS RESERVE INFORMATION
(UNAUDITED) -- (CONTINUED)
Net quantities of proved developed and undeveloped reserves of natural gas
and crude oil, including condensate and natural gas liquids, are summarized as
follows:
<TABLE>
<CAPTION>
NATURAL GAS
CRUDE OIL (THOUSAND
(BARRELS) CUBIC FEET)
---------- -----------
<S> <C> <C>
December 31, 1993.......................................... 3,721,084 11,047,393
Purchase of reserves in place............................ 1,035,137 1,858,271
Extensions and discoveries............................... 906,526 1,996,771
Revisions of previous estimates.......................... (387,840) (879,838)
Production............................................... (115,642) (620,843)
Sales of reserves in place............................... (3,524) (21,280)
---------- -----------
December 31, 1994.......................................... 5,155,741 13,380,474
Purchase of reserves in place............................ 190,063 25,785,458
Revisions of previous estimates.......................... (1,141,288) (6,453,623)
Production............................................... (283,440) (1,752,990)
Sales of reserves in place............................... -- (90,207)
---------- -----------
December 31, 1995.......................................... 3,921,076 30,869,112
Purchase of reserves in place............................ 4,691,982 97,840,796
Extensions and discoveries............................... 37,800 371,062
Revisions of previous estimates.......................... 703,594 6,104,198
Production............................................... (521,701) (5,680,904)
Sales of reserves in place............................... (29,880) (634,386)
---------- -----------
December 31, 1996.......................................... 8,802,871 128,869,878
========== ===========
Proved developed reserves:
December 31, 1993........................................ 1,641,800 8,781,785
December 31, 1994........................................ 1,532,470 9,205,784
December 31, 1995........................................ 1,632,404 13,304,031
December 31, 1996........................................ 4,383,926 77,496,645
</TABLE>
The Company's principal individual properties are the GAU, located onshore
in Texas, and the South Lake Boeuf Field located in La Fourche Parish,
Louisiana. As of December 31, 1994, 1995, and 1996, the Company's net interests
in the proved reserves of the GAU was approximately 32,532 Mmcfe, 25,002 Mmcfe,
and 25,035 Mmcfe, respectively. As of December 31, 1996, the Company's net
interest in the South Lake Boeuf Field was 15,200 Mmcfe.
The following is a summary of a standardized measure of discounted net cash
flows related to the Company's proved crude oil and natural gas reserves. For
these calculations, estimated future cash flows from estimated future production
of proved reserves were computed using crude oil and natural gas prices as of
the end of each period presented. Future development and production costs
attributable to the proved reserves were estimated assuming that existing
conditions would continue over the economic lives of the individual leases and
costs were not escalated for the future. Estimated future income tax expenses
were calculated by applying future statutory tax rates (based on the current tax
law adjusted for permanent differences and tax credits) to the estimated future
pretax net cash flows related to proved crude oil and natural gas reserves, less
the tax basis of the properties involved.
The Company cautions against using this data to determine the fair value of
its crude oil and natural gas properties. To obtain the best estimate of fair
value of the crude oil and natural gas properties, forecasts of
F-24
<PAGE> 111
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. SUPPLEMENTARY CRUDE OIL AND NATURAL GAS RESERVE INFORMATION
(UNAUDITED) -- (CONTINUED)
future economic conditions, varying discount rates, and consideration of other
than proved reserves would have to be incorporated into the calculation. In
addition, there are significant uncertainties inherent in estimating quantities
of proved reserves and in projecting rates of production that impair the
usefulness of the data.
The standardized measure of discounted future net cash flows relating to
proved crude oil and natural gas reserves are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1995 1996
------------ -------------
<S> <C> <C>
Future cash inflows.................................... $132,218,400 $ 702,089,600
Future production and development costs................ (71,109,500) (220,155,000)
Future income tax expenses............................. (7,123,405) (105,547,035)
------------ -------------
Future net cash flows.................................. 53,985,495 376,387,565
10% annual discount for estimated timing of cash
flows................................................ (21,858,394) (146,607,933)
------------ -------------
Standardized measure of discounted future net cash
flows................................................ $ 32,127,101 $ 229,779,632
============ =============
</TABLE>
The following are the principal sources of change in the standardized
measure of discounted future net cash flows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1994 1995 1996
----------- ------------ ------------
<S> <C> <C> <C>
Sales and transfers of crude oil and
natural gas produced, net of production
costs................................... $(1,775,145) $ (5,710,325) $(19,293,463)
Net changes in prices and production
costs................................... 14,785,630 14,654,096 131,330,518
Development costs incurred during the
period and changes in estimated future
development
costs................................... (119,443) (11,886,400) 4,884,876
Purchases of reserves in place............ 3,414,926 15,455,400 117,893,900
Sales of reserves in place................ (30,585) (97,210) (450,300)
Extensions and discoveries, less related
costs................................... 4,605,206 -- 850,200
Revisions of previous quantity
estimates............................... (1,985,978) (8,871,208) 16,576,531
Accretion of discount..................... 1,439,950 2,744,504 3,627,860
Net change in income taxes................ (6,952,217) 2,590,707 (57,743,416)
Changes in production rates (timing) and
other................................... (4,221,647) 2,408,034 (24,175)
----------- ------------ ------------
Net change...................... $ 9,160,697 $ 11,287,598 $197,652,531
=========== ============ ============
</TABLE>
During recent years, there have been significant fluctuations in the prices
paid for crude oil in the world markets. This situation has had a destabilizing
effect on crude oil posted prices in the United States, including the posted
prices paid by purchasers of the Company's crude oil. The net weighted average
prices of crude oil and natural gas at December 31, 1994, 1995, and 1996, used
in the above table were $16.59, $18.71, and $25.36 per barrel of crude oil,
respectively, and $1.62, $1.91, and $3.72 per thousand cubic feet of natural
gas, respectively.
F-25
<PAGE> 112
NATIONAL ENERGY GROUP, INC.
BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
Current assets:
Cash and cash equivalents................................. $ 35,615
Marketable securities..................................... 542
Accounts receivable-oil and gas sales..................... 9,196
Accounts receivable-joint interest and other.............. 9,059
Other..................................................... 2,282
--------
Total current assets.............................. 56,694
Oil and gas properties, at cost (full cost method):
Proved oil and gas properties............................. 215,228
Unproved oil and gas properties........................... 33,291
--------
248,519
Accumulated depreciation, depletion, and amortization..... 31,464
--------
Net oil and gas properties........................ 217,055
Other property and equipment................................ 4,204
Accumulated depreciation.................................... 647
--------
Net other property and equipment............................ 3,557
Other assets, net........................................... 7,819
--------
Total assets...................................... $285,125
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable-trade.................................... $ 10,152
Accounts payable-revenue and other........................ 11,067
Accrued interest.......................................... 5,256
--------
Total current liabilities......................... 26,475
Other long-term liabilities................................. 859
10 3/4% Senior Notes due 2006, including issuance premium of
$1,436.................................................... 166,436
Deferred income taxes....................................... 8,365
Stockholders' equity:
Convertible preferred stock, $1.00 par:
Authorized shares 1,000,000
Issued and outstanding shares -- 242,500
Aggregate liquidation preference -- $24,250............ 243
Common stock, $.01 par value:
Authorized shares -- 100,000,000
Issued and outstanding shares -- 36,275,669............ 363
Additional paid-in capital................................ 111,170
Unrealized gain on marketable securities.................. 27
Deficit................................................... (28,813)
--------
Total stockholders' equity........................ 82,990
--------
Total liabilities and stockholders' equity........ $285,125
========
</TABLE>
See accompanying notes.
F-26
<PAGE> 113
NATIONAL ENERGY GROUP, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1996 1997
-------- -------
<S> <C> <C>
Revenue:
Oil and gas sales......................................... $ 13,181 $38,151
Well operator fees........................................ 314 994
-------- -------
13,495 39,145
Cost and expenses:
Lease operating........................................... 2,096 5,551
Oil and gas production taxes.............................. 663 2,087
Depreciation, depletion, and amortization................. 5,444 16,741
Write-down of oil and gas properties...................... 43,497 --
General and administrative................................ 1,957 3,807
-------- -------
53,657 28,186
-------- -------
Operating income (loss)..................................... (40,162) 10,959
Interest expense............................................ (1,826) (8,259)
Interest income and other, net.............................. 154 507
Gain (loss) on sale of marketable securities................ (118) --
-------- -------
Income (loss) before income taxes........................... (41,952) 3,207
Benefit (provision) for income taxes........................ 15,146 (1,079)
-------- -------
Income (loss) before extraordinary item..................... (26,806) 2,128
Extraordinary charge for early extinguishment of debt....... (292) --
-------- -------
Net income (loss)................................. $(27,098) $ 2,128
======== =======
Net income per common share:
Income (loss) before extraordinary item................... $ (1.87) $ .03
======== =======
Net income (loss)......................................... $ (1.89) $ .03
======== =======
Weighted average number of common shares outstanding........ 14,693 43,886
======== =======
</TABLE>
See accompanying notes.
F-27
<PAGE> 114
NATIONAL ENERGY GROUP, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1996 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $(27,098) $ 2,128
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, depletion, and amortization................. 5,444 16,741
Write-down of oil and gas properties...................... 43,497 --
Amortization of debt issuance costs....................... 71 415
Amortization of deferred compensation..................... 35 130
Provision (benefit) for deferred income taxes............. (15,146) 1,091
Extraordinary charge for early extinguishment of debt..... 292 --
Common stock, options, and warrants issued for services... 138 17
Changes in operating assets and liabilities:
Accounts receivable.................................... (1,107) (8,438)
Other current assets................................... (822) (1,006)
Accounts payable and accrued liabilities............... (524) 3,948
-------- --------
Net cash provided by operating activities......... 4,780 15,026
-------- --------
INVESTING ACTIVITIES
Purchases of marketable securities.......................... (9) (515)
Proceeds from sale of marketable securities................. 1,750 --
Purchases of other property and equipment................... (163) (1,342)
Oil and gas acquisition, exploration, and development
expenditures.............................................. (16,339) (54,792)
Acquisition of Alexander Energy Corporation, net of cash
acquired of $1,333........................................ (1,489) --
Other....................................................... (600) (2,626)
-------- --------
Net cash used by investing activities............. (16,850) (59,275)
-------- --------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt, net............... 72,036 99,441
Proceeds from issuance of convertible preferred stock....... 15,000 --
Repayments of note payable.................................. (3,060) --
Repayments of long-term debt................................ (69,010) (33,000)
Repayments of other long-term liabilities................... -- (777)
Proceeds from exercise of stock options and warrants........ 150 570
Purchase of common stock.................................... -- (80)
Preferred stock dividends................................... (472) (472)
-------- --------
Net cash provided by financing activities......... 14,644 65,682
-------- --------
Increase in cash and cash equivalents....................... 2,574 21,433
Cash and cash equivalents and beginning of period........... 6,076 14,182
-------- --------
Cash and cash equivalents at end of period.................. $ 8,650 $ 35,615
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid in cash....................................... $ 1,927 $ 5,668
======== ========
</TABLE>
See accompanying notes.
F-28
<PAGE> 115
NATIONAL ENERGY GROUP, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
UNREALIZED
CONVERTIBLE GAIN ON
PREFERRED STOCK COMMON STOCK ADDITIONAL AVAILABLE TOTAL
---------------- ------------------- PAID-IN FOR SALE STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL SECURITIES DEFICIT EQUITY
------- ------ ---------- ------ ---------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996... 242,500 $243 35,977,140 $360 $110,293 $-- $(30,469) $80,427
Common stock issued upon
exercise of options and
warrants..................... -- -- 239,665 2 568 -- -- 570
Common stock, options, and
warrants issued for
services..................... -- -- 82,854 1 389 -- -- 390
Purchase of common stock....... -- -- (24,000) -- (80) -- -- (80)
Preferred stock dividends...... -- -- -- -- -- -- (472) (472)
Unrealized gain on marketable
securities................... -- -- -- -- -- 27 -- 27
Net income..................... -- -- -- -- -- -- 2,128 2,128
------- ---- ---------- ---- -------- --- -------- -------
Balance as of September 30,
1997......................... 242,500 $243 36,275,659 $363 $111,170 $27 $(28,813) $82,990
======= ==== ========== ==== ======== === ======== =======
</TABLE>
See accompanying notes.
F-29
<PAGE> 116
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
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 September 30, 1997, the results of operations for the nine
month periods ended September 30, 1996 and 1997, and the cash flows for the nine
month periods ended September 30, 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 annual financial statements and notes thereto included elsewhere
herein.
The Company capitalizes internal general and administrative costs that can
be directly identified with acquisition, exploration, and development
activities. These costs totaled $173,033 for the nine months ended September 30,
1996 and $1,006,280 for the nine months ended September 30, 1997. During the
nine months ended September 30, 1997, the Company capitalized interest costs of
$1,539,000, related to its unproved oil and gas properties.
Certain previously reported amounts have been reclassified to conform with
the current presentation.
The results of operations for the nine months ended September 30, 1997, are
not necessarily indicative of the results expected for the full year.
Primary earnings (loss) per common and common equivalent share data is
computed by dividing net income (loss), adjusted for preferred stock dividend
requirements of $708,750 for the nine months ended September 30, 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 14,693,000 and
43,885,794 for the nine months ended September 30 1996 and 1997, respectively.
In February 1997, the Financial Accounting Standards Board ("FASB") 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 periods ended September 30, 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.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income ("SFAS 130"). SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. SFAS 130 is effective for
fiscal years beginning after December 15, 1997. The adoption of SFAS 130 will
require additional
F-30
<PAGE> 117
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. BASIS OF PRESENTATION -- (CONTINUED)
disclosures in the Company's financial statements, but will not have any impact
on the financial position or results of operations of the Company.
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 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 approximately $.7 million 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 BankOne.
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 approximately $1.4 million 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., 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.
Under the full cost method of accounting, the carrying value of oil and gas
properties, (net of related deferred taxes) is generally not permitted to exceed
the sum of the present value (10% discount rate) of estimated future net cash
flows, after tax, from proved reserves, based on current prices and costs, plus
the lower of cash or estimated fair value of unproved properties (the "cost
center ceiling"). Based upon the combined cost center ceiling at August 29,
1996, and the preliminary allocation of the Company's purchase price, the
purchase price allocated to oil and natural gas properties was in excess of the
cost center ceiling using oil and natural gas prices being received by the
Company and NEG-OK in August 1996 of $20.75 per Bbl and $2.21 per Mcf. Such
excess was written off at the date of acquisition, resulting in a charge to the
Company's results of operations of $28.3 million as follows (in thousands):
<TABLE>
<S> <C>
Write downs of oil and gas properties....................... $ 43,497
Deferred income tax benefit................................. (15,224)
--------
$ 28,273
========
</TABLE>
F-31
<PAGE> 118
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITIONS -- (CONTINUED)
In connection with the Merger, on August 29, 1996, the Company 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.
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.
The following pro forma data presents the results of the Company for the
nine months ended September 30, 1996, as if the acquisition of NEG-OK, the Lake
Boeuf Acquisition 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 properties acquired, interest on borrowed funds, and the related income
tax effects (in thousands, except per share amounts):
<TABLE>
<CAPTION>
PRO FORMA
NINE MONTHS
ENDED
SEPTEMBER 30, 1996
------------------
(UNAUDITED)
<S> <C>
Total revenues.............................................. $27,107
=======
Net income.................................................. $ 2,217
=======
Net income per share........................................ $ 0.03
=======
</TABLE>
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
$3.3 million 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 $9.0 million 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 additional 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 $7.0 million
in cash. The Company increased its 17% working interest in the East Bayou Sorrel
Field to 60% working interest, as a result of the W & T Acquisition and MCNIC
Acquisition. 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.
In January 1997, the Company acquired, for $4.0 million in cash, John
Hancock Mutual Life Insurance Company's limited partnership interests in certain
limited partnerships in which the Company was the general partner. The limited
partnerships owned working interests the Anadarko and Arkoma Basin areas of
Oklahoma and the Giddings area of Texas.
F-32
<PAGE> 119
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. CREDIT FACILITIES
The Company has a revolving credit agreement with a group of banks which,
as amended, (the "Revised Credit Facility") provides for a borrowing base of
$40.0 million. The borrowing base will be redetermined at least semiannually and
may require mandated monthly principal reductions by an amount determined by the
Banks from time to time. The principal is due at maturity, August 29, 2000.
Interest is payable monthly and is calculated at the BankOne base rate, as
determined from time to time by BankOne (which increases by .25% if the
outstanding loan balance is greater than 75% of the borrowing base). The Company
may elect to calculate interest under the EuroDollar Rate, as defined in the
Credit Facility. The EuroDollar Rate increases by (i) 2.25% if the outstanding
loan balance is greater than 75% of the borrowing base, (ii) 2.0% if the
outstanding loan balance is greater than 50% but less than 75% of the borrowing
base or (iii) 1.75% if the outstanding loan amount is less than 50% of the
borrowing base. At September 30, 1997, the Company had no indebtedness under the
Revised Credit Facility.
The Company paid a facility fee equal to 3/4% of the initial borrowing
base under the Revised Credit Facility and is required to pay a commitment fee
on the unused portion of the borrowing base equal to 1% per annum.
The Company has 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
Revised Credit Facility requires, among other things, semiannual engineering
reports covering oil and natural gas properties, and maintenance of certain
financial ratios, including the maintenance of a minimum interest coverage, a
current ratio, and a minimum tangible net worth.
The Revised Credit Facility includes other covenants prohibiting cash
dividends, distributions, loans, or advances to third parties, except that cash
dividends on preferred stock will be allowed so long as no event of default
exists or would exist as a result of the payment thereof. In addition, if the
Company is required to purchase or redeem any portion of the Notes (as
hereinafter defined), or if any portion of the Notes become due, the borrowing
base is subject to reduction. At September 30, 1997, the Company was not in
violation of any covenants of the Revised Credit Facility.
4. 10 3/4% SENIOR NOTES DUE 2006
On November 1, 1996, the Company closed the offering of, and issued $100
million aggregate principal amount of unregistered 10 3/4% Senior Notes due 2006
(the "Series A Notes"). The net proceeds of the Series A Notes of approximately
$96.1 million were used to repay approximately $62.0 million of borrowings under
the predecessor to the Revised Credit Facility and to increase the Company's
working capital. In 1997, the Series A Notes were exchanged for the registered
10 3/4% Senior Notes due 2006 (the "Series B Notes") which are substantially
identical to the Series A Notes. Collectively, the Series A Notes and Series B
Notes are referred to as the "Series A/B Notes." On August 21, 1997, the Company
closed the offering of $65.0 million aggregate principal amount of its
unregistered 10 3/4% Senior Notes (the "Series C Notes"). The net proceeds of
the Series C Notes of approximately $64.8 million were used to repay
approximately $23.0 million of borrowings under the Revised Credit Facility and
to increase the Company's working capital. In November 1997, the Company
commenced an exchange offer (the "Exchange Offer") of the Series A/B Notes and
the Series C Notes for registered 10 3/4% Senior Notes due 2006 (the "Series D
Notes"). The Series D Notes are substantially identical to the Series A/B Notes
and the Series C Notes. Collectively, the Series A/B Notes, the Series C Notes
and the Series D 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. The Notes
mature November 1, 2006, but may be redeemed after November 1, 2001, at the
Company's option. The Indentures governing the Notes contain certain covenants,
including, but not limited to covenants restricting the Company's and its
Restricted Subsidiaries' (as defined), ability to incur additional indebtedness.
F-33
<PAGE> 120
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. PREFERRED STOCK
In October 1997, 13,813 shares of Series B Preferred Stock, 17,000 shares
of Series C Preferred Stock and 38,000 shares of Series E Preferred Stock were
converted into approximately 3.4 million shares of Common Stock.
F-34
<PAGE> 121
======================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
SECURITIES TO WHICH THIS PROSPECTUS RELATES OR AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH
SUCH OFFER OR SOLICITATION IS UNLAWFUL OR TO ANY PERSON IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED OR INCORPORATED BY REFERENCE HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREIN OR THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE SUCH DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 12
Disclosure Regarding Foward-Looking
Statements.......................... 19
Use of Proceeds....................... 21
Price Range of the Common Stock and
Dividends........................... 21
Capitalization........................ 22
Selected Historical Financial and
Operating Data...................... 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 25
Business and Properties............... 35
Management............................ 51
Security Ownership of Certain
Beneficial Owners and Management.... 55
Certain Transactions.................. 59
Description of the Series F Preferred
Stock............................... 60
Description of Depositary Shares...... 66
Description of Capital Stock.......... 70
Description of Certain Indebtedness... 73
Certain United States Federal Income
Tax Consequences.................... 75
Underwriting.......................... 79
Legal Matters......................... 80
Experts............................... 80
Available Information................. 81
Incorporation of Certain Information
by Reference........................ 81
Glossary.............................. 83
Financial Statements.................. F-1
</TABLE>
======================================================
======================================================
2,000,000 DEPOSITARY SHARES
[LOGO]
NATIONAL ENERGY GROUP, INC.
DEPOSITARY SHARES EACH
REPRESENTING A
ONE-TENTH INTEREST IN ONE SHARE OF % CONVERTIBLE PREFERRED STOCK, SERIES F
------------------------
PROSPECTUS
------------------------
RAYMOND JAMES & ASSOCIATES, INC.
FORUM CAPITAL MARKETS L.P.
, 1997
======================================================
<PAGE> 122
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth expenses in connection with the issuance and
distribution of the Depositary Shares and the Series F Preferred Stock being
registered, other than underwriting discounts and commissions. All of the
expenses listed below will be borne by the Company. All of the amounts shown are
estimates, except the Commission registration fees, the Nasdaq Stock Market
filing fee and the NASD filing fee.
<TABLE>
<S> <C>
Commission registration fees................................ $34,849
Nasdaq Stock Market filing fee.............................. 17,500
NASD filing fee............................................. 12,000
Engineering fees and expenses............................... *
Accounting fees and expenses................................ *
Depositary fees and expenses................................ *
Legal fees and expenses..................................... *
Blue sky fees and expenses.................................. 5,000
Printing expenses........................................... *
Transfer agent and custodian fees and expenses.............. *
Miscellaneous expenses...................................... *
-------
Total............................................. $ *
=======
</TABLE>
- ---------------
* To be completed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As authorized by Section 145 of the General Corporation Law of Delaware
(the "Delaware Corporation Law"), each director and officer of the Company may
be indemnified by the Company against expenses (including attorney's fees,
judgments, fines and amounts paid in settlement) actually and reasonably
incurred in connection with the defense or settlement of any threatened, pending
or completed legal proceedings in which he is involved by reason of the fact
that he is or was a director or officer of the Company if he acted in good faith
and in a manner that he reasonably believed to be in or not opposed to the best
interests of the Company, and, with respect to any criminal action or
proceeding, if he had no reasonable cause to believe that his conduct was
unlawful. In each case, such indemnity shall be to the fullest extent authorized
by the Delaware Corporation Law, as amended, to the extent such amendment
permits the Company to provide broader indemnification rights. If the legal
proceeding, however, is by or in the right of the Company, the director or
officer may not be indemnified in respect of any claim, issue or matter as to
which he shall have been adjudged to be liable for negligence or misconduct in
the performance of his duty to the Company unless a court determines otherwise.
Article Eighth of the Certificate of Incorporation of the Company provides
that no Director of the Company shall be personally liable to the Company or its
Stockholders for monetary damages for any breach of fiduciary duty as a Director
except for liability: (1) for any breach of duty of loyalty to the Company or
its Stockholders, (2) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (3) under Section 174 of
the Delaware Corporation Law, or (4) for any transaction from which the Director
derived an improper personal benefit. In addition, Article Ninth of the
Certificate of Incorporation and Section 7.4 of the Bylaws of the Company
require the Company to indemnify to the fullest extent authorized by law any
person made or threatened to be made a party to any action, suit or proceeding,
whether criminal, civil, administrative, or investigative, by reason of the fact
that such person or such person's testator or intestate is or was a director,
officer, employee or agent of the Company or serves or served at the request of
the Company any other enterprise as a director, officer, employee or agent.
II-1
<PAGE> 123
The Company has agreed to indemnify the officers and directors of the
Company against any and all damages to which such indemnified individuals may
become subject, pursuant to any securities, corporate or other laws, which
damages arise in connection with this Registration Statement or any amendment
thereto, or from the inaccuracy or omission of any information in connection
with this Registration Statement. In the event that the foregoing indemnity is
unavailable or insufficient, then the indemnifying party shall contribute to
amounts paid or payable by the indemnified party in respect to the damages of
the indemnified party in such proportion as is appropriate to reflect the
relative fault of the indemnified and indemnifying parties.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1* -- Form of Underwriting Agreement.
4.1* -- Form of Certificate of Designations of Series F
Convertible Preferred Stock.
4.2** -- Form of Certificate of Series F Preferred Stock.
4.3 -- Form of Certificate for Common Stock -- (incorporated by
reference to Exhibit 4.5 to the Registrant's Current
Report on Form 8-K/A No. 1, dated August 29, 1996).
4.4* -- Form of Deposit Agreement.
4.5** -- Form of Depositary Receipt.
5.1** -- Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
12.1* -- Statement regarding Computation of Ratio of Earnings to
Combined Fixed Charges and Preferred Stock Dividends.
23.1* -- Consent of Ernst & Young LLP, independent auditors.
23.2* -- Consent of Coopers & Lybrand LLP, independent
accountants.
23.3* -- Consent of Netherland, Sewell & Associates, Inc.,
independent petroleum engineers.
23.4* -- Consent of Roebuck Associates, Inc., independent
petroleum engineers.
23.5** -- Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
(included in Exhibit 5.1).
24.1* -- Powers of Attorney (included in signature pages to this
Registration Statement).
</TABLE>
- ---------------
* Filed herewith.
** To be filed by amendment.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
Company pursuant to provisions described in Item 15 above or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The Company hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, each filing of the Company's annual report pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to Sec-
II-2
<PAGE> 124
tion 15(d) of the Securities Exchange Act of 1934) that is incorporated by
reference in this Registration Statement shall be deemed to be a new
registration statement relating to the securities offered herein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(2) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(3) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 125
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Dallas, State of Texas, on November 24, 1997.
NATIONAL ENERGY GROUP, INC.
By: /s/ MILES D. BENDER
----------------------------------
Miles D. Bender
President and Chief Executive
Officer
November 24, 1997
POWER OF ATTORNEY AND SIGNATURES
The undersigned directors and officers of National Energy Group, Inc.
hereby constitute and appoint Miles D. Bender and Melissa H. Rutledge and each
of them, with full power to act without the other and with full power of
substitution and resubstitution, our true and lawful attorneys-in-fact with full
power to execute in our name and behalf in the capacities indicated below any
and all amendments (including post-effective amendments and amendments thereto)
to this Registration Statement and any registration statement for the same
offering that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act and to file the same, with all exhibits thereto and other
documents in connection therewith with the Commission and hereby ratify and
confirm all that such attorneys-in-fact, or either of them, or their substitutes
shall lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and as of
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ MILES D. BENDER President, Chief Executive November 24, 1997
- ----------------------------------------------------- Officer and Director
Miles D. Bender
/s/ MELISSA H. RUTLEDGE Chief Financial Officer, November 24, 1997
- ----------------------------------------------------- Controller and Chief
Melissa H. Rutledge Accounting Officer
/s/ GEORGE B. MCCULLOUGH Chairman of the Board and November 21, 1997
- ----------------------------------------------------- Director
George B. McCullough
/s/ NORMAN C. MILLER Chairman, Executive November 21, 1997
- ----------------------------------------------------- Committee and Director
Norman C. Miller Director
/s/ ROBERT H. KITE Director November 21, 1997
- -----------------------------------------------------
Robert H. Kite
Director November , 1997
- -----------------------------------------------------
George M. McDonald
</TABLE>
II-4
<PAGE> 126
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ROBERT V. SINNOTT Director November 24, 1997
- -----------------------------------------------------
Robert V. Sinnott
/s/ ELWOOD W. SCHAFER Director November 20, 1997
- -----------------------------------------------------
Elwood W. Schafer
Director November , 1997
- -----------------------------------------------------
Bob G. Alexander
/s/ JIM L. DAVID Director November 24, 1997
- -----------------------------------------------------
Jim L. David
/s/ ROBERT J. MITCHELL Director November 24, 1997
- -----------------------------------------------------
Robert J. Mitchell
</TABLE>
II-5
<PAGE> 127
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1* -- Form of Underwriting Agreement.
4.1* -- Form of Certificate of Designations of Series F
Convertible Preferred Stock.
4.2** -- Form of Certificate of Series F Preferred Stock.
4.3 -- Form of Certificate for Common Stock -- (incorporated by
reference to Exhibit 4.5 to the Registrant's Current
Report on Form 8-K/A No. 1, dated August 29, 1996).
4.4* -- Form of Deposit Agreement.
4.5** -- Form of Depositary Receipt.
5.1** -- Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
12.1* -- Statement regarding Computation of Ratio of Earnings to
Combined Fixed Charges and Preferred Stock Dividends.
23.1* -- Consent of Ernst & Young LLP, independent auditors.
23.2* -- Consent of Coopers & Lybrand LLP, independent
accountants.
23.3* -- Consent of Netherland, Sewell & Associates, Inc.,
independent petroleum engineers.
23.4* -- Consent of Roebuck Associates, Inc., independent
petroleum engineers.
23.5** -- Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
(included in Exhibit 5.1).
24.1* -- Powers of Attorney (included in signature pages to this
Registration Statement).
</TABLE>
- ---------------
* Filed herewith.
** To be filed by amendment.
<PAGE> 1
EXHIBIT 1.1
2,000,000 DEPOSITARY SHARES
EACH REPRESENTING A ONE-TENTH INTEREST
IN A SHARE OF
______% CONVERTIBLE PREFERRED STOCK, SERIES F
NATIONAL ENERGY GROUP, INC.
UNDERWRITING AGREEMENT
December ____, 1997
Raymond James & Associates, Inc.
880 Carillon Parkway
St. Petersburg, Florida 33716
Forum Capital Markets L.P.
53 Forest Avenue
Old Greenwich, Connecticut 06870
Ladies and Gentlemen:
National Energy Group, Inc., a Delaware corporation (the "COMPANY"),
proposes to deliver and sell to Raymond James & Associates, Inc. and Forum
Capital Markets L.P. (the "UNDERWRITERS") 2,000,000 Depositary Shares (each a
"DEPOSITARY SHARE" and collectively, the "DEPOSITARY SHARES"), each Depositary
Share representing a one-tenth (1/10) interest in a share of ________%
Convertible Preferred Stock, Series F, par value $1.00 per share (the
"PREFERRED STOCK"). Such 2,000,000 Depositary Shares are hereinafter referred
to as the "FIRM SHARES" and the 200,000 shares of Preferred Stock represented
by the Firm Shares are hereinafter referred to as the "FIRM PREFERRED SHARES."
Upon the request of the Underwriters, as provided in Section 2(b) of this
Agreement, the Company shall also deliver and sell to the Underwriters up to an
additional 300,000 Depositary Shares. Such 300,000 Depositary Shares are
hereinafter referred to as the "OPTION SHARES." The 45,000 shares of Preferred
Stock represented by the Option Shares are hereafter referred to as the "OPTION
PREFERRED SHARES." The Firm Preferred Shares and the Option Preferred Shares
will be issued by the Company and deposited with _______________ (the
"DEPOSITARY") under a Deposit Agreement (the "DEPOSIT AGREEMENT") among the
Company, the Depositary and the holders of certificates evidencing the
Depositary Shares. The Firm Shares and the Option Shares collectively
constitute all of the "SHARES." The Preferred Stock will be convertible into
shares of the Company's common stock, par value $.01 per share (the "COMMON
STOCK"). The Shares, the Preferred Stock and the shares of Common Stock
issuable upon conversion of the Preferred Stock (the "CONVERSION SHARES") are
hereinafter referred to sometimes collectively as the "SECURITIES." The
Company hereby confirms its agreement with the Underwriters with respect to the
sale by the Company and the purchase by the Underwriters of the Shares, as set
forth herein.
1
<PAGE> 2
The Shares will be offered and sold to the Underwriters pursuant to a
Registration Statement filed with the Securities and Exchange Commission (the
"COMMISSION") under the Securities Act of 1933, as amended (the "SECURITIES
ACT"). The Company has prepared a preliminary prospectus dated
________________ ___, 1997, and a final prospectus dated
______________________________, 1997, setting forth information regarding the
Company and the Securities. The Company hereby confirms that it has authorized
the use of such preliminary prospectus and such final prospectus in connection
with the offering and sale of the Preferred Stock (the "OFFERING").
Capitalized terms used herein without definition have the respective
meanings specified therefor in the Prospectus. For purposes hereof, "RULES AND
REGULATIONS" means the rules and regulations adopted by Commission under the
Securities Act or the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT"), as applicable.
1. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, each of the Underwriters as of the
date hereof, and as of the Closing Date and each Option Closing Date (as
defined in Section 2(b) hereof), if any, as follows:
(a) A registration statement on Form S-3 (File No. 333-_______),
and any amendment or amendments thereto, in respect of the registration of the
Securities under the Securities Act has been filed with the Commission; the
Company will not, without the prior consent of the Underwriters (which consent
will not be unreasonably withheld), file any amendment thereto or make any
change in the form of final prospectus included therein; such registration
statement and any post-effective amendment thereto, have been declared
effective by the Commission in such form; no other document with respect to
such registration statement has heretofore been filed with the Commission; and
no stop order suspending the effectiveness of such registration statement has
been issued and no proceeding for that purpose has been initiated or threatened
by the Commission or any "BLUE SKY" or securities authority of any
jurisdiction; such registration statement, including the prospectus, financial
statements and schedules, exhibits and all other documents filed as a part
thereof, at the time of effectiveness of the registration statement, including
any information to be a part thereof as of the time of effectiveness pursuant
to paragraph (b) of Rule 430A or Rule 434 of the Rules and Regulations is
herein called the "REGISTRATION STATEMENT" and the prospectus, in the form
first filed with the Commission pursuant to Rule 424(b) of the Regulations or
filed as part of the Registration Statement at the time of effectiveness if no
Rule 424(b) or Rule 434 filing is required, is herein called the "PROSPECTUS;"
the term "PRELIMINARY PROSPECTUS" as used herein means a preliminary prospectus
as described in Rule 430 of the Regulations. If the Company has filed an
abbreviated registration statement to register additional shares of Common
Stock pursuant to Rule 462(b) of the Rules and Regulations (the "RULE 462
REGISTRATION STATEMENT"), then any reference herein to the term "REGISTRATION
STATEMENT" shall be deemed to include such Rule 462 Registration Statement. Any
reference herein to the Registration Statement, any Preliminary Prospectus or
the Prospectus shall be deemed to refer to and include the documents
incorporated by reference therein pursuant to Item 12 of Form S-3 which were
filed under the Exchange Act, on or before the effective date of the
Registration Statement, the date of such Preliminary Prospectus or the date of
the Prospectus, as the case may be, and any reference herein to the terms
"AMEND," "AMENDMENT" or "SUPPLEMENT"
2
<PAGE> 3
with respect to the Registration Statement, any Preliminary Prospectus or the
Prospectus shall be deemed to refer to and include (i) the filing of any
document under the Exchange Act after the effective date of the Registration
Statement, the date of such Preliminary Prospectus or the date of the
Prospectus, as the case may be, and prior to the termination of the Offering to
which the Registration Statement relates, which is incorporated therein by
reference and (ii) any such document so filed.
(b) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission or any "BLUE SKY" or securities
authority of any jurisdiction, and each Preliminary Prospectus, at the time of
filing thereof, conformed in all material respects to the requirements of the
Securities Act and the Rules and Regulations, and did not contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided, however,
that this representation and warranty shall not apply to any statements or
omissions made in reliance upon and in conformity with information furnished in
writing to the Company by the Underwriters expressly for use therein (the
"UNDERWRITERS' INFORMATION"). The parties acknowledge and agree that the
Underwriters' Information consists solely of the last paragraph at the bottom
of the front cover page concerning the terms of the offering by the
Underwriters, the legends concerning over-allotment and trading activities of
the Underwriters and their affiliates on the inside front cover page and the
paragraphs under the caption "UNDERWRITING" in the Prospectus. No order
suspending or preventing the sale of the Securities in any jurisdiction has
been issued or threatened or, to the knowledge of the Company, is contemplated.
(c) The Registration Statement conforms, and the Prospectus and
any further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of the
Securities Act and the Rules and Regulations and do not and will not, as of the
applicable effective date as to the Registration Statement and any amendment
thereto and as of the Closing Date and any Option Closing Date as to the
Prospectus and any amendment or supplement thereto, contain an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading; provided,
however, that this representation and warranty shall not apply to the
Underwriters' Information.
(d) The Company is subject to Section 13 of the Exchange Act.
The documents incorporated by reference into the Registration Statement and the
Prospectus (the "INCORPORATED DOCUMENTS"), when they were filed with the
Commission (or, if any amendment with respect to any such document was filed,
when such amendment was filed), complied in all material respects with the
applicable requirements of the Exchange Act and did not, as of such date,
contain an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein not misleading; and any Incorporated Documents filed subsequent to the
date of the Prospectus shall, when filed with the Commission, conform in all
material respects to the applicable requirements of the Securities Act, the
Rules and Regulations and the Exchange Act, as applicable. All reports and
statements required to be filed by the Company under the Securities Act and the
Exchange Act (the "SEC DOCUMENTS") have been filed,
3
<PAGE> 4
together with all exhibits required to be filed therewith. The documents and
agreements so filed which are described in the Prospectus are in full force and
effect on the date hereof (unless noted otherwise in the Prospectus) and
neither the Company or its subsidiary (the "SUBSIDIARY"), nor, to the knowledge
of the Company, any other party thereto is in breach of or default under a
material provision of any such document or agreement, which breach or default,
if left uncured, would have a material adverse effect on the condition,
financial or otherwise, results of operations, assets, business or prospects of
the Company and the Subsidiary, taken as a whole (a "MATERIAL ADVERSE EFFECT").
The descriptions in the Prospectus of agreements, contracts and other documents
to which the Company or the Subsidiary is a party or by which any of them is
bound fairly present in all material respects the information that would be
required to be presented with respect thereto under United States federal
securities laws.
(e) The Company and the Subsidiary have been duly organized and
each is validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation. Each of the Company and the Subsidiary
is duly qualified and licensed and in good standing as a foreign corporation in
each jurisdiction in which its ownership or leasing of any properties or the
character of its operations require such qualification or licensing, except
where the failure to be so qualified or licensed would not have a Material
Adverse Effect. The Company does not own or control, directly or indirectly,
any corporation, association or other entity other than the Subsidiary, and the
Subsidiary does not own or control directly or indirectly, any corporation,
association or other entity. The Company owns all of the outstanding capital
stock of the Subsidiary, in each case free and clear of all liens, charges,
claims, encumbrances, pledges, security interests, defects or other
restrictions or equities of any kind whatsoever; and all outstanding capital
stock of the Subsidiary has been duly authorized and validly issued and is
fully paid and non-assessable and not issued in violation of any preemptive
rights or applicable securities laws. Each of the Company and the Subsidiary
has all requisite power and authority (corporate and other), and has obtained
any and all requisite authorizations, approvals, orders, licenses,
certificates, franchises and permits of and from all governmental or regulatory
officials and bodies, to own or lease its properties and conduct its business
as described in the Prospectus, except where the failure to have any such
power, authority, authorization, approval, order license, certificate,
franchise or permit would not have a Material Adverse Effect; each of the
Company and the Subsidiary is and has been doing business in compliance with
all such authorizations, approvals, orders, licenses, certificates, franchises
and permits and all federal, foreign, state and local laws, rules and
regulations, except where the failure to be in compliance would not have a
Material Adverse Effect; and neither the Company nor the Subsidiary has
received any notice of proceedings relating to the revocation or modification
of any such authorization, approval, order, license, certificate, franchise or
permit which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would have a Material Adverse Effect.
(f) The Company has an authorized capitalization as set forth in
the Prospectus and will have the adjusted capitalization as of the period
indicated therein, based upon the assumptions set forth therein. Neither the
Company nor the Subsidiary is a party to or bound by any instrument, agreement
or other arrangement, including, but not limited to, any voting trust
agreement, stockholders' agreement or other agreement or instrument, affecting
the securities or rights or obligations of security holders of the Company or
the Subsidiary or providing for either
4
<PAGE> 5
of them to issue, sell, transfer or acquire any capital stock, rights,
warrants, options or other securities of the Company or the Subsidiary, except
for this Agreement and as set forth in the Prospectus. The Company's capital
stock and the Securities conform in all material respects to all statements
with respect thereto contained in the Prospectus. All issued and outstanding
equity securities of the Company or the Subsidiary have been duly authorized
and validly issued and are fully paid and non-assessable, as applicable; the
holders thereof have no rights of rescission with respect thereto and are not
subject to personal liability by reason of being such holders; none of such
securities were issued in violation of the preemptive rights of any security
holder of the Company or the Subsidiary or similar contractual rights granted
by the Company or the Subsidiary and, except as described in the Prospectus,
there are no outstanding securities convertible into or exchangeable for, or
warrants, rights or options to purchase from the Company, or obligations of the
Company to issue, shares of Common Stock or any other class of capital stock of
the Company; and, except as set forth in the Prospectus, there are no
restrictions on subsequent transfers of the Preferred Stock under the laws of
the United States (other than sales of Preferred Stock owned by the Company and
its affiliates).
(g) The Depositary Shares have been duly authorized and, when
issued, delivered and paid for in the manner contemplated by this Agreement,
will be duly authorized, validly issued, fully paid and non-assessable. The
Preferred Stock issued to the Depositary as contemplated hereby and in
accordance with the Deposit Agreement will, upon such issuance, be duly
authorized, validly issued, fully paid and non-assessable. The shares of
Common Stock issuable upon conversion of the Preferred Stock will, upon such
issuance, in accordance with the terms of the Certificate of Designations, be
duly authorized, validly issued, fully paid and non-assessable, and the Company
has duly authorized and reserved for issuance upon conversion of the Preferred
Stock the shares of Common Stock issuable upon such conversion. The Depositary
Shares, the Preferred Stock and the Conversion Shares are not and will not be
subject to any preemptive or other similar rights of any security holder of the
Company or the Subsidiary; all corporate action required to be taken for the
authorization, issue and sale of the Depositary Shares, the Preferred Stock and
the Conversion Shares has been duly and validly taken; and the certificates
representing the Depositary Shares, the Preferred Stock and the Conversion
Shares will be in due and proper form. Upon the issuance and delivery pursuant
to the terms of this Agreement and the Deposit Agreement of the Preferred Stock
hereunder, the Depositary will acquire good and marketable title thereto free
and clear of any lien, charge, claim, encumbrance, pledge, security interest,
defect or other restriction or equity of any kind whatsoever. Upon issuance
and delivery pursuant to the terms of this Agreement and the Deposit Agreement
of the Depositary Shares to be issued by the Depositary, delivered to the
Company and then delivered to the Underwriters hereunder, the Underwriters will
acquire good and marketable title thereto free and clear of any lien, charge,
claim, encumbrance, pledge, security interest, defect or other restriction or
equity of any kind whatsoever.
(h) The financial statements of the Company together with the
related notes thereto included in the Preliminary Prospectus and the Prospectus
fairly present the financial position, income, changes in stockholders' equity,
cash flow and results of operations of the Company at the respective dates and
for the respective periods to which they apply and such historical financial
statements have been prepared in conformity with generally accepted accounting
principles and
5
<PAGE> 6
the Rules and Regulations, consistently applied throughout the periods
involved; the pro forma financial information incorporated by reference in each
Preliminary Prospectus and the Prospectus presents fairly the information shown
therein in accordance with Article 11 of Regulation S-X. Except as described
in or contemplated by the Prospectus, (i) there has been no material adverse
change or development involving a prospective material adverse change in the
condition, financial or otherwise, or in the earnings, business, assets,
prospects or results of operations of the Company and the Subsidiary, whether
or not arising in the ordinary course of business, since the date of the latest
financial statements included in the Prospectus and (ii) the outstanding debt,
the property, both tangible and intangible, and the businesses of each of the
Company and the Subsidiary conform in all material respects to the descriptions
thereof contained in the Prospectus. Financial information set forth in the
Prospectus under the headings "Prospectus Summary -- Summary Historical and Pro
Forma Combined Financial, Operating and Reserve Data," "Capitalization,"
"Selected Financial Data," and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" fairly present, on the basis
stated in the Prospectus, the information set forth therein and have been
derived from or compiled on a basis consistent with that of the financial
statements included or incorporated by reference in the Prospectus.
(i) Each of the Company and the Subsidiary has filed all income
and franchise tax returns required to be filed through the date hereof by it in
any jurisdiction, and has paid all taxes shown to be due on such returns or
claimed to be due from such entities, other than those being contested in good
faith, except where the failure to so file or pay would not have a Material
Adverse Effect. All tax liabilities, including those being contested by the
Company or the Subsidiary are adequately reserved for in the Company's
financial statements (in accordance with generally accepted accounting
principles). No tax deficiency has been asserted and no tax proceedings are
pending or, to the knowledge of the Company, are threatened against the Company
or the Subsidiary which, if adversely determined would have a Material Adverse
Effect, and to the knowledge of the Company, no such deficiency or proceeding
is contemplated.
(j) No transfer tax, stamp duty or other similar tax is payable
by or on behalf of the Underwriters in connection with (i) the issuance by the
Company of the Securities, (ii) the purchase by the Underwriters of the
Depositary Shares from the Company or (iii) the consummation by the Company of
any of its obligations under this Agreement.
(k) Each of the Company and the Subsidiary maintains liability,
casualty and other insurance (subject to customary deductions and retentions)
with responsible insurance companies against such risk of the types and in the
amounts customarily maintained by independent oil and gas companies of
comparable size to the Company engaged in the acquisition, development and
exploration of oil and natural gas properties and related assets (which may
include self-insurance in comparable form to that maintained by such
responsible companies); neither the Company nor the Subsidiary has received
notice from any insurer or agent of such insurer that substantial capital
improvements or other expenditures will have to be made in order to continue
such insurance; all such insurance is outstanding and in full force and effect.
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(l) There is no action, suit, proceeding, litigation or
governmental proceeding pending or, to the knowledge of the Company, threatened
or contemplated against (or circumstances that are reasonably likely to give
rise to the same), or involving the properties or businesses of, the Company or
the Subsidiary which (i) questions the validity of the capital stock of the
Company or the Subsidiary, this Agreement, the Deposit Agreement, or of any
action taken or to be taken by the Company or the Subsidiary pursuant to or in
connection with this Agreement or the Deposit Agreement or (ii) except as
disclosed in or contemplated by the Prospectus, would have a Material Adverse
Effect.
(m) The Company has full legal right, power, and authority to
(i) authorize, issue and deliver the Preferred Stock, (ii) deliver and sell the
Depositary Shares, (iii) to authorize, issue, deliver and sell the Conversion
Shares upon conversion of the Preferred Stock, and (iv) enter into this
Agreement and the Deposit Agreement and consummate the transactions contained
herein and in the Deposit Agreement; and this Agreement and the Deposit
Agreement have been duly and properly authorized, executed and delivered by the
Company and constitute legal, valid and binding agreements of the Company
enforceable against the Company in accordance with their respective terms.
None of the Company's issue and sale of the Preferred Stock, delivery and sale
of the Depositary Shares and issue and sale of the Conversion Shares upon the
conversion of the Preferred Stock, the execution or delivery of this Agreement
and the Deposit Agreement or the Company's performance hereunder or thereunder,
its consummation of the transactions contemplated herein or therein or the
conduct by it and the Subsidiary of their businesses as described in the
Prospectus or any amendments or supplements thereto conflicts or will conflict
with or results or will result in any breach or violation of any of the terms
or provisions of, or constitutes or will constitute a default under, or results
or will result in the creation or imposition of any lien, charge, claim,
encumbrance, pledge, security interest, defect or other restriction or equity
of any kind whatsoever upon any property or assets of the Company or the
Subsidiary pursuant to the terms of, (i) the certificate of incorporation or
by-laws of the Company or the Subsidiary, (ii) any license, contract,
indenture, mortgage, deed of trust, voting trust agreement, stockholders'
agreement, note, loan or credit agreement or other agreement or instrument to
which the Company or the Subsidiary is a party or by which it or the Subsidiary
is or may be bound or to which its or the Subsidiary's properties or assets is
or may be subject, or any indebtedness, or (iii) any statute, judgment, decree,
order, rule or regulation directly applicable to the Company or the Subsidiary
of any arbitrator, court, regulatory body or administrative agency or other
governmental agency or body, having jurisdiction over the Company or the
Subsidiary or any of their respective activities or properties.
(n) Neither the Company nor the Subsidiary (i) is in violation
of its certificate of incorporation or by-laws, (ii) is in default in the
performance of any obligation, agreement or condition contained in any license,
contract, indenture, mortgage, installment sale agreement, lease, deed of
trust, voting trust agreement, stockholders' agreement, note, loan or credit
agreement, purchase order, agreement or instrument evidencing an obligation for
borrowed money or other agreement or instrument to which the Company or the
Subsidiary is a party or by which the Company or the Subsidiary may be bound or
to which the property or assets of the Company or the Subsidiary is subject or
affected or (iii) is in violation in any respect of any law, ordinance,
governmental rule, regulation or court decree to which it or its property or
assets may be subject,
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except any violation or default under the foregoing clauses (ii) or (iii) as
would not have a Material Adverse Effect.
(o) No consent, approval, authorization or order of, and no
filing with, any court, arbitrator, regulatory body, government agency or other
body, domestic or foreign, is required for the execution, delivery or
performance of this Agreement or the Deposit Agreement or the transactions
contemplated hereby or thereby (including the issue and sale of the Depositary
Shares and the Conversion Shares or the issue and delivery of the Preferred
Stock), except such as have been or may be obtained under the Securities Act,
rules and regulations of the National Association of Securities Dealers, Inc.
or may be required under state securities or Blue Sky laws.
(p) Subsequent to the respective dates as of which information
is set forth in the Prospectus, and except as may otherwise be indicated or
contemplated herein or therein, neither the Company nor the Subsidiary has (i)
issued any securities, or incurred any material liability or obligation, direct
or contingent, for borrowed money not in the ordinary course of business, (ii)
entered into any material transaction other than in the ordinary course of
business, (iii) declared or paid any dividend or made any other distribution on
or in respect of its capital stock of any class, and there has not been any
change in the capital stock or long term debt of the Company or (iv) suffered
any material adverse change in or affecting the general affairs, business,
management, financial condition, stockholders' equity or results of operations
of the Company.
(q) The Company and the Subsidiary are in material compliance
with all applicable federal, state, local and foreign laws and regulations
respecting employment and employment practices, terms and conditions of
employment and wages and hours. To the knowledge of the Company, there are no
pending investigations involving the Company or the Subsidiary by the U.S.
Department of Labor or any other governmental agency responsible for the
enforcement of such federal, state, local or foreign laws and regulations.
There is no unfair labor practice charge or complaint against the Company or
the Subsidiary pending before the National Labor Relations Board or any strike,
picketing, boycott, dispute, slowdown or stoppage pending or, to the knowledge
of the Company, threatened against or involving the Company or the Subsidiary.
Neither the Company nor the Subsidiary are or ever have been a party to any
collective bargaining agreement, and no collective bargaining agreement is
currently being negotiated by the Company or the Subsidiary. No material labor
dispute with the employees of the Company or the Subsidiary exists or, to the
knowledge of the Company, is imminent.
(r) No "employee pension benefit plan," "employee welfare
benefit plan" or "multi-employer plan" of the Company ("ERISA PLANS") as such
terms are defined in Sections 3(2), 3(1) and 3(37), respectively, of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or any
trust created thereunder has engaged in a "prohibited transaction" within the
meaning of Section 406 of ERISA or Section 4975 of the Internal Revenue Code of
1986, as amended (the "CODE") which could subject the Company or the Subsidiary
to any tax penalty on prohibited transactions and which has not adequately been
corrected. No "accumulated funding deficiency" (as defined in Section 302 of
ERISA) or any of the events set forth in Section 4043(b) of ERISA (other than
events with respect to which the 30-day notice under Section 4043 of ERISA has
been waived) has occurred with respect to any employee benefit plan which might
8
<PAGE> 9
reasonably be expected to have a Material Adverse Effect. Each ERISA Plan is
in compliance with all material reporting, disclosure and other requirements of
the Code and ERISA as they relate to such ERISA Plan. Determination letters
have been received from the Internal Revenue Service with respect to each ERISA
Plan which is intended to comply with Code Section 401(a) stating that such
ERISA Plan and the attendant trust are qualified thereunder. Neither the
Company nor the Subsidiary has ever completely or partially withdrawn from a
"multi-employer plan" as so defined.
(s) None of the Company, the Subsidiary or any of its affiliates
has taken or will take, directly or indirectly, any action designed to or which
has constituted or which might be expected to cause or result in, under the
Exchange Act or otherwise, stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Securities or
otherwise.
(t) Each of the Company and the Subsidiary (i) owns or has the
right to use, free and clear of all liens, claims, encumbrances, pledges,
security interests, and other adverse interests of any kind whatsoever, all
patents, trademarks, service marks, trade names, copyrights, technology, and
all licenses and rights with respect to the foregoing, owned or licensed by the
Company and the Subsidiary and used in the conduct of its business as now
conducted or proposed to be conducted without, to the best knowledge of the
Company and the Subsidiary, infringing upon or otherwise acting adversely to
the right or claimed right of any person, corporation or other entity, except
those disclosed in the Prospectus or those which are not material in amount and
do not materially adversely affect the use made or proposed to be made of such
property, (ii) is not obligated or under any liability whatsoever to make any
payments by way of royalties, fees or otherwise to any owner or licensee of, or
other claimant to, any patent, trademark, service mark, trade name, copyright,
know-how, technology or other intangible asset, with respect to the use thereof
or in connection with the conduct of its business or otherwise and (iii) has
not received any notice of infringement of or conflict with asserted rights of
others with respect to any of the foregoing which, singly or in the aggregate,
if the subject of an unfavorable decision, ruling or finding, might have a
Material Adverse Effect.
(u) Each of the Company and the Subsidiary has good and
marketable title to, or valid and enforceable leasehold estates in, all items
of real and personal property which are material to its business and are
reflected as owned or leased by it in the financial statements included in the
Prospectus, in each case free and clear of all liens, charges, claims,
encumbrances, pledges, security interests, defects and other restrictions
except those disclosed in the Prospectus or those which are not material in
amount and do not materially adversely affect the use made or proposed to be
made of such property.
(v) Ernst & Young LLP are independent certified public
accountants of the Company as required by the Securities Act and the Rules and
Regulations.
(w) The Common Stock is registered pursuant to Section 12(g) of
the Exchange Act and is approved for listing on the Nasdaq National Market
under the symbol "NEGX." The Company has taken no action that was designed to
terminate, or that is likely to have the affect
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<PAGE> 10
of terminating, trading of the Common Stock on the Nasdaq National Market, nor
has the Company received any notification that the Commission or the Nasdaq
National Market is contemplating terminating such trading.
(x) Neither the Company nor the Subsidiary has, nor, to the
knowledge of the Company, has any officer, director or employee of the Company
or the Subsidiary or, to the knowledge of the Company, any other person acting
on behalf of the Company or the Subsidiary, for the benefit of the Company or
the Subsidiary at any time during the last five years, (i) made any unlawful
gift or contribution to any candidate for federal, state, local or foreign
political office, or failed to disclose fully any such gift or contribution in
violation of law, or (ii) made any payment to any federal, state, local or
foreign governmental officer or official, which would be reasonably likely to
subject the Company or the Subsidiary to any damage or penalty in any civil,
criminal or governmental litigation or proceeding (domestic or foreign). Each
of the Company's and the Subsidiary's internal accounting controls are
sufficient to cause the Company and the Subsidiary to comply in all material
respects with the Foreign Corrupt Practices Act of 1977, as amended.
(y) Except as set forth in the Prospectus or the Incorporated
Documents, no officer, director or 5% or greater stockholder of the Company or
the Subsidiary, or any "affiliate" or "associate" (as these terms are defined
in Rule 405 promulgated under the Rules and Regulations) of any of the
foregoing persons or entities, has or has had, either directly or indirectly,
(i) a material interest in any person or entity which (A) furnishes or sells
services or products which are furnished or sold or are proposed to be
furnished or sold by the Company or the Subsidiary or (B) purchases from or
sells or furnishes to the Company or the Subsidiary any goods or services or
(ii) a material beneficiary interest in any contract or agreement to which the
Company or the Subsidiary is a party or by which the Company or the Subsidiary
may be bound or affected.
(z) The minute books of the Company and the Subsidiary have been
made available to the Underwriters, contain a complete summary of all meetings
and actions of the directors and stockholders of the Company and the Subsidiary
since the time of their respective incorporation and reflect all transactions
referred to in such minutes accurately in all respects.
(aa) Neither the Company nor the Subsidiary has been notified in
writing that it is liable with respect to obligations under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, or
any applicable existing federal, state, local or international laws and
regulations relating to protection of human health or the environment or
imposing liability or standards of conduct concerning any "Hazardous Material"
("ENVIRONMENTAL LAWS"), except for any liability as would not have a Material
Adverse Effect, and it is not aware of any facts or circumstances which could
reasonably be expected to result in any such liability. The Company and the
Subsidiary are in compliance with all applicable existing Environmental Laws,
except for such instances of noncompliance which would not have a Material
Adverse Effect. The term "Hazardous Material" means (i) any "hazardous
substance" as defined by the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended, (ii) any "hazardous waste" as defined by
the Resource Conservation and Recovery Act, as amended, (iii) any petroleum or
petroleum product, (iv) any polychlorinated biphenyl and (v)
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<PAGE> 11
any pollutant or contaminant or hazardous or toxic chemical, material, waste or
substance regulated under or within the meaning of any other Environmental Law.
No disposal, release or discharge of "Hazardous Material" has occurred on, in,
at or about any of the facilities or properties of the Company or the
Subsidiary, except for any such disposal, release or discharge which is in
compliance with Environmental Laws or which would not have a Material Adverse
Effect. Except as described in the Prospectus: (i) there has been no storage,
disposal, generation, transportation, handling or treatment of hazardous
substances or solid wastes by the Company or the Subsidiary (or to the
knowledge of the Company, any of its predecessors in interest) at, upon or from
any of the property now or previously owned or leased by the Company or the
Subsidiary in violation of any applicable law, ordinance, rule, regulation,
order, judgment, decree or permit or which would require remedial action which
has not been taken, under any applicable law, ordinance, rule, regulation,
order, judgment, decree or permit, except for such violations and failures to
take remedial action which would not result in, singularly or in the aggregate,
a Material Adverse Effect; and (ii) there has been no spill, discharge, leak,
emission, injection, escape, dumping or release of any kind onto such property
or into the environment surrounding such property by the Company or the
Subsidiary of any Hazardous Materials, except for such spills, discharges,
leaks, emissions, injections, escapes, dumping or releases which would not
result in, singularly or in the aggregate, a Material Adverse Effect.
(bb) The Company is not, and following the Offering will not be,
an "investment company" or a company controlled by an "investment company" or,
an "affiliated person" of, or "promoter" or "principal underwriter" for, an
"investment company" as such terms are defined in the Investment Company Act of
1940, as amended.
(cc) Except as to its interests in oil and gas leases, each of
the Company and the Subsidiary has good and marketable title to, or valid and
enforceable leasehold estates in, all items of real and personal property which
are material to its business and/or reflected as owned by it in the financial
statements included in the Prospectus, in each case free and clear of all liens,
mortgages, charges, claims, encumbrances, pledges, security interests, defects
and other restrictions except those disclosed in the Prospectus or those which
are not material in amount and do not materially adversely affect the use made
or proposed to be made of such property. Each of the Company and the Subsidiary
has good and defensible title to its interests in oil and gas leases, free and
clear of any liens, mortgages, charges, claims, encumbrances, pledges, security
interests, defects and other restrictions of any kind, liens and encumbrances
under operating agreements, unitization and pooling arrangements and crude oil
and gas sales contracts that secure payment of amounts not yet due and payable
and which are of a nature and scope customary in connection with similar oil and
gas drilling and producing operations, and except those which, individually or
in the aggregate, are not material in amount and do not materially adversely
affect the use made and proposed to be made of such oil and gas leases. Except
to the extent described in the Prospectus, the leases, options to lease,
drilling concessions or other arrangements held by the Company and the
Subsidiary reflect in all material respects the right of the Company and the
Subsidiary to develop, exploit and explore their properties. Each of the
Company and the Subsidiary has conducted such title investigations and
has acquired its interest in oil and gas leases in such manner as is customary
in the oil and gas industry for the respective regions in which the property
subject to such leases is located. Each of the Company and the Subsidiary has
complied in all
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material respects with the terms of oil and gas leases in which each purports
to own an interest, and, to the knowledge of the Company, no claim of any sort
has been asserted by any person or entity adverse to the rights of the Company
or the Subsidiary as lessee or sublessee under any of such leases or
questioning its rights to the continued possession of the leased premises under
any such lease, except with respect to claims which do not materially adversely
affect the use made and proposed to be made of such oil and gas leases by the
Company or the Subsidiary. The concessions, reservations, licenses, permits
and rights to hydrocarbons held by the Company and the Subsidiary are valid,
subsisting and enforceable with such exceptions which do not materially
adversely affect the use made and proposed to be made of such oil and gas
leases. Except as set forth in the Prospectus, the Company and the Subsidiary
(i) do not own or lease any real or personal property, the loss of which would
have a Material Adverse Effect and (ii) own or lease or have the right to use
or enjoy the benefits of all properties as are necessary to its respective
operations as now conducted.
(dd) The information provided by the Company to the Petroleum
Consultants (as hereinafter defined) for the preparation of the estimates of
reserves in the reserve reports for the oil and gas properties of the Company
prepared by Netherland, Sewell & Associates, Inc., independent petroleum
consultants (the "PETROLEUM CONSULTANTS"), were at the respective times of
delivery thereof to the Petroleum Consultants complete and accurate in all
material respects. The Underwriters have received from the Petroleum
Consultants a true and correct copy of its reserve reports with respect to the
Company's interests as of December 31, 1995 and 1996 (collectively, the
"RESERVE REPORTS"), and the Reserve Reports and the letters from the Petroleum
Consultants to the Company with respect thereto have been reviewed, and
accepted as having a reasonable basis, by the Company and has been included in
the Prospectus in good faith by the Company. Except as expressly stated in the
Preliminary Prospectus and the Prospectus, information in the Preliminary
Prospectus and in the Prospectus regarding estimates of reserves, future net
cash flows and present values of proved reserves comply in all material
respects with the applicable requirements of Rule 4-10 of Regulation S-X and
Industry Guide 2 under the Securities Act.
(ee) Neither the Company nor the Subsidiary has sustained since
the date of the latest audited financial statements included in the Prospectus
any loss or interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus, which would have a Material Adverse Effect;
and, since the respective dates as of which information is given in the
Registration Statement and the Prospectus.
(ff) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurance that (i) transactions are
executed in accordance with management's general or specific authorizations;
(ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to financial assets is
permitted only in accordance with management's general or specific
authorization and (iv) the recorded accountability for assets is
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compared with the existing assets at reasonable intervals and appropriate
action is taken with respect thereto.
(gg) No person has any right to the registration of any security
of the Company by reason of the filing of the Registration Statement with the
Commission or the consummation of the transactions contemplated hereby that has
not been waived or lapsed.
(hh) As of the date of the Prospectus, neither the Company nor
the Subsidiary is currently planning any probable acquisitions for which
disclosure of pro forma financial information would be required by the
Securities Act.
(ii) The Company has complied and will comply with the
provisions of Florida Statutes Section 517.075 (Chapter 92-198, Laws of
Florida). Neither the Company, nor any affiliate thereof, does business with
the government of Cuba or with any person or affiliate located in Cuba.
2. Purchase and Sale by the Underwriters.
(a) Subject to the terms and conditions herein set forth, (i)
the Company agrees to issue and deposit with the Depositary the Firm Preferred
Shares, to take receipt of the Firm Shares issued therefor by the Depositary
and sell to each of the Underwriters, and each of the Underwriters agrees,
severally and not jointly, to purchase from the Company, at a purchase price
per Firm Share of $50.00, the number of Firm Shares (to be adjusted by the
Underwriters so as to eliminate fractional shares) as set forth opposite their
respective names in Schedule I and (ii) in the event and to the extent that the
Underwriters shall exercise the election to purchase Option Shares as provided
below, the Company agrees to sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company,
at the purchase price per Share set forth in clause (i) of this Section 2, that
portion of the number of Option Shares as to which such election shall have
been exercised (to be adjusted by the Underwriters so as to eliminate
fractional shares) determined by multiplying such number of Option Shares by a
fraction the numerator of which is the maximum number of Option Shares which
such Underwriter is entitled to purchase as set forth opposite the name of such
Underwriter in Schedule I hereto and the denominator of which is the maximum
number of Option Shares that all of the Underwriters are entitled to purchase
hereunder.
(b) The Company hereby grants to the Underwriters the right to
purchase at their election up to an aggregate of 300,000 Option Shares, at the
purchase price per Share set forth in the paragraph above, for the sole purpose
of covering over-allotments in the sale of the Firm Shares. In conjunction with
delivery and sale of Option Shares to the Underwriters, the Company agrees to
issue and deposit with the Depositary the Option Preferred Shares, to take
receipt of the Option Shares issued therefor by the Depositary and sell to the
Underwriters said Option shares. Any such election to purchase Option Shares
may be exercised only by written notice from the Underwriters to the Company,
given within a period of 30 calendar days after the date of this Agreement and
setting forth the aggregate number of Option Shares to be purchased and the
date on which such Option Shares are to be delivered, as determined by the
Underwriters but in no
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event earlier than the First Time of Delivery (as defined in Section 3 hereof)
or, unless the Underwriters and the Company otherwise agree in writing, earlier
than two or later than ten business days after the date of such notice.
(c) Upon the authorization by the Underwriters of the release of
the Firm Shares, the several Underwriters propose to offer the Firm Shares for
sale upon the terms and conditions set forth in the Prospectus.
3. Deliveries.
(a) The Shares to be purchased by each Underwriter hereunder,
in definitive form, and in such authorized denominations and registered in such
names as Raymond James & Associates, Inc. may request upon at least forty-eight
hours' notice to the Company prior to Time of Delivery (as defined below) (the
"NOTIFICATION TIME"), shall be delivered by or on behalf of the Company to
Raymond James & Associates Inc., for the account of such Underwriter, against
payment by or on behalf of such Underwriter of the purchase price therefor by
wire transfer payable to the order of the Company, in immediately available
funds. The Company will cause the certificates representing the Shares to be
made available for checking and packaging at least twenty-four hours prior to
the Time of Delivery with respect thereto at the office of Raymond James &
Associates, Inc., 880 Carillon Parkway, St. Petersburg, Florida 33716 or such
other designated location (the "DESIGNATED OFFICE").
(b) The time and date of such delivery and payment shall be,
with respect to the Firm Shares, 9:30 a.m., Central Standard Time, on December
____, 1997 or such other time and date as Raymond James & Associates, Inc. and
the Company may agree upon in writing, and, with respect to the Option Shares,
9:30 a.m., Central Standard Time, on the date specified by Raymond James &
Associates, Inc. in the written notice given by Raymond James & Associates,
Inc. of the Underwriters' election to purchase such Optional Shares, or such
other time and date as Raymond James & Associates, Inc. and the Company may
agree upon in writing. Such time and date for delivery of the Firm Shares is
herein called the "FIRST TIME OF DELIVERY", such time and date for delivery of
the Optional Shares, if not the First Time of Delivery, is herein called the
"SECOND TIME OF DELIVERY", and each such time and date for delivery is herein
called a "TIME OF DELIVERY."
(c) The documents to be delivered at each Time of Delivery by
or on behalf of the parties hereto pursuant to Section 6 hereof, including the
cross-receipt for the Shares, will be delivered at the offices of Haynes and
Boone, LLP, 901 Main Street, Suite 3100, Dallas, Texas 75202 (the "CLOSING
LOCATION"), and the Shares will be delivered as specified in Section 3 above,
all at such Time of Delivery. A meeting will be held at the Closing Location
at 1:00 p.m., Central Standard Time, on the New York Business Day next
preceding such Time of Delivery, at which meeting the final drafts of the
documents to be delivered pursuant to the preceding sentence will be available
for review by the parties hereto. For the purposes of this Section 3, "NEW
YORK BUSINESS DAY" shall mean each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which banking institutions in New York are
generally authorized or obligated by law or executive order to close.
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4. Covenants and Agreements of the Company. The Company covenants
and agrees with the Underwriters as follows:
(a) If the Registration Statement has not yet been declared
effective, the Company will use its best efforts to cause the Registration
Statement and any amendments thereto to become effective as promptly as
possible; to prepare the Prospectus in a form approved by the Underwriters
(such approval not to be unreasonably withheld or delayed) and to file such
Prospectus pursuant to Rule 424(b) under the Securities Act not later than the
Commission's close of business on the second business day following the
execution and delivery of this Agreement, or, if applicable, such earlier time
as may be required by Rule 430A(a)(3) under the Securities Act; to file
promptly all reports required to be filed by the Company with the Commission
pursuant to Section 13(a), 13(c) or 15(d) of the Exchange Act subsequent to the
date of the Prospectus and for so long as the delivery of a prospectus is
required in connection with the offering or sale of the Preferred Stock; to
advise the Underwriters, promptly after it receives notice thereof, of the
issuance by the Commission of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or prospectus, of the
suspension of the qualification of the Depositary Shares for offering or sale
in any jurisdiction, of the initiation or threatening of any proceeding for any
such purpose, or of any request by the Commission for the amending or
supplementing of the Registration Statement or Prospectus or for additional
information; and to use its reasonable best efforts to prevent the issuance of
any such order preventing or suspending the use of the Preliminary Prospectus
or of the Prospectus or suspending any such qualification and, if any such
suspension is issued, to use its reasonable best efforts to obtain the lifting
thereof at the earliest possible time; the Company will not file any amendment
to the Registration Statement or any amendment of or supplement to the
Prospectus (including the prospectus required to be filed pursuant to Rule
424(b)) that differs from the prospectus on file at the time of the
effectiveness of the Registration Statement before or after the effective date
of the Registration Statement or file any document under the Exchange Act if
such document would be deemed to be incorporated by reference into the
Prospectus to which the Underwriters shall reasonably object in writing after
being timely furnished in advance a copy thereof.
(b) To advise the Underwriters promptly, and, if requested by
the Underwriters confirm such advice in writing, of the issuance by any state
securities commission of any stop order suspending the qualification or
exemption of any of the Depositary Shares for offering or sale in any
jurisdiction, or the initiation of any proceeding for such purpose by any state
securities commission or other regulatory authority, and to use its best
efforts to prevent the issuance of any stop order or order suspending the
qualification or exemption of any of the Depositary Shares under any state
securities or Blue Sky laws, and if, at any time, any state securities
commission or other regulatory authority shall issue an order suspending the
qualification or exemption of any of the Depositary Shares under any state
securities or Blue Sky laws, to use its best efforts to obtain the withdrawal
or lifting of such order at the earliest possible time.
(c) To promptly deliver to the Underwriters three signed copies
of the Registration Statement, including exhibits and all documents
incorporated by reference therein and all amendments thereto; to furnish the
Underwriters and counsel for the Underwriters, without charge, with copies of
the Prospectus in such quantities as the Underwriters may from time to time
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<PAGE> 16
reasonably request, and, if the delivery of a prospectus is required at any
time prior to the expiration of nine months after the time of issue of the
Prospectus in connection with the offering or sale of the Shares by the
Underwriters and if at such time any events shall have occurred as a result of
which the Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made when such Prospectus is delivered, not misleading, or, if
for any other reason it shall be necessary during such period to amend or
supplement the Prospectus in order to comply with the Securities Act, to notify
the Underwriters (and, if requested, to confirm such notification in writing)
and upon the Underwriters' request to prepare and furnish without charge to
each Underwriter and to any dealer in securities as many copies as the
Underwriters may from time to time reasonably request of an amended Prospectus
or a supplement to the Prospectus which will correct such statement or omission
or effect such compliance, and in case any Underwriter is required to deliver a
prospectus in connection with sales of any of the Shares at any time after nine
months or more after the time of issue of the Prospectus, upon the
Underwriters' request but at the expense of such Underwriters, to prepare and
deliver to such Underwriters as many copies as the Underwriters may request of
an amended or supplemented Prospectus complying with Section 10(a)(3) of the
Securities Act;
(d) During the three-year period following the Closing Date,
provided any of the Preferred Stock remain outstanding, to furnish to the
Underwriters all reports, documents, information and financial statements filed
by the Company with the Commission pursuant the Exchange Act or the Rules and
Regulations.
(e) To use the proceeds from the sale of the Preferred Stock in
the manner described in the Prospectus under the caption "Use of Proceeds."
(f) In connection with the Offering, to make its officers,
employees, independent accountants and legal counsel reasonably available upon
request by the Underwriters.
(g) To use its reasonable best efforts to do and perform all
things required to be done and performed under this Agreement by it that are
within its control prior to or after the Closing Date and to use its reasonable
best efforts to satisfy all conditions precedent on its part to the delivery of
the Securities.
(h) To not, so long as the Preferred Stock or the Common Stock
is outstanding, be or become (and use its best efforts not to be or become
owned by) an open-end investment company, unit investment trust or face-amount
certificate company that is or is required to be registered under Section 8 of
the Investment Company Act, and to not be or become (and use its best efforts
not to be or become owned by) a closed-end investment company required to be
registered, but not registered thereunder.
(i) To cooperate with the Underwriters and counsel for the
Underwriters to qualify the Preferred Stock for offering and sale under the
securities laws of such jurisdictions as the Underwriters may reasonably
request and to comply with such laws so as to permit the
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<PAGE> 17
continuance of sales and dealings therein in such jurisdictions for as long as
may be necessary to complete the distribution of the Preferred Stock; provided,
however, that in connection therewith the Company shall not be required to
qualify as a foreign corporation or to file a general consent to service of
process or to subject it to taxation in any jurisdiction where it is not so
qualified or so subject.
(j) In connection with the Offering, until the Underwriters
shall have notified the Company of the completion of the Offering, to not and
use reasonable efforts to not permit any affiliated purchasers (as defined in
Regulation M under the Exchange Act), either alone or with one or more other
persons, to bid for or purchase, for any account in which it or any of its
affiliated purchasers has a beneficial interest, any Depositary Shares,
Preferred Stock or Common Stock, or attempt to induce any person to purchase
any Depositary Shares, Preferred Stock or Common Stock; and to not and use
reasonable efforts to not permit any of its affiliated purchasers to make bids
or purchases for the purpose of creating actual, or apparent, active trading in
or of raising the price of the Depositary Shares, Preferred Stock or Common
Stock.
(k) Prior to the Closing Date, to not issue any press release or
other communication directly or indirectly or hold any press conference with
respect to the Company, its condition, financial or otherwise, or earnings,
business affairs or business prospects, without prior consultation with the
Underwriters, unless in the judgment of the Company and its counsel, and after
notification to the Underwriters, such press release or communication is
required by law.
(l) To not take any action prior to the Closing Date which in
the Company's reasonable judgment would require the Prospectus to be amended or
supplemented pursuant to Section 4(c) hereof.
(m) To maintain a transfer agent and, if necessary under the
laws of the jurisdiction of incorporation of the Company, a registrar (which
may be the same entity as the transfer agent) for the Depositary Shares, the
Preferred Stock and the Common Stock.
(n) To make generally available to its securityholders as soon
as practicable, but in any event not later than twelve months after the
effective date of the Registration Statement (as defined in Rule 158(c) under
the Securities Act), an earnings statement of the Company including the
Subsidiary (which need not be audited) complying with Section 11(a) of the
Securities Act and the Regulations (including, at the option of the Company,
Rule 158).
(o) To list, subject to notice of issuance, the Common Stock
issuable upon conversion of the Preferred Stock on the Nasdaq National Market.
5. Payment of Expenses.
(a) The Company hereby agrees to pay all of the following
expenses and fees incident to the performance of the obligations of the Company
under this Agreement, including, regardless of whether any sale of the
Depositary Shares to the Underwriters is consummated: (i) the fees and expenses
of accountants and counsel for the Company, (ii) all costs and expenses
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<PAGE> 18
incurred in connection with the preparation, duplication, printing (including
mailing and handling charges), delivery and mailing (including the payment of
postage with respect thereto) of each Preliminary Prospectus and the Prospectus
and any amendments and supplements thereto, in quantities as hereinabove
stated, (iii) the printing, engraving, issuance and delivery of the
certificates representing the Depositary Shares and the Preferred Stock, (iv)
costs and expenses of travel, food and lodging of Company personnel in
connection with the "road show," information meetings and presentations, (v)
fees and expenses of the Depositary, transfer agent and registrar, (vi) the
fees payable to the NASD CUSIP Service Bureau, and DTC incurred in connection
with the sale of the Depositary Shares, (vii) the fees payable to the
Commission and the Nasdaq National Market in connection with the filing of a
registration statement with respect to the Depositary Shares, the Preferred
Stock and the Conversion Shares and the listing of the Conversion Shares on the
Nasdaq National Market, and (viii) all other costs and expenses incident to the
performance of its obligations hereunder which are not specifically otherwise
provided for in this Section; provided that the Underwriters shall pay their
own costs and expenses, including the costs and expenses of their counsel.
(b) If this Agreement is terminated for any reason, the Company
shall reimburse and indemnify the Underwriters for their actual accountable and
reasonable out-of-pocket expenses, up to the limits and subject to the
conditions set forth in the preceding paragraph.
6. Conditions of the Underwriters' Obligations. The obligations of
the Underwriters hereunder shall be subject to the continuing accuracy of the
representations and warranties of the Company herein as of the date hereof and
as of the First Time of Delivery and the Second Time of Delivery, if any, as if
they had been made on and as of the First Time of Delivery and the Second Time
of Delivery, as the case may be; and the performance by the Company on and as
of the First Time of Delivery and Second Time of Delivery, if any, of its
covenants and obligations hereunder and to the following further conditions:
(a) The Registration Statement shall have become effective not
later than 5:30 P.M., New York time, on the date of this Agreement, or at such
later time and date as shall have been consented to in writing by the
Underwriters; the Prospectus shall have been filed with the Commission pursuant
to Rule 424(b) within the applicable time period prescribed for such filing by
the Rules and Regulations and in accordance with Section 4(a) hereof; no stop
order suspending the effectiveness of the Registration Statement or any part
thereof shall have been issued and no proceeding for that purpose shall have
been initiated or threatened by the Commission and all requests for additional
information on the part of the Commission shall have been complied with to the
Underwriters' reasonable satisfaction;
(b) The Underwriters shall not have advised the Company that the
Prospectus, or any supplement or amendment thereto, contains an untrue
statement of fact which, in the Underwriters' reasonable opinion, is material,
or omits to state a fact which, in the Underwriters' reasonable opinion, is
material and is required to be stated therein or is necessary to make the
statements, in light of the circumstances under which they were made when the
Prospectus is delivered, not misleading. No order suspending the sale of the
Securities in any jurisdiction shall
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<PAGE> 19
have been issued on either the First Time of Delivery or the Second Time of
Delivery, if any, and no proceedings for that purpose shall have been
instituted or shall be contemplated.
(c) On or prior to the Closing Date and each Option Closing
Date, if any, the Underwriters shall have received from Haynes and Boone, LLP
such opinion or opinions with respect to the incorporation of the Company, the
validity of the Securities, the Prospectus and other related matters as the
Underwriters may request.
(d) Akin, Gump, Strauss, Hauer & Feld, L.L.P., counsel for the
Company, shall have furnished to the Underwriters their written opinion, dated
such Time of Delivery, containing customary assumptions and qualifications and
in form and substance satisfactory to the Underwriters, to the effect that:
(i) This Agreement has been duly executed and delivered
by the Company under the laws of the State of Texas;
(ii) All of the issued shares of capital stock of the
Company (including the Preferred Stock being delivered to the
Depositary at the First Time of Delivery or the Second Time of
Delivery, as the case may be, against indirect payment therefor
in accordance with the Agreement) have been duly authorized and
validly issued, are fully paid and nonassessable. The Preferred
Stock being delivered to the Depositary by the Company are free
and clear of any liens, charges, claims, pledges, security
interests or encumbrances of any kind whatsoever other than as
disclosed in the Prospectus. The Shares being delivered to the
Underwriters at the First Time of Delivery or the Second Time of
Delivery, as the case may be, against payment therefor in
accordance with this Agreement, have been duly authorized and
validly issued, fully paid and non-assessable. The Conversion
Shares issuable upon conversion of the Preferred Stock, upon
conversion thereof in accordance with the terms of the
Certificate of Designation, have been duly authorized and will be
validly issued, fully paid and non-assessable. The Depositary
Shares being delivered to the Underwriters by the Company are
free and clear of any liens, charges, claims, pledges, security
interest or encumbrances of any kind whatsoever other than as
disclosed in the Prospectus.
(iii) The execution and delivery by the Company of this
Agreement and the Deposit Agreement, the performance by the
Company hereunder and thereunder, the compliance by the Company
with the provisions hereof and thereof and the consummation of
the transactions contemplated hereby and thereby, in accordance
with its terms, do not and will not conflict with or result in
any breach or violation of, constitute a default under or result
in the creation or imposition of any lien, charge, claim, pledge,
security interest or other encumbrance upon any property or
assets of the Company or the Subsidiary pursuant to the terms of
(A) the charter documents and bylaws of the Company and the
Subsidiary, (B) any license, contract, indenture, mortgage, deed
of trust, voting trust agreement, stockholders' agreement, note,
loan or credit agreement or other agreement or instrument filed
19
<PAGE> 20
as an exhibit to any of the Incorporated Documents, or (C) any
federal, Delaware or Texas statute, rule or regulation or, to the
best of such counsel's knowledge, any judgment, decree or order
applicable to the Company or the Subsidiary of any arbitrator,
court, regulatory body or administrative agency or other
governmental agency or body having jurisdiction over the Company
or the Subsidiary or any of their respective activities or
properties, except with respect to this clause (C) for such
conflicts, breaches, violations, defaults and creations or
impositions which in the aggregate would not have a Material
Adverse Effect. Such counsel need express no opinion in this
paragraph (iii) as to (A) state securities or Blue Sky laws or
(B) with respect to matters of fact relating to compliance with
any financial covenants, ratios or tests or any aspect of the
financial condition or results of operations of the Company.
(iv) No consent, permit, license, exception, approval,
authorization, order, registration or qualification (hereinafter
referred to as "GOVERNMENT AUTHORIZATION") of or with any such
federal, state and local governmental authority, arbitrator,
court, tribunal regulatory body or administrative agency or other
governmental agency or body or any stock exchange authorities
having jurisdiction over the Company or the Subsidiary or any of
their properties is required for the issue and sale of the
Shares, the Preferred Stock or the Conversion Shares by the
Company or the consummation by the Company of the transactions
contemplated by this Agreement and the Deposit Agreement, except
the registration under the Securities Act of the Shares, the
Preferred Stock or the Conversion Shares, and such consents,
approvals, authorizations, registrations or qualifications as may
be required under state securities or Blue Sky laws or the
Bylaws, rules and regulations of the National Association of
Securities Dealers, Inc. in connection with the purchase and
distribution of the Shares by the Underwriters.
(v) The securities when issued will conform in all
material respects to the description thereof contained in the
"Description of the Series F Preferred Stock" and "Description
of Depositary Shares," and the disclosure contained in "Certain
Federal Income Tax Consequences," and in the Registration
Statement in Item 15 fairly present the information called for
with respect to such terms of the Securities, legal matters,
documents or proceedings in all material respects.
(vi) The Company has the corporate power and authority
to execute, deliver and perform this Agreement and the Deposit
Agreement and to consummate the transactions provided for herein
and therein; the execution and delivery of this Agreement and the
Deposit Agreement have been duly authorized by all requisite
corporate action on the part of the Company, and this Agreement
and the Deposit Agreement have been duly executed and delivered
by the Company, and, assuming due authorization, execution and
delivery by each other party hereto and thereto, constitute
legal, valid and binding agreements of the Company enforceable
against the Company in accordance with their respective terms;
except to the extent that enforcement hereof and thereof may be
limited by (A) bankruptcy, insolvency,
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<PAGE> 21
reorganization, moratorium or other similar laws now or hereafter
in effect relating to creditors' rights generally and (B) general
principles of equity (regardless of whether enforceability is
considered in a proceeding at law or in equity) and except to the
extent that rights to indemnification and contribution contained
in this Agreement may be limited by federal or state securities
laws or public policy relating thereto.
(vii) The certificates evidencing the Preferred Stock
and the Common Stock comply as to form with the requirements of
the Delaware General Corporation Law.
(viii) The Shares being delivered to the Underwriters
by the Company, the Preferred Stock being issued to the
Depositary and the Conversion Shares have not been or will not
have been issued in violation of or subject to any preemptive
rights arising under the Company's Certificate of Incorporation
or Bylaws or under the laws of the State of Delaware, or similar
rights that entitle or will entitle any person to acquire any
shares of Common Stock upon issuance of such shares of capital
stock by the Company.
(ix) The Registration Statement has become effective
under the Securities Act, and, to such counsel's knowledge, no
stop order suspending the effectiveness of the Registration
Statement or any part thereof has been issued and no proceedings
for that purpose have been instituted or are pending under the
Securities Act.
(x) The Registration Statement and the Prospectus and
any further amendments and supplements thereto made by the
Company prior to such Time of Delivery (other than the reserve
data, the financial statements and related schedules and
statistical information, as to which such counsel need express no
opinion) comply as to form in all material respects with the
requirements of the Securities Act and the Rules and Regulations.
Such counsel may state that because the primary purpose of their
engagement was not to establish or confirm factual matters or reserve,
financial, accounting or statistical matters and because of the wholly or
partially non-legal character of many of the statements contained in the
Registration Statement and the Prospectus, such counsel is not passing upon
and does not assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration Statement or the
Prospectus (except to the extent expressly set forth in paragraphs (vi) and
(vii) above), and they have not independently verified the accuracy,
completeness or fairness of such statements (except as aforesaid). Without
limiting the foregoing, such counsel may state that they assume no
responsibility for and have not independently verified the accuracy,
completeness or fairness of the reserve data or the financial statements
included in the Registration Statement and the Prospectus and they have not
examined the reserve information or the accounting or financial records
from which such statements and data are derived. Such
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<PAGE> 22
counsel may state that although certain portions of the
Registration Statement and the Prospectus have been included
therein on the authority of "experts" within the meaning of the
Securities Act, they are not experts with respect to any portion
of the Registration Statement or the Prospectus. However, such
counsel may state that they have participated in conferences with
officers, legal counsel and other representatives of the Company,
representatives of the independent accountants of the Company,
and with representatives of, and legal counsel for, the
Underwriters, at which the contents of the Registration Statement
and Prospectus and related matters were discussed. Such counsel
may state that they have also reviewed certain corporate
documents furnished to them by the Company. Based on such
participation and review (relying as to materiality to a certain
extent upon the officers and the other representatives of the
Company), and subject to the limitations described above, such
counsel may state that they advise the Underwriters that no facts
have come to their attention that causes them to believe that the
Registration Statement at the time it became effective, contained
an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make
the statements therein not misleading, or that the Prospectus, as
of its date or as of the date hereof, contained or contains an
untrue statement of a material fact or omitted or omits to state
a material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not
misleading.
In rendering such opinion, such counsel may state that they
express no opinion as to the laws of any jurisdiction other than
the United States, the State of Delaware, the State of New York
and the State of Texas.
(e) Philip D. Devlin, General Counsel for the Company,
shall have furnished to the Underwriters his written opinion,
dated such Time of Delivery, containing customary assumptions and
qualifications and in form and substance satisfactory to the
Underwriters, to the effect that:
(i) The Company and the Subsidiary have been duly
incorporated and is validly existing as a corporation in
good standing under the laws of its jurisdiction of
incorporation or formation, with corporate or other power
and authority to own its properties and conduct its
business as described in the Prospectus;
(ii) The Company and the Subsidiary have been duly
qualified as a foreign corporation for the transaction of
business and is in good standing under the laws of each
other jurisdiction in which it owns or leases properties,
or conducts any business, so as to require such
qualification, other than where the failure to be so
qualified or in good standing would not reasonably be
expected to have a Material Adverse Effect;
(iii) Except as disclosed in the Prospectus, there
were as of the date of the Prospectus, and are as of the
date set forth herein, no outstanding subscriptions,
rights, warrants, options, calls, convertible securities,
commitments of sale or liens
22
<PAGE> 23
related to or entitling any person to purchase or
otherwise to acquire any shares of the capital stock of,
or other ownership interest in, the Company or the
Subsidiary;
(iv) The authorized, the issued and the issued and
outstanding capital stock of the Company set forth in the
Prospectus is true and correct in all material respects as
of the date set forth therein and the authorized capital
stock of the Company conforms as to legal matters in all
material respects to the description thereof contained in
the section of the Prospectus entitled "Description of
Capital Stock."
(v) There is no action, arbitration, suit, or
other proceeding pending or threatened in writing or any
judgments outstanding against the Company, the Subsidiary,
or involving the properties or business of the Company or
the Subsidiary which (A) questions the validity of the
capital stock of the Company or the Subsidiary or of this
Agreement or the Deposit Agreement or of any action taken
or to be taken by the Company or the Subsidiary pursuant
to or in connection with such capital stock or this
Agreement or the Deposit Agreement or (B) except as
disclosed in the Prospectus, could have a Material Adverse
Effect;
(vi) No holders of securities of the Company have
rights to the registration thereof under the Registration
Statement or, if any such holders have such rights, such
holders have waived such rights; and
(vii) The Company and the Subsidiary are not in
violation of their Constituent Documents; neither the
Company nor the Subsidiary is in breach of, or in default
with respect to, any provisions of any license, contract,
indenture, mortgage, deed of trust, voting trust
agreement, stockholders' agreement, note, loan or credit
agreement or other agreement or instrument known to such
counsel to which the Company or the Subsidiary is a party
or by which any of them is or may be bound or to which any
of their respective properties or assets is or may be
subject, except for such breaches or defaults as would not
have a Material Adverse Effect, and to the knowledge of
such counsel, the Company and the Subsidiary are in
material compliance with all laws, rules and regulations
and all judgments, decrees and orders of any judicial or
governmental authority to which the Company or the
Subsidiary or by which any of them is or may be bound or
to which any of their respective properties or assets is
or may be subject, except for such noncompliance as would
not have a Material Adverse Effect.
In rendering such opinion, such counsel may state that
they express no opinion as to the laws of any jurisdiction other
than the United States, the State of Texas and the State of
Delaware;
(f) On or prior to the First Time of Delivery and the
Second Time of Delivery, if any, Haynes and Boone, LLP shall have been
furnished such documents and certificates as they may reasonably require for
the purpose of enabling them to review or pass upon the matters
23
<PAGE> 24
referred to in Section 6(c) above or in order to evidence the accuracy,
completeness or satisfaction of any of the representations, warranties or
conditions of the Company herein contained.
(g) On and as of the First Time of Delivery and the Second Time
of Delivery, if any: (i) there shall have been no material adverse change in
the condition, financial or otherwise, prospects, stockholders' equity or the
business activities of the Company and the Subsidiary taken as a whole, whether
or not in the ordinary course of business, from the latest dates as of which
such condition is set forth in the Prospectus; (ii) there shall have been no
transaction, not in the ordinary course of business, entered into by the
Company or the Subsidiary, from the latest date as of which the financial
condition of the Company and the Subsidiary is set forth in the Prospectus
which is materially adverse to the Company and the Subsidiary taken as a whole;
(iii) neither the Company nor the Subsidiary shall be in default under any
provision of any instrument relating to any material outstanding indebtedness;
(iv) no material amount of the assets of the Company or the Subsidiary shall
have been pledged or mortgaged, except as set forth in the Prospectus; (v) no
action, suit or proceeding, at law or in equity, shall have been pending or, to
the knowledge of the Company, threatened or contemplated against the Company or
the Subsidiary, or affecting any of their respective properties or businesses,
before or by any court or federal, state or foreign commission, board or other
administrative agency wherein an unfavorable decision, ruling or finding may
have a Material Adverse Effect, except as set forth in the Prospectus; and (vi)
no order suspending or preventing the sale of the Securities shall have been
issued under the Securities Act and no proceedings therefor shall have been
initiated or threatened or, to the knowledge of the Company, contemplated by
the Commission or any state regulatory authority.
(h) At the First Time of Delivery and the Second Time of
Delivery, if any, the Underwriters shall have received a certificate of the
Company signed on behalf of the Company by the principal executive officer and
by the chief financial or chief accounting officer of the Company, in their
capacities as such, dated the First Time of Delivery or the Second Time of
Delivery, as the case may be, to the effect that each of such persons has
carefully examined the Prospectus, this Agreement and the Deposit Agreement,
and that:
(i) the representations and warranties of the Company in
this Agreement and the Deposit Agreement are true and correct in all
material respects, as if made on and as of the First Time Delivery or the
Second Time Delivery, as the case may be, and the Company has complied
with all agreements and covenants and satisfied all conditions contained
in this Agreement on its part to be performed or satisfied at or prior to
the First Time of Delivery or the Second Time of Delivery, as the case
may be;
(ii) no stop order suspending the qualification or
exemption from qualification of the Securities shall have been issued
and no proceedings for that purpose shall have been commenced or, to the
knowledge of the Company, be contemplated;
(iii) since the date of the most recent financial
statements included in the Prospectus, there has been no material adverse
change in the condition, financial or
24
<PAGE> 25
otherwise, business, prospects or results of operation of the Company and
the Subsidiary, taken as a whole, except as set forth in the Prospectus;
(iv) none of the Registration Statement, Prospectus
or any amendment or supplement thereto includes any untrue statement of a
material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made when the Prospectus is
delivered, not misleading; and
(v) subsequent to the respective dates as of which
information is given in the Prospectus: (a) neither the Company nor the
Subsidiary has incurred up to and including the First Time of Delivery
and the Second Time of Delivery, as the case may be, other than in the
ordinary course of its business, any material liabilities or obligations,
direct or contingent, except as disclosed in the Prospectus; (b) neither
the Company nor the Subsidiary has paid or declared any dividends or
other distributions on its capital stock; (c) neither the Company nor the
Subsidiary has entered into any material transactions not in the ordinary
course of business, except as disclosed in the Prospectus; (d) there has
not been any change in the capital stock or the long term debt of the
Company or the Subsidiary; (e) neither the Company nor the Subsidiary has
sustained any material loss or damage to its property or assets, whether
or not insured; (f) there is no litigation which is pending or, to the
Company's knowledge, threatened or contemplated against the Company, the
Subsidiary or any affiliated party of any of the foregoing which would,
if decided adversely, have a Material Adverse Effect and which is
required to be set forth in an amended or supplemented Prospectus which
has not been set forth; and (g) there has occurred no event which would
be required to be set forth in an amended or supplemented prospectus
included in a registration statement on Form S-3, which has not been set
forth in an amendment or supplement to the Prospectus.
(i) On or before the date hereof the Underwriters shall have
received a letter, dated such date, addressed to the Underwriters in form and
substance satisfactory in all respects to the Underwriters and Haynes and
Boone, LLP, from Ernst & Young LLP.
(j) At the First Time of Delivery and the Second Time of
Delivery, if any, the Underwriters shall have received from Ernst & Young LLP a
letter, dated as of the First Time of Delivery or the Second Time of Delivery,
as the case may be, to the effect that they reaffirm their statements made in
the letter furnished pursuant to Section 6(h), except that the specified date
referred to shall be a date not more than five days prior to the First Time of
Delivery or the Second Time of Delivery, as the case may be, and to the further
effect that they have carried out procedures as specified in their letter
furnished pursuant to Section 6(h) with respect to certain amounts, percentages
and financial information as specified by the Underwriters and deemed to be a
part of the Prospectus and have found such amounts, percentages and financial
information to be in agreement with the records specified in their letter
furnished pursuant to Section 6(h).
(k) On the First Time of Delivery and the Second Time of
Delivery, if any, there shall have been duly tendered to the Underwriters the
appropriate number of Depositary Shares
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<PAGE> 26
and the Company shall have tendered to the Depositary the appropriate number of
shares of Preferred Stock.
(l) Trading in the Common Stock shall not have been suspended by
the Nasdaq National Market at any time.
(m) Subsequent to the execution and delivery of this Agreement
there shall not have occurred any of the following: (i) trading in securities
generally on the New York Stock Exchange, the American Stock Exchange or the
over-the-counter market shall have been suspended, or minimum prices shall have
been established on either of such exchanges or such market by the Commission,
by such exchange or by any other regulatory body or governmental authority
having jurisdiction, or trading in securities of the Company on any exchange or
in the over-the-counter market shall have been suspended or (ii) any moratorium
on commercial banking activities shall have been declared by Federal or New York
State authorities or (iii) an outbreak or escalation of hostilities or a
declaration by the United States of a national emergency or war or such a
material adverse change in general economic, political or financial conditions
(or the effect of international conditions on the financial markets in the
United States shall be such) as to make it, in the judgment of the Underwriters,
impracticable or inadvisable to proceed with the offering or the delivery of the
Preferred Stock on the terms and in the manner contemplated in the Prospectus.
(n) The Certificate of Designations shall have been duly
executed and filed by the Company with the Secretary of State of the State of
Delaware.
(o) If any event shall have occurred that requires the Company
under Section 4(c) hereof to prepare an amendment or supplement to the
Prospectus, such amendment or supplement shall have been prepared, the
Underwriters shall have been given a reasonable opportunity to comment thereon,
and copies thereof delivered to the Underwriters.
(p) On or prior to the First Time of Delivery and the Second
Time of Delivery, if any, the Underwriters shall have received a certificate
signed on behalf of the Company by the secretary of the Company, in his capacity
as such, dated the First Time of Delivery or the Second Time of Delivery, as the
case may be, as to:
(i) the absence of any contemplated proceeding for the
merger, consolidation, liquidation or dissolution of the Company or the
Subsidiary, as the case may be, or the sale of all or substantially all of
its assets;
(ii) the due adoption and full force and effect of the
by-laws of the Company (with a copy of the by-laws attached);
(iii) resolutions adopted by the Board of Directors of
the Company and/or a committee thereof authorizing the Offering and the
consummation of the transactions contemplated by this Agreement, the
Deposit Agreement and the Certificate of Designations (with copies of such
resolutions attached); and
26
<PAGE> 27
(iv) the incumbency, authorization and signatures of
those officers of the Company signing this Agreement and/or any
certificate delivered at Closing.
(q) The NASD, upon review of the terms of the public offering of
the Firm Shares and the Option Shares, shall not have objected to the
Underwriters' participation in the Offering.
(r) The Company and the Depositary shall have each executed and
delivered the Depositary Agreement.
All opinions, letters, evidence and certificates mentioned above
or elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably
satisfactory to the Underwriters.
If any condition to the Underwriters' obligations hereunder to be
fulfilled prior to or at the First Time of Delivery or the Second Time of
Delivery, as the case may be, is not so fulfilled, the Underwriters may
terminate their obligations pursuant to Section 9 or, if the Underwriters so
elect, they may waive any such conditions which have not been fulfilled or
extend the time for their fulfillment.
7. Indemnification.
(a) The Company agrees to indemnify and hold harmless the
Underwriters (for purposes of this Section 7, "Underwriters" shall include the
officers, directors, partners, employees and agents, and each person, if any,
who controls the Underwriters ("CONTROLLING PERSON") within the meaning of
Section 15 of the Securities Act or Section 20(a) of the Exchange Act), from
and against any and all losses, claims, damages, expenses or liabilities, joint
or several (and actions, proceedings, suits and litigation in respect thereof),
whatsoever, as the same are incurred, to which the Underwriters or any such
controlling person may become subject, under the Securities Act, the Exchange
Act or any other statute or at common law or otherwise insofar as such losses,
claims, damages, expenses or liabilities arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact contained in
any Preliminary Prospectus or the Prospectus (as from time to time amended and
supplemented) or arise out of or are based upon the omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein in the light of the circumstances
under which they were made at the time such Preliminary Prospectus or
Prospectus is delivered, not misleading; provided, however, that the Company
shall not be liable in any such case to the extent that any such loss, claim,
damage, expense or liability arises out of or is based upon any untrue
statement or alleged untrue statement or omission or alleged omission made in
any Preliminary Prospectus or the Prospectus or any such amendment or
supplement in reliance upon and in conformity with Underwriters' Information
and provided, further, that the Company shall not be liable to the Underwriters
under the indemnity agreement in this subsection (a) (i) with respect to any
Preliminary Prospectus to the extent that any such loss, liability, claim,
damage or expense of the Underwriters arises out of a sale of the Preferred
Stock by the Underwriters to a person to whom there was not sent or given, at
or prior to the written confirmation of such sale, a copy of the Prospectus (or
of the Prospectus as then amended or supplemented) if the Company has
previously
27
<PAGE> 28
furnished requested copies thereof to the Underwriters a reasonable time in
advance and the loss, liability, claim, damage or expense of the Underwriters
results from an untrue statement or alleged untrue statement or omission or
alleged omission of a material fact contained in the Preliminary Prospectus
which was corrected in the Prospectus (or the Prospectus as amended or
supplemented) or (ii) to the extent that any such loss, claim, damage, expense
or liability arises out of or is based upon any action or failure to act by the
Underwriters that is found in a final judicial determination (or a settlement
tantamount thereto) to constitute bad faith, willful misconduct or gross
negligence on the part of the Underwriters. The indemnity agreement in this
subsection (a) shall be in addition to any liability which the Company may have
at common law or otherwise.
(b) The Underwriters agree severally and not jointly to
indemnify and hold harmless the Company, each of its directors, each of its
officers and each other person, if any, who controls the Company within the
meaning of the Securities Act, to the same extent as the foregoing indemnity
from the Company to the Underwriters, with respect to any Preliminary
Prospectus to the extent that any such loss, liability, claim, damage or
expense of the Underwriters arises out of a sale of the Preferred Stock by the
Underwriters to a person to whom there was not sent or given, at or prior to
the written confirmation of such sale, a copy of the Prospectus (or of the
Prospectus as then amended or supplemented) if the Company has previously
furnished requested copies thereof to the Underwriters a reasonable time in
advance and the loss, liability, claim, damage or expense of the Underwriters
results from an untrue statement or alleged untrue statement or omission or
alleged omission of a material fact contained in the Preliminary Prospectus
which was corrected in the Prospectus (or the Prospectus as amended or
supplemented), but only with respect to statements or omissions, if any, made
as part of the Underwriters' Information.
(c) Promptly after receipt by an indemnified party under this
Section 7 of notice of the commencement of any action, suit or proceeding, such
indemnified party shall, if a claim in respect thereof is to be made against one
or more indemnifying parties under this Section 7, notify each party against
whom indemnification is to be sought in writing of the commencement thereof (but
the failure to notify an indemnifying party shall not relieve it from any
liability which it may have under Sections 7(a) or (b) unless and to the extent
that it has been prejudiced in a material respect by such failure or from the
forfeiture of substantial rights and defenses). In case any such action, suit
or proceeding is brought against any indemnified party, and it notifies an
indemnifying party or parties of the commencement thereof, the indemnifying
party or parties will be entitled to participate therein, and to the extent it
may elect by written notice delivered to the indemnified party promptly after
receiving the aforesaid notice from such indemnified party, to assume the
defense thereof with counsel reasonably satisfactory to such indemnified party,
which may be the same counsel as counsel to the indemnifying party.
Notwithstanding the foregoing, the indemnified party or parties shall have the
right to employ its or their own counsel in any such case but the fees and
expenses of such counsel shall be at the expense of such indemnified party or
parties unless (i) the employment of such counsel shall have been authorized in
writing by the indemnifying parties in connection with the defense of such
action at the expense of the indemnifying party, (ii) the indemnifying parties
shall not have employed counsel reasonably satisfactory to such indemnified
party to take charge of the defense of such action within a reasonable time
after notice of commencement of the action or (iii) such indemnified party or
28
<PAGE> 29
parties shall have reasonably concluded, upon advice of counsel to such
indemnified party or parties, that a conflict of interest exists which makes
representation by counsel chosen by the indemnifying party not advisable (in
which case the indemnifying parties shall not have the right to direct the
defense of such action on behalf of the indemnified party or parties), in any
of which events such fees and expenses of one additional counsel shall be borne
by the indemnifying parties. In no event shall the indemnifying parties be
liable for reasonable fees and expenses of more than one counsel (in addition
to any local counsel) separate from their own counsel for all indemnified
parties in connection with any one action or separate but similar or related
actions in the same jurisdiction arising out of the same general allegations or
circumstances. Anything in this Section 7 to the contrary notwithstanding, an
indemnifying party shall not be liable for any settlement of any claim or
action effected without its written consent.
(d) In order to provide for just and equitable contribution in
any case in which (i) an indemnified party makes a claim for indemnification
pursuant to this Section 7, but it is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the expiration
of time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
the express provisions of this Section 7 provide for indemnification in such
case, or (ii) contribution under the Securities Act may be required, then each
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid as a result of such losses, claims, damages,
expenses or liabilities (or actions, suits, proceedings or litigation in respect
thereof) (A) in such proportion as is appropriate to reflect the relative
benefits received by each of the contributing parties, on the one hand, and the
party to be indemnified on the other hand, from the offering of the Preferred
Stock or (B) if the allocation provided by clause (A) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
each of the contributing parties, on the one hand, and the party to be
indemnified, on the other hand, in connection with the statements or omissions
that resulted in such losses, claims, damages, expenses or liabilities, as well
as any other relevant equitable considerations. The relative benefits received
by the Company, on the one hand, and the Underwriters, on the other, shall be
deemed to be in the same proportion as the total net proceeds from the offering
of the Preferred Stock (before deducting expenses) bear to the total discounts
received by the Underwriters hereunder, in each case as set forth in the table
on the cover page of the Prospectus. Relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or by the Underwriters, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such untrue statement or omission. The amount paid or
payable by an indemnified party as a result of the losses, claims, damages,
expenses or liabilities (or actions, suits, proceedings or litigation in respect
thereof) referred to above in this subsection (d) shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating, preparing or defending any such action, claim,
suit, proceeding or litigation. Notwithstanding the provisions of this
subsection (d), the Underwriters shall not be required to contribute any amount
in excess of the discount applicable to the Preferred Stock purchased by the
Underwriters hereunder. No person guilty of fraudulent misrepresentation
(within the meaning of Section 12(f) of the Securities Act) shall be entitled to
contribution from
29
<PAGE> 30
any person who was not guilty of such fraudulent misrepresentation. For
purposes of this Section 7, each person, if any, who controls the Company
within the meaning of the Securities Act, each executive officer of the Company
and each director of the Company shall have the same rights to contribution as
the Company, subject in each case to this subsection (d). Any party entitled
to contribution will, promptly after receipt of notice of commencement of any
action, suit, proceeding or litigation against such party in respect to which a
claim for contribution may be made against another party or parties under this
subsection (d), notify such party or parties from whom contribution may be
sought, but the omission so to notify such party or parties shall not relieve
the party or parties from whom contribution may be sought from any obligation
it or they may have hereunder or otherwise than under this subsection (d), or
to the extent that such party or parties were not adversely affected by such
omission. The contribution agreement set forth above shall be in addition to
any liabilities which any indemnifying party may have at common law or
otherwise.
8. Representations and Agreements to Survive Delivery. All
representations, warranties and agreements contained in this Agreement or
contained in certificates of officers of the Company submitted pursuant hereto
shall be deemed to be representations, warranties and agreements at the First
Time of Delivery and the Second Time of Delivery, as the case may be, and the
agreements of the Company and the provisions with respect to the payment of
expenses contained in Sections 5 and 9 and the respective indemnity agreements
contained in Section 7 hereof shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of the
Underwriters, the Company, the Subsidiary or any controlling person, and shall
survive termination of this Agreement or the issuance and delivery of the
Depositary Shares to the Underwriters.
9. Termination.
(a) Subject to subsection (b) of this Section 9, the
Underwriters shall have the right to terminate this Agreement (i) if any
domestic or international event or act or occurrence has disrupted, or in the
Underwriters' reasonable and good faith opinion will in the immediate future
disrupt the United States financial markets; or (ii) if any material adverse
change in the United States financial markets shall have occurred; or (iii) if
trading on the New York Stock Exchange, the American Stock Exchange or in the
over-the-counter market shall have been suspended, or minimum or maximum prices
for trading shall have been fixed, or maximum ranges for prices for securities
shall have been required on the over-the-counter market by the NASD or by order
of the Commission or any other government authority having jurisdiction; or
(iv) if the United States shall have become involved in a war or major
hostilities, or there shall have been an escalation in an existing war or major
hostilities, or a national emergency shall have been declared in the United
States; or (v) if a banking moratorium has been declared by a state or federal
authority; or (vi) if a moratorium in foreign exchange trading has been
declared; or (vii) if the Company or the Subsidiary shall have sustained a loss
material to the Company or the Subsidiary by fire, flood, accident, hurricane,
earthquake, theft, sabotage or other calamity or malicious act which, whether
or not such loss shall have been insured, will, in the Underwriters' opinion,
make it inadvisable to proceed with the delivery of the Securities; or (viii)
if there shall have been such a material adverse change in the general market,
political or economic conditions in the United States or
30
<PAGE> 31
elsewhere, as in the Underwriters' judgment would make it inadvisable to
proceed with the offering, sale and/or delivery of the Depositary Shares.
(b) If this Agreement is terminated by the Underwriters in
accordance with the provisions of Section 9(a) or 10 hereof or if this Agreement
shall not be carried out within the time specified herein, or any extension
thereof granted to the Underwriters, by reason of any failure on the part of the
Company to perform any undertaking in this Agreement or satisfy any condition of
this Agreement by it to be performed or satisfied (including, without
limitation, pursuant to Section 6, 9 or 10 hereof), then the Company shall
promptly reimburse and indemnify the Underwriters for all of its reasonable
out-of-pocket expenses, including the fees and disbursements of counsel for the
Underwriters. Notwithstanding any contrary provision contained in this
Agreement, any election hereunder or any termination of this Agreement
(including, without limitation, pursuant to Sections 6, 9 and 10 hereof), and
whether or not this Agreement is otherwise carried out, the provisions of
Section 5 and Section 7 shall not be in any way affected by such election or
termination or failure to carry out the terms of this Agreement or any part
hereof.
10. Default by the Company. If the Company shall fail at the
First Time of Delivery or the Second Time of Delivery, as applicable, to sell
and deliver the number of Securities which it is obligated to sell hereunder on
such date against payment therefor, then the obligations of the Underwriters
under this Agreement shall terminate (or, if such default shall occur with
respect to any Option Shares to be purchased on the First Time of Delivery or
the Second Time of Delivery, the Underwriters may, at their option, by notice
from the Underwriters to the Company, terminate the Underwriters' obligation to
purchase Option Shares from the Company on such date) without any liability on
the part of any non-defaulting party other than pursuant to Sections 5, 7 and 9
hereof. No action taken pursuant to this Section 10 shall relieve the Company
from liability, if any, in respect of such default.
11. Effective Time of Agreement. This Agreement shall become
effective (i) if Rule 430A under the Securities Act is not used, when the
Underwriters and the Company shall have received notification of the
effectiveness of the Registration Statement, or (ii) if Rule 430A under the Act
is used, when the parties hereto have executed and delivered this Agreement.
If either the initial public offering price or the purchase price per Share has
not been agreed upon prior to 5:00 p.m., New York time, on the fifteenth full
business day after the Registration Statement shall have become effective, this
Agreement shall thereupon terminate without liability to the Company or the
Underwriters except as herein expressly provided. Until this Agreement becomes
effective as aforesaid, it may be terminated (A) by the Company by notifying
the Underwriters, or (B) by the Underwriters by notifying the Company.
Notwithstanding the foregoing, the provisions of this Section 11 and of
Sections 5, 7 and 9 hereof shall at all times be in full force and effect.
12. Notices. All notices and communications hereunder, except as
herein otherwise specifically provided, shall be given in writing and shall be
deemed to have been duly given if mailed or transmitted by any standard form of
telecommunication and shall be effective upon actual receipt. Notices to the
Underwriters shall be directed to them at Raymond James & Associates, Inc., 880
Carillon Parkway, St. Petersburg, Florida 33716, Attention: [Clarke B.
31
<PAGE> 32
Futch] and Forum Capital Markets L.P., 53 Forest Avenue, Old Greenwich,
Connecticut 06870, Attention: [Craig T. Slaughter], with a copy to Haynes and
Boone, LLP, 901 Main Street, Dallas, Texas 75202, Attention: William L. Boeing.
Notices to the Company shall be directed to the Company at 4925 Greenville
Avenue, Suite 1400, Dallas, Texas 75206, Attention: Philip D. Devlin, with a
copy to Akin, Gump, Strauss, Hauer & Feld, L.L.P., 1700 Pacific Avenue, Suite
4100, Dallas, Texas 75201, Attention: Diane B. Muse.
13. Parties. This Agreement shall inure solely to the benefit of and
shall be binding upon the Underwriters, the Company and the controlling persons,
directors and officers referred to in Section 7 hereof, and their respective
successors, legal representatives and assigns, and no other person shall have or
be construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provisions herein contained.
No purchaser of Preferred Stock from the Underwriters shall be deemed to be a
successor by reason merely of such purchase.
14. Construction. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Texas
without giving effect to choice of law or conflict of laws principles.
15. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall be deemed to be one and the same instrument.
16. Entire Agreement; Amendments. This Agreement constitutes the
entire agreement of the parties hereto and supersedes all prior written or oral
agreements, understandings and negotiations with respect to the subject matter
hereof. This Agreement may not be amended except in a writing signed by the
Underwriters and the Company.
* * *
32
<PAGE> 33
If the foregoing correctly sets forth the understanding between the
Underwriters and the Company, please so indicate in the space provided below
for that purpose, whereupon this letter shall constitute a binding agreement
among us.
Very truly yours,
NATIONAL ENERGY GROUP, INC.
By:
---------------------------
Name:
----------------------
Title:
---------------------
Confirmed and accepted as of
the date first above written.
RAYMOND JAMES & ASSOCIATES, INC.
By:
---------------------------
Name:
----------------------
Title:
---------------------
FORUM CAPITAL MARKETS L.P.
By:
---------------------------
Name:
----------------------
Title:
---------------------
33
<PAGE> 34
SCHEDULE I
<TABLE>
<CAPTION>
Number of
Option Shares
Number of Firm to be Purchased
Shares to be if Maximum
Purchased from Option
Underwriter Company Exercised
- ----------- --------------- -----------------
<S> <C> <C>
Raymond James & Associates, Inc. ..........
Forum Capital Markets, L.P. ...............
--------- -------
2,000,000 300,000
========= =======
</TABLE>
34
<PAGE> 35
ANNEX I
Subsidiaries
<TABLE>
<CAPTION>
Jurisdictions in
Ownership which Qualified to
Name Jurisdiction of Incorporation Percentage Conduct Business
- ------------ ------------------------------ ----------------- -------------------
<S> <C> <C> <C>
</TABLE>
<PAGE> 1
EXHIBIT 4.1
CERTIFICATE OF DESIGNATIONS
OF
PREFERRED STOCK
OF
NATIONAL ENERGY GROUP, INC.
TO BE DESIGNATED
____% SERIES F CONVERTIBLE PREFERRED STOCK
-------------------------
Pursuant to Section 151(g) of the
General Corporation Law of the State of Delaware
-------------------------
The undersigned DO HEREBY CERTIFY that the following resolution was duly
adopted by the Board of Directors of National Energy Group, Inc., a Delaware
corporation (the "Corporation"), in accordance with Section 141(f) of the
General Corporation Law of the State of Delaware (the "DGCL"):
"RESOLVED, that pursuant to the authority conferred on the Board of
Directors of the Corporation by the Corporation's Certificate of Incorporation,
the issuance of preferred stock, par value $1.00 per share, of the Corporation
which shall consist of an aggregate of up to [300,000] shares of preferred
stock be, and the same hereby is, authorized; and the Chairman and Chief
Executive Officer and Secretary of the Corporation be, and they hereby are,
authorized and directed to execute and file with the Secretary of State of the
State of Delaware the Certificate of Designations of ____% Series F Convertible
Preferred Stock of the Corporation fixing the designations, powers, preferences
and rights of the shares of such preferred stock, and the qualifications,
limitations or restrictions thereof (in addition to the designations, powers,
preferences and rights, and the qualifications, limitations or restrictions
thereof, set forth in the Certificate of Incorporation which may be applicable
to the Corporation's preferred stock), as follows:
1. NUMBER OF SHARES; DESIGNATION. An aggregate of up to [300,000]
shares of preferred stock, par value $1.00 per share, of the Corporation are
hereby designated as ____% Series F Convertible Preferred Stock (the "Series F
Preferred Stock"). The number of authorized shares of the Series F Preferred
Stock may be reduced by the Board of Directors of the Corporation by the filing
of a certificate pursuant to the provisions of the DGCL stating that the
reduction has been so authorized. In addition, the number of authorized shares
of the Series F Preferred Stock may be increased by the Board of Directors of
the Corporation, but it shall be a condition to the issuance of any additional
shares of the Series F Preferred Stock so authorized that such shares be
registered under the Securities Act of 1933, as amended (the "Securities Act"),
and admitted to trading on the Private Offerings, Resale and Trading through
Automated Linkages ("PORTAL") Market, if the shares of the Series F Preferred
Stock are then listed on PORTAL, or listed on the Nasdaq National Market or
other national securities
<PAGE> 2
exchange on which shares of the Series F Preferred Stock may then be listed.
Furthermore, the Board may authorize Depositary Shares representing a 1/10
interest in the Series F Preferred Stock (the "Depositary Shares").
2. RANK. The Series F Preferred Stock shall, with respect to payment
of dividends, redemption payments and rights upon liquidation, dissolution or
winding up of the affairs of the Corporation, rank (a) senior and prior to the
Common Stock, par value $0.01 per share, of the Corporation (the "Common
Stock"); (b) pari passu with (i) the currently existing Series D and E preferred
stock of the Corporation and (ii) any additional preferred stock convertible
into other equity securities of the Corporation that may in the future be issued
by the Corporation, except and to the extent any such convertible preferred
stock is (x) created or assumed as a result of a merger or consolidation and is
already senior by its stated terms at the time of its issue and immediately
prior to the merger or consolidation (the "Senior Merger Preferred"), or (y) is
stated to be junior to the Series F Preferred Stock in the related Certificate
of Designations or amendment to the Corporation's Certificate of Incorporation
(all shares identified in this clause (b)(y) and in clause (a) which are junior
to the shares of the Series F Preferred Stock with respect to redemption,
payment and rights upon liquidation, dissolution or winding up of the affairs of
the Corporation being hereinafter referred to as "Junior Liquidation Shares")
and (ii) any preferred stock that is not convertible for other equity securities
of the Corporation, except and to the extent any such preferred stock is stated
to be senior to the Series F Preferred Stock in the related Certificate of
Designations or amendment to the Corporation's Certificate of Incorporation (all
shares identified in this clause (b) which are pari passu with the shares of the
Series F Preferred Stock with respect to the payment of dividends are
hereinafter referred to as "Parity Dividend Shares" and all shares identified in
this clause (b) which are pari passu with the shares of the Series F Preferred
Stock with respect to redemption, payment and rights upon liquidation,
dissolution or winding up of the affairs of the Corporation being hereinafter
referred to as "Parity Liquidation Shares"); and (c) junior and subordinate to
(i) the currently existing Series B and Series C preferred stock, (ii) any
additional preferred stock which may in the future be issued by the Corporation
that is not convertible for other equity securities of the Corporation, but only
to the extent any such non-convertible preferred stock is stated to be senior to
the Series F Preferred Stock in the related Certificate of Designations or
amendment to the Corporation's Certificate of Incorporation and (iii) any Senior
Merger Preferred (all shares identified in this clause (c) which are senior to
the shares of the Series F Preferred Stock with respect to the payment of
dividends are hereinafter referred to as "Senior Dividend Shares" and all shares
identified in this clause (c) which are senior to the shares of the Series F
Preferred Stock with respect to redemption, payment and rights upon liquidation,
dissolution or winding up of affairs of the Corporation being hereinafter
referred to as "Senior Liquidation Shares"). Except for the Senior Merger
Preferred, the Corporation shall not, without the consent of the holders of at
least a majority of the Series F Preferred Stock, create, authorize or issue, or
reclassify any authorized stock of the Corporation into, or create, authorize or
issue any obligation or security convertible or exchangeable into or evidencing
a right to purchase, any shares of any class of Capital Stock of the Corporation
ranking senior to the Series F Preferred Stock, except for non-convertible
preferred stock, which may be authorized and issued without such consent and
Senior Merger Preferred. The Corporation may issue additional series of
preferred stock ranking on parity with the Series F Preferred Stock without the
consent of the holders of the Series F Preferred Stock.
3. DIVIDENDS. (a) The cash dividend rate on shares of the Series F
Preferred Stock shall be _____% per annum. Dividends on shares of the Series F
Preferred Stock shall be fully cumulative, accruing, without interest, from the
date of original issuance of the Series F Preferred Stock and shall be payable
quarterly in arrears, when, as and if declared by the Board
2
<PAGE> 3
of Directors out of funds legally available for the payment of cash dividends,
on March 31, June 30, September 30 and December 31 of each year, commencing
March 31, 1998, except that if such date is not a business day then the
dividend shall be payable on the first immediately succeeding business day (as
used herein, the term "business day" shall mean any day except a Saturday,
Sunday or day on which banking institutions are legally authorized to close in
New York, New York) (each such period being hereinafter referred to as
"Quarterly Dividend Period"). Each dividend shall be paid to the holders of
record of shares of the Series F Preferred Stock as they appear on the stock
register of the Corporation on the record date, not less then 10 nor more than
60 days preceding the payment date thereof, as shall be fixed by the Board of
Directors of the Corporation. Dividends payable for each Quarterly Dividend
Period shall be computed by dividing the annual dividend by four (rounded to
the nearest cent). Dividends payable for any partial Quarterly Dividend Period
shall be computed on the basis of a 360-day year of twelve 30-day months.
Dividends on account of arrearages for any past Quarterly Dividend Period may
be declared and paid at any time, without reference to any regular dividend
payment date, to holders of record on such date, not exceeding 45 days
preceding the payment date thereof, as may be fixed by the Board of Directors
of the Corporation. No interest shall be payable with respect to any dividend
payment that may be in arrears. Holders of Shares of the Series F Preferred
Stock called for redemption between the close of business on a dividend payment
record date and the close of business on the corresponding dividend payment
date shall, in lieu of receiving such dividend on the dividend payment date
fixed therefor, receive such dividend payment on the date fixed for redemption
together with all other accrued and unpaid dividends to the date fixed for
redemption. The holders of shares of the Series F Preferred Stock shall not be
entitled to any dividends other than the cash dividends provided for in this
paragraph
(b) No dividends, except as described in the next succeeding
sentence, shall be declared or paid or set apart for payment on any Parity
Dividend Shares for any period unless full cumulative dividends have been or
contemporaneously are declared and paid or declared and set apart for payment
with respect to the Series F Preferred Stock through the most recent Quarterly
Dividend Period ending on or prior to the date of payment (or the date of
setting apart for payment) of such dividends on such Parity Dividend Shares.
Unless dividends accrued and payable but unpaid on shares of the Series F
Preferred Stock and any Parity Dividend Shares at the time outstanding have
been paid in full, all dividends declared by the Corporation upon shares of the
Series F Preferred Stock or Parity Dividend Shares shall be declared pro rata
with respect to all such shares, so that the amounts of any dividends declared
on shares of the Series F Preferred Stock and the Parity Dividend Shares shall
in all cases bear to each other the same ratio that, at the time of the
declaration, all accrued but unpaid dividends on shares of the Series F
Preferred Stock and the other Parity Dividend Shares, respectively, bear to
each other.
(c) If at any time the Corporation has failed to pay or set apart for
payment all accrued dividends on any shares of the Series F Preferred Stock
through the then most recent Quarterly Dividend Period, the Corporation shall
not, and shall not permit any Subsidiary to:
(i) declare or pay or set aside for payment any
dividend or other distribution on or with respect to any Junior Dividend
Shares, whether in cash, securities, obligations or otherwise (other
than dividends or distributions paid in shares, options, warrants or
rights to subscribe for or purchase shares, which are both Junior
Dividend Shares and Junior Liquidation Shares); or
3
<PAGE> 4
(ii) redeem, purchase or otherwise acquire, or set apart
money for a sinking or other analogous fund for the redemption, purchase
or other acquisition of any Parity Dividend Shares, Junior Dividend
Shares, Parity Liquidation Shares or Junior Liquidation Shares for any
consideration (except by conversion into or exchange for shares which
are both Junior Liquidation Shares and Junior Dividend Shares)
unless, in each case, all dividends accrued on shares of the Series F
Preferred Stock through the most recent Quarterly Dividend Period and on
any Parity Dividend Shares have been or contemporaneously are declared
and paid in full or are declared and a sum sufficient for the payment
thereof is set aside for such payment.
(d) Any reference to "distribution" contained in this paragraph 3
shall not be deemed to include any distribution made in connection with any
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary.
4. LIQUIDATION. (a) The liquidation value of shares of the Series
F Preferred Stock, in case of the voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, shall be $500.00 per share
($50.00 per Depositary Share), plus an amount equal to the dividends accrued
and unpaid thereon, whether or not earned or declared, to the payment date
(such aggregate total being hereinafter referred to as the "Aggregate
Liquidation Preference").
(b) In the event of any voluntary liquidation, dissolution or winding
up of the Corporation, the holders of such shares of the Series F Preferred
Stock (i) shall not be entitled to receive the liquidation value of the shares
held by them until the liquidation value of all Senior Liquidation Shares shall
have been paid in full and (ii) shall be entitled to receive the liquidation
value of such shares held by them in preference to and in priority over
distributions upon the Junior Liquidation Shares. Upon payment in full of the
liquidation value to which the holders of shares of the Series F Preferred
Stock are entitled, the holders of shares of the Series F Preferred Stock will
not be entitled to any further participation in any distribution of assets by
the Corporation. If the assets of the Corporation are not sufficient to pay in
full the liquidation value payable to the holders of shares of the Series F
Preferred Stock and the liquidation value payable to the holders of any Parity
Liquidation Shares, the holders of all such shares shall share ratably in such
distributions of assets in accordance with the amounts that would be payable on
the distribution if the amounts to which the holders of shares of the Series F
Preferred Stock and the holders of Parity Liquidation Shares are entitled were
paid in full.
(c) Neither a consolidation or merger of the Corporation with or into
any other entity, nor a merger of any other entity with or into the
Corporation, nor a sale or transfer of all or any part of the Corporation's
assets for cash or securities or other Property shall be considered a
liquidation, dissolution or winding up of the Corporation within the meaning of
this paragraph 4.
(d) Written notice of any liquidation, dissolution or winding up of
the Corporation, stating the payment date or dates when and the place or places
where the amounts distributable in such circumstances shall be payable, shall
be given by first-class mail, postage prepaid, not less the 30 days prior to
any payment date stated therein, to the holders of record of shares of the
Series F Preferred Stock at their respective addresses as the same shall appear
on the books of the transfer agent for the Series F Preferred Stock.
4
<PAGE> 5
5. OPTIONAL REDEMPTIONS FOR CASH. (a) The shares of the Series F
Preferred Stock are not redeemable by the Corporation prior to January 2, 2001.
Subject to the restrictions in paragraph 3 above, shares of the Series F
Preferred Stock will be redeemable at the option of the Corporation, in whole or
in part, from and after January 2, 2001 at the following redemption prices per
share (In each case, together with an amount equal to the dividends accrued and
unpaid thereon, whether or not declared, to the redemption date):
<TABLE>
<CAPTION>
During the 12-month period
commencing , Redemption Price
------------------------------- ----------------
<S> <C>
__________ $__________
__________ $__________
__________ $__________
__________ and thereafter $500.00 ($50.00
per Depositary
Share)
</TABLE>
(b) Not less than 30 nor more than 60 days prior to the date fixed
for any redemption of shares of the Series F Preferred Stock pursuant to this
paragraph 5, a notice specifying the time and place of the redemption and the
number of shares to be redeemed shall be given by first-class mail, postage
prepaid, to the holders of record of the shares of the Series F Preferred Stock
to be redeemed at their respective addresses as the same shall appear on the
books of the transfer agent for the Series F Preferred Stock, calling upon each
holder of record to surrender to the Corporation at such place as shall be
designated in such notice on the redemption date such holder's certificate or
certificates representing the number of shares specified in the notice of
redemption. Neither failure to mail such notice, nor any defect therein or in
the mailing thereof, to any particular holder shall affect the sufficiency of
the notice or the validity of the proceedings for redemption with respect to
any other holder. Any notice mailed in the manner herein provided shall be
conclusively presumed to have been duly given whether or not the holder
receives the notice. On or after the redemption date, each holder of shares of
the Series F Preferred Stock to be redeemed shall present and surrender such
holder's certificate or certificates for such shares to the Corporation at the
place designated in the redemption notice and thereupon the redemption price of
the shares shall be paid to or on the order of the Person whose name appears on
such certificate or certificates as the owner thereof, and each surrendered
certificate shall be canceled. In case less than all the shares represented by
any such certificate are redeemed, a new certificate shall be issued to the
holder representing the unredeemed shares of the Series F Preferred Stock.
(c) If a notice of redemption has been given pursuant to this
paragraph 5 and if, on or before the date fixed for redemption, the funds
necessary for such redemption shall have been set aside by the Corporation,
separate and apart from its other funds, in trust for the pro rata benefit of
the holders of the shares of the Series F Preferred Stock so called for
redemption, then, notwithstanding that any certificates for such shares have
not been surrendered for cancellation, on the redemption date dividends shall
cease to accrue on the shares of the Series F Preferred Stock to be redeemed,
and at the close of business on the redemption date the
5
<PAGE> 6
holders of such shares shall cease to be stockholders with respect to those
shares, shall have no interest in or claims against the Corporation by virtue
thereof and shall have no voting or other rights with respect thereto, except
the right to receive the money payable upon such redemption, without interest
thereon, upon surrender (and endorsement, if required by the Corporation) of
their certificates, and the shares evidenced thereby shall no longer be
outstanding. Subject to applicable escheat laws, any money so set aside by the
Corporation and unclaimed at the end of two years from the redemption date
shall revert to the general funds of the Corporation, after which reversion the
holders of such shares so called for redemption shall look only to the general
funds of the Corporation for the payment of the redemption price. Any interest
accrued on funds so deposited shall be paid to the Corporation from time to
time.
(d) If a notice of redemption has been given pursuant to this paragraph
5, and any holder of shares of the Series F Preferred Stock shall, prior to the
date fixed for redemption, give written notice to the Corporation pursuant to
paragraph 6 or 10 below of the conversion of any or all of the shares to be
redeemed by the holder, then such redemption shall not become effective as to
such shares to be converted and such conversion shall become effective as
provided in paragraph 6 or 10 below, whereupon any funds deposited by the
Corporation, or on its behalf, with a payment agent or segregated and held in
trust by the Corporation for the redemption of such shares shall (subject to any
right of the holder of such shares to receive the dividend payable thereon as
provided in paragraph 6 or 10 below) immediately upon such conversion be
returned to the Corporation or, if then held in trust by the Corporation, shall
be discharged from the trust.
(e) In every case of redemption of less than all of the outstanding
shares of the Series F Preferred Stock pursuant to this paragraph 5, the shares
to be redeemed shall be selected pro rata or by lot or in such other manner as
the Board of Directors may equitably determine, as may be prescribed by
resolution of the Board of Directors of the Corporation, provided that only
whole shares shall be selected for redemption. Notwithstanding the foregoing,
the Corporation shall not redeem any of the shares of the Series F Preferred
Stock at any time outstanding until all dividends accrued and in arrears upon
all shares of the Series F Preferred Stock then outstanding shall have been paid
for all past dividend periods.
6. CONVERSION. (a) Holders of shares of the Series F Preferred
Stock will have the right, exercisable at any time prior to redemption of such
shares (as described in paragraph 5), to convert shares of the Series F
Preferred Stock into shares of Common Stock (calculated as to each conversion
to the nearest whole share) at the conversion price of $_____, subject to
adjustment as described below (the "Conversion Price"). The number of shares of
Common Stock into which each share of the Series F Preferred Stock shall be
convertible shall be determined by dividing the Aggregate Liquidation
Preference of such share by the Conversion Price then in effect. In the case of
shares of the Series F Preferred Stock called for redemption, conversion rights
will expire at the close of business on the redemption date. No payment or
adjustment for accrued dividends on the shares of the Series F Preferred Stock
is to be made on conversion, but holders of record of shares of the Series F
Preferred Stock on a record date fixed for the payment of a dividend on such
shares shall be entitled to receive the dividend notwithstanding the conversion
of the shares prior to the dividend payment date. A share of the Series F
Preferred Stock may not be converted in part.
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<PAGE> 7
(b) In order to exercise the conversion right, the holder of each
share of the Series F Preferred Stock to be converted shall surrender the
certificate representing such share, duly endorsed or assigned to the
Corporation or in blank, at the office of the transfer agent for the Series F
Preferred Stock in New York, New York and shall give written notice to the
Corporation in the form of Exhibit A attached hereto. Such notice shall also
state the name or names (with address) in which the certificate or certificates
for the shares of Common Stock which shall be issuable upon such conversion
shall be issued, and shall be accompanied by funds in an amount sufficient to
pay any transfer or similar tax required by the provisions of paragraph 6(e)
below. Each share surrendered for conversion shall, unless the shares issuable
on conversion are to be issued in the same name as the name in which such share
of the Series F Preferred Stock is registered, be duly endorsed by, or be
accompanied by, instruments of transfer (in each case, in form reasonably
satisfactory to the Corporation), duly executed by the holder or such holder's
duly authorized attorney-in-fact.
(c) As promptly as practicable after the surrender of certificates
for shares of the Series F Preferred Stock for conversion and the receipt of
such notice and funds, if any, as aforesaid, the Corporation shall issue and
shall deliver to such holder, or on such holder's written order, a certificate
or certificates for the number of shares of Common Stock issuable upon the
conversion of such shares of the Series F Preferred Stock in accordance with
the provisions of this paragraph 6, and a check or cash in respect of any
fractional interest in respect of a share of Common Stock arising upon such
conversion, as provided in paragraph 6(d) below. Each conversion with respect
to such shares of the Series F Preferred Stock shall be deemed to have been
effected immediately prior to the close of business on the date on which the
certificates for shares of the Series F Preferred Stock shall have been
surrendered (accompanied by the funds, if any, required by paragraph 6(e)
below) and such notice shall have been received by the Corporation as
aforesaid, and the Person or Persons entitled to receive the Common Stock
issuable upon such conversion shall be deemed for all purposes to be the record
holder or holders of such Common Stock upon that date.
(d) No fractional shares of Common Stock or scrip representing
fractional shares shall be issued upon conversion of shares of the Series F
Preferred Stock. If more than one share of the Series F Preferred Stock shall
be surrendered for conversion at one time by the same holder, the number of
full shares of Common Stock issuable upon conversion thereof shall be computed
on the basis of the aggregate number of shares of the Series F Preferred Stock
so surrendered. Instead of any fractional share of Common Stock otherwise
issuable upon conversion of any shares of the Series F Preferred Stock, the
Corporation shall pay a cash adjustment in respect of such fraction based on
the last sales price of the Common Stock at the close of business on the last
day on which the Common Stock traded preceding the date of conversion.
(e) If a holder converts shares of the Series F Preferred Stock, the
Corporation shall pay any and all documentary, stamp or similar issue or
transfer tax payable in respect of the issue or delivery of the shares of the
Series F Preferred Stock (or any other securities issued on account thereof
pursuant hereto) or Common Stock upon the conversion; provided, however, the
Corporation shall not be required to pay any such tax that may be payable
because any such shares are issued in a name other than the name of the holder.
In the event that the shares are to be issued in a name other than that of the
holder, the holder shall provide the funds necessary to pay any and all of the
foregoing taxes.
7
<PAGE> 8
(f) The Corporation shall reserve out of its authorized but unissued
Common Stock or its Common Stock held in treasury enough shares of Common Stock
to permit the conversion of all of the outstanding shares of the Series F
Preferred Stock. The Corporation shall from time to time, in accordance with
the DGCL, increase the authorized amount of its Common Stock if at any time the
authorized amount of its Common Stock remaining unissued shall not be
sufficient to permit the conversion of all shares of the Series F Preferred
Stock at the time outstanding. If any shares of Common Stock required to be
reserved for issuance upon conversion of shares of the Series F Preferred Stock
hereunder require registration with or approval of any governmental authority
under any federal or state law before the shares may be issued upon conversion,
the Corporation shall in good faith and as expeditiously as possible endeavor
to cause the shares to be so registered or approved. All shares of Common Stock
delivered upon conversion of the shares of the Series F Preferred Stock will,
upon delivery, be duly authorized and validly issued, fully paid and
nonassessable, free from all taxes, liens and charges with respect to the issue
thereof.
(g) The Conversion Price shall be subject to adjustment from time to
time as follows:
(i) If the Corporation shall (A) pay a dividend or
other distribution, in Common Stock, on any class of Capital
Stock of the Corporation, (B) subdivide or split the outstanding
Common Stock into a greater number of shares by any means or (C)
combine the outstanding Common Stock into a smaller number of
shares by any means (including, without limitation, a reverse
stock split), then in each such case the Conversion Price in
effect immediately prior thereto shall be adjusted so that the
holder of any share of the Series F Preferred Stock thereafter
surrendered for conversion shall be entitled to receive the
number of shares of Common Stock that such holder would have
owned or have been entitled to receive upon the happening of such
event had such share of the Series F Preferred Stock been
converted immediately prior to the relevant record date or, if
there is no such record date, the effective date of such event.
An adjustment made pursuant to this paragraph 6(g)(i) shall
become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend
or distribution and shall become effective immediately after the
effective date of such subdivision or combination, as the case
may be.
(ii) If the Corporation shall (A) issue or distribute
(at a price per share less than the Current Market Price per
share of such Capital Stock on the date of such issuance or
distribution) Capital Stock of the Corporation or of any
Subsidiary of the Corporation which is not wholly owned generally
to holders of Common Stock or to holders of any class or series
of Capital Stock which is convertible into or exchangeable or
exercisable for Common Stock (excluding an issuance or
distribution of Common Stock described in paragraph 6(g)(i)) or
(B) issue or distribute generally to such holders rights,
warrants, options or convertible or exchangeable securities
entitling the holder thereof to subscribe for, purchase, convert
into or exchange for Capital Stock at a price per share less than
the Current Market Price per share of such Capital Stock on the
date of issuance or distribution, then, in each such case, at the
earliest of (i) the date the Corporation enters into a firm
contract for such issuance or distribution, (ii) the
8
<PAGE> 9
record date for the determination of stockholders entitled to
receive any such Capital Stock or any such rights, warrants,
options or convertible or exchangeable securities or (iii) the
date of actual issuance or distribution of any such Capital Stock
or any such rights, warrants, options or convertible or
exchangeable securities, the Conversion Price shall be reduced by
multiplying the Conversion Price in effect immediately prior to
such earliest date by:
(x) if such Capital Stock is Common Stock, a
fraction the numerator of which is the number of shares of
Common Stock outstanding on such earliest date plus the
number of shares of Common Stock which could be purchased
at the Current Market Price per share of Common Stock on
the date of such issuance or distribution with the
aggregate consideration (based on the Fair Market Value
thereof) received or receivable by the Corporation in
connection with such issuance or distribution and such
consideration received or receivable by the Corporation
upon the conversion, exchange, exercise, purchase or
subscription of all such rights, warrants, options or
convertible or exchangeable securities (the "Aggregate
Consideration"), and the denominator of which is the
number of shares of Common Stock outstanding on such
earliest date plus the number of shares of Common Stock to
be so issued or distributed or to be issued upon the
conversion, exchange, exercise, purchase or subscription
of all such rights, warrants, options or convertible or
exchangeable securities; or
(y) if such Capital Stock is other than Common
Stock, a fraction the numerator of which is the Current
Market Price per share of Common Stock on such earliest
date minus an amount equal to (A) the difference between
(1) the Current Market Price per share of such Capital
Stock multiplied by the number of shares of such Capital
Stock to be so issued and (2) the Aggregate Consideration,
divided by (B) the number of shares of Common Stock
outstanding on such date, and the denominator of which is
the Current Market Price per share of Common Stock on such
earliest date.
Such adjustment shall be made successively whenever any such
Capital Stock, rights, warrants, options or convertible or
exchangeable securities are so issued or distributed. In
determining whether any rights, warrants, options or convertible
or exchangeable securities entitle the holders thereof to
subscribe for, purchase, convert into or exchange for shares of
such Capital Stock at less than such Current Market Price, there
shall be taken into account the Fair Market Value of any
consideration received or receivable by the Corporation for such
rights, warrants, options or convertible or exchangeable
securities. If any right, warrant, option or convertible or
exchangeable securities, the issuance of which resulted in an
adjustment in the Conversion Price pursuant to this paragraph
6(g)(ii), shall expire and shall not have been exercised, the
Conversion Price shall immediately upon such expiration be
recomputed to the Conversion Price which would have been in
effect if such right, warrant, option or convertible or
exchangeable
9
<PAGE> 10
securities had never been distributed or issued. Notwithstanding
anything contained in this paragraph to the contrary, (i) the
issuance of Capital Stock upon the exercise of such rights,
warrants or options or the conversion or exchange of such
convertible or exchangeable securities will not cause a further
adjustment in the Conversion Price; provided, however, that, if
the consideration payable upon such exercise, conversion or
exchange and/or the Capital Stock receivable thereupon are
changed after the time of the issuance or distribution of such
right, warrant, option or convertible or exchangeable security,
then such change shall be deemed to be the expiration thereof
without having been exercised and the issuance or distribution of
new options, rights, warrants or convertible or exchangeable
securities; (ii) the issuance of Common Stock upon the conversion
of the Series F Preferred Stock shall not cause an adjustment in
the Conversion Price; and (iii) the declaration, setting aside or
payment of dividends on the Series F Preferred Stock or any other
preferred stock that is senior to the Series F Preferred Stock
shall not cause an adjustment in the Conversion Price.
Notwithstanding anything contained in this Certificate to
the contrary, options, rights or warrants issued or distributed
by the Corporation, including options, rights or warrants
distributed prior to the date of this Certificate, to holders of
Common Stock generally which, until the occurrence of a specified
event or events (a "Trigger Event"), (i) are deemed to be
transferred with Common Stock, (ii) are not exercisable and (iii)
are also issued on a pro rata basis with respect to future
issuances of Common Stock, shall be deemed not to have been
issued or distributed for purposes of this paragraph 6(g)(ii)
(and no adjustment to the Conversion Price under this paragraph
6(g)(ii) will be required) until the occurrence of the earliest
Trigger Event. Upon the occurrence of a Trigger Event, such
options, rights or warrants shall continue to be deemed not to
have been issued or distributed for purposes of this paragraph
6(g)(ii) (and no adjustment to the Conversion Price under this
paragraph 6(g)(ii) will be required) if and for so long as each
holder of the Series F Preferred Stock who thereafter converts
such holder's Series F Preferred Stock shall be entitled to
receive upon such conversion, in addition to the shares of Common
Stock issuable upon such conversion, a number of such options,
rights or warrants, as the case may be, equal to the number of
options, rights or warrants to which a holder of the number of
shares of Common Stock equal to the number of shares of Common
Stock issuable upon conversion of such holder's Series F
Preferred Stock is entitled to receive at the time of such
conversion in accordance with the terms and provisions of and
applicable to such options, rights or warrants. Upon the
expiration of any such options, rights or warrants or at such
time, if any, as a holder of the Series F Preferred Stock is not
entitled to receive such options, rights or warrants upon
conversion of such holder's Series F Preferred Stock, an
adjustment (if any is required) to the Conversion Price shall be
made in accordance with this paragraph 6(g)(ii) with respect to
the issuance of all such options, rights and warrants as of the
date of issuance thereof, but subject to the provisions of the
preceding paragraph. If any such option, right or warrant,
including any such options, rights or warrants distributed prior
to the date of this Certificate, are subject to events, upon the
occurrence of which such options,
10
<PAGE> 11
rights or warrants become exercisable to purchase different
securities, evidences of indebtedness, cash, Properties or other
assets or different amounts thereof, then, subject to the
preceding provisions of this paragraph 6(g)(ii), the date of the
occurrence of any and each such event shall be deemed to be the
date of distribution and record date with respect to new options,
rights or warrants with such new purchase rights (and a
termination or expiration of the existing options, rights or
warrants without exercise thereof). In addition, in the event of
any distribution (or deemed distribution) of options, rights or
warrants, or any Trigger Event or other event of the type
described in the preceding sentence, that required (or would have
required but for the provisions of paragraph 6(g)(v) or this
paragraph 6(g)(ii)) an adjustment to the Conversion Price under
this paragraph 6(g)(ii) and such options, rights or warrants
shall thereafter have been redeemed or repurchased without having
been exercised, then the Conversion Price shall be adjusted upon
such redemption or repurchase to give effect to such
distribution, Trigger Event or other event, as the case may be,
as though it had instead been a cash distribution, equal on a per
share basis to the result of the aggregate redemption or
repurchase price received by holders of such options, rights or
warrants divided by the number of shares of Common Stock
outstanding as of the date of such repurchase or redemption, made
to holders of Common Stock generally as of the date of such
redemption or repurchase.
Notwithstanding anything contained in this paragraph
6(g)(ii) to the contrary, no adjustment shall be made in the
Conversion Price pursuant to this paragraph 6(g)(ii) with respect
to the issuance of Common Stock or options, warrants or other
rights to purchase Common Stock pursuant to any employee stock
purchase, bonus, award, grant, option or ownership plan
(including, without limitation, an employee stock ownership plan
which is part of an employee benefit plan qualified under Section
401 of the Internal Revenue Code of 1986, as amended (the "Code"),
an employee stock option or incentive stock option plan qualified
under Section 422 or any employee stock purchase plan under
Section 423(b) of the Code and a restricted stock plan), including
the issuance of Common Stock upon the exercise of such options,
warrants or other rights or for employee stock grants, where an
employee stock grant is (i) made to new employees, (ii) approved
by the Board of Directors of the Corporation, and (iii) in the
ordinary course of business; provided, that, for purposes of this
paragraph 6(g)(ii), except for employee stock grants, the term
"employee" includes directors, consultants and advisors and the
term "plan" means a plan, program or arrangement, approved by the
Board of Directors or a committee appointed thereunder, in which 5
or more Persons are eligible to participate (or, if only directors
or outside directors of the Corporation are eligible to
participate and there are fewer than 5 such directors or outside
directors, as the case may be, in which all of such directors or
outside directors, as the case may be, are eligible to
participate).
(iii) If the Corporation shall pay or distribute, as a
dividend or otherwise, generally to holders of Common Stock or
any class or series of Capital Stock which is convertible into or
exercisable or exchangeable for Common Stock any assets,
Properties or rights (including, without limitation, evidences of
11
<PAGE> 12
indebtedness of the Corporation, any Subsidiary or any other
Person, cash or Capital Stock or other securities of the
Corporation, any Subsidiary or any other Person, but excluding
payments and distributions as described in paragraph 6(g)(i) or
6(g)(ii), dividends and distributions in connection with the
liquidation, dissolution or winding up of the Corporation in its
entirety and distributions consisting solely of cash, which are
governed exclusively by paragraph 6(g)(iv)), then in each such
case the Conversion Price shall be reduced by multiplying the
Conversion Price in effect immediately prior to the date of such
payment or distribution by a fraction, the numerator of which is
the Current Market Price per share of Common Stock on the record
date for the determination of stockholders entitled to receive
such payment or distribution less the Fair Market Value per share
on such record date of the assets, Properties or rights so paid
or distributed, and the denominator of which is the Current
Market Price per share of Common Stock on such record date. Such
adjustment shall become effective immediately after such record
date. For purposes of this paragraph 6(g)(iii), such Fair Market
Value per share shall equal the aggregate Fair Market Value on
such record date of the assets, Properties or rights so paid or
distributed divided by the number of shares of Common Stock
outstanding on such record date.
(iv) If the Corporation shall, by dividend or otherwise,
make a distribution (other than in connection with the
liquidation, dissolution or winding up of the Corporation in its
entirety) generally to holders of Common Stock or any class or
series of Capital Stock which is convertible into or exercisable
or exchangeable for Common Stock (but not including any
distribution to holders of the Series F Preferred Stock or any
other preferred stock senior to the Series F Preferred Stock),
consisting solely of cash where (x) the sum of (i) the aggregate
amount of such cash plus (ii) the aggregate amount of all cash so
distributed (by dividend or otherwise) to such holders within the
12-month period ending on the record date for determining
stockholders entitled to receive such distribution with respect
to which no adjustment has been made to the Conversion Price
pursuant to this paragraph 6(g)(iv) exceeds (y) 10% of the result
of the multiplication of (1) the Current Market Price per share
of Common Stock on such record date times (2) the number of
shares of Common Stock outstanding on such record date, then the
Conversion Price shall be reduced, effective immediately prior to
the opening of business on the day following such record date, by
multiplying the Conversion Price in effect immediately prior to
the close of business on the day prior to such record date by a
fraction, the numerator of which is the Current Market Price per
share of Common Stock on such record date less the aggregate
amount of cash per share so distributed and the denominator of
which is such Current Market Price; provided, however, that, if
the aggregate amount of cash per share is equal to or greater
than such Current Market Price, then, in lieu of the foregoing
adjustment, adequate provision shall be made so that each holder
of the Series F Preferred Stock shall have the right to receive
upon conversion (with respect to each share of Common Stock
issued upon such conversion and in addition to the Common Stock
issuable upon conversion) the aggregate amount of cash per share
such holder of the Series F Preferred Stock would have received
had such holder's Series F Preferred Stock been converted
immediately prior to
12
<PAGE> 13
such record date. In no event shall the Conversion Price be
increased pursuant to this paragraph 6(g)(iv); provided, however,
that if such distribution is not so made, the Conversion Price
shall be adjusted to be the Conversion Price which would have
been in effect if such distribution had not been declared. For
purposes of this paragraph 6(g)(iv), such aggregate amount of
cash per share shall equal such sum divided by the number of
shares of Common Stock outstanding on such record date. No
adjustment shall be made for any distribution of cash which
aggregates to less than the foregoing amounts.
(v) The provisions of this paragraph 6(g) shall
similarly apply to all successive events of the type described in
this paragraph 6(g). Notwithstanding anything contained herein to
the contrary, no adjustment in the Conversion Price shall be
required unless such adjustment would require an increase or
decrease of at least 2% in the Conversion Price then in effect;
provided, however, that any adjustments which by reason of this
paragraph 6(g)(v) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All
calculations under this paragraph 6 shall be made by the
Corporation and shall be made to the nearest cent or to the
nearest one hundredth of a share, as the case may be.
Notwithstanding anything contained in this paragraph 6(g) to the
contrary, the Corporation shall be entitled to make such
reductions in the Conversion Price, in addition to those required
by this paragraph 6(g), as it in its discretion shall determine
to be advisable in order than any stock dividends, subdivision of
shares, distribution of rights to purchase stock or securities,
or distribution of securities convertible into or exchangeable
for stock hereafter made by the Corporation to its stockholders
shall not be taxable. Except as provided in this paragraph 6, no
adjustment in the Conversion Price will be made for the issuance
of Common Stock or any securities convertible into or
exchangeable for Common Stock or carrying the right to purchase
Common Stock or any securities so convertible or exchangeable.
(vi) In the event that, at any time as a result of an
adjustment made pursuant to paragraph 6(g)(i) through 6(g)(iv)
above, the holder of any share of the Series F Preferred Stock
thereafter surrendered for conversion shall become entitled to
receive any shares of the Corporation other than shares of the
Common Stock, thereafter the number of such other shares so
receivable upon conversion of any share of the Series F Preferred
Stock shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common Stock contained in
paragraphs 6(g)(i) through 6(g)(iv) above, and the other
provisions of this paragraph 6(g)(vi) with respect to the Common
Stock shall apply on like terms to any such other shares.
(h) In the event of (i) any reclassification or change of outstanding
Common Stock (other than a change in par value, or from par value to no par
value, or from no par value to par value, or as a result of a subdivision or
combination), (ii) any consolidation, merger or combination of the Corporation
with another corporation as a result of which holders of Common Stock shall be
entitled to receive securities or other Property (including cash) with respect
to or in exchange for Common Stock or (iii) any sale or conveyance of the
collective
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<PAGE> 14
Property of the Corporation and its Subsidiaries as, or substantially as, an
entirety to any other corporation as a result of which holders of Common Stock
shall be entitled to receive securities or other Property (including cash) with
respect to or in exchange for Common Stock, then lawful provision shall be made
as part of the terms of such transaction whereby the holder of each share of
the Series F Preferred Stock then outstanding shall have the right thereafter,
during the period such share shall be convertible, to convert such share only
into the kind and amount of securities, cash and other Property receivable upon
the reclassification, change, consolidation, merger, sale, transfer or share
exchange by a holder of the number of shares of Common Stock of the Corporation
into which a share of the Series F Preferred Stock might have been converted
immediately prior to the reclassification, change, consolidation, merger, sale,
transfer or share exchange. As a condition of such transaction, the
Corporation, the Person formed by the consolidation or resulting from the
merger or which acquires such assets or which acquires the Corporation's
shares, as the case may be, shall make provisions in its certificate or
articles of incorporation or other constituent document to establish such
right. The certificate or articles of incorporation or other constituent
document shall provide for adjustments which, for events subsequent to the
effective date of the certificate or articles of incorporation or other
constituent document, shall be as nearly equivalent as may be practicable to
the adjustments provided for in this paragraph 6. The provisions of this
paragraph 6(h) shall similarly apply to successive reclassifications, changes,
consolidations, mergers, sales, transfers or share exchanges.
(i) If:
(i) the Corporation shall take any action which would
require an adjustment in the Conversion Price pursuant to Section
6(g); or
(ii) the Corporation shall authorize the granting to the
holders of its Common Stock generally of rights or warrants to
subscribe for or purchase any shares of any class of Capital
Stock or any other rights or warrants; or
(iii) there shall be any reclassification or change of
the Common Stock (other than a subdivision or combination of its
outstanding Common Stock or a change in par value) or any
consolidation, merger or statutory share exchange to which the
Corporation is a party and for which approval of any stockholders
of the Corporation is required, or the sale or transfer of all or
substantially all of the assets of the Corporation; or
(iv) there shall be a voluntary or involuntary
dissolution, liquidation or winding up of the Corporation;
then, except as provided otherwise in paragraph 10, the Corporation shall cause
to be filed with the transfer agent for the Series F Preferred Stock and shall
cause to be mailed to the holders of shares of the Series F Preferred Stock at
their addresses as shown on the books of the transfer agent for the Series F
Preferred Stock, as promptly as possible, but at least 30 days prior to the
applicable date hereinafter specified, a notice stating (A) the date on which a
record is to be taken for the purpose of such dividend, distribution or
granting of rights or warrants, or, if a record is not to be taken, the date as
of which the holders of Common Stock of record to be entitled to such dividend,
distribution or rights or warrants are to be determined or (B) the date
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<PAGE> 15
on which such reclassification, change, consolidation, merger, statutory share
exchange, sale, transfer, dissolution, liquidation or winding up is expected to
become effective or occur, and the date as of which it is expected that holders
of Common Stock of record shall be entitled to exchange their shares of Common
Stock for securities or other Property deliverable upon such reclassification,
change, consolidation, merger, statutory share exchange, sale, transfer,
dissolution, liquidation or winding up. Failure to give such notice or any
defect therein shall not affect the legality or validity of the proceedings
described in this paragraph 6(i).
(j) Whenever the Conversion Price is adjusted as herein provided, the
Corporation shall promptly file with the transfer agent for the Series F
Preferred Stock a certificate of an officer of the Corporation setting forth
the Conversion Price after the adjustment and setting forth a brief statement
of the facts requiring such adjustment and a computation thereof. The
Corporation shall promptly cause a notice of the adjusted Conversion Price to
be mailed to each registered holder of shares of the Series F Preferred Stock.
(k) In any case in which paragraph 6(g) provides that an adjustment
shall become effective immediately after a record date for an event and the
date fixed for such adjustment pursuant to paragraph 6(g) occurs after such
record date but before the occurrence of such event, the Corporation may defer
until the actual occurrence of such event (i) issuing to the holder of any
shares of the Series F Preferred Stock converted after such record date and
before the occurrence of such event the additional shares of Common Stock
issuable upon such conversion by reason of the adjustment required by such
event over and above the Common Stock issuable upon such conversion before
giving effect to such adjustment and (ii) paying to such holder any amount in
cash in lieu of any fraction pursuant to paragraph 6(d).
(l) In case the Corporation shall take any action affecting the
Common Stock, other than actions described in this paragraph 6, which in the
opinion of the Board of Directors would materially adversely affect the
conversion right of the holders of the shares of the Series F Preferred Stock,
the Conversion Price may be adjusted, to the extent permitted by law, in such
manner, if any, and at such time, as the Board of Directors may determine to be
equitable in the circumstances; provided, however, that in no event shall the
Board of Directors be required to take any such action.
(m) The Corporation will endeavor to list the shares of Common Stock
required to be delivered upon conversion of shares of the Series F Preferred
Stock, prior to delivery, upon each national securities exchange, the Nasdaq
National Market or any similar system of automated dissemination of securities
prices, if any, upon which the Common Stock is listed at the time of delivery.
7. STATUS OF SHARES. All shares of the Series F Preferred Stock
that are at any time redeemed pursuant to paragraph 5 above or converted
pursuant to paragraph 6 above or paragraph 10 below, and all shares of the
Series F Preferred Stock that are otherwise reacquired by the Corporation and
subsequently canceled by the Board of Directors, shall have the status of
authorized but unissued shares of preferred stock, without designation as to
series, subject to reissuance by the Board of Directors as shares of any one or
more other series. Notwithstanding the foregoing, shares of Series F Preferred
Stock redeemed or otherwise reacquired by the
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<PAGE> 16
Corporation may be put in Treasury by the Corporation and would be available
for subsequent issuance upon a vote of the Board of Directors.
8. VOTING RIGHTS. (a) General. Except as provided by law,
holders of the Series F Preferred Stock will vote as a single class with the
holders of the Common Stock at annual or special meetings, and are entitled to
ten votes for each share of the Series F Preferred Stock owned by such holder
(one vote per Depositary Share).
(b) Dividend Defaults.
(i) If and whenever the Corporation misses payments on six
successive quarterly dividends payable on shares of the Series F
Preferred Stock, which dividend payments remain unpaid, or if the
holders of any class of preferred shares, including but not limited to,
the Series B, C, D and E preferred shares shall become entitled to elect
more than 50% of the Corporation's Board of Directors, then upon such
event, without the requirement of any additional action by the Board of
Directors or stockholders of the Corporation, the number of directors
constituting the Board of Directors of the Corporation shall
automatically be increased to such number as may be necessary to enable
the holders of shares of the Series F Preferred Stock, voting as a
single class, to elect two directors of the Corporation, and the holders
of shares of the Series F Preferred Stock, voting as a single class,
shall be entitled to elect such directors. At elections for such
directors, each holder of shares of the Series F Preferred Stock shall
be entitled to ten votes for each share of the Series F Preferred Stock
held by such holder (one vote per Depositary Share). Such right to vote
as a single class to elect directors shall, when vested, continue until
all dividends in default on the shares of the Series F Preferred Stock
shall have been paid in full or until such rights of the preferred
shares entitled to elect such majority of the Corporation's Board of
Directors to elect multiple directors has terminated, upon which time
such right to elect directors separately as a class shall cease, subject
to the same provisions for the vesting of such right to elect directors
separately as a class in the case of future dividend defaults or future
triggers of rights or Parity Dividend Shares to elect more than one
director.
(ii) Whenever such voting right shall have vested, such right
may be exercised initially either at a special meeting of the holders of
shares of the Series F Preferred Stock called as hereinafter provided or
at any annual meeting of stockholders held for the purpose of electing
directors, and thereafter at such meetings or by the written consent of
such holders pursuant to Section 228 of the GCL.
(iii) At any time when the voting right granted by this
paragraph 8(b) shall have vested in the holders of shares of the Series
F Preferred Stock entitled to vote thereon, and if such right shall not
already have been initially exercised, an officer of the Corporation
shall, upon written request of holders of record of 10% in the aggregate
of outstanding shares of the Series F Preferred Stock addressed to the
Chief Financial Officer of the Corporation, call a special meeting of
holders of shares of the Series F Preferred Stock. Such meeting shall be
held at the earliest practicable date upon the notice required for
annual meetings of stockholders at the place for holding annual meetings
of stockholders of the Corporation or, if none, at a place designated by
the
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<PAGE> 17
Chief Financial Officer of the Corporation. If such meeting shall not be
called by the proper officers of the Corporation within 30 days after
such written request is mailed to the Chief Financial Officer of the
Corporation, by registered mail, addressed to the Chief Financial
Officer of the Corporation at its principal office (such mailing to be
evidenced by the registry receipt issued by the postal authorities),
then the holders of record of 10% of the outstanding shares of the
Series F Preferred Stock may designate in writing any Person to call
such meeting at the expense of the Corporation, and such meeting may be
called by such Person so designated upon the notice required for annual
meetings of stockholders and shall be held at the same place as is
elsewhere provided in this paragraph 8(b)(iii). Any holder of shares of
the Series F Preferred Stock then outstanding that would be entitled to
vote at such meeting shall have access to the stock record books of the
Corporation for the purpose of causing a meeting of stockholders to be
called pursuant to the provisions of this paragraph 8(b)(iii).
Notwithstanding the provisions of this paragraph, however, no such
special meeting shall be called or held during a period within 30 days
immediately preceding the date fixed for the next annual meeting of
stockholders.
(iv) The directors elected pursuant to this paragraph 8(b)
shall serve until the next annual meeting or until their respective
successors shall be elected and shall qualify. Any director elected by
the holders of shares of the Series F Preferred Stock may be removed by,
and shall not be removed otherwise than by, the vote of the holders of a
majority of the outstanding shares of the Series F Preferred Stock who
were entitled to participate in such election of directors, voting as a
special class, at a meeting called for such purpose or by written
consent as permitted by law and the Certificate of Incorporation and
Bylaws of the Corporation. If the office of any director elected by the
holders of the shares of the Series F Preferred Stock, voting as a
class, becomes vacant by reason of death, resignation, retirement,
disqualification or removal from office or otherwise, the holders of the
Series F Preferred Stock, voting as a class, may choose a successor who
shall hold office for the unexpired term in respect of which such
vacancy occurred. Upon any termination of the right of the holders of
shares of the Series F Preferred Stock to vote for directors as herein
provided, the term of office of all directors then in office elected by
holders of shares of the Series F Preferred Stock, voting as a class,
shall terminate immediately. Whenever the terms of office of the
directors elected by the holders of shares of the Series F Preferred
Stock shall have expired, the number of directors shall be such number
as may be provided for pursuant to the Bylaws of the Corporation
irrespective of any increase made pursuant to the provisions of this
paragraph 8(b).
(v) So long as any shares of the Series F Preferred Stock are
outstanding, the Bylaws shall contain no provisions that would restrict
the exercise, by the holders of shares of the Series F Preferred Stock,
of the right to elect directors under the circumstances provided in
paragraph 8(b)(i) above.
(c) So long as any shares of the Series F Preferred Stock remain
outstanding, the consent of the holders of at least a majority of the shares of
the Series F Preferred Stock outstanding at the time, given in Person or by
proxy either in writing (as permitted by law and
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<PAGE> 18
the Certificate of Incorporation and Bylaws of the Corporation) or at any
special or annual meeting, shall be necessary to permit, effect or validate any
one or more of the following:
(i) the creation, authorization, issuance or reclassification
of any authorized stock of the Corporation into (or the creation,
authorization or issuance of any obligation or security convertible or
exchangeable into or evidencing a right to purchase) any share of
Capital Stock of the Corporation ranking senior to the Series F
Preferred Stock as to dividends or the distribution of assets upon
liquidation, dissolution or winding up, other than preferred stock which
is not convertible into other equity securities of the Corporation or
Senior Merger Preferred; or
(ii) the amendment, alteration or repeal, whether by merger,
consolidation or otherwise, of any of the provisions of the Certificate
of Incorporation (including this Certificate) or the Bylaws of the
Corporation which would adversely affect the relative rights,
preferences, qualifications, limitations or restrictions of the Series F
Preferred Stock or of the holders thereof; provided, however, that any
action permitted under the preceding clause (i) with respect to
preferred stock which is not convertible into other equity securities of
the Corporation or Senior Merger Preferred shall not be deemed to
adversely affect such rights, preferences, privileges or voting powers.
9. MANDATORY REDEMPTION. The shares of the Series F Preferred Stock
are not subject to mandatory redemption or sinking fund requirements.
10. SPECIAL CONVERSION RIGHTS OF HOLDERS UPON CERTAIN EVENTS
FOLLOWING A CHANGE OF CONTROL OF THE CORPORATION.
(a) Change of Control. If a Change of Control (as defined in
paragraph 10(d) below) with respect to the Corporation shall occur, and if at
the time of such occurrence the Market Value (as defined in paragraph 10(d)
below) of the Common Stock is less than the Conversion Price in effect at the
time of such occurrence, then each holder of shares of the Series F Preferred
Stock shall have the right, at the holder's option, for a period of 45 days
after the mailing of a notice by the Corporation that a Change of Control has
occurred, to convert all, but not less than all, of such holder's shares of the
Series F Preferred Stock at an adjusted Conversion Price per share equal to the
Special Conversion Price (as defined in paragraph 10(d) below). Upon such
conversion, the holder will receive Common Stock or the kind and amount of
cash, securities or other assets receivable upon such Change of Control by a
holder of the number of shares of Common Stock into which the Series F
Preferred Stock of the holder exercising the special conversion right would
have been convertible immediately prior to the Change of Control at the Special
Conversion Price. However, the Corporation or its successor may, at its option,
elect to provide the holder with cash equal to the Market Value of the number
of shares of Common Stock into which the holder's Series F Preferred Stock
would have been convertible immediately prior to such Change of Control at the
Special Conversion Price, but only if the Corporation, in its notice to holders
that a Change of Control has occurred, has notified such holder of the election
to provide cash in lieu of other consideration. Shares of the Series F
Preferred Stock that become convertible pursuant to a special conversion right
shall, unless so converted, remain convertible in accordance with paragraph 6.
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(b) Notice. Within 30 days after the occurrence of a Change in
Control, the Corporation shall mail to each registered holder of shares of the
Series F Preferred Stock a notice of the occurrence (the "Special Conversion
Notice") setting forth the following:
(i) the event constituting the Change of Control and that such
event entitles the holders of shares of the Series F Preferred Stock to
the special conversion right;
(ii) the Special Conversion Price;
(iii) the Conversion Price then in effect under paragraph 6 and
the continuing conversion rights, if any, thereunder;
(iv) the name and address of the paying agent and conversion
agent;
(v) that the holders who elect to convert shares of the Series
F Preferred Stock must satisfy the requirements of paragraph 10(c) and
must exercise their conversion right within the 45-day period after the
mailing of the Special Conversion Notice by the Corporation;
(vi) the conversion date upon exercise of the applicable
special conversion right;
(vii) the exercise of such conversion right is revocable by the
holders of shares of the Series F Preferred Stock at any time prior to
the conversion date by notice of withdrawal to the conversion agent;
(viii) no dividends on shares of the Series F Preferred Stock (or
portions thereof) tendered for conversion shall accrue from and after
the conversion date; and
(ix) whether the Corporation (or a successor corporation, if
applicable) has exercised its option to pay cash (specifying the amount
thereof per share) for all shares of the Series F Preferred Stock
tendered for conversion.
The Special Conversion Notice shall be given by first-class mail, postage
prepaid, to the holders of record of the shares of the Series F Preferred Stock
at their respective addresses as the same shall appear on the books of the
transfer agent for the Series F Preferred Stock. No failure of the Corporation
to give the foregoing notice shall limit any holder's right to exercise the
special conversion right hereunder.
(c) Exercise Procedures. A holder of shares of the Series F
Preferred Stock must exercise a special conversion right within the 45-day
period after the mailing of the Special Conversion Notice. Such right must be
exercised in accordance with paragraph 6(b) to the extent the procedures
therein are consistent with the provisions of this paragraph 10. Exercise of
such conversion right is revocable by the holders of shares of the Series F
Preferred Stock at any time prior to the conversion date by notice of
withdrawal to the conversion agent. Dividends on shares of the Series F
Preferred Stock tendered for conversion shall cease to accrue from and after
the conversion date. The conversion date with respect to the exercise of a
special
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conversion right arising upon a Change of Control shall be the 45th day after
the mailing of the Special Conversion Notice. In taking any action in
connection with any Change of Control or related special conversion right, the
Corporation will comply with all applicable federal securities laws and
regulations.
(d) Definitions. The following definitions shall apply to terms used
in this paragraph 10 and elsewhere in this Certificate:
(i) a "Change of Control" means the occurrence of any of the
following events after the date of issuance of the Series F Preferred Stock: (i)
any Person (including, without limitation, any "person" within the meaning of
Section 13(d) or 14(d) of the Securities Exchange Act of 1934 (the "Exchange
Act"), but excluding the Corporation, any Subsidiary and any employee benefit
plan of the Corporation or any such Subsidiary) becomes the direct or indirect
beneficial owner of shares of Capital Stock representing greater than 50% of the
combined voting power of all outstanding shares of Capital Stock entitled to
vote in the election of directors under ordinary circumstances ("Voting Stock");
(ii) the Corporation consolidates with or merges into any other Person and the
outstanding Common Stock is changed or exchanged as a result; (iii) the
Corporation sells, conveys, transfers or otherwise disposes of all or
substantially all of the collective assets of the Corporation and its
Subsidiaries to any other entity; (iv) at any time Continuing Directors do not
constitute at least 50% of the Board of Directors of the Corporation then in
office; or (v) on any day the Corporation makes any distribution or
distributions of cash, Property or securities (other than regular quarterly
dividends, Common Stock, preferred stock which is substantially equivalent to
Common Stock or rights to acquire Common Stock or rights to acquire preferred
stock which is substantially equivalent to Common Stock) to holders of Common
Stock generally, or the Corporation or any of its Subsidiaries purchases or
otherwise acquires Common Stock, and the sum of the Fair Market Value of such
distribution or purchase on the date the same is made, plus the Fair Market
Value, when made, of all other such distributions and purchases which have
occurred during the 12 month period ending on such date, in each case expressed
as a percentage of the aggregate Current Market Price of all of the shares of
Common Stock outstanding at the close of business on the last Trading Day prior
to the date of each such distribution or purchase, exceeds 50%.
A "Change of Control" shall not be deemed to occur in (i) above if
as a result of a consolidation or merger or purchase of assets or Capital Stock
of a Person (the "Event") (x) the Corporation's Common Stock is publicly traded
on a nationally recognized exchange, (y) immediately following such Event, the
Continuing Directors constitute at least 50% of the Board of Directors of the
Corporation, and (z) the Company's market capitalization plus the fully-diluted
effect, if any, of all Capital Stock issued to such Person immediately
following the Event is at least 85% of the market capitalization immediately
prior to the Event, and in (ii) above if at least 85% of the consideration
received by the holders of Common Stock is in the form of capital stock that is
publicly traded on a nationally recognized exchange. For purposes of this
paragraph 10(d), capitalization means the outstanding number of shares of
Common Stock multiplied by the Current Market Price. "Continuing Director"
means at any date any member of the Corporation's Board of Directors who (A) is
a member of the Board of Directors on the date of issuance of the Series F
Preferred Stock or (B) was nominated for election or elected to the
Corporation's Board of Directors with the affirmative vote of at least a
majority of the directors who were Continuing Directors at the time of such
nomination or election or whose election to the Corporation's Board of
Directors was recommended or endorsed
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by the affirmative vote of at least a majority of the directors who were
Continuing Directors at the time of such election. For purposes of the
foregoing definitions, the term "controlled by" has the meaning set
forth in the definition of "Affiliate" in paragraph 13.
(ii) the "Special Conversion Price" shall mean the higher of
the Market Value of the Common Stock or $_____ per share of Common Stock
(66 2/3% of the Conversion Price); provided, however, that each time the
then prevailing Conversion Price shall be adjusted as provided elsewhere
herein, such dollar amount shall likewise be adjusted so that the ratio
of such dollar amount to the then prevailing Conversion Price, after
giving effect to any such adjustment, shall always be the same as the
ratio of $_____ to the initial Conversion Price (without giving effect
to any such adjustment).
(iii) the "Market Value" of the Common Stock or any other
Marketable Stock shall be the average of the last reported sales price
of the Common Stock or such other Marketable Stock, as the case may be,
for the five trading days ending on the last business day preceding the
date of the Change of Control; provided, however, that if the Marketable
Stock is not traded on any national securities exchange or similar
quotation system as described in the definition of "Marketable Stock"
during such period, then the Market Value of such Marketable Stock shall
be the average of the last reported sales price per share of such
Marketable Stock during the first five trading days commencing with the
first day after the date on which such Marketable Stock was first
distributed to the general public and traded on the New York Stock
Exchange, the American Stock Exchange, the Nasdaq National Market or any
similar system of automated dissemination of quotations of securities
prices in the United States; and
(iv) "Marketable Stock" shall mean Common Stock or common stock
of any corporation that is the successor to all or substantially all of
the business or assets of the Corporation as a result of a Change of
Control (or of the ultimate parent of such successor), which is (or
will, upon distribution thereof, be) listed or quoted on the New York
Stock Exchange, the American Stock Exchange, the Nasdaq National Market
or any similar system of automated dissemination of quotations of
securities prices in the United States.
(v) a "Subsidiary" of a Person on any date means any other
Person of whom such Person owns, directly or indirectly through a
Subsidiary or Subsidiaries of such Person, Capital Stock with voting
power, acting independently and under ordinary circumstances, entitling
such Person to elect a majority of the Board of Directors or other
governing body of such other Person. Unless otherwise stated herein or
the context otherwise requires, "Subsidiary" means a Subsidiary of the
Corporation.
11. LIMITATION ON DIVIDEND RESTRICTIONS AFFECTING SUBSIDIARIES. The
Corporation shall not, and shall not permit any of its Subsidiaries to, create
or otherwise cause or suffer to exist or become effective any encumbrance or
restriction of any kind on the ability of any Subsidiary of the Corporation to
(a) pay to the Corporation dividends or make to the Corporation any other
distribution on its capital stock, (b) pay any debt owed to the Corporation or
any of its Subsidiaries, (c) make loans or advances to the Corporation or any
of its Subsidiaries or (d) transfer any of its property or assets to the
Corporation or any of its Subsidiaries, other than
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such encumbrances or restrictions existing or created under or by reason of (i)
applicable law, (ii) covenants or restrictions contained in any instrument
governing debt of the Corporation or any of its Subsidiaries existing on the
date hereof, (iii) customary provisions restricting subletting, assignment and
transfer of any lease governing a leasehold interest of the Corporation or any
of its Subsidiaries or in any license or other agreement entered into in the
ordinary course of business, or (iv) any agreement governing debt of a person
acquired by the Corporation or any of its Subsidiaries in existence at the time
of such acquisition (but not created in contemplation thereof, except for
acquisition debt which by its terms matures within twelve months of creation),
which encumbrances or restrictions are not applicable to any person, or the
property or assets of any person, other than the person, or the property or
assets of the person so acquired.
12. CERTAIN DEFINITIONS. As used in this Certificate, the following
terms shall have the following respective meanings:
"Affiliate" of a Person means any other Person which, directly or
indirectly, is in control of, is controlled by or is under common control with
such specified Person. For purpose of this definition, "control" of a Person
means the power, directly or indirectly, to direct or cause the direction of
the management and policies of such Person, whether by ownership of voting
securities, by contract or otherwise, and "controlling" or "controlled" having
corresponding meanings.
"Capital Stock" of any Person means the Common Stock or preferred stock
of such Person. Unless otherwise stated herein or the context otherwise
requires, "Capital Stock" means Capital Stock of the Corporation.
"Current Market Price" means, when used with respect to any security as
of any date, the last sale price, regular way, or, in case no such sale takes
place on such date, the average of the closing bid and asked prices, regular
way, of such security in either case as reported for consolidated transactions
on the New York Stock Exchange or, if such security is not listed or admitted
to trading on the New York Stock Exchange, as reported for consolidated
transactions with respect to securities listed on the principal national
securities exchange on which such security is listed or admitted to trading or,
if such security is not listed or admitted to trading on any national
securities exchange, as reported on the Nasdaq National Market, or, if such
security is not listed or admitted to trading on the Nasdaq National Market, as
reported on the Nasdaq SmallCap Market, or if such security is not listed or
admitted to trading on any national securities exchange or the Nasdaq National
Market or the Nasdaq SmallCap Market, the average of the high bid and low asked
prices of such security in the over-the-counter market as reported by the
National Association of Securities Dealers, Inc. Automated Quotations System or
such other system then in use or, if such security is not quoted by any such
organization, the average of the closing bid and asked prices of such security
furnished by a New York Stock Exchange member firm selected by the Corporation.
If such security is not quoted by any such organization and no such New York
Stock Exchange member firm is able to provide such prices, the Current Market
Price of such security shall be the Fair Market Value thereof.
"Fair Market Value" means, at any date as to any asset, Property or
right (including, without limitation, Capital Stock of any Person, evidences of
indebtedness or other securities, but excluding cash), the fair market value of
such item as determined in good faith by the Board
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of Directors, whose determination shall be conclusive; provided, however, that
such determination is described in an officer's certificate filed with the
transfer agent and that, if there is a Current Market Price for such item on
such date, "Fair Market Value" means such Current Market Price (without giving
effect to the last sentence of the definition thereof).
"Person" means any individual, corporation, partnership, association,
trust or other entity or organization, including a government or political
subdivision or any agency or instrumentality thereof.
"Property" of any Person means any and all types of real, personal,
tangible, intangible or mixed property owned by such Person whether or not
included on the most recent consolidated balance sheet of such Person in
accordance with GAAP.
"Trading Day" means (i) if the applicable security is listed or admitted
for trading on a national security exchange, a day on which such exchange is
open for business, (ii) if the applicable security is quoted on The Nasdaq
Stock Market, a day on which trades may be made thereon or (iii) if the
applicable security is not so listed, admitted for trading or quoted, any
business day.
* * * *
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IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
duly executed on its behalf by its undersigned President and Chief Executive
Officer and attested to by its Secretary this _____ day of _____________, 1997.
Corporate Seal NATIONAL ENERGY GROUP, INC.
--------------------------------------
Miles D. Bender
President and Chief Executive Officer
ATTEST:
- ---------------------------------------------
Philip D. Devlin
Vice President, General Counsel and Secretary
<PAGE> 1
EXHIBIT 4.4
DEPOSIT AGREEMENT
DEPOSIT AGREEMENT, dated as of November ____, 1997, among NATIONAL
ENERGY GROUP, INC., a Delaware corporation (the "Company"), _____________, a
___________ trust company, as depositary (the "Depositary"), and all holders
from time to time of Depositary Receipts (the "Receipts") issued hereunder.
WHEREAS, it is desired to provide, as hereinafter set forth in this
Deposit Agreement, for the deposit of shares of ____% Convertible Preferred
Stock, Series F, par value $1.00 per share (the "Series F Preferred Stock") of
the Company with the Depositary for the purposes set forth in this Deposit
Agreement and for the issuance hereunder of the Receipts evidencing Depositary
Shares, each representing a 1/10 interest in a share of such Series F Preferred
Stock so deposited; and
WHEREAS, the Receipts are to be substantially in the form of Exhibit A
annexed to this Deposit Agreement, with appropriate insertions, modifications
and omissions, as hereinafter provided in this Deposit Agreement;
NOW, THEREFORE, in consideration of the premises contained herein, it
is agreed by and among the parties hereto as follows:
ARTICLE I
DEFINITIONS
The following definitions shall apply to the respective terms used in this
Deposit Agreement and the Receipts:
SECTION 1.1 The term "Accredited Investor" shall have the meaning given
that term in Rule 501(a) of the rules and regulations under the Securities Act.
SECTION 1.2 The term "Affiliate" shall mean, with respect to any
person, any person that, directly or indirectly, controls, is controlled by or
is under common control with such person in question. For the purposes of this
definition, "control" (including, with correlative meanings, the terms
"controlled by" and "under common control with") shall mean the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of such person, whether through the ownership of voting
securities or by contract or otherwise.
SECTION 1.3 The term "Business Day" shall mean any day other than
Saturday, Sunday or a day on which banking institutions are obligated or
authorized to be closed in New York, New York.
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SECTION 1.4 The term "Certificate of Designations" shall mean the
Certificate of Designations adopted by the Board of Directors of the Company or
a duly authorized committee thereof establishing and setting forth the rights,
preferences, privileges and limitations of the Series F Preferred Stock.
SECTION 1.5 The term "Certificate of Incorporation" shall mean the
Certificate of Incorporation, as amended from time to time, of the Company.
SECTION 1.6 The term "Certificate of Transfer" shall mean the
instrument of transfer on the reverse of the Certificated Receipt.
SECTION 1.7 The term "Certificated Receipt" shall have the meaning
assigned to such term in Section 2.3.
SECTION 1.8 The term "Company" shall mean National Energy Group, Inc.,
a Delaware corporation having its principal office at 4925 Greenville Avenue,
Suite 1400, Dallas, Texas 75206, and its successors.
SECTION 1.9 The term "Corporate Office" shall mean the corporate office
of the Depositary at which at any particular time its depositary receipt
business shall be administered.
SECTION 1.10 The term "Deposit Agreement" shall mean this agreement, as
the same may be amended, modified or supplemented from time to time.
SECTION 1.11 The term "Depositary" shall mean ______________, a
___________ trust company, having its principal office at ________________, and
any successor as Depositary hereunder.
SECTION 1.12 The term "Depositary Share" shall mean a 1/10 interest in
a share of the Series F Preferred Stock deposited with the Depositary hereunder
and the same proportional interest in any and all other property received by the
Depositary in respect of such share of Series F Preferred Stock and held under
this Deposit Agreement, all as evidenced by the Receipts executed and delivered
hereunder. Subject to the terms of this Deposit Agreement, each holder of a
Depositary Share is entitled, proportionately, to all the rights, preferences,
privileges and obligations of the Series F Preferred Stock represented by such
Depositary Share, including those set forth in the dividend, voting, conversion,
liquidation and redemption provisions of the Certificate of Designations, and to
the benefits of all obligations of the Company under the Certificate of
Designations.
SECTION 1.13 The term "Depositary's Agent" shall mean an agent
appointed by the Depositary as provided, and for the purposes specified, in
Section 7.5.
SECTION 1.14 The term "Exchange Act" shall mean the Securities Exchange
Act of 1934, as amended.
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SECTION 1.15 The term "Global Receipt" shall have the meaning assigned
to such term in Section 2.3.
SECTION 1.16 The term "Qualified Institutional Buyer" shall have the
meaning given that term in Rule 144A in the rules and regulations under the
Securities Act.
SECTION 1.17 The term "Receipt" shall mean a Depositary Receipt issued
hereunder to evidence one or more Depositary Shares, whether in definitive or
temporary form.
SECTION 1.18 The term "record holder" as applied to a Receipt shall
mean the person in whose name a Receipt is registered on the books maintained by
the Depositary for such purpose.
SECTION 1.19 The term "Registrar" shall mean any bank or trust company
appointed to register Receipts as herein provided.
SECTION 1.20 The term "SEC" shall mean the Securities and Exchange
Commission.
SECTION 1.21 The term "Securities Act" shall mean the Securities Act of
1933, as amended.
SECTION 1.22 The term "Series F Preferred Stock" shall mean shares of
the Company's ____% Series F Convertible Preferred Stock, par value $1.00 per
share.
ARTICLE II
FORM OF RECEIPTS, DEPOSIT OF SERIES F
PREFERRED STOCK, EXECUTION AND DELIVERY,
TRANSFER, SURRENDER AND REDEMPTION OF RECEIPTS
SECTION 2.1 FORM AND TRANSFERABILITY OF RECEIPTS. Definitive Receipts
shall be engraved or printed or lithographed with steel-engraved borders and
underlying tint and shall be substantially in the form set forth in Exhibit A
annexed to this Deposit Agreement, with appropriate insertions, modifications
and omissions, as hereinafter provided. Pending the preparation of definitive
Receipts, the Depositary shall, upon written order in accordance with Section
2.2, execute and deliver temporary Receipts which are printed, lithographed,
typewritten, mimeographed or otherwise substantially of the tenor of the
definitive Receipts in lieu of which they are issued and with such appropriate
insertions, modifications and omissions as hereinafter provided. The Company
will cause definitive Receipts to be prepared without unreasonable delay. After
the preparation of definitive Receipts, the temporary Receipts shall be
exchangeable for definitive Receipts upon surrender of the temporary Receipts,
at the Corporate Office, without charge to the holder.
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<PAGE> 4
Upon surrender for cancellation of any one or more temporary Receipts, the
Depositary shall execute and deliver in exchange therefor definitive Receipts
representing the same number of Depositary Shares as represented by the
surrendered temporary Receipt or Receipts. Such exchange shall be made at the
Company's expense and without any charge to the holder thereof, provided,
however, that the Company will not bear the expense incurred by the holder for
transferring the temporary Receipts to the Corporate Office for exchange. Until
so exchanged, the temporary Receipts shall in all respects be entitled to the
same benefits under this Deposit Agreement as definitive Receipts. Receipts
shall be executed by the Depositary by the manual signature of a duly authorized
signatory of the Depositary, provided that such signature may be a facsimile if
a Registrar (other than the Depositary) shall have countersigned the Receipts by
manual signature of a duly authorized signatory of the Registrar. No Receipt
shall be entitled to any benefits under this Deposit Agreement or be valid or
obligatory for any purpose unless it shall have been executed as provided in the
preceding sentence. The Depositary shall record on its books each Receipt
executed as provided above and delivered as hereinafter provided.
Receipts shall be in denominations of any number of whole Depositary
Shares. All Receipts shall be dated the date of their execution.
Receipts may be endorsed with or have incorporated in the text thereof,
such legends or recitals or changes not inconsistent with the provisions of this
Deposit Agreement as may be required by the Depositary or required to comply
with any applicable law or regulation or with the rules and regulations of any
securities exchange upon which the Series F Preferred Stock, the Depositary
Shares or the Receipts may be listed or to conform with any usage with respect
thereto, or to indicate any special limitations or restrictions to which any
particular Receipts are subject by reason of the date of issuance of the Series
F Preferred Stock or otherwise.
Title to any Receipt (and to the Depositary Shares evidenced by such
Receipt) that is properly endorsed or accompanied by a properly executed
instrument of transfer or endorsement, shall be transferable by delivery with
the same effect as in the case of a negotiable instrument; provided, however,
that until a Receipt shall be transferred on the books of the Depositary as
provided in Sections 2.5 and 2.6, the Depositary may, notwithstanding any notice
to the contrary, treat the record holder thereof at such time as the absolute
owner thereof for the purpose of determining the person entitled to dividend
distributions or other distributions or to any notice provided for in this
Deposit Agreement and for all other purposes.
SECTION 2.2 DEPOSIT OF SERIES F PREFERRED STOCK; EXECUTION AND DELIVERY
OF RECEIPTS IN RESPECT THEREOF. Subject to the terms and conditions of this
Deposit Agreement, the Depositary, upon receipt of written instructions from the
Company or the holder to which such Series F Preferred Stock was issued, and a
certificate or certificates for the Series F Preferred Stock to be deposited
under this Deposit Agreement in accordance with the provisions of this Section
2.2, shall execute
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and deliver a Receipt or Receipts for the number of Depositary Shares
representing such deposited Series F Preferred Stock to the person or persons
stated in such instructions.
Subject to the terms and conditions of this Deposit Agreement, any
holder of Series F Preferred Stock may deposit such Series F Preferred Stock
(including any fractional share of Series F Preferred Stock) under this Deposit
Agreement by delivery to the Depositary of a certificate or certificates for the
Series F Preferred Stock to be deposited, properly endorsed or accompanied, if
required by the Depositary, by a properly executed instrument of transfer or
endorsement in form satisfactory to the Depositary, together with (i) all such
certifications as may be required by the Depositary in accordance with the
provisions of this Deposit Agreement and (ii) a written order directing the
Depositary to execute and deliver to or upon the written order of the person or
persons stated in such order a Receipt or Receipts for the number of Depositary
Shares representing such deposited Series F Preferred Stock.
If required by the Depositary, Series F Preferred Stock presented for
deposit at any time, whether or not the register of stockholders of the Company
is closed, shall also be accompanied by an agreement or assignment, or other
instrument satisfactory to the Depositary, that will provide for the prompt
transfer to the Depositary or its nominee of any dividend or right to subscribe
for additional Series F Preferred Stock or to receive other property that any
person in whose name the Series F Preferred Stock is or has been registered may
thereafter receive upon or in respect of such deposited Series F Preferred
Stock, or in lieu thereof such agreement of indemnity or other agreement as
shall be satisfactory to the Depositary.
Upon receipt by the Depositary of a certificate or certificates for
Series F Preferred Stock to be deposited hereunder, together with the other
documents specified above, the Depositary shall, as soon as transfer and
registration can be accomplished, present such certificate or certificates to
the registrar and transfer agent of the Series F Preferred Stock for transfer
and registration in the name of the Depositary or its nominee of the Series F
Preferred Stock being deposited. Deposited Series F Preferred Stock shall be
held by the Depositary in an account to be established by the Depositary at the
Corporate Office or at such other office as the Depositary shall determine.
Upon receipt by the Depositary of a certificate or certificates for
Series F Preferred Stock to be deposited hereunder, together with the other
documents specified above, the Depositary, subject to the terms and conditions
of this Deposit Agreement, shall execute and deliver to or upon the order of the
person or persons named in the written order delivered to the Depositary
referred to in the first or second paragraph of this Section 2.2 a Receipt or
Receipts for the number of whole Depositary Shares representing the Series F
Preferred Stock so deposited and registered in such name or names as may be
requested by such person or persons. The Depositary shall execute and deliver
such Receipt or Receipts at the Corporate
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<PAGE> 6
Office, except that, at the request, risk and expense of any person requesting
such delivery, such delivery may be made at such other place which may be
designated by such person. In each case, delivery will be made only upon payment
to the Depositary of all taxes and other governmental charges and any fees
payable in connection with such deposit and the transfer of the deposited Series
F Preferred Stock. The Company shall deliver to the Depositary from time to time
such quantities of Receipts as the Depositary may request to enable the
Depositary to perform its obligations under this Deposit Agreement.
SECTION 2.3 PROCEDURES FOR GLOBAL RECEIPTS. The Receipts may be
represented by (i) one or more fully registered Receipts in global form ("Global
Receipts") or (ii) Receipts registered in the name of individual holders or
their nominees ("Certificated Receipts").
If Receipts are to be represented by one or more Global Receipts, the
Depositary shall execute and deliver such Global Receipt which (i) shall
represent, and shall be denominated in an amount equal to, the aggregate number
of Receipts to be represented by such Global Receipt, (ii) shall be registered
in the name of _________________ ("____________") or in the name of
___________________ or of another nominee, as nominee of ____________________,
(iii) shall be delivered to ____________________ or pursuant to
________________'s instructions and (iv) shall bear a legend substantially to
the following effect:
Unless and until it is exchanged in whole or in part for
Receipts in definitive form, this Receipt may not be transferred except
as a whole by _________________ (_______________) ("___________"), to a
nominee of ________________ or by a nominee of ______________ to
______________ or another nominee of _____________ or by _____________
or any such nominee to a successor depositary or a nominee of such
successor depositary. Unless this certificate is presented by an
authorized representative of _________________ to the issuer or its
agent for registration of transfer, exchange, exercise or payment, and
any certificate issued is registered in the name of ________________ or
such other name as requested by an authorized representative of
___________ (and any payment is made to ________________ or such other
entity as is requested by an authorized representative of ___________),
ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR
TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof,
_______________, has an interest herein.
A Global Receipt may be transferred, in whole but not in part, only to
a nominee of ___________ for such Global Receipt, or to __________, or to a
successor depositary selected or approved by the Company, or to a nominee of
such successor depositary.
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If at any time __________ notifies the Company that it is unwilling or
unable to continue as depositary for such Global Receipt or if at any time
__________ shall no longer be eligible or in good standing under the Exchange
Act or other applicable statute or regulation, the Company shall appoint a
successor depositary with respect to such Global Receipt. If a successor
depositary for such Global Receipt is not appointed by the Company within 90
days after the Company receives such notice or becomes aware of such
ineligibility, the Depositary will execute and deliver Certificated Receipts in
exchange for such Global Receipt, in an aggregate amount equal to the number of
Depositary Receipts represented by the Global Receipt exchanged for such
Certificated Receipts.
The Company may at any time and in its sole discretion determine that
the Receipts or any portion thereof issued or issuable in the form of one or
more Global Receipts shall no longer be represented by such Global Receipt or
Receipts. In such event the Depositary will execute at the Corporate Office and
deliver Certificated Receipts in exchange in whole or in part for such Global
Receipt or Receipts in an aggregate amount equal to the number of Receipts
represented by such Global Receipt or Receipts or portion thereof exchanged for
such Certificated Receipts.
In any exchange provided for in either of the two preceding paragraphs,
the Depositary will execute and deliver Certificated Receipts. Upon the exchange
of the entire number of Receipts represented by a Global Receipt, such Global
Receipt shall be canceled by ___________. Except as provided in the preceding
paragraph, Certificated Receipts issued in exchange for a Global Receipt
pursuant to this Section shall be registered in such names and in such amounts
as _______________ shall instruct the Depositary. The Depositary shall deliver
such Certificated Receipts to the holders of Depositary Receipts in whose names
such Certificated Receipts are so registered.
SECTION 2.4 OPTIONAL REDEMPTION OF SERIES F PREFERRED STOCK FOR CASH.
Whenever the Company shall elect to redeem shares of Series F Preferred Stock in
accordance with the Certificate of Designations it shall (unless otherwise
agreed in writing with the Depositary) give the Depositary in its capacity as
Depositary notice of the date of such proposed redemption of the Series F
Preferred Stock, which notice shall be given not less than 5 Business Days prior
to the date the Depositary is to mail notice of the redemption to the record
holders of Receipts, in the case of a redemption of all outstanding Depositary
Shares, and not less than 10 days prior to the date the Depositary is to mail
notice of the redemption to the record holders of Receipts evidencing the
Depositary Shares to be redeemed, in the case of a partial redemption of
outstanding Depositary Shares, and be accompanied by a certificate from the
Company stating that such redemption of the Series F Preferred Stock is in
accordance with the provisions of the Certificate of Designations. Such notice
shall be in addition to the notice required to be given by the Company for
redemption pursuant to the Certificate of Designations. On the date of any such
redemption of Series F Preferred Stock, provided that the Company shall then
have deposited with the Depositary the cash required pursuant to the Certificate
of Designations to be
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delivered in exchange for the Series F Preferred Stock to be redeemed, the
Depositary shall redeem the number of Depositary Shares representing such
redeemed Series F Preferred Stock. The Depositary shall mail, first class
postage prepaid, notice of the redemption of Series F Preferred Stock and the
proposed simultaneous redemption of the Depositary Shares representing the
Series F Preferred Stock to be redeemed, not less than 30 and not more than 60
days prior to the date fixed for redemption of such Series F Preferred Stock and
Depositary Shares (the "Redemption Date"), to the record holders of the Receipts
evidencing the Depositary Shares to be so redeemed, at the addresses of such
holders as they appear on the records of the Depositary; but neither failure to
mail any such notice to one or more such holders nor any defect in any notice to
one or more such holders shall affect the sufficiency of the proceedings for
redemption as to other holders. Each such notice shall state: (i) the Redemption
Date; (ii) the number of Depositary Shares to be redeemed and, if less than all
the Depositary Shares held by any such holder are to be redeemed, the number of
such Depositary Shares held by such holder to be so redeemed; (iii) the
redemption price (as set forth in the Certificate of Designations); (iv) the
place or places where Receipts evidencing Depositary Shares are to be
surrendered for payment of the redemption price; and (v) that dividends in
respect of the shares of Series F Preferred Stock represented by the Depositary
Shares to be redeemed will cease to accumulate on such Redemption Date. Notices
shall be mailed by the Company pursuant to the Certificate of Designations. In
case fewer than all the outstanding Depositary Shares are to be redeemed, the
Depositary Shares to be redeemed shall be selected by lot or pro rata (as nearly
as may be) or by any other equitable method determined by the Depositary to be
consistent with the method determined by the Board of Directors of the Company
with respect to the Series F Preferred Stock.
Notice having been mailed as aforesaid, from and after the Redemption
Date (unless the Company shall have failed to redeem the shares of Series F
Preferred Stock to be redeemed by it, as set forth in the Company's notice
provided for in the preceding paragraph), the Depositary Shares called for
redemption shall be deemed no longer to be outstanding and all rights of the
holders of Receipts evidencing such Depositary Shares (except the right to
receive the redemption consideration) shall, to the extent of such Depositary
Shares, cease and terminate. Upon surrender in accordance with said notice of
the Receipts evidencing such Depositary Shares (properly endorsed or assigned
for transfer, as the Depositary shall so require), such Depositary Shares shall
be redeemed at a rate per Depositary Share equal to 1/10 of the amount of cash
delivered upon redemption of a share of Series F Preferred Stock pursuant to the
Certificate of Designations.
If fewer than all the Depositary Shares evidenced by a Receipt are
called for redemption, the Depositary will deliver to the holder of such Receipt
upon its surrender to the Depositary, together with the amount of cash for the
Depositary Shares called for redemption, a new Receipt evidencing the Depositary
Shares evidenced by such prior Receipt and not called for redemption.
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SECTION 2.5 TRANSFER OF RECEIPTS. Subject to the terms and conditions
of this Deposit Agreement, the Depositary shall make transfers on its books from
time to time of Receipts upon any surrender thereof at the Corporate Office or
such other office as the Depositary may designate by the holder in person or by
a duly authorized attorney, properly endorsed or accompanied by a properly
executed instrument of transfer or endorsement, or other instrument satisfactory
to the Depositary, together with evidence of the payment of any transfer taxes
as may be required by law. Upon such surrender, the Depositary shall execute a
new Receipt or Receipts and deliver the same to or upon the order of the person
or persons entitled thereto evidencing the same aggregate number of Depositary
Shares evidenced by the Receipt or Receipts surrendered.
SECTION 2.6 COMBINATIONS AND SPLIT-UPS OF RECEIPTS. Upon surrender of a
Receipt or Receipts at the Corporate Office or such other office as the
Depositary may designate for the purpose of effecting a split-up or combination
of Receipts, subject to the terms and conditions of this Deposit Agreement, the
Depositary shall issue a new Receipt or Receipts in the authorized denominations
requested evidencing the same aggregate number of Depositary Shares evidenced by
the Receipt or Receipts surrendered; provided, however, that the Depositary
shall not issue any Receipt evidencing a fractional Depositary Share.
SECTION 2.7 SURRENDER OF RECEIPTS AND WITHDRAWAL OF SERIES F PREFERRED
STOCK. Any holder of a Receipt or Receipts may withdraw any or all of the Series
F Preferred Stock (but only in whole shares of Series F Preferred Stock)
represented by the Depositary Shares evidenced by such Receipts and all money
and other property, if any, represented by such Depositary Shares by
surrendering such Receipt or Receipts at the Corporate Office or at such other
office as the Depositary may designate for such withdrawals. After such
surrender, without unreasonable delay, the Depositary shall deliver to such
holder, or to the person or persons designated by such holder as hereinafter
provided, certificates for the whole number of shares of Series F Preferred
Stock and all such money and other property, if any, represented by the
Depositary Shares evidenced by the Receipt or Receipts so surrendered for
withdrawal. If the Receipt or Receipts delivered by the holder to the Depositary
in connection with such withdrawal shall evidence a number of Depositary Shares
in excess of the number of whole Depositary Shares representing the number of
shares of Series F Preferred Stock to be withdrawn, the Depositary shall at the
same time, in addition to such whole number of shares of Series F Preferred
Stock and such money and other property, if any, to be withdrawn, deliver to
such holder, or (subject to Section 2.5) upon his order, a new Receipt or
Receipts evidencing such excess number of whole Depositary Shares. Delivery of
the Series F Preferred Stock and such money and other property being withdrawn
may be made by the delivery of such certificates, documents of title and other
instruments as the Depositary may deem appropriate, which, as required by the
Depositary, shall be properly endorsed or accompanied by proper instruments of
transfer.
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If the Series F Preferred Stock and the money and other property being
withdrawn are to be delivered to a person or persons other than the record
holder of the Receipt or Receipts being surrendered for withdrawal of Series F
Preferred Stock, such holder shall execute and deliver to the Depositary a
written order so directing the Depositary and the Depositary may require that
the Receipt or Receipts surrendered by such holder for withdrawal of such shares
of Series F Preferred Stock be properly endorsed in blank or accompanied by a
properly executed instrument of transfer or endorsement in blank.
The Depositary shall deliver the Series F Preferred Stock and the money
and other property, if any, represented by the Depositary Shares evidenced by
Receipts surrendered for withdrawal at the Corporate Office, except that, at the
request, risk and expense of the holder surrendering such Receipt or Receipts
and for the account of the holder thereof, such delivery may be made at such
other place as may be designated by such holder.
SECTION 2.8 LIMITATIONS ON EXECUTION AND DELIVERY, TRANSFER, SPLIT-UP,
COMBINATION, REDEMPTION, SURRENDER AND EXCHANGE OF RECEIPTS. As a condition
precedent to the execution and delivery, transfer, split-up, combination,
redemption, surrender or exchange of any Receipt or the exercise of any
conversion right referred to in Section 2.11, the Depositary, any of the
Depositary's Agents or the Company may require any or all of the following: (i)
payment to it of a sum sufficient for the payment (or, in the event that the
Depositary or the Company shall have made such payment, the reimbursement to it)
of any tax (including applicable interest, penalties or additions) or other
governmental charge with respect thereto (including any such tax or charge with
respect to the Series F Preferred Stock being deposited or withdrawn or with
respect to the Common Stock (as defined in Section 2.11) or other securities or
property of the Company being issued upon conversion or redemption); (ii) the
production of proof satisfactory to it as to the identity and genuineness of any
signature; and (iii) compliance with such regulations, if any, as the Depositary
or the Company may establish consistent with the provisions of this Deposit
Agreement.
The deposit of Series F Preferred Stock may be refused, the delivery of
Receipts against Series F Preferred Stock may be suspended, the transfer of
Receipts may be refused, and the transfer, split-up, combination, surrender or
exchange of outstanding Receipts may be suspended (i) during any period when the
register of stockholders of the Company is closed, or (ii) if any such action is
deemed necessary or advisable by the Depositary, any of the Depositary's Agents
or the Company at any time or from time to time because of any requirement of
law or of any government or governmental body or commission, under any provision
of this Deposit Agreement, or for any other reason.
SECTION 2.9 LOST RECEIPTS, ETC. In case any Receipt shall be mutilated
or destroyed or lost or stolen, the Depositary in its discretion may execute and
deliver a Receipt of like form and tenor in exchange and substitution for such
mutilated
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Receipt or in lieu of and in substitution for such destroyed, lost or stolen
Receipt; provided that the holder thereof provides the Depositary with (i)
evidence satisfactory to the Depositary of such destruction, loss or theft of
such Receipt, of the authenticity thereof and of his ownership thereof, (ii)
reasonable indemnification satisfactory to the Depositary and (iii) payment of
any expense (including fees, charges and expenses of the Depositary) in
connection with such execution and delivery.
SECTION 2.10 CANCELLATION AND DESTRUCTION OF SURRENDERED RECEIPTS. All
Receipts surrendered to the Depositary or any Depositary's Agent shall be
cancelled by the Depositary and returned to the Company. Except as prohibited by
applicable law or regulation the Company may destroy such Receipts so canceled.
SECTION 2.11 OPTIONAL CONVERSION OF SERIES F PREFERRED STOCK INTO
COMMON STOCK. At any time prior to the redemption of shares of Series F
Preferred Stock as provided in the Certificate of Designations, Receipts may be
surrendered with written instructions to the Depositary to instruct the Company
to cause the conversion of any specified number of whole shares of Series F
Preferred Stock represented by whole Depositary Shares evidenced by such
Receipts into whole shares of common stock, par value $0.01 per share, of the
Company ("Common Stock"), and cash for any fractional share amount at the
conversion price then in effect for the Series F Preferred Stock pursuant to the
Certificate of Designations, as such conversion price may be adjusted by the
Company from time to time as provided in the Certificate of Designations.
Subject to the terms and conditions of this Deposit Agreement and the
Certificate of Designations, a holder of a Receipt or Receipts evidencing
Depositary Shares representing whole or fractional shares of Series F Preferred
Stock may surrender such Receipt or Receipts at the Corporate Office or at such
office or to such Depositary's Agents as the Depositary may designate for such
purpose, together with a notice of conversion duly completed and executed,
thereby directing the Depositary to instruct the Company to cause the conversion
of the number of whole shares of underlying Series F Preferred Stock specified
in such notice of conversion into shares of Common Stock, and an assignment of
such Receipt or Receipts to the Company or in blank, duly completed and
executed. To the extent that a holder delivers to the Depositary for conversion
a Receipt or Receipts which in the aggregate are convertible into less than one
whole share of Common Stock, the holder shall receive payment in cash in lieu of
such fractional share of Common Stock otherwise issuable. If more than one
Receipt shall be delivered for conversion at one time by the same holder, the
number of whole shares of Common Stock issuable upon conversion thereof shall be
computed on the basis of the aggregate number of Depositary Shares represented
by the Receipts so delivered.
Upon receipt by the Depositary of a Receipt or Receipts, together with
notice of conversion, duly completed and executed, directing the Depositary to
instruct the Company to cause the conversion of a specified number of shares of
Series F Preferred Stock, and an assignment of such Receipt or Receipts to the
Company or in blank, duly completed and executed, the Depositary shall instruct
the Company (i) to cause the conversion of the number of whole shares of Series
F Preferred Stock
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represented by the Depositary Shares evidenced by the Receipts so surrendered
for conversion as specified in the written notice to the Depositary and (ii) to
cause the delivery to the holders of such Receipts of a certificate or
certificates evidencing the number of whole shares of Common Stock and the
amount of money, if any, to be delivered to the holders of Receipts surrendered
for conversion in lieu of fractional shares of Common Stock otherwise issuable.
The Company shall as promptly as practicable after receipt thereof cause the
delivery of (i) a certificate or certificates evidencing the number of whole
shares of Common Stock into which the Series F Preferred Stock represented by
the Depositary Shares evidenced by such Receipt or Receipts has been converted,
and (ii) any money or other property to which the holder is entitled by reason
of such conversion. Upon such conversion, the Depositary (i) shall deliver to
the holder a Receipt evidencing the number of Depositary Shares evidenced by the
surrendered Receipt in excess of the number of Depositary Shares evidenced by
such Receipt that has been so converted, (ii) shall cancel the Depositary Shares
evidenced by Receipts surrendered for conversion and (iii) shall deliver to the
Company or its transfer agent for the Series F Preferred Stock for cancellation
the shares of Series F Preferred Stock represented by the Depositary Shares
evidenced by the Receipts so surrendered and so converted. Upon the delivery of
the shares of Series F Preferred Stock to be canceled due to such conversion by
the Depositary to the Company, the Company shall deliver to the Depositary a
certificate or certificates evidencing the number of shares of Series F
Preferred Stock, if any, that equals the excess of the number of shares of
Series F Preferred Stock evidenced by the surrendered certificate over the
number of shares of Preferred Stock evidenced by that certificate that have been
so converted.
If Series F Preferred Stock shall be called by the Company for
redemption, the Depositary Shares representing such stock may be converted into
Common Stock as provided in this Deposit Agreement until, but not after, the
close of business on the day preceding the Redemption Date, unless the Company
shall fail to deposit with the Depositary the amount of cash required to redeem
the Series F Preferred Stock held by the Depositary, in which case the
Depositary Shares representing such Series F Preferred Stock may continue to be
converted into Common Stock until, but not after, the close of business on the
date on which the Company deposits with the Depositary such amount of cash as is
required by the Certificate of Designations to make full payment of the amounts
payable upon such redemption.
The record holder of Depositary Shares on any dividend payment record
date established by the Depositary shall be entitled to receive the dividend
payable with respect to such Depositary Shares on the corresponding dividend
payment date notwithstanding the conversion subsequent to such record date of
the shares of Series F Preferred Stock to which such Depositary Shares relate.
However, any Receipts surrendered with instructions to the Depositary for
conversion of the underlying Series F Preferred Stock during the period from the
close of business on a dividend payment record date for any dividend payment
date, through the close of business on the day next preceding such dividend
payment date shall (unless such underlying Series F Preferred Stock shall have
been called for redemption on a Redemption Date
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in such period) be accompanied by payment of an amount equal to the dividend
payable on the Depositary Shares evidenced by the Receipts surrendered for
conversion, on such dividend payment date.
Upon the conversion of any share of Series F Preferred Stock for which
a request for conversion has been made by the holder of Depositary Shares
representing such share, all dividends in respect of such Depositary Shares
shall cease to accrue, such Depositary Shares shall be deemed no longer
outstanding, all rights of the holder of the Receipt with respect to such
Depositary Shares (except the right to receive the Common Stock, any cash
payable with respect to any fractional shares of Common Stock as provided herein
and any cash payable on account of accrued dividends as provided herein and any
Receipts evidencing Depositary Shares not so converted) shall terminate, and the
Receipt evidencing such Depositary Shares shall be cancelled in accordance with
Section 2.11 hereof.
No fractional shares of Common Stock shall be issuable upon conversion
of Series F Preferred Stock underlying the Depositary Shares. If any holder of
Receipts surrendered with instructions to the Depositary for conversion of the
underlying Series F Preferred Stock would be entitled to a fractional share of
Common Stock upon such conversion, the Company shall cause to be delivered to
such holder an amount in cash for such fractional share as provided in the
Certificate of Designations.
SECTION 2.12 CONVERSION UPON A CHANGE OF CONTROL. Upon the Depositary's
or a Depositary's Agent's receipt from the Company of a notice that special
conversion rights have been triggered as a result of a Change of Control (as
such terms are defined in the Certificate of Designations), the Depositary shall
mail notice of such event (the "Special Conversion Notice") to all holders of
Receipts and Stockholders, at their respective addresses as they appear on the
records of the Depositary, first class postage prepaid, within 30 days after the
occurrence of such Change of Control. Neither failure to mail any Special
Conversion Notice to any holder of Receipts or Stockholder nor any defect in any
Special Conversion Notice shall affect the sufficiency of the special conversion
proceedings as to other holders of receipts and Stockholders. The Special
Conversion Notice shall state: (i) the event constituting the Change of Control
and that such event entitles the holders of the shares of Series F Preferred
Stock or of Depositary Shares representing shares of Series F Preferred Stock to
a special conversion right; (ii) the Special Conversion Price (as defined in the
Certificate of Designations), as determined by the Company; (iii) the Conversion
Price (as defined in the Certificate of Designations) then in effect with
respect to the Series F Preferred Stock, as determined by the Company; (iv) the
name and address of the paying agent and conversion agent; (v) that the
Stockholders who elect to convert their shares of Preferred Stock and the
holders of Receipts who elect to convert the shares of Series F Preferred Stock
represented by their Depositary Shares must satisfy the procedures set forth in
the Certificate of Designations, along with a description of applicable
procedures, and that they must exercise their conversion right, if at all,
within the 45- day period after the mailing
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of the Special Conversion Notice; (vi) the conversion date upon exercise of the
special conversion right (the "Special Conversion Date," which shall be 45 days
after the mailing of the Special Conversion Notice); (vii) that the exercise of
the special conversion right is revocable by the Stockholder or holder of
Receipts at any time prior to the conversion date by notice of withdrawal to the
conversion agent and that no dividends on shares of the Series F Preferred Stock
(or portions thereof) tendered for conversion will accrue from and after the
conversion date; (viii) the extent to which the Company has elected to pay cash
(specifying the amount thereof per share of Series F Preferred Stock and per
Depositary Share) in respect of converted shares of Preferred Stock; and (ix)
all information required by applicable securities laws.
Upon the Special Conversion Date, the Depositary shall determine each
holder of Receipts (an "Electing Holder") from whom the Depositary or a
Depositary's Agent has received a written notice of such holder of Receipt's
election, pursuant to the special conversion right, to convert all whole shares
of the Series F Preferred Stock represented by such holder's Depositary Shares
into Common Stock, along with delivery to the Depositary of such holder's
Receipts evidencing such Depositary Shares and of a proper assignment of such
Receipts to the Company or in blank. Provided that the Company shall then have
provided the Depositary the number of shares of Common Stock and/or any cash or
other property necessary to effect the special conversion, the Depositary shall,
upon the Special Conversion Date, (i) cancel each Electing Holder's Receipts,
(ii) deliver to each Electing Holder a certificate for any whole shares of
Common Stock into which that Electing Holder's Preferred Stock is converted,
pursuant to the special conversion rate as calculated by the Company in
accordance with the Certificate of Designations, (iii) deliver to each Electing
Holder any and all money and other property, if any, represented by that
Electing Holder's Depositary Shares, including all amounts, if any, paid by the
Company in respect of dividends which on the date of conversion have accrued on
the shares of Series F Preferred Stock to be so converted and have not
theretofore been paid, and (iv) cancel (or, if the Depositary is not the
transfer agent for Series F Preferred Stock, deliver for cancellation) that
number of shares of Series F Preferred Stock held by the Depositary which are
represented by the aggregate of all Depositary Shares so converted.
After the effective date of such conversion of any Depositary Shares,
(i) all dividends in respect of the shares of Series F Preferred Stock
represented by such Depositary Shares shall cease to accrue, (ii) the Depositary
Shares representing the shares of Series F Preferred Stock so converted shall be
deemed no longer to be outstanding, and (iii) all rights of the holders of
Receipts evidencing such Depositary Shares (except the right to receive any
shares of Common Stock, money, or other property to which such holders were
entitled upon such conversion) shall, to the extent of such Depositary Shares,
cease and terminate. No fractional shares of the Series F Preferred Stock may be
converted. The foregoing shall further be subject to the terms and conditions of
the Certificate of Incorporation and Certificate of Designations.
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ARTICLE III
CERTAIN OBLIGATIONS OF HOLDERS
OF RECEIPTS AND THE COMPANY
SECTION 3.1 FILING PROOFS, CERTIFICATES AND OTHER INFORMATION. Any
person presenting Series F Preferred Stock for deposit or any holder of a
Receipt may be required from time to time to file such proof of residence or
other information, to execute such certificates and to make such representations
and warranties as the Depositary or the Company may reasonably deem necessary or
proper. The Depositary or the Company may withhold or delay the delivery of any
Receipt, the transfer, redemption or exchange of any Receipt, the withdrawal of
the Series F Preferred Stock represented by the Depositary Shares evidenced by
any Receipt, the distribution of any dividend or other distribution, the sale of
any rights or of the proceeds thereof, the exercise of any conversion right
referred to in Sections 2.11 and 2.12 or the delivery of any Common Stock upon
such conversion until such proof or other information is filed, such
certificates are executed or such representations and warranties are made.
SECTION 3.2 PAYMENT OF TAXES OR OTHER GOVERNMENTAL CHARGES. If any tax
(including applicable interest, penalties or additions) or other governmental
charge shall become payable by or on behalf of the Depositary with respect to
any Receipt, the Depositary Shares evidenced by such Receipt, the Series F
Preferred Stock (or any fractional interest therein) represented by such
Depositary Shares, the exercise of any conversion right referred to in Sections
2.11 and 2.12 or any transaction referred to in Section 4.6 with respect to a
Receipt or the Series F Preferred Stock represented by such Receipt, such tax
(including transfer, issuance or acquisition taxes, if any) or governmental
charge shall be payable by the holder of such Receipt. Until such payment is
made, transfer of any Receipt or any withdrawal of the Series F Preferred Stock
or money or other property, if any, represented by the Depositary Shares
evidenced by such Receipt may be refused, any dividend or other distribution may
be withheld, conversion rights may be refused and any part or all of the Series
F Preferred Stock or other property represented by the Depositary Shares
evidenced by such Receipt may be sold for the account of the holder thereof
(after attempting by reasonable means to notify such holder prior to such sale).
Any dividend or other distribution so withheld and the proceeds of any such sale
may be applied to any payment of such tax or other governmental charge, the
holder of such Receipt remaining liable for any deficiency. In the event the
Depositary is required to pay any such amounts, the Company shall reimburse the
Depositary for payment thereof upon the request of the Depositary and the
Depositary shall, upon the Company's request and as instructed by the Company,
pursue its rights against such holder at the Company's expense.
SECTION 3.3 REPRESENTATIONS AND WARRANTIES AS TO SERIES F PREFERRED
STOCK. Each person (including, without limitation, the Company) depositing
Series F Preferred Stock under this Deposit Agreement shall be deemed to thereby
represent
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and warrant that such Series F Preferred Stock and each certificate therefor are
valid, fully paid and nonassessable shares and that the person making such
deposit is duly authorized to do so. Such representations and warranties shall
survive the deposit of the shares of Series F Preferred Stock and the issuance
of Receipts.
ARTICLE IV
DIVIDENDS AND DISTRIBUTIONS AND THE
SERIES F PREFERRED STOCK NOTICES
SECTION 4.1 CASH DISTRIBUTIONS. Whenever the Depositary shall receive
any cash dividend or other cash distribution on the Series F Preferred Stock,
the Depositary shall, subject to Section 3.2, distribute to record holders of
Receipts on the record date fixed pursuant to Section 4.4 such amounts of such
sum as are, as nearly as practicable, attributable to the respective numbers of
Depositary Shares evidenced by the Receipts held by such holders; provided,
however, that in case the Company or the Depositary shall be required to
withhold and does withhold from any cash dividend or other cash distributed in
respect of the Series F Preferred Stock an amount on account of taxes, the
amount made available for distribution or distributed in respect of Depositary
Shares shall be reduced accordingly. The Depositary shall distribute or make
available for distribution, as the case may be, only such amount, however, as
can be distributed without attributing to any owner of Depositary Shares a
fraction of one cent and any balance not so distributable shall be rounded to
the next highest whole cent and, upon request of the Depositary, the Company
shall pay the additional amount to the Depositary for distribution.
SECTION 4.2 DISTRIBUTIONS OTHER THAN CASH. Whenever the Depositary
shall receive any distribution other than cash on the Series F Preferred Stock,
the Depositary shall, subject to Section 3.2, distribute to record holders of
Receipts on the record date fixed pursuant to Section 4.4 such amounts of the
securities or property received by it as are, as nearly as practicable, in
proportion to the respective numbers of Depositary Shares evidenced by the
Receipts held by such holders, in any manner that the Depositary and the Company
may deem equitable and practicable for accomplishing such distribution. If, in
the opinion of the Company after consultation with the Depositary, such
distribution cannot be made proportionately among such record holders, or if for
any other reason (including any requirement that the Company or the Depositary
withhold an amount on account of taxes or as otherwise required by law,
regulation, or court process), the Depositary deems, after consultation with the
Company, such distribution not to be feasible, the Depositary may, with the
approval of the Company, adopt such method as it deems equitable and practicable
for the purpose of effecting such distribution, including the sale (a public or
private sale) of the securities or property thus received, or any part thereof,
at such place or places and upon such terms as it may deem proper. The net
proceeds of any such sale shall, subject to Section 3.2, be distributed or made
available for
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distribution, as the case may be, by the Depositary to record holders of
Receipts as provided by Section 4.1 in the case of a distribution received in
cash.
SECTION 4.3 SUBSCRIPTION RIGHTS, PREFERENCES OR PRIVILEGES. If the
Company shall at any time offer or cause to be offered to the persons in whose
names Series F Preferred Stock is registered on the books of the Company any
rights, preferences or privileges to subscribe for or to purchase any securities
or any rights, preferences or privileges of any other nature, such rights,
preferences or privileges shall, in each such instance be made available by the
Depositary to the record holders of Receipts if the Company so directs in such
manner as the Company shall instruct (including by the issuance to such record
holders of warrants representing such rights, preferences or privileges);
provided, however, that (a) if at the time of issue or offer of any such rights,
preferences or privileges the Company determines that it is not lawful or
feasible to make such rights, preferences or privileges available to some or all
holders of Receipts (by the issue of warrants or otherwise) or (b) if and to the
extent instructed by holders of Receipts who do not desire to exercise such
rights, preferences or privileges, the Depositary shall then, if so instructed
by the Company, and if applicable laws or the terms of such rights, preferences
or privileges so permit, sell such rights, preferences or privileges of such
holders at public or private sale, at such place or places and upon such terms
as it may deem proper. The net proceeds of any such sale shall be distributed by
the Depositary to the record holders of Receipts entitled thereto as provided by
Section 4.1 in the case of a distribution received in cash.
If registration under the Securities Act of the securities to which any
rights, preferences or privileges relate is required in order for holders of
Receipts to be offered or sold the securities to which such rights, preferences
or privileges relate, the Company will promptly file a registration statement
pursuant to the Securities Act with respect to such rights, preferences or
privileges and securities and use its best efforts to cause such registration
statement to become effective sufficiently in advance of the expiration of such
rights, preferences or privileges to enable such holders to exercise such
rights, preferences or privileges. In no event shall the Depositary make
available to the holders of Receipts any right, preference or privilege to
subscribe for or to purchase any securities unless and until the Depositary
receives written notice and an opinion of counsel from the Company that a
registration statement shall have become effective or the offering and sale of
such securities to such holders are exempt from registration under the
provisions of the Securities Act.
If any other action under the law of any jurisdiction or any
governmental or administrative authorization, consent or permit is required in
order for such rights, preferences or privileges to be made available to holders
of Receipts, the Company will use its best efforts to take such action or obtain
such authorization, consent or permit sufficiently in advance of the expiration
of such rights, preferences or privileges to enable such holders to exercise
such rights, preferences or privileges.
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SECTION 4.4 NOTICE OF DIVIDENDS, FIXING OF RECORD DATE FOR HOLDERS OF
RECEIPTS. Whenever any cash dividend or other cash distribution shall become
payable, any distribution other than cash shall be made, or any rights,
preferences or privileges shall at any time be offered, with respect to the
Series F Preferred Stock or the Depositary shall receive notice of (i) any
meeting at which holders of Series F Preferred Stock are entitled to vote or of
which holders of Series F Preferred Stock are entitled to notice or (ii) any
election on the part of the Company to redeem any shares of Series F Preferred
Stock, the Depositary shall in each such instance fix a record date (which shall
be the same date as the record date fixed by the Company in respect of the
Series F Preferred Stock) for the determination of the holders of Receipts who
shall be entitled to receive such dividend, distribution, rights, preferences or
privileges or the net proceeds of the sale thereof, to give instructions for the
exercise of voting rights at any such meeting or to receive notice of such
meeting or whose Depositary Shares are to be so redeemed.
SECTION 4.5 VOTING RIGHTS. Upon receipt of notice of any meeting at
which the holders of Series F Preferred Stock are entitled to vote, the
Depositary shall, as soon as practicable (but in no event more than two business
days) thereafter, mail to the record holders of Receipts a notice, which shall
be provided by the Company and which shall contain (i) such information as is
contained in such notice of meeting, (ii) a statement that the holders of
Receipts at the close of business on a specified record date fixed pursuant to
Section 4.4 will be entitled, subject to any applicable provision of law, the
Certificate of Incorporation or the Certificate of Designations, to instruct the
Depositary as to the exercise of the voting rights pertaining to the amount of
Series F Preferred Stock represented by their respective Depositary Shares and
(iii) a brief statement as to the manner in which such instructions may be
given. Upon the written request of a holder of a Receipt on such record date,
the Depositary shall endeavor insofar as practicable to vote or cause to be
voted the number of shares of Series F Preferred Stock represented by the
Depositary Shares evidenced by such Receipt in accordance with the instructions
set forth in such request. The Company hereby agrees to take all reasonable
action that may be deemed necessary by the Depositary in order to enable the
Depositary to vote such shares of Series F Preferred Stock or cause such shares
of Series F Preferred Stock to be voted. In the absence of specific instructions
from the holder of a Receipt, the Depositary will abstain from voting to the
extent of the Series F Preferred Stock represented by the Depositary Shares
evidenced by such Receipt. After aggregating all voting Depositary Shares, the
Depositary will disregard for voting purposes any fractional share of Series F
Preferred Stock remaining.
SECTION 4.6 CHANGES AFFECTING SERIES F PREFERRED STOCK AND
RECLASSIFICATIONS, RECAPITALIZATIONS, ETC. Upon any split-up, consolidation or
any other reclassification of Series F Preferred Stock, or upon any
recapitalization, reorganization, merger, amalgamation or consolidation
affecting the Company or to which it is a party or sale of all or substantially
all of the Company's assets, the Depositary shall, upon the instructions of the
Company, treat any shares of stock or other securities or property (including
cash) that shall be received by the Depositary
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in exchange for or upon conversion of or in respect of the Series F Preferred
Stock as new deposited property under this Deposit Agreement, and Receipts then
outstanding shall thenceforth represent the proportionate interests of holders
thereof in the new deposited property so received in exchange for or upon
conversion or in respect of such Series F Preferred Stock. In any such case the
Depositary may, in its discretion, with the approval of the Company, execute and
deliver additional Receipts, or may call for the surrender of all outstanding
Receipts to be exchanged for new Receipts specifically describing such new
deposited property.
ARTICLE V
THE DEPOSITARY AND THE COMPANY
SECTION 5.1 MAINTENANCE OF OFFICES, AGENCIES, TRANSFER BOOKS BY THE
DEPOSITARY; THE REGISTRAR. Upon execution of this Deposit Agreement in
accordance with its terms, the Depositary shall maintain at the Corporate Office
facilities for the execution and delivery, transfer, surrender and exchange,
split-up, combination and redemption of Receipts and deposit and withdrawal of
Series F Preferred Stock and at the offices of the Depositary's Agents, if any,
facilities for the delivery, transfer, surrender and exchange, split-up,
combination, conversion and redemption of Receipts and deposit and withdrawal of
Series F Preferred Stock, all in accordance with the provisions of this Deposit
Agreement.
The Depositary shall keep books at the Corporate Office for the
registration and transfer of Receipts, which books at all reasonable times and
during normal business hours shall be open for inspection by the record holders
of Receipts as provided by applicable law; provided, that any such holder
requesting to exercise such right shall certify to the Depositary that such
inspection shall be for a proper purpose reasonably related to such person's
interest as an owner of Depositary Shares evidenced by the Receipts. The
Depositary shall consult with the Company upon receipt of any request for
inspection and shall not permit such inspection unless authorized by the Company
in writing. The Depositary may close such books, at any time or from time to
time, when deemed expedient by it in connection with the performance of its
duties hereunder.
The Depositary shall make available for inspection by holders of
Receipts at the Corporate Office and at such other places as it may from time to
time deem advisable during normal business hours any reports and communications
received from the Company that are both received by the Depositary as the holder
of Series F Preferred Stock and made generally available to the holders of
Series F Preferred Stock.
Promptly upon request from time to time by the Company, the Depositary
shall, at the Company's sole expense, furnish to it a list, as of a recent date,
of the
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names, addresses and holdings of Depositary Shares of all persons in whose names
Receipts are registered on the books of the Depositary.
If the Receipts, the Depositary Shares evidenced thereby or the Series
F Preferred Stock represented by such Depositary Shares are listed on one or
more stock exchanges or on the Nasdaq National Market ("Nasdaq"), the Depositary
will, at the request of the Company, arrange such facilities for the delivery,
transfer, surrender and exchange of such Receipts, such Depositary Shares or
such Series F Preferred Stock as may be required by law or applicable stock
exchange or Nasdaq regulations.
SECTION 5.2 PREVENTION OR DELAY IN PERFORMANCE BY THE DEPOSITARY, THE
DEPOSITARY'S AGENTS OR THE COMPANY. Neither the Depositary, the Registrar nor
any Depositary's Agent nor the Company shall incur any liability to any holder
of any Receipt, if by reason of any provision of any present or future law or
regulation thereunder of the United States of America or of any other
governmental authority or, in the case of the Depositary or the Depositary's
Agent, by reason of any provision, present or future, of the Certificate of
Incorporation or the Certificate of Designations or, in the case of the Company,
the Depositary or the Depositary's Agent, by reason of any act of God or war or
other circumstance beyond the control of the relevant party, the Depositary, any
Depositary's Agent or the Company shall be prevented or forbidden from doing or
performing any act or thing that the terms of this Deposit Agreement provide
shall be done or performed; nor shall the Depositary, any Depositary's Agent or
the Company incur any liability to any holder of a Receipt by reason of any
nonperformance or delay, caused as aforesaid, in the performance of any act or
thing that the terms of this Deposit Agreement provide shall or may be done or
performed, or by reason of any exercise of, or failure to exercise, any
discretion provided for in this Deposit Agreement.
SECTION 5.3 OBLIGATIONS OF THE DEPOSITARY, THE DEPOSITARY'S AGENTS AND
THE COMPANY. Neither the Depositary, the Registrar, any Depositary's Agent nor
the Company assumes any obligation or shall be subject to any liability under
this Deposit Agreement or any Receipt to holders of Receipts other than for
their negligence (including the failure to meet customary trade practice) or
willful misconduct and that each of them agrees to act in good faith in the
performance of such duties as are specifically set forth in this Deposit
Agreement.
Neither the Depositary, the Registrar nor any Depositary's Agent nor
the Company shall be under any obligation to appear in, prosecute or defend any
action, suit or other proceeding with respect to the Series F Preferred Stock,
Depositary Shares, Receipts or Common Stock that in its opinion may involve it
in expense or liability, unless indemnity satisfactory to it against all expense
and liability be furnished as often as may be required.
Neither the Depositary, the Registrar, any Depositary's Agent nor the
Company shall be liable for any action or any failure to act by it in reliance
upon the
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advice of or information from legal counsel, any person presenting Series F
Preferred Stock for deposit, any holder of a Receipt or any other person
believed by it in good faith to be competent to give such advice or information.
The Depositary, any Depositary's Agent and the Company may each rely and shall
each be protected in acting upon any written notice, request, direction or other
document believed by it to be genuine and to have been signed or presented by
the proper party or parties.
The Depositary, its parent, affiliates, or subsidiaries, the Registrar
and any Depositary's Agent may own, buy, sell or deal in any class of securities
of the Company and its affiliates and in Receipts or Depositary Shares or become
pecuniarily interested in any transaction in which the Company and its
affiliates may be interested or contract with or lend money to or otherwise act
as fully or as freely as if the Depositary, the Registrar or the Depositary's
Agent, as the case may be, was not the Depositary, the Registrar or the
Depositary's Agent hereunder. The Depositary may also act as transfer agent or
registrar of any of the securities of the Company and its affiliates.
It is intended that neither the Depositary nor any Depositary's Agent
shall be deemed to be an "issuer" of the securities under the federal securities
laws or applicable state securities laws, it being expressly understood and
agreed that the Depositary and any Depositary's Agent are acting only in a
ministerial capacity as Depositary for the Series F Preferred Stock. The
Depositary agrees to comply with all information reporting and withholding
requirements applicable to it under law or this Deposit Agreement in its
capacity as Depositary.
The Depositary shall act as the withholding agent for any payments,
distributions, and exchanges made with respect to the Depositary Shares and
Receipts, and the Series F Preferred Stock, Common Stock or other securities or
assets represented thereby (collectively, the "Securities"). The Depositary
shall be responsible with respect to the Securities for the timely (i)
collection and deposit of any required withholding or backup withholding tax,
and (ii) filing of any information returns or other documents with Federal
taxing authorities.
SECTION 5.4 RESIGNATION AND REMOVAL OF THE DEPOSITARY, APPOINTMENT OF
SUCCESSOR DEPOSITARY. The Depositary may at any time resign as Depositary
hereunder by notice of its election to do so delivered to the Company, such
resignation to take effect upon the appointment of a successor depositary and
its acceptance of such appointment as hereinafter provided.
The Depositary may at any time be removed by the Company by notice of
such removal delivered to the Depositary, such removal to take effect upon the
appointment of a successor depositary and its acceptance of such appointment as
hereinafter provided.
In case at any time the Depositary acting hereunder shall resign or be
removed, the Company shall, within 60 days after the delivery of the notice of
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resignation or removal, as the case may be, appoint a successor depositary,
which shall be a bank or trust company having its principal office in the United
States of America and having a combined capital and surplus of at least
$150,000,000. If a successor depositary shall not have been appointed in 60
days, the resigning Depositary may petition a court of competent jurisdiction to
appoint a successor depositary. Every successor depositary shall execute and
deliver to its predecessor and to the Company an instrument in writing accepting
its appointment hereunder, and thereupon such successor depositary, without any
further act or deed, shall become fully vested with all the rights, powers,
duties and obligations of its predecessor and for all purposes shall be the
Depositary under this Deposit Agreement, and such predecessor, upon payment of
all sums due it and on the written request of the Company, shall promptly
execute and deliver an instrument transferring to such successor all rights and
powers of such predecessor hereunder, shall duly assign, transfer and deliver
all rights, title and interest in the Series F Preferred Stock and any moneys or
property held hereunder to such successor and shall deliver to such successor a
list of the record holders of all outstanding Receipts and such other records
respecting the Receipts, the Depositary Shares and the Series F Preferred Stock
as the successor shall require in order to perform its duties. Any successor
depositary shall promptly mail notice of its appointment to the record holders
of Receipts.
Any corporation into or with which the Depositary may be merged,
consolidated or converted shall be the successor of such Depositary without the
execution or filing of any document or any further act. Such successor
depositary may execute the Receipts either in the name of the predecessor
depositary or in the name of the successor depositary.
SECTION 5.5 CORPORATE NOTICES AND REPORTS. The Company agrees that it
will deliver to the Depositary, and the Depositary will, promptly (but in no
event more than two business days) after receipt thereof, transmit to the record
holders of Receipts, in each case at the address recorded in the Depositary's
books, copies of all notices and reports (including financial statements)
required by law, by the rules of any national securities exchange or Nasdaq upon
which the Series F Preferred Stock, the Depositary Shares or the Receipts may be
listed or by the Certificate of Incorporation and the Certificate of
Designations to be furnished by the Company to holders of Series F Preferred
Stock. Such transmission will be at the Company's expense and the Company will
provide the Depositary with such number of copies of such documents as the
Depositary may reasonably request. In addition, the Depositary will transmit to
the record holders of Receipts at the Company's expense such other documents as
may be requested by the Company.
SECTION 5.6 DEPOSIT OF SERIES F PREFERRED STOCK BY THE COMPANY. The
Company agrees with the Depositary that neither the Company nor any company
controlled by the Company will at any time deposit any Series F Preferred Stock
if such Series F Preferred Stock is required to be registered under the
provisions of the
22
<PAGE> 23
Securities Act and no registration statement is at such time in effect as to
such Series F Preferred Stock.
SECTION 5.7 INDEMNIFICATION BY THE COMPANY. The Company agrees to
indemnify the Depositary, any Depositary's Agent and any Registrar against, and
hold each of them harmless from, any liability, costs and expenses (including
the reasonable fees and expenses of counsel) that may arise out of or in
connection with its acting as Depositary, Depositary's Agent or Registrar,
respectively, under this Deposit Agreement and the Receipts, except for any
liability arising out of negligence or bad faith on the part of any such person
or persons.
SECTION 5.8 FEES, CHARGES AND EXPENSES. No fees, charges and expenses
of the Depositary or any Depositary's Agent hereunder or of any Registrar shall
be payable by any person other than the Company, except for any taxes (including
transfer taxes, if any) and other governmental charges and except as provided in
this Deposit Agreement. If the Depositary incurs fees, charges or expenses for
which it is not otherwise liable hereunder due to any action or inaction of a
holder of a Receipt or other person, such holder or other person will be liable
for such fees, charges and expenses. All other fees, charges and expenses of the
Depositary and any Depositary's Agent hereunder and of any Registrar (including,
in each case, the reasonable fees and expenses of counsel) incident to the
performance of their respective obligations hereunder will be paid upon
consultation and agreement between the Depositary and the Company as to the
amount and nature of such fees, charges and expenses. The Depositary shall
present its statement for fees, charges and expenses to the Company once every
month or at such other intervals as the Company and the Depositary may agree.
ARTICLE VI
AMENDMENT AND TERMINATION
SECTION 6.1 AMENDMENT. The form of the Receipts and any provision of
this Deposit Agreement may at any time and from time to time be amended by
agreement between the Company and the Depositary in any respect that they may
deem necessary or desirable. Any amendment that shall impose any fees, taxes or
charges (other than taxes and other governmental charges, fees and expenses
provided for herein or in the Receipts), or that shall otherwise prejudice any
substantial existing right of holders of Receipts, shall not become effective as
to outstanding Receipts until the holders of record of Receipts representing not
less than 66 2/3% of the number of Depositary Shares then outstanding shall have
consented thereto in writing or by voting therefor in person or by proxy at a
meeting held on notice for such purpose or any adjournment or adjournments
thereof. Every holder of an outstanding Receipt at the time any such amendment
becomes effective shall be deemed, by continuing to hold such Receipt, to
consent and agree to such amendment and to be bound by this Deposit Agreement as
amended thereby. In no event shall
23
<PAGE> 24
any amendment impair the right, subject to the provisions of Sections 2.4, 2.5,
2.7, 2.8 and 2.11 and Article III, of any owner of any Depositary Shares to
surrender the Receipt evidencing such Depositary Shares with instructions to the
Depositary to deliver to the holder the underlying Series F Preferred Stock or
to cause the conversion of the underlying Series F Preferred Stock into Common
Stock and cash for fractional shares and, in each case, all money and other
property, if any, represented thereby, except in order to comply with mandatory
provisions of applicable law.
SECTION 6.2 TERMINATION. Whenever so directed by the Company, the
Depositary will terminate this Deposit Agreement by mailing notice of such
termination to the record holders of all Receipts then outstanding at least 30
days prior to the date fixed in such notice for such termination. The Depositary
may likewise terminate this Deposit Agreement if at any time 60 days shall have
expired after the Depositary shall have delivered to the Company a written
notice of its election to resign and a successor depositary shall not have been
appointed and accepted its appointment as provided in Section 5.4. If any
Receipts remain outstanding after the date of termination, the Depositary
thereafter will discontinue the transfer of Receipts, will suspend the
distribution of dividends to the holders thereof, and will not give any further
notices (other than notice of such termination) or perform any further acts
under this Deposit Agreement except as provided below and except that the
Depositary will continue (i) to collect dividends on the Series F Preferred
Stock and any other distributions with respect thereto and (ii) to deliver
Series F Preferred Stock together with such dividends and distributions and the
net proceeds of any sales of rights, preferences, privileges or other property,
without liability for interest thereon, in exchange for Receipts surrendered. At
any time after the expiration of two years from the date of termination, the
Depositary may sell the Series F Preferred Stock then held by it at public or
private sales, at such place or places and upon such terms as it deems proper
and may thereafter hold the net proceeds of any such sale, together with any
money and other property then held by it, without liability for interest
thereon, for the pro rata benefit of the holders of Receipts which have not been
surrendered. In the event this Deposit Agreement is terminated and a sufficient
number of shares of Series F Preferred Stock remain outstanding, the Company
will use its best efforts to list the shares of Series F Preferred Stock with
Nasdaq (unless the holders of a majority of the outstanding shares of Series F
Preferred Stock shall consent to the Company not effecting such listing). Upon
termination, the Company and the Depositary shall be discharged from all
obligations under this Deposit Agreement, except from the Company's obligations
to the Depositary, any Depositary's Agent or any Registrar under Sections 5.7
and 5.8.
24
<PAGE> 25
ARTICLE VII
MISCELLANEOUS
SECTION 7.1 COUNTERPARTS. This Deposit Agreement may be executed by the
Company and the Depositary in separate counterparts, each of which counterparts,
when so executed an delivered, shall be deemed an original, but all such
counterparts taken together shall constitute one and the same instrument.
Delivery of an executed counterpart of a signature page to this Deposit
Agreement by telecopier shall be effective as delivery of a manually executed
counterpart of this Deposit Agreement. Copies of this Deposit Agreement shall be
filed with the Depositary and the Depositary's Agent at the Corporate Office and
the respective offices of the Depositary's Agents, if any.
SECTION 7.2 EXCLUSIVE BENEFITS OF PARTIES. This Deposit Agreement is
for the exclusive benefit of the parties hereto, and their respective successors
hereunder, and shall not be deemed to give any legal or equitable right, remedy
or claim to any other person whatsoever.
SECTION 7.3 INVALIDITY OF PROVISIONS. In case any one or more of the
provisions contained in this Deposit Agreement or in the Receipts should be or
become invalid, illegal or unenforceable in any respect, the validity, legality
and enforceability of the remaining provisions contained herein or therein shall
in no way be affected, prejudiced or disturbed thereby.
SECTION 7.4 NOTICES. Any notices to be given to the Company hereunder
or under the Receipts shall be in writing and shall be deemed to have been duly
given if personally delivered or sent by overnight, registered or certified
mail, or by telegram or telex confirmed by letter, addressed to the Company at
4925 Greenville Avenue, Suite 1400, Dallas, Texas 75206; Attention:
____________________, with a copy addressed to the Company's Counsel at Akin
Gump Strauss Hauer & Feld, LLP; Attention: Diane Muse, or at such other address
as shall be specified by the Company by like notice. Any notices to be given to
the Depositary hereunder or under the Receipts shall be in writing and shall be
deemed to have been duly given if personally delivered or sent by overnight,
registered or certified mail, or by telegram or telex confirmed by letter,
addressed to the Depositary at ______________, Attention: ______________,
General Counsel and [other title], or at such other address as shall be
specified by the Depositary by like notice.
Any notices given to any record holder of a Receipt hereunder or under
the Receipts shall be in writing and shall be deemed to have been duly given if
personally delivered or sent by mail, or by telegram or telex confirmed by
letter, addressed to such record holder at the address of such record holder as
it appears on the books of the Depositary or, if such holder shall have filed
with the Depositary a written request that notices intended for such holder be
mailed to some other address, at the address designated in such request.
25
<PAGE> 26
Delivery of a notice sent by mail, or by telegram or telex shall be
deemed to be effected at the time when a duly addressed letter containing the
same (or a duly addressed letter confirming an earlier notice in the case of a
telegram or telex message) is deposited, postage prepaid, in a post office
letter box. The Depositary or the Company may, however, act upon any telegram or
telex message received by it from the other or from any holder of a Receipt,
notwithstanding that such telegram or telex message shall not subsequently be
confirmed by letter as aforesaid.
SECTION 7.5 DEPOSITARY'S AGENTS. The Depositary may from time to time
appoint Depositary's Agents to act in any respect for the Depositary for the
purposes of this Deposit Agreement and may at any time appoint additional
Depositary's Agents and vary or terminate the appointment of such Depositary's
Agents. The Depositary will notify the Company in writing of any such action.
SECTION 7.6 HOLDERS OF RECEIPTS ARE PARTIES. The holders of Receipts
from time to time shall be deemed to be parties to this Deposit Agreement and
shall be bound by all of the terms and conditions hereof and of the Receipts by
acceptance of delivery thereof.
SECTION 7.7 GOVERNING LAW. This Deposit Agreement and the Receipts and
all rights hereunder and thereunder and provisions hereof and thereof shall be
governed by, and construed in accordance with, the laws of the State of New
York, without regard to conflict of laws rules.
SECTION 7.8 HEADINGS. The headings of articles and sections in this
Deposit Agreement and in the form of the Receipt set forth in Exhibit A hereto
have been inserted for convenience only and are not to be regarded as a part of
this Deposit Agreement or the Receipts or to have any bearing upon the meaning
or interpretation of any provision contained herein or in the Receipts.
26
<PAGE> 27
IN WITNESS WHEREOF, the Company and the Depositary have duly executed
this agreement as of the day and year first above set forth and all holders of
Receipts shall become parties hereto by and upon acceptance by them of delivery
of Receipts issued in accordance with the terms hereof.
NATIONAL ENERGY GROUP, INC.
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
--------------------------------
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
Attest:
- ----------------------------
27
<PAGE> 1
EXHIBIT 12.1
NATIONAL ENERGY GROUP, INC.
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDEND REQUIREMENTS
(IN THOUSANDS, EXCEPT FOR RATIOS)
<TABLE>
<CAPTION>
Year End December 31,
----------------------------------------------------------------------------
Pro Forma
1992 1993 1994 1995 1996 1996(1)
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Income (loss) before
taxes and extraordinary items . . . . . ($221) ($299) ($489) $ 206 ($40,061) $ 5,302
Interest expense. . . . . . . . . . . . . . 131 137 498 995 4,062 5,748
Amortization of debt issuance cost. . . . . 43 51 19 37 151 151
Interest portion of rental cost . . . . . . 8 8 21 34 37 37
Earnings. . . . . . . . . . . . . . . . ($ 39) ($103) $ 49 $1,272 ($35,811) $11,238
Fixed charges:
Interest including capitalized
portion . . . . . . . . . . . . . . . . $ 131 $ 137 $ 498 $ 995 $ 4,062 $ 5,748
Amortization of debt issuance
cost. . . . . . . . . . . . . . . . . . 43 51 19 37 151 151
Interest portion of rental expense. . . . . 8 8 21 34 37 37
Fixed charges . . . . . . . . . . . . . $ 182 $ 196 $ 538 $1,066 $ 4,250 $ 5,936
Preferred stock dividend requirements . . . 13 18 265 735 945 945
Adjustment to reflect preferred stock
dividend requirement on a pre-tax
basis . . . . . . . . . . . . . . . . . -- -- -- -- 170 509
Combined fixed charges and
preferred stock dividends . . . . . . . $ 195 $ 214 $ 803 $1,801 $ 5,365 $ 7,390
Ratio of earnings to fixed charges . . . . . . . -- -- -- -- -- 1.5x
Deficiency of earnings to fixed charges and
preferred stock dividend requirements. . . . . . ($234) ($317) ($754) ($529) ($41,176) --
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------------
Pro Forma
1996 1997 1996(1)
----------------------------------
<S> <C> <C> <C>
Earnings:
Income (loss) before
taxes and extraordinary items. . . . ($41,952) $ 3,207 $3,411
Interest expense . . . . . . . . . . . . 1,755 7,929 3,442
Amortization of debt issuance cost . . . 71 330 71
Interest portion of rental cost. . . . . 35 21 35
Earnings . . . . . . . . . . . . . . ($40,091) $11,487 $6,959
Fixed charges:
Interest including capitalized
portion. . . . . . . . . . . . . . . $1,755 $ 9,468 $3,442
Amortization of debt issuance
cost . . . . . . . . . . . . . . . . 71 330 71
Interest portion of rental expense . . . 35 21 35
Fixed charges. . . . . . . . . . . . $1,861 $ 9,819 $3,548
Preferred stock dividend requirements. . 708 708 708
Adjustment to reflect preferred stock
dividend requirement on a pre-tax
basis. . . . . . . . . . . . . . . . -- 381 381
Combined fixed charges and
preferred stock dividends. . . . . . $2,569 $10,908 $4,637
Ratio of earnings to fixed charges. . . . . . -- 1.1x 1.5x
Deficiency of earnings to fixed charges
and preferred stock dividend
requirements. . . . . . . . . . . . . . . . ($42,660) -- --
</TABLE>
- -------------------
(1) The pro forma computations of ratio of earnings to combined fixed charges
and preferred stock dividend requirements have been prepared as if the
merger with Alexander Energy Corporation (the "Merger") and related
transactions and the Lake Boeuf Acquisition (as defined) had been
consummated on January 1, 1996. The pro forma results of operations exclude
a non-cash write down of oil and natural gas properties of approximately
$28.3 million (net of deferred income taxes), in accordance with the full
cost method of accounting, which was charged to expense in the third
quarter of 1996, when the Merger was consummated.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the caption Experts and to
the use of our report dated March 18, 1997, in the Registration Statement (Form
S-3) and related Prospectus of National Energy Group, Inc. for the registration
of $100 million of Series F Convertible Preferred Stock. We also consent to the
incorporation by reference therein of our report dated March 30, 1996, except
Notes 4 and 13 for which date is May 10, 1996 with respect to the consolidated
financial statements of Alexander Energy Corporation included in the Company's
Proxy Statement filed, as part of, or in conjunction with, the Registration
Statement on Form S-4, as amended, declared effective August 3, 1996.
ERNST & YOUNG LLP
Dallas, Texas
November 19, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the reference of our firm under the caption "Experts" and to
use of and the incorporation by reference of our report in the Registration
Statement on Form S-3 and related Prospectus of National Energy Group, Inc. for
registration of interests in $100,000,000 of Convertible Preferred Stock, which
report includes an explanatory paragraph relating to the Company's adoption of
different methods of accounting for its oil and gas properties and income taxes,
dated February 22, 1994, on our audit of the consolidated financial statements
of American Natural Energy Corporation and Subsidiaries (the "Company") for the
year ended December 31, 1993.
/s/ COOPERS & LYBRAND L.L.P.
------------------------------------
COOPERS & LYBRAND L.L.P.
Tulsa, Oklahoma
November 24, 1997
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-3 of our reserve reports to the interest of National Energy
Group, Inc. dated March 6, 1997 and February 15, 1996 relating to the estimated
quantities of certain of the Company's proved reserves of oil and gas and the
related estimates of future net revenue and present values thereof, included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1996,
as well as to the references to our estimates of the Company's proved reserves
and future net revenue for the years ending December 31, 1995 and December 1996
in the Notes to the Financial Statements of the Company in such Annual Report.
We also consent to the reference to us under the heading "Experts" in such
Registration Statement.
NETHERLAND, SEWELL & ASSOCIATES, INC.
By: /s/ FREDERIC D. SEWELL
-------------------------------------
Frederic D. Sewell
President
Dallas, Texas
November 21, 1997
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-3 of our reserve report to the interest of National Energy
Group, Inc. dated March 1, 1995, relating to the estimated quantities of
certain of the Company's proved reserves of oil and gas and the related
estimates of future net revenue and present values thereof, included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1994, as
well as in the Notes to the Consolidated Financial Statements of the Company
in such Annual Report. We also consent to the references to us under the heading
"Experts" in such Registration Statement.
ROEBUCK ASSOCIATES, INC.
By: /s/ Field Roebuck
------------------------------
Field Roebuck
President
Dallas, Texas
November 24, 1997
