<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NO. 0-19136 (COMMON STOCK)
AND 333-9045 (SENIOR NOTES)
NATIONAL ENERGY GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 58-1922764
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
</TABLE>
1400 ONE ENERGY SQUARE
4925 GREENVILLE AVENUE
DALLAS, TEXAS 75206
(Address of principal executive offices)
(214) 692-9211
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
------------------------
40,063,820 shares of the registrant's Common Stock, $0.01 par value, were
outstanding on November 10, 1997.
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<PAGE>
NATIONAL ENERGY GROUP, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
-----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets at September 30, 1997 and December 31, 1996 (Unaudited)........................... 1
Statements of Operations for the three and nine months ended September 30, 1997
and 1996 (Unaudited)........................................................................... 2
Statements of Cash Flows for the nine months ended September 30, 1997 and 1996 (Unaudited)....... 3
Statement of Stockholders' Equity for the nine months ended September 30, 1997 (Unaudited)....... 4
Notes to Financial Statements (Unaudited)........................................................ 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................................ 16
Item 6. Exhibits and Reports on Form 8-K................................................................. 16
</TABLE>
<PAGE>
NATIONAL ENERGY GROUP, INC.
BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................................... $ 35,615 $ 14,182
Marketable securities............................................................. 542 --
Accounts receivable-oil and gas sales............................................. 9,196 6,812
Accounts receivable-joint interest and other...................................... 9,059 3,004
Other............................................................................. 2,282 1,132
------------- ------------
Total current assets................................................................ 56,694 25,130
Oil and gas properties, at cost (full cost method):
Proved oil and gas properties..................................................... 215,228 169,863
Unproved oil and gas properties................................................... 33,291 24,683
------------- ------------
248,519 194,546
Accumulated depreciation, depletion, and amortization............................. 31,464 15,040
------------- ------------
Net oil and gas properties.......................................................... 217,055 179,506
Other property and equipment........................................................ 4,204 2,869
Accumulated depreciation............................................................ 647 348
------------- ------------
Net other property and equipment.................................................... 3,557 2,521
Other assets, net................................................................... 7,819 4,879
------------- ------------
Total assets........................................................................ $ 285,125 $ 212,036
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable-trade............................................................ $ 10,152 $ 12,012
Accounts payable-revenue and other................................................ 11,067 7,281
Accrued merger costs.............................................................. -- 1,463
Accrued interest.................................................................. 5,256 1,792
------------- ------------
Total current liabilities........................................................... 26,475 22,548
Other long-term liabilities......................................................... 859 1,787
10 3/4% Senior Notes due 2006, including issuance premium of $1,436 in 1997......... 166,436 100,000
Deferred income taxes............................................................... 8,365 7,274
Stockholders' equity:
Convertible preferred stock, $1.00 par:
Authorized shares 1,000,000
Issued and outstanding shares--242,500
Aggregate liquidation preference--$24,250,000................................. 243 243
Common stock, $.01 par value:
Authorized shares--100,000,000
Issued and outstanding shares--36,275,669 and 35,977,140 at September 30, 1997
and December 31, 1996, respectively........................................... 363 360
Additional paid-in capital........................................................ 111,170 110,293
Unrealized gain on marketable securities.......................................... 27 --
Deficit........................................................................... (28,813) (30,469)
------------- ------------
Total stockholders' equity.......................................................... 82,990 80,427
------------- ------------
Total liabilities and stockholders' equity.......................................... $ 285,125 $ 212,036
------------- ------------
------------- ------------
</TABLE>
See accompanying notes.
1
<PAGE>
NATIONAL ENERGY GROUP, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1997 1996 1997 1996
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Revenue:
Oil and gas sales................................................. $ 13,404 $ 5,490 $ 38,151 $ 13,181
Well operator fees................................................ 263 215 994 314
--------- ---------- --------- ----------
13,667 5,705 39,145 13,495
Cost and expenses:
Lease operating................................................... 1,931 894 5,551 2,096
Oil and gas production taxes...................................... 677 270 2,087 663
Depreciation, depletion, and amortization......................... 6,189 2,239 16,741 5,444
Write-down of oil and gas properties.............................. -- 43,497 -- 43,497
General and administrative........................................ 1,593 909 3,807 1,957
--------- ---------- --------- ----------
10,390 47,809 28,186 53,657
--------- ---------- --------- ----------
Operating income (loss)............................................. 3,277 (42,104) 10,959 (40,162)
Interest expense.................................................... (3,153) (850) (8,259) (1,826)
Interest income and other, net...................................... 269 125 507 154
Gain (loss) on sale of marketable securities........................ -- 10 -- (118)
--------- ---------- --------- ----------
Income (loss) before income taxes................................... 393 (42,819) 3,207 (41,952)
Benefit (provision) for income taxes................................ (121) 15,146 (1,079) 15,146
--------- ---------- --------- ----------
Income (loss) before extraordinary item............................. 272 (27,673) 2,128 (26,806)
Extraordinary charge for early extinguishment of debt............... -- (292) -- (292)
--------- ---------- --------- ----------
Net income (loss)................................................... $ 272 $ (27,965) $ 2,128 $ (27,098)
--------- ---------- --------- ----------
--------- ---------- --------- ----------
Net income per common share:
Income (loss) before extraordinary item........................... $ .00 $ (1.40) $ .03 $ (1.87)
--------- ---------- --------- ----------
--------- ---------- --------- ----------
Net income (loss)................................................. $ .00 $ (1.42) $ .03 $ (1.89)
--------- ---------- --------- ----------
--------- ---------- --------- ----------
Weighted average number of common shares Outstanding................ 43,907 19,880 43,886 14,693
--------- ---------- --------- ----------
--------- ---------- --------- ----------
</TABLE>
See accompanying notes.
2
<PAGE>
NATIONAL ENERGY GROUP, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
30,
---------------------------
1997 1996
------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................................................... $ 2,128 $ (27,098)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion, and amortization......................................... 16,741 5,444
Write-down of oil and gas properties.............................................. -- 43,497
Amortization of debt issuance costs............................................... 415 71
Amortization of deferred compensation............................................. 130 35
Provision (benefit) for deferred income taxes..................................... 1,091 (15,146)
Extraordinary charge for early extinguishment of debt............................. -- 292
Common stock, options, and warrants issued for services........................... 17 138
Changes in operating assets and liabilities:
Accounts receivable............................................................. (8,438) (1,107)
Other current assets............................................................ (1,006) (822)
Accounts payable and accrued liabilities........................................ 3,948 (524)
------------- ------------
Net cash provided by operating activities........................................... 15,026 4,780
------------- ------------
INVESTING ACTIVITIES
Purchases of marketable securities.................................................. (515) (9)
Proceeds from sale of marketable securities......................................... -- 1,750
Purchases of other property and equipment........................................... (1,342) (163)
Oil and gas acquisition, exploration, and development expenditures.................. (54,792) (16,339)
Acquisition of Alexander Energy Corporation, net of cash acquired of $1,333......... -- (1,489)
Other............................................................................... (2,626) (600)
------------- ------------
Net cash used by investing activities............................................... (59,275) (16,850)
------------- ------------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt, net....................................... 99,441 72,036
Proceeds from issuance of convertible preferred stock............................... -- 15,000
Repayments of note payable.......................................................... -- (3,060)
Repayments of long-term debt........................................................ (33,000) (69,010)
Repayments of other long-term liabilities........................................... (777) --
Proceeds from exercise of stock options and warrants................................ 570 150
Purchase of common stock............................................................ (80) --
Preferred stock dividends........................................................... (472) (472)
------------- ------------
Net cash provided by financing activities........................................... 65,682 14,644
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Increase in cash and cash equivalents............................................... 21,433 2,574
Cash and cash equivalents and beginning of period................................... 14,182 6,076
------------- ------------
Cash and cash equivalents at end of period.......................................... $ 35,615 $ 8,650
------------- ------------
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SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid in cash............................................................... $ 5,668 $ 1,927
------------- ------------
------------- ------------
</TABLE>
See accompanying notes.
3
<PAGE>
NATIONAL ENERGY GROUP, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
UNREALIZED
CONVERTIBLE PREFERRED GAIN ON
STOCK COMMON STOCK ADDITIONAL AVAILABLE FOR
---------------------- ------------------------ PAID-IN SALE
SHARES AMOUNT SHARES AMOUNT CAPITAL SECURITIES DEFICIT
--------- ----------- ----------- ----------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996........... 242,500 $ 243 35,977,140 $ 360 $ 110,293 $ -- $ (30,469)
Common stock issued upon exercise of
options and warrants................. -- -- 239,665 2 568 -- --
Common stock, options, and warrants
issued for services.................. -- -- 82,854 1 389 -- --
Purchase of common stock............... -- -- (24,000) -- (80) -- --
Preferred stock dividends.............. -- -- -- -- -- -- (472)
Unrealized gain on marketable
securities........................... -- -- -- -- -- 27 --
Net income............................. -- -- -- -- -- -- 2,128
--------- ----- ----------- ----- ----------- ----- ---------
Balance as of September 30, 1997....... 242,500 $ 243 36,275,659 $ 363 $ 111,170 $ 27 $ (28,813)
--------- ----- ----------- ----- ----------- ----- ---------
--------- ----- ----------- ----- ----------- ----- ---------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balance at December 31, 1996........... $ 80,427
Common stock issued upon exercise of
options and warrants................. 570
Common stock, options, and warrants
issued for services.................. 390
Purchase of common stock............... (80)
Preferred stock dividends.............. (472)
Unrealized gain on marketable
securities........................... 27
Net income............................. 2,128
-------------
Balance as of September 30, 1997....... $ 82,990
-------------
-------------
</TABLE>
4
<PAGE>
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 and December 31, 1996, the results of
operations for the three and nine month periods ended September 30, 1997 and
1996, and the cash flows for the nine month periods ended September 30, 1997 and
1996.
The accompanying unaudited financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and disclosures normally included in annual financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to those rules and regulations, although the Company believes
that the disclosures made are adequate to make the information presented not
misleading. These financial statements should be read in conjunction with the
Company's financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.
The Company capitalizes internal general and administrative costs that can
be directly identified with acquisition, exploration, and development
activities. These costs totaled $1,006,280 for the nine months ended September
30, 1997 and $173,033 for the nine months ended September 30, 1996. 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, 1997 and 1996,
and $236,250 for the three months ended September 30, 1997 and 1996, 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 43,885,794 and
14,693,000 for the nine months ended September 30 1997 and 1996, respectively,
and 43,906,694 and 19,880,000 for the three months ended September 30, 1997 and
1996, 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, 1997 and 1996 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.
5
<PAGE>
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION (CONTINUED)
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.
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
6
<PAGE>
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
(UNAUDITED)
2. ACQUISITIONS (CONTINUED)
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>
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
three and nine months ended September 30, 1996, as if the acquisition of NEG-OK,
the Lake Boeuff 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 PRO FORMA
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1996
------------------- ------------------
<S> <C> <C>
(UNAUDITED) (UNAUDITED)
Total revenues (in thousands)......................... $ 9,170 $ 27,107
------ -------
------ -------
Net income (in thousands)............................. $ 998 $ 2,217
------ -------
------ -------
Net income per share.................................. $ 0.01 $ 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%
7
<PAGE>
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
(UNAUDITED)
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.
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.
8
<PAGE>
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
(UNAUDITED)
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.
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 2.1 million shares of Common Stock.
9
<PAGE>
NATIONAL ENERGY GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
In the fourth quarter of 1996 the Company began an accelerated development
and exploration program (the "Drilling Program") using the net proceeds from the
Notes. The Company had budgeted $57 million for the Drilling Program during
1997, of which $45 million was designated for development drilling and $12
million was designated for exploration drilling. As of September 30, 1997, the
Company had spent approximately $54.8 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 and $4.0 million was for acquisitions.
RESULTS OF OPERATIONS
The following table sets forth certain information regarding the production
volumes, oil and natural gas sales, average sales prices, lease operating
expenses ("LOE"), general and administrative expenses ("G&A") and depreciation,
depletion, and amortization ("DD&A") associated with the Company's oil and
natural gas sales for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net production (in thousands):
Oil (Bbls)................................................. 292 121 790 344
Natural gas (Mcf).......................................... 3,580 1,421 9,853 2,997
Natural gas equivalent (Mcfe).............................. 5,329 2,150 14,594 5,060
Oil and natural gas sales (in thousands):
Oil........................................................ $ 5,427 $ 2,663 $ 15,566 $ 7,077
Natural gas................................................ 7,977 2,827 22,585 6,104
--------- --------- --------- ---------
Total...................................................... $ 13,404 $ 5,490 $ 38,151 $ 13,181
--------- --------- --------- ---------
--------- --------- --------- ---------
Average sales price:
Oil (Bbls)................................................. $ 18.61 $ 21.93 $ 19.70 $ 20.62
Natural gas (Mcf).......................................... 2.23 1.99 2.29 2.04
Natural gas equivalent (Mcfe).............................. 2.52 2.55 2.61 2.60
LOE per Mcfe................................................. .36 .42 .38 .41
G&A expenses per Mcfe........................................ .30 .42 .26 .38
DD&A per Mcfe................................................ 1.13 1.02 1.13 1.02
</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 and the Bayou Sorrel Acquisition (hereinafter referred to as the
"1996 Acquisitions") completed during 1996. In 1997, the Company produced
790,000 barrels of oil, an increase of 129.7% over 344,000 barrels in 1996, and
9,853,000 Mcf of natural gas, an increase of 228.8% over 2,997,000 Mcf in the
same period of 1996.
10
<PAGE>
NATIONAL ENERGY GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Also contributing to the increase in revenues was the increase in average
natural gas prices of $.25 per Mcf to $2.29 per Mcf for 1997 from $2.04 for
1996, offset by the decrease in average oil prices of $.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 $.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.
Although G&A increased $1.8 million to $3.8 million for 1997, G&A per Mcfe
decreased 31.6% to $.26 for 1997 from $.38 for 1996. This decrease is
attributable to the increase in production from 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 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.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1996
REVENUES
Total revenues increased by $8.0 million (140.4%) to $13.7 million for 1997
from $5.7 million in 1996. The increase in revenues is due to the increase in
production primarily from the Merger with Alexander, the Drilling Program and
the 1996 Acquisitions. In 1997, the Company produced 292,000 barrels of oil, an
increase of 141.3% over 121,000 barrels in 1996, and 3,580,000 Mcf of natural
gas, an increase of 151.9% over 1,421,000 Mcf in the same period of 1996.
11
<PAGE>
NATIONAL ENERGY GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Also contributing to the increase in revenues was the increase in average
natural gas prices of $.24 per Mcf to $2.23 per Mcf for 1997 from $1.99 for
1996, offset by the decrease in average oil prices of $3.32 per barrel to $18.61
for 1997 from $21.93 for 1996.
COSTS AND EXPENSES
Lease operating expenses increased $1.0 million (111.1%) to $1.9 million for
1997 from $.9 million for 1996 primarily due to the Merger, the Drilling Program
and the 1996 Acquisitions. However, lease operating expenses per Mcfe decreased
to $.36 for 1997 compared to $.42 for 1996.
Production taxes increased $.4 million (133.3%) to $.7 million for 1997
compared to $.3 million for 1996. This increase is a direct result from the
increase in total oil and natural gas revenues discussed above.
DD&A increased $4.0 million (181.8%) to $6.2 million for 1997 compared to
$2.2 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.
Although G&A increased $.7 million to $1.6 million for 1997, G&A per Mcfe
decreased 28.6% to $.30 for 1997 from $.42 for 1996. This decrease is
attributable to the increase in production from the Drilling Program, the 1996
Acquisitions and, to a lesser extent, the Merger, without a proportionate
increase in the G&A costs to the Company.
OTHER INCOME AND EXPENSES
The increase of $2.2 million (244.4%) in interest expense to $3.1 million
for 1997 from $.9 million for 1996, was due to the issuance of the Notes offset
by $.8 million of interest costs related to the Company's unproved oil and gas
properties which was capitalized in 1997. The average balance outstanding under
the Notes during the third quarter of 1997 was $133 million as compared to
average debt outstanding under credit facilities of $37 million for 1996. The
weighted average interest rate for 1997 was 10.6% compared to 9.12% for the same
period of 1996.
NET INCOME
Net income of $.3 million was generated for 1997, compared with net loss of
$28.0 million for 1996, resulting principally from the increase in operating
income, offset by the increase in interest expense and the provision for income
taxes. The net loss for 1996 included a non-cash write down of $28.3 million to
the Company's oil and gas properties due to the Merger.
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 due to the increase in working capital requirements due to the
Company's growth.
12
<PAGE>
NATIONAL ENERGY GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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
primarily consisted of oil and gas acquisition, 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 net cash provided by financing activities for 1996.
The cash net 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.
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 $54.8 million was spent during the first nine months of
1997. The Company is not contractually committed to expend the budgeted funds.
The Company currently expects that available cash, cash flows from
operations, and available borrowings under the Credit Facility shall be
sufficient to fund planned capital expenditures for its existing properties
through 1997 in addition to funding interest requirements on the Notes. However,
the Company may need to raise additional capital to fund any acquisitions.
For the periods following 1997, the Company may seek additional capital, if
required, from traditional reserve base borrowings, equity, and debt offerings
or joint ventures to further develop and explore its properties and to acquire
additional properties. There is no assurance that the Company will be able to
access additional capital or that, if available, it will be at prices or on
terms acceptable to the Company.
Should the Company be unable to access the capital markets or should
sufficient capital not be available, the development and exploration of the
Company's properties could be delayed or reduced and, accordingly, oil and
natural gas revenues and operating results may be adversely affected.
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. 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
13
<PAGE>
NATIONAL ENERGY GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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.
CREDIT FACILITIES
The Company's Revised Credit Facility is a revolving line of credit with a
borrowing base of $40.0 million. The Revised Credit Facility contains certain
covenants, including maintenance of a minimum interest coverage ratio, a current
ratio, and a minimum tangible net worth. See Note 3 of Notes to the Financial
Statements.
FINANCIAL REPORTING IMPACT OF FULL COST METHOD OF ACCOUNTING
The Company follows the full cost method of accounting for oil and natural
gas properties. Under such method, the net book value of such properties, less
related deferred income taxes, may not exceed a calculated "ceiling." The
ceiling is the estimated after-tax future net revenues from proved oil and
natural gas properties, discounted at 10% per year. In calculating future net
revenues, prices and costs in effect at the time of the calculation are held
constant indefinitely, except for changes which are fixed and determinable by
existing contracts. The net book value is compared to the ceiling on a quarterly
and yearly basis. The excess, if any, of the net book value above the ceiling is
required to be written off as a non-cash expense. At September 30, 1997, the net
book value of the Company's oil and natural gas properties did not exceed the
ceiling. Sustained decreases in oil and natural gas prices could result in write
downs during future periods.
CHANGES IN PRICES AND INFLATION
The Company's revenues and value of its oil and natural gas properties have
been and will continue to be affected by changes in oil and gas prices. Oil and
gas prices are subject to seasonal and other fluctuations that are beyond the
Company's ability to control or predict.
During 1996, the Company hedged crude oil and natural gas prices through the
use of commodity swap agreements in an effort to reduce the effects of the
volatility of the price of crude oil and natural gas on the Company's
operations. These agreements involved the receipt of fixed-price amounts in
exchange for variable payments based on NYMEX prices and specific volumes. In
connection with the commodity swap agreements, the Company may also enter into
basis swap agreements to reduce the effects of unusual fluctuations between
prices actually received at the wellhead and NYMEX prices. Through the use of
commodity price and basis swap agreements, the Company can fix the price to be
received for specified volumes of production to the commodity swap price less
the basis swap price. The differential to be paid or received, under the swap
agreement, is accrued in the month of the related production and recognized as a
component of crude oil and natural gas sales. The Company does not hold or issue
financial instruments for trading purposes.
14
<PAGE>
NATIONAL ENERGY GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 nine months ended September 30, 1996,
the Company recognized a net gain of $20,000 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.
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. The Company pays the cost of
transportation of the natural gas to the delivery point specified in the
contracts. 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. At September 30, 1997 the Company had fixed the
prices of approximately 921 Mmcf of natural gas to be delivered in October and
November 1997 at an average price of $3.014 per mcf.
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.
DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
This Form 10-Q and the documents incorporated by reference herein include
"forward-looking statements" within the meaning of various provisions of the
Securities Act and the Exchange Act. All statements, other than statements of
historical facts, included in this Form 10-Q 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 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 and references to future success, references to intentions as
to future matters and other such matters are forward-looking statements. These
statements are based on certain assumptions and analyses made by the Company in
light of its experience and perception of historical trends, current conditions
and expected future developments as well as other facts 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 Form 10-Q, 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
Form 10-Q 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.
15
<PAGE>
NATIONAL ENERGY GROUP, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 30, 1995, the Company filed a lawsuit in the District Court of
Ector County, Texas, against R. E. Steakley in which the Company seeks to enjoin
Mr. Steakley from interfering with its operations on the surface property
controlled by Mr. Steakley. The lawsuit alleges tortuous interference with the
Company's access to its facilities and wrongful conduct with respect to the
Company's personnel.
On August 31, 1995, R. E. Steakley and N.M. Steakley filed a lawsuit in the
District Court of Harris County, Texas, against Amoco Production Company,
Phillips Petroleum Company, the Company, and others. The lawsuit alleges certain
environmental claims and related tortuous and contractual claims and seeks
unspecified damages. On December 19, 1996, the Court in Harris County, Texas,
signed an order transferring the R.E. Steakley claim to the court in Ector
County, Texas as a part of the Company's claim against R.E. Steakley.
Subsequently, R.E. Steakley filed a Fourth Amended Original Answer and Original
Counterclaims against the Company in Ector County District Court in which he
reasserts the claims filed in the Harris County action. The Company believes
that it is operating in compliance with applicable environmental laws and
regulations and believes, based on the advice of counsel, that the ultimate
resolution of the lawsuit will not have a material effect on the Company's
financial condition or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The list of exhibits required by Item 601 of Regulation S-K and filed as
part of this report is set forth in the Index to Exhibits.
(b) No reports on Form 8-K were filed during the three months ended
September 30, 1997.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NATIONAL ENERGY GROUP, INC.
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ MILES D. BENDER
- ------------------------------ President and Chief November 14, 1997
Miles D. Bender Executive Officer
/s/ MELISSA H. RUTLEDGE Chief Financial Officer,
- ------------------------------ Controller and Chief November 14, 1997
Melissa H. Rutledge Accounting Officer
17
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<C> <S>
2.1 Agreement and Plan of Merger, dated June 6, 1996, among the Company, NEG-OK, Inc.
("NEG- OK"), and Alexander Energy Corporation ("Alexander") (1)
2.2 First Amendment to Agreement and Plan of Merger, dated as of June 20, 1996, among the
Company, NEG-OK, and Alexander (2)
2.3 Mutual Waiver Agreement dated as of August 29, 1996 by and among the Company, NEG-OK
and Alexander (3)
3.1 Certificate of Incorporation of the Company, which includes the Certificate of
Incorporation of the Company filed with the Secretary of State of Delaware on
November 20, 1990 (4), the Certificate of Elimination of the Redeemable Convertible
Preferred Stock, Series A of the Company, filed with the office of the Secretary of
State of the State of Delaware on June 2, 1994 (3), the Certificate of Amendment of
Certificate of Incorporation of the Company, filed with the office of the Secretary
of State of the State of Delaware on August 29, 1996 (3), the Certificate of
Designations of the Company of 10% Cumulative Convertible Preferred Stock, Series B
(5), the Certificate of Designations of the Company of 10 1/2% Cumulative Convertible
Preferred Stock, Series (6), the Certificate of Designations of the Company of
Convertible Preferred Stock, Series D (3), and the Certificate of Designations of the
Company of Convertible Preferred Stock, Series E (3)
3.2 By-laws of the Company (4)
4.1 Certificate of Designations of the Company of 10% Cumulative Convertible Preferred
Stock, Series B (5)
4.2 Certificate of Designations of the Company of 10 1/2% Cumulative Convertible
Preferred Stock, Series C (6)
4.3 Certificate of Designations of the Company of Convertible Preferred Stock, Series D
(3)
4.4 Certificate of Designations of the Company of Convertible Preferred Stock, Series E
(3)
4.5 Indenture dated as of November 1, 1996, among the Company, National Energy Group of
Oklahoma, Inc. (the "Guarantor"), formerly NEG-OK, and BankOne, Columbus, N.A. (7)
4.6 Indenture dated August 21, 1997, among the Company and Bank One, N.A. (10)
10.1 Letter Agreement dated as of July 11, 1997 between the Company and Carl C. Icahn re:
Prospect Participation (11)
10.2 Gascon Partners Warrant to Purchase 300,000 shares of the Company's Common Stock (11)
11.0 Computation of Earnings Per Share (11)
27.1 Financial Data Schedule (8)
99.39 Certificate of Merger with respect to the merger of Alexander with and into NEG-OK,
filed with the offices of the Secretary of State of the State of Delaware and the
Secretary of State of State of Oklahoma on August 29, 1996 (3)
</TABLE>
- ------------------------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-4 (No. 333-9045), dated July 29, 1996.
(2) Incorporated by reference to Amendment No. 1 to the Company's Registration
Statement on Form S-4 (No. 333-9045), dated August 7, 1996.
(3) Incorporated by reference to the Company's Current Report on Form 8-K, dated
August 29, 1996.
(4) Incorporated by reference to the Company's Registration Statement on Form
S-4 (No. 33-38331), dated April 23, 1991.
18
<PAGE>
(5) Incorporated by reference to the Company's Current Report on Form 8-K, dated
June 17, 1994.
(6) Incorporated by reference to the Company's Current Report on Form 8-K, dated
July 18, 1995.
(7) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996.
(8) The Financial Data Schedule, is filed herewith for EDGAR filings only.
(9) Incorporated by reference to the Company's Schedule 14A filed April 25,
1997.
(10) Incorporated by reference to the Company's Registration Statement on Form
S-4 (333-38075) dated October 16, 1997.
(11) Filed herewith.
19
<PAGE>
[LETTERHEAD]
July 11, 1997
VIA FEDERAL EXPRESS
Mr. Carl C. Icahn
c/o Icahn Associates Corp.
767 Fifth Avenue
47th Floor
New York, New York 10153
RE: LETTER AGREEMENT
PROSPECT PARTICIPATION
NEG EXPLORATION PROSPECTS
Dear Mr. Icahn:
Pursuant to our discussions, this Letter Agreement shall act to express the
mutual understanding and agreement by and between National Energy Group, Inc.
("NEG") and Icahn Associates Corp. ("Icahn") with respect to participation in
various oil and gas exploration prospects of NEG (individually, "Prospect" and
collectively, "Prospects").
NOW THEREFORE, in consideration of the mutual covenants and agreements
contained herein and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. PROSPECTS. NEG and Icahn agree that Icahn shall participate as set forth
herein in certain Prospects to be drilled by NEG. Notwithstanding
anything to the contrary, it is the intention of the parties, unless
otherwise specifically agreed in writing, the term "Prospect" as used
herein shall include all exploration and all available development
Prospects generated or acquired by NEG, its agents, advisors or
consultants during the term hereof.
2. PARTICIPATION. The parties agree that Icahn's participation in any
Prospect shall be on a promoted basis of one-third (1/3) for one-fourth
(1/4) interest to the casing point of the initial well in each Prospect,
which shall include the actual prospect fees and land acquisition costs
of each Prospect. The interest acquired by Icahn hereunder shall not be
burdened by any back-in interest in favor of Sandefer Oil & Gas, Inc.,
its successors and assigns. It is further understood and agreed that
in the event NEG should sell any Prospect under more favorable terms to
another party purchaser other than Icahn, then in such event, Icahn
shall be entitled to participate in each Prospect under the more
favorable terms and conditions as any other such purchaser.
<PAGE>
Mr. Carl C. Icahn
c/o Icahn Associates Corp.
July 11, 1997
3. COMMITMENT. Through September 30, 1998, Icahn agrees to acquire, and NEG
agrees to offer participation to Icahn in each of NEG's Prospects for
an interest up to three-eighths (3/8) of one hundred percent (100%)
before casing point for any such Prospect and all development activity
deriving therefrom; if more is available, it shall be offered by NEG
and may be accepted by Icahn or rejected. The obligation and
commitment of Icahn described herein shall be an aggregate amount of
TEN MILLION DOLLARS ($10,000,000) during the term hereof. NEG agrees
that it will invest in and retain at least an amount equal to the
amount invested by Icahn in each well in which Icahn participates,
provided, however, that NEG may transfer all or a portion of its
interest if it first obtains a firm written bid for the interest from a
party whose identity it makes known to Icahn, which if accepted would
be a binding agreement to sell on the terms contained in such bid, and
if it then offers Icahn the right for a period of fifteen (15) days to
either (i) purchase the applicable portion of the interest at the same
price as contained in the firm bid or (ii) sell the same portion of
Icahn's entire interest in such well to the bidder at the same price
and on the same terms as contained in the bid. If Icahn chooses
alternative (i), then NEG shall sell to Icahn on the basis contained in
the firm bid and if Icahn chooses alternative (ii), then NEG shall sell
the applicable portion of its interest and shall sell, for Icahn, the
applicable portion of Icahn's interest to the firm bidder on the basis
set forth in the firm bid. If Icahn chooses neither alternative, then
NEG is free, for a period of ninety (90) days, to sell the applicable
portion of its interest to the firm bidder on a basis no more favorable
to it than contained in the firm bid.
4. PREFERENTIAL RIGHT. If at any time Icahn decides to sell a portion of its
interest in any Prospect to any party (other than to a subsidiary or
affiliate of Icahn, in which case there shall be an unrestricted right
to do so), it shall first notify NEG in writing that such interest is
for sale (the "Offered Interest"). NEG shall then have fifteen (15)
days from receipt of such notice in which to make an offer in writing
to purchase the Offered Interest. NEG's failure to timely respond in
writing within such fifteen (15) day period shall be deemed by Icahn to
be an election by NEG not to make an offer to purchase the Offered
Interest. Upon receipt of NEG's offer to purchase the Offered
Interest, Icahn shall then have fifteen (15) working days thereafter in
which to accept or reject in writing NEG's offer. Icahn's failure to
timely respond in writing within such ten (10) working day period shall
be deemed by NEG to be an election by Icahn to accept NEG's offer to
purchase the Offered Interest. In the event Icahn gives NEG timely
notice in writing of its rejection of NEG's offer to purchase the
Offered Interest, Icahn shall thereafter, for a period of ninety (90)
days, be free to offer the Offered Interest to any other party. In the
event that thereafter Icahn desires to transfer the Offered interest to
any other party, Icahn must first give NEG the right for a period of
ten (10) days to exceed the bid, in writing, for the Offered Interest.
The parties hereto agree that notwithstanding any other provision
contained herein, this Paragraph 4 shall apply to successors and
assigns of NEG. NEG covenants and agrees that no agreements relating
to the subject matter hereof shall diminish the rights granted in
Paragraphs 3 and 4 hereof.
Page 2 of 5
<PAGE>
Mr. Carl C. Icahn
c/o Icahn Associates Corp.
July 11, 1997
5. WARRANTS. In consideration of the Preferential Rights granted in Paragraph
4 and the commitment of the amount of TEN MILLION DOLLARS ($10,000,000)
contained herein, NEG agrees that it shall hereby grant to Icahn
certain warrants to purchase THREE HUNDRED THOUSAND (300,000) shares of
common stock of NEG (the "Warrants") as more fully described below:
5.1 NUMBER OF WARRANTS. The Warrants shall become exercisable on the
earlier of (i) December 31, 1997, or (ii) as to each block of ONE
HUNDRED FIFTY THOUSAND (150,000) warrants where FIVE MILLION DOLLARS
($5,000,000) has been invested by Icahn in the Prospects.
5.2 EXERCISE PRICE. The exercise price per share of each Warrant shall be
equal to THREE DOLLARS ($3.00) per share for each share of NEG Common
Stock.
5.3 EXPIRATION DATE; FORM. Warrants earned hereunder shall expire five
(5) years from the date hereof, and any Warrants not so exercised
by such date shall become null and void of all rights and shall
cease to exist. The Warrants shall be in the form of EXHIBIT "A"
attached hereto and incorporated herein. The Warrants and warrant
shares shall be subject to the Registration Rights Agreement as set
forth on EXHIBIT "A-1" attached hereto and incorporated herein.
6. RELATED AGREEMENTS. The parties hereto further agree that all operations
on the jointly owned acreage shall be conducted pursuant to the terms
of a Participation Agreement and AAPL Form 610 1982 Joint Operating
Agreement, as modified, which shall (i) be mutually agreed upon by all
working interest participants in the Prospect (ii) designate NEG as
operator and (iii) contain a mutually agreeable area of mutual interest
to include the Prospect. In the event that there is any conflict
between this Letter Agreement and any such other agreement, the terms
of this Letter Agreement shall govern.
7. OTHER COVENANTS.
7.1 NEG shall use its best efforts to sell Icahn's proportionate share of
the oil and gas produced from any well if Icahn so requests, but
only for such reasonable periods of time as are consistent with
the minimum needs of the industry under the particular
circumstances, but in no event for a period in excess of one (1)
year. Such request shall be made in writing, within thirty (30)
days of the commencement of oil or gas production from the
aforementioned well.
7.2 TITLE:
i. Upon the initial payment for participation in any Prospect,
Icahn's interest in the right, title and interest in the property
or leasehold underlying the Prospect acquired by NEG shall be
conveyed and assigned to Icahn in any name, as directed by Icahn.
ii. NEG shall provide Icahn with timely and appropriate title as
is usual and customary in the industry for drilling operations as
contemplated herein.
Page 3 of 5
<PAGE>
Mr. Carl C. Icahn
c/o Icahn Associates Corp.
July 11, 1997
7.3 Prior to committing to any single Prospect, NEG shall furnish to Icahn
all relevant reports or documents relating to that Prospect (including
the insurance coverage provided by NEG).
7.4 NEG represents and warrants that it is not an "integrated
oil company" as defined in Section 291(b) of the Internal Revenue
Code of 1986, as amended, and further covenants that NEG shall not
become an integrated oil company for the duration of this Agreement
(including any extensions thereof) and shall indemnify and hold
Icahn and its affiliates harmless against any loss of all benefits,
including tax benefits, in the event either the representation and
warranty or the covenant in this Paragraph 7.4 is breached.
8. CHOICE OF LAW. THIS LETTER AGREEMENT, THE LEGAL RELATIONSHIP OF THE
PARTIES AND ALL RIGHTS AND OBLIGATIONS HEREUNDER SHALL BE GOVERNED
BY AND INTERPRETED, CONSTRUED, APPLIED AND ENFORCED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REFERENCE TO THE
LAWS OF ANY OTHER JURISDICTION.
9. NOTICES. Any notice required hereunder shall be in writing; delivered to
or sent by U.S. Mail, postage pre-paid, or nationally recognized
commercial carrier service, postage or delivery charges pre-paid, or by
facsimile with a copy delivered to the U.S. Mail, postage pre-paid,
addressed as follows (or such other address as may be specified by five
(5) days prior written notice to the other party hereto):
IF TO NEG: IF TO ICAHN:
National Energy Group, Inc. Icahn Associates Corp.
4925 Greenville Avenue 767 Fifth Avenue
Suite 1400 47th Floor
Dallas, Texas 75206- 4095 New York, New York 10153
Attn: Mr. William T. Jones Attn: Mr. Carl C. Icahn
Senior Vice President President
Phone: (214) 692-9211 Phone: (212) 702-4333
Fax: (214) 692-5055 Fax: (212) 750-5807
10. ASSIGNMENT. This Letter Agreement shall inure to the benefit of and be
binding upon NEG and Icahn and their respective successors and assigns.
11. COMPLETENESS. This Letter Agreement supersedes all prior written or oral
agreements and understandings between the parties and constitutes the
complete agreement between the parties with respect to the subject
matter hereof. This Letter Agreement cannot be modified or amended
except by written instrument duly executed by NEG and Icahn.
Page 4 of 5
<PAGE>
Mr. Carl C. Icahn
c/o Icahn Associates Corp.
July 11, 1997
If the foregoing expresses our mutual understanding and agreement, please so
indicate by executing in the appropriate space below and returning one (1)
fully executed copy to the undersigned.
Sincerely,
National Energy Group, Inc.
/s/ Miles D. Bender
--------------------------------
Miles D. Bender
President
MDB:ljg
ACCEPTED AND AGREED THIS
11 DAY OF JULY, 1997.
ICAHN ASSOCIATES CORP.
- ---------------------------------
By: Edward E. Mattner
--------------------------
Title: President
--------------------------
Page 5 of 5
<PAGE>
NEITHER THIS WARRANT NOR THE SECURITIES RECEIVED UPON EXERCISE OF THIS
WARRANT HAS BEEN REGISTERED OR QUALIFIED UNDER THE UNITED STATES SECURITIES ACT
OF 1933 OR ANY APPLICABLE STATE SECURITIES LAWS AND, ACCORDINGLY, THIS WARRANT
AND THE SECURITIES RECEIVED UPON EXERCISE OF THIS WARRANT MAY NOT BE OFFERED,
SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL
REGISTERED OR QUALIFIED UNDER SAID ACT AND ALL APPLICABLE STATE SECURITIES LAWS
OR, IN THE OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER
OF THESE WARRANTS AND THE SECURITIES RECEIVED UPON EXERCISE OF THIS WARRANT, AN
EXEMPTION FROM SUCH REGISTRATION OR QUALIFICATION IS AVAILABLE AND SUCH OFFER,
SALE, TRANSFER, PLEDGE OR HYPOTHECATION DOES NOT VIOLATE THE PROVISIONS OF THE
ACT OR APPLICABLE LAWS.
NATIONAL ENERGY GROUP, INC.
WARRANT TO PURCHASE
300,000 SHARES OF
COMMON STOCK OF
NATIONAL ENERGY GROUP, INC.
This Warrant (the "Warrant") is issued to Gascon Partners, a New York
general partnership ("Holder") and Holder agrees by acceptance hereof that
this Warrant is subject to the terms and conditions contained herein and the
terms and conditions of that certain Letter Agreement dated July 11, 1997
between National Energy Group, Inc. (the "Company") and Holder (the "Letter
Agreement").
This Warrant is a warrant to purchase THREE HUNDRED THOUSAND (300,000)
shares of Common Stock, $0.01 par value (the "Common Stock") of the Company
at a price of THREE DOLLARS ($3.00) per share (the "Exercise Price"), subject
to adjustment as provided herein.
This Warrant shall expire on July 11, 2002 (the "Expiration Date") and
shall become exercisable on the earlier of (i) December 31, 1997, or (ii) as
to each block of ONE HUNDRED FIFTY THOUSAND (150,000) warrants where FIVE
MILLION DOLLARS ($5,000,000) has been invested by Gascon Partnership, a New
York partnership, as provided in the Letter Agreement. This Warrant shall
be void and all rights of Holder under this Warrant shall cease if this
Warrant shall not have been duly exercised on or prior to the Expiration Date.
This Warrant shall not entitle Holder to any rights other than as set
forth herein, and Holder will not have any of the rights, privileges or
liabilities of a stockholder of the Company prior to the exercise of this
Warrant.
The number of shares of Common Stock as to which this Warrant may be
exercised and the Exercise Price from time to time in effect shall be
adjusted from time to time as follows:
<PAGE>
(A) In case the Company shall (i) subdivide its shares of outstanding
Common Stock into a larger number of shares of Common Stock, (ii) combine
shares of its outstanding Common Stock into a smaller number of shares of
Common Stock or (iii) issue stock as a dividend on its Common Stock; then
Holder, after the close of business on the effective date of such
subdivision, combination or stock dividend, as the case may be (the close of
business time being hereinafter in this subparagraph (A) referred to as "such
record date"), shall be entitled to receive, upon actual exercise of this
Warrant, the aggregate number and kind of shares of capital stock of the
Company which, if this Warrant had been exercised immediately prior to such
record date at the Exercise Price then in effect, it would have been entitled
to receive by virtue of such subdivision, combination or stock dividend; and
the Exercise Price shall be deemed to have been adjusted after such record
date to apply to such aggregate number and kind of shares. Such adjustment
shall be made whenever any of the events listed above shall occur.
(B) No notification to Holder of any adjustment in the exercise price
otherwise required by this subparagraph (B) to be made must be made, if such
adjustment (plus any other adjustments not heretofore made since the time of
the last notice to Holder of an adjustment, if any) would not require any
increase or decrease of five percent (5%) or more in the Exercise Price;
provided, however, that upon exercise of this Warrant, all adjustments shall
be made in calculating the exercise rights of Holder. Whenever the Exercise
Price is adjusted by five percent (5%) or more since the time of the last
notice to Holder of an adjustment, if any, as herein provided, the Company
shall promptly mail to Holder a notice setting forth the Exercise Price after
such adjustment and setting forth a brief statement of the facts requiring
such adjustment.
(C) In the event that at any time, as a result of an adjustment, Holder
shall become entitled to receive any shares of capital stock of the Company
other than shares of Common Stock, the number of such other shares so
receivable upon exercise of this Warrant 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 shares of Common Stock contained in
subparagraphs (A) and (B), above, and the other provisions of this
subparagraph (C) with respect to the shares of Common Stock shall apply on
like terms to any such other shares.
(D) In case of any reclassification of the 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), any consolidation of the Company with, or merger of the
Company into, any other person, any merger of any person into the Company
(other than a merger that does not result in any reclassification of, or
change in the outstanding shares of Common Stock), any sale or transfer of
all or substantially all of the assets of the Company (other than a
sale-lease back, collateral assignment, mortgage or other similar financing
transaction), or any compulsory share exchange whereby the Common Stock is
converted into other securities, cash or other properties, then Holder shall
have the right thereafter, during the period this Warrant shall be
exercisable, to exercise this Warrant for the kind and amount of securities,
cash or other property receivable upon such reclassification, consolidation,
merger, sale, transfer or share exchange by a holder of the number of shares
of Common Stock into which this Warrant might have been exercised immediately
prior to such reclassification, consolidation, merger, sale, transfer or
share exchange.
(E) In case the Company, at any time while this Warrant is outstanding,
shall issue shares of Common Stock, warrants or rights to acquire Common
Stock or securities convertible into Common Stock (excluding (i) those issued
as a dividend or distribution with respect to Series B, Series C, Series D or
Series E Preferred Stock so long as the securities are additional shares of
Series B, Series C, Series D or
Page 2
<PAGE>
Series E Preferred Stock and (ii) options or shares of Common Stock or other
common stock issued to officers, employees or directors so long as the number
issued to officers, employees and directors in any one year does not exceed
five percent (5%) of the number of shares of Common Stock outstanding on
January 1st of such year) at a price per Common Stock share purchased,
purchasable, or issuable upon conversion that is less than the Exercise
Price, then the Exercise Price at which each share of Common Stock at which
this Warrant shall thereafter be exercisable shall be reduced by multiplying
the Exercise Price in effect on the date of issuance of such shares,
warrants, rights or convertible securities by a fraction, of which the
denominator shall be the number of shares of Common Stock (excluding treasury
shares, if any) outstanding on the date of issuance of such shares, warrants,
rights or convertible securities plus the number of additional shares of
Common Stock issued, offered for subscription or purchase or issuable upon
conversion, and of which the numerator shall be the number of shares of
Common Stock (excluding treasury shares, if any) outstanding on the date of
issuance of such shares, warrants, rights or convertible securities plus the
number of shares of Common Stock that the aggregate offering price of the
total number of shares so offered, issued, or issuable, or, with respect to
convertible securities, the aggregate consideration received by the Company
for the convertible securities, would purchase at the prior Exercise Price.
Such adjustment shall be made whenever shares, warrants, rights or
convertible securities are issued, and shall become effective immediately
after such issuance date. However, upon the expiration of any warrant, right
or conversion right to purchase Common Stock, the issuance of which resulted
in an adjustment in the Exercise Price of this Warrant pursuant to this
subparagraph (E), if any such warrant, right or convertible rights shall
expire and shall not have been exercised, the Exercise Price per share of
Common Stock at which this Warrant shall thereafter be exercisable shall
immediately upon such expiration be recomputed and effective immediately upon
such expiration be increased to the price which it would have been (but
reflecting any other adjustments in the Exercise Price made pursuant to the
provisions of this subparagraph (E) after the issuance of such warrants,
rights or convertible securities) had the adjustment of the Exercise Price
made upon the issuance of such warrants, rights or convertible securities
been made on the basis of offering for subscription or purchase only that
number of shares of Common Stock actually purchased upon the exercise of the
warrants or rights actually exercised or the conversion of the convertible
securities actually converted. For purposes of this subparagraph (E), the
term Common Stock shall include (i) any common equity security into which the
Common Stock is reclassified or for which it is exchanged, or (ii) any common
equity security of the Company that has equal or superior voting rights with
the Common Stock.
(F) In case the Company, at any time while this Warrant is outstanding,
shall distribute to all holders of Common Stock evidences of its indebtedness
or assets (excluding cash dividends or cash distributions paid out of earned
surplus) or rights to subscribe (excluding those referred to in subparagraph
(E) above) then in each such case the Exercise Price per share of Common
Stock at which this Warrant shall thereafter be exercisable shall be
determined by multiplying the Exercise Price in effect prior to the record
date fixed for determination for stockholders entitled to receive such
distribution by a fraction, of which the denominator shall be the Closing
Price of a share of Common Stock determined as of the record date mentioned
above, and (of which the numerator shall be such Closing Price of a share of
Common Stock, less the then fair market value per share (as determined by the
Board of Directors of the Company in good faith, whose determination shall be
conclusive if made in good faith and shall be described in a statement
provided to Holder) of the portion of assets or evidences of indebtedness so
distributed or of such subscription rights. Such adjustment shall be made
whenever any such distribution is made and shall become effective immediately
after the record date mentioned above.
(G) Upon each adjustment of the Exercise Price as provided for herein,
the Holder of this Warrant shall thereafter (until another such adjustment)
be entitled to purchase, at the adjusted Exercise Price on the date purchase
rights under this Warrant are exercised, the number of shares of Common Stock
Page 3
<PAGE>
determined by (a) multiplying the number of purchasable shares hereunder
immediately prior to the adjustment of the Exercise Price by the Exercise
Price in effect immediately prior to such adjustment, and (b) dividing the
product so obtained by the adjusted Exercise Price in effect on the date of
such exercise.
(H) In case:
1. the Company shall declare a dividend (or any other distribution) on
the Common Stock payable otherwise than in cash out of its earned
surplus; or
2. the Company shall declare a special nonrecurring cash dividend on or a
redemption of its Common Stock; or
3. the Company shall authorize the granting to the holders of the Common
Stock of rights or warrants to subscribe for or purchase any shares
of capital stock of any class or of any other rights; or
4. the approval of any stockholders of the Company shall be required in
connection with any reclassification of the Common Stock of the
Company (other than a subdivision or combination of the outstanding
shares of Common Stock), any consolidation or merger to which the
Company is party or any sale or transfer of all or substantially
all of the assets of the Company; or
5. of the voluntary or involuntary dissolution, liquidation or winding up
of the affairs of the Company; then the Company shall, at least 10
days prior to the applicable record date hereinafter specified,
contact by telephone and cause to be mailed to Holder at its last
address as it shall appear upon the stock books of the Company, a
notice stating (x) the date on which a record is to be taken for
the purpose of such dividend, distribution, redemption, 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, redemption, rights or warrants are to be
determined, or (y) the date on which such reclassification,
consolidation, merger, sale, transfer, dissolution, liquidation or
winding up is expected to become effective, 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,
consolidation, merger, sale, transfer, dissolution, liquidation or
winding up.
(I) In case at any time conditions shall arise by reason of action taken
by the Company, which, in the opinion of the Board of Directors of the
Company, are not adequately covered by the other provisions hereof and which
might materially and adversely affect the rights of Holder, or in case at any
time any such conditions are expected to arise by reason of any action
contemplated by the Company, the Board of Directors of the Company shall
appoint a firm of independent certified public accountants of recognized
standing (which may be the firm that regularly examines the financial
statements of the Company), who shall give their opinion as to the
adjustment, if any (not inconsistent with the standards herein), of the
Exercise Price (including, if necessary, any adjustment as to the securities
to be received thereafter upon exercise of this Warrant) which is or would be
required to preserve without dilution the rights of Holder. The Board of
Directors of the Company may, in its judgment, make the adjustment
recommended upon the receipt of such opinion; provided, however, that no
adjustment pursuant to this subparagraph (I) of the Exercise Price shall be
made which in the opinion of the accountant or firm of
Page 4
<PAGE>
accountants giving the aforesaid opinion would result in an increase of the
Exercise Price to more than the Exercise Price then in effect.
As used above, the term "Closing Price" on any day shall mean the higher
of (i) the reported closing sales price per share of Common Stock on the
principal national securities exchange or the NASDAQ National Market on which
the shares of Common Stock are at the time listed or traded on such day or
(ii) the average of the closing sales prices for the twenty Trading Days
prior to such day. In case no such sale takes place on a day, the Closing
Price shall be the average of the reported closing bid and asked prices, or,
if the shares of Common Stock shall not be so listed, the average of the high
bid and low ask prices in the over-the-counter market as reported by the
National Association of Securities Dealers' Automated Quotation System, or,
if not so reported, as reported by the National Quotation Bureau,
Incorporated, or any successor thereof, or, if not so reported, the average
of the closing bid and asked prices as furnished by any member of the
National Association of Securities Dealers, Inc. selected from time to time
by the Company for that purpose. The term "Trading Day" shall mean a day on
which the principal national securities exchange or the NASDAQ National
Market on which the shares of Common Stock are listed or admitted to trading
is open for the transaction of business or, if the shares of Common Stock are
not listed or admitted to, trading on any national securities exchange or the
NASDAQ National Market, a Monday, Tuesday, Wednesday, Thursday, or Friday on
which banking institutions in the City of Dallas, State of Texas, are not
authorized or obligated by law or executive order to close.
The Company shall at all times after July 11, 1997, reserve and keep
available, free from preemptive rights, out of its authorized but unissued
shares of Common Stock solely for the purpose of issuance upon the exercise
of this Warrant the full number of shares of Common Stock then deliverable
upon the exercise of this Warrant. The Company covenants and agrees that all
shares which may be issued upon the exercise of this Warrant will, upon
issuance, be legally and validly issued, fully paid and nonassessable and
free from all taxes, liens and charges of any nature whatsoever.
This Warrant may be exercised by filling out and signing the Warrant
Exercise Notice and mailing or delivering the Warrant Exercise Notice to the
Company in time to reach the Company by the Expiration Date, accompanied by
payment of the full applicable Exercise Price. Payment of the Exercise Price
must be made in United States funds (by certified check) payable to the order
of the Company. Common Stock certificates will be issued as soon as
practicable after exercise and payment of the Exercise Price for the shares
of Common Stock so purchased. If the Warrant Exercise Notice is mailed by
first class mail, registered or certified, postage prepaid, and properly
addressed to National Energy Group, Inc., 4925 Greenville Ave., Suite 1400,
Dallas, Texas, 75206, or, to such other address as the Company may have
specified in a notice duly given to Holder, then the Warrant Exercise Notice
will be presumed to be received by the Company three (3) business days after
the date so mailed.
Subject to the provisions of the legend on the first page of this
Warrant, this Warrant is transferable by Holder, in whole or in part
(provided that any partial transfer shall be for a whole number of shares of
Common Stock), and upon delivery of this Warrant to the Company with evidence
of such transfer by Holder reasonably satisfactory to the Company, the
Company shall issue a replacement Warrant in a form similar to this Warrant,
in the name of such transferee (and in the case of such partial transfer, the
Company shall issue a new Warrant to Holder to purchase the balance of the
shares of Common Stock that is not the subject of transfer). Holder shall
indemnify the Company against any loss, claim or damages arising from or
related to such transfer and shall sign a written instrument of indemnity in
a form acceptable to the Company.
Page 5
<PAGE>
This Warrant shall be deemed to be a contract made under the laws of the
State of Texas and shall for all purposes be governed by and construed in
accordance with the laws of such State.
Dated: July 11, 1997.
NATIONAL ENERGY GROUP, INC.
By: /s/ Miles D. Bender
-----------------------------
Miles D. Bender, President and
Chief Executive Officer
Page 6
<PAGE>
WARRANT EXERCISE NOTICE
INSTRUCTIONS
IN ORDER FOR WARRANTS TO BE EXERCISED, THIS NOTICE
MUST BE RECEIVED BY THE COMPANY ON OR PRIOR TO THE
EXPIRATION DATE SPECIFIED IN THE WARRANT.
This Warrant Exercise Notice, dated _______________ (the "Notice"),
relates to this Warrant, dated July 11, 1997 (the "Warrant"), issued by
National Energy Group, Inc., a Delaware corporation whose address is 4925
Greenville Ave., Ste. 1400, Dallas, Texas, 75206 (the "Company"), to the
undersigned. This Warrant initially represented the right to purchase the
aggregate number of shares as indicated in this Warrant, which number will be
reduced by this Warrant Exercise Notice and by any prior or future Warrant
Exercise Notices.
The undersigned hereby exercises the portion of this Warrant to purchase,
and hereby purchases, ________ shares of the Company's Common Stock, at the
current exercise price of $_______ per share, which is the price, as
adjusted, indicated in this Warrant. The undersigned acknowledges that the
number of shares of Common Stock must be divisible by 100 for an effective
exercise of any portion or all of this Warrant. The full amount of
$__________ in United States funds, by certified check payable to the order
of the Company is attached hereto. The undersigned acknowledges that a
certificate for the shares of Common Stock purchased by the undersigned
through the exercise of this Warrant pursuant to this Notice will be
delivered to the undersigned, at the address indicated below (unless the
Company has received written notice of a different address) as soon as
practicable after receipt of this notice and the full payment of the
applicable purchase price.
"HOLDER"
By:
----------------------------------
Title:
-------------------------------
Address:
-----------------------------
-------------------------------------
-------------------------------------
-------------------------------------
-------------------------------------
-------------------------------------
Social Security or
Taxpayer Identification Number:
Business Phone Number:
Home Phone Number:
<PAGE>
NATIONAL ENERGY GROUP, INC.
COMPUTATION OF EARNINGS PER SHARE
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PRIMARY FULLY DILUTED
------------- -------------
<S> <C> <C>
Income applicable to common stockholders:
Net income....................................................................... $ 2,128,967 $ 2,128,967
Preferred dividend requirements.................................................. (708,750) --
------------- -------------
Income applicable to common stockholders......................................... $ 1,420,217 $ 2,128,967
------------- -------------
------------- -------------
Common and common equivalent shares:
Weighted average number of common shares outstanding............................. 36,151,259 36,151,259
Shares issuable upon exercise of options and warrants............................ 4,447,835 4,447,835
Less shares assumed repurchased.................................................. (3,379,966) (2,227,349)
------------- -------------
Shares issuable upon conversion of Convertible Preferred Stock:
Series B and Series C.......................................................... -- 5,230,769
Series D and Series E.......................................................... 6,666,666 6,666,666
------------- -------------
Common and common equivalent shares.............................................. 43,885,794 50,269,180
------------- -------------
------------- -------------
Net income per common and common equivalent share.................................. $ .032 $ .042
------------- -------------
------------- -------------
</TABLE>
Note: Fully diluted net income per common share data is not presented because
the effect of assumed conversion of the Convertible Preferred Stock,
Series B and C, is antidilutive.
THREE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PRIMARY FULLY DILUTED
------------- -------------
<S> <C> <C>
Income applicable to common stockholders:
Net income....................................................................... 271,008 271,008
Preferred dividend requirements.................................................. (236,250) --
------------- -------------
------------- -------------
Income applicable to common stockholders......................................... $ 34,838 $ 271,088
------------- -------------
------------- -------------
Common and common equivalent shares:
Weighted average number of common shares outstanding............................. 36,172,159 36,172,159
Shares issuable upon exercise of options and warrants............................ 4,447,835 4,447,835
Less shares assumed repurchased.................................................. (3,379,966) (2,227,349)
------------- -------------
Shares issuable upon conversion of Convertible Preferred Stock:
Series B and Series C.......................................................... -- 5,230,769
Series D and Series E.......................................................... 6,666,666 6,666,666
------------- -------------
Common and common equivalent shares.............................................. 43,906,694 50,290,080
------------- -------------
------------- -------------
Net income per common and common equivalent share.................................. $ .001 $ .005
------------- -------------
------------- -------------
</TABLE>
Note: Fully diluted net income per common share data is not presented because
the effect of assumed conversion of the Convertible Preferred Stock,
Series B and C, is antidilutive.
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 35,615
<SECURITIES> 542
<RECEIVABLES> 18,255
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 56,694
<PP&E> 252,723
<DEPRECIATION> 32,111
<TOTAL-ASSETS> 285,125
<CURRENT-LIABILITIES> 26,475
<BONDS> 166,436
0
243
<COMMON> 363
<OTHER-SE> 82,384
<TOTAL-LIABILITY-AND-EQUITY> 285,125
<SALES> 0
<TOTAL-REVENUES> 39,145
<CGS> 0
<TOTAL-COSTS> 24,379
<OTHER-EXPENSES> 3,807
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<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
