<PAGE> 1
================================================================================
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 JUNE 30, 1998
[ ] 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 (Series B Senior Notes)
and 333-38075 (Series D Senior Notes)
NATIONAL ENERGY GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 58-1922764
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
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
-------------------------
40,481,320 shares of the registrant's Common Stock, $0.01 par value, were
outstanding on August 12, 1998.
================================================================================
<PAGE> 2
NATIONAL ENERGY GROUP, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at December 31, 1997 and June 30, 1998
(Unaudited)........................................................................ 1
Consolidated Statements of Operations for the three and six months ended
June 30, 1997 and 1998 (Unaudited)................................................. 2
Consolidated Statements of Cash Flows for the six months
ended June 30, 1997 and 1998 (Unaudited)........................................... 3
Consolidated Statement of Stockholders' Equity for the six months ended
June 30, 1998 (Unaudited).......................................................... 4
Notes to Consolidated Financial Statements (Unaudited).................................. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................................... 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders..................................... 13
ITEM 5. Other Information....................................................................... 14
Item 6. Exhibits and Reports on Form 8-K........................................................ 14
</TABLE>
<PAGE> 3
NATIONAL ENERGY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 25,954,479 $ 1,063,731
Marketable securities .............................................. 486,750 472,000
Accounts receivable--oil and natural gas sales ..................... 10,145,739 7,295,512
Accounts receivable--joint interest and other ...................... 7,278,436 4,875,183
Other .............................................................. 2,678,029 3,108,614
------------ -------------
Total current assets ........................................... 46,543,433 16,815,040
Oil and natural gas properties, at cost (full cost method):
Proved oil and natural gas properties .............................. 245,228,081 276,599,344
Unproved oil and natural gas properties ............................ 35,698,549 34,816,367
------------ -------------
280,926,630 311,415,711
Accumulated depreciation, depletion, and amortization .............. (83,478,971) (145,941,809)
------------ -------------
Net oil and natural gas properties ............................. 197,447,659 165,473,902
Other property and equipment ............................................ 4,797,737 5,485,862
Accumulated depreciation ........................................... (799,136) (1,098,360)
------------ -------------
Net other property and equipment ............................... 3,998,601 4,387,502
Other assets and deferred charges, net .................................. 6,371,714 6,206,222
------------ -------------
Total assets ....................................................... $254,361,407 $ 192,882,666
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable-trade ............................................. $ 21,725,575 $ 5,119,046
Accounts payable-revenue ........................................... 7,393,127 5,665,056
Drilling advances .................................................. 5,282,467 614,586
Accrued interest ................................................... 2,956,250 2,956,250
Other .............................................................. 798,983 776,485
------------ -------------
Total current liabilities ...................................... 38,156,402 15,131,423
Long-term liabilities ................................................... 1,915,305 1,787,120
Credit facility ......................................................... -- 20,000,000
10 3/4% Senior Notes due 2006, including unamortized issuance premium ... 166,396,622 166,317,568
Stockholders' equity:
Convertible preferred stock, $1.00 par:
Authorized shares--1,000,000
Issued and outstanding share--171,187
Aggregate liquidation preference--$17,187,000 .................. 171,187 171,187
Common stock, $.01 par value:
Authorized shares--100,000,000
Issued and outstanding shares--40,456,320 and 40,481,320 at
December 31, 1997 and June 30, 1998, respectively ........... 404,563 404,813
Additional paid-in capital ......................................... 112,940,414 113,033,914
Unrealized loss on marketable securities, net ...................... (28,594) (43,344)
Deficit ............................................................ (65,594,492) (123,920,015)
------------ -------------
Total stockholders' equity (deficit) ........................... 47,893,078 (10,353,445)
------------ -------------
Total liabilities and stockholders' equity ......................... $254,361,407 $ 192,882,666
============ =============
</TABLE>
See accompanying notes.
1
<PAGE> 4
NATIONAL ENERGY GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Revenues:
Oil and natural gas sales ................................ $11,782,265 $ 10,828,088 $24,747,292 $ 21,679,225
Well operator fees and other ............................. 342,808 197,317 730,544 507,963
----------- ------------ ----------- ------------
12,125,073 11,025,405 25,477,836 22,187,188
Cost and expenses:
Operating costs .......................................... 2,411,354 3,184,998 5,029,794 5,950,606
Depreciation, depletion, and amortization ................ 5,813,014 5,994,831 10,806,111 11,932,879
Write-down of oil and natural gas properties ............. -- 24,800,000 -- 51,300,000
Restructuring charge ..................................... -- 598,247 -- 598,247
General and administrative ............................... 1,148,851 1,727,213 2,213,558 3,441,922
----------- ------------ ----------- ------------
9,373,219 36,305,289 18,103,463 73,223,654
----------- ------------ ----------- ------------
Operating income (loss) ..................................... 2,751,854 (25,279,884) 7,374,373 (51,036,466)
Other income (expense):
Interest expense ......................................... (2,106,643) (3,748,308) (4,797,617) (7,259,467)
Interest income and other, net ........................... 43,255 60,379 238,134 284,595
----------- ------------ ----------- ------------
Income (loss) before income taxes ........................... 688,466 (28,967,813) 2,814,890 (58,011,338)
Provision for income taxes .................................. 234,028 -- 957,012 --
----------- ------------ ----------- ------------
Net income (loss) ........................................... 454,438 (28,967,813) 1,857,878 (58,011,338)
Preferred stock dividend requirements ....................... (236,250) (157,095) (472,500) (314,185)
----------- ------------ ----------- ------------
Net income (loss) applicable to common shareholders ......... $ 218,188 $(29,124,908) $ 1,385,378 $(58,325,523)
=========== ============ =========== ============
Net income (loss) per common share, basic and diluted ....... $ .00 $ (.72) $ .03 $ (1.44)
=========== ============ =========== ============
Weighted average number of common shares outstanding ........ 36,148,855 $ 40,481,320 36,138,936 40,481,320
=========== ============ =========== ============
</TABLE>
See accompanying notes.
2
<PAGE> 5
NATIONAL ENERGY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1997 1998
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ....................................................... $ 1,857,877 $ (58,011,338)
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation, depletion, and amortization ........................... 10,882,030 11,931,734
Write-down of oil and natural gas properties ....................... -- 51,300,000
Amortization of issuance premium .................................... -- (79,056)
Amortization of deferred compensation ............................... 19,156 20,761
Provision for deferred income taxes ................................. 957,010 --
Common stock, options, and warrants issued for services ............. 84,260 66,405
Other ............................................................... -- 256,244
Changes in operating assets and liabilities:
Accounts receivable ................................................. (4,609,240) 5,259,991
Other current assets ................................................ (531,104) (736,827)
Accounts payable and accrued liabilities ............................ (2,373,974) (12,861,264)
------------ ------------
Net cash provided by (used in) operating activities ................. 6,226,015 (2,853,351)
------------ ------------
INVESTING ACTIVITIES
Purchases of other property and equipment ............................... (634,500) (718,174)
Oil and gas acquisition, exploration, and development expenditures ...... (38,914,981) (40,820,469)
Purchases of other long-term assets ..................................... (553,802) (261,414)
Other ................................................................... (3,457) 10,013
------------ ------------
Net cash used in investing activities ............................... (40,106,740) (41,790,044)
------------ ------------
FINANCING ACTIVITIES
Proceeds from credit facility ........................................... -- 25,000,000
Repayments of credit facility ........................................... -- (5,000,000)
Proceeds from issuance of 103/4% Notes due 2006, net .................... 32,978,502 --
Repayments of other long-term liabilities ............................... (772,026) (26,918)
Proceeds from exercise of stock options and warrants .................... 227,282 93,750
Preferred stock dividends ............................................... (472,500) (314,185)
------------ ------------
Net cash provided by financing activities ........................... 31,957,728 19,752,647
------------ ------------
Decrease in cash and cash equivalents ................................... (1,923,467) (24,890,748)
Cash and cash equivalents and beginning of period ....................... 14,182,246 25,954,479
------------ ------------
Cash and cash equivalents at end of period .............................. $ 12,258,779 $ 1,063,731
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid in cash ................................................... $ 5,378,708 $ 9,077,517
============ ============
</TABLE>
See accompanying notes.
3
<PAGE> 6
NATIONAL ENERGY GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 ..................... 171,187 $ 171,187 40,456,320 $ 404,563
Common stock issued upon exercise of options
-- -- 25,000 250
Dividends on Series B
Preferred Stock ........................... -- -- -- --
Dividends on Series C
Preferred Stock ........................... -- -- -- --
Unrealized loss on marketable
securities ................................ -- -- -- --
Net loss ..................................... -- -- -- --
------------ ------------ ------------ ------------
Balance at June 30, 1998 ......................... 171,187 $ 171,187 40,481,320 $ 404,813
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED
LOSS TOTAL
ADDITIONAL ON STOCKHOLDERS'
PAID-IN MARKETABLE EQUITY
CAPITAL SECURITIES DEFICIT (DEFICIT)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 ..................... $112,940,414 $ (28,594) $(65,594,492) $ 47,893,078
Common stock issued upon exercise of options 93,500 -- -- 93,750
Dividends on Series B
Preferred Stock ........................... -- -- (193,435) (193,435)
Dividends on Series C
Preferred Stock ........................... -- -- (120,750) (120,750)
Unrealized loss on marketable
securities ................................ -- -- -- --
Net loss ..................................... -- (14,750) (58,011,338) (58,011,338)
------------ ------------ ------------ ------------
Balance at June 30, 1998 ......................... $113,033,914 $ (43,344) $(123,920,015) $(10,353,445)
============ ============ ============ ============
</TABLE>
See accompanying notes.
4
<PAGE> 7
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998
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 December 31, 1997 and June 30, 1998, the results of
operations for the three- and six-month periods ended June 30, 1997 and 1998,
and the cash flows for the six month periods ended June 30, 1997 and 1998.
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,
1997.
The Company capitalizes internal general and administrative costs
that can be directly identified with acquisition, exploration, and development
activities. These costs totaled $336,465 and $672,936 for the three- and
six-month periods ended June 30, 1997, respectively, and $446,291 and $984,588
for the three- and six-month periods ended June 30, 1998, respectively. The
Company capitalized interest costs $726,000 for the three- and six-month periods
ended June 30, 1997, and $955,000 and $1,919,000 for the three- and six-month
periods ended June 30, 1998, related to its unproved oil and natural gas
properties.
Certain previously reported amounts have been reclassified to
conform with the current presentation.
The results of operations for the six months ended June 30, 1998,
are not necessarily indicative of the results expected for the full year.
In 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share ("SFAS 128") which replaced the previously reported
primary and fully diluted earnings per share with basic and diluted earnings per
share. Basic earnings per share data is computed by dividing income (loss)
applicable to common shareholders by the weighted average number of common
shares outstanding and excludes any dilutive effects of options, warrants, and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. Shares issuable upon
exercise of options and warrants are included in the computation of diluted
earnings per share to the extent that they are dilutive. Diluted earnings per
share computations also assume the conversion of the Company's preferred stock
if such conversion has a dilutive effect. For the three- and six-month periods
ended June 30, 1997 and 1998, neither the common equivalent shares nor the
assumed conversion of the preferred stock had a dilutive effect on the loss per
share calculations. Accordingly, both basic and diluted loss per share
calculations for such periods are based on the weighted average number of common
shares outstanding during each period. SFAS 128 has been applied in the
computation of the loss per share data for all periods presented. However,
adoption of SFAS 128 had no effect on the per share amounts previously reported
for three- and the six-month periods ended June 30, 1997.
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities,
which is required to be adopted in years beginning after June 15, 1999. Because
the Company currently does not use or anticipate using derivatives, management
does not anticipate that the adoption of the new Statement will have an effect
on earnings or the financial position of the Company.
2. ACQUISITIONS
On March 31, 1998, the Company acquired Fortune Natural Resources
Corporation's 12.5% working interest in the East Bayou Sorrel Field for $4.5
million in cash.
5
<PAGE> 8
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998
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
Revised 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 or equal to 75%
of the borrowing base or (iii) 1.75% if the outstanding loan amount is less than
50% of the borrowing base. At June 30, 1998, the Company had $20.0 million
outstanding 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 3/8% 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 June 30, 1998, the Company was not in violation
of any covenants of the Revised Credit Facility.
4. 10 3/4% SENIOR NOTES DUE 2006
In November 1996, the Company issued $100 million aggregate
principal amount of unregistered 10 3/4% Series A 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%
Series B 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." In August 1997, the Company issued $65.0
million aggregate principal amount of its unregistered 10 3/4% Series C Notes
due 2006 (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, to fund the Drilling Program (as
defined), and to increase the Company's working capital. In December 1997, the
Company exchanged substantially all 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"). The
Series D Notes are substantially identical to the Series A/B Notes and the
Series C Notes. Collectively, the Series
6
<PAGE> 9
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998
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 Indenture governing the Senior Notes contains certain covenants
limiting the Company, with respect to the following: (i) assets sales; (ii)
restricted payments; (iii) the incurrence of additional indebtedness and the
issuance of certain redeemable preferred stock; (iv) liens; (v) sale and
leaseback transactions; (vi) lines of business; (vii) dividend and other payment
restrictions affecting subsidiaries; (viii) mergers and consolidations; and (ix)
transactions with affiliates.
5. CRUDE OIL AND NATURAL GAS PRODUCING ACTIVITIES
At March 31, 1998 and June 30, 1998, the net book value of the
Company's oil and natural gas properties exceeded the full cost ceiling, based
on the weighted average prices of crude oil and natural gas received by the
Company, resulting in a non-cash writedowns of $26.5 million and $24.8 million
during the three-month periods ended March 31, 1998 and June 30, 1998,
respectively. There can be no assurance that there will not be additional
writedowns in future periods under the full cost method of accounting as a
result of sustained decreases in oil and natural gas prices or other factors.
7
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company's results of operations and cash flows from operating
activities were adversely impacted during the first six months of 1998 by
declines in the prices received for oil and natural gas. The average price
received for the Company's crude oil production declined 32.7% compared to the
first six-months of 1997 and 24.9% compared to the second six-months of 1997.
The average price received for the Company's natural gas production declined
6.0% compared to the first six months of 1997 and 13.4% compared to the second
six-months of 1997. A sustained period of commodity prices at current levels
would have a material adverse impact on the Company's results of operations,
cash flows and financial position.
RESULTS OF OPERATIONS
OVERVIEW OF PRODUCTION, SALES AND UNIT ECONOMICS
The following table sets forth certain information regarding the
production volumes, oil and natural gas sales, average sales prices, and unit
economics per Mcfe for revenues and costs and expenses related to the Company's
oil and natural gas production for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
1997 1998 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net production:
Oil (Mbbls) ......................................... 261 335 498 628
Natural gas (Mmcf) .................................. 3,390 2,913 6,274 5,993
Natural gas equivalent (Mmcfe) ...................... 4,956 4,925 9,264 9,760
Oil and natural gas sales (in thousands):
Oil ................................................. $ 4,941 $ 4,322 $ 10,139 $ 8,583
Natural gas ......................................... 6,841 6,506 14,608 13,096
----------- ----------- ----------- -----------
Total ............................................... $ 11,782 $ 10,828 $ 24,747 $ 21,679
=========== =========== =========== ===========
Average sales price:
Oil (per Bbl) ....................................... $ 18.92 $ 12.90 $ 20.34 $ 13.67
Natural gas (per Mcf) ............................... 2.02 2.23 2.33 2.19
Unit economics (per Mcfe):
Average sales price ................................. 2.38 2.20 2.67 2.22
Operating expenses .................................. .49 .65 .54 .61
Depreciation, depletion and amortization ............ 1.13 1.17 1.14 1.18
General and administrative .......................... 23 .39 .24 .35
</TABLE>
THREE MONTHS ENDED JUNE 30, 1998, COMPARED WITH THREE MONTHS ENDED JUNE 30, 1997
Revenues. Total revenues decreased by $1.1 million (9.1%) to $11.0
million for 1998 from $12.1 million in 1997. In 1998, the Company produced 335
Mbbls of oil, an increase of 28.4% over the 261 Mbbls produced in 1997. The
Company produced 2,913 Mmcf of natural gas in 1998, a decrease of 14.1% from the
3,390 Mmcf produced in the same period of 1997. Aggregate production increases
resulting from the Company's drilling program during 1997 and 1998 ("Drilling
Program") were partially offset by the temporary shut-in of the Company's East
Bayou Sorrel Field in South Louisiana to allow for the repair of a gas line,
which reduced second quarter 1998 production by approximately 128 Mmcfe. This
impact was partially offset by the acquisition on March 31, 1998 of an
additional 12.5% working interest in the East Bayou Sorrel Field which increased
1998 production approximately 112 Mmcfe. The 1997 sale of certain non-strategic
properties (the "1997 Divestiture") also reduced 1998 second quarter production
by approximately 262 Mmcfe compared to 1997. In addition, natural gas production
was also impacted by the natural decline in production rates at the Company's
properties in Oklahoma and East Texas. Average natural gas prices increased $.21
per Mcf to $2.23 per Mcf for 1998 from $2.02 for 1997, and average oil prices
declined $6.02 per barrel to $12.90 for 1998 from $18.92 for 1997. The decreases
in average prices reduced second quarter 1998 revenues by approximately $1.2
million compared to 1997.
8
<PAGE> 11
Costs and Expenses. Operating costs, including production taxes,
increased $.8 million to $3.2 million for 1998 from $2.4 million for 1997,
primarily due to additional workover and maintenance activities during 1998
implemented to maintain or increase current production levels. As a result,
operating costs per Mcfe increased $.16 to $.65 for 1998 from $.49 for 1997.
Depreciation, depletion and amortization increased $.1 million
(1.7%) to $5.8 million for 1998 compared to $5.7 million for 1997 due to the
increase in the depletion rate per Mcfe which was $1.17 for 1998 compared to
$1.13 for 1997. This increase in the depletion rate was due to the increase in
capitalized costs resulting from the Company's Drilling Program.
At June 30, 1998, the net book value of the Company's oil and
natural gas properties exceeded the full cost ceiling, resulting in a non-cash
writedown of the Company's oil and natural gas properties of $24.8 million for
the three months ended June 30, 1998. This writedown resulted primarily from the
decline in oil and natural gas prices during the quarter, combined with the
costs incurred on unsuccessful exploratory wells drilled during the period. As a
result of the writedown, the Company expects its depletion rate per Mcfe to
decrease to $1.05 for the third quarter of 1998.
In the second quarter of 1998, the Company recorded a non-recurring
charge of approximately $598,000 for severance and related costs resulting from
the restructuring of its management team.
General and administrative costs increased $.6 million to $1.7
million compared to $1.1 million for 1997. The increase in general and
administrative expenses is primarily due to increased personnel and office space
due to the increased scope of the Company's operations.
Other Income and Expenses. The increase of $1.7 million in interest
expense to $4.0 million for 1998 from $2.3 million for 1997 was due to the
issuance of the Series C Notes issued in August of 1997 and interest on
borrowings under the Revised Credit Facility, partially offset by an increase of
$.2 million of interest costs which were capitalized in 1998 related to the
Company's unproved oil and natural gas properties. The average balance of debt
outstanding during 1998 was $178.5 million as compared to average debt
outstanding of $100.0 million for 1997. The weighted average interest rate for
1998 was 10.5% compared to 10.3% for 1997.
Net Income (Loss). The Company incurred a net loss of $29.0 million
for 1998, compared with net income of $.4 million for 1997. The net loss for
1998 includes a writedown of oil and natural gas properties of $24.8 million and
a non-recurring restructuring charge of $598,000. Excluding these charges, net
income declined $4.3 million in 1998 compared with 1997, primarily due to the
decrease in revenues and the increase in interest expense discussed above.
SIX MONTHS ENDED JUNE 30, 1998, COMPARED WITH SIX MONTHS ENDED JUNE 30, 1997
Revenues. Total revenues decreased by $3.3 million (12.9%) to $22.2
million for 1998 from $25.5 million in 1997. In 1998, the Company produced 628
Mbbls of oil, an increase of 26.1% over the 498 Mbbls produced in 1997. The
Company produced 5,993 Mmcf of natural gas in 1998, a decrease of 4.4% from the
6,274 Mmcf produced in the same period of 1997. Production increases resulting
from Company's Drilling Program were partially offset by the temporary shut-in
of the Company's East Bayou Sorrel Field in South Louisiana to allow for the
repair of a gas line, which reduced 1998 production by approximately 291 Mmcfe.
This impact was partially offset by the acquisition on March 31, 1998 of an
additional 12.5% working interest in the East Bayou Sorrel Field which increased
1998 production approximately 112 Mmcfe. The 1997 sale of certain non-strategic
properties (the "1997 Divestiture") also reduced the 1998 production by
approximately 529 Mmcfe compared to 1997. In addition, natural gas production
was also impacted by the natural decline in production rates from the Company's
properties in Oklahoma and East Texas. Average natural gas prices declined $.14
per Mcf to $2.19 per Mcf for 1998 from $2.33 for 1997, and average oil prices
declined $6.67 per barrel to $13.67 for 1998 from $20.34 for 1997. The decreases
in average prices reduced 1998 revenues by approximately $5.0 million compared
to 1997.
Costs and Expenses. Operating costs, including production taxes,
increased $.9 million to $5.9 million for 1998 from $5.0 million for 1997,
primarily due to the increased oil production discussed above and additional
workover and maintenance activities during 1998 which were implemented to
maintain or increase current production levels. As a result, operating costs per
Mcfe increased $.07 to $.61 for 1998 from $.54 for 1997.
9
<PAGE> 12
Depreciation, depletion and amortization increased $.9 million
(8.5%) to $11.5 million for 1998 compared to $10.6 million for 1997 due to the
increase in the depletion rate per Mcfe of $1.18 for 1998 compared to $1.14 for
1997. This increase in the depletion rate was due to the increase in capitalized
costs resulting from the Company's Drilling Program.
At March 31, 1998 and June 30, 1998, the net book value of the
Company's oil and natural gas properties exceeded the full cost ceiling,
resulting in a non-cash writedowns of the oil and natural gas properties
totaling $51.3 million for the six months ended June 30, 1998. These writedowns
resulted primarily from the decline in oil and natural gas prices in 1998,
combined with the costs incurred on unsuccessful exploratory wells drilled
during the period.
In the second quarter of 1998, the Company recorded a non-recurring
charge of approximately $598,000 for severance and related costs resulting from
the restructuring of its management team.
General and administrative costs increased $1.2 million to $3.4
million compared to $2.2 million for 1997. The increase in general and
administrative expenses is primarily due to increased personnel and office space
due to the increase in the scope of the Company's operations.
Other Income and Expenses. The increase of $2.6 million in interest
expense to $7.7 million for 1998 from $5.1 million for 1997 was due to the
issuance of the Series C Notes issued in August of 1997 and interest on
borrowings under the Revised Credit Facility, partially offset by an
increase of $1.2 million of interest costs which were capitalized in 1998
related to the Company's unproved oil and natural gas properties. The average
balance of debt outstanding during 1998 was $171.9 million as compared to
average debt outstanding of $100.0 million for 1997. The weighted average
interest rate for 1998 was 10.6% compared to 10.5% for 1997.
Net Income (Loss). The Company incurred a net loss of $58.0 million
for 1998, compared with net income of $1.8 million for 1997. The net loss for
1998 includes writedowns of oil and natural gas properties aggregating $51.3
million and a nonrecurring restructuring charge of $598,000. Excluding these
charges, net income declined $7.9 million in 1998 compared with 1997, primarily
due to the decrease in revenues, the increase in depreciation, depletion and
amortization and the increase in interest expense discussed above.
LIQUIDITY AND CAPITAL RESOURCES
SIX MONTHS ENDED JUNE 30, 1998, COMPARED WITH SIX MONTHS ENDED JUNE 30, 1997
Net cash used in operating activities was $2.9 million for the six
months ended June 30, 1998, compared to net cash provided by operating
activities of $6.2 million for the same period in 1997. Net cash flow from
operating activities before changes in operating assets and liabilities
decreased to $5.5 million in 1998 from $13.7 million in 1997. The decline in
cash flows from operating activities is primarily due to the decrease in
operating income, excluding non cash charges, and the increase in interest
expense discussed above.
Net cash used in investing activities was $41.8 million for 1998
compared with $40.1 million for 1997. The cash used by investing activities for
1998, included $40.8 million of expenditures for the Company's Drilling Program,
leasehold and seismic costs, and the acquisition of additional interests in East
Bayou Sorrel.
Net cash provided by financing activities was $19.8 million for 1998
compared $32.0 million for 1997. The net cash provided by financing activities
during 1998 consisted primarily of proceeds from borrowings under the Revised
Credit Facility. In 1997, net cash provided by financing activities consisted
primarily of proceeds from the issuance of additional 10 3/4% Notes due 2006.
CREDIT FACILITIES
The Revised Credit Facility, as amended, currently 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 amount of any
borrowings is due at maturity, August 29, 2000. Interest is payable monthly and
is calculated at the Bank One base rate, as determined
10
<PAGE> 13
from time to time by Bank One (which increases by .25% if the outstanding loan
balance is greater than 75% of the borrowing base). The Company may elect to
calculate interest under the EuroDollar Rate, as defined in the Revised Credit
Facility. 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 or equal to 75% of the borrowing
base or (iii) 1.75% if the outstanding loan amount is less than 50% of the
borrowing base. At June 30, 1998, the Company had $20.0 million outstanding
under the Revised Credit Facility.
The Company has granted liens to the Banks on substantially all of
the Company's oil and natural gas properties, whether currently owned or
hereafter acquired, and a negative pledge on all other oil and natural gas
properties. The Credit Facility requires, among other things, semiannual
engineering reports covering oil and natural gas properties, and maintenance of
certain financial ratios, including the maintenance of a minimum interest
coverage ratio, a current ratio, and a minimum tangible net worth.
The Revised Credit Facility contains other covenants prohibiting
cash dividends, distributions, loans, or advances to third parties, except that
cash dividends on preferred stock will be allowed so long as no event of default
exists or would exist as a result of the payment thereof. In addition, if the
Company is required to purchase or redeem any portion of the Notes, or if any
portion of the Notes become due, the borrowing base is subject to reduction. At
June 30, 1998, the Company was not in violation of any covenants of the Revised
Credit Facility.
10 3/4% SENIOR NOTES DUE 2006
In November 1996, the Company issued $100 million aggregate
principal amount of unregistered 10 3/4% Series A 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%
Series B 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." In August 1997, the Company issued $65.0
million aggregate principal amount of its unregistered 10 3/4% Series C Notes
due 2006 (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, to fund the Drilling Program, and
to increase the Company's working capital. In December 1997, the Company
exchanged substantially all 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"). 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 Indenture governing the Senior Notes contains certain covenants
limiting the Company, with respect to the following: (i) assets sales; (ii)
restricted payments; (iii) the incurrence of additional indebtedness and the
issuance of certain redeemable preferred stock; (iv) liens; (v) sale and
leaseback transactions; (vi) lines of business; (vii) dividend and other payment
restrictions affecting subsidiaries; (viii) mergers and consolidations; and (ix)
transactions with affiliates.
FUTURE CAPITAL AND FINANCING REQUIREMENTS
The Company has made, and will continue to make, substantial capital
expenditures for the exploration, acquisition, development, and exploitation of
oil and natural gas reserves. Actual amounts to be expended by the Company for
these activities will be dependent upon a number of factors, including oil and
natural gas prices, seismic and contract service costs, availability of drilling
rigs, future drilling results, and the availability of capital.
At current prices for oil and natural gas, the Company currently
expects available working capital, cash flows from operations, and available
borrowings under the Revised Credit Facility will be sufficient to fund planned
capital expenditures for its existing properties through 1998, in addition to
funding interest requirements on its outstanding indebtedness. However, if the
prices for oil and natural gas decline further, or if additional borrowings
under the Revised Credit Facility were not available, the Company may not be
able to develop and explore its properties as currently planned.
11
<PAGE> 14
If required, the Company will seek additional capital from equity
and debt offerings or joint ventures to develop and explore its 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 cash flows and 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. Such developments could also impact the ability of the Company to meet
its obligations on its existing indebtedness.
FINANCIAL REPORTING IMPACT OF FULL COST METHOD OF ACCOUNTING
The Company follows the full cost method of accounting for oil and
natural gas properties. Under such method, the net book value of such
properties, less related deferred income taxes, may not exceed a calculated
"ceiling." The ceiling is the estimated after-tax future net revenues from
proved oil and natural gas properties, discounted at 10% per year. In
calculating future net revenues, prices and costs in effect at the time of the
calculation are held constant indefinitely, except for charges which are fixed
and determinable by existing contracts. The net book value is compared to the
ceiling on a quarterly and yearly basis. The excess, if any, of the net book
value above the ceiling is required to be written off as a non-cash expense. At
March 31, 1998 and June 30, 1998, the net book value of the Company's oil and
natural gas properties exceeded the full cost ceiling, based on the weighted
average prices of crude oil and natural gas received by the Company, resulting
in non-cash writedowns aggregating $51.3 million. There can be no assurance that
there will not be additional writedowns in future periods under the full cost
method of accounting as a result of sustained decreases in oil and natural gas
prices or other factors.
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.
At December 31, 1997, the Company had entered into forward sales
contracts with three purchasers covering the future production of natural gas.
Deliveries under these contracts are priced based on NYMEX prices less a
differential whereby the Company may fix the price for deliveries under these
contracts at any time three days prior to the close of the then current contract
based on the NYMEX prices at that time. The Company pays the cost of
transportation of the natural gas to the delivery point specified in the
contracts. Currently, the Company has fixed the sales prices of approximately
790,000 Mcf of gas to be delivered under these contracts during the months of
July 1998 through September 1998. The average price of the natural gas for these
deliveries is approximately $2.45 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 six months ended June 30, 1997 and
1998.
YEAR 2000
The Company has reviewed the computer systems in order to evaluate
necessary modifications for the year 2000 and expects that it will not incur
material expenditures to complete such modifications.
12
<PAGE> 15
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.
The Company is not a defendant in any additional pending legal
proceedings other than routine litigation incidental to its business. While the
ultimate results of these proceedings cannot be predicted with certainty, the
Company does not believe that the outcome of these matters will have a material
adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 4, 1998, an annual meeting of the shareholders of the
Company was held. George B. McCullough, Norman C. Miller, Miles D. Bender,
Robert H. Kite, George N. McDonald, Jim L. David, and Bob G. Alexander were
elected directors at such annual meeting to serve for a term of one year until
the next annual meeting of shareholders and until their successors are duly
elected or appointed and qualified or until their death, resignation or
removal. In addition, the holders of a majority, a majority of the holders of
the Series C Preferred Stock appointed Elwood W. Schafer as director and the
holders of the Series D Preferred Stock appointed Robert J. Mitchell as
director of the Company.
At the meeting, three proposals were voted upon and the following
sets forth the number of votes that were cast for and against the proposals and
the number of abstentions and broker no votes on the proposals:
(i) Proposal to elect seven nominees as directors of the Company to
serve until the next annual meeting of shareholders:
<TABLE>
<CAPTION>
NAME OF DIRECTORS
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
JIM L. BOB G. MILES D. ROBERT H. GEORGE B. GEORGE N. NORMAN C.
DAVID ALEXANDER BENDER KITE McCULLOUGH MCDONALD MILLER
For 34,571,906 34,595,274 34,568,743 34,568,493 34,561,739 34,564,756 34,561,626
Against 249,907 226,539 253,070 253,320 260,074 257,057 260,187
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total 34,821,813 34,821,813 34,821,813 34,821,813 34,821,813 34,821,813 34,821,813
========== ========== ========== ========== ========== ========== ==========
</TABLE>
13
<PAGE> 16
(ii) To approve the adoption of the National Energy Group, Inc. 1996
Employee Stock Purchase Plan (the "1996 Plan") under which
employees of the Company will be able to purchase Stock through
accumulated payroll deductions at a discount. The Plan authorizes
and reserves for issuance of 500,000 shares of the Company's
Common Stock, which may be purchased pursuant to the terms of the
Plan.
<TABLE>
<S> <C>
For..................................................... 33,952,448
Against................................................. 646,217
Abstain................................................. 223,148
----------
Total............................................... 34,821,813
(iii) Proposal to ratify the selection of Ernst & Young LLP as the
Company's independent auditors for the current fiscal year ended
December 31, 1998.
For..................................................... 34,575,116
Against................................................. 161,451
Abstain................................................. 85,246
----------
Total............................................... 34,821,813
</TABLE>
There were no broker non-votes with respect to any of the
proposals.
ITEM 5. OTHER INFORMATION
Shareholders who wish to include proposals for action at the
Company's 1999 annual meeting of shareholders in next year's proxy statement
must, in addition to other applicable requirements cause their proposals to be
received in writing by the Company at its address set forth on the cover of
this Form 10-Q no later than March 15, 1999, rather than December 20, 1998 as
originally stated in the Company's Proxy Statement related to its Annual
Meeting held June 4, 1998. Such proposals should be addressed to the Company's
Secretary and may be included in next year's proxy statement if they comply
with certain rules and regulations promulgated by the Securities and Exchange
Commission.
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 six months ended
June 30, 1998.
14
<PAGE> 17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Miles D. Bender August 14, 1998
------------------------------------
Miles D. Bender
Chairman and Chief Executive Officer
By: /s/ Fred R. Miller August 14, 1998
-------------------------------------
Fred R. Miller
Senior Vice President, Finance and
Administration, and
Chief Financial Officer
/s/ Melissa H. Rutledge August 14, 1998
-------------------------------------
Melissa H. Rutledge
Vice President, Controller, and Chief
Accounting Officer
15
<PAGE> 18
INDEX TO EXHIBITS
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. (8)
10.1 Executive Employment Agreement, dated April 13, 1998, between the
Company and Kent Lueders (9)
10.2 Executive Employment Agreement, dated June 1, 1998, between the
Company and Leslie J. Wylie (10)
11.1 Computation of Earnings Per Share (10)
27.1 Financial Data Schedule (11)
- ----------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-4 (No. 333-9045), dated July 29, 1996.
(2) Incorporated by reference to Amendment No. 1 to the Company's
Registration Statement on Form S-4 (No. 333-9045), dated August 7, 1996.
(3) Incorporated by reference to the Company's Current Report on Form 8-K,
dated August 29, 1996.
(4) Incorporated by reference to the Company's Registration Statement on Form
S-4 (No. 33-38331), dated April 23, 1991.
(5) Incorporated by reference to the Company's Current Report on Form 8-K,
dated June 17, 1994.
(6) Incorporated by reference to the Company's Current Report on Form 8-K,
dated July 18, 1995.
(7) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996.
(8) Incorporated by reference to the Company's Form S-4 (No. 333-38075),
filed October 16, 1997.
(9) Incorporated by reference to the Company's quarterly Report on Form 10-Q
for the quarter ended March 31, 998.
(10) Filed herewith.
(11) The Financial Data Schedule, is filed herewith for EDGAR filings only.
<PAGE> 1
EXHIBIT 10.1
EXECUTIVE EMPLOYMENT AGREEMENT
This Executive Employment Agreement (the "Agreement") is made the
1st day of June, 1998, by and between National Energy Group, Inc., a Delaware
corporation acting by and through its hereunto duly authorized officer (the
"Company"), and Leslie J. Wylie (the "Executive").
WHEREAS, the Executive is presently in the employ of the Company in
the capacity of Vice President-Land and Assistant General Counsel and is willing
to provide certain employment assurances to the Executive in the event of a
Change of Control (as defined below) of the Company as incentive and inducement
for the Executive to continue in such employment in her present capacity after a
Change of Control; and
WHEREAS, in consideration of such employment assurances, the
Executive is willing to remain in the employ of the Company in the capacity of
Vice President-Land and Assistant General Counsel after a Change of Control of
the Company.
NOW, THEREFORE, in consideration of the premises and the mutual
terms and conditions hereof, the Company and the Executive hereby agree as
follows:
1. Employment. In consideration of the benefits hereinafter
specified, the Executive hereby agrees to continue her employment with the
Company in the capacity of Vice President-Land and Assistant General Counsel
after a Change of Control of the Company and to discharge her duties in such
capacity during the term of this Agreement.
2. Exclusive Services. The Executive shall devote her full working
time, ability and attention to the business of the Company during the term of
this Agreement and shall not, directly or indirectly, render any services of a
business, commercial or professional nature to any other person, corporation or
organization, whether for compensation or otherwise, without the prior knowledge
and consent of the Board of Directors (the "Board") or President and Chief
Executive Officer of the Company; provided, however, that the provisions of this
Agreement shall not be construed as preventing the Executive from investing in
other non-competitive businesses or enterprises if such investments do not
require substantial services on the part of the Executive in the affairs or
operations of any such business or enterprise so as to significantly diminish
the performance by the Executive of her duties, functions and responsibilities
under this Agreement. During the term of this Agreement, the Executive shall
not, directly or indirectly, either through any kind of ownership (other than
ownership of securities of publicly held corporations of which the Executive
owns less than five percent (5%) of any class of outstanding securities) or as a
director, officer, agent, employee or consultant engage in any business that is
competitive with the Company.
3. Authority and Duties. During the term of this Agreement, the
Executive shall have such authority and shall perform such duties, functions and
responsibilities as are specified by the Bylaws of the Company, the Executive
Committee, the Board of Directors, or the President of the Company and/or as are
appropriate for the office of the Vice President-Land and Assistant General
Counsel and shall serve with the necessary power and authority commensurate with
such position. If the Company removes the Executive from the office of the Vice
President-Land and Assistant General Counsel of the Company after a Change of
Control or limits, restricts or reassigns her authority and responsibility after
a Change of Control so as to be less significant than, or not comparable to,
that to which she held immediately preceding such Change of Control in her
capacity as Vice President-Land and Assistant General Counsel without her prior
mutual consent, the Executive shall be entitled to resign for good reason and
receive the Severance Benefits set forth in this Agreement.
<PAGE> 2
4. Compensation. In consideration for the services to be rendered by
the Executive to the Company and/or its subsidiaries, the Company shall pay to
the Executive at least the gross cash compensation and shall award to the
Executive at least the bonuses as set forth below:
<TABLE>
<CAPTION>
==================================================================================================================================
<S> <C> <C>
ANNUAL ANNUAL BONUS
ANNUAL PERIOD BASE SALARY
- ----------------------------------------------------------------------------------------------------------------------------------
For the one year period 100% of the average of the Executive's annual base 100% of the average of the bonuses paid
following effective date of a salary in effect immediately prior to the Change in to the Executive for each of the three
Change of Control Control and of the Executive's annual base salary for fiscal years before the Change in Control
each of the immediately preceding two years
- ----------------------------------------------------------------------------------------------------------------------------------
For the second year following 100% of the average of the Executive's annual base 100% of the average of the bonuses paid
effective date of a Change of salary on the date that is one year after the Change to the Executive for the three immediately
Control in Control and of the Executive's annual base salary preceding fiscal years
for each of the immediately preceding two years
- ----------------------------------------------------------------------------------------------------------------------------------
For the third year following 100% of the average of the Executive's annual base 100% of the average of the bonuses paid to
effective date of a Change of salary on the date that is two years after the Change the Executive for the three immediately
Control in Control and of the Executive's annual base salary preceding fiscal years
for each of the immediately preceding two years
==================================================================================================================================
</TABLE>
In the event that the Executive shall not have been employed for three years
prior to the effective date of this Agreement, the Executive's annual base
compensation rate or bonus rate shall be averaged over the actual period of
employment of the Executive by the Company.
Each of the annual base salary amounts set forth above shall be paid
to the Executive in equal monthly installments, or as otherwise agreed, during
each corresponding year of the term of this Agreement, provided that for any
period of less than one (1) year, the annual base salary shall be pro-rated
accordingly. The annual bonus amount indicated above or amounts in excess of
such indicated bonus shall be awarded no later than December 31 of the
corresponding annual period. The amount set forth above is compensation to the
Executive or gross amounts due hereunder, and the Company shall have the right
to deduct therefrom all taxes and other amounts which may be required to be
deducted or withheld by law (including, but not limited to, income tax,
withholding, social security and medicare payments) whether such law is now in
effect or becomes effective after the execution of this Agreement.
5. Benefits and Business Expenses. During the term hereof:
(a) The Executive shall be entitled to continue her participation
in programs maintained by the Company for the benefit of its
employees and officers and to participate in new or amended
programs, including, but not limited to, medical, health, life,
accident and disability insurance programs, pension plans, incentive
compensation plans, stock option plans, stock appreciation rights
plans, and limited stock appreciation rights plans. The Company
shall not terminate nor amend such plans to the detriment of the
Executive.
2
<PAGE> 3
(b) To the extent that the Company has provided the Officer with
an automobile, club memberships, association and trade memberships
and other memberships prior to the Change of Control, the Company
shall continue to provide the Officer with such items, of a
comparable nature, following a Change of Control. The Company shall
pay the expenses of such automobile, memberships and subscriptions.
(c) The Executive shall be reimbursed for any business expenses
reasonably incurred in carrying out her duties, functions and
responsibilities upon presentation of expense reports to the
Company.
6. Term. This Agreement shall have a term of three (3) years
commencing on the effective date of a Change of Control and shall be
automatically extended on the 1st day of each and every calendar month during
the term of this Agreement for an additional calendar month so that at the
beginning of each and every month during the term of this Agreement there shall
be a remaining term of three (3) years (but in no event beyond the time the
Executive reaches age 65) unless and until the Company gives written notice to
the Executive that the term of this Agreement shall not be further so extended,
in which case the Executive shall be entitled to resign for good reason. The
provisions of this Section 6 shall apply to each Change of Control irrespective
of any Changes of Control which may have occurred previously.
7. Severance Benefits After Change Of Control. In addition to such
compensation and other benefits payable to or provided for the Executive as
authorized by the Board from time to time, Executive shall be entitled to
receive in lieu of the compensation described in paragraph 4 hereof, and the
Company shall pay or provide to the Executive the following severance benefits
(the "Severance Benefits") in the event that, during the term hereof, the
Company discharges the Executive without cause or the Executive resigns for good
reason after a Change of Control, to-wit:
(a) The Company shall pay to the Executive a lump sum cash
payment (multiplied by the applicable factor described below)
payable on such date of termination of employment equal to the
Executive's Abase compensation@ then in effect, which shall, and is
defined to, consist of the sum of (i) the Executive's annual base
salary then in effect, (ii) the average of the amounts of the last
three annual cash bonuses paid or granted to, or earned by, the
Executive, and (iii) the average of the total amounts of the
Company's contributions to its retirement plan allocable to the
Executive on a fully vested basis for the last three fiscal years of
the retirement plan. The amount of the Abase compensation@ payable
to the Executive pursuant to this Section 7(a) shall be multiplied
by the number three (3) for the purposes of determining the lump sum
cash severance payment due under this Section 7(a).
(b) All stock options granted by the Company to the Executive,
all contributions made by the Executive and by the Company for the
account of the Executive to any pension, retirement or any other
benefit plan, and all other benefits or bonuses, including but not
limited to net profits interests which contain vesting or
exercisability provisions conditioned upon or subject to the
continued employment of the Executive, shall become fully vested and
exercisable and shall remain fully exercisable for a period of the
later of three hundred sixty (360) days after (i) the date of such
termination of employment, or (ii) the termination of this
Agreement.
(c) The Company shall continue the participation of the Executive
in all life, accident, disability, medical, dental and all other
health and casualty insurance plans maintained by the Company for
its officers and employees for a period of one (1) year after the
date of such termination of employment or for such longer period as
may be required by applicable law.
3
<PAGE> 4
(d) Notwithstanding any provision of this Agreement to the
contrary, if the Executive is a disqualified individual (as the term
"disqualified individual" is defined in Section 280G of the Code)
and if any portion of the Severance Benefits under this Section 7 of
this Agreement would be an excess parachute payment (as the term
"excess parachute payment" is defined in Section 280G of the Code)
but for the application of this sentence, then the amount of the
Severance Benefits otherwise payable to the Executive pursuant to
this Agreement will be reduced to the minimum extent necessary (but
in no event to less than zero) so that no portion of the Severance
Benefits, as so reduced, constitutes an excess parachute payment.
The determination of whether any reduction in the amount of the
Severance Benefits is required pursuant to this Section 7(d) will be
made by the Company's independent accountants. The fact that the
Executive has her Severance Benefits reduced as a result of the
limitations set forth in this Section 7(d) will not of itself limit
or otherwise affect any rights of the Executive arising other than
pursuant to this Agreement.
(e) The Company has determined that the amounts payable under
this Agreement constitute reasonable compensation for services
rendered. Accordingly, notwithstanding any other provision hereof,
unless such action would be expressly prohibited by applicable law,
if any amount is paid pursuant to this Agreement which is determined
to be subject to the excise tax imposed by Section 4999 of the Code,
the Company will pay to the Executive an additional amount in cash
equal to the amount necessary to cause the aggregate amount payable
under this Agreement, including such additional cash payment (net of
all federal, state and local income taxes and all taxes payable as
the result of the application of Sections 280G and 4999 of the
Code), to be equal to the aggregate amount payable under this
Agreement, excluding such additional payment (net of all federal,
state and local income taxes), as if Sections 280G and 4999 of the
Code (and any successor provisions thereto) had not been enacted
into law.
8. Place of Performance. During the term hereof:
(a) The principal office of the Executive and the principal place
for performance by her of her duties, functions and responsibilities
under this Agreement shall be in the City or suburbs of Dallas,
Texas.
(b) It is recognized that the performance of the Executive's
duties hereunder may occasionally require the Executive, on behalf
of the Company, to be away from her principal office for business
reasons. Unless consent of the President and Chief Executive Officer
is obtained by the Executive, such periods of being away from her
principal office on behalf of the Company shall not exceed thirty
(30) calendar days per year.
9. Definition of Change of Control. For purposes of this Agreement,
"Change of Control" shall mean the occurrence of one or more of the following
events: (i) a person or entity or group (as that term is used in Section
13(d)(3) of the Exchange Act) of persons or entities shall have become the
beneficial owner of a majority of the securities of the Company ordinarily
having the right to vote in the election of directors, (ii) during any
consecutive two-year period, individuals who at the beginning of such period
constituted the Board of Directors of the Company (together with any directors
who are members of such Board of Directors of the Company on the date hereof and
any new directors whose election by such Board of Directors of the Company or
whose nomination for election by the stockholders of the Company was approved by
a vote of 66 2/3% of the directors then still in office who were either
directors at the beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the Board of Directors of the Company then in office, (iii) any
sale, lease, exchange or other transfer (in one transaction or a series of
related transactions) of all, or substantially all, the assets of the Company to
any person or entity or group (as so defined in Section 13(d)(3) of the Exchange
Act)
4
<PAGE> 5
of persons or entities (other than any wholly owned subsidiary of the Company),
or (iv) the merger or consolidation of the Company into or with another
corporation or the merger of another corporation into the Company with the
effect that immediately after such transaction any person or entity or group (as
so defined in Section 13(d)(3) of the Exchange Act) of persons or entities, or
the stockholders of any other entity, shall have become the beneficial owner of
securities of the surviving corporation of such merger or consolidation
representing a majority of the voting power of the outstanding securities of the
surviving corporation ordinarily having the right to vote in the election of
directors. The Alexander Energy Corporation merger, however it might be
structured, shall not constitute a Change of Control under this Agreement.
10. Discharge with Cause. For the purposes of this Agreement, the
Company shall be deemed to have discharged the Executive for cause only if any
one of the following conditions existed:
(a) If the Executive shall have willfully breached or habitually
neglected her duties and responsibilities as the Vice President-Land
and Assistant General Counsel of the Company; or
(b) If the Executive shall have been convicted of any felony
offense during the term of this Agreement.
The discharge of the Executive by the Company when none of the foregoing
conditions exist shall be deemed to be a discharge without cause.
11. Resignation for Good Reason. For the purposes of this Agreement,
the Executive shall have resigned for good reason if any one of the following
conditions existed at the time of her resignation:
(a) If the Company shall have assigned to the Executive
authority and responsibilities less significant than, or not
comparable to, that which she had in her capacity as Vice
President-Land and Assistant General Counsel immediately preceding a
Change of Control or shall otherwise so limit or restrict her
authority and responsibilities after a Change of Control;
(b) The Company shall have reduced the Executive's annual base
salary below her annual base salary in effect on the effective date
of a Change of Control or the Company shall have reduced the
Executive's annual cash bonus below that of her last annual cash
bonus prior to the effective date of a Change of Control;
(c) The Company shall have taken any actions having the purpose
or intent and the effect of inducing the Executive to resign, such
as failing to provide the Executive with all personnel benefits
which are otherwise generally provided to executive officers of the
Company or reasonably necessary or appropriate for the performance
by the Executive of her duties as Vice President-Land and Assistant
General Counsel of the Company; or
(d) The Company shall have declined to extend the term of this
Agreement pursuant to Section 6 hereof.
12. Termination Upon Death. This Agreement shall terminate
immediately upon the date of the death of the Executive.
13. Remedies. Subject to the provisions of Section 14(i) below, if
the Executive shall file any judicial action for enforcement of this Agreement
and successfully recover compensation or
5
<PAGE> 6
damages, the Executive shall be entitled to recover from the Company an
additional amount equal to interest at ten percent (10%) per annum on the amount
recovered from the date such amount was due and payable together with all
expenses and reasonable attorneys' fees incurred in obtaining legal advice and
counseling respecting her rights under this Agreement and in prosecuting and
disposing of such action.
14. General Provisions.
(a) Notices. Any notices to be given hereunder by either party
to the other may be given either by personal delivery in writing or
by fax, or by mail, registered or certified, postage prepaid, return
receipt requested, addressed to the parties at their respective
addresses set forth below their signatures to this Agreement, or at
such other addresses as they may specify to the other in writing.
(b) Law Governing. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas.
(c) Invalid Provisions. If any provision of this Agreement is
held to be illegal, invalid or unenforceable under present or future
laws effective during the term hereof, such provision shall be fully
severable and this Agreement shall be construed and enforced as if
such illegal, invalid or unenforceable provision had never comprised
a part hereof, and the remaining provisions hereof shall remain in
full force and effect and shall not be affected by the illegal,
invalid or unenforceable provision or by its severance herefrom.
Furthermore, in lieu of such illegal, invalid or unenforceable
provision, there shall be added automatically as part of this
Agreement a provision as similar in terms to such illegal, invalid
or unenforceable provision as may be possible and still be legal,
valid or enforceable.
(d) Entire Agreement. This Agreement sets forth the entire
understanding of the parties and supersedes all prior agreements or
understandings, whether written or oral, with respect to the subject
matter hereof. No terms, conditions or warranties, other than those
contained herein, and no amendments or modifications hereto shall be
binding unless made in writing and signed by the parties hereto.
(e) Binding Effect. This Agreement shall extend to and be
binding upon and inure to the benefit of the parties hereto, their
respective heirs, representatives, successors and assigns. All of
the provisions of this Agreement shall be fully applicable to any
successor to the Company resulting from a Change of Control. The
Company agrees that in the event of a tender or exchange offer,
merger, consolidation or liquidation or any such similar event
involving the Company, its securities or assets, it shall reveal the
existence of this Agreement to the acquiring person or entity. The
Company further agrees that if such action is not inconsistent with
the best interests of the Company, it shall condition approval of
any transactions proposed by the acquiror upon obtaining the
consent, in writing, of the potential successor to the Company to be
bound by this Agreement. In the event the Executive dies prior to
the termination of this Agreement, any compensation or other payment
due and owing to the Executive on or before the date of the
Executive's death shall be paid to her estate, executors,
administrators, heirs or legal representatives. Since the duties and
services of the Executive hereunder are special, personal and unique
in nature, the Executive may not transfer, sell or otherwise assign
her rights, obligations or benefits under this Agreement.
(f) Waiver. The waiver by either party hereto of a breach of
any term or provision of this Agreement shall not operate or be
construed as a waiver of a subsequent breach of the same provisions
by either party or of the breach of any other term or provision of
this Agreement.
6
<PAGE> 7
(g) Titles. Titles of the paragraphs herein are used solely for
convenience and shall not be used for interpretation or construing
any word, clause, paragraph or provision of this Agreement.
(h) Certain Conflicts. The parties hereto acknowledge and agree
that Executive has entered into that certain letter agreement
pertaining to the Executive's employment with the Company dated
March 26, 1998 (the "Letter Agreement"). Where a conflict may arise
between the provisions of this Agreement and the Letter Agreement,
the provisions of the Letter Agreement shall apply.
(i) Mediation/Arbitration. Notwithstanding anything to the
contrary contained herein, in the event of a dispute between the
parties to this agreement, the parties agree to participate in good
faith in a minimum of four (4) hours of mediation in Dallas, Texas
with an attorney-mediator trained and certified by the American
Arbitration Association, the United States Arbitration and Mediation
Service, or any comparable organization, and to abide by the
mediation procedures and decision of such organization. The parties
agree to equally bear the costs of the mediation. In the event the
parties cannot resolve their dispute through mediation as described
herein, the parties agree to participate in binding arbitration
pursuant to the rules of the American Arbitration Association or
mutually agreeable similar organization. Such arbitration shall be
held in Dallas, Texas, shall be binding and nonappealable and a
judgment on the award to the prevailing party (inclusive of
reasonable attorney's fees and costs) may be entered in any court
having competent jurisdiction.
IN WITNESS WHEREOF, the Company and the Executive have executed this
Executive Employment Agreement as of the day and year first written above,
effective as of the date specified above.
COMPANY:
NATIONAL ENERGY GROUP, INC.
By: /s/ CHUCK L. ELSEY
---------------------------------
Chuck L. Elsey
Executive Vice President and
Chief Operating Officer
4925 Greenville Avenue, Suite 1400
Dallas, Texas 75206
(214) 692-9211
(214) 692-5055 (Fax)
EXECUTIVE:
/s/ LESLIE J. WYLIE
---------------------------------------
LESLIE J. WYLIE
2728 Spyglass
Carrollton, TX 75007
7
<PAGE> 1
EXHIBIT 11.1
NATIONAL ENERGY GROUP, INC.
COMPUTATION OF EARNINGS PER SHARE
SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
BASIC DILUTED
------------ -------------
<S> <C> <C>
Income applicable to common stockholders:
Net income .......................................................... $ 1,857,878 $ 1,857,878
Preferred dividend requirements ..................................... (472,500) --
------------ ------------
Income applicable to common stockholders ............................ $ 1,385,378 $ 1,857,878
============ ============
Common and common equivalent shares:
Weighted average number of common shares outstanding ................ 36,138,936 36,183,936
Shares issuable upon exercise of options and warrants ............... 3,416,535 3,416,535
Less shares assumed repurchased ..................................... (2,632,363) (2,632,363)
------------ ------------
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 ................................. 43,589,774 48,820,543
============ ============
Net income per common and common equivalent shares ..................... $ .028 $ .035
============ ============
</TABLE>
Note: 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 JUNE 30, 1997
<TABLE>
<CAPTION>
BASIC DILUTED
------------ -------------
<S> <C> <C>
Income applicable to common stockholders:
Net income .......................................................... $ 454,438 $ 454,438
Preferred dividend requirements ..................................... (472,500) --
------------ ------------
Income applicable to common stockholders ............................ $ (18,062) $ 454,438
============ ============
Common and common equivalent shares:
Weighted average number of common shares outstanding ................ 36,148,855 36,148,855
Shares issuable upon exercise of options and warrants ............... 3,416,535 3,416,535
Less shares assumed repurchased ..................................... (2,632,363) (2,632,363)
------------ ------------
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 ................................. 43,599,693 48,830,462
============ ============
Net income per common and common equivalent shares ..................... $ .000 $ .035
============ ============
</TABLE>
Note: Diluted net income per common share data is not presented because
the effect of assumed conversion of the Convertible Preferred Stock,
Series B and C, is antidilutive.
<TABLE> <S> <C>
<ARTICLE> CT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<TOTAL-ASSETS> 192,883
0
171
<COMMON> 405
<OTHER-SE> (10,929)
<TOTAL-LIABILITY-AND-EQUITY> 192,883
<TOTAL-REVENUES> 22,187
<INCOME-TAX> 0
<INCOME-CONTINUING> (58,011)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (58,011)
<EPS-PRIMARY> (1.44)
<EPS-DILUTED> (1.44)
</TABLE>
