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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] 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 of (IRS Employer
incorporation or organization) Identification No.)
4925 GREENVILLE AVENUE
DALLAS, TEXAS 75206 75206
(Address of principal executive (Zip code)
offices)
(214) 692-9211
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of Class)
Securities registered pursuant to Securities Act of 1933:
Series B Senior Notes, 10 3/4% due 2006
Series D Senior Notes, 10 3/4% due 2006
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments hereto to this Form 10- K. Yes [x] No [ ]
The aggregate market value of the shares of Common Stock held by
non-affiliates of the Registrant, as of March 23, 1998, (based upon the last
sales price of $3.1563 as reported by NASDAQ) was $90,059,210.
40,481,320 shares of the Registrant's common stock, $0.01 par value,
were outstanding on March 23, 1998.
The information required by Part III of this Report is incorporated by
reference from Registrant's definitive proxy statement for its 1998 Annual
Meeting of Stockholders (to be filed with the Commission not later than April
30,1998).
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TABLE OF CONTENTS
PART I
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Page
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ITEMS 1. AND 2. BUSINESS AND PROPERTIES
General . . . . . . . . . . . . . . . . . . . . . . 3
Forward-Looking Statements . . . . . . . . . . . . . 4
Business Strategy . . . . . . . . . . . . . . . . . 4
Exploration . . . . . . . . . . . . . . . . . . . . 5
Acquisitions . . . . . . . . . . . . . . . . . . . . 7
Development and Exploitation . . . . . . . . . . . . 8
Oil and Natural Gas Reserves . . . . . . . . . . . . 10
Principal Areas of Operation . . . . . . . . . . . . 11
Oil and Natural Gas Production and Unit Economics . 11
Productive Well Summary . . . . . . . . . . . . . . 12
Leasehold Acreage . . . . . . . . . . . . . . . . . 12
Drilling Activity . . . . . . . . . . . . . . . . . 13
Title to Oil and Natural Gas Properties . . . . . . 13
Production and Sales Prices . . . . . . . . . . . . 13
Control Over Production Activities . . . . . . . . . 13
Markets and Customers . . . . . . . . . . . . . . . 14
Regulation . . . . . . . . . . . . . . . . . . . . . 14
Operational Hazards and Insurance . . . . . . . . . 17
Competition . . . . . . . . . . . . . . . . . . . . 17
Office Space . . . . . . . . . . . . . . . . . . . . 18
Employees . . . . . . . . . . . . . . . . . . . . . 18
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS . . . . . . . . . . . . . . . . . . . . . 18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . 19
Market Information . . . . . . . . . . . . . . . . . 19
Holders . . . . . . . . . . . . . . . . . . . . . . 19
Dividends on Common Stock . . . . . . . . . . . . . 19
Recent Sales of Unregistered Securities . . . . . . 19
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . 22
Overview . . . . . . . . . . . . . . . . . . . . . . 22
Results of Operations . . . . . . . . . . . . . . . 22
Liquidity and Capital Resources . . . . . . . . . . 24
Future Capital Requirements . . . . . . . . . . . . 25
10 3/4% Senior Notes Due 2006 . . . . . . . . . . . 26
Credit Facilities . . . . . . . . . . . . . . . . . 26
Preferred Stock . . . . . . . . . . . . . . . . . . 27
Financial Reporting Impact of Full Cost Method
of Accounting . . . . . . . . . . . . . . . . . . 27
Recent Accounting Pronouncements . . . . . . . . . . 28
Changes in Prices and Inflation . . . . . . . . . . 28
Year 2000 . . . . . . . . . . . . . . . . . . . . . 29
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK . . . . . . . . . . . . . . . . . . . 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . 29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . 29
</TABLE>
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . 29
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . 29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT . . . . . . . . . . . . . . . . . . 29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . 29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K . . . . . . . . . . . . . . . 30
Signatures . . . . . . . . . . . . . . . . . . . . . 36
</TABLE>
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PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES
GENERAL
National Energy Group, Inc. ("the Company") was incorporated under the laws
of the State of Delaware on November 20, 1990. Effective June 11, 1991, Big
Piney Oil and Gas Company ("Big Piney") and VP Oil, Inc. ("VP") merged with and
into the Company. On August 29, 1996, Alexander Energy Corporation
("Alexander") was merged with and into a wholly-owned subsidiary of the
Company, which subsidiary was merged with and into the Company on December 31,
1996.
The Company is an independent energy company engaged in the exploration,
acquisition, exploitation, development and operation of oil and natural gas
properties in major producing basins onshore in Texas, Louisiana, Oklahoma,
Arkansas, and Mississippi, and offshore in the Gulf of Mexico. The Company has
developed an exploration program that is concentrating primarily on onshore
prospects in Louisiana, Texas, and Mississippi and offshore Gulf of Mexico
prospects in shallow state waters of Texas. As a result of several acquisitions
in 1996, which substantially increased its reserve and property base, the
Company has implemented a comprehensive capital expenditure program to enhance
existing production and to convert Proved Undeveloped Reserves to Proved
Developed Producing Reserves through development drilling, workovers,
recompletions, and other production enhancement activities. By acquiring
properties with significant reserve and production enhancement potential and by
focusing its efforts on the subsequent exploitation and development of those
properties, the Company has substantially increased its reserves, production,
and cash flow from operations. The Company generally seeks to acquire
properties where it can act as operator and that have a balance between oil and
natural gas with a mix of both short and long reserve lives.
At December 31, 1997, the Company had estimated Proved Reserves, as
determined from reserve reports prepared by the Company's in-house reserve
engineers, of 169.1 Bcfe with a PV10% at that date of approximately $169.4
million. The reserves were approximately 65% natural gas and 74% Proved
Developed Reserves.
As a result of its exploration, acquisition, exploitation, and development
activities, the Company has achieved substantial growth as evidenced by:
-- An increase in estimated net Proved Reserves from 6.8 Bcfe at December
31, 1991 to 169.1 Bcfe at December 31, 1997.
-- An increase in PV10% from $6 million at December 31, 1991 to $169.4
million at December 31, 1997.
-- An increase in average daily production from 1.2 Mmcfe for the year
ended 1991 to 54.3 Mmcfe for the year ended 1997.
- An increase in EBITDA from $0.3 million for 1991 to $39.2 million for
1997.
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FORWARD-LOOKING STATEMENTS
This document includes "forward-looking statements" within the meaning of
various provisions of the Securities Act and the Securities Exchange Act of
1934, as amended (the "Exchange Act"). The words "expect," "estimate."
"anticipate," "predict," "believe," and similar expressions and variations
thereof are intended to identify forward-looking statements. All statements,
other than statements of historical facts, included in this document that
address activities, events, or developments that the Company expects or
anticipates will or may occur in the future, including such things as estimated
future net revenues from oil and natural gas reserves and the present value
thereof, future capital expenditures (including the amount and nature thereof),
business strategy and measures to implement strategy, competitive strengths,
goals, expansion, and growth of the Company's business and operations, plans,
references to future success, references to intentions as to future matters and
other such matters are forward-looking statements and include statements
regarding the interest, belief or current expectations of the Company, its
directors, or its officers regarding such matters. These statements are based
on certain assumptions and analyses made by the Company in light of its
experience and its perception of historical trends, current conditions and
expected future developments as well as other factors it believes are
appropriate under the circumstances. However, whether actual results and
developments will conform with the Company's expectations and predictions is
subject to a number of risks and uncertainties, including the risk factors
discussed in this document, 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
document 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.
BUSINESS STRATEGY
The Company's strategy is to increase reserves, production, cash flow from
operations and earnings through acquisitions and a balanced program of
exploration, exploitation, and development of its substantial property
inventory. The Company believes its emphasis on the factors described below
will enhance its ability to achieve its long-term goals and objectives.
EXPLORATION PROJECTS. To balance its relatively lower risk exploitation and
development activities and to enhance its opportunities for growth, the Company
will continue to emphasize exploratory drilling as an important aspect of its
business. The Company seeks to reduce the greater risks normally associated
with exploratory drilling by (i) allocating only a limited portion of its
capital expenditure budget to exploration activities, (ii) limiting its Working
Interests in exploratory prospects through participation by industry partners,
(iii) obtaining operational control of its exploratory prospects and (iv)
utilizing advanced seismic and drilling technologies, including 3-D seismic
surveys, where cost-effective. The Company's exploration program targets
prospects with significant reserve potential, focusing primarily on its
inventory of exploratory prospects onshore in Louisiana, Texas, Mississippi and
offshore Gulf of Mexico. During the years ended 1995, 1996 and 1997, the
Company participated in drilling 18 Gross (6.7 Net) Exploratory Wells. During
this period, 5 Gross (2.4 Net) Exploratory Wells have been completed as
commercially productive. This represents a 28% success rate for the Company's
exploratory drilling.
SELECTIVE ACQUISITIONS. A principal source of the Company's of growth to date
has been its ability to identify and acquire properties or entities that allow
it to increase reserves, production and cash flow from operations and provide
continuing exploitation opportunities. From January 1, 1991 through December
31, 1997, the Company acquired approximately 204.6 Bcfe of net Proved Reserves
(estimated at the time of their respective purchases) at an average cost per
Mcfe of approximately $0.85. The Company's Merger with Alexander in 1996 added
a significant amount of reserves and allowed the Company to expand its
Mid-Continent and East Texas presence. The Company's acquisitions have provided
the Company with a substantial inventory of exploration, exploitation and
development opportunities. Consistent with its historical acquisition strategy,
the Company will seek to continue purchases of underdeveloped properties in
its core areas of interest either through negotiated property acquisitions,
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acquisitions of other energy companies, or other business combinations. As a
result of its increased reserves, cash flow and operating base, the Company may
seek to make larger acquisitions which meet its criteria.
EXPLOITATION AND DEVELOPMENT. During 1995, 1996, and 1997, the Company
participated in the drilling of 123 Gross (107.1 Net) Development Wells. All
but four of these Development Wells were completed as commercially productive.
The Company is continuing the exploitation and development of its properties
through development drilling, workovers, redrills, recompletions, and other
production enhancement techniques to maximize its reserves and production. As a
result, the Company spent $54.5 million in 1997 for development and
exploitation activities, a major portion of which was targeted to develop
Proved Undeveloped Reserves.
OPERATING CONTROL. The Company generally prefers to operate and, except for
its exploratory prospects, own a majority Working Interest in its oil and
natural gas properties. This operating philosophy enables the Company to
control the nature, timing and costs of exploration and development of its
properties, as well as the marketing of the resulting production. At December
31, 1997, the Company operated 453 of the 636 producing wells in which it owns
an interest.
LOW OPERATING COST STRUCTURE. The Company seeks to increase its cash flow
from operations by maintaining a low unit operating cost structure through its
focus on increasing production while reducing nonstrategic interests and
limiting its field operating and corporate overhead expenses. Through these
efforts, the Company has reduced historical lease operating expenses per unit
of production by approximately 46% from $0.70 per Mcfe produced for the year
ended December 31, 1991 to $0.38 per Mcfe for the year ended December 31, 1997.
During this same period, the Company decreased general and administrative
expenses per unit of production by approximately 64% from $0.80 per Mcfe
produced to $0.29 per Mcfe.
EXPLORATION
The Company dedicates a portion of its capital expenditure budget to higher
potential, higher risk exploration to balance its strategy of acquiring and
exploiting mature but underdeveloped reserves. During the years ended 1995,
1996 and 1997, the Company participated in drilling 18 Gross (6.7 Net)
Exploratory Wells. During this period, 5 Gross (2.4 Net) Exploratory Wells have
been completed as commercially productive. This represents a 28% success rate
for the Company's exploratory drilling. The Company anticipates spending
approximately $20 million for its 1998 exploration program. The Company expects
that its exploratory projects will be concentrated in Gulf Coast areas, both
onshore and offshore.
SANDEFER EXPLORATION VENTURE. On January 1, 1996, the Company entered into
the Sandefer Exploration Venture to develop exploration prospects for the
Company in certain areas. The agreement, as amended, expires December 31, 1998.
The venture generates exploration prospects and submits leasing and drilling
proposals to the Company for a monthly retainer fee. When the Company accepts a
drilling proposal generated by the Sandefer Exploration Venture, Sandefer Oil &
Gas, Inc. receives an Overriding Royalty Interest in leases acquired by the
Company in the defined prospect area and, upon payout of specified costs
incurred on a prospect, may have the right to receive a deferred leasehold
interest. Of the 16 Gross (5.9 Net) Exploratory Wells drilled during 1996 and
1997, the Company drilled 5 Gross (2.5 Net) Wells as part of the Sandefer
Exploration Venture. In 1998, the principal activity of the venture will be
interpretation of the 3-D seismic survey of the Greater Bayou Sorrel Area.
GREATER BAYOU SORREL AREA. The Greater Bayou Sorrel Area is located
approximately eighty miles west of New Orleans, in Iberville Parish, Louisiana,
in the Atchafalaya River Basin. The topography of the surface is river swamp
and all work must be done with barge-mounted drilling rigs and boats.
Production platforms are mounted on pilings. The Company became involved in
this area in January 1996, through the Sandefer Exploration Venture, when it
participated in the successful exploratory test of the Schwing #1 well in the
Company's East Bayou Sorrel prospect. This discovery well was drilled to a
total depth of approximately 14,000 feet on the eastern flank of the old Bayou
Sorrel Field which was discovered by Shell Oil Company in 1954 (the "Shell
Bayou Sorrel Field"). The Shell Bayou Sorrel Field was drilled in the 1950s and
1960s, with a total of 87 wells drilled and produced in twenty-eight different
horizons ranging in depths from 7,000 to 11,100 feet and in geological age from
the Lower Miocene to the Upper Oligocene. Approximately 35 million barrels of
oil and 206 Bcf of natural gas have been
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produced from depths of 11,000 feet and shallower from this field. During the
year ended December 31, 1997, the Company successfully drilled and completed a
second test well, the Schwing #2. The target formations of the Company's
exploration prospects in this area range from 11,000 to 14,000 feet and include
the Marg Vag, Marg Howeii, Camerina Cib Haz, and Marg Tex zones and range in
geological age from the Upper Oligocene to the Lower Oligocene.
The Company recently completed shooting and processing, and is currently
interpreting, a 3-D seismic survey over the Greater Bayou Sorrel Area.
Interpretation of the 3-D seismic data will allow the Company to finalize
drilling locations for these prospects. The Greater Bayou Sorrel Area has
produced and continues to produce significant oil and gas. Because of the
difficult topography, very little seismic data had been acquired before the
Company's 3-D survey, and the Company believes there could be several other
prospects identified by the 3-D survey. The Company has approximately 38,000
acres either under lease, seismic option to lease, or seismic permit within the
Greater Bayou Sorrel Area.
MUSTANG ISLAND. The Mustang Island area located in shallow state waters in
offshore Nueces County, Texas, is another principal area of focus for the
Company's exploration program. The Company purchased, processed, and
interpreted 500 line miles of 2-D seismic data which was used in assessing and
acquiring acreage and production in the area. As a result, the Company has
acquired 100% of approximately 18,000 acres of leases, majority interests in 7
producing wells, 11 miles of pipeline, and an onshore tank facility. In
addition, the Company participated in a 3-D seismic survey over the area, which
provided 90 square miles of data. The Company is currently interpreting this
data. An active drilling program is anticipated following interpretation of the
3-D data.
LAKE MONGOULOIS FIELD. In January 1998, the Company acquired a 50% working
interest in the Lake Mongoulois Field, St. Martin Parish, Louisiana, from
Enserch Exploration, Inc. ("EEX"). The Lake Mongoulois Field is located eight
miles west northwest of the Greater Bayou Sorrel Area. The purchase price
consisted of $500,000 in cash and a commitment by the Company to spend $7.0
million in drilling and completion costs by December 31, 1999. The acquisition
includes a unit covering approximately 5,000 acres. The Company also acquired a
license to a 49.3 square mile 3-D seismic survey covering the Lake Mongoulois
Field area and an option to lease 50% of EEX's mineral acres within the 3-D
area. The Company believes there are exploratory prospects in deeper horizons
in this field that have not yet been tested. The Company anticipates drilling
its initial Exploratory Wells in the Lake Mongoulois Field in 1998.
OTHER EXPLORATORY ACTIVITIES. The Company has several other exploration
prospects in its inventory. These prospects are in various stages of evaluation
and development, with 2 Gross (1 Net) Wells currently drilling. The Company
expects to drill additional wells on these prospects during 1998.
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ACQUISITIONS
Since its formation in 1990, the Company has actively engaged in the
acquisition of producing oil and natural gas properties, primarily onshore in
Texas, Louisiana, Oklahoma, Arkansas and offshore in the Gulf of Mexico. See
Note 2 of Notes to Consolidated Financial Statements. The following table sets
forth information on the Company's acquisitions since 1990:
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ESTIMATED
PROVED
RESERVES AT ESTIMATED
DATE OF ACQUISITION ACQUISITION
LOCATION OF ACQUISITION COST COST
PRINCIPAL SELLER PRINCIPAL PROPERTIES (BCFE)(1) (IN MILLIONS)(2) PER MCFE(2)
---------------- -------------------- --------- ---------------- -----------
DATES
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1991 Big Piney Oil & Gas Company Wyoming 3.1 $1.9 $0.61
1992 TriSearch, Inc. GAU 6.1 4.1 0.67
1993 Oil Search Partnerships GAU 1.4 0.7 0.50
1993 Bligh Petroleum, Inc. GAU 19.0 3.5 0.18
1994 Various Working Interest Owners GAU 7.0 0.6 0.09
1995 Sierra 1994 Limited Partnership East Texas 20.7 9.1 0.44
1995 Enron Oil and Gas Company New Mexico 1.8 2.1 1.17
1995 Sierra Mineral Development L.C Mustang Island 4.5 2.0 0.44
1996 C/A Limited Mustang Island 3.1 0.7(3) 0.23
1996 UMC Petroleum Corporation Mustang Island 1.3 1.0 0.77
1996 Araxas Energy Corporation and
O'Sullivan Oil and Gas
Company, Inc. Lake Boeuf 17.5 7.2 0.41
1996 Alexander Energy Corporation Anadarko Basin,
East Texas,
Arkoma Basin 102.1 118.5(4) 1.16
1996 Panaco, Inc. Bayou Sorrel 10.0 8.0(5) 0.80
1996 W & T Offshore, Inc. East Bayou Sorrel 0.3 3.4 *
1996 MCNIC Oil & Gas Company East Bayou Sorrel 0.6 7.0 *
1996 John Hancock Mutual Life Anadarko Basin,
Insurance Company East Texas,
Arkoma Basin 6.1 4.2 0.69
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Total 204.6 $174.0 $ 0.85(6)
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* Not meaningful.
(1) Estimated Proved Reserves at date of acquisition are based on reserve
reports prepared for the specific acquisition or, if one was not prepared
at the date of acquisition, are based on the first year end reserve report
prepared following the acquisition date and adjusted for production
subsequent to the date of acquisition.
(2) Does not include costs to develop these properties, which properties
include a substantial amount of Proved Undeveloped Reserves.
(3) Acquisition cost does not include approximately $500,000 allocated to the
related production facilities.
(4) Acquisition cost includes assumed indebtedness of approximately $49.0
million attributable to Alexander and excludes deferred income taxes of
$21.8 million. See Note 2 of Notes to Consolidated Financial Statements.
(5) Acquisition cost does not include approximately $3.5 million allocated to
the related production facilities and the rights to produce hydrocarbons
from depths below 11,340 feet.
(6) Represents weighted average cost per Mcfe for all acquisitions shown.
The Company continually reviews potential acquisitions and anticipates making
additional acquisitions if such properties fit into its overall business
strategy. The Company does not have a budget specifically for acquisitions,
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however, because their timing and size cannot be predicted. At December 31,
1997, the Company had no commitments, contracts, understandings or arrangements
with respect to any material acquisitions.
DEVELOPMENT AND EXPLOITATION
While acquisitions historically have been the primary focus of the Company's
business strategy, the Company has accelerated the development and exploitation
of its existing properties by drilling Development Wells, and recompleting and
reworking existing wells.
ANADARKO BASIN. At December 31, 1997, approximately 33.6% (56.8 Bcfe) of the
Company's Proved Reserves were located throughout the Anadarko Basin in west
central Oklahoma. The Anadarko Basin is considered a mature oil and natural gas
province characterized by multiple producing horizons and relatively long
reserve lives. Drilling a Producing Well on these locations can convert Proved
Undeveloped Reserves to Proved Developed Producing Reserves, and can provide
additional PUD locations on the Company's leasehold acreage.
The Company's Anadarko properties were initially drilled on 640 acre
producing units. Industry has successfully demonstrated to Oklahoma regulators
that deeper wells in the Anadarko Basin will not efficiently drain 640 acres
and obtained authorization for increased density drilling on smaller acreage
units. Further, under the forced pooling rules in Oklahoma, even if the Company
is not the operator of the property for which increased density drilling has
been approved, the Company may propose to drill and operate additional wells on
the original production unit. Frequently this results in the proposing party
owning a larger portion of newly drilled wells because other Working Interest
owners may decline to participate. The Company intends to continue its
increased density drilling strategy in the Anadarko Basin.
During the year ended December 31, 1997, the Company drilled 13 Gross (9.5
Net) Wells in the Anadarko Basin and currently anticipates additional
development drilling in the Anadarko Basin, but at a reduced level during the
year ending December 31, 1998. The Company's wells typically are completed in
horizons ranging in depth between 7,000 and 15,000 feet.
SOUTH LOUISIANA. At December 31, 1997, 17.8% (30.1 Bcfe) of the Company's
Proved Reserves were located in South Louisiana, principally in the Greater
Bayou Sorrel Area in Iberville Parish and the Lake Boeuf Field in LaFourche
Parish.
Greater Bayou Sorrel Area. Following the successful test of the Schwing #1,
the Company increased its original 17% Working Interest in the well to 62% (45%
Net Revenue Interest) through a series of acquisitions from two other Working
Interest owners in 1996. Currently, the Company has a 60% working interest (43%
Net Revenue Interest) in the remainder of the East Bayou Sorrell prospect.
In November 1996, the Company acquired 100% of the Shell Bayou Sorrel Field,
adjacent to the Schwing #1 discovery well. The Shell Bayou Sorrel Field
acquisition included 10 wells producing approximately 325 barrels of oil per
day and 18 shut in wells, along with approximately 2,000 leasehold acres held
by production and production facilities capable of handling 35,000 barrels of
oil per day, 50,000 Mcf of natural gas per day and salt water disposal capacity
of 30,000 barrels of water per day.
In addition, the Company has acquired leases adjacent to the Shell Bayou
Sorrel Field and East Bayou Sorrel which, in total, give the Company a current
leasehold position of 6,408 Gross (5,989 Net) Acres in the area. In addition,
the Company holds options to acquire a leasehold position in an additional
12,000 Gross (10,000 Net) Acres in the area. The Company has undertaken a
complete geologic and engineering study of the Greater Bayou Sorrel Area, which
includes a proprietary 3-D seismic survey of fifty-four square miles
encompassing the Greater Bayou Sorrel Area lease and option position.
Based on the interpretation of the 3-D seismic survey, the Company
anticipates drilling development wells in the Shell Bayou Sorrel Field and in
the East Bayou Sorrel prospect offsetting the Schwing wells during 1998. In
addition, the Company plans to workover 6 wells in the Shell Bayou Sorrel Field
in 1998.
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Lake Boeuf Field. The Company's interest in the Lake Boeuf Field, located in
Lafourche Parish, Louisiana, was acquired in September 1996. The Company owns a
95.6% Working Interest in its Lake Boeuf properties. The Company drilled 1
Gross (.9 Net) Well in the Lake Boeuf Field in 1997 which was successfully
completed. Reserves in the field are found in nine different horizons ranging
in depths from 9,500 to 15,000 feet. Currently, no additional wells are planned
for the Lake Boeuf Field in 1998.
Lake Mongoulois Field. The Company's interest in this field was acquired on
January 1, 1998. Seventy-two wells have been previously drilled at the Lake
Mongoulois Field for a total production of approximately 30 million BOE from
depths of 11,500 feet and shallower. The Company believes there are
substantial additional reserves to be recovered by development drilling in the
existing field pays. The Company anticipates drilling its initial Development
Wells in the Lake Mongoulois Field in 1998.
EAST TEXAS. At December 31, 1997, approximately 21.4% (36.2 Bcfe) of the
Company's Proved Reserves were located in Harrison and Rusk Counties in East
Texas. These reserves are located in the Cotton Valley formation and the Travis
Peak formation. The Cotton Valley formation is generally 1,500 to 2,000 feet
thick and is found at depths of 8,500 to 10,500 feet in the Company's area of
interest. These properties produce from low permeability reservoirs that
generally contain relatively long life natural gas reserves. The Travis Peak
formation is generally found at a depth of 7,200 feet and principally contains
oil reserves.
During the year ended December 31, 1997, the Company drilled 15 Gross (14.7
Net) Wells in East Texas of which 14 Gross (13.7 Net) Wells were drilled in the
Cotton Valley formation and 1 Gross (1.0 Net) Well was drilled in the Travis
Peak formation. A significant portion of the cost to complete these wells is
incurred due to the low permeability of interbedded sandstones and shales,
which requires large hydraulic fracture stimulation, typically of multiple
zones of the producing formation, to obtain the increased production levels
necessary to make such wells commercially viable. The Company anticipates
drilling 3 additional development wells in East Texas in 1998, which will be
drilled in the Travis Peak formation. These wells will be drilled on PUD
locations where the Company owns 100% of the Working Interests in the drilling
units.
GOLDSMITH ADOBE UNIT ("GAU"). At December 31, 1997, approximately 14.0% (23.7
Bcfe) of the Company's Proved Reserves were located in the 7,880 acre GAU,
which is in the Permian Basin in West Texas. This production unit is operated
by the Company and it owns approximately a 95% Working Interest in the GAU.
Originally the GAU was drilled on 40 acre spacing units. Previous operators
had drilled several wells on 20 acre spacing units and, based on the results of
this drilling and 20 acre spacing development on adjoining leases, the Company
began a drilling program in July 1994 to develop the GAU on 20 acre spacing
units. The Company completed 6 wells during 1994, 22 wells during 1995, 28
wells in 1996, and 29 wells in 1997 on the GAU.
The Company has drilled an additional 4 Gross (3.8 Net) Wells on the GAU in
1998, but anticipates reducing additional development until oil prices recover.
Typically, wells drilled by the Company in the GAU in 1997 were drilled to
depths between 5,600 and 6,000 feet. As of December 31, 1997, the GAU had
approximately 51 Infill Well locations if the unit were to be fully developed
on 20 acre spacing.
ARKOMA BASIN. At December 31, 1997, approximately 7.2% (12.1 Bcfe) of the
Company's Proved Reserves were located in the Arkoma Basin in Eastern Oklahoma
and Western Arkansas. These properties were acquired by the Company as a result
of the Merger with Alexander. Most Arkoma Basin reserves are produced from
formations at depths ranging from 3,000 to 8,000 feet.
During 1997, the Company drilled 7 Gross (4.0 Net) Wells in the Arkoma Basin.
The Company anticipates drilling an active drilling program drilling program in
the Arkoma Basin in 1998. The typical Arkoma Basin well is drilled to a total
depth of approximately 7,500 feet.
9
<PAGE> 11
oOIL AND NATURAL GAS RESERVES
The estimated reserves and related future net revenues as of December 31,
1997, were prepared by the Company's in- house reserve engineers. All of the
Company's reserves are located in the continental United States. This reserve
report was prepared using constant prices and costs in accordance with the
published guidelines of the Commission. The net weighted average prices used in
the Company's reserve report at December 31, 1997, were $17.03 per barrel of
oil and $2.38 per Mcf of natural gas. Substantially all of the Company's oil
and natural gas properties are subject to liens, and the remaining oil and
natural gas properties are subject to a negative pledge pursuant to the Revised
Credit Facility.
All reserves are evaluated at constant temperature and pressure which can
affect the measurement of natural gas reserves. Operating costs, development
costs and certain production-related and ad valorem taxes were deducted in
arriving at the estimated future net cash flows. No provision was made for
income taxes. The following estimates set forth reserves considered to be
economically recoverable under normal operating methods and existing conditions
at the prices and operating costs prevailing at the dates indicated above. The
estimates of the PV10% from future net cash flows differ from the Standardized
Measure of discounted future net cash flows set forth in the notes to the
Financial Statements of the Company, which is calculated after provision for
future income taxes. There can be no assurance that these estimates are
accurate predictions of future net cash flows from oil and natural gas reserves
or their present value.
Reservoir engineering is a subjective process of estimating the volumes of
underground accumulations of oil and natural gas that cannot be measured in an
exact way. The accuracy of any reserve estimates is a function of the quality
of available data and of engineering and geological interpretation and
judgment. Reserve estimates prepared by other engineers might differ from the
estimates contained herein. Results of drilling, testing, and production
subsequent to the date of the estimate may justify revision of such estimate.
Future prices received for the sale of oil and natural gas may be different
from those used in preparing these reports. The amounts and timing of future
operating and development costs may also differ from those used. Accordingly,
reserve estimates are often different from the quantities of oil and natural
gas that are ultimately recovered.
No estimates of Proved Reserves of oil and natural gas have been filed by the
Company with, or included in any report to, any United States authority or
agency (other than the Commission) since December 31, 1996.
The following table sets forth certain information for the Company's total
Proved Reserves of oil and natural gas and the PV10% of estimated future net
revenues from such reserves, at December 31, 1997. Also presented is the
Standardized Measure of the Company's total Proved Reserves of oil and natural
gas.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
-------------------------------------------------------
NATURAL NATURAL GAS PV10%
OIL GAS EQUIVALENT (IN
(MBBLS) (MMCF) (MMCFE) THOUSANDS)
------- ------- ------- ---------
<S> <C> <C> <C> <C>
Proved Developed Reserves ........... 5,781 89,935 124,621 $126,376
Proved Undeveloped Reserves ......... 3,997 20,546 44,528 42,999
Total Proved Reserves ............... 9,778 110,481 169,149 $169,375
----- ------- ------- --------
Standardized Measure ................ $161,751
========
</TABLE>
10
<PAGE> 12
PRINCIPAL AREAS OF OPERATIONS
The following table sets forth the Company's principal areas of operations,
the Company's Proved Reserves of oil and natural gas and PV10% of the estimated
future net revenue from such reserves at December 31, 1997.
<TABLE>
<CAPTION>
OIL AND NATURAL GAS
CONDENSATE NATURAL GAS EQUIVALENT PV10% % OF
(MBBLS) (MMCF) (MMCFE) (IN THOUSANDS) TOTAL
----- ------ ------- ------------ -----
<S> <C> <C> <C> <C> <C>
FIELD
Onshore:
Anadarko Basin, OK .............. 1,937 45,208 56,830 $ 49,408 29.2%
South Louisiana ................. 3,577 8,592 30,054 46,918 27.7
East Texas ...................... 465 33,441 36,231 32,814 19.4
GAU, TX ......................... 3,340 3,676 23,716 14,466 8.5
Arkoma Basin, OK and AR ......... -- 12,100 12,100 13,804 8.1
Other Onshore ................... 229 3,137 4,511 6,458 3.8
----- ------- ------- -------- -----
Total Onshore ................... 9,548 106,154 163,442 163,868 96.7
----- ------- ------- -------- -----
Offshore:
Mustang Island .................. 230 4,327 5,707 5,507 3.3
----- ------- ------- -------- -----
Total ........................... 9,778 110,481 169,149 $169,375 100.0%
===== ======= ======= ======== =====
</TABLE>
The following table sets forth the Company's production by principal area of
operation for the year ended December 31, 1997:
<TABLE>
<CAPTION>
NATURAL NATURAL GAS
OIL GAS EQUIVALENT % OF
(MBBLS) (MMCF) (MMCFE) TOTAL
------ ------ ------ -----
<S> <C> <C> <C> <C>
FIELD
Onshore:
Anadarko Basin, OK .............. 117 4,435 5,137 25.9%
South Louisiana ................. 434 519 3,123 15.7
East Texas ...................... 23 4,323 4,461 22.6
GAU, TX ......................... 478 483 3,351 16.9
Arkoma Basin, OK and AR ......... -- 2,343 2,343 11.8
Other Onshore ................... 35 918 1,128 5.8
----- ------ ------ -----
Total Onshore ................... 1,087 13,021 19,543 98.7
----- ------ ------ -----
Offshore:
Mustang Island .................. 23 125 264 1.3
----- ------ ------ -----
Total ........................... 1,110 13,146 19,807 100.0%
===== ====== ====== =====
</TABLE>
Oil and Natural Gas Production and Unit Economics
The following table shows the approximate net production attributable to the
Company's oil and natural gas interests, the average sales price per barrel of
oil and Mcf of natural gas produced, and the average unit economics per Mcfe
related to the Company's oil and natural gas production for the periods
indicated. Information relating to properties acquired or disposed of is
reflected in this table only since or up to the closing date of their
respective acquisition or sale, and may affect the comparability of the data
between the periods presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net production:
Oil (Mbbls) .................................. 283 522 1,110
Natural gas (Mmcf) ........................... 1,753 5,681 13,146
Natural gas equivalent (Mmcfe) ............... 3,454 8,811 19,807
Average sales price:
Oil (per Bbl) ................................ $ 17.22 $ 21.70 $ 19.17
Natural gas (per Mcf) ........................ 1.70 2.29 2.43
Unit economics (per Mcfe):
Average sales price .......................... $ 2.28 $ 2.75 $ 2.69
Lease operating expenses ..................... .50 .42 .38
Oil and gas production taxes ................. .12 .15 .16
Depreciation, depletion, and amortization .... .91 1.11 1.13
General and administrative ................... .51 .34 .29
</TABLE>
11
<PAGE> 13
PRODUCTIVE WELL SUMMARY
The Company's production of oil and natural gas is primarily derived from
wells located in Texas, Oklahoma, Louisiana, and Arkansas. The following table
sets forth the Company's interests in Productive Wells, by principal area of
operation, as of December 31, 1997:
<TABLE>
<CAPTION>
OIL NATURAL GAS TOTAL
------------------ ----------------- -----------------
FIELD GROSS NET GROSS NET GROSS NET
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Onshore:
Anadarko Basin, OK .............. 143 65.3 175 89.2 318 154.5
South Louisiana ................. 27 24.6 1 .4 28 25.0
East Texas ...................... 4 3.4 36 34.9 40 38.3
GAU, TX ......................... 142 134.8 -- -- 142 134.8
Arkoma Basin, OK and AR ......... -- -- 80 35.3 80 35.3
Other Onshore ................... 8 5.5 6 3.1 14 8.6
--- ----- --- ----- --- -----
Total Onshore ................... 324 233.6 298 162.9 622 396.5
Offshore:
Mustang Island, TX .............. 1 1.0 13 10.0 14 11.0
--- ----- --- ----- --- -----
Total ........................... 325 234.6 311 172.9 636 407.5
=== ===== === ===== === =====
</TABLE>
In December 1997, the Company sold its interests in 274 nonstrategic
producing wells, 103 of which were operated by the Company, for approximately
$5.4 million.
LEASEHOLD ACREAGE
The following table shows the approximate Gross and Net Acres in which the
Company had a leasehold interest as of December 31, 1997:
<TABLE>
<CAPTION>
Developed Acreage Undeveloped Acreage
--------------------- ---------------------
Field Gross Net Gross Net
------- ------ ------ ------
<S> <C> <C> <C> <C>
Onshore:
Anadarko Basin, OK 99,020 34,871 8,874 5,450
South Louisiana 3,691 3,613 11,596 10,716
East Texas 4,761 4,410 1,567 1,455
GAU, TX 4,720 4,482 3,160 3,007
Arkoma Basin, OK and AR 42,950 14,161 1,144 110
Other Onshore (1) 18,848 1,952 14,620 11,707
Total Onshore 173,990 63,489 40,961 32,445
------- ------ ------ ------
Offshore:
Mustang Island, TX 6,045 3,530 11,765 11,765
------- ------ ------ ------
Combined Totals 180,035 67,019 52,726 44,210
======= ====== ====== ======
</TABLE>
__________
(1) Includes acreage in Alabama, Kansas, Mississippi, Nebraska,
Oklahoma, and Texas.
During 1997, the Company purchased additional leasehold interests in 4,000
Gross and Net Acres in the Mustang Island area for approximately $1.1 million,
in 1,647 Gross (1,286 Net) Acres in the Greater Bayou Sorrel Area for
approximately $480,000, and in 4,435 Gross (4,107 Net) Acres in four other
exploratory prospects for approximately $1.5 million.
Substantially all of the Company's producing oil and natural gas properties
are located on leases held by the Company for an indeterminate number of years
for so long as production is maintained. All of the Company's non-producing
acreage is held under leases from mineral owners or a government entity which
expire at varying dates. The Company is obligated to pay annual delay rentals
to the lessors of certain properties in order to prevent the leases from
terminating. Because substantially all of the Company's Undeveloped Acreage
was held by production, annual delay rentals for 1996 were nominal. However,
such delay rentals were approximately $1.0 million for the year ended December
31, 1997, and could increase in future periods due to the Company's accelerated
lease acquisition activities.
12
<PAGE> 14
DRILLING ACTIVITY
The following table sets forth exploration and development drilling results
for the years ended December 31, 1995, 1996, and 1997. From January 1, 1998
through March 23, 1998 the Company has drilled 2 Gross (.9 Net) Exploratory
Wells and 8 Gross (6.7 Net) Development Wells.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1995 1996 1997
-------------- -------------- ---------------
GROSS NET GROSS NET GROSS NET
---- ---- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Exploratory
Productive - - 3 1.4 2 1.0
Non-productive 2 .8 5 1.1 6 2.4
-- ---- -- ---- -- ----
Total 2 .8 8 2.5 8 3.4
-- ---- -- ---- -- ----
Development
Productive 24 20.7 28 25.6 67 58.5
Non-productive 1 .6 1 .2 2 1.5
-- ---- -- ---- -- ----
Total 25 21.3 29 25.8 69 60.0
-- ---- -- ---- -- ----
Combined Total 27 22.1 37 28.3 77 63.4
== ==== == ==== == ====
</TABLE>
TITLE TO OIL AND NATURAL GAS PROPERTIES
The Company has acquired interests in producing and non-producing acreage in
the form of Working Interests, Royalty Interests, and Overriding Royalty
Interests. To reduce the Company's financial exposure in any one exploratory
prospect, the Company often acquires less than 100% of the Working Interest in
a prospect. Working Interests held by the Company may, from time to time,
become subject to minor liens. Furthermore, updated title opinions may not be
received prior to the acquisition of a producing oil and natural gas property.
It is contemplated, however, that investigations will be made in accordance
with standard practices in the industry before the acquisition of such
properties and before drilling.
The Company generally acquires a leasehold interest in the properties to be
explored. The leases grant the lessee the right to explore for and extract oil
and natural gas from a specified area. Rentals usually consists of fixed annual
charges prior to production and, once production has been established, a
royalty based upon the gross proceeds from the sale of oil and natural gas.
Once wells are drilled, a lease generally continues as long as production of
oil and natural gas continues. In some cases, leases may be acquired in
exchange for a commitment to drill or finance the drilling of a specified
number of wells to predetermined depths.
PRODUCTION AND SALES PRICES
The Company's production of oil and natural gas is derived solely from its
activities in the continental United States. The Company is not obligated to
provide a fixed and determinable quantity of oil and/or natural gas in the
future under existing contracts or agreements. The Company does not plan to
refine or process the oil and natural gas it produces, but plans to sell the
production to unaffiliated oil and natural gas purchasing companies in the area
in which it is produced. The Company expects to sell crude oil on a market
price basis and to sell natural gas under contracts to both interstate and
intrastate natural gas pipeline companies. The Company currently sells a
significant portion of its oil pursuant to a contract with Plains Marketing and
Transportation. See "-- Markets and Customers."
CONTROL OVER PRODUCTION ACTIVITIES
The Company operated 453 of the 636 producing wells in which it owns an
interest as of December 31, 1997. The non- operated properties are operated by
unrelated third parties pursuant to operating agreements which are generally
standard in the industry. Significant decisions about operations regarding
non-operated properties may be determined by the outside operator rather than
by the Company. If the Company declines to participate in additional activities
proposed by the outside operator under certain operating agreements, the
Company will not receive revenues from, and/or will lose its interest in, the
activity in which it declined to participate.
13
<PAGE> 15
MARKETS AND CUSTOMERS
The availability of a ready market for any oil and natural gas produced by
the Company and the prices obtained for such oil and natural gas depend upon
numerous factors beyond its control, including the demand for and supply of oil
and natural gas; fluctuations in production and seasonal demand; the
availability of adequate pipeline and other transportation facilities; weather
conditions; economic conditions; imports of crude oil; production by and
agreements among OPEC members, and the effects of state and federal
governmental regulations on the import, production, transportation, and sale of
oil and natural gas. The occurrence of any factor that affects a ready market
for the Company's oil and natural gas or reduces the price obtained for such
oil and natural gas, may adversely affect the Company.
A large percentage of the Company's oil and natural gas sales are made to a
small number of purchasers. The Company normally sells its oil under six month
contracts. During the year ended December 31, 1995, two purchasers, Plains
Marketing and Transportation ("Plains") and Energy Source, Inc., accounted for
approximately 59% of the Company's oil sales and 11% of its natural gas sales.
During 1996, Plains accounted for 83% of the Company's oil sales, while
Crosstex Energy ("Crosstex") and GPM Natural Gas Corporation ("GPM") each
accounted for 22% of the Company's natural gas sales. For the year ended
December 31, 1997, Plains accounted for 84% of the Company's oil sales, and
Crosstex and GPM accounted for 20% and 14%, respectively, of the Company's
natural gas sales. The agreement with Plains, entered into in 1993, provides
for Plains to purchase the Company's oil pursuant to West Texas Intermediate
posted prices plus a premium. The Company does not believe that the loss of any
customer would have a material adverse effect on its business because, under
prevailing market conditions, such customer could be replaced.
A portion of the Company's natural gas production is sold pursuant to long
term netback contracts. Under netback contracts, gas purchasers buy gas from a
number of producers, process the gas for natural gas liquids, and sell the
liquids and residue gas. Each producer receives a fixed portion of the proceeds
from the sale of the liquids, and residue gas. The gas purchasers pay for
transportation, processing, and marketing of the gas and liquids, and assumes
the risk of contracting pipelines and processing plants in return for a portion
of the proceeds of the sale of the gas and liquids. Generally, because the
purchasers are marketing large volumes of hydrocarbons gathered from multiple
producers, higher prices may be obtained for the gas and liquids. A portion of
the Company's natural gas production is also sold under forward sales contract.
See Note 8 of Notes to Consolidated Financial Statements. 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 these contracts. In March 1998, the
Company fixed the prices of all of its natural gas to be delivered under these
contracts for the month of April 1998 and approximately one-third of the of
natural gas to be delivered under these contracts for the months of May, June
and July, 1998. The remainder of the Company's natural gas is sold on the spot
market under short-term (30 day or less) contracts.
REGULATION
GENERAL. The Company's oil and natural gas exploration, production, and
related operations are subject to extensive rules and regulations promulgated
by federal and state agencies. Failure to comply with such rules and
regulations can result in substantial penalties. The regulatory burden on the
oil and gas industry increases the Company's cost of doing business and affects
its profitability. Because such rules and regulations are frequently amended or
interpreted by federal and state agencies or jurisdiction, the Company is
unable to predict the future cost or impact of complying with such laws.
EXPLORATION AND PRODUCTION. The Company's exploration and development
operations are subject to various types of regulation at the federal, state,
and local levels. Such regulation includes requiring permits for the drilling
of wells; maintaining bonding requirements in order to drill or operate wells;
and regulating the location of wells, the method of drilling and casing wells,
the surface use and restoration of properties upon which wells are drilled, and
the plugging and abandoning of wells. The Company's operations are also subject
to various conservation regulations and rules to protect the correlative rights
of mineral interest owners. These include the regulation of the
14
<PAGE> 16
size of drilling and spacing units or proration units, the density of wells
which may be drilled, and the unitization or pooling of oil and natural gas
properties. In this regard, some states allow the forced pooling or integration
of tracts to facilitate exploration, while other states rely on voluntary
pooling of land and leases. In addition, state conservation laws establish
maximum rates of production from oil and natural gas wells, generally prohibit
the venting or flaring of natural gas, and impose certain requirements
regarding the ratability of production. The effect of these regulations is to
limit the amounts of oil and natural gas the Company can produce from its wells
and to limit the number of wells or the locations at which the Company can
drill. Legislation in Oklahoma and regulatory action in Texas governs the
methodology by which the regulatory agencies establish permissible monthly
production allowables. This action has generated substantial controversy,
especially at the federal level, and has been labeled as an attempt to reduce
the total production of natural gas in order to increase natural gas prices. A
recent attempt to enact a federal prohibition of these recent state proration
rule initiatives was defeated, but various members of Congress and some federal
regulators have declared an intent to monitor the states' actions very
carefully. The Company cannot predict what effect possible change in
prorationing regulations will have on its production and sales of natural gas.
Certain of the Company's Oil and Natural Gas Leases are granted by the
federal government and administered by various federal agencies. Such leases
require compliance with detailed federal regulations and orders which regulate,
among other matters, drilling and operations on these leases and calculation
and disbursement of royalty payments to the federal government. The Mineral
Lands Leasing Act of 1920 places limitations on the number of acres under
federal leases that may be owned in any one state.
ENVIRONMENTAL PROTECTION AND OCCUPATIONAL SAFETY. The Company is subject to
numerous federal, state and local laws and regulations governing the release of
materials into the environment or otherwise relating to environmental
protection. These laws and regulations may require the acquisition of a permit
before drilling commences, restrict the types, quantities and concentration of
various substances that can be released into the environment in connection with
drilling and production activities, limit or prohibit drilling activities on
certain lands lying within wilderness, wetlands and other protected areas, and
impose substantial liabilities for pollution resulting from operations.
Moreover, the recent trend toward stricter standards in environmental
legislation and regulation is likely to continue. For instance, legislation has
been proposed in Congress from time to time that would reclassify certain oil
and natural gas production wastes as "hazardous wastes," which reclassification
would make such wastes subject to much more stringent handling, disposal, and
clean-up requirements. If such legislation were to be enacted, it could have a
significant impact on the operating costs of the Company, as well as the oil
and gas industry in general. It is not anticipated that the Company will be
required in the near future to expend amounts that are material in relation to
its total capital expenditure program by reason of environmental laws and
regulations, but because such laws and regulations are frequently changed, the
Company is unable to predict the ultimate cost and effects of such compliance.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without
regard to fault or the legality of the original conduct, on certain classes of
persons who are considered to have contributed to the release of a "hazardous
substance" into the environment. These persons include the owner or operator of
the disposal site or sites where the release occurred and companies that
disposed or arranged for the disposal of the hazardous substances. Under
CERCLA, such persons or companies may be subject to joint and several
liabilities for the costs of cleaning up the hazardous substances that have
been released into the environment and for damages to natural resources. Also,
it is not uncommon for neighboring landowners and other third parties to file
claims for personal injury, property damage, and recovery of response costs
allegedly caused by the hazardous substance released into the environment.
In addition, the U.S. Oil Pollution Act of 1990 (the "OPA") and regulations
promulgated pursuant thereto impose a variety of regulations on responsible
parties related to the prevention of oil spills and liability for damages
resulting from such spills. The OPA establishes strict liability for owners of
facilities that are the site of a release of oil into "waters of the United
States." While OPA liability more typically applies to facilities near
substantial bodies of water, at least one district court has held that OPA
liability can attach if the contamination could enter waters that may flow into
navigable waters.
15
<PAGE> 17
Stricter standards in environmental legislation may be imposed in the oil and
gas industry as the result of the reclassification of certain oil and natural
gas exploration and production wastes as "hazardous oil and gas wastes," which
could make the reclassified wastes subject to more stringent and costly
handling, disposal and clean-up requirements. The impact of any such
requirements, however, would not likely be any more burdensome to the Company
than to any other similarly situated company involved in oil and natural gas
exploration and production.
The Resource Conservation and Recovery Act ("RCRA") and regulations
promulgated thereunder govern the generation, storage, transfer and disposal of
hazardous wastes. RCRA, however, excludes from the definition of hazardous
wastes "drilling fluids, produced waters, and other wastes associated with the
exploration, development, or production of crude oil, natural gas, or
geothermal energy." Because of this exclusion, many of the Company's operations
are exempt from RCRA regulation. Nevertheless, the Company must comply with
RCRA regulations for any of its operations that do not fall within the RCRA
exclusion (such as painting activities or use of solvents).
Because oil and natural gas exploration and production, and possibly other
activities, have been conducted at some of the Company's properties by previous
owners and operators, materials from these operations remain on some of the
properties and in some instances require remediation. In addition, the Company
has agreed to indemnify sellers of producing properties from whom the Company
has acquired reserves against certain liabilities for environmental claims
associated with such properties. While the Company does not believe that costs
to be incurred by the Company for compliance and remediating previously or
currently owned or operated properties will be material, there can be no
guarantee that such costs will not result in material expenditures.
Additionally, in the course of the Company's routine oil and natural gas
operations, surface spills and leaks, including casing leaks, of oil or other
materials occur, the Company incurs costs for waste handling and environmental
compliance. Moreover, the Company is able to control directly the operations of
only those wells for which it acts as the operator. Notwithstanding the
Company's lack of control over wells owned by the Company but operated by
others, the failure of the operator to comply with applicable environmental
regulations may, in certain circumstances, be attributable to the Company.
The Company is also subject to laws and regulations concerning occupational
safety and health. While it is not anticipated that the Company will be
required in the near future to expend amounts that are material in the
aggregate to the Company's overall operations by reason of occupational safety
and health laws and regulations, the Company is unable to predict the ultimate
cost of compliance.
MARKETING AND TRANSPORTATION. Federal legislation and regulatory controls in
the United States have historically affected the price of the natural gas
produced by the Company and the manner in which such production is marketed.
The transportation and sales for resale of natural gas in interstate commerce
are regulated pursuant to the Natural Gas Act of 1938 (the "NGA") and the
Federal Energy Regulatory Commission ("FERC") regulations promulgated
thereunder. Maximum selling prices of certain categories of natural gas,
whether sold in interstate or intrastate commerce, previously were regulated
pursuant to The Natural Gas Policy Act of 1978 ("NGPA"). The NGPA established
various categories of natural gas and provided for graduated deregulation of
price controls of several categories of natural gas and the deregulation of
sales of certain categories of natural gas. All price deregulation contemplated
under the NGPA has already taken place. Subsequently, the Natural Gas Wellhead
Decontrol Act of 1989 (the "Decontrol Act") terminated all remaining NGA and
NGPA price and non-price controls on wellhead sales of domestic natural gas on
January 1, 1993. While natural gas producers may currently make sales at
uncontrolled market prices, Congress could re-enact price controls in the
future.
Commencing in late 1985, the FERC issued a series of orders (Order No. 436,
Order No. 500 and related orders) that significantly altered the transportation
and marketing of natural gas. Among other things, these regulations (i)
required interstate pipelines that elect to transport natural gas for others
under self-implementing authority to provide transportation services to all
shippers on a non-discriminatory basis, and (ii) permitted each exiting firm
sales customer of any such pipeline to modify over at least a five-year period
its existing purchase obligations. Although the regulations do not directly
regulate natural gas producers such as the Company, the availability of non-
discriminatory transportation services and the ability of pipeline customers to
modify their existing purchase obligations under these regulations has greatly
enhanced the ability of producers to market their natural gas directly
16
<PAGE> 18
to end users and local distribution companies. In this regard, access to
markets through interstate pipelines is critical to the Company's marketing
initiatives.
In April 1992, the FERC issued its restructuring rule, known as Order No. 636
("Order No. 636"), that has had a major impact on pipeline operations,
services, and rates. The most significant provisions of Order No. 636: (i)
required interstate pipelines to provide firm and interruptible transportation
solely on an "unbundled" basis, separate from their sales service, and to
convert each pipeline's bundled firm sales service into unbundled firm
transportation service; (ii) provided for the issuance of blanket certificates
to pipelines to provide unbundled sales service giving all utility customers a
chance to purchase their firm supplies from non-pipeline merchants; (iii)
required that pipelines provide firm and interruptible transportation service
on a basis that is equal in quality for all natural gas supplies, whether
purchased from the pipeline or elsewhere; (iv) required that pipelines provide
a new, non-discriminatory "no-notice" transportation service that largely
replicates the "bundled" sales service previously provided by pipelines; (v)
established two new, generic programs for the reallocation of firm pipeline
capacity; (vi) required that all pipelines offer access to their storage
facilities on a firm and interruptible basis; (vii) provided for pregranted
abandonment of pipeline sales agreements, interruptible and firm short-term
(defined as one year or less) transportation agreements and conditional
pregranted abandonment of firm long-term transportation service; (viii)
modified transportation rate design by requiring that all fixed costs related
to transportation be recovered through the reservation charge; and (ix)
provided mechanisms for the recovery by pipelines of certain transition costs
occurring from implementation of Order No. 636.
The rules contained in Order No. 636, as amended by Order No. 636-A (issued
in August 1992) and Order No. 636-B (issued in November 1992) (collectively,
"Order No. 636"), are far-reaching and complex. In addition, Order No. 636 and
individual orders in restructuring proceedings are currently subject to court
challenges. While Order No. 636 does not directly regulate natural gas
producers such as the Company, the FERC has stated that Order No. 636 is
intended to foster increased competition within the gas industry.
OPERATIONAL HAZARDS AND INSURANCE
The Company's operations are subject to all of the risks inherent in oil and
natural gas exploration, drilling and production. These hazards can result in
substantial losses to the Company due to personal injury and loss of life,
severe damage to and destruction of property and equipment, pollution or
environmental damage, or suspension of operations. The Company maintains
insurance of various types customary in the industry to cover its operations.
The Company believes it is insured prudently against certain of these risks. In
addition, the Company maintains operator's extra expense coverage that provides
coverage for the care, custody and control of wells drilled by the Company. The
Company's insurance does not cover every potential risk associated with the
drilling and production of oil and natural gas. The Company does, however,
maintain levels of insurance customary in the industry to limit its financial
exposure in the event of a substantial environmental claim resulting from
sudden and accidental discharges. However, 100% coverage is not maintained.
The occurrence of a significant adverse event, the risks of which are not fully
covered by insurance, could have a material adverse effect on the Company's
financial condition and results of operations. Moreover, no assurance can be
given that the Company will be able to maintain adequate insurance in the
future at rates it considers reasonable. The Company believes that it operates
in compliance with government regulations and in accordance with safety
standards which meet or exceed industry standards.
COMPETITION
The oil and gas industry is intensely competitive in all of its phases,
particularly with respect to the acquisition of desirable producing Oil and
Natural Gas Leases and oil and natural gas companies with production. The
Company, which is a small competitive factor in the industry, encounters strong
competition from major oil companies, independent oil and natural gas concerns,
and individual producers and operators, many of which have financial resources,
staffs, facilities and experience substantially greater than those of the
Company. Furthermore, in times of high drilling activity, exploration for and
production of oil and natural gas may be affected by the availability of
equipment, labor, supplies and by competition for drilling rigs. The Company
cannot predict the effect these factors will have on its operations. The
Company owns no drilling rigs, and it is anticipated that its
17
<PAGE> 19
drilling will be conducted by third parties. Furthermore, the oil and gas
industry also competes with other industries in supplying the energy and fuel
requirements of industrial, commercial, and individual consumers.
OFFICE SPACE
The Company leases approximately 28,467 square feet of office space in
Dallas, Texas. The Company also leases a small amount of office space in
Houston, Texas and Odessa, Texas for its business activities.
EMPLOYEES
At March 23, 1998, the Company had 74 full-time employees. Of these
employees, nine are field-related personnel. The Company does not have any
collective bargaining agreements with employees and believes that relations
with its employees are generally satisfactory.
ITEM 3. 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, in a matter involving the same property described above,
R.E. Steakley and N.M. Steakley filed a lawsuit in the District Court of Harris
County, Texas, against Amoco Production Company, Phillips Petroleum Company,
the Company and others. The lawsuit alleges certain environmental claims and
related tortuous and contractual claims and sought unspecified damages. On
December 19, 1996, the court in Harris County, Texas, signed an order
transferring the R.E. Steakley claim to the court in Ector County, Texas as a
part of the Company's claim against R.E. Steakley. Subsequently, R.E. Steakley
filed a Fourth Amended Original Answer and Original Counterclaims against the
Company in Ector County District Court in which Mr. Steakley reasserts the
claims filed in the Harris County Court action. The Company intends to
vigorously defend against the suit and believes that it is operating the
property in compliance with applicable environmental laws and regulations and,
based on advice from legal counsel, believes that the ultimate resolution of
the lawsuit will not have a material adverse effect on the Company's financial
condition or results of operations when taken as a whole.
The Company is not a defendant in any additional pending legal proceedings
other than routine litigation incidental to its business. While the ultimate
results of these proceedings cannot be predicted with certainty, the Company
does not believe that the outcome of these matters will have a material adverse
effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1997.
18
<PAGE> 20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock has traded on the Nasdaq National Market since
September 1, 1995 under the symbol "NEGX". The following table sets forth for
the periods indicated, the high and low closing sales prices for the Company's
Common Stock, as reported on Nasdaq. The quotations represent prices between
dealers in securities and may not include retail mark-up, mark-down, or
commission and may not represent actual transactions.
<TABLE>
<CAPTION>
COMMON STOCK PRICE
------------------
HIGH LOW
---- ---
<S> <C> <C>
CALENDAR YEARS BY QUARTER
1997:
First $4.56 $3.13
Second 3.69 2.88
Third 5.63 2.94
Fourth 6.56 3.44
1996:
First 3.50 2.63
Second 3.88 2.50
Third 4.56 3.06
Fourth 4.75 3.25
</TABLE>
On March 23, 1998, the latest practicable date for providing price
information, the last sales price for the Company's Common Stock was $3.1563.
HOLDERS
As of March 23, 1998, the Company had approximately 11,000 record holders of
its shares of Common Stock, including several nominee holders for an
undetermined number of beneficial owners.
DIVIDENDS ON COMMON STOCK
The Company has not paid cash dividends on its Common Stock and does not
expect to declare cash dividends in the foreseeable future. Furthermore, any
future dividends on the Common Stock will be limited by the terms of the
Preferred Stock, which prohibits cash dividends on Common Stock unless all
accrued and unpaid dividends on the Preferred Stock have been paid, and the
terms of the Company's credit facility with Bank One, Texas, N.A. ("Bank One")
and Credit Lyonnais New York Branch ("Revised Credit Facility"), which does not
permit dividends on the Common Stock.
RECENT SALES OF UNREGISTERED SECURITIES
On August 21, 1997, the Company closed the offering of $65 million
aggregate principal amount of its unregistered 10 3/4% Series C Senior Notes
due 2006 (the "Series C Notes"). The Company sold these securities at a
discount of 0.295% to Jefferies & Company, Inc. ("Jefferies") and Prudential
Securities Incorporated ("Prudential") pursuant to a private offering exemption
under Section 4(2) of the Securities Act of 1933, as amended (the "Act"), and
such securities were subsequently resold to institutional accredited investors
pursuant to Rule 144A of the Act for approximately $66.5 million, yielding a
premium to Jefferies and Prudential of $1.7 million. The net proceeds of the
Series C Notes were used to repay approximately $23 million of borrowings under
the Revised Credit Facility and to fund the Company's drilling program and to
increase the Company's working capital.
19
<PAGE> 21
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial and operating
data with respect to the Company as of and for each of the five years in the
period ended December 31, 1997. The Company acquired significant producing oil
and natural gas properties during the periods presented which affects the
comparability of the historical financial and operating data for the periods
presented. The financial data was derived from the historical financial
statements of the Company. This information is not necessarily indicative of
the Company's future performance. The financial data set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and the related notes thereto of the Company included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT FOR RATIOS AND PER UNIT DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:(1)
Oil and natural gas sales .................. $ 1,803 $ 3,159 $ 7,858 $ 24,319 $ 53,284
Well operator fees and other ............... 427 158 137 876 1,277
--------- --------- --------- --------- ---------
Total revenues ............................. 2,230 3,317 7,995 25,195 54,561
Costs and expenses:
Lease operating ........................ 575 1,207 1,732 3,741 7,596
Oil and natural gas production taxes ... 110 176 416 1,285 3,139
Depreciation, depletion and
amortization ...................... 679 1,030 3,149 9,795 22,521
Writedown of oil and natural gas
properties(2) ..................... -- -- -- 43,497 46,396
General and administrative ............. 994 985 1,772 3,034 5,669
--------- --------- --------- --------- ---------
Total costs and expenses ............... 2,358 3,398 7,069 61,352 85,321
--------- --------- --------- --------- ---------
Operating income (loss) .................... (128) (81) 926 (36,157) (30,760)
Interest expense ........................... (188) (517) (1,032) (4,213) (11,895)
Other income (expenses) .................... 17 109 312 308 1,032
--------- --------- --------- --------- ---------
Income (loss) before income taxes and
extraordinary item ..................... (299) (489) 206 (40,062) (41,623)
Income tax benefit ......................... -- -- -- 14,504 7,285
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item .... (299) (489) 206 (25,558) (34,338)
Extraordinary loss ......................... -- (122) (432) (292) --
--------- --------- --------- --------- ---------
Net loss ................................... $ (299) $ (611) $ (226) $ (25,850) $ (34,338)
========= ========= ========= ========= =========
Income (loss) per common share before
extraordinary item ..................... $ (0.05) $ (0.09) $ (0.05) $ (1.33) $ (.94)
========= ========= ========= ========= =========
Net loss per common share .................. $ (0.05) $ (0.10) $ (0.09) $ (1.34) $ (.94)
========= ========= ========= ========= =========
CASH FLOW DATA:
Net cash provided by operating activities .. $ 519 $ 373 $ 2,857 $ 11,788 $ 22,864
Net cash used in investing activities ...... (1,473) (3,812) (16,726) (49,277) (75,826)
Net cash provided by financing activities .. 2,647 5,871 17,352 45,595 64,734
OTHER FINANCIAL DATA:
EBITDA(3) .................................. $ 568 $ 1,058 $ 4,387 $ 17,443 $ 39,189
Ratio of EBITDA to interest expense ........ 3.0x 2.0x 4.3x 4.1x 3.3x
Ratio of earnings to fixed charges (4) ..... -- -- 1.2x -- --
BALANCE SHEET DATA (AT PERIOD END):(1)
Cash and cash equivalents .................. $ 161 $ 2,594 $ 6,076 $ 14,182 $ 25,954
Working capital (deficit) .................. (1,213) 3,561 (2,335) (1,582) 8,387
Total assets ............................... 12,710 18,746 43,491 216,199 254,361
Long-term debt ............................. 3,799 6,000 13,475 100,000 166,397
Stockholders' equity ....................... 6,320 11,328 17,775 80,426 47,893
</TABLE>
20
<PAGE> 22
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:(1)
Production:
Oil (Mbls) ................................... 49 116 283 522 1,110
Natural gas (Mmcf) ........................... 483 621 1,753 5,681 13,146
Natural gas equivalent (Mmcfe) ............... 776 1,315 3,454 8,811 19,807
Average sales price:
Oil (per Bbl) ................................ $ 16.46 $ 16.01 $ 17.22 $ 21.70 $ 19.17
Natural gas (per Mcf) ........................ 2.07 2.11 1.70 2.29 2.43
Unit economics (per Mcfe):
Average sales price .......................... $ 2.32 2.40 $ 2.28 $ 2.75 $ 2.69
Lease operating expenses ..................... .74 .92 .50 .42 .38
Oil and natural gas production taxes ......... .14 .13 .12 .15 .16
Depreciation, depletion and amortization ..... .88 .70 .91 1.11 1.13
General and administrative ................... 1.28 .75 .51 .34 .29
</TABLE>
__________
(1) Reflects the revenues, results of operations, and production subsequent to
the dates of acquisitions of various oil and natural gas properties that
affect the comparability of the data presented. The Company acquired a
63.8% Working Interest in the GAU in December 1993 and an additional
interest of 17% in the GAU during 1994. During 1995, the Company acquired
interests in producing oil and natural gas properties in the Mustang Island
area, the Oak Hill Field, and in Eddy County, New Mexico. In August 1996,
the Company completed the Merger with Alexander. See Note 2 of Notes to
Consolidated Financial Statements.
(2) The results of operations for the year ended December 31, 1996 include a
writedown of oil and natural gas properties of approximately $43.5 million
($28.3 million net of deferred income taxes), in accordance with the full
cost method of accounting, which resulted from the Merger. The results of
operations for the year ended December 31, 1997, include a writedown of oil
and natural gas properties of approximately $46.4 million ($37.5 million,
net of deferred income taxes) in accordance with the full cost method of
accounting. See Notes 2 and 9 of Notes to Consolidated Financial
Statements.
(3) See the Glossary included elsewhere herein for the definition of EBITDA.
EBITDA is not a measure of cash flow as determined by generally accepted
accounting principles. The Company has included information concerning
EBITDA because EBITDA is a measure used by certain investors in determining
the Company's historical ability to service its indebtedness. However,
this measure may not be comparable to similarly titled measures of other
companies. EBITDA should not be considered as an alternative to, or more
meaningful than, net income or cash flows as determined in accordance with
generally accepted accounting principles as an indicator of the Company's
operating performance or liquidity.
(4) For the purposes of calculating the ratio of earnings to, or deficiency of
earnings over, fixed charges, earnings consist of income before
extraordinary items and income taxes plus fixed charges, excluding
capitalized interest. Fixed charges consist of interest expense,
capitalized interest, the interest component of rent expense, and
amortization of debt premium, discount and financing costs. The deficiency
of earnings over fixed charges for the years ended December 31, 1993, 1994,
1996, and 1997, were approximately $0.3 million, $0.5 million, $40.0
million, and $44.2 million, respectively.
21
<PAGE> 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Financial Statements and "Selected Historical Financial and Operating Data" and
respective notes thereto, included elsewhere herein. The information below
should not be construed to imply that the results discussed herein will
necessarily continue into the future or that any conclusion reached herein will
necessarily be indicative of actual operating results in the future. Such
discussion represents only the best present assessment by management of the
Company. Because of the size and scope of the Company's acquisitions during
1995 and 1996 and the relatively small scale of the Company's operations prior
to 1996, the results of operations from period to period are not necessarily
comparative.
OVERVIEW
During 1995 and 1996, the Company acquired an estimated 27.0 Bcfe and 141.0
Bcfe in Proved Reserves, respectively (based on reserve estimates at the date
of acquisition), including the Merger with Alexander in August 1996, whereby
the Company acquired 102.1 Bcfe. See "Business and Properties - Acquisitions."
As a result of the exploration and development of the Greater Bayou Sorrel
Area, the efforts to increase production from the GAU and at the Company's
properties in East Texas, and the Company's historical acquisitions, Proved
Reserves totaled 169.1 Bcfe at December 31, 1997. See "Business and Properties
- - Principal Areas of Operations."
The Company's increased reserve base and production volumes, combined with
more efficient operations, lowered lease operating expenses ("LOE") and general
and administrative expenses ("G&A") all on a per unit of production basis
during each of the three years in the period ended December 31, 1997.
In the fourth quarter of 1996, the Company began an accelerated development
and exploration program (the "Drilling Program") on its increased inventory of
properties using the net proceeds from the Series A/B Notes (as defined below).
During 1997, the Company spent approximately $85.6 million during 1997 related
to the Drilling Program of which $54.5 million was for development drilling and
$31.1 million was for exploratory drilling, including $5.3 million for seismic
costs. An additional $2.1 million was spent for leasehold acreage. The
Company's Drilling Program combined with its historical acquisitions have been
the primary reasons for the increase in the Company's production.
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>
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net production:
Oil (Mbbls) ............................ 283 522 1,110
Natural Gas (Mmcf) ..................... 1,753 5,681 13,146
Natural Gas Equivalent (Mmcfe) ......... 3,454 8,811 19,807
Oil and natural gas sales (in thousands):
Oil .................................... $ 4,880 $ 11,320 $ 21,276
Natural gas ............................ 2,978 12,999 32,009
---------- ---------- ----------
Total .................................. $ 7,858 $ 24,319 $ 53,285
========== ========== ==========
Average sales price:
Oil (per Bbl) .......................... $ 17.22 $ 21.70 $ 19.17
Natural gas (per Mcf) .................. 1.70 2.29 2.43
Unit economics (per Mcfe):
Average sales price .................... 2.28 2.75 2.69
LOE .................................... .50 .42 .38
Oil and gas production taxes ........... .12 .15 .16
Depreciation, depletion and amortization .91 1.11 1.13
General and administrative ............. .51 .34 .29
</TABLE>
22
<PAGE> 24
YEAR ENDED DECEMBER 31, 1997, COMPARED WITH YEAR ENDED DECEMBER 31, 1996
Revenues. Total revenues increased by $29.4 million (116.6%) to $54.6
million for 1997 from $25.2 million in 1996. The increase in revenues is due
to the increase in production primarily from the results of the Drilling
Program and the Merger with Alexander completed in August 1996. Also
contributing to the increased production is the UMC Acquisition, the CA
Acquisition, the Lake Boeuf Acquisition and the Bayou Sorrel Acquisition
(collectively, the "1996 Acquisitions") completed during 1996. In 1997, the
Company produced 1,110 Mbbls of oil, an increase of 112.6% over 522 Mbbls in
1996, and 13,146 Mmcf of natural gas, an increase of 131.4% over 5,681 Mmcf in
the same period of 1996. See "Business and Properties - Principal Areas of
Operation." Also contributing to the increase in revenues was the increase in
average natural gas prices of $.14 per Mcf to $2.43 per Mcf for 1997 from $2.29
for 1996, offset by the decrease in average oil prices of $2.53 per barrel to
$19.17 for 1997 from $21.70 for 1996.
Costs and Expenses. Lease operating expenses increased $4.5 million (103.1%)
to $7.6 million for 1997 from $3.7 million for 1996 primarily due to the
increased production discussed above. Although total lease operating expenses
increased, lease operating expenses per Mcfe decreased to $.38 for 1997 from
$.42 for 1996.
Production taxes increased $1.8 million (144.2%) to $3.1 million for 1997
compared to $1.3 million for 1996. This increase principally resulted from the
increase in total oil and natural gas revenues discussed above and increased
production in Louisiana, which has higher production tax rates than Texas,
Oklahoma and Arkansas.
Depreciation, depletion and amortization increased $12.7 million (130.2%) to
$22.5 million for 1997 compared to $9.8 million for 1996. This increase is due
to the increased production. The depletion rate per Mcfe was $1.13 for 1997
compared to $1.11 for 1996. This increase in the depletion rate was primarily
due to the acquisition costs incurred in the Merger.
At December 31, 1997, 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 oil and natural gas properties of $46.4 million ($37.5 million net of
deferred income taxes). This writedown resulted primarily from the decline in
oil and natural gas prices in the fourth quarter of 1997, combined with the
costs incurred on unsuccessful exploratory wells drilled during such period. In
August, 1996, as a result of allocating the cost of the Merger with Alexander,
under the purchase method of accounting, to the proved oil and natural gas
properties acquired in connection with the Merger, the Company recognized a
writedown of the oil and natural gas properties, net of related deferred income
taxes of $28.3 million. See Note 2, and 9 of Notes to Financial Statements.
General and administrative costs increased $2.7 million (86.8%) to $5.7
million compared to $3.0 million for 1996 although general and administrative
costs per Mcfe decreased 14.7% to $.29 for 1997 from $.34 for 1996. This
decrease per Mcfe is attributable to the increase in production, without a
proportionate increase in costs to the Company.
Other Income and Expenses. The increase of $7.7 million in interest expense
to $11.9 million for 1997 from $4.2 million for 1996, was due to the issuance
of the Notes, partially offset by $2.5 million of interest costs related to the
Company's unproved oil and natural gas properties which was capitalized in
1997. The average balance of debt outstanding during 1997 was $133.4 million as
compared to average debt outstanding of $41.4 million for 1996. The weighted
average interest rate for 1997 was 10.34% compared to 8.64% for 1996.
Net Loss. A net loss of $34.3 million was generated for 1997, compared with
net loss of $25.8 million for 1996. The net losses for 1997 and 1996 included
writedowns of oil and natural gas properties of $37.5 million and $28.3
million, respectively, net of deferred taxes. Excluding these charges, income
increased $.8 million in 1997 compared with 1996 as the increase in 1997
operating income more than offset the increase in interest expense.
YEAR ENDED DECEMBER 31, 1996, COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Revenues. Total revenues increased by $17.2 million (215.1%) to $25.9 million
for 1996 from $8.0 million in 1995. The increase in revenues is due to the
increase in production from the Merger with Alexander completed in the third
quarter of 1996, the continued development of the GAU, the full year inclusion
in 1996 of the 1995 acquisitions of Mustang Island, Oak Hill, and the Enron
Properties (collectively, the "1995 Acquisitions") and the 1996 Acquisitions.
In
23
<PAGE> 25
1996, the Company produced 522 Mbbls of oil, an increase of 84.1% over 283
Mbbls in 1995, and 5,681 Mmcf of natural gas, an increase of 224.1% over 1,753
Mmcf in 1995.
Also contributing to the increase in revenues was the increase in average oil
prices of $4.48 per barrel to $21.70 for 1996 from $17.22 for 1995, and the
increase in average natural gas prices of $.59 per Mcf to $2.29 per Mcf for
1996 from $1.70 for 1995.
Costs and Expenses. Total costs and expenses, excluding the writedown
described below, increased $10.8 million (152.6%) to $17.9 million for 1996
from $7.1 million for 1995. Lease operating expenses and production taxes
increased $2.9 million (138.1%) to $5.0 million for 1996 from $2.1 million for
1995 primarily due to the development of the GAU, the 1995 Acquisitions, the
1996 Acquisitions and the Merger. Lease operating expenses per Mcfe decreased
by $.08 to $.42 per Mcfe for 1996 from $.50 per Mcfe for 1995. This decrease is
a result of the lower operating costs of the acquired properties combined with
reductions in costs at the GAU obtained through economies of scale resulting
from the additional wells drilled during 1995 and 1996.
Depreciation, depletion and amortization increased $6.6 million (211.0%) to
$9.8 million for 1996 compared to $3.1 million for 1995. This increase is due
to the increased production from the GAU, the 1995 Acquisitions, the 1996
Acquisitions, and the Merger. The depletion rate per Mcfe was $1.11 for 1996
compared to $0.91 for 1995. This increase in the depletion rate is primarily
due to downward revisions in estimated Proved Reserves at December 31, 1995,
and the acquisition costs associated with the Merger with Alexander.
In August, 1996, as a result of allocating the cost of the Merger with
Alexander, under the purchase method of accounting, to the proved oil and
natural gas properties acquired in connection with the Merger, the Company
recognized a writedown of its oil and natural gas properties, net of related
deferred income taxes of $28.3 million. See Note 2 of Notes to Financial
Statements.
Although general and administrative costs increased $1.2 million to $3.0
million for 1996, general and administrative costs per Mcfe decreased to $0.34
(33.3%) for 1996 from $0.51 for 1995. This decrease is attributable to the
increase in production from the GAU, the 1995 and 1996 Acquisitions, and to a
lesser extent, the Merger, without a proportionate increase in the general and
administrative costs to the Company.
Other Income and Expenses. The increase of $3.2 million (320.0%) in interest
expense to $4.2 million for 1996 from $1.0 million for 1995, was due to the
increase in the amount of outstanding debt as a result of borrowings under a
prior credit facility and the Revised Credit Facility to fund the 1996
Acquisitions and the Merger during 1996, and was partially offset by the
decline in weighted average interest rates. Also contributing to the increase
was the issuance of the Series A/B Notes. The average debt outstanding for 1996
was $41.4 million, including the Series A/B Notes, as compared to $10.6 million
for 1995. The weighted average interest rate for 1996 was 8.64% compared to
9.66% for 1995.
Net Loss. A net loss of $25.8 million was generated for 1996, compared with a
net loss of $0.2 million for 1995. The loss for 1995 includes an extraordinary
charge resulting from the write-off of unamortized loan costs attributable to a
prior credit facility which was paid off out of proceeds from the Revised
Credit Facility. The net loss for 1996 includes a net non-cash writedown of
$28.3 million to the Company's oil and natural gas properties, partially offset
by the increased operating income generated by the Merger with Alexander, the
GAU, the 1995 Acquisitions, the 1996 Acquisitions, and the Merger. Also
included in the net loss was a loss on sale of marketable securities of $0.1
million for 1996 as compared to a gain of $0.2 million for 1995.
LIQUIDITY AND CAPITAL RESOURCES
YEAR ENDED DECEMBER 31, 1997, COMPARED WITH YEAR ENDED DECEMBER 31, 1996
Net cash provided by operating activities was $22.9 million for the year
ended December 31, 1997, compared to $11.8 million for the same period in 1996.
The increase in cash flow from operating activities is primarily due to the
increase in income from operations before non-cash charges.
24
<PAGE> 26
Net cash used by investing activities was $75.8 million for 1997 compared
with $49.3 million for 1996. The cash used by investing activities for 1997
included $77.9 million for exploration and development expenditures pursuant to
the Company's Drilling Program, including acquisitions of leasehold interests
and seismic costs. In December 1997, the Company sold its interests in 274
nonstrategic wells for approximately $5.4 million.
Net cash provided by financing activities was $64.7 million for 1997 compared
with $45.6 million for the same period in 1996. The net cash provided by
financing activities during 1997 consisted primarily 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 of preferred stock, partially offset by repayments
of long-term debt.
The Company's working capital surplus at December 31, 1997, was $8.4 million
compared to a working capital deficit at December 31, 1996, of $1.6 million.
The increase in working capital was due primarily to the issuance of the Series
C Notes, partially offset by the expenditures of cash for oil and gas
exploration, acquisition, and development activities.
YEAR ENDED DECEMBER 31, 1996, COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Net cash provided by operating activities was $11.8 million for the year
ended December 31, 1996, compared to $2.9 million for the same period in 1995.
The increase in cash flow from operating activities is primarily due to the
significant increase in income from operations before depreciation, depletion
and amortization resulting from the 1995 Acquisitions, the 1996 Acquisitions,
and the Merger discussed above.
Net cash used in investing activities was $49.3 million for 1996 compared
with $16.7 million for 1995. This increase was principally due to increased
expenditures for oil and natural gas property acquisitions, the 1996
Acquisitions, the Merger, and exploration and development costs.
Net cash provided by financing activities was $45.6 million for 1996 compared
with $17.4 million for 1995. The cash provided by financing activities during
1996 primarily consisted of borrowings under credit facilities of $69.0
million, net proceeds from issuance of the Series A/B Notes of $96.1 million,
and proceeds from the issuance of the Series D Preferred Stock and the Series E
Preferred Stock for an aggregate of $15.0 million, partially offset by
repayments of borrowings under various credit facilities and debt assumed in
the Merger aggregating $141.5 million. Borrowings under credit facilities in
1995 were used to fund acquisitions, development of the GAU, and working
capital.
The Company's working capital deficit at December 31, 1996, was $1.6 million
compared to a deficit at December 31, 1995, of $2.3 million. The improvement
was due primarily to refinancing of borrowings under a credit facility.
FUTURE CAPITAL 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. The Company has currently budgeted approximately
$70 million for capital expenditures related to its oil and gas properties in
1998, of which approximately $20 million would be for exploration projects,
approximately $45 million would be for development and exploitation activities,
and approximately $5 million would be for leasehold acreage and seismic costs.
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. The Company is not
contractually committed to expend the budgeted funds. In addition, because of
the decline in crude oil prices during the first quarter of 1998, the Company
is currently re-evaluating its 1998 capital budget.
The Company currently expects that 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 the Notes.
However, the Company would need to raise additional capital to fund any
acquisitions.
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For the periods following 1998, the Company may seek additional capital, if
required, from traditional reserve base borrowings, equity, and debt offerings
or joint ventures to further develop and explore its properties and to acquire
additional properties. There is no assurance that the Company will be able to
access additional capital or that, if available, it will be at prices or on
terms acceptable to the Company.
Should the Company be unable to access the capital markets or should
sufficient capital not be available, the development and exploration of the
Company's properties could be delayed or reduced and, accordingly, oil and
natural gas revenues and operating results may be adversely affected.
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 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." In August
1997, the Company issued $65.0 million aggregate principal amount of its
unregistered 10 3/4% Series C Notes. The net proceeds of the Series C Notes of
approximately $64.8 million were used to repay approximately $23.0 million of
borrowings under the Revised Credit Facility, 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 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 ability of the Company and its Restricted
Subsidiaries' (as defined), to incur additional indebtedness. See Note 4 of
Notes to Consolidated Financial Statements.
CREDIT FACILITIES
On August 29, 1996, in connection with the Merger with Alexander, the Company
entered into a credit facility (as amended, the " Credit Facility") with Bank
One, as Bank and Administrative Agent, and Credit Lyonnais New York Branch, as
Bank and Syndication Agent (collectively, the "Banks"). The Credit Facility
initially consisted of a $100.0 million reducing revolving line of credit, with
an initial borrowing base of $60.0 million and a $5.0 million term loan.
Interest under the reducing line of credit was payable monthly at the Bank One
base rate. The proceeds from the Credit Facility were used to repay borrowings
under a prior credit facility and the existing indebtedness of Alexander,
resulting in an extraordinary charge of $292,372 or $.01 per common share in
1996.
On November 1, 1996, the Company repaid the outstanding borrowings under the
Credit Facility with a portion of proceeds from the issuance of $100.0 million
principal amount of Series A/B Notes. See Note 4 of Notes to Consolidated
Financial Statements.
In connection with the issuance of the Series A Notes, the Company revised
the Credit Facility (the "Revised Credit Facility"). 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 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 that 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 December 31, 1997, the Company had no
indebtedness under the Revised Credit Facility.
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The Company paid a facility fee equal to .75% 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 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 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 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
December 31, 1997, the Company was not in violation of any covenants of the
Revised Credit Facility. See Note 3 of Notes to Consolidated Financial
Statements.
PREFERRED STOCK
In June 1994, the Company consummated the sale of $5.0 million of the Series
B Preferred Stock. Fifty thousand shares of the Series B Preferred Stock were
sold by the Company at $100 per share. The Series B Preferred Stock is
convertible into shares of the Common Stock at a conversion price of $1.625 per
share. In October 1997, 13,813 shares of the Series B Preferred Stock were
converted into Common Stock, leaving 38,687 shares of the Series B Preferred
Stock outstanding.
In June 1995, the Company consummated the sale of $4.0 million of the Series
C Preferred Stock. Forty thousand shares of the Series C Preferred Stock were
sold by the Company at $100 per share. The Series C Preferred Stock is
convertible into shares of the Common Stock at a conversion rate of $2.00 per
share. The Series B Preferred Stock and Series C Preferred Stock require that
dividends be paid on the Series B Preferred Stock and Series C Preferred Stock
before any dividends are paid on the Common Stock. In October 1997, 17,000
shares of the Series C Preferred Stock were converted into Common Stock,
leaving 23,000 shares of the Series C Preferred Stock outstanding.
In August 1996, the Company completed the sale of 100,000 shares of the
Series D Preferred Stock for $10.0 million and 50,000 shares of the Series E
Preferred Stock for $5.0 million. The Series D Preferred Stock and Series E
Preferred Stock are convertible into shares of the Common Stock at a conversion
price of $2.25 per share. In conjunction therewith, the Company agreed to
extend the date at which it may first redeem the Series B Preferred Stock and
Series C Preferred Stock from June 14, 1997 to June 14, 1999. In October 1997,
40,500 shares of the Series E Preferred Stock were converted into Common Stock,
leaving 9,500 shares of the Series E Preferred Stock outstanding.
See Note 6 of Notes to Consolidated Financial Statements.
FINANCIAL REPORTING IMPACT OF FULL COST METHOD OF ACCOUNTING
The Company follows the full cost method of accounting for oil and natural
gas properties. Under such method, the net book value of such properties, less
related deferred income taxes, may not exceed a calculated "ceiling." The
ceiling is the estimated after-tax future net revenues from proved oil and
natural gas properties, discounted at 10% per year. In calculating future net
revenues, prices and costs in effect at the time of the calculation are held
constant indefinitely, except for charges which are fixed and determinable by
existing contracts. The net book value is compared to the ceiling on a
quarterly and yearly basis. The excess, if any, of the net book value above the
ceiling is required to be written off as a non-cash expense. As a result of
allocating additional cost, under the purchase method of accounting, to the oil
and natural gas properties in connection with the Merger, the Company
recognized a non-cash writedown of its oil and natural gas properties of
approximately $28.3 million, net of deferred taxes. The amount of the actual
writedown was charged to expense in the third quarter of 1996, the period in
which the Merger was consummated. At December 31, 1997, the net book value of
the Company's oil and natural gas properties exceeded the ceiling based on the
weighted average prices of crude oil and natural gas received by the Company
resulting in a writedown of non-cash $37.5 million, net of deferred taxes. The
Company currently anticipates recording additional writedowns during 1998 if
the
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prices for oil and natural gas prices do not increase from their present
levels. 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share ("SFAS 128") which replaced 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 during the period 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 common and common equivalent share to the extent that
they are dilutive. Diluted earnings per share computations also assume the
conversion of the Company's preferred stock (Note 5) if such conversion has a
dilutive effect. For the years ended December 31, 1995, 1996, and 1997, 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 year. 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 per share
amounts previously reported for years prior to 1997.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income ("SFAS 130"). SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. SFAS 130 is effective
for fiscal years beginning after December 15, 1997. The adoption of SFAS 130
will require additional disclosures in the Company's financial statements, but
will not have any impact on the financial position or results of operations of
the Company.
CHANGES IN PRICES AND INFLATION
The Company's revenues and value of its oil and natural gas properties have
been and will continue to be affected by changes in oil and gas prices. Oil and
gas prices are subject to seasonal and other fluctuations that are beyond the
Company's ability to control or predict.
During 1995 and 1996, the Company hedged crude oil and natural gas prices
through the use of commodity swap agreements in an effort to reduce the effects
of the volatility of the price of crude oil and natural gas on the Company's
operations. These agreements involved the receipt of fixed-price amounts in
exchange for variable payments based on NYMEX prices and specific volumes. In
connection with the commodity swap agreements, the Company may also enter into
basis swap agreements to reduce the effects of unusual fluctuations between
prices actually received at the wellhead and NYMEX prices. Through the use of
commodity price and basis swap agreements, the Company can fix the price to be
received for specified volumes of production to the commodity swap price less
the basis swap price. The differential to be paid or received, under the swap
agreement, is accrued in the month of the related production and recognized as
a component of crude oil and natural gas sales. The Company does not hold or
issue financial instruments for trading purposes.
While the use of hedging arrangements limits the downside risk of adverse
price movements, it may also limit future gains from favorable movements. All
hedging has been accomplished pursuant to swap agreements based upon standard
forms. The Company addresses market risk by selecting instruments whose value
fluctuations correlate strongly with the underlying commodity being hedged.
Credit risk related to hedging activities is managed by requiring minimum
credit standards for counter parties, periodic settlements, and market to
market valuations. The Company has not been required to provide collateral
relating to hedging activities. At December 31, 1997, the Company had no
hedging or basis swap agreements outstanding. During the years ended December
31, 1996 and 1997, the Company recognized a net gain of $20,315 and $0,
respectively, related to hedging transactions.
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
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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. In March, 1998, the Company fixed the prices of all
of its natural gas to be delivered under these contracts for the month of April
1998 and approximately one-third of the natural gas to be delivered under these
contracts for the months of May, June and July, 1998. See Note 8 of Notes to
Consolidated Financial Statements.
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 years ended December 31, 1997.
YEAR 2000
The Company has reviewed its computer systems in order to evaluate necessary
modifications for the year 2000 and expects that it will not incur material
expenditures to complete any such modifications.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements of the Company required by this Item 8 are included
as part of Item 14(a)(1) hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is set forth in the sections
entitled "Proposal 1 - Director Election Proposal", "Management" and "Certain
Relationships and Related Transactions" in the Company's definitive proxy
statement for its 1998 Annual Meeting of Shareholders (the "Proxy Statement"),
and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is set forth in the section
entitled, "Management" in the Company's Proxy Statement, and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is set forth in the section entitled
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is set forth in the section entitled
"Certain Relationships and Related Transactions" in the Company's Proxy
Statement, and is incorporated herein by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as part of this report.
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1. Financial Statements: See Index to Financial Statements and Financial Statement Schedules on page
F-1 of this report.
2. Financial Statement Schedules: See Index to Financial Statements and Financial Statement Schedules on page
F-1 of this report.
3. Exhibits: The following documents are filed as exhibits to this report:
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 C (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 Bank One, Columbus, N.A. (7)
4.6 Indenture dated August 21, 1997, among the Company and Bank One, N.A. (15)
10.1 Crude Oil Purchase Contract, dated November 30, 1992, between the Company and Plains Liquids
Transport Inc. (8)
10.2 Amendment to Crude Oil Purchase Contract, dated November 17, 1993, between the Company and Plains Liquids
Transport, Inc. (5)
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10.3 Crude Oil Purchase Contract, dated February 8, 1993, between the Company and Plains Marketing and
Transportation Inc. and the predecessor contract, the Crude Oil Purchase Contract, dated November 12,
1991, between Sunnybrook Transmission, Inc. and TriSearch Inc. (8)
10.4 Stock Purchase Agreement, dated as of June 2, 1994, among the Company, Arbco Associates L.P., Offense
Group Associates L.P., Kayne, Anderson Nontraditional Investments L.P., and Opportunity Associates L.P.
(5)
10.5 Purchase and Sale Agreement, dated as of March 29, 1995, between the Company and Enron Oil and Gas Company
(8)
10.6 Agreement for Purchase and Sale (Oak Hill), dated April 12, 1995, between the Company and Sierra 1994 I
Limited Partnership (6)
10.7 Agreement for Purchase and Sale (Mustang Island), dated April 20, 1995, between the Company and Sierra
Mineral Development, L.C. (6)
10.8 Stock Purchase Agreement, dated as of June 14, 1995, among the Company, Arbco Associates L.P., Offense
Group Associates L.P., Kayne, Anderson Nontraditional Investments L.P., and Opportunity Associates L.P.
(6)
10.9 Executive Employment Agreement, dated January 1, 1996, between the Company and Miles D. Bender (9)
10.10 Executive Employment Agreement, dated January 1, 1996, between the Company and Melissa Rutledge (9)
10.11 Executive Employment Agreement, dated January 1, 1996, between the Company and William T. Jones (9)
10.12 Executive Employment Agreement, dated June 6, 1996, between the Company and Jim L. David (1)
10.13 Executive Employment Agreement dated March 20, 1997, between the Company and Philip D. Devlin (10)
10.14 Executive Employment Agreement, dated March 20, 1997, between the Company and Gene W. Anderson (10)
10.15 Executive Employment Agreement, dated January 29, 1998, between the Company and Fred R. Miller (16)
10.16 Separation Agreement between the Company and R. Thomas Fetters, Jr. dated July 3, 1997 (16)
10.17 Compromise and Settlement Agreement between the Company and R. Thomas Fetters, Jr. dated November 18, 1997
(16)
10.18 Separation Agreement between the Company and Robert A. Imel dated October 31, 1997 (16)
10.19 National Energy Group, Inc. 1996 Incentive Compensation Plan (11)
10.20 National Energy Group, Inc. Employee Stock Purchase Plan (12)
10.21 Prudential Securities Incorporated Warrant to Purchase 100,000 Shares of the Company's Common Stock (3)
10.22 Gaines Berland, Inc. Warrant to Purchase 300,000 Shares of the Company's Common Stock dated August 29 1996
(3)
10.23 Gaines Berland, Inc. Warrant to Purchase 700,000 Shares of the Company's Common Stock dated
August 29, 1996 (3)
10.24 Warrant Purchase Agreement among Alexander, Hanifen, Imhoff Inc. and The Principal/Eppler, Guerin &
Turner, Inc. (14)
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10.25 Agreement dated January 1, 1996 between the Company and Sandefer Oil & Gas, Inc. (1)
10.26 Consulting Agreement dated January 1, 1996 between Sandefer Oil & Gas, Inc. and Potosky Oil & Gas, Inc.
and Atocha Exploration, Inc. (1)
10.27 Memorandum of Amendment dated March 27, 1997 amending (I) Agreement dated January 1, 1996 between the
Company and Sandefer Oil & Gas, Inc. and (ii) Consulting Agreement dated January 1, 1996 between Sandefer
Oil & Gas, Inc. and Potosky Oil & Gas, Inc. and Atocha Exploration, Inc. (16)
10.28 First Amendment dated April 15, 1997 to (I) Agreement dated January 1, 1996 between the Company and
Sandefer Oil & Gas, Inc. and (ii) Consulting Agreement dated January 1, 1996 between Sandefer Oil & Gas,
Inc. and Potosky Oil & Gas, Inc. and Atocha Exploration, Inc. (16)
10.29 Stock Purchase Agreement dated August 7, 1996 between the Company and High River Limited Partnership (2)
10.30 High River Limited Partnership Warrant to purchase 700,000 Shares of Common Stock, dated
August 29, 1996 (3)
10.31 Stock Purchase Agreement dated as of August 26, 1996, between the Company and Foremost Insurance Company,
Arbco Associates, L.P., Kayne, Anderson Nontraditional Investments L.P., Offense
Group Associates, L.P., Topa Insurance Company and Kayne, Anderson Offshore Limited (the "Series E
Investors") (3)
10.32 Form of Series E Investors' Warrants to purchase an aggregate 350,000 Shares of Common Stock, dated August
29, 1996 (3)
10.33 Agreement dated as of August 29, 1996 by and between the Company and Prudential Securities Incorporated
(3)
10.34 Gascon Partners Warrant to Purchase 300,000 shares of the Company's Common Stock (13)
10.35 Letter Agreement dated as of July 11, 1997 between the Company and Carl C. Icahn regarding Prospect
Participation (13)
10.36 Restated Loan Agreement dated August 29, 1996 among Bank One and Credit Lyonnais New York Branch ("Credit
Lyonnais") and the Company, NEG-OK and Boomer Marketing Corporation ("Boomer") (3)
10.37 $50,000,000 Revolving Note dated August 29, 1996 payable to Bank One (3)
10.38 $50,000,000 Revolving Note dated August 29, 1996 payable to Credit Lyonnais (3)
10.39 $2,500,000 Term Note dated August 29, 1996 payable to Bank One (3)
10.40 $2,500,000 Term Note dated August 29, 1996 payable to Credit Lyonnais (3)
10.41 Unlimited Guaranty of NEG-OK dated August 29, 1996 for the benefit of Bank One (3)
10.42 Unlimited Guaranty of NEG-OK, dated August 29, 1996 for the benefit of Credit Lyonnais (3)
10.43 Unlimited Guaranty of Boomer dated August 29, 1996 for the benefit of Bank One (3)
10.44 Unlimited Guaranty of Boomer dated August 29, 1996 for the benefit of Credit Lyonnais (3)
10.45 Form of Deeds of Trust, Mortgages, Security Agreements, Assignments of Production and Financing
Statements covering oil and gas properties of the Company and NEG-OK, dated August 29, 1996 (3)
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10.46 First Amendment to Restated Loan Agreement dated October 31, 1996 among Bank One and Credit Lyonnais and
the Company, Guarantor and Boomer (9)
10.47 Second Amendment to Restated Loan Agreement dated October 31, 1996, among Bank One and Credit Lyonnais and
the Company, Guarantor and Boomer (10)
10.48 Third Amendment to Restated Loan Agreement dated October 31, 1996, among Bank One and Credit Lyonnais and
the Company, Guarantor and Boomer (10)
10.49 Fourth Amendment to Restated Loan Agreement dated October 31, 1996, among Bank One and Credit Lyonnais and
the Company, Guarantor and Boomer (16)
10.50 Purchase Agreement dated October 29, 1996, by and among the Company, Guarantor and Bear, Stearns & Co.
Inc., Smith Barney Inc. and Jefferies & Company, Inc. (the "Initial Purchasers") (9)
10.51 Executive Employment Agreement, dated August 25, 1997, between the Company and C. Dewayne Cravens (16)
12.1 Computation of Ratio of Earnings to Fixed Charges (16)
23.1 Consent of Ernst & Young LLP, Independent Auditors (16)
24.1 Power of Attorney (included in signature pages to this Form 10-K) (16)
27.1 Financial Data Schedule (16)
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(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 17, 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 Annual Report on Form
10-KSB for the year ended December 31, 1992.
(9) Incorporated by reference to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995.
(10) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997.
(11) Incorporated by reference to the Company's Schedule 14A filed
April 25, 1997.
(12) Incorporated by reference to the Company's Form S-8 filed December
23, 1997.
(13) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997.
(14) Incorporated by reference to Alexander's Amendment No. 1 to
Registration Statement (No. 33-57142), dated February 26, 1993.
(15) Incorporated by reference to the Company's Form S-4 (No.
333-38075), filed October 16, 1997.
(16) Filed herewith.
33
<PAGE> 35
GLOSSARY
Wherever used herein, the following terms shall have the meaning specified.
Bbl -- One stock tank barrel, or 42 U.S. gallons liquid volume, used herein
in reference to crude oil or other liquid hydrocarbons.
Bcf -- One billion cubic feet.
Bcfe -- One billion cubic feet of Natural Gas Equivalent.
Behind the Pipe -- Hydrocarbons in a potentially producing horizon penetrated
by a well bore the production of which has been postponed pending the
production of hydrocarbons from another formation penetrated by the well bore.
The hydrocarbons are classified as proved but non-producing reserves.
Developed Acreage -- Acres which are allocated or assignable to producing
wells or wells capable of production.
Development Well -- A well drilled within the proved area of an oil and
natural gas reservoir to the depth of stratigraphic horizon known to be
productive.
Dry Well -- A well found to be incapable of producing either oil or natural
gas in sufficient quantities to justify completion as an oil or natural gas
well.
EBITDA -- Earnings (including interest income and excluding discontinued
operations, extraordinary items, charges resulting from changes in accounting
and significant nonrecurring revenues and expenses) before interest expense,
income taxes, depletion, depreciation and amortization, and the provision for
impairment of oil and natural gas properties. EBITDA is not a measure of cash
flow as determined by generally accepted accounting principles. EBITDA
information has been included in this document because EBITDA is a measure used
by certain investors in determining historical ability to service indebtedness.
EBITDA should not be considered as an alternative to, or more meaningful than,
net income or cash flows as determined in accordance with generally accepted
accounting principles as an indicator of operating performance or liquidity.
Exploratory Well -- A well drilled to find and produce oil or natural gas in
an unproved area, to find a new reservoir in a field previously found to be
productive of oil or natural gas in another reservoir, or to extend a known
reservoir.
Gross Acres or Gross Wells -- The total acres or wells, as the case may be,
in which a Working Interest is owned.
Infill Well -- A well drilled between known producing wells.
Mbbl -- One thousand Bbl.
Mcf -- One thousand cubic feet.
Mcfe -- One thousand cubic feet of Natural Gas Equivalent.
Mmcf -- One million cubic feet.
Mmcfe -- One million cubic feet of Natural Gas Equivalent.
Natural Gas Equivalent -- The ratio of one Bbl of crude oil to six Mcf of
natural gas.
Net Acres or Net Wells -- The sum of the fractional Working Interests owned
in Gross Acres or Gross Wells.
34
<PAGE> 36
NYMEX -- New York Mercantile Exchange.
Oil and Natural Gas Lease -- An instrument by which a mineral fee owner
grants to a lessee the right for a specific period of time to explore for oil
and natural gas underlying the lands covered by the lease and the right to
produce any oil and natural gas so discovered generally for so long as there is
production in economic quantities from such lands.
OPEC -- Organization of Petroleum Exporting Countries.
Overriding Royalty Interest -- A fractional undivided interest in an oil and
natural gas property entitling the owner of a share of oil and natural gas
production, in addition to the usual royalty paid to the owner, free of costs
of production.
PDNP -- Proved developed, nonproducing, or Behind the Pipe reserves.
Productive Well -- A well that is producing oil or natural gas or that is
capable of production.
Proved Developed Producing Reserves -- Proved reserves that can be expected
to be recovered from currently producing zones under the continuation of
present operating methods.
Proved Developed Reserves -- Reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.
Proved Reserves -- The estimated quantities of crude oil, natural gas, and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
Proved Undeveloped Reserves -- Reserves that are expected to be recovered
from new wells on undrilled acreage, or from existing wells where a relatively
major expenditure is required for completion.
PUD -- See Proved Undeveloped Reserves.
PV 10% -- The discounted future net cash flows for Proved Reserves of oil and
natural gas computed on the same basis as the Standardized Measure, but without
deducting income taxes, which is not in accordance with generally accepted
accounting principles. PV 10% is an important financial measure for evaluating
the relative significance of oil and natural gas properties and acquisitions,
but should not be construed as an alternative to the Standardized Measure (as
determined in accordance with generally accepted accounting principles).
Revenue Interest -- The interest in a lease or well that receives a
proportionate share of all revenues from that lease or well as identified in
the division order.
Royalty Interest -- An interest in an oil and natural gas property entitling
the owner to a share of oil and natural gas production free of costs of
production.
Secondary Recovery -- A method of oil and natural gas extraction in which
energy sources extrinsic to the reservoir are utilized.
Standardized Measure -- The estimated future net cash flows from Proved
Reserves of oil and natural gas computed using prices and costs, at the date
indicated, after income taxes and discounted at 10%.
Undeveloped Acreage -- Lease acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of oil and natural gas regardless of whether such acreage contains Proved
Reserves.
Working Interest -- The operating interest which gives the owner the right to
participate in the drilling, producing, and conducting operating activities on
the property and a share of all costs of exploration, development, and
operations and all risks in connection therewith.
35
<PAGE> 37
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 March 27, 1998
----------------------------
Miles D. Bender
President and Chief Executive
Officer
By: /s/ Fred R. Miller March 27, 1998
----------------------------
Fred R. Miller
Senior Vice President, Finance
and Administration,
and Chief Financial Officer
By: /s/ Melissa H. Rutledge March 27, 1998
----------------------------
Melissa H. Rutledge
Vice President, Controller,
and Chief Accounting Officer
POWER OF ATTORNEY AND SIGNATURES
The undersigned directors and officers of National Energy Group, Inc.
hereby constitute and appoint Miles D. Bender with full power to act and with
full power of substitution and resubstitution, our true and lawful
attorney-in-fact with full power to execute in our name and on our behalf in
the capacities indicated below any and all amendments to this Form 10-K and to
file the same, with all exhibits thereto and other documents in connection
therewith with the Commission, and hereby ratify and confirm all that such
attorney-in-fact, which he or his substitute shall lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities on March 27, 1998.
/s/ Bob G. Alexander Director
- ------------------------------------
Bob G. Alexander
/s/ Miles D. Bender President, Chief Executive
- ------------------------------------ Officer, and Director
Miles D. Bender
/s/ Jim L. David Vice President, Exploration
- ------------------------------------ and Director
Jim L. David
/s/ Robert H. Kite Director
- ------------------------------------
Robert H. Kite
/s/ George B. McCullough Chairman of the Board and
- ------------------------------------ Director
George B. McCullough
36
<PAGE> 38
/s/ George N. McDonald Director
- ------------------------------------
George N. McDonald
/s/ Norman C. Miller Chairman, Executive
- ------------------------------------ Committee and Director
Norman C. Miller
/s/ Robert J. Mitchell Director
- ------------------------------------
Robert J. Mitchell
/s/ Elwood W. Schafer Director
- ------------------------------------
Elwood W. Schafer
/s/ Robert V. Sinnott Director
- ------------------------------------
Robert V. Sinnott
37
<PAGE> 39
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors F-2
Consolidated Balance Sheets as of December 31, 1996, and 1997 F-3
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996, and 1997 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996, and 1997 F-5
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1995, 1996, and 1997 F-6
Notes to Consolidated Financial Statements F-8
</TABLE>
FINANCIAL STATEMENT SCHEDULES
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable and therefore have been omitted.
F-1
<PAGE> 40
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
National Energy Group, Inc.
We have audited the accompanying consolidated balance sheets of National
Energy Group, Inc., as of December 31, 1996 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of National Energy
Group, Inc., at December 31, 1996 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
March 13, 1998
F-2
<PAGE> 41
NATIONAL ENERGY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------
1996 1997
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................. $ 14,182,246 $ 25,954,479
Marketable securities ...................................... -- 486,750
Accounts receivable - oil and natural gas sales ............ 6,812,358 10,145,739
Accounts receivable - joint interest and other ............. 3,003,661 7,278,436
Other ...................................................... 1,131,736 2,678,029
------------- -------------
Total current assets ................................... 25,130,001 46,543,433
Oil and natural gas properties, at cost (full cost method):
Proved oil and natural gas properties ...................... 174,027,255 245,228,081
Unproved oil and natural gas properties .................... 24,682,425 35,698,549
------------- -------------
198,709,680 280,926,630
Accumulated depreciation, depletion, and amortization .......... (15,039,999) (83,478,971)
------------- -------------
Net oil and natural gas properties ......................... 183,669,681 197,447,659
Other property and equipment ................................... 2,869,227 4,797,737
Accumulated depreciation ....................................... (347,841) (799,136)
------------- -------------
Net other property and equipment ........................... 2,521,386 3,998,601
Other assets and deferred charges, net ......................... 4,878,234 6,371,714
------------- -------------
Total assets ............................................... $ 216,199,302 $ 254,361,407
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade ................................... $ 13,864,691 $ 21,725,575
Accounts payable - revenue ................................. 9,260,417 7,393,127
Drilling advances .......................................... -- 5,282,467
Accrued merger costs ....................................... 1,462,724 --
Accrued interest ........................................... 1,791,667 2,956,250
Other ...................................................... 332,964 798,983
------------- -------------
Total current liabilities .................................. 26,712,463 38,156,402
Long-term liabilities .......................................... 1,786,813 1,915,305
10 3/4% Senior Notes due 2006, including unamortized
issuance premium of $1,396,622 at December 31, 1997 ........ 100,000,000 166,396,622
Deferred income taxes .......................................... 7,273,829 --
Stockholders' equity:
Convertible preferred stock, $1.00 par:
Authorized shares - 1,000,000;
Issued and outstanding shares 242,500 and 171,187 at
December 31, 1996 and 1997, respectively;
Aggregate liquidation preference $24,250,000 and
$17,187,000 at December 31, 1996 and 1997, respectively 242,500 171,187
Common stock, $.01 par value:
Authorized shares - 100,000,000;
Issued and outstanding shares - 35,977,140 and 40,456,320
at December 31, 1996 and 1997, respectively ........... 359,771 404,563
Additional paid-in capital ................................... 110,293,386 112,940,414
Unrealized loss on marketable securities, net ................ -- (28,594)
Deficit ...................................................... (30,469,460) (65,594,492)
------------- -------------
Total stockholders' equity ................................. 80,426,197 47,893,078
------------- -------------
Total liabilities and stockholders' equity ................. $ 216,199,302 $ 254,361,407
============= =============
</TABLE>
See accompanying notes.
F-3
<PAGE> 42
NATIONAL ENERGY GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Oil and natural gas sales ..................... $ 7,858,316 $ 24,319,398 $ 53,284,555
Well operator fees and other .................. 136,943 876,247 1,276,609
------------ ------------ ------------
7,995,259 25,195,645 54,561,164
Costs and expenses:
Lease operating ............................... 1,732,124 3,740,525 7,596,131
Oil and natural gas production taxes .......... 415,867 1,285,410 3,138,644
Depreciation, depletion, and amortization ..... 3,149,464 9,795,283 22,521,612
Writedown of oil and natural gas properties ... -- 43,497,000 46,396,334
General and administrative .................... 1,771,372 3,034,146 5,669,078
------------ ------------ ------------
7,068,827 61,352,364 85,321,799
------------ ------------ ------------
Operating income (loss) ........................... 926,432 (36,156,719) (30,760,635)
Other income (expense):
Interest expense .............................. (1,032,096) (4,212,564) (11,895,457)
Interest income and other, net ................ 90,875 426,021 1,031,980
Gain (loss) on sale of marketable securities .. 220,582 (117,955) --
------------ ------------ ------------
Income (loss) before income taxes ................. 205,793 (40,061,217) (41,624,112)
Benefit for income taxes .......................... -- 14,503,595 7,285,765
------------ ------------ ------------
Income (loss) before extraordinary item ........... 205,793 (25,557,622) (34,338,347)
Extraordinary loss on early extinguishments of debt (431,762) (292,372) --
------------ ------------ ------------
Net loss .......................................... (225,969) (25,849,994) (34,338,347)
Preferred stock dividend requirements ............. 735,000 945,000 883,435
------------ ------------ ------------
Net loss applicable to common shareholders ........ $ (960,969) $(26,794,994) $(35,221,782)
============ ============ ============
Loss per common share, basic and diluted:
Loss before extraordinary item ................ $ (.05) $ (1.33) $ (.94)
============ ============ ============
Net loss ...................................... $ (.09) $ (1.34) $ (.94)
============ ============ ============
Weighted average number of common
shares outstanding ....................... 10,701,635 19,939,975 37,380,343
============ ============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 43
NATIONAL ENERGY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1995 1996 1997
------------ ------------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss .............................................. $ (225,969) $ (25,849,994) $(34,338,347)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation, depletion, and amortization ............. 3,149,464 9,795,283 22,521,612
Writedown of oil and natural gas properties ........... -- 43,497,000 46,396,334
Amortization of loan costs and issuance premium ....... 21,060 151,063 573,705
Amortization of deferred compensation ................. 39,809 36,083 39,094
Benefit for deferred income taxes ..................... -- (14,503,595) (7,273,829)
Loss (gain) on sale of marketable securities .......... (220,582) 117,955 --
Extraordinary loss on early extinguishment of debt .... 431,762 292,372 --
Common stock, options, and warrants issued for services 104,614 216,206 151,365
Changes in operating assets and liabilities excluding
effects of business acquisitions:
Accounts receivable ............................... (784,668) (4,729,262) (7,771,430)
Accounts receivable from related parties .......... 23,999 -- --
Other current assets .............................. (108,615) (320,601) (1,350,230)
Accounts payable and accrued liabilities .......... 425,626 3,085,455 3,915,896
------------ ------------- ------------
Net cash provided by operating activities ......... 2,856,500 11,787,965 22,864,170
------------ ------------- ------------
INVESTING ACTIVITIES
Purchases of marketable securities .................... (2,917,659) (9,008) (515,344)
Proceeds from sale of marketable securities ........... 2,111,890 1,675,669 --
Proceeds from broker margin ........................... 978,656 -- --
Purchases of other property and equipment ............. (42,950) (1,553,355) (1,910,904)
Oil and natural gas acquisition, exploration,
and development expenditures ........................ (16,912,919) (46,945,872) (77,902,861)
Acquisition of Alexander Energy Corporation, net of
cash acquired of $1,332,444 ......................... -- (2,455,993) --
Proceeds from sales of oil and gas properties ......... 69,306 -- 5,419,581
Other ................................................. (11,963) 11,638 (916,639)
------------ ------------- ------------
Net cash used in investing activities ............. (16,725,639) (49,276,921) (75,826,167)
------------ ------------- ------------
FINANCING ACTIVITIES
Proceeds from issuance of 10 3/4% Notes due 2006, net . -- 96,059,119 64,483,206
Proceeds from issuance of long-term debt, net ......... 17,514,077 69,026,613 32,978,502
Proceeds from issuance of note payable ................ 3,000,000 8,000,000 --
Repayments of long-term debt .......................... (6,875,000) (130,510,233) (33,000,000)
Repayments of note payable ............................ -- (11,000,000) --
Repayments of other long-term liabilities ............. -- (534,815) (776,034)
Proceeds from exercise of stock options and warrants .. 467,987 499,704 1,917,561
Proceeds from issuance of convertible
preferred stock, net ................................ 3,980,343 15,000,000 --
Preferred stock dividends ............................. (735,000) (945,000) (786,685)
Other ................................................. (714) (385) (82,320)
------------ ------------- ------------
Net cash provided by financing activities ......... 17,351,693 45,595,003 64,734,230
------------ ------------- ------------
Increase in cash and cash equivalents ................. 3,482,554 8,106,047 11,772,233
Cash and cash equivalents at beginning of period ...... 2,593,645 6,076,199 14,182,246
------------ ------------- ------------
Cash and cash equivalents at end of period ............ $ 6,076,199 $ 14,182,246 $ 25,954,479
============ ============= ============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid in cash ................................. $ 983,075 $ 2,549,835 $ 12,403,910
============ ============= ============
</TABLE>
See accompanying notes.
F-5
<PAGE> 44
NATIONAL ENERGY GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON
STOCK
ISSUABLE
CONVERTIBLE UNDER
PREFERRED STOCK COMMON STOCK ASSET
-------------------- ----------------------- ACQUISITION
SHARES AMOUNT SHARES AMOUNT AGREEMENT
------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 .... 52,500 $ 52,500 9,007,536 $ 90,075 $ 136,035
Common stock issued upon
exercise of options and
warrants ............... -- -- 327,992 3,280 --
Common stock issued under
asset acquisition
agreement .............. -- -- 300,000 3,000 (136,035)
Common stock and warrants
issued for services .... -- -- 13,000 130 --
Common stock issued upon
conversion of Class B
Common Stock ........... -- -- 1,166,796 11,668 --
Common stock and warrants
issued to acquire
interests in oil and
natural gas properties . -- -- 1,064,801 10,648 --
Issuance of Series C
Preferred Stock ........ 40,000 40,000 -- -- --
Preferred stock dividends ... -- -- -- -- --
Unrealized loss on marketable
securities ............. -- -- -- -- --
Net loss ....................... -- -- -- -- --
------- -------- ---------- -------- ---------
Balance at December 31, 1995 .... 92,500 92,500 11,880,125 118,801 --
Common stock issued upon
exercise of options and
warrants ............... -- -- 351,242 3,513 --
Common stock, options, and
warrants issued for
services ............... -- -- 50,000 500 --
Common stock issued to
acquire interests in oil
and natural gas
properties ............. -- -- 2,416,332 24,163 --
Issuance of Series D and E
Convertible Preferred
Stock and related
warrants to purchase
common stock ........... 150,000 150,000 -- -- --
Common stock, stock options,
and warrants issued or
assumed in acquisition
of Alexander Energy
Corporation ............ -- -- 21,279,441 212,794 --
Preferred stock dividends ... -- -- -- -- --
In unrealized gain on
marketable securities .. -- -- -- -- --
Net loss .................... -- -- -- -- --
------- -------- ---------- -------- ---------
Balance at December 31, 1996 .... 242,500 $242,500 35,977,140 $359,771 $ --
======= ======== ========== ======== =========
</TABLE>
<TABLE>
<CAPTION>
GAIN
(LOSS) ON
ADDITIONAL AVAILABLE TOTAL
PAID-IN FOR SALE STOCKHOLDERS'
CAPITAL SECURITIES DEFICIT EQUITY
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 .... $ 13,626,116 $ 136,285 $ (2,713,497) $ 11,327,514
Common stock issued upon
exercise of options and
warrants ............... 464,707 -- -- 467,987
Common stock issued under
asset acquisition
agreement .............. 133,035 -- -- --
Common stock and warrants
issued for services .... 79,203 -- -- 79,333
Common stock issued upon
conversion of Class B
Common Stock ........... (11,668) -- -- --
Common stock and warrants
issued to acquire
interests in oil and
natural gas properties . 3,269,003 -- -- 3,279,651
Issuance of Series C
Preferred Stock ........ 3,924,828 -- -- 3,964,828
Preferred stock dividends ... -- -- (735,000) (735,000)
Unrealized loss on marketable
securities ............. -- (383,777) -- (383,777)
Net loss ....................... -- -- (225,969) (225,969)
------------- ------------- ------------ ------------
Balance at December 31, 1995 .... 21,485,224 (247,492) (3,674,466) 17,774,567
Common stock issued upon
exercise of options and
warrants ............... 496,191 -- -- 499,704
Common stock, options, and
warrants issued for
services ............... 215,706 -- -- 216,206
Common stock issued to
acquire interests in oil
and natural gas
properties ............. 8,319,203 -- -- 8,343,366
Issuance of Series D and E
Convertible Preferred
Stock and related
warrants to purchase
common stock ........... 14,850,000 -- -- 15,000,000
Common stock, stock options,
and warrants issued or
assumed in acquisition
of Alexander Energy .... 64,927,062 -- -- 65,139,856
Corporation
Preferred stock dividends ... -- -- (945,000) (945,000)
In unrealized gain on
marketable securities .. -- 247,492 -- 247,492
Net loss .................... -- -- (25,849,994) (25,849,994)
------------- ------------- ------------ ------------
Balance at December 31, 1996 .... $ 110,293,386 $ -- $(30,469,460) $ 80,426,197
============= ============= ============ ============
</TABLE>
See accompanying notes.
F-6
<PAGE> 45
NATIONAL ENERGY GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
COMMON
STOCK
ISSUABLE
CONVERTIBLE UNDER
PREFERRED STOCK COMMON STOCK ASSET
---------------------- ----------------------- ACQUISITION
SHARES AMOUNT SHARES AMOUNT AGREEMENT
------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 .... 242,500 $ 242,500 35,977,140 $ 359,771 $-
Common stock issued upon
exercise of options and
warrants................ -- -- 920,300 9,203 --
Common stock and warrants
issued for services and
other ................. -- -- 82,854 829 --
Common stock issued upon
conversion of Series B,
C, and E convertible ...
preferred .............. (71,313) (71,313) 3,500,026 35,000 --
Repurchase of common stock .. -- -- (24,000) (240) --
Preferred stock dividends ... -- -- -- -- --
Unrealized loss on marketable
securities ............. -- -- -- -- --
Net loss .................... -- -- -- -- --
-------- --------- ----------- --------- ---
Balance at December 31, 1997 .... 171,187 $ 171,187 40,456,320 $ 404,563 $-
======== ========= =========== ========= ===
</TABLE>
<TABLE>
<CAPTION>
GAIN
(LOSS) ON
ADDITIONAL AVAILABLE TOTAL
PAID-IN FOR SALE STOCKHOLDERS'
CAPITAL SECURITIES DEFICIT EQUITY
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 .... $ 110,293,386 $ -- $(30,469,460) $ 80,426,197
Common stock issued upon
exercise of options and
warrants .............. 1,908,358 -- -- 1,917,561
Common stock and warrants
issued for services and
other ................. 782,489 -- -- 783,318
Common stock issued upon
conversion of Series B,
C, and E convertible
preferred .............. 36,313 -- -- --
Repurchase of common stock .. (80,132) -- -- (80,372)
Preferred stock dividends ... -- -- (786,685) (786,685)
Unrealized loss on marketable
securities ............. -- (28,594) -- (28,594)
Net loss .................... -- -- (34,338,347) (34,338,347)
------------- -------- ------------ ------------
Balance at December 31, 1997 .... $ 112,940,414 $(28,594) $(65,594,492) $ 47,893,078
============= ======== ============ ============
</TABLE>
See accompanying notes.
F-7
<PAGE> 46
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
National Energy Group, Inc. (the "Company") was incorporated under the laws
of the State of Delaware on November 20, 1990. The Company is engaged in the
exploration, acquisition, exploitation, development, and operation of crude oil
and natural gas properties in major producing basins onshore in Texas,
Louisiana, Oklahoma, Arkansas, and Mississippi and offshore in the Gulf of
Mexico.
Consolidation
The consolidated financial statements include the accounts of National
Energy Group, Inc., and its subsidiaries. All significant intercompany
transactions and balances have been eliminated.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits, short-term commercial
paper, and money-market investments with maturities of three months or less
when purchased. At December 31, 1996 and 1997, all cash and cash equivalents
were invested with Bank One, Texas, N.A. ("Bank One").
Marketable Securities
The Company's marketable securities are classified as available-for-sale.
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses, net of tax, reported as a separate component of stockholders'
equity. Realized gains and losses and declines in value judged to be
other-than-temporary are included in interest income. The cost of securities
sold is based on the specific identification method.
The following is a summary of available-for-sale securities at December 31,
1997 (none in 1996):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Common stocks $515,344 $ -- $28,594 $486,750
======== ======== ======= ========
</TABLE>
The Company's investments in marketable securities are comprised of
securities of other independent oil and gas companies.
During the year ended December 31, 1996, the Company sold available-for-sale
securities with a fair value at the date of sale of $1,675,669 (none in 1997).
The gross realized gains and losses on such sales totaled $9,765 and $127,720,
respectively.
F-8
<PAGE> 47
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounts Receivable
The Company sells crude oil and natural gas to various customers. In
addition, the Company participates with other parties in the operation of crude
oil and natural gas wells. Substantially all of the Company's accounts
receivable are due from either purchasers of crude oil and natural gas or
participants in crude oil and natural gas wells for which the Company serves as
the operator. Generally, operators of crude oil and natural gas properties have
the right to offset future revenues against unpaid charges related to operated
wells. Crude oil and natural gas sales are generally unsecured.
Natural Gas Production Imbalances
The Company accounts for natural gas production imbalances using the sales
method, whereby the Company recognizes revenue on all natural gas sold to its
customers notwithstanding the fact that its ownership may be less than 100% of
the natural gas sold.
Oil and Natural Gas Properties
The Company utilizes the full cost method of accounting for its crude oil and
natural gas properties. Under the full cost method, all productive and
nonproductive costs incurred in connection with the acquisition, exploration,
and development of crude oil and natural gas reserves are capitalized and
amortized on the units-of-production method based upon total proved reserves.
The costs of unproven properties are excluded from the amortization calculation
until the individual properties are evaluated and a determination is made as to
whether reserves exist. Capitalized costs are limited to the aggregate of the
present value of future net reserves plus the lower of cost or fair market
value of unproved properties (full cost ceiling). Conveyances of properties,
including gains or losses on abandonments of properties, are treated as
adjustments to the cost of crude oil and natural gas properties, with no gain
or loss recognized. The Company does not believe that future costs related to
dismantlement, site restoration, and abandonment costs, net of estimated
salvage values, will have a significant effect on its results of operations or
financial position because the salvage value of equipment and related
facilities should approximate or exceed any future expenditures for
dismantlement, restoration, or abandonment. The Company has not incurred any
net expenditures for costs of this nature during the last two years.
Unproven properties are excluded from the amortization base and consist
primarily of acreage, acquisition costs, and related seismic and other
geological and geophysical costs. These costs are expected to be evaluated
during the Company's drilling program during the next three to five years.
The Company has capitalized internal costs of $141,516, $487,835, and
$1,582,021 for the years ended December 31, 1995, 1996, and 1997, respectively.
Such capitalized costs include salaries and related benefits of individuals
directly involved in the Company's acquisition, exploration, and development
activities based on the percentage of their time devoted to such activities.
During the year ended December 31, 1997 the Company capitalized interest costs
of $2,545,617 related to its unproved oil and gas properties.
Other Property and Equipment
Other property and equipment includes gas processing and field production
facilities, furniture, fixtures, and other equipment. Such assets are recorded
at cost and are depreciated over their estimated useful lives using the
straight- line method.
Maintenance and repairs are charged against income when incurred; renewals
and betterments, which extend the useful lives of property and equipment, are
capitalized.
F-9
<PAGE> 48
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
The Company uses the liability method in accounting for income taxes. Under
the liability method, deferred tax assets and liabilities are determined based
on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
Natural Gas Hedging Activities
In 1996, the Company hedged natural gas prices through the use of commodity
price swap agreements in an effort to reduce the effects of the volatility of
the price of natural gas on the Company's operations. These agreements involve
the receipt of fixed-price amounts in exchange for variable payments based on
NYMEX prices and specific volumes. In connection with the commodity price swap
agreements, the Company may also enter into basis swap agreements to reduce the
effects of unusual fluctuations between prices actually received at the
wellhead and NYMEX prices. Through the use of commodity price and basis swap
agreements, the Company can fix the price to be received for specified volumes
of production to the commodity swap price less the basis swap price. The
differential to be paid or received under the swap agreement is accrued in the
month of the related production and recognized as an adjustment to oil and gas
sales. The Company does not hold or issue financial instruments for trading
purposes.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25") in accounting for its
employee stock options. Under APB 25, if the exercise price of an employee's
stock options equals or exceeds the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Earnings (Loss) Per Share
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 common and common equivalent share to the extent that they are
dilutive. Diluted earnings per share computations also assume the conversion of
the Company's preferred stock (Note 5) if such conversion has a dilutive
effect. For the years ended December 31, 1995, 1996, and 1997, 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 year.
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 years prior to 1997.
Recent Accounting Pronouncements
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
F-10
<PAGE> 49
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Reclassifications
Certain previously reported amounts have been reclassified to conform with
the current presentation.
2. ACQUISITIONS
In April 1995, the Company purchased a 100% working interest (77% net revenue
interest) in State of Texas Lease No. 69153 and the State Tract 901-S Field,
Nueces County, Texas ("Mustang Island") for $900,000 in cash and 352,500 shares
of Common Stock. The cash portion of the acquisition was funded from available
cash.
In June 1995, the Company completed the acquisition of producing natural gas
properties in the Oak Hill Field ("Oak Hill") in Rusk County, Texas, which is a
component of the Cotton Valley Trend. The consideration paid by the Company for
Oak Hill consisted of $7,200,000 in cash, 612,301 shares of Common Stock and
warrants to purchase 200,000 shares of Common Stock at a price per share of
$2.00. The cash portion of the acquisition was funded primarily by borrowings
under a credit facility with Bank One.
In addition, in June 1995, the Company completed the acquisition of producing
oil and natural gas properties in Eddy County, New Mexico, from Enron Oil and
Gas Company (the "Enron Properties") for $2,119,295 in cash. This acquisition
was funded by borrowings under a credit facility with Bank One and available
cash.
The following pro forma data presents the results of the Company for the year
ended 1995, as if the acquisition of Mustang Island, Oak Hill, and the Enron
Properties had occurred on January 1, 1995. The pro forma results of operations
are presented for comparative purposes only and are not necessarily indicative
of the results which would have been obtained had the acquisitions been
consummated as presented. The following data reflect pro forma adjustments for
the oil and gas revenues, production costs, and depreciation and depletion
related to the properties and additional interest on borrowed funds (in
thousands, except per share amounts).
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED
DECEMBER 31, 1995
-----------------
(UNAUDITED)
<S> <C>
Revenues ...................................... $ 9,254
=========
Loss before extraordinary item ................ $ --
=========
Loss before extraordinary item per common share $ (.06)
=========
</TABLE>
In January 1996, the Company completed the acquisition of oil and natural gas
properties in offshore Nueces County, Texas, adjacent to the Company's Mustang
Island property, from C/A Limited, Chartex Petroleum Company, and Petrotex
Engineering Company. The acquisition includes interests in five wells, a
pipeline and separation facility related to Mustang Island. The consideration
for this acquisition consisted of 140,857 shares of the Company's Common Stock
and $675,000 in cash.
In February 1996, the Company completed the acquisition of two oil and gas
wells on one offshore block, interests in five other offshore blocks, and a
related production platform and equipment in offshore Nueces County, Texas,
adjacent to the Company's Mustang Island property, from UMC Petroleum
Corporation (the "UMC Acquisition"). The consideration for this acquisition
consisted of $1.5 million in cash, which was funded primarily from borrowings
under a credit agreement with Bank One.
F-11
<PAGE> 50
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
2. ACQUISITIONS (CONTINUED)
In April 1996, the Company won exploration rights on 16 offshore tracts
(covering 7,765 acres) in the Mustang Island area in offshore Nueces County,
Texas, through successful bids with the State of Texas ("Offshore Lease
Acquisition"). The Company paid $1,437,302 in cash for these rights, and the
purchase was funded by borrowings under a credit facility with Bank One and
available cash.
On August 29, 1996, the Company completed the acquisition of Alexander
Energy Corporation ("Alexander").The transaction consisted of a merger (the
"Merger") of Alexander with and into National Energy Group of Oklahoma, Inc.,
formerly known as NEG-OK, Inc., a wholly-owned subsidiary of the Company
("NEG-OK"). Pursuant to the Merger, (a) the separate corporate existence of
Alexander terminated, (b) each share of Alexander common stock, par value $.03
per share ("Alexander Common Stock"), together with certain rights associated
with the Alexander Common Stock outstanding immediately before the Merger, were
converted into 1.7 shares of the Company's Common Stock, and (c) all
outstanding options and warrants to purchase Alexander Common Stock were
assumed by the Company and converted into options and warrants to purchase
Common Stock. In lieu of fractional shares, Alexander shareholders otherwise
entitled to receive fractional shares of Common Stock were paid in cash an
amount equal to $4.375 multiplied by the fraction of a share of Common Stock to
be received. On December 31, 1996, NEG-OK was merged into and with the Company
and its separate corporate existence ceased to exist.
In connection with the Merger, on August 29, 1996, the Company, NEG-OK, and
Boomer Marketing Corporation ("Boomer Marketing"), a wholly-owned subsidiary of
NEG-OK, entered into a new credit facility. See Note 3. On August 29, 1996, the
Company also closed the sale of 100,000 shares of its Convertible Preferred
Stock, Series D, $1.00 par value per share, the sale of 50,000 shares of its
Convertible Preferred Stock, Series E, $1.00 par value per share, and warrants
to purchase 1,050,000 shares of Common Stock. See Note 6.
The cost of acquiring Alexander was approximately $69.4 million, consisting
of the following (in thousands):
<TABLE>
<S> <C>
Fair value of 21.1 million shares of the Company's Common
Stock issued ........................................... $63,404
Cost of 105,740 shares of NEG-OK common stock owned by the
Company ................................................ 288
Alexander stock options and warrants assumed ............... 340
Fair value of 122,324 shares of the Company's Common Stock
and 800,000 warrants issued for services provided by
investment advisors .................................... 1,322
Other investment advisor, legal, and accounting professional
fees and other Merger related costs .................... 4,009
-------
$69,363
=======
</TABLE>
The fair value of the securities issued in connection with the Merger was
calculated using the price of the Company's Common Stock at the time the Merger
was announced to the public of $3.00 per share.
The Company's purchase price was allocated to the consolidated assets and
liabilities of NEG-OK based on preliminary estimates of fair values with the
remaining purchase price allocated to proved oil and gas properties. No
goodwill was recorded in this transaction.
F-12
<PAGE> 51
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
2. ACQUISITIONS (CONTINUED)
The allocation of the purchase price is summarized as follows (in thousands):
<TABLE>
<S> <C>
Working capital (deficit) assumed, excluding current portion
of long-term debt ........................................ $ (87)
Oil and natural gas properties:
Proved ..................................................... 132,756
Unproved ................................................... 6,319
Other property and equipment ............................... 970
Other non-current assets ................................... 198
Long-term debt assumed ..................................... (45,853)
Other non-current liabilities assumed ...................... (3,163)
Deferred income taxes ...................................... (21,777)
---------
$ 69,363
=========
</TABLE>
Under the full cost method of accounting, the carrying value of oil and gas
properties (net of related deferred taxes) is generally not permitted to exceed
the sum of the present value (10% discount rate) of estimated future net cash
flows, after tax, from proved reserves, based on current prices and costs, plus
the lower of cost or estimated fair value of unproved properties (the "cost
center ceiling"). Based upon the combined cost center ceiling at August 29,
1996, and the preliminary allocation of the Company's purchase price, the
purchase price allocated to oil and gas properties was in excess of the cost
center ceiling using oil and natural gas prices being received by the Company
and NEG-OK in August 1996 of $20.75 per Bbl and $2.21 per Mcf. Such excess was
written off at the date of acquisition, resulting in a charge to the Company's
results of operations of $28.3 million as follows (in thousands):
<TABLE>
<S> <C>
Writedown of oil and natural gas properties $ 43,497
Deferred income tax benefit ............... (15,224)
--------
$ 28,273
========
</TABLE>
In September 1996, the Company acquired an approximate 87.5% working interest
in two wells and certain proved undeveloped reserves in the South Lake Boeuf
Field, La Fourche Parish, Louisiana (the "Lake Boeuf Acquisition") for
approximately $7.2 million, consisting of $1.5 million in cash and 1,758,460
shares of Common Stock.
The following pro forma data presents the results of the Company for the
years ended December 31, 1995 and 1996, as if the acquisitions of Mustang
Island, Oak Hill, the Enron Properties, NEG-OK, and the Lake Boeuf Acquisition
had occurred on January 1, 1995. The pro forma results of operations are
presented for comparative purposes only and are not necessarily indicative of
the results which would have been obtained had the acquisitions been
consummated as presented. The following data reflect pro forma adjustments for
oil and gas revenues, production costs, depreciation, and depletion related to
the properties and businesses acquired, interest on borrowed funds, additional
preferred stock dividend requirements, and the related income tax effects (in
thousands, except per share amounts).
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED DECEMBER 31,
----------------------
1995 1996
-------- -------
(UNAUDITED)
<S> <C> <C>
Total revenues .................................. $ 28,790 $38,807
======== =======
Income (loss) before extraordinary item ......... $ (6,131) $ 3,465
======== =======
Income (loss) before extraordinary item per share $ (.20) $ .06
======== =======
</TABLE>
F-13
<PAGE> 52
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
2. ACQUISITIONS (CONTINUED)
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 consideration paid by the Company consisted of $3,300,000 in cash. In
November 1996, the Company completed the acquisition of oil and natural gas
properties and related facilities located in the Bayou Sorrel Field, Iberville
Parish, Louisiana. The consideration paid by the Company consisted of
$9,025,000 cash, 477,612 shares of the Company's Common Stock and conveyance of
3% overriding royalty interest in the property acquired, limited to production
below 11,000 feet. In December 1996, the Company acquired certain oil and
natural gas properties located in the East Bayou Sorrel Field, Iberville
Parish, Louisiana. The consideration paid by the Company consisted of
$7,000,000 in cash. The Company funded the cash portion of these acquisitions
from available cash. These acquisitions consisted principally of proved
developed nonproducing and unproved properties and, accordingly, did not have a
significant impact on the Company's results of operations for 1996.
In December 1996, the Company acquired, for $4.2 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 in the Anadarko and Arkoma Basin
areas of Oklahoma and the Giddings area of Texas.
3. CREDIT FACILITIES
In June 1995, the Company consummated a $33,000,000 reducing revolving line
of credit facility (the "Prior Credit Facility") with Bank One. The initial
advance under the Facility of $12,500,000 was used to pay off the Company's
borrowings under a credit facility with Texas Gas Fund I, to purchase Oak Hill
and the Enron Properties (Note 2), and for closing fees. The repayment of
borrowings under the Texas Gas Fund I facility resulted in an extraordinary
charge of $431,762 or $.04 per common share in 1995.
At December 31, 1995, the Prior Credit Facility consisted of a revolving note
of up to $30,000,000, subject to a borrowing base, and an advance note of up to
$3,000,000. Interest on the revolving note was at a rate of prime plus 1%
(subject to reduction in certain circumstances) or LIBOR plus 3.75% (subject to
reduction in certain circumstances), at the Company's option. Interest on the
advance note was at a rate of prime plus 4%. Payments of interest and principal
were made monthly. At December 31, 1995, the Company had $16,975,000
outstanding under the revolving note and $3,000,000 outstanding under the
advance note.
On August 29, 1996, the Company, NEG-OK and Boomer Marketing, entered into a
credit facility (the "Credit Facility") with Bank One, as Bank and
Administrative Agent, and the Credit Lyonnais New York Branch, as Bank and
Syndication Agent (collectively, the "Banks"). The Credit Facility consisted of
a $100.0 million reducing revolving line of credit, with an initial borrowing
base of $60.0 million and a $5.0 million term loan. Interest under the reducing
revolving line of credit was payable monthly at the Bank One base rate. The
proceeds from the Credit Facility were used to repay the Prior Credit Facility
and the existing indebtedness of NEG-OK, resulting in an extraordinary charge
of $292,372 or $.01 per common share in 1996.
In November 1996, the Company repaid the outstanding borrowings under the
Credit Facility with a portion of proceeds from the issuance of $100.0 million
principal amount of 10 3/4% Senior Notes due 2006 (the "Series A Notes"). See
Note 4.
In connection with the issuance of the Series A Notes, the Company revised
the Credit Facility (the "Revised Credit Facility"). 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 from time to time by Bank One (which increases by .25% if
the outstanding loan balance is
F-14
<PAGE> 53
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
3. CREDIT FACILITIES (CONTINUED)
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 that 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
December 31, 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 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, 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
December 31, 1997, 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% 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 Credit Facility and
to increase the Company's working capital. In 1997, the Series A Notes were
exchanged for registered 10 3/4% Senior Notes due 2006 (the "Series B Notes")
which were 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% 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 December 1997, the Company
exchanged substantially all of the Series A/B Notes and all of 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 an
annual rate of 10 3/4%, payable semiannually in arrears on May 1 and November
1 of each year. The Notes are senior, unsecured obligations of the Company,
ranking pari passu with all existing and future senior indebtedness of the
Company, and senior in right of payment to all future subordinated indebtedness
of the Company. Subject to certain limitations set forth in the indenture
covering the Notes (the "Indenture"), the Company and its subsidiaries may
incur additional senior indebtedness and other indebtedness.
The Indenture provides that the Notes will be unconditionally guaranteed (the
"Guarantee") by any subsidiary designated by the Company as a Restricted
Subsidiary (a "Guarantor"). As a result of the merger of NEG-OK into the
Company on December 31, 1996, the Company has no Restricted Subsidiaries.
The Indenture contains certain covenants limiting the Company and any
Restricted Subsidiaries, with respect to the following: (i) assets sales; (ii)
restricted payments; (iii) the incurrence of additional indebtedness and the
issuance of certain redeemable preferred stock; (iv) liens; (v) sale and
leaseback transactions; (vi) lines of business; (vii) dividend and other
payment restrictions affecting subsidiaries; (viii) mergers and consolidations;
and (ix) transactions with affiliates.
F-15
<PAGE> 54
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
4. 10 3/4% SENIOR NOTES DUE 2006 (CONTINUED)
The Notes mature on November 1, 2006. At any time on or after November 1,
2001, the Company may, at its option, redeem all or any portion of the Notes at
the redemption prices expressed as percentages of the principal amount of the
Notes set forth below, plus, in each case, accrued and unpaid interest thereon
to the applicable redemption date, if redeemed during the 12-month period
beginning November 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2001 105.375%
2002 102.688%
2003 and thereafter 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to November 1, 2001, the
Company may, at its option, redeem all or any portion of the Notes at the
Make-Whole Price, as defined, plus accrued and unpaid interest to the date of
redemption. In addition, in the event the Company consummates one or more
Equity Offerings, as defined, on or prior to November 1, 1999, the Company, at
its option, may redeem up to $35.0 million of the aggregate principal amount of
the Notes with all or a portion of the aggregate net proceeds received by the
Company from such Equity Offering or Equity Offerings at a redemption price of
110.75% of the aggregate principal amount of the Notes so redeemed, plus
accrued and unpaid interest thereon to the redemption date; provided, however,
that following such redemption, at least $65.0 million of the aggregate
principal amount of the Notes remains outstanding.
Upon a Change of Control, as defined, the Company will be required, subject
to certain conditions, to offer to repurchase all Notes at 101% of the
principal amount thereof, plus accrued and unpaid interest to the date of
purchase.
At December 31, 1997, the fair value of the Notes, as determined by quoted
market prices, was approximately $172.4 million.
5. COMMITMENTS AND CONTINGENCIES
The Company leases office space under an operating lease. Rental expense
charged to operations was approximately $101,000, $117,000, and $275,446 during
the years ended December 31, 1995, 1996, and 1997, respectively. Minimum lease
payments under future operating lease commitments at December 31, 1997, are as
follows:
<TABLE>
<S> <C>
1998 ................................. $ 675,394
1999 ................................. 673,021
2000 ................................. 728,864
2001 ................................. 655,632
2002 ................................. 555,107
Thereafter ............................. 3,131,260
----------
$6,419,278
==========
</TABLE>
On August 30, 1995, the Company filed a lawsuit in the District Court of
Ector County, Texas against R.E. Steakley in which the Company seeks to enjoin
Mr. Steakley from interfering with its operations on the surface property
controlled by Mr. Steakley. The lawsuit alleges tortuous interference with the
Company's access to its facilities and wrongful conduct with respect to the
Company's personnel.
F-16
<PAGE> 55
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
6. STOCKHOLDERS' EQUITY
Preferred Stock
At December 31, 1997, the Company has authorized 330,000 shares of $1.00 par
value convertible preferred stock designated in four series B through E:
<TABLE>
<CAPTION>
SERIES B SERIES C SERIES D SERIES E
------- --------- ------- -------
<S> <C> <C> <C> <C>
Number of authorized
shares 100,000 80,000 100,000 50,000
Number of shares issued and
outstanding:
December 31, 1995 52,500 40,000 - -
December 31, 1996 52,500 40,000 100,000 50,000
December 31, 1997 38,687 23,000 100,000 9,500
Conversion price per
common share $ 1.625 $ 2.00 $ 2.25 $ 2.25
Liquidation preference
value per share $100.00 $ 100.00 $100.00 $100.00
Dividend rights
10% payable 10 1/2% payable Participation Participation
semi-annually semi-annually with common with common
(cumulative) (cumulative) stock stock
</TABLE>
On June 3, 1994, the Company consummated the sale of $5,000,000 of the
Company's 10% Cumulative Convertible Preferred Stock, Series B ("Series B").
Fifty thousand shares of Series B were sold by the Company at $100.00 per
share. The Series B is convertible into shares of Common Stock at a conversion
price of $1.625 per share. The Series B has a liquidation and dividend
preference over the Common Stock. The Series B has a 10% dividend, payable
semi-annually. The Company has the option to make six dividend payments in
shares of Series B;
F-17
<PAGE> 56
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
6. STOCKHOLDERS' EQUITY (CONTINUED)
after the sixth such payment, the holders of Series B have the option to
receive additional dividends in shares of Series B or to accrue such dividends
in cash. If the Company makes four dividend payments in shares of Series B, the
holders of Series B have the right to appoint one-third of the members of the
Company's Board of Directors. As of December 31, 1997, all dividend payments
were current. The Series B is redeemable by the Company beginning June 14,
1999, at $100.00 per share, plus accrued and unpaid dividends; provided,
however, that the Company cannot redeem any shares of Series B unless and until
all outstanding shares of the Series C have been redeemed by the Company. The
holders of Series B currently have the right to appoint one member to the
Company's Board of Directors. The Series B requires that dividends be paid on
the Series B before any dividends are paid on Common Stock.
The holders of Series B are entitled to one vote for each share as to matters
upon which by law they are entitled to vote as a class. The approval of a
majority of the Series B, voting separately as a class, is required to (i) make
changes to the Company's Certificate of Incorporation or By-Laws which
adversely affect the Series B, (ii) authorize or issue additional shares of
Series B, (iii) issue preferred stock equal to or senior to the Series B as to
dividends or liquidation, or (iv) subject to certain exceptions, to effect an
extraordinary transaction that requires a vote of the Company's stockholders.
As a result, a class vote of the holders of Series B would be required for the
Company to merge or be acquired and may therefore delay, deter, or prevent a
change in control of the Company.
In June 1995, the Company consummated the sale of $4,000,000 of the Company's
10 1/2% Cumulative Convertible Preferred Stock, Series C ("Series C"). Forty
thousand shares of Series C were sold by the Company at $100.00 per share. The
Series C is convertible into shares of Common Stock at a conversion price of
$2.00 per share.
The Series C has a liquidation and dividend preference over the Common Stock
and is parity stock to the previously issued Series B. The Series C has a 10
1/2% dividend, payable semi-annually. The Company has the option to make six
dividend payments in shares of Series C; after the sixth such payment, the
holders of Series C have the option to receive additional dividends in shares
of Series C or to accrue such dividends in cash.
If the Company makes four dividend payments in shares of Series C, the
holders of Series C (voting as a class with other affected series of preferred
stock with similar voting rights) have the right to appoint one-third of the
members of the Company's Board of Directors; provided, however, that if the
holders of Series B are presently entitled to a similar right, then the holders
of Series C shall have no such right until the right of the holders of Series B
terminates. As of December 31, 1997, all dividend payments were current and
have been made in cash. The Series C is redeemable by the Company beginning
June 14, 1999, at $100.00 per share, plus accrued and unpaid dividends. The
holders of the Series C currently have the right to appoint one member to the
Company's Board of Directors. The holders of Series C are entitled to one vote
for each share as to matters upon which by law they are entitled to vote as a
class. The approval of a majority of the Series C, voting separately as a
class, is required to (i) make changes to the Company's Certificate of
Incorporation or By-Laws which adversely affect the Series C, (ii) authorize or
issue additional shares of Series C, (iii) issue preferred stock equal to or
senior to the Series C as to dividends or liquidation, (iv) subject to certain
exceptions, to effect an extraordinary transaction that requires a vote of the
Company stockholders. As a result, a class vote of the holders of Series C, as
well as the Series B, would be required for the Company to merge or be acquired
and may therefore delay, deter, or prevent a change in control of the Company.
On August 29, 1996, the Company closed the sale for $10.0 million to High
River Limited Partnership ("High River") of 100,000 shares of its Convertible
Preferred Stock, Series D, $1.00 par value per share ("Series D") and warrants
to purchase 700,000 shares of Common Stock exercisable immediately at $2.50 per
share, which warrants expire five years from their date of issuance. The rights
and preferences of the Series D are described in the Certificate of
Designations of the Series D and include the immediate right to convert all the
shares of the Series D into 4,444,444 shares of Common Stock, based upon the
initial conversion price of $2.25 per share.
F-18
<PAGE> 57
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
6. STOCKHOLDERS' EQUITY (CONTINUED)
The holders of the Series D are entitled to one vote for each share when
entitled to vote as described below and as to matters upon which by law they
are entitled to vote as a class. The holders of Series D will have the right to
appoint one member to the Board of Directors. The Company may not, without the
consent of the director appointed by the holders of Series D, voluntarily file
for protection under federal or other bankruptcy laws. In addition, the holders
of Series D will have the right to choose to appoint one-half of the members of
the Board of Directors plus one member (including the member appointed by the
Series D) if the Series D contingent voting rights are triggered and the
holders of the Series D exercise their rights.
On August 29, 1996, simultaneously with the closing of the sale for $10.0
million of the Series D to High River, the Company also closed the sale for
$5.0 million to two insurance companies and four affiliates of Kayne, Anderson
Investment Management, Inc. ("KAIM"), a registered investment adviser, of
50,000 shares of Convertible Preferred Stock, Series E, $1.00 par value per
share ("Series E") and warrants to purchase 350,000 shares of the Common Stock
exercisable immediately at $2.50 per share, which warrants expire five years
from their date of issuance. The Series E has the rights and preferences
described in the Certificate of Designations of the Series E which include the
immediate right to convert all of the shares of the Series E into 2,222,222
shares of the Common Stock, based upon the initial conversion price of $2.25
per share. The Series E will vote together with the Common Stock on all matters
submitted to the holders of Common Stock and shall have that number of votes
per share equal to the number of shares of Common Stock into which such share
is convertible as of the record date for the vote.
In October 1997, 13,813 shares of Series B Preferred Stock, 17,000 shares of
Series C Preferred Stock and 40,500 shares of Series E Preferred Stock were
converted into approximately 3.5 million shares of Common Stock.
Common Stock
Holders of Common Stock are entitled to one vote for each share held of
record on all matters voted on by stockholders. The shares of the Common Stock
do not have cumulative voting rights, which means that the holders of more than
50% of the shares of the Common Stock voting for the election of the directors
can elect all of the directors to be elected by holders of the Common Stock, in
which event the holders of the remaining shares of Common Stock will not be
able to elect any director. Upon any liquidation, dissolution, or winding-up of
the affairs of the Company, holders of the Common Stock would be entitled to
receive, pro rata, all of the assets of the Company available for distribution
to stockholders, after payment of any liquidation preference of any Preferred
Stock that may be issued and outstanding at the time. Holders of the Common
Stock have no subscription, redemption, sinking fund, or preemptive rights.
The Company's Class B Common Stock ("Class B") was entitled to special
conversion rights. In June 1995, as a result of the Company's proved crude oil
and natural gas reserves reaching a value in excess of $25,000,000, the 129,644
shares of Class B then outstanding were converted into 1,296,440 shares of
Common Stock, in accordance with the terms of the Class B. Under the terms of
the Class B, such shares cannot be reissued. In connection with the merger, the
Company's shareholders approved an amendment to the Company's certificate of
incorporation to eliminate the authorization of the Class B.
Warrants
In June 1994, in connection with the sale of the Series B Preferred Stock,
the Company issued warrants to purchase 307,692 shares of Common Stock at a
price of $1.625 per share. During 1995, 255,492 of these warrants were
exercised and the remainder was exercised in 1996. In 1995, the Company granted
warrants to purchase 300,000 shares of Common Stock at a price of $1.625 per
share, pursuant to a consulting agreement. The estimated
F-19
<PAGE> 58
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
6. STOCKHOLDERS' EQUITY (CONTINUED)
fair value of the warrants was determined at the date of grant and charged to
general and administrative expenses over the vesting period. During 1997,
300,000 of these warrants were exercised. In June 1995, in connection with the
acquisition of Oak Hill (Note 2), the Company issued warrants to purchase
200,000 shares of Common Stock at a price of $2.00 per share. During 1996,
100,000 of these warrants were exercised.
During 1996, the Company issued warrants to purchase 1,050,000 shares of
Common Stock with exercise prices of $2.50 per share to the purchasers of the
Series D and Series E and issued warrants to purchase 300,000 shares of Common
Stock with exercise prices of $2.875 per share to financial advisors in
connection with this transaction. In connection with the Merger, the Company
issued warrants to purchase 800,000 shares of Common Stock to two financial
advisors. Warrants to purchase 700,000 shares have an exercise price of $2.875
per share while warrants to purchase 100,000 shares have an exercise price of
$4.09 per share. The Company also assumed 396,015 warrants to purchase Common
Stock at prices ranging from $2.07 to $3.00 in the Merger. During 1997, 353,515
of these warrants were exercised. During 1997, the Company issued warrants to
purchase 300,000 shares of common stock with exercise prices of $3.00 per share
in connection with the formation of a drilling joint venture.
The following table summarizes warrants outstanding at December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF SHARES EXPIRATION WARRANTS EXERCISE
UNDER WARRANT DATE EXERCISABLE PRICES
- ------------- --------------- --------------- ---------------
<S> <C> <C> <C>
100,000 June 30, 1998 100,000 $ 2.00
1,050,000 August 29, 2001 1,050,000 2.50
300,000 August 29, 2001 300,000 2.875
700,000 August 29, 2001 700,000 2.875
100,000 August 29, 2001 100,000 4.09
42,500 March 10, 1998 42,500 3.00
300,000 July 11, 2002 300,000 3.00
- --------- ---------
2,592,500 2,592,500
========= =========
</TABLE>
Stock Options
A summary of the Company's stock option activity, and related information for
the years ended December 31, 1995, 1996, and 1997, follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------------------------- -------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
----------- ---------- ------- ----- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year ..................... 240,000 $ .79 932,500 $ 2.02 873,486 $ 2.28
Granted ...................... 765,000 1.93 5,000 3.00 2,707,500 3.92
Assumed in the Merger with
Alexander ................ -- -- 135,028 2.25 -- --
Exercised .................... (72,500) .72 (199,042) 1.08 (266,785) 2.44
Canceled ..................... -- -- -- -- (242,000) 3.52
----------- ---------- ----------
Outstanding at end of year ... 932,500 2.02 873,486 2.28 3,072,201 3.62
=========== ========== ==========
Exercisable at end of year ... 347,500 1.24 503,484 2.24 936,450 2.84
=========== ========== ==========
Weighted-average fair value of
options granted or assumed
during the year .......... $ 1.31 $ 2.15 $ 1.46
=========== ========== ==========
</TABLE>
F-20
<PAGE> 59
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
6. STOCKHOLDERS' EQUITY (CONTINUED)
Information related to options outstanding and exercisable at December 31,
1997, is summarized below:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------- ------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
--------------- ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$1.625-$2.99 566,700 2.00 $2.26 566,700 $2.26
$3.00-$4.13 2,482,001 4.25 3.90 369,750 3.74
$5.75 23,500 4.78 5.75 -- --
------ -------
3,072,201 3.83 3.62 936,450 2.84
========= =======
</TABLE>
On August 30, 1996 the Board of Directors approved the issuance of options to
purchase 700,000 shares of Common Stock to the Company's chief executive
officer. These options have an exercise price of $4.00 per share and become
exercisable when the price of the Common Stock reaches and remains at or above
$8.00 for a period of 30 days. If the price target is not met within five
years, the options expire. In December 1996, the Company's Board of Directors
approved grants of options to purchase 966,500 shares of Common Stock for $3.75
per share. Both grants were subject to approval of a new stock option plan by
the stockholders of the Company which was received in June 1997. Therefore,
these grants are included in the above table in 1997.
Statement of Financial Accounting Standards No. 123, Accounting for Stock
Based Compensation, ("SFAS 123") requires the disclosure of pro forma net
income and earnings per share information computed as if the Company had
accounted for its employee stock options granted subsequent to December 31,
1994, under the fair value method set forth in SFAS 123. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 1995, 1996
and 1997, respectively: a risk-free interest rates of 6%, 6%, and 5.5%, a
dividend yield of 0%, and volatility factors of .54, .54 and .53. In addition,
the fair value of these options was estimated based on an expected life of
three to five years for options granted by the Company and one year for options
assumed in the merger with Alexander.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. In addition,
because SFAS 123 is applicable only to options granted subsequent to December
31, 1994, the pro forma information does not reflect the pro forma effect of
all previous stock option grants of the Company, and thus the pro forma
information is not necessarily indicative of future amounts until SFAS 123 is
applied to all outstanding stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except for earnings per share
information):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Pro forma net loss $(321,559) $(26,380,771) $(35,226,665)
========= ============ =============
Pro forma net loss per common share $(.10) $(1.37) $(.97)
========= ============ =============
</TABLE>
F-21
<PAGE> 60
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
7. INCOME TAXES
The reconciliation of income taxes computed at the U.S. federal statutory tax
rates to the benefit for income taxes on the income (loss) before extraordinary
item is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1995 1996 1997
------------ ----------- ------------
<S> <C> <C> <C>
Income tax benefit (provision) at statutory rate $ (69,970) $14,021,426 $ 14,568,439
Utilization of net operating loss carryforward . 69,970 414,177 --
Valuation allowance on deferred tax assets ..... -- -- (7,294,578)
Other .......................................... -- 67,992 11,904
------------ ----------- ------------
$ -- $14,503,595 $ 7,285,765
============ =========== ============
</TABLE>
The computation of the net deferred tax asset (liability) follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1997
------------ ------------
<S> <C> <C>
Deferred tax liabilities:
Property and equipment .......... $(19,948,392) $ (6,875,104)
Other ........................... (38,549) (18,156)
Deferred tax assets:
Net operating loss carryforwards 14,564,346 15,236,438
Statutory depletion carryforwards 1,340,763 1,340,763
Other ........................... 1,812,635 1,027,527
------------ ------------
(2,269,197) 10,711,468
Less valuation allowance ........ (5,004,632) (10,711,468)
------------ ------------
$ (7,273,829) $ --
============ ============
</TABLE>
At December 31, 1997, the Company had net operating loss carryforwards
available for federal income tax purposes of approximately $43.5 million which
expire beginning in 1998. Utilization of substantially all of the net operating
loss carryforwards is subject to various limitations because of previous
changes in control of ownership (as defined in the Internal Revenue Code) of
the Company and Alexander. Additional net operating loss limitations may be
imposed as a result of subsequent changes in stock ownership of the Company.
For federal income tax purposes, the Company also has statutory depletion
carryforwards of $3.8 million, which do not expire. As a result of the
limitations on the utilization of net operating loss carryforwards, the Company
has established a valuation allowance to reduce deferred tax assets to amounts
that are more likely than not to be realized.
8. NATURAL GAS HEDGING ACTIVITIES AND FORWARD SALES CONTRACTS
While the use of financial hedging arrangements limits the downside risk of
adverse price movements, it may also limit future gains from favorable
movements. All financial hedging is accomplished pursuant to swap agreements
based upon standard forms. The Company addresses market risk by selecting
instruments whose value fluctuations correlate strongly with the underlying
commodity being hedged. Credit risk related to hedging activities is managed by
requiring minimum credit standards for counterparties, periodic settlements,
and mark to market valuations. The Company has not been required to provide
collateral relating to its hedging activities.
In December 1995, the Company had entered into various swap agreements to fix
the selling prices for natural gas at a weighted average NYMEX price of $2.805
per Mcf for 225,000 Mcf of natural gas to be produced during 1996. The Company
closed the positions prior to December 31, 1995, resulting in a deferred gain
of approximately $70,875 which was recognized in 1996.
During the year ended December 31, 1996, the Company recognized a net gain of
$20,315 related to hedging transactions. At December 31, 1996 and 1997, the
Company had no financial hedging agreements outstanding.
F-22
<PAGE> 61
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
8. NATURAL GAS HEDGING ACTIVITIES AND FORWARD SALES CONTRACTS (CONTINUED)
At December 31, 1997, the Company had entered into forward sales contracts
with three purchasers covering future production of natural gas as follows:
<TABLE>
<CAPTION>
VOLUME COMMITMENT
(MMBTU PER DAY) TERM
--------------- --------------------------------
<S> <C>
14,850 January 1998 through March 1998
6,500 February 1998 through June 1998
3,500 April 1998 through March 1999
5,000 April 1998 through October 1999
</TABLE>
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 the time. The Company pays the cost of
transportation of the natural gas to the delivery point specified in the
contracts. In March 1998, the Company fixed the prices of all of its natural
gas to be delivered under these contracts in the month of April 1998, and
approximately one-third of the natural gas to be delivered under these
contracts for the months of May, June and July, 1998.
9. CRUDE OIL AND NATURAL GAS PRODUCING ACTIVITIES
Costs incurred in connection with the exploration acquisition, development,
and exploitation of the Company's crude oil and natural gas properties for the
years ended December 31, 1995, 1996, and 1997, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1995 1996 1997
----------- ------------ ----------
<S> <C> <C> <C>
Acquisitions of properties:
Proved ........................ $13,657,383 $155,675,254 $ --
Unproved ...................... 707,913 24,534,610 2,074,339
Exploration costs ................. 73,034 4,406,015 31,126,227
Development costs ................. 8,595,363 19,389,494 54,475,373
Amortization rate per Mcfe ........ .91 1.11 1.13
</TABLE>
The acquisitions of properties in 1996 include $132.8 million of proved
properties and $6.3 million of unproved properties acquired in the Merger. See
Note 2.
At December 31, 1997, the net book value of the Company's oil and natural
gas properties exceeded the full cost ceiling resulting in a writedown of the
oil and natural gas properties of $46.4 million ($37.5 million net of deferred
income taxes). The Company currently anticipates recording additional
writedowns during 1998 if the prices for oil and natural gas prices do not
increase from their present levels. 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.
Depletion, depreciation, and amortization increased $351,964 for the fourth
quarter of 1995 due to downward revisions in estimated proved reserves at
December 31, 1995.
Revenues from individual customers that exceed 10% of total crude oil and
natural gas sales are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
Plains Marketing and Transportation $4,618,136 $9,382,466 $17,918,762
Crosstex Energy ................... -- 2,919,944 6,471,157
GPM Natural Gas Corporation ....... -- 2,832,049 4,547,352
Energy Source, Inc. ............... 870,285 -- --
</TABLE>
The Company believes that the loss of these customers would not have a
significant impact on the Company's results of operations or financial
condition.
F-23
<PAGE> 62
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
10. SUPPLEMENTARY CRUDE OIL AND NATURAL GAS RESERVE INFORMATION (UNAUDITED)
The Company has interests in crude oil and natural gas properties that are
principally located onshore in Texas, Louisiana, Oklahoma, Arkansas, and
offshore in the Gulf of Mexico. The Company does not own or lease any crude oil
and natural gas properties outside the United States.
In 1995 and 1996, the Company retained independent petroleum engineering
firms to provide year-end estimates of the Company's future net recoverable
crude oil, natural gas, and natural gas liquids reserves. In 1997, such
estimates were prepared by the Company's in-house reserve engineers. Estimated
proved net recoverable reserves as shown below include only those quantities
that can be expected to be commercially recoverable at prices and costs in
effect at the balance sheet dates under existing regulatory practices and with
conventional equipment and operating methods.
Proved developed reserves represent only those reserves expected to be
recovered through existing wells. Proved undeveloped reserves include those
reserves expected to be recovered from new wells on undrilled acreage or from
existing wells on which a relatively major expenditure is required for
recompletion.
Net quantities of proved developed and undeveloped reserves of natural gas
and crude oil, including condensate and natural gas liquids, are summarized as
follows:
<TABLE>
<CAPTION>
NATURAL GAS
CRUDE OIL (THOUSAND CUBIC
(BARRELS) FEET)
------------ -------------
<S> <C> <C>
December 31, 1994 5,155,741 13,380,474
Purchase of reserves in place 190,063 25,785,458
Revisions of previous estimates (1,141,288) (6,453,623)
Production (283,440) (1,752,990)
Sales of reserves in place - (90,207)
------------ -------------
December 31, 1995 3,921,076 30,869,112
Purchase of reserves in place 4,691,982 97,840,796
Extensions and discoveries 37,800 371,062
Revisions of previous estimates 703,594 6,104,198
Production (521,701) (5,680,904)
Sales of reserves in place (29,880) (634,386)
------------ -------------
December 31, 1996 8,802,871 128,869,878
Extensions and discoveries 1,908,087 7,835,287
Revisions of previous estimates 397,541 (7,685,884)
Production (1,110,105) (13,146,251)
Sales of reserves in place (220,190) (5,391,799)
------------ -------------
December 31, 1997 9,778,204 110,481,231
============ =============
Proved developed reserves:
December 31, 1994 1,532,470 9,205,784
December 31, 1995 1,632,404 13,304,031
December 31, 1996 4,383,926 77,496,645
December 31, 1997 5,780,958 89,939,678
</TABLE>
The following is a summary of a standardized measure of discounted net cash
flows related to the Company's proved crude oil and natural gas reserves. For
these calculations, estimated future cash flows from estimated future
production of proved reserves were computed using crude oil and natural gas
prices as of the end of each period presented. Future development and
production costs attributable to the proved reserves were estimated assuming
that existing conditions would continue over the economic lives of the
individual leases and costs were not escalated for the future. Estimated future
income tax expenses were calculated by applying future statutory tax rates
(based on the current tax law adjusted for permanent differences and tax
credits) to the estimated future pretax net cash flows related to proved crude
oil and natural gas reserves, less the tax basis of the properties involved.
F-24
<PAGE> 63
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
10. SUPPLEMENTARY CRUDE OIL AND NATURAL GAS RESERVE INFORMATION (UNAUDITED)
(CONTINUED)
The Company cautions against using this data to determine the fair value of
its crude oil and natural gas properties. To obtain the best estimate of fair
value of the crude oil and natural gas properties, forecasts of future economic
conditions, varying discount rates, and consideration of other than proved
reserves would have to be incorporated into the calculation. In addition, there
are significant uncertainties inherent in estimating quantities of proved
reserves and in projecting rates of production that impair the usefulness of
the data.
The standardized measure of discounted future net cash flows relating to
proved crude oil and natural gas reserves are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1996 1997
------------- -------------
<S> <C> <C>
Future cash inflows .................................... $ 702,089,600 $ 430,107,524
Future production and development costs ................ (220,155,000) (163,245,775)
Future income tax expenses ............................. (105,547,035) (17,720,565)
------------- -------------
Future net cash flows .................................. 376,387,565 249,141,184
10% annual discount for estimated timing of cash flows . (146,607,933) (87,390,632)
------------- -------------
Standardized measure of discounted future net cash flows $ 229,779,632 $ 161,750,552
============= =============
</TABLE>
The following are the principal sources of change in the standardized measure
of discounted future net cash flows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1995 1996 1997
------------ ------------- -------------
<S> <C> <C> <C>
Sales and transfers of crude oil and
natural gas produced, net of production costs $ (5,710,325) $ (19,293,463) $ (42,549,780)
Net changes in prices and production costs ...... 14,654,096 131,330,518 (136,971,646)
Development costs incurred during the
period and changes in estimated future ...... (11,886,400) 4,884,876 24,893,672
development costs
Purchases of reserves in place .................. 15,455,400 117,893,900 --
Sales of reserves in place ...................... (97,210) (450,300) (8,489,852)
Extensions and discoveries, less related costs .. -- 850,200 24,388,228
Revisions of previous quantity estimates ........ (8,871,208) 16,576,531 (5,219,509)
Accretion of discount ........................... 2,744,504 3,627,860 19,576,509
Net change in income taxes ...................... 2,590,707 (57,743,416) 54,258,990
Changes in production rates (timing) and other .. 2,408,034 (24,175) 2,084,308
------------ ------------- -------------
Net change ...................................... $ 11,287,598 $ 197,652,531 $ (68,029,080)
============ ============= =============
</TABLE>
During recent years, there have been significant fluctuations in the prices
paid for crude oil in the world markets. This situation has had a
destabilizing effect on crude oil posted prices in the United States, including
the posted prices paid by purchasers of the Company's crude oil. The net
weighted average prices of crude oil and natural gas at December 31, 1995,
1996, and 1997, used in the above table were $18.71, $25.36 and $17.03 per
barrel of crude oil, respectively, and $1.91, $3.72, and $2.38 per thousand
cubic feet of natural gas, respectively.
F-25
<PAGE> 64
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
11. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
The Company's operating results for each quarter of 1996 and 1997 are
summarized as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
Total revenues ................... $ 3,848 $ 3,942 $ 5,705 $ 11,700
======= ======= ======== ========
Operating income (loss) .......... $ 894 $ 1,049 $(42,104) $ 4,004
======= ======= ======== ========
Income (loss) before extraordinary
item ........................ $ 433 $ 436 $(27,673) $ 1,246
======= ======= ======== ========
Net income (loss) ................ $ 433 $ 436 $(27,965) $ 1,246
======= ======= ======== ========
Income (loss) per common share:
Income (loss) before
extraordinary .................... $ .02 $ .02 $ (1.40) $ .02
======= ======= ======== ========
item
Net income (loss) ........... $ .02 $ .02 $ (1.42) $ .02
======= ======= ======== ========
Production:
Oil (Bbl) ........................ 111 114 121 176
Natural gas (Mcf) ................ 833 759 1,421 2,668
Natural gas equivalent (Mcfe) .... 1,497 1,442 2,150 3,722
YEAR ENDED DECEMBER 31, 1997:
Total revenues ................... $13,353 $12,125 $ 13,667 $ 15,416
======= ======= ======== ========
Operating income (loss) .......... $ 4,785 $ 2,897 $ 3,277 $(41,719)
======= ======= ======== ========
Net income (loss) ................ $ 1,403 $ 454 $ 272 $(36,467
======= ======= ======== ========
Income (loss) per common share ... $ .03 $ .00 $ .00 $ (.93)
======= ======= ======== ========
Production:
Oil (Bbl) ........................ 237 261 292 310
Natural gas (Mcf) ................ 2,884 3,389 3,580 3,293
Natural gas equivalent (Mcfe) .... 4,308 4,956 5,329 5,155
</TABLE>
In August 1996, the Company consummated the Merger with Alexander. The
results of operations for the three months ended September 30, 1996 include a
writedown of oil and natural gas properties of approximately $43.5 million
($28.3 million, net of deferred income taxes) in accordance with the full cost
method of accounting which resulted from the Merger. See Note 2.
The results of operations for the three months ended December 31, 1997
include a writedown of oil and natural gas properties of approximately $46.4
million ($37.5 million, net of deferred income taxes) in accordance with the
full cost method of accounting. See Note 9.
The income (loss) per share data has been computed in accordance with SFAS
128. See Note 1. Adoption of SFAS 128 had no effect on previously reported
amounts per share data. There are no differences between the basic and diluted
earnings (loss) per share amounts for the periods presented.
F-26
<PAGE> 65
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
INDEX DESCRIPTION
- ----- -----------
<S> <C>
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 C (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 Bank One, Columbus, N.A. (7)
4.6 Indenture dated August 21, 1997, among the Company and Bank One, N.A. (15)
10.1 Crude Oil Purchase Contract, dated November 30, 1992, between the Company and Plains Liquids
Transport Inc. (8)
10.2 Amendment to Crude Oil Purchase Contract, dated November 17, 1993, between the Company and Plains Liquids
Transport, Inc. (5)
</TABLE>
<PAGE> 66
<TABLE>
<S> <C>
10.3 Crude Oil Purchase Contract, dated February 8, 1993, between the Company and Plains Marketing and
Transportation Inc. and the predecessor contract, the Crude Oil Purchase Contract, dated November 12,
1991, between Sunnybrook Transmission, Inc. and TriSearch Inc. (8)
10.4 Stock Purchase Agreement, dated as of June 2, 1994, among the Company, Arbco Associates L.P., Offense
Group Associates L.P., Kayne, Anderson Nontraditional Investments L.P., and Opportunity Associates L.P.
(5)
10.5 Purchase and Sale Agreement, dated as of March 29, 1995, between the Company and Enron Oil and Gas Company
(8)
10.6 Agreement for Purchase and Sale (Oak Hill), dated April 12, 1995, between the Company and Sierra 1994 I
Limited Partnership (6)
10.7 Agreement for Purchase and Sale (Mustang Island), dated April 20, 1995, between the Company and Sierra
Mineral Development, L.C. (6)
10.8 Stock Purchase Agreement, dated as of June 14, 1995, among the Company, Arbco Associates L.P., Offense
Group Associates L.P., Kayne, Anderson Nontraditional Investments L.P., and Opportunity Associates L.P.
(6)
10.9 Executive Employment Agreement, dated January 1, 1996, between the Company and Miles D. Bender (9)
10.10 Executive Employment Agreement, dated January 1, 1996, between the Company and Melissa Rutledge (9)
10.11 Executive Employment Agreement, dated January 1, 1996, between the Company and William T. Jones (9)
10.12 Executive Employment Agreement, dated June 6, 1996, between the Company and Jim L. David (1)
10.13 Executive Employment Agreement dated March 20, 1997, between the Company and Philip D. Devlin (10)
10.14 Executive Employment Agreement, dated March 20, 1997, between the Company and Gene W. Anderson (10)
10.15 Executive Employment Agreement, dated January 29, 1998, between the Company and Fred R. Miller (16)
10.16 Separation Agreement between the Company and R. Thomas Fetters, Jr. dated July 3, 1997 (16)
10.17 Compromise and Settlement Agreement between the Company and R. Thomas Fetters, Jr. dated November 18, 1997
(16)
10.18 Separation Agreement between the Company and Robert A. Imel dated October 31, 1997 (16)
10.19 National Energy Group, Inc. 1996 Incentive Compensation Plan (11)
10.20 National Energy Group, Inc. Employee Stock Purchase Plan (12)
10.21 Prudential Securities Incorporated Warrant to Purchase 100,000 Shares of the Company's Common Stock (3)
10.22 Gaines Berland, Inc. Warrant to Purchase 300,000 Shares of the Company's Common Stock dated August 29 1996
(3)
10.23 Gaines Berland, Inc. Warrant to Purchase 700,000 Shares of the Company's Common Stock dated
August 29, 1996 (3)
10.24 Warrant Purchase Agreement among Alexander, Hanifen, Imhoff Inc. and The Principal/Eppler, Guerin &
Turner, Inc. (14)
</TABLE>
<PAGE> 67
<TABLE>
<S> <C>
10.25 Agreement dated January 1, 1996 between the Company and Sandefer Oil & Gas, Inc. (1)
10.26 Consulting Agreement dated January 1, 1996 between Sandefer Oil & Gas, Inc. and Potosky Oil & Gas, Inc.
and Atocha Exploration, Inc. (1)
10.27 Memorandum of Amendment dated March 27, 1997 amending (I) Agreement dated January 1, 1996 between the
Company and Sandefer Oil & Gas, Inc. and (ii) Consulting Agreement dated January 1, 1996 between Sandefer
Oil & Gas, Inc. and Potosky Oil & Gas, Inc. and Atocha Exploration, Inc. (16)
10.28 First Amendment dated April 15, 1997 to (I) Agreement dated January 1, 1996 between the Company and
Sandefer Oil & Gas, Inc. and (ii) Consulting Agreement dated January 1, 1996 between Sandefer Oil & Gas,
Inc. and Potosky Oil & Gas, Inc. and Atocha Exploration, Inc. (16)
10.29 Stock Purchase Agreement dated August 7, 1996 between the Company and High River Limited Partnership (2)
10.30 High River Limited Partnership Warrant to purchase 700,000 Shares of Common Stock, dated
August 29, 1996 (3)
10.31 Stock Purchase Agreement dated as of August 26, 1996, between the Company and Foremost Insurance Company,
Arbco Associates, L.P., Kayne, Anderson Nontraditional Investments L.P., Offense
Group Associates, L.P., Topa Insurance Company and Kayne, Anderson Offshore Limited (the "Series E
Investors") (3)
10.32 Form of Series E Investors' Warrants to purchase an aggregate 350,000 Shares of Common Stock, dated August
29, 1996 (3)
10.33 Agreement dated as of August 29, 1996 by and between the Company and Prudential Securities Incorporated
(3)
10.34 Gascon Partners Warrant to Purchase 300,000 shares of the Company's Common Stock (13)
10.35 Letter Agreement dated as of July 11, 1997 between the Company and Carl C. Icahn regarding Prospect
Participation (13)
10.36 Restated Loan Agreement dated August 29, 1996 among Bank One and Credit Lyonnais New York Branch ("Credit
Lyonnais") and the Company, NEG-OK and Boomer Marketing Corporation ("Boomer") (3)
10.37 $50,000,000 Revolving Note dated August 29, 1996 payable to Bank One (3)
10.38 $50,000,000 Revolving Note dated August 29, 1996 payable to Credit Lyonnais (3)
10.39 $2,500,000 Term Note dated August 29, 1996 payable to Bank One (3)
10.40 $2,500,000 Term Note dated August 29, 1996 payable to Credit Lyonnais (3)
10.41 Unlimited Guaranty of NEG-OK dated August 29, 1996 for the benefit of Bank One (3)
10.42 Unlimited Guaranty of NEG-OK, dated August 29, 1996 for the benefit of Credit Lyonnais (3)
10.43 Unlimited Guaranty of Boomer dated August 29, 1996 for the benefit of Bank One (3)
10.44 Unlimited Guaranty of Boomer dated August 29, 1996 for the benefit of Credit Lyonnais (3)
10.45 Form of Deeds of Trust, Mortgages, Security Agreements, Assignments of Production and Financing
Statements covering oil and gas properties of the Company and NEG-OK, dated August 29, 1996 (3)
</TABLE>
<PAGE> 68
<TABLE>
<S> <C>
10.46 First Amendment to Restated Loan Agreement dated October 31, 1996 among Bank One and Credit Lyonnais and
the Company, Guarantor and Boomer (9)
10.47 Second Amendment to Restated Loan Agreement dated October 31, 1996, among Bank One and Credit Lyonnais and
the Company, Guarantor and Boomer (10)
10.48 Third Amendment to Restated Loan Agreement dated October 31, 1996, among Bank One and Credit Lyonnais and
the Company, Guarantor and Boomer (10)
10.49 Fourth Amendment to Restated Loan Agreement dated October 31, 1996, among Bank One and Credit Lyonnais and
the Company, Guarantor and Boomer (16)
10.50 Purchase Agreement dated October 29, 1996, by and among the Company, Guarantor and Bear, Stearns & Co.
Inc., Smith Barney Inc. and Jefferies & Company, Inc. (the "Initial Purchasers") (9)
10.51 Executive Employment Agreement, dated August 25, 1997, between the Company and C. Dewayne Cravens (16)
12.1 Computation of Ratio of Earnings to Fixed Charges (16)
23.1 Consent of Ernst & Young LLP, Independent Auditors (16)
24.1 Power of Attorney (included in signature pages to this Form 10-K) (16)
27.1 Financial Data Schedule (16)
</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.
(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 17, 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 Annual Report on Form
10-KSB for the year ended December 31, 1992.
(9) Incorporated by reference to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995.
(10) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997.
(11) Incorporated by reference to the Company's Schedule 14A filed
April 25, 1997.
(12) Incorporated by reference to the Company's Form S-8 filed December
23, 1997.
(13) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997.
(14) Incorporated by reference to Alexander's Amendment No. 1 to
Registration Statement (No. 33-57142), dated February 26, 1993.
(15) Incorporated by reference to the Company's Form S-4 (No.
333-38075), filed October 16, 1997.
(16) Filed herewith.
<PAGE> 1
EXHIBIT 10.15
EXECUTIVE EMPLOYMENT AGREEMENT
This Executive Employment Agreement (the "Agreement") is made the 29th
day of January, 1998, by and between National Energy Group, Inc., a Delaware
corporation acting by and through its hereunto duly authorized officer (the
"Company"), and Frederic R. Miller (the "Executive").
WHEREAS, the Executive is presently in the employ of the Company in the
capacity of Senior Vice President of Finance and Administration and Chief
Financial Officer, and the Company is willing to provide certain employment
assurances to the Executive in the event of a Change of Control (as defined
below) of the Company as incentive and inducement for the Executive to continue
in such employment in his present capacity after a Change of Control; and
WHEREAS, in consideration of such employment assurances, the Executive
is willing to remain in the employ of the Company in the capacity of Senior Vice
President of Finance and Administration and Chief Financial Officer after a
Change of Control of the Company.
NOW, THEREFORE, in consideration of the premises and the mutual terms
and conditions hereof, the Company and the Executive hereby agree as follows:
1. Employment. In consideration of the benefits hereinafter specified,
the Executive hereby agrees to continue his employment with the Company in the
capacity of Senior Vice President of Finance and Administration and Chief
Financial Officer after a Change of Control of the Company and to discharge his
duties in such capacity during the term of this Agreement.
2. Exclusive Services. The Executive shall devote his full working
time, ability and attention to the business of the Company during the term of
this Agreement and shall not, directly or indirectly, render any services of a
business, commercial or professional nature to any other person, corporation or
organization, whether for compensation or otherwise, without the prior knowledge
and consent of the Board of Directors (the "Board") or President and Chief
Executive Officer of the Company; provided, however, that the provisions of this
Agreement shall not be construed as preventing the Executive from investing in
other non-competitive businesses or enterprises if such investments do not
require substantial services on the part of the Executive in the affairs or
operations of any such business or enterprise so as to significantly diminish
the performance by the Executive of his duties, functions and responsibilities
under this Agreement. During the term of this Agreement, the Executive shall
not, directly or indirectly, either through any kind of ownership (other than
ownership of securities of publicly held corporations of which the Executive
owns less than five percent (5%) of any class of outstanding securities) or as a
director, officer, agent, employee or consultant engage in any business that is
competitive with the Company.
3. Authority and Duties. During the term of this Agreement, the
Executive shall have such authority and shall perform such duties, functions and
responsibilities as are specified by the Bylaws of the Company, the Executive
Committee, the Board of Directors, or the President of the Company and/or as are
appropriate for the office of the Senior Vice President of Finance and
Administration and Chief Financial Officer and shall serve with the necessary
power and authority commensurate with such position. If the Company removes the
Executive from the office of the Senior Vice President of Finance and
Administration and Chief Financial Officer of the Company after a Change of
Control or limits, restricts or reassigns his authority and responsibility after
a Change of Control so as to be less significant than, or not comparable to,
that to which he held immediately preceding such Change of Control in his
capacity as Senior Vice President of Finance and Administration and Chief
Financial Officer without his prior mutual consent, the Executive
<PAGE> 2
shall be entitled to resign for good reason and receive the Severance Benefits
set forth in this Agreement.
4. Compensation. In consideration for the services to be rendered by
the Executive to the Company and/or its subsidiaries, the Company shall pay to
the Executive at least the gross cash compensation and shall award to the
Executive at least the bonuses as set forth below:
<TABLE>
<CAPTION>
==================================================================================================================================
ANNUAL PERIOD ANNUAL ANNUAL BONUS
BASE SALARY
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
For the one year period following 100% of the average of the Executive's 100% of the average of the bonuses
effective date of a Change of Control annual base salary in effect immediately paid to the Executive for each of the
prior to the Change in Control and of three fiscal years before the Change
the Executive's annual base salary for in Control
each of the immediately preceding two
years
- ----------------------------------------------------------------------------------------------------------------------------------
For the second year following effective 100% of the average of the Executive's 100% of the average of the bonuses paid
date of a Change of Control annual base salary on the date that is to the Executive for the three
one year after the Change in Control and immediately preceding fiscal years
of the Executive's annual base salary
for each of the immediately preceding
two years
- ----------------------------------------------------------------------------------------------------------------------------------
For the third year following effective 100% of the average of the Executive's 100% of the average of the bonuses paid
date of a Change of Control annual base salary on the date that is to the Executive for the three
two years after the Change in Control and immediately preceding fiscal years
of the Executive's annual base salary
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 his
participation in programs maintained by the Company for the benefit of
its employees and officers and to participate in new or amended
programs, including, but not limited to, medical, health, life,
accident and disability insurance programs, pension plans, incentive
compensation plans, stock
2
<PAGE> 3
option plans, stock appreciation rights plans, and limited stock
appreciation rights plans. The Company shall not terminate nor amend
such plans to the detriment of the Executive.
(b) To the extent that the Company has provided the Officer
with an automobile, club memberships, association and trade memberships
and other memberships prior to the Change of Control, the Company shall
continue to provide the Officer with such items, of a comparable
nature, following a Change of Control. The Company shall pay the
expenses of such automobile, memberships and subscriptions.
(c) The Executive shall be reimbursed for any business
expenses reasonably incurred in carrying out his duties, functions and
responsibilities upon presentation of expense reports to the Company.
6. Term. This Agreement shall have a term of three (3) years commencing
on the effective date of a Change of Control and shall be automatically extended
on the 9th day of each and every calendar month during the term of this
Agreement for an additional calendar month so that at the beginning of each and
every month during the term of this Agreement there shall be a remaining term of
three (3) years (but in no event beyond the time the Executive reaches age 65)
unless and until the Company gives written notice to the Executive that the term
of this Agreement shall not be further so extended, in which case the Executive
shall be entitled to resign for good reason. The provisions of this Section 6
shall apply to each Change of Control irrespective of any Changes of Control
which may have occurred previously.
7. Severance Benefits After Change Of Control. In addition to such
compensation and other benefits payable to or provided for the Executive as
authorized by the Board from time to time, Executive shall be entitled to
receive in lieu of the compensation described in paragraph 4 hereof, and the
Company shall pay or provide to the Executive the following severance benefits
(the "Severance Benefits") in the event that, during the term hereof, the
Company discharges the Executive without cause or the Executive resigns for good
reason after a Change of Control, to-wit:
(a) The Company shall pay to the Executive a lump sum cash
payment (multiplied by the applicable factor described below) payable
on such date of termination of employment equal to the Executive's
"base compensation" then in effect, which shall, and is defined to,
consist of the sum of (i) the Executive's annual base salary then in
effect, (ii) the average of the amounts of the last three annual cash
bonuses paid or granted to, or earned by, the Executive, and (iii) the
average of the total amounts of the Company's contributions to its
retirement plan allocable to the Executive on a fully vested basis for
the last three fiscal years of the retirement plan. The amount of the
"base compensation" payable to the Executive pursuant to this Section
7(a) shall be 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.
3
<PAGE> 4
(c) The Company shall continue the participation of the
Executive in all life, accident, disability, medical, dental and all
other health and casualty insurance plans maintained by the Company for
its officers and employees for a period of one (1) year after the date
of such termination of employment or for such longer period as may be
required by applicable law.
(d) Notwithstanding any provision of this Agreement to the
contrary, if the Executive is a disqualified individual (as the term
"disqualified individual" is defined in Section 280G of the Code) and
if any portion of the Severance Benefits under this Section 7 of this
Agreement would be an excess parachute payment (as the term "excess
parachute payment" is defined in Section 280G of the Code) but for the
application of this sentence, then the amount of the Severance Benefits
otherwise payable to the Executive pursuant to this Agreement will be
reduced to the minimum extent necessary (but in no event to less than
zero) so that no portion of the Severance Benefits, as so reduced,
constitutes an excess parachute payment. The determination of whether
any reduction in the amount of the Severance Benefits is required
pursuant to this Section 7(d) will be made by the Company's independent
accountants. The fact that the Executive has his Severance Benefits
reduced as a result of the limitations set forth in this Section 7(d)
will not of itself limit or otherwise affect any rights of the
Executive arising other than pursuant to this Agreement.
(e) The Company has determined that the amounts payable under
this Agreement constitute reasonable compensation for services
rendered. Accordingly, notwithstanding any other provision hereof,
unless such action would be expressly prohibited by applicable law, if
any amount is paid pursuant to this Agreement which is determined to be
subject to the excise tax imposed by Section 4999 of the Code, the
Company will pay to the Executive an additional amount in cash equal to
the amount necessary to cause the aggregate amount payable under this
Agreement, including such additional cash payment (net of all federal,
state and local income taxes and all taxes payable as the result of the
application of Sections 280G and 4999 of the Code), to be equal to the
aggregate amount payable under this Agreement, excluding such
additional payment (net of all federal, state and local income taxes),
as if Sections 280G and 4999 of the Code (and any successor provisions
thereto) had not been enacted into law.
8. Place of Performance. During the term hereof:
(a) The principal office of the Executive and the principal
place for performance by him of his duties, functions and
responsibilities under this Agreement shall be in the City or suburbs
of Dallas, Texas.
(b) It is recognized that the performance of the Executive's
duties hereunder may occasionally require the Executive, on behalf of
the Company, to be away from his principal office for business reasons.
Unless consent of the Executive is obtained, such periods of being away
from his principal office on behalf of the Company shall not exceed
thirty (30) calendar days per year.
9. Definition of Change of Control. For purposes of this Agreement,
"Change of Control" shall mean the occurrence of one or more of the following
events: (i) a person or entity or group (as that term is used in Section
13(d)(3) of the Exchange Act) of persons or entities shall have become the
beneficial owner of a majority of the securities of the Company ordinarily
having
4
<PAGE> 5
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 66b% of the directors then still in office who were either directors at
the beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
Board of Directors of the Company then in office, (iii) any sale, lease,
exchange or other transfer (in one transaction or a series of related
transactions) of all, or substantially all, the assets of the Company to any
person or entity or group (as so defined in Section 13(d)(3) of the Exchange
Act) of persons or entities (other than any wholly owned subsidiary of the
Company), or (iv) the merger or consolidation of the Company into or with
another corporation or the merger of another corporation into the Company with
the effect that immediately after such transaction any person or entity or group
(as so defined in Section 13(d)(3) of the Exchange Act) of persons or entities,
or the stockholders of any other entity, shall have become the beneficial owner
of securities of the surviving corporation of such merger or consolidation
representing a majority of the voting power of the outstanding securities of the
surviving corporation ordinarily having the right to vote in the election of
directors. The Alexander Energy Corporation merger, however it might be
structured, shall not constitute a Change of Control under this Agreement.
10. Discharge with Cause. For the purposes of this Agreement, the
Company shall be deemed to have discharged the Executive for cause only if any
one of the following conditions existed:
(a) If the Executive shall have willfully breached or
habitually neglected his duties and responsibilities as the Senior Vice
President of Finance and Administration and Chief Financial Officer 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 his resignation:
(a) If the Company shall have assigned to the Executive
authority and responsibilities less significant than, or not comparable
to, that which he had in his capacity as Senior Vice President of
Finance and Administration and Chief Financial Officer immediately
preceding a Change of Control or shall otherwise so limit or restrict
his authority and responsibilities after a Change of Control;
(b) The Company shall have reduced the Executive's annual base
salary below his annual base salary in effect on the effective date of
a Change of Control or the Company shall have reduced the Executive's
annual cash bonus below that of his last annual cash bonus prior to the
effective date of a Change of Control;
5
<PAGE> 6
(c) The Company shall have taken any actions having the
purpose or intent and the effect of inducing the Executive to resign,
such as failing to provide the Executive with all personnel benefits
which are otherwise generally provided to executive officers of the
Company or reasonably necessary or appropriate for the performance by
the Executive of his duties as Senior Vice President of Finance and
Administration and Chief Financial Officer of the Company; or
(d) The Company shall have declined to extend the term of this
Agreement pursuant to Section 6 hereof.
12. Termination Upon Death. This Agreement shall terminate immediately
upon the date of the death of the Executive.
13. Remedies. If the Executive shall file any judicial action for
enforcement of this Agreement and successfully recover compensation or damages,
the Executive shall be entitled to recover from the Company an additional amount
equal to interest at ten percent (10%) per annum on the amount recovered from
the date such amount was due and payable together with all expenses and
reasonable attorneys' fees incurred in obtaining legal advice and counselling
respecting his rights under this Agreement and in prosecuting and disposing of
such action. The provisions of this Section shall be cumulative and without
prejudice to any other right or remedy to which the Executive may be entitled
either at law, in equity or under this Agreement and shall not constitute the
exclusive remedy of the Executive for breach of this Agreement.
14. General Provisions.
(a) Notices. Any notices to be given hereunder by either party
to the other may be given either by personal delivery in writing or by
fax, or by mail, registered or certified, postage prepaid, return
receipt requested, addressed to the parties at their respective
addresses set forth below their signatures to this Agreement, or at
such other addresses as they may specify to the other in writing.
(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.
6
<PAGE> 7
(e) Binding Effect. This Agreement shall extend to and be
binding upon and inure to the benefit of the parties hereto, their
respective heirs, representatives, successors and assigns. All of the
provisions of this Agreement shall be fully applicable to any successor
to the Company resulting from a Change of Control. The Company agrees
that in the event of a tender or exchange offer, merger, consolidation
or liquidation or any such similar event involving the Company, its
securities or assets, it shall reveal the existence of this Agreement
to the acquiring person or entity. The Company further agrees that if
such action is not inconsistent with the best interests of the Company,
it shall condition approval of any transactions proposed by the
acquiror upon obtaining the consent, in writing, of the potential
successor to the Company to be bound by this Agreement. In the event
the Executive dies prior to the termination of this Agreement, any
compensation or other payment due and owing to the Executive on or
before the date of the Executive's death shall be paid to his estate,
executors, administrators, heirs or legal representatives. Since the
duties and services of the Executive hereunder are special, personal
and unique in nature, the Executive may not transfer, sell or otherwise
assign his rights, obligations or benefits under this Agreement.
(f) Waiver. The waiver by either party hereto of a breach of
any term or provision of this Agreement shall not operate or be
construed as a waiver of a subsequent breach of the same provisions by
either party or of the breach of any other term or provision of this
Agreement.
(g) Titles. Titles of the paragraphs herein are used solely
for convenience and shall not be used for interpretation or construing
any word, clause, paragraph or provision of this Agreement.
(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 January
2, 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. 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.
7
<PAGE> 8
IN WITNESS WHEREOF, the Company and the Executive have executed this
Executive Employment Agreement as of the day and year first written above,
effective as of the date specified above.
COMPANY:
NATIONAL ENERGY GROUP, INC.
By: /s/ MILES D. BENDER
--------------------------------------
Miles D. Bender
President and Chief Executive Officer
4925 Greenville Avenue, Suite 1400
Dallas, Texas 75206
(214) 692-9211
(214) 692-5055 (Fax)
EXECUTIVE:
/s/ FREDERIC R. MILLER
-----------------------------------------
FREDERIC R. MILLER
3701 Atrium Lane
Plano, Texas 75075
8
<PAGE> 1
EXHIBIT 10.16
[NATIONAL ENERGY GROUP, INC. LETTERHEAD]
May 6, 1997
VIA HAND DELIVERY
Mr. R. Thomas Fetters, Jr.
101 Red Brick Circle
Lafayette, Louisiana 70503
Re: Separation Agreement
Dear Mr. Fetters:
National Energy Group, Inc. (the "Company") recognizes your service to the
Company. This letter confirms the discussions we have held concerning the
termination of your employment with the Company, and the Company's offer and
your acceptance of this proposed separation agreement (this "Separation
Agreement") on the terms set forth below.
1. Termination of Employment. Your employment with the Company, where
you have been employed as a Senior Vice President, is terminated
effective May 6, 1997 (hereinafter the "Separation Date"), at which
time your Employment Agreement dated January 1, 1996 (the "Employment
Agreement") shall also terminate.
2. Salary and Benefits. In accordance with the Company's existing
policies, you have received, will receive, or are receiving with this
letter the following payments and benefits pursuant to your employment
with the Company and your participation in the Company's benefit
plans:
(a) Payment of your regular base salary through May 15, 1997, less
all legal deductions; and
(b) Payment of accrued and unused vacation leave, if any, through
the Separation Date, less all legal deductions.
<PAGE> 2
Mr. R. Thomas Fetters, Jr.
May 6, 1997
Page Two
The amounts paid in accordance with subparagraphs (a) and (b) of this
Paragraph are gross amounts, subject to lawful deductions, including
any deductions you have previously authorized.
Your paid group health insurance benefits continue through May 31,
1997. After the Separation Date, you are entitled at your option to
continue your group health insurance coverage at your expense (but
subject to the provisions of Paragraph 3 (b) below), in accordance
with applicable law. Please complete the COBRA election form, which
will be furnished to you, and return it to Ms. Patti Davis-Sebastian
at your earliest convenience, if you elect to continue such insurance
coverage.
Payment of any benefits to which you have vested entitlement under the
terms of the employee benefit plans established by the Company,
including but not limited to the Company 401(k) Plan, shall be paid to
you in accordance with the provisions of such plans.
The Company will settle promptly all authorized reimbursable business
expenses, if any, when you have submitted appropriate expense reports
along with the required receipts and documenting information. These
must be submitted by the close of business on or before May 31, 1997.
3. Special Separation Benefits. In consideration of the General Release,
the Confidentiality of Separation Agreement and Nondisparagement
provision, and the Agreement Regarding Solicitation of Employees and
Consultants set forth in this Agreement, and contingent upon your
acceptance of the terms of this Agreement, the Company offers you the
following Special Separation Benefits, in addition to the benefits you
will receive pursuant to Paragraph 2:
(a) Termination Allowance. A termination allowance in the amount
of $82,500, which is equivalent to your base salary for six
(6) months payable concurrently with the regularly scheduled
pay periods of the Company in twelve (12) equal installments
of $6,875 through November 15, 1997; provided that the first
installment for payment through May 31, 1997 shall be paid
upon execution and delivery of this Separation Agreement.
(b) Extension of Health Care Benefits. Reimbursement to you of
eighty-five percent (85%) of the cost of your COBRA premium
for group health insurance coverage for a period of six (6)
months up until and including November 30, 1997, if you elect
to continue and/or convert for that period under the Company's
group health insurance policy.
<PAGE> 3
Mr. R. Thomas Fetters, Jr.
May 6, 1997
Page Three
(c) Forfeiture. In the event you accept other employment or
become eligible or participate in a health coverage insurance
plan offered by another employer, you acknowledge and agree
that such Special Separation Benefits shall cease and no
longer be an obligation of the Company.
By execution of this Separation Agreement, you acknowledge and agree
that for purposes of unemployment compensation benefits, the amounts
to be paid as specified in this Paragraph constitute wages in lieu of
notice for the period from the Separation Date through November 15,
1997. Accordingly, you may not be eligible to receive unemployment
compensation benefits during this time period.
4. Return of Property. Whether or not you accept the terms of this
Separation Agreement, you must return to the Company any and all items
of its property, including without limitation, office keys, security
access cards, computers, equipment, credit cards, forms, files,
manuals, correspondence, business records, personnel data, lists of
employees, salary and benefits information, work product, maps, data
and files relating to wells, leases, partners and/or contractors,
seismic data and files, contracts, contract information, Prospect
information and plans for future Prospects, brochures, catalogs,
computer tapes and diskettes, and data processing reports, and any and
all other documents or property which you have had possession of or
control over during the course of your employment, and which you have
not already returned to the Company. You agree that you will return
such property to the Company by no later than the close of business on
or before May 6, 1997, or as soon thereafter as is possible with
respect to any items not then immediately available or which you later
find in your possession. The provisions of this Paragraph 4 do not
prohibit the maintenance by you of copies of any non-confidential,
non-proprietary information, such as reading files, work papers,
calculations, flowcharts and other similar information reflecting the
performance of your job duties and responsibilities.
5. Use of Confidential Information. You acknowledge and agree that,
except for your knowledge and training to compete in the marketplace,
all of the non-public documents and information to which you have had
access during your employment, including but not limited to all
information pertaining to any specific business transactions in which
the Company or any other Released Parties (as defined in Paragraph 6
below) were, are, or may be involved, all information concerning
salary and benefits paid to employees of the Company or any of the
other Released Parties, all personnel information relating in any way
to current or former employees of the Company or any of the other
Released Parties, all non-public information obtained in the course of
employment pertaining to acquisitions, divestitures, wells, Prospects
and development plans of the Company or any of the other Released
Parties, lease holdings and lease block bid information and
strategies, all financial
<PAGE> 4
Mr. R. Thomas Fetters, Jr.
May 6, 1997
Page Four
budgetary information, all other information specified in Paragraph 4
above, and in general, the business and operations of the Company or
any of the other Released Parties in addition to any other work
product, calculations, files, maps, logs, flowcharts and other related
and/or similar information to which you had access through the
Company, its partners or consultants (and in particular, Sandefer Oil
and Gas Company, Robert A. Potosky and W. David Willig) are considered
confidential and are not to be disseminated or disclosed by you to any
other parties, except as may be required by law or judicial process.
You further agree that in the event it appears that you will be
compelled by law or judicial process to disclose such confidential
information, you will notify Mr. Philip D. Devlin, General Counsel, in
writing at 4925 Greenville Avenue, Suite 1400, Dallas, Texas, 75206,
immediately upon your receipt of any such notice, a subpoena or other
legal process.
6. General Release.
(a) Except for the undertakings of the Company to be performed
hereunder and in consideration of the Special Separation
Benefits described above, you and your family members, heirs,
successors, and assigns (collectively, the "Releasing
Parties") hereby release, acquit, and forever discharge any
and all claims and demands of whatever kind or character,
whether vicarious, derivative, or direct, that you or they,
individually, collectively, or otherwise, may have or assert
against (i) National Energy Group, Inc. or (ii) any officer,
director, stockholder, fiduciary, agent, employee,
representative, insurer, attorney, or any successors and
assigns of National Energy Group, Inc. or the individuals
referenced in (ii) above (collectively, the "Released
Parties"). This Separation Agreement includes but is not
limited to any claim or demand based on any federal, state, or
local statutory or common law that applies or is asserted to
apply, directly or indirectly, to the formation of your
employment relationship, your employment relationship, or the
termination of your employment relationship with the Company.
Thus, you and the other Releasing Parties agree not to make
any claims or demands against the Company or any of the other
Released Parties such as for wrongful discharge; unlawful
employment discrimination; retaliation; breach of contract
(express or implied); breach of the duty of good faith and
fair dealing; violation of the public policy of the United
States, the State of Texas, or any other state; intentional or
negligent infliction of emotional distress; tortious
interference with contract; promissory estoppel; detrimental
reliance; defamation of character; duress; negligent
misrepresentation; intentional misrepresentation or fraud;
invasion of privacy; loss of consortium; assault; battery;
conspiracy; bad faith; negligent hiring or supervision; any
intentional or negligent act of personal injury; any alleged
act of harassment or intimidation; or any other intentional or
negligent tort; or any alleged violation of the Age
Discrimination in Employment Act of 1967; Title VII of the
Civil Rights Act of 1964; the Americans with Disabilities Act
of 1990; the Employee Retirement Income Security Act of 1974;
the Fair Labor Standards Act; the Fair Credit Reporting Act;
the Texas Commission on Human Rights Act; or the Texas Wage
Payment Statute, Tex. Rev. Civ. Stat. Ann. art. 5155.
<PAGE> 5
Mr. R. Thomas Fetters, Jr.
May 6, 1997
Page Five
(b) Except for your undertakings to be performed hereunder, the
Company and the other Released Parties hereby release, acquit,
and forever discharge any and all claims and demands of
whatever kind or character, whether vicarious, derivative, or
direct, that it or they, individually, collectively, or
otherwise may have or assert against you or any of the other
Releasing Parties. This Separation Agreement includes, but is
not limited to, any claim or demand based on any federal,
state, or local statutory or common law that applies or is
asserted to apply, directly or indirectly, to the formation of
your employment relationship, your employment, or the
termination of your employment relationship with the Company.
(c) Except as otherwise provided herein, the effect of the
Severance Agreement is to mutually release, acquit, and
forever discharge any and all claims and demands of whatever
kind or character, that either party, the Releasing Parties,
or the Released Parties may now have, or hereafter have or
assert against each other arising out of the employment
relationship (including the formation and termination thereof)
which has existed between you and the Company. This mutual
general release does not include: (i) the executory
obligations of either party yet to be performed, or (ii) any
rights, claims or obligations which may accrue as between the
parties after the date of this Separation Agreement.
7. Confidentiality of this Separation Agreement and Nondisparagement. In
consideration of the Special Separation Benefits described above, you
agree that the terms of this Separation Agreement shall be and remain
confidential, and shall not be disclosed by you to any party other
than your spouse, attorney, accountant or tax return preparer;
provided such persons have agreed to keep such information
confidential, and except as may be required by law or judicial
process. You further agree, except as requested by the Company or as
compelled by law or judicial process, not to cooperate or supply
information of any kind in any proceeding, investigation, or inquiring
raising issues under the Age Discrimination in Employment Act of 1967,
Title VII of the Civil Rights Act of 1964, the Americans with
Disabilities Act of 1990, the Employee Retirement Income Security Act
of 1974, the Fair Labor Standards Act, the Fair Credit Reporting Act,
the Texas Commission on Human Rights Act, ro the Texas Wage Payment
Statute, Tex. Rev. Civ. Stat. Ann. art. 5155, or any other federal,
state, or local law, involving the formation of your employment
relationship, your employment relationship, the termination of your
employment relationship, or the employment of other persons by the
Company or any of the Released Parties.
<PAGE> 6
Mr. R. Thomas Fetters, Jr.
May 6, 1997
Page Six
You further agree not to make any statement, oral or written, which
directly or indirectly impugns the quality or integrity of the
Company's or any of the other Released Parties' business practices, or
to make any other disparaging or derogatory remarks about the Company
or any of the other Released Parties, their officers, directors,
stockholders, managerial personnel, or other employees or their
partners and consultants to any other parties. You further agree and
acknowledge that should you breach this obligation, in addition to any
other remedy the Company may have at law or in equity, you may be
required to repay the Special Separation Benefits provided to you by
this Separation Agreement, but all other provisions of this Separation
Agreement shall remain in full force and effect.
In consideration of the General Release, the Confidentiality of
Separation Agreement and Nondisparagement provision, and the Agreement
Regarding Solicitation of Employees and Consultants, set forth herein,
the Company agrees that is shall instruct its officers, directors,
managerial personnel, or other employees not to make any disparaging
or derogatory remarks about you.
8. Agreement Regarding Solicitation of Employees. In consideration of
the monetary payments and other benefits provided to you or on your
behalf by the Company in this Separation Agreement, you acknowledge
and agree that for a period of two (2) years following the termination
of your employment with the Company, you will not, directly or
indirectly, for your own account or for the benefit of any other
person or party, solicit, induce, entice, or attempt to entice any
employee, or independent contractor of the Company to terminate his or
her employment relationship, agreements or contracts with the Company.
You acknowledge and agree that the Company has an exclusive agreement
with Sandefer Oil and Gas Company et al. dated January 1, 1996 (the
"SOG Agreement") as amended April 15, 1997, and that the provisions of
this Paragraph 8 shall specifically apply to the SOG Agreement and the
services of Mr. Robert A. Potosky and Mr. W. David Willig.
9. Nonadmission of Liability and Wrongdoing. It is acknowledged that
this Separation Agreement does not in any manner constitute an
admission of liability or wrongdoing on the part of the Executive and
the other Released Parties, but that Executive and the other Released
Parties expressly deny any such liability or wrongdoing, and enter
into this Separation Agreement for the sole purpose of avoiding
further trouble and expense; and that, except to the extent necessary
to enforce this Separation Agreement, neither this Separation
Agreement, nor any part of it may be construed, used, or admitted into
evidence in any judicial, administrative, or arbitral proceedings as
an admission of any kind by the Company or any of the other Released
Parties.
<PAGE> 7
Mr. R. Thomas Fetters, Jr.
May 6, 1997
Page Seven
10. Authority to Execute. You represent and warrant that you have the
authority to execute this Separation Agreement on behalf of all the
Releasing Parties. You further agree to indemnify fully and hold
harmless the Company and any of the other Released Parties from any
and all claims brought by the Releasing Parties or derivative of your
own, including the amount of any such claims the Company or any of the
other Released Parties are compelled to pay, and the costs and
attorney's fees incurred in defending against all such claims.
11. GOVERNING LAW AND INTERPRETATION. THIS SEPARATION AGREEMENT AND THE
RIGHTS AND DUTIES OF THE PARTIES UNDER IT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS. If any
provision of this Separation Agreement is held to be unenforceable,
such provision shall be considered separate, distinct, and severable
from the other remaining provisions and shall not affect the validity
or enforceability of such other remaining provisions, and that, in all
other respects, this Separation Agreement shall remain in full force
and effect. If any provision of this Separation Agreement is held to
be unenforceable as written by may be made to be enforceable by
limitation thereof, then such provision shall be enforceable to the
maximum extent permitted by applicable law. The language of all
parts of this Separation Agreement shall in all cases be construed as
a whole, according to its fair meaning, and not strictly for or
against any of the parties.
12. Expiration of Offer. The Company's offer of the proposed Special
Separation Benefits will expire at midnight on the tenth day (the
"Expiration of Offer") following the date of this correspondence,
i.e., on May 16, 1997. You may accept this offer at any time before
the Expiration of Offer by executing this Separation Agreement and
returning it to the designated representative of the Company. Whether
or not you execute this Separation Agreement, you will receive the
items set forth in Paragraph 2 (a) and (b) and are required to follow
the obligations set forth in Paragraphs 4 and 5 hereof.
13. The Effective Date. This Separation Agreement will become effective
and enforceable seven (7) days after your execution hereof (the
"Effective Date"). At any time before the Effective Date, you may
revoke your acceptance. You further agree to execute and deliver to
the Company within seven (7) days of the execution of this Separation
Agreement, the Reaffirmation of this Separation Agreement, attached
hereto as Exhibit "A".
14. Consultation With Counsel. You have the right to consult, and are
encouraged to consult, an attorney before executing this Separation
Agreement.
<PAGE> 8
Mr. R. Thomas Fetters, Jr.
May 6, 1997
Page Eight
15. Voluntary Agreement. You acknowledge that execution of this
Separation Agreement is knowing and voluntary on your part, that you
have had reasonable time to deliberate regarding its terms, and that
you have had the right to consult with an attorney if you so desire.
16. Entire Agreement. This Separation Agreement contains and constitutes
the entire understanding and agreement between you and the Company and
may be modified only by a writing of contemporaneous or subsequent
date executed by both you and an authorized officer of the Company.
If you are in agreement with the foregoing provisions, please execute the
attached duplicate copy of this letter in the space provided below. This
Separation Agreement shall then constitute a valid and binding agreement by and
between the Company and you, effective as of seven (7) days after the date of
your execution hereof and delivery to the Company.
Sincerely,
National Energy Group, Inc. ACCEPTED AND AGREED THIS
13TH DAY OF MAY, 1997.
By: /s/ MILES D. BENDER /s/ R. THOMAS FETTERS, JR.
---------------------------- --------------------------------------
Name: Miles D. Bender Name: Mr. R. Thomas Fetters, Jr.,
Title: President and CEO an Individual
<PAGE> 1
EXHIBIT 10.17
No. CC-97-8806-A
R. THOMAS FETTERS, JR. ) IN COUNTY COURT
vs. ) AT LAW NUMBER ONE
NATIONAL ENERGY GROUP, INC., ) DALLAS COUNTY, TEXAS
and MILES G. BENDER
COMPROMISE AND SETTLEMENT AGREEMENT
WHEREAS, NATIONAL ENERGY GROUP, INC., a Delaware corporation, herein
abbreviated "NEG" entered into an Employment Agreement with R. THOMAS FETTERS,
JR., herein shortened to "Fetters" on or about January 1, 1996;
WHEREAS, NEG, through its President and Chief Executive Officer, MILES
D. BENDER, herein shortened to "Bender", entered into a Separation Agreement
pertaining to the termination of the employment of Tom Fetters on or about May
6, 1997;
WHEREAS, a dispute has arisen between NEG and Fetters regarding his
employment and events related to his employment and termination;
WHEREAS, Fetters filed suit against NEG and BENDER in County Court at
Law Number One, Dallas County, Texas, on September 22, 1997,
cause # CC-97-8806-A. The causes of action by Fetters are identified in
Plaintiff's Original Petition, which lawsuit is pending;
WHEREAS, bona fide disputes and controversies exist between the
parties, both as to liability and the amount of liability, which they desire to
compromise and settle to the terms of this Compromise and Settlement Agreement;
NOW THEREFORE in consideration of the mutual agreements contained
herein, the parties enter into the following agreements:
(1) PAYMENT OF AGREED CONSIDERATION. Contemporaneously with the
execution of this agreement, NEG agrees to pay to Fetters the sum of
$75,625.00, plus an aggregate amount of $10,500.00 in attorney's fees
to his attorneys, Charles B. Crowell and John Emmett, P.C.
(2) COBRA BENEFITS, NEG represents that it has instructed its
insurance carrier, EPOCH Group to keep in force COBRA benefits of
Fetters, and contemporaneous with the execution of this agreement, in
addition to the payment of sums provided for in paragraph (1), NEG
agrees to reimburse Fetters 85% of the cost of his COBRA premiums for
group health insurance coverage for the period from June
Compromise and Settlement Agreement - Page 1
Fetters. C&S
<PAGE> 2
1, 1997 through November 30, 1997, being the sum of $2,999.05.
(3) COMPREHENSIVE RELEASE BY FETTERS EXCLUDES COMPANY BENEFITS. Upon
the payment of said sums, Fetters releases and forever discharges NEG,
its President, and all other employees, officers, and directors, and
agents and representatives and Bender from any claims, causes of
action, controversies, and demands, including those of whatever nature
or character, now known and those unknown, arising out of or in any
way related to the employment of Fetters, excluding, however, the
interest of Fetters in the company's benefits plans, including COBRA,
which interest is acknowledged by NEG and Bender, and from all
transactions arising out of or relating to the agreements between them
and all action taken pursuant to said agreements, excluding the
company benefits due Fetters.
(4) COMPREHENSIVE RELEASE BY NATIONAL ENERGY AND BENDER. Upon the
payment to Fetters, National Energy Group, Inc., and Miles D. Bender
release and forever discharge, Fetters, his heirs, personal
representative, successors and assigns, from any claims, causes of
action, controversies, and demands, including those of whatever nature
or character, now known and those unknown, arising out of or in any
way related to the employment of Fetters, and from all transactions
arising out of or relating to the agreements between them and all
action taken pursuant to said agreements, excluding the obligations of
Fetters in this agreement.
(5) DISPUTED CLAIMS ARE NOT AN ADMISSION OF LIABILITY. The claims
asserted by Fetters against NEG and Bender are disputed by them and
the execution of this agreement is not an admission of liability on
the part of any party hereto.
(6) CORRECTION OF MISIDENTIFICATION OF DATES. The recitation of
dates in this agreement are not contractual in nature. Any incorrect
date or any dispute as to dates shall not affect the validity or
extent of the releases granted herein. Fetters was only employed one
time by NEG, and this document pertains to that period of employment.
Each party agrees that a misidentification or mischaracterization of
any date is to be corrected to reflect the actual dates, and shall not
affect the validity of the releases granted herein or the
extinguishment of the causes of action identified in numbered
paragraphs (3) and (4).
(7) MERGER CLAUSE. This agreement contains the entire agreement
between the parties and supersedes all prior agreements, oral or
written, arrangements, or understandings between the parties relating
to the subject matter. Each party hereto acknowledges that each agrees
that any oral understandings, statements or representations contrary
to the terms of this agreement are superseded by this agreement. This
agreement cannot be altered or modified except by a written agreement
signed by the parties.
Compromise & Settlement Agreement - Page 2
<PAGE> 3
(8) DUPLICATE ORIGINALS OF THIS AGREEMENT. This Agreement is to be
executed in multiple duplicate originals, each of which is to be "an
original". Each signatory in a representative capacity warrants that
his signature is an authorized act of the entity on whose behalf the
signature is signed.
(9) EXECUTION OF AGREEMENT. Whenever the expression "execution of this
agreement" or substantially similar language is used in this agreement
it shall mean that each party has received a signed original of this
agreement, and the party to be paid any sums under this agreement has
received such payment.
(10) DISMISSAL OF PENDING LAWSUIT. Upon execution of this agreement,
together with the payment of the sums provided for in paragraphs (1)
and (2), an Agreed Motion and Order of Dismissal with Prejudice shall
be submitted to the court for entry in the lawsuit, with each of the
parties to pay their respective court costs.
(11) PROHIBITED DISCLOSURES OF CONFIDENTIAL INFORMATION. All parties
agree that none of them will at any time, discuss with or inform any
parties not a party to the pending lawsuit or parties not a party to
this agreement, any of the facts related to the disputes being
compromised, including the terms and conditions of this Compromise and
Settlement Agreement, all of which are strictly confidential between
the parties to this agreement. All parties agree that the "facts
related to the disputes" include all acts and transactions plead in
the pending litigation, as well as those acts and transactions
included in the releases which are the subject of this agreement. Acts
and transactions include conversations related to any acts or
transactions. This confidentiality extends not only to factual
information, but also to expressions of opinions, beliefs and personal
comments. The only permissible statement or comment to be made by
either party concerning the "facts related to the dispute" or and how
the dispute was concluded is "All claims have been compromised", or
words to that effect, provided that in the event either party is
compelled by judicial process or court order to make any such
disclosures, such party shall timely notify the other party of such
judicial process or court order.
Fetters further agrees that prior to May 6, 1999, he will not
disclose any confidential or proprietary information of NEG learned
during his employment with NEG. Any information which was known to
Fetters prior to his employment with NEG which is in the public domain
other than through Fetters or comes to Fetters through a third party
shall not be deemed confidential and proprietary information and is
excluded from this agreement. Further, any testimony by Fetters under
legal process is excluded and shall not be a breach of this paragraph,
provided NEG has been given timely notice of such legal process so
that it may file a motion for protective order or other appropriate
motion to prevent such disclosure.
NATIONAL ENERGY GROUP., INC.
Compromise & Settlement Agreement - Page 3
<PAGE> 4
By: /s/ MILES BENDER /s/ MILES D. BENDER
- ---------------------------------- ---------------------------------
MILES BENDER, PRESIDENT AND CEO MILES D. BENDER, Individually
Date: November 18, 1997. Date: November 18, 1997.
/s/ R. THOMAS FETTERS, JR.
- ----------------------------
R. THOMAS FETTERS, JR.
Date: November 1997
Compromise & Settlement Agreement - Page 4
<PAGE> 1
EXHIBIT 10.18
[NATIONAL ENERGY GROUP, INC. LETTERHEAD]
October 31, 1997
VIA HAND DELIVERY
Mr. Robert A. Imel
10110 Gaywood Road
Dallas, Texas 75229
Re: Separation Agreement
Dear Mr. Imel:
National Energy Group, Inc. (the "Company") recognizes your service to the
Company. This letter confirms the discussions we have held concerning the
resignation of your employment from the Company, and the Company's offer and
your acceptance of this proposed separation agreement (this "Separation
Agreement") on the terms set forth below.
1. Resignation; Termination of Employment. You agree to resign as an
officer of the Company and its Chief Financial Officer effective
October 31, 1997. Your employment with the Company, where you have
been employed as a Senior Vice President and Chief Financial Officer,
is terminated effective December 6, 1997 (hereinafter the "Separation
Date"), at which time your Employment Agreement dated January 1, 1996
and any other agreements regarding your employment with the Company
shall also terminate.
2. Salary and Benefits. In accordance with the Company's existing
policies, you have received, will receive, or are receiving with this
letter the following payments and benefits pursuant to your employment
with the Company and your participation in the Company's benefit
plans:
(a) Payment of your regular base salary of $15,000.00 per month
through December 6, 1997, less all legally required
deductions; and
(b) Payment of accrued and unused vacation leave, if any, through
December 6, 1997, less all legally required deductions.
<PAGE> 2
Mr.Robert A. Imel
October 31, 1997
Page 2
The amounts paid in accordance with subparagraphs (a) and (b) of this
Paragraph are gross amounts, subject to lawful deductions, including
any deductions you have previously authorized or authorize prior to
your Separation Date.
Your paid group health insurance benefits shall continue through
December 31, 1997. After the Separation Date, you are entitled at
your option to continue your group health insurance coverage at your
expense (but subject to the provisions of Paragraph 3 (b) below), in
accordance with applicable law. Please complete the COBRA election
form, which will be furnished to you, and return it to Ms. Patti
Davis-Sebastian at your earliest convenience, if you elect to continue
such insurance coverage.
Payment of any benefits to which you have vested entitlement under the
terms of the employee benefit plans established by the Company,
including but not limited to the Company 401(k) Plan, shall be paid to
you in accordance with the provisions of such plans.
3. Special Separation Benefits. In consideration of the General Release,
the Confidentiality of Separation Agreement and Nondisparagement
provision, and the Agreement Regarding Solicitation of Employees set
forth in this Agreement, and contingent upon your acceptance of the
terms of this Agreement, the Company offers you the following Special
Separation Benefits, in addition to the benefits you will receive
pursuant to Paragraph 2; provided that the Special Separation Benefits
described in this Paragraph 3 shall be subject to and not become due
and payable until such time that you have made actual payment of
amounts owed to the Company for loans, salary advances and/or
non-reimbursable expense advances, which you and the Company agree to
be an amount equal to Thirty-Three Thousand Five Hundred Eighty
Dollars and 93/100 Cents ($33,580.93):
(a) Termination Allowance. A termination allowance in the amount
of Eighty-Five Thousand Dollars ($85,000.00), which is
equivalent to your base salary for a period of five (5) months
from your Separation Date through April 30, 1998 payable on
execution and delivery of this Separation Agreement and
subject to all legally required or authorized deductions; and
(b) Extension of Health Care Benefits. Reimbursement to you on a
monthly basis of eighty-five percent (85%) of the cost of your
COBRA premium for group health insurance coverage for a period
of eighteen (18) months commencing January 1, 1998 up through
and including June 30, 1999, provided you elect to continue
and/or convert to COBRA coverage for such eighteen (18) month
period under the
<PAGE> 3
Mr.Robert A. Imel
October 31, 1997
Page 3
Company's group health insurance policy and furnish the
Company an invoice for each such payment actually made by you
or on your behalf.
(c) Personal Leave. From and after October 30, 1997 until your
Separation Date, the Company shall grant you a personal leave
of absence, during which time you shall receive your full
salary and benefits; provided that you shall make your
services available to the Company from time to time during
such period as may be requested to assist the Company with its
business and operations.
(d) Stock Options. The Company agrees that it shall help you
facilitate a "cashless option" of any stock options granted to
you by the Company which have vested in accordance with their
terms, whereby payment for the exercise of such options shall
be made to the Company concurrently with their exercise and
sale; provided that such "cashless option" shall apply only to
any such stock options which are exercised by you and the
underlying shares immediately sold in a transaction where the
Company receives its exercise option payment within a period
following such "cashless option" exercise not to exceed five
(5) days.
(e) Redemption Right. The Company agrees to amend that certain
Letter Agreement by and between the Company and Robert a. Imel
dated January 14, 1996 pertaining to the redemption on or
before December 15, 1997 of certain shares of the Company's
common stock to provide that such redemption date be extended
for a period of time through June 30, 1998.
(f) Executive Committee Meeting. Robert A. Imel shall be invited
and attend the Company's next regularly scheduled Executive
Committee meeting to address his desire to make a presentation
to the Company's Board of Directors on December 5, 1997. Mr.
Miles A. Bender agrees to recommend to the Executive Committee
that it place Robert A. Imel on the agenda for such Company's
December 5, 1997 Board of Directors meeting.
By execution of this Separation Agreement and payment of the Special
Separation Benefits described in subparagraph 3(a) hereof, you
acknowledge and agree that for purposes of unemployment compensation
benefits, the amounts to be paid as specified in this Paragraph 3
constitute wages in lieu of notice for the period from the Separation
Date through April 30, 1997. Accordingly, you agree not to seek,
qualify for nor receive unemployment compensation benefits for the
period from December 7, 1997 through April 30, 1998
<PAGE> 4
Mr.Robert A. Imel
October 31, 1997
Page 4
4. Return of Property. You agree to return to the Company any and all
items of its property, including without limitation: a 1997 Chevrolet
Suburban automobile, office keys, security access cards, computers,
equipment, credit cards, forms, files, manuals, correspondence,
business records, personnel data, lists of employees, salary and
benefits information, work product, maps, data and files relating to
wells, leases, partners and/or contractors, seismic data and files,
contracts, contract information, Prospect information and plans for
future Prospects, brochures, catalogs, computer tapes and diskettes,
and data processing reports, and any and all other documents or
property which you have had possession of or control over during the
course of your employment, and which you have not already returned to
the Company. You agree that you will return such property to the
Company by no later than the close of business on or before your
Separation Date, or as soon thereafter as is possible with respect to
any items not then immediately available or which you later find in
your possession. The provisions of this Paragraph 4 do not prohibit
the maintenance by you of copies of any non-confidential,
non-proprietary information, such as reading files, work papers,
calculations, flowcharts and other similar information reflecting the
performance of your job duties and responsibilities.
5. Use of Confidential Information. You acknowledge and agree that,
except for your knowledge and training to compete in the marketplace
and except for information which is now or in the future becomes
available in the public domain, all of the non-public documents and
information to which you have had access during your employment,
including but not limited to all information pertaining to any
specific business transactions in which the Company or any other
Company Released Parties (as defined in Paragraph 6 below) were, are,
or may be involved, all information concerning salary and benefits
paid to employees of the Company or any of the other Company Released
Parties, all personnel information relating in any way to current or
former employees of the Company or any of the other Company Released
Parties, all non-public information obtained in the course of
employment pertaining to acquisitions, divestitures, wells, Prospects
and development plans of the Company or any of the other Company
Released Parties, lease holdings and lease block bid information and
strategies, all financial budgetary information, all other information
specified in Paragraph 4 above, and in general, the business and
operations of the Company or any of the other Company Released Parties
in addition to any other work product, calculations, files, maps,
logs, flowcharts and other related and/or similar information to which
you had access through the Company, its partners or consultants are
considered confidential and are not to be disseminated or disclosed by
you to any other parties, except as may be required by law or judicial
process. In the event you are required to disclose such information
to any other party, you shall provide the Company immediate
<PAGE> 5
Mr.Robert A. Imel
October 31, 1997
Page 5
written notice to enable the Company to seek, at the Company's
discretion and expense, a protective order or take other such action
as the Company in its sole discretion deems advisable or necessary.
You further agree that in the event it appears that you will be
compelled by law or judicial process to disclose such confidential
information, you will notify Mr. Philip D. Devlin, General Counsel, in
writing at 4925 Greenville Avenue, Suite 1400, Dallas, Texas, 75206,
immediately upon your receipt of any such notice, a subpoena or other
legal process.
6. General Release.
(a) Except for the obligations of the Company and the Company
Released Parties to be performed hereunder and in
consideration of the Special Separation Benefits described
above, you and your family members, heirs, successors, and
assigns (collectively, the "Imel Released Parties") hereby
release, acquit, and forever discharge any and all claims and
demands of whatever kind or character, whether vicarious,
derivative, or direct, that you or they, individually,
collectively, or otherwise, may have or assert against (i)
National Energy Group, Inc. or (ii) any officer, director,
stockholder, fiduciary, agent, employee, representative,
insurer, attorney, or any successors and assigns of National
Energy Group, Inc. or the individuals referenced in (ii) above
(collectively, the "Company Released Parties"). This
Separation Agreement includes but is not limited to any claim
or demand based on any federal, state, or local statutory or
common law that applies or is asserted to apply, directly or
indirectly, to the formation of your employment relationship,
your employment relationship, or the termination of your
employment relationship with the Company. Thus, you and the
other Imel Released Parties agree not to make any claims or
demands against the Company or any of the other Company
Released Parties such as for wrongful discharge; unlawful
employment discrimination; retaliation; breach of contract
(express or implied); breach of the duty of good faith and
fair dealing; violation of the public policy of the United
States, the State of Texas, or any other state; intentional or
negligent infliction of emotional distress; tortious
interference with contract; promissory estoppel; detrimental
reliance; defamation of character; duress; negligent
misrepresentation; intentional misrepresentation or fraud;
invasion of privacy; loss of consortium; assault; battery;
conspiracy; bad faith; negligent hiring or supervision; any
intentional or negligent act of personal injury; any alleged
act of harassment or intimidation; or any other intentional or
negligent tort; or any alleged violation of the Age
Discrimination in Employment Act of 1967; Title VII of the
Civil Rights Act of 1964; the Americans with Disabilities Act
of 1990; the Employee Retirement Income Security Act of
<PAGE> 6
Mr.Robert A. Imel
October 31, 1997
Page 6
1974; the Fair Labor Standards Act; the Fair Credit Reporting
Act; the Texas Commission on Human Rights Act; or the Texas
Wage Payment Statute, Tex. Rev. Civ. Stat. Ann. art. 5155.
(b) Except for your obligations to be performed hereunder, the
Company and the other Company Released Parties hereby release,
acquit, and forever discharge any and all claims and demands
of whatever kind or character, whether vicarious, derivative,
or direct, that it or they, individually, collectively, or
otherwise may have or assert against you or any of the other
Imel Released Parties. This Separation Agreement includes,
but is not limited to, any claim or demand based on any
federal, state, or local statutory or common law that applies
or is asserted to apply, directly or indirectly, to the
formation of your employment relationship, your employment, or
the termination of your employment relationship with the
Company.
(c) Except as otherwise provided herein, the effect of this
Separation Agreement is to mutually release, acquit, and
forever discharge any and all claims and demands of whatever
kind or character, that either party, the Imel Released
Parties, or the Company Released Parties may now have, or
hereafter have or assert against each other arising out of the
employment relationship (including the formation and
termination thereof) which has existed between you and the
Company. It is further agreed that each of you and the
Company agree to indemnify and hold harmless the other for any
breach of the provisions of this Separation Agreement by the
respective Imel Released Parties or Company Released Parties
which results in damage to the other or to the respective
parties hereto. This mutual general release does not include:
(i) the executory obligations of either party yet to be
performed, or (ii) any rights, claims or obligations which may
accrue as between the parties after the date of this
Separation Agreement.
7. Confidentiality of this Separation Agreement and Nondisparagement. In
consideration of the Special Separation Benefits described above, each
of the Company and you agree that the terms of this Separation
Agreement shall be and remain confidential, and shall not be disclosed
by you and the other Imel Release Parties or the Company and the other
Company Released Parties to any party other than your spouse,
attorney, accountant or tax return preparer; provided such persons
have agreed to keep such information confidential, and except as may
be required by law or judicial process. Each of the Company and you
further agree, except as compelled by law or judicial process, not to
cooperate or supply information of any kind in any proceeding,
investigation, or inquiring raising issues under the Age
Discrimination in Employment Act of 1967, Title VII of the Civil
Rights Act of 1964, the
<PAGE> 7
Mr.Robert A. Imel
October 31, 1997
Page 7
Americans with Disabilities Act of 1990, the Employee Retirement
Income Security Act of 1974, the Fair Labor Standards Act, the Fair
Credit Reporting Act, the Texas Commission on Human Rights Act, or the
Texas Wage Payment Statute, Tex. Rev. Civ. Stat. Ann. art. 5155, or
any other federal, state, or local law, involving the formation of
your employment relationship, your employment relationship, the
termination of your employment relationship, or the employment of
other persons by the Company or any of the Company Released Parties.
In the event it appears that either party hereto shall be compelled by
law or judicial process to disclose the terms and conditions of this
Separation Agreement, such party shall immediately notify the other
party in writing and provide a copy of any notice that such disclosure
is being requested or required so that such party at its sole
discretion and expense may seek a protective order or take other such
action as such party in its sole discretion deems advisable or
necessary.
You and the other Imel Release Parties further agree not to make any
statement, oral or written, which directly or indirectly impugns the
quality or integrity of the Company's or any of the Company Released
Parties' business practices, or to make any other disparaging or
derogatory remarks or statements, oral or written, about the Company
or any of the Company Released Parties, their officers, directors,
stockholders, managerial personnel, or other employees or their
partners and consultants to any other parties.
In consideration of the General Release, the Confidentiality of
Separation Agreement and Nondisparagement provision, and the Agreement
Regarding Solicitation of Employees and Consultants, set forth herein,
the Company and the Company Released Parties agree that it and they,
respectively, shall instruct its officers, directors, managerial
personnel, or other employees not to make any statement, oral or
written, which directly or indirectly impugns the quality or integrity
of you or any of the Imel Released Parties' business practices, or to
make any other disparaging or derogatory remarks or statements, oral
or written, about you or any of the Imel Released Parties to any other
parties., and nothing shall be contained in personnel files of the
Company pertaining to you of a derogatory or denigrating nature or
disseminated by the Company or the Company Released Parties to third
parties.
8. Agreement Regarding Solicitation of Employees. In consideration of
the monetary payments and other benefits provided to you or on your
behalf by the Company in this Separation Agreement, you acknowledge
and agree that for a period of one (1) year following the termination
of your employment with the Company, you will not, directly or
indirectly, for your own account or for the benefit of any other
person or party, solicit, induce, entice, or attempt to entice any
employee, or independent contractor of the Company to terminate his or
her employment relationship, agreements or contracts with the Company.
<PAGE> 8
Mr.Robert A. Imel
October 31, 1997
Page 8
9. Nonadmission of Liability and Wrongdoing. It is acknowledged that
this Separation Agreement does not in any manner constitute an
admission of liability or wrongdoing on the part of the Company or
you, but that each of the Company and you expressly deny any such
liability or wrongdoing, and enter into this Separation Agreement for
the sole purpose of avoiding further trouble and expense; and that,
except to the extent necessary to enforce this Separation Agreement,
neither this Separation Agreement, nor any part of it may be
construed, used, or admitted into evidence in any judicial,
administrative, or arbitral proceedings as an admission of any kind by
the Company or you or any of the Company Released Parties or the Imel
Released Parties.
10. Authority to Execute. Each of the parties hereto warrants and agrees
that it (i) has full power and authority to execute, deliver and
perform the obligations contained in this Separation Agreement, (ii)
is a legally binding and enforceable agreement in accordance with its
terms and conditions, (iii) has the power and authority to bind its
respective Released Parties, (iv) does not violate, conflict with or
constitute a breach or default under any statute, rule, ordinance,
regulation or administrative order of any federal, state, county or
municipal court, board, office, agency or commission, and (v) is not
contemplating, nor are any bankruptcy or insolvency proceedings
threatened against such party of which it is aware.
11. GOVERNING LAW AND INTERPRETATION. THIS SEPARATION AGREEMENT AND THE
RIGHTS AND DUTIES OF THE PARTIES UNDER IT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND
PERFORMED IN DALLAS COUNTY, TEXAS. If any provision of this
Separation Agreement is held to be unenforceable, such provision shall
be considered separate, distinct, and severable from the other
remaining provisions and shall not affect the validity or
enforceability of such other remaining provisions, and that, in all
other respects, this Separation Agreement shall remain in full force
and effect. If any provision of this Separation Agreement is held to
be unenforceable as written and may be made to be enforceable by
limitation thereof, then such provision shall be enforceable to the
maximum extent permitted by applicable law and to the extent the
remaining provisions further accomplish the goals, benefits and intent
of this Separation Agreement. The language of all parts of this
Separation Agreement shall in all cases be construed as a whole,
according to its fair meaning, and not strictly for or against any of
the parties.
12. Expiration of Offer. The Company's offer of the proposed Special
Separation Benefits will expire at 4:00 P.M. local Dallas time on
October 31, 1997. You may accept this offer at any
<PAGE> 9
Mr.Robert A. Imel
October 31, 1997
Page 9
time before the Expiration of Offer by executing this Separation
Agreement and returning it to the designated representative of the
Company.
13. The Effective Date. This Separation Agreement will become effective
as of the date of execution hereof.
14. Consultation With Counsel. You have the right to consult, and are
encouraged to consult, an attorney before executing this Separation
Agreement.
15. Voluntary Agreement. You and the Company acknowledge that execution
of this Separation Agreement is knowing and voluntary, that you and
the Company have had reasonable time to deliberate regarding its
terms, and that you and the Company have had the right to consult with
an attorney.
16. Legal Fees. Each of the Company and you agree to pay its own legal
fees and expenses with respect to the preparation, negotiation,
execution and delivery of this Separation Agreement, and further agree
to indemnify and hold harmless the other with respect thereto.
17. Entire Agreement. This Separation Agreement contains and constitutes
the entire understanding and agreement between you and the Company and
may be modified only by a writing of contemporaneous or subsequent
date executed by both you and an authorized officer of the Company.
18. Press Release. The parties hereto agree that any statement and/or
press release regarding your employment with the Company and/or
separation or resignation therefrom shall be limited to the effect
that you have resigned to pursue personal or other interests.
19. ARBITRATION/MEDIATION. 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
<PAGE> 10
Mr. Robert A. Imel
October 31, 1997
Page 10
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.
If you are in agreement with the foregoing provisions, please execute the
attached duplicate copy of this letter in the space provided below. This
Separation Agreement shall then constitute a valid and binding agreement by and
between the Company and you enforceable in accordance with its terms as of the
date of your and the Company's execution hereof and delivery to the Company and
you.
Sincerely,
National Energy Group, Inc. ACCEPTED AND AGREED THIS
31ST DAY OF OCTOBER, 1997.
By: /s/ MILES D. BENDER /s/ ROBERT A. IMEL
-------------------------- ---------------------------------------
Name: Miles D. Bender Name: Robert A. Imel,
Title: President and CEO an Individual
<PAGE> 1
EXHIBIT 10.27
[NATIONAL ENERGY GROUP, INC. LETTERHEAD]
March 27,1997
Mr. W. David Willig
Atocha Exploration, Inc.
1201 Louisiana, Suite 1050
Houston, Texas 77002
Mr. Robert A. Potosky
Potosky Oil and Gas
1201 Louisiana, Suite 1050
Houston, Texas 77002
Sandefer Oil and Gas
Two Houston Center
Suite 3250
Houston, Texas 77010
Re: Memorandum of Amendment
to (i) Agreement dated January 1, 1996
and (ii) Consulting Agreement
dated January 1, 1996
Gentlemen:
This Memorandum shall act to express the mutual understanding and
agreement by and between National Energy Group, Inc. ("NEG") and Atocha
Exploration, Inc. ("Atocha"), Potosky Oil and Gas Company ("POG") and Sandefer
Oil & Gas, Inc. ("SOG") with respect to amending that certain Agreement by and
between NEG and SOG dated January 1, 1996 (the "Agreement") and that certain
Consulting Agreement between SOG, Atocha and POG dated January 1, 1996 (the
"Consulting Agreement") which provides for the services of W. David Willig
("Willig") and Robert A. Potosky ("Potosky").
In consideration of the mutual covenants and agreements contained
herein and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree as follows:
1. Paragraph 3 of the Agreement and Paragraph 4 of the Consulting
Agreement, Initial Term, shall be amended to provide that the period
of January 1, 1998 through December 31, 1998 shall be defined as the
"Secondary Term".
<PAGE> 2
Atocha Exploration, Inc.
Potosky Oil and Gas Company
Sandefer Oil & Gas, Inc.
March 27, 1997
Page Two
2. Paragraph 4 of the Agreement and Paragraph 6 of the Consulting
Agreement, Prospect Generation By SOG and Obligations of Potosky and
Atocha, respectively, shall be amended to provide that Potosky and
Willig shall generate Prospects exclusively for NEG; provided that in
the event any such Prospect is declined by NEG, Atocha and POG shall
be free to offer the Prospect to any other party as described in
Paragraph 11 of the Agreement, Rejection of Proposals, etc.. Potosky
and Willig further agree that they shall not provide consulting work
or services to others without the prior written consent of NEG, which
consent shall not be unreasonably withheld.
3. Paragraph 6 of the Agreement and Paragraph 7 of the Consulting
Agreement, Compensation, shall be amended to provide that effective
April 1, 1997 through the end of the Secondary Term and any renewals
and/or extensions thereof, the monthly fee paid to Atocha and POG
shall (i) be paid on or before the fifteenth day of each month, (ii)
be increased to the amount of $29,000.00 per month and (iii) include
all expenses incurred by Atocha and POG.
4. Paragraph 8 of the Consulting Agreement, Reimbursement or Payment of
Costs etc., shall be amended to provide that the $29,000.00 monthly
fee paid to Atocha and POG shall be inclusive of all expenses incurred
by Atocha and POG; provided that direct expenses related to Prospect
generation, which have been approved in writing by the Company prior
to expenditure, shall be reimbursed to Atocha and POG.
5. Paragraph 4 of the Agreement, Prospect Generation by SOG, shall be
amended to provide that the following Prospects, together with any
additional Prospects generated prior to December 31, 1997, shall be
those Prospects which shall determine cost reimbursement to NEG as
applied to the Initial Term Program with respect to the provisions of
Paragraph 12 of the Agreement, Disbursement of Proceeds:
(a) South Lake Arthur (e) West Grand Bayou
(b) Southeast Gueydon (f) Northwest Bayou Sorrel
(c) Tiger Bayou (g) Berry Bayou
(d) South Tiger Bayou (h) Mushroom
6. Paragraph 12 of the Agreement, Disbursement of Proceeds, shall be
amended to provide that cost reimbursement to NEG with respect to any
Prospects generated during the Secondary Term shall be separate and
distinct from any Prospects generated during the Initial Term.
7. In the event there is an election to accept a Deferred Leasehold
Interest as described in Paragraph 17 of the Agreement, NEG agrees
that it shall timely execute and deliver to Potosky and Willig et al.
an Assignment substantially in the form of Exhibit "A", attached
hereto.
<PAGE> 3
Atocha Exploration, Inc.
Potosky Oil and Gas Company
Sandefer Oil & Gas, Inc.
March 27, 1997
Page Three
8. Atocha, POG, Potosky and Willig agree to execute, and shall cause SOG
to execute, that certain Letter Agreement dated December 20, 1996,
attached hereto as Exhibit "B" with respect to the definition of the
respective ORRI's and Back-In Interests as such apply to the PANACO,
Inc. transaction described in such Letter Agreement.
9. NEG agrees that it shall provide office space for Atocha and POG in
Houston, Texas at the Wedge International Tower and shall execute a
Lease agreement, substantially in the form of Exhibit "C", attached
hereto.
10. NEG shall make available to each of Potosky and Willig through the end
of the Secondary Term and any renewals and/or extensions thereof, the
health and dental benefits available to employees of NEG; provided
that the amount described in Paragraph 3 hereof shall be reduced by an
amount equal to $615.00 per month for each of Willig and/or Potosky in
any month either of them are participants in NEG's medical and/or
dental plan.
11. In the event NEG requests Atocha and POG to perform services with
respect to the interpretation of 3-D data incidental to Prospect
development of Bayou Sorrel or any other Prospect, NEG shall provide
them with the use of a 3-D station for such time that their
interpretive services are requested by NEG; provided that such use
shall be exclusively for the benefit of NEG and shall not exceed the
expiration of the Secondary Term and any renewals and/or extensions
thereof.
12. Miscellaneous:
(a) CHOICE OF LAW. THIS MEMORANDUM AND ALL OF THE RIGHTS
AND OBLIGATIONS OF THE PARTIES ARISING FROM OR
RELATING TO THE SUBJECT MATTER OF THIS AGREEMENT OR
THE TRANSACTIONS CONTEMPLATED HEREBY SHALL BE
GOVERNED BY, CONSTRUED AND ENFORCED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF TEXAS, EXCLUDING THE
CONFLICT OF LAWS AND RULES OF SUCH STATE.
(b) Other Agreements. This Memorandum supersedes any
prior agreements between the parties with respect to
the subject matter of hereof.
(c) Confidentiality. SOG, Atocha, Willig, POG and/or
Potosky shall not disclose the terms of this
Memorandum to any third party, except to the extent
required by law, rule, regulation or court order.
<PAGE> 4
Atocha Exploration, Inc.
Potosky Oil and Gas Company
Sandefer Oil & Gas, Inc.
March 27, 1997
Page Four
(d) Mediation. In the event any dispute regarding this
Memorandum cannot be reconciled by the parties, then
they shall attempt to resolve any such dispute
through (i) mediation, using a mutually acceptable
mediator, and if necessary through (ii) binding
arbitration, using a mutually acceptable arbitrator.
No dispute related to this Agreement shall be brought
before any court of law or equity. Any arbitration
will be conducted in Houston, Harris County, Texas
using the commercial rules of the American
Arbitration Association.
The parties agree that this Memorandum shall be reduced to a formal
amendment of the Agreement and the Consulting Agreement with respect to those
provisions relevant thereto.
If the foregoing reflects our mutual understanding and agreement of
the subject matter contained herein, please so indicate by executing in the
appropriate space below. This Memorandum shall be effective as of the date
first written hereinabove.
Sincerely,
National Energy Group, Inc.
By: /s/ MILES D. BENDER
-------------------------------
Name: Miles D. Bender
Title: President and CEO
ATOCHA EXPLORATION, INC.
By: /s/ W. DAVID WILLIG
-------------------------------
Name: W. DAVID WILLIG
Title: President
POTOSKY OIL AND GAS COMPANY
By: /s/ ROBERT A. POTOSKY
-------------------------------
Name: ROBERT A. POTOSKY
Title: President
SANDEFER OIL & GAS, INC.
By: /s/ STEPHEN F. SMITH
-------------------------------
Name: STEPHEN F. SMITH
Title: Executive Vice President
<PAGE> 1
EXHIBIT 10.28
[NATIONAL ENERGY GROUP, INC. LETTERHEAD]
April 15, 1997
Mr. W. David Willig
Atocha Exploration, Inc.
1415 Louisiana, Suite 2250
Houston, Texas 77002
Mr. Robert A. Potosky
Potosky Oil and Gas Company
1415 Louisiana, Suite 2250
Houston, Texas 77002
Sandefer Oil & Gas
1415 Louisiana, Suite 2250
Houston, Texas 77002
Re: First Amendment to (i) Agreement dated January 1, 1996
and (ii) Consulting Agreement dated January 1, 1996
Gentlemen:
This First Amendment to (i) that certain Agreement dated January 1, 1996 by
and between National Energy Group, Inc. ("NEG") and Sandefer Oil & Gas Inc.
("SOG"), hereinafter (the "Agreement"), incorporated by reference herein; and
(ii) that certain Consulting Agreement dated January 1, 1996 by and between SOG
and Atocha Exploration Inc. ("Atocha") and Potosky Oil and Gas Company ("POG"),
hereinafter (the "Consulting Agreement"), incorporated by reference herein;
which provides for the services of Mr. Robert A. Potosky ("Mr. Potosky") and Mr.
W. David Willig ("Mr. Willig"), shall express the mutual understanding and
agreement of NEG and SOG and Atocha and POG as expressed in that certain
memorandum among the parties dated March 27, 1997, hereinafter (the
"Memorandum") incorporated by reference herein. The term "First Amendment"
shall be used herein to describe corresponding amendments to both the Agreement
and the Consulting Agreement as contemplated in the Memorandum.
In consideration of the mutual covenants and agreements contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
1. Paragraph 3 of the Agreement and Paragraph 4 of the Consulting
Agreement, Initial Term, shall be amended to provide that the period
of January 1, 1998 through December 31, 1998 shall be defined as the
"Secondary Term," and all references in the Agreement and the
Consulting Agreement to the Initial Term shall include the Secondary
Term, unless otherwise expressly stated to the contrary in this First
Amendment.
<PAGE> 2
Atocha Exploration, Inc.
Potosky Oil and Gas Company
Sandefer Oil & Gas, Inc.
April 15, 1997
Page Two
2. Paragraph 4 of the Agreement and Paragraph 6 of the Consulting
Agreement, Prospect Generation By SOG and Obligations of Potosky and
Atocha, respectively, shall be amended to provide that Mr. Potosky and
Mr. Willig shall generate Prospects exclusively for NEG; provided that
in the event any such Prospect is declined by NEG as provided in
Paragraph 11 of the Agreement, Rejection of Proposals; Release of
Prospects; Atocha and POG shall be free to offer the Prospect to any
other party as described in Paragraph 11 of the Agreement and
Paragraph 10 of the Consulting Agreement, Sale of Prospects.
3. Paragraph 4 of the Agreement, shall be further amended to provide that
the following Prospects, together with any additional Prospects
generated prior to December 31, 1997, shall be those Prospects which
shall determine cost reimbursement to NEG as applied to the Initial
Term Program with respect to the provisions of Paragraph 12 of the
Agreement, Disbursement of Proceeds:
(a) South Lake Arthur (e) West Grand Bayou
(b) Southeast Gueydon (f) Northwest Bayou Sorrel
(c) Tiger Bayou (g) Berry Bayou
(d) South Tiger Bayou (h) Mushroom
4. Paragraph 6 of the Agreement and Paragraph 7 of the Consulting
Agreement, Compensation, shall be amended to provide that effective
April 1, 1997 through the end of the Secondary Term and any renewals
and/or extensions thereof, the monthly fee paid to Atocha and POG
shall (i) be paid on or before the fifteenth day of each month, (ii)
be increased to the amount of $29,000.00 per month and (iii) include
all expenses incurred by Atocha and POG, including lease costs as
described in Paragraph 9 below.
5. Paragraph 8 of the Consulting Agreement, Reimbursement or Payment of
Costs; Furnishing of Office Space and Personnel, shall be amended to
provide that the $29,000.00 monthly fee paid to Atocha and POG shall
be inclusive of all expenses incurred by Atocha and POG; provided that
direct expenses related to Prospect generation as described in
Paragraph 4 of the Agreement and Paragraph 6 of the Consulting
Agreement, which have been approved in writing by the Company prior to
expenditure, shall be reimbursed to Atocha and POG.
6. Paragraph 12 of the Agreement, shall be amended to provide that cost
reimbursement to NEG with respect to any Prospects generated during
the Secondary Term shall be separate and distinct from any Prospects
generated during the Initial Term and shall start a new accounting
cycle with respect thereto.
7. In the event there is an election to accept a Deferred Leasehold
Interest as described in Paragraph 17 of the Agreement, Deferred
Leasehold Interest, NEG agrees that it shall timely execute and
deliver to Mr. Potosky and Mr. Willig et al. an Assignment
substantially in the form of Exhibit "A", attached hereto.
<PAGE> 3
Atocha Exploration, Inc.
Potosky Oil and Gas Company
Sandefer Oil & Gas, Inc.
April 15, 1997
Page Three
8. Atocha, POG, Mr. Potosky and Mr. Willig agree to execute, and shall
cause SOG to execute, that certain Letter Agreement dated December 20,
1996, attached hereto as Exhibit "B", with respect to the definition
of the respective ORRI's and Back-In Interests as such apply to the
PANACO, Inc. transaction described in such Letter Agreement.
9. NEG agrees that it shall provide office space for Atocha and POG in
Houston, Texas at the Wedge International Tower pursuant to a Lease
Agreement, in the form of Exhibit "C", attached hereto, and Paragraph
5 of the Agreement, Reimbursement of Expenses; Sublease of Office
Space; Personnel, and Paragraph 9 of the Consulting Agreement, Office
Space, shall be amended accordingly and shall provide that the costs
associated with such lease shall be borne by Atocha and POG.
10. NEG shall make available to each of Mr. Potosky and Mr. Willig through
the end of the Secondary Term and any renewals and/or extensions
thereof, the health and dental benefits available to employees of NEG;
provided that the amount described in Paragraph 3 hereof shall be
reduced by an amount equal to $615.00 per month for each of Mr. Willig
and/or Mr. Potosky in any month either of them are participants in
NEG's medical and/or dental plan.
11. In the event NEG requests Atocha and POG to perform services with
respect to the interpretation of 3-D data incidental to Prospect
development of Bayou Sorrel or any other Prospect, NEG shall provide
them with the use of a 3-D station for such time that their
interpretive services are requested by NEG; provided that such use
shall be exclusively for the benefit of NEG and shall not exceed the
expiration of the Secondary Term or any renewals and/or extensions
thereof.
12. Miscellaneous:
(a) CHOICE OF LAW. THIS FIRST AMENDMENT AND ALL OF THE
RIGHTS AND OBLIGATIONS OF THE PARTIES ARISING FROM OR
RELATING TO THE SUBJECT MATTER HEREIN OR THE
TRANSACTIONS CONTEMPLATED HEREBY SHALL BE GOVERNED
BY, CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF TEXAS, EXCLUDING THE CONFLICT OF
LAWS AND RULES OF SUCH STATE.
(b) Other Agreements. This First Amendment supersedes
any prior agreements between the parties with respect
to the subject matter of hereof.
(c) Confidentiality. SOG, Atocha, Mr. Potosky, Mr.
Willig, and/or Mr. Potosky shall not disclose the
terms of this to any third party, except to the
extent required by law, rule, regulation or court
order.
<PAGE> 4
Atocha Exploration, Inc.
Potosky Oil and Gas Company
Sandefer Oil & Gas, Inc.
April 15, 1997
Page Four
(d) Mediation. In the event any dispute regarding The
Agreement, the Consulting Agreement and/or this First
Amendment cannot be reconciled by the parties, then
they shall attempt to resolve any such dispute
through (i) mediation, using a mutually acceptable
mediator, and, if necessary, through (ii) binding
arbitration, using a mutually acceptable arbitrator.
No dispute related to this Agreement, the Consulting
Agreement and/or this First Amendment shall be
brought before any court of law or equity. Any
arbitration will be conducted in Houston, Harris
County, Texas using the commercial rules of the
American Arbitration Association.
The parties specifically acknowledge and agree that this First
Amendment to (i) the Agreement and (ii) the Consulting Agreement shall be
effective to amend, change and otherwise modify the Agreement and the
Consulting Agreement; and wherever a conflict should arise in the
interpretation or performance contemplated in the Agreement and/or the
Consulting Agreement, the terms and conditions of this First Amendment shall
supersede the terms of the Agreement and/or the Consulting Agreement.
If the foregoing reflects our mutual understanding and agreement of
the subject matter contained herein, please so indicate by executing in the
appropriate space below. This First Amendment shall be effective as of April
1, 1997.
Sincerely,
National Energy Group, Inc.
By:
---------------------------------------------
Name: Miles D. Bender
Title: President and CEO
ATOCHA EXPLORATION, INC.
By: /s/ W. DAVID WILLIG
---------------------------------------------
Name: W. DAVID WILLIG
-------------------------------------------
Title: PRESIDENT
------------------------------------------
POTOSKY OIL AND GAS COMPANY
By: /s/ ROBERT A. POTOSKY
---------------------------------------------
Name: ROBERT A. POTOSKY
-------------------------------------------
Title: PRESIDENT
------------------------------------------
SANDEFER OIL & GAS, INC.
By: /s/ STEPHEN F. SMITH
---------------------------------------------
Name: STEPHEN F. SMITH
-------------------------------------------
Title: EXECUTIVE VICE PRESIDENT
------------------------------------------
<PAGE> 5
EXHIBIT "A"
ASSIGNMENT OF OVERRIDING ROYALTY INTERESTS
THE STATE OF }
} KNOW ALL MEN BY THESE PRESENTS
PARISH OF }
THAT, the undersigned, NATIONAL ENERGY GROUP, INC. whose address is
1400 One Energy Square, 4925 Greenville Avenue, Dallas, Taxes 75206 hereinafter
called "Assignor", In consideration of Ten Dollars cash and other consideration
to Assignor paid by the following named parties hereinafter called "Assignees",
the receipt and sufficiency of all consideration being hereby acknowledged,
and subject to the terms and provisions of the Participation Agreement and as
hereinafter set forth, has TRANSFERRED, ASSIGNED AND CONVEYED, and does hereby
TRANSFER, ASSIGN AND CONVEY unto said Assignees, the following described
overriding royalty Interests with respect to oil, gas, and other minerals
produced and saved pursuant to the leases, hereinafter referred to as "Said
Leases", described in Exhibit "A" attached hereto and incorporated herein,
to-wit:
Assignees and Addresses Overriding Royalty Interests Hereby Conveyed
The above overriding royalty Interests hereby conveyed apply to and
are in connection with the following:
1. The overriding royalty herein provided In all instances shall bear its
proportionate part of production, severance and other direct tax or
taxes applicable thereto. The overriding royalty on oil and gas shall
be computed after deducting any lost, used or consumed on the lease
for operating same or for treating and handling the products
therefrom.
2. On Assignee's proportionate share of oil, condensate or gas, including
casinghead gas or other gaseous substances produced from said lease,
the overriding royalty shall be paid on the amount realized from such
sale.
3. In the event that the lease described herein is effective as to less
than the entire fee simple estate In the oil and gas in and
1
<PAGE> 6
under and to be produced from any tract or parcel of land purported to
be covered thereby, then and in that event, the overriding royalty
interest herein assigned shall be reduced in the proportion that the
mineral interest covering said lease bears to the entire fee simple
mineral estate therein.
4. The overriding royalty interest herein granted shall never be deemed
to impose any obligation upon Assignor to conduct any drilling
operations whatsoever upon any of the property covered by the
above-mentioned lease or to maintain any such operations if once begun
or to maintain production of oil or gas if once established or to
protect the lease from drainage or to maintain such lease in effect by
payment of rentals, drilling operations or otherwise and all
operations on the property covered by said lease and the extent and
duration thereof as well as the preservation of such lease shall be
solely at the will of Assignor.
5. Assignor, its successors assigns and legal representatives shall have
the right and power to pool the overriding royalty interest herein
granted to the same extent and in the same manner as any lessor's
interest may be pooled, whether by operation or action of law or other
governmental authority, or under the above-mentioned lease or as may
thereafter be provided by amendment or supplemental agreement between
Assignor and Assignee and their respective heirs, successors, assigns,
and legal representatives into such units as it may be deemed
advisable for the production and development of oil or gas;
TO HAVE AND TO HOLD the interest herein conveyed, subject to the terms
and conditions, covenants and reservations aforesaid unto Assignee and unto
Assignee's successors and assigns.
This Assignment is made without warranty of title, either express or
implied.
IN WITNESS WHEREOF, this instrument is executed and delivered this
_______ day of , 1997.
WITNESSES: NATIONAL ENERGY GROUP, INC.
By:
- ----------------------- -------------------------
Name:
- ----------------------- -----------------------
2
<PAGE> 7
PARTIAL ASSIGNMENT OF DEFERRED LEASEHOLD INTEREST IN OIL, GAS AND
MINERAL LEASE
STATE OF }
KNOW ALL MEN BY THESE PRESENTS, THAT:
PARISH OF }
WHEREAS, National Energy Group, Inc. a Delaware corporation, duly
qualified to transact business in the State of Texas, hereinafter referred to
as "Assignor", is the present owner and holder of those certain Oil, Gas and
Mineral Leases situated in ,described on Exhibit "A",
comprising the ("Prospect") which is attached hereto and made
a part hereof, and being hereinafter referred to as "Subject Leases".
NOW, THEREFORE, in consideration of the sum of TEN DOLLARS ($10.00)
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, National Energy Group, Inc. sometimes herein referred
to as "Deferred Leasehold Interest Assignor", has GRANTED, SOLD, TRANSFERRED,
ASSIGNED and CONVEYED, and by these presents do hereby GRANT, SELL, TRANSFER,
ASSIGN and CONVEY unto Potosky Oil and Gas, Inc. and Atocha Oil & Gas, Inc.,
collectively hereinafter sometimes referred to as "Deferred Leasehold Interest
Assignees", an % leasehold interest in and to Subject Leases, in the
proportions set out below, this assignment to be effective and operative after
the occurrence of "Payout", as hereinafter defined.
PROSPECT POTOSKY OIL AND GAS, INC. ATOCHA OIL & GAS, INC.
"Payout", as such term is herein used shall mean that point in time
when National Energy Group, Inc. has recovered from production from wells
drilled on the Subject Lease (less the production taxes, the Lessee's royalty
and overriding royalties payable out of production) the following out of pocket
costs paid solely by National Energy Group, Inc.: the geological/geophysical
services fee for the Prospect, the costs incurred in purchasing or shooting the
additional seismic data or in the reprocessing of any seismic data by SOG are
hereinafter referred to as the "Additional Seismic Data Costs" for the Prospect,
the costs incurred in such leasing or acquisition, including without limitation
brokerage costs, lease bonuses, rentals, costs of title examination and title
curative matters, are hereinafter referred to as the "Leasing Costs" for the
Prospect, the Prospect generation fee for the Prospect, the costs incurred in
drilling, testing, completing and equipping wells drilled on the Prospect, the
costs incurred in plugging and abandoning wells drilled on the Prospect and the
costs incurred in operating wells located on the Prospect during the time of
recovery of said costs less any fees or expenses paid to National Energy Group,
Inc. by others whether considered a reimbursement, Prospect Promotion, service
fee or otherwise. Such costs shall be determined in accordance with the
accounting procedure which is attached to the applicable operating agreement.
This assignment and conveyance is made without warranty of title,
either expressed or implied, except as to conveyances or encumbrances by,
through or under Assignor.
The provisions hereof shall inure to the benefit of and be binding
upon the parties hereto, their respective successors and assigns.
IN WITNESS WHEREOF, this assignment is executed on the date of the
acknowledgments, but made effective for all purposes as of the _______ day of
_________, 1997, at _________ , Central Daylight Time, in the presence of the
competent witness subscribing their names hereto.
<PAGE> 8
WITNESSES NATIONAL ENERGY GROUP, INC.
By:
- --------------------------- -------------------------------
Name: Name:
---------------------- -----------------------------
- ---------------------------
Name:
----------------------
WITNESSES POTOSKY OIL AND GAS, INC.
By:
- --------------------------- -------------------------------
Name: Name:
---------------------- -----------------------------
- ---------------------------
Name:
----------------------
WITNESSES ATOCHA OIL & GAS, INC.
By:
- --------------------------- -------------------------------
Name: Name:
---------------------- -----------------------------
- ---------------------------
Name:
----------------------
STATE OF TEXAS
COUNTY OF ___________
On this ________ day of ________________, 1997, before me appeared
___________________,to me personally known, who being by me duly sworn did say
that he is the __________________________ of National Energy Group, Inc., a
Delaware corporation, and that said instrument was signed in behalf or the
corporation by authority of its Board of Directors, and that ___________
acknowledged the instrument to be the free act and deed of the corporation.
-------------------------------------------
Name (print):
------------------------------
Notary Public in and for the State of Texas
My Commission Expires:
---------------------
STATE OF TEXAS
COUNTY OF HARRIS
On this ___________ day of _____________, 1997, before me appeared
__________, to me personally known, who being by me duly sworn did say that he
is the ___________________ of Potosky Oil and Gas, Inc., a Texas corporation,
and that said instrument was signed in behalf or the corporation by authority of
its Board of Directors, and that ____________________ acknowledged the
instrument to be the free act and deed of the corporation.
-------------------------------------------
Name (print):
------------------------------
Notary Public in and for the State of Texas
My Commission Expires:
---------------------
<PAGE> 9
STATE OF TEXAS
COUNTY OF HARRIS
On this ____________ day of ________________, 1997, before me appeared
________________________, to me personally known, who being by me duly sworn did
say that he is the ______ of Atocha Oil & Gas, Inc. a Louisiana corporation, and
that said instrument was signed in behalf of the corporation by authority of its
Board of Directors, and that _____________________ acknowledged the instrument
to be the free act and deed of the corporation.
-------------------------------------------
Name (print):
------------------------------
Notary Public in and for the State of Texas
My Commission Expires:
---------------------
<PAGE> 10
EXHIBIT "B"
[NATIONAL ENERGY GROUP, INC. LETTERHEAD]
December 20, 1996
Mr. Robert Potosky
Potosky Oil & Gas
1201 Louisiana, Suite 1050
Houston, Texas 77002
Sandefer Oil & Gas
Two Houston Center
Suite 3250
Houston, Texas 77010
Mr. W. David Willig
Atocha Exploration, Inc.
1201 Louisiana, Suite 1050
Houston, Texas 77002
Re: East Bayou Sorrel Prospect
Iberville Parish, Louisiana
Gentlemen:
Pursuant to that certain Joint Operating Agreement ("JOA") dated December 15,
1995, between National Energy Group, Inc. ("NEG") (successor in interest to
W&T Offshore, Inc.) as Operator and Supply Development Group, Inc. et al., as
Non-Operator, pertaining to the East Bayou Sorrel Prospect, Sandefer Oil & Gas
("SOG"), Robert Potosky ("Potosky") and W. David Willig ("Willig") are entitled
to a certain overriding royalty ("ORRI") and Potosky Oil & Gas ("POG") and
Atocha Exploration, Inc. ("Atocha") are entitled to a reversionary back-in
interest ("Back-In") pursuant to the terms of such JOA.
WHEREAS, it is the intention of the parties that the ORRI and Back-In shall be
paid as consideration for generation and presentation of new oil and gas
exploration prospects; and
WHEREAS, NEG has acquired certain oil and gas leases from PANACO, Inc.
("PANACO") which are partially subject to the Area of Interest ("AOI")
provisions of the JOA and which include oil and gas wells with producing
horizons down to a depth of 11,000 feet; and
<PAGE> 11
Mr. Robert Potosky
Potosky Oil & Gas
Sandefer Oil & Gas
Mr. W. David Willig
Atocha Exploration, Inc.
December 20, 1996
Page Two
WHEREAS, the parties agree SOG, Potosky, Willig, POG and Atocha are entitled to
their respective ORRI and Back-In as consideration for generation and
presentation of new oil and gas prospects related to certain portions of the
PANACO acquisition; and
WHEREAS, the parties desire to clarify their rights and obligations with
respect to the ORRI to be earned with respect to production acquired in the
PANACO acquisition.
NOW THEREFORE, in consideration of the mutual promises and agreements set forth
herein, the above recitals and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:
1. It is agreed with respect to the leases acquired in the PANACO
acquisition which are within the AOI (as defined in the JOA), that it
was not the intent of the parties, nor contemplated, to burden such
leases with the ORRI for established production (being defined as any
productive or once productive sand as described in State of Louisiana
Conservation Department Unit Orders) included in any and all existing
well bores which fall within certain existing Louisiana Department of
Conservation units; specifically the following as may be described on
Exhibit "A", attached hereto:
C2 RA SUB; C2 RA SUA; D RA SUA; E ZONE
RA SUA, SUB, AND SUC; H2 RA SUA; I RB SUA
K RA SUA; Y RA SUA (hereinafter " Existing Units").
However, to further clarify, the following exceptions are subject to
the ORRI as defined in the JOA:
(a) For existing wells within the Existing Units, and for any well
drilled hereafter within the Existing Units, all rights below
the L4 Sand, the base of which is defined as occurring in the
National Energy Group, Inc. Schwing #1 well (2-T1OS-R11E)
at the measured log depth of 11,340' shall be subject to the
ORRI.
(b) With respect to new wells drilled in those portions of
sections 3, 4, 5 and 6-T1OS-R11E that fall within the
Existing Units, all rights, except those unitized rights
pertaining to the Existing Units and only with respect to the
sand interval pertaining to such unit, shall be subject to the
ORRI.
<PAGE> 12
Mr. Robert Potosky
Potosky Oil & Gas
Sandefer Oil & Gas
Mr. W. David Willig
Atocha Exploration, Inc.
December 20, 1996
Page Three
(c) All rights determined by the State of Louisiana Department of
Conservation unitization proceedings to be upthrown and fault
separated from the Existing Units by Fault "1" as documented
by established State of Louisiana Conservation Department
adopted unitized geology shall be subject to the ORRI,
irrespective of depth or formation.
(d) For any wells drilled outside the Existing Units but within
the AOI, all rights shall be subject to an ORRI on 8/8ths of
the production from any such well.
2. Accordingly, each of SOG, Potosky, Willig, POG, and Atocha for
themselves on behalf of their respective successors and assigns, waive
all claims to any ORRI with respect to the PANACO acquisition derived
from established production included in any and all existing well
bores which fall within the Existing Units and which fall within the
AOI except for the exceptions stated in Paragraphs 1 (a) through (d)
above.
3. Nothing contained in this correspondence shall act to supersede,
change, amend or otherwise modify the terms and provisions of the
JOA, except as otherwise provided herein.
4. This agreement may be executed in several counterparts, each of which
will be deemed to be an original, but all of which together will
constitute one and the same instrument.
If the foregoing correctly states our mutual understanding and agreement,
please so indicate your acceptance by executing in the appropriate space below.
Sincerely,
National Energy Group, Inc.
/s/ WILLIAM T. JONES
William T. Jones
Title: Senior Vice President
WTJ:1jg
cc: Miles D. Bender (President and CEO)
<PAGE> 13
Mr. Robert Potosky
Potosky Oil & Gas
Sandefer Oil & Gas
Mr. W. David Willig
Atocha Exploration, Inc.
December 20, 1996
Page Four
ACCEPTED AND AGREED
THIS 20TH DAY OF DECEMBER, 1996.
Robert A. Potosky, an Individual
/s/ ROBERT A. POTOSKY
- -------------------------------------
By: ROBERT A. POTOSKY
Potosky Oil & Gas
/s/ ROBERT A. POTOSKY
- -------------------------------------
By: /s/ ROBERT A. POTOSKY
Title: President
Sandefer Oil & Gas
/s/ STEPHEN F. SMITH
- -------------------------------------
By: STEPHEN F. SMITH
Title: EXECUTIVE VICE PRESIDENT
W. David Willig, an Individual
/s/ W. DAVID WILLIG
- -------------------------------------
By: W. DAVID WILLIG
Atocha Exploration, Inc.
/s/ W. DAVID WILLIG
- -------------------------------------
By: W. DAVID WILLIG
Title: PRESIDENT
<PAGE> 14
[BAYOU SORREL FIELD DIAGRAM]
EXHIBIT "A"
<PAGE> 1
EXHIBIT 10.49
FOURTH AMENDMENT TO RESTATED LOAN AGREEMENT
THIS FOURTH AMENDMENT TO RESTATED LOAN AGREEMENT (hereinafter referred
to as the "Agreement") executed as of the 21st day of August, 1997, by and
among NATIONAL ENERGY GROUP, INC., a Delaware corporation ("Borrower") and
BOOMER MARKETING CORPORATION, an Oklahoma corporation ("Boomer") (Boomer is
hereinafter referred to as "Guarantor") and BANK ONE, TEXAS, N.A., a national
banking association ("Bank One") and CREDIT LYONNAIS NEW YORK BRANCH ("Credit
Lyonnais") and each of the financial institutions which may from time to time
become a party hereto or any successor or assignee thereof (hereinafter
collectively referred to as "Banks", and individually as "Bank") and Bank One,
as "Administrative Agent" and Credit Lyonnais as "Syndication Agent."
W I T N E S S E T H:
WHEREAS, Borrower, Guarantor, Banks and Agent entered into a Restated
Loan Agreement, dated as of August 29, 1996 (the "Loan Agreement") under the
terms of which the Banks agreed to provide the Borrower with a reducing
revolving line of credit facility in an amount of up to $100,000,000 and a term
loan in an amount of up to $5,000,000; and
WHEREAS, Borrower, Guarantor, Banks and Agent entered into a First
Amendment to Restated Loan Agreement dated October 31, 1996 and a Second
Amendment to Restated Loan Agreement dated March 7, 1997 and a Third Amendment
to Restated Loan Agreement dated May 12, 1997; and
WHEREAS, the Borrower, the Guarantor and the Banks have agreed to
amend the Loan Agreement to make certain changes thereto.
NOW, THEREFORE, the parties hereto agree to amend the Loan Agreement
as follows:
1. Section 7(b) of the Loan Agreement is hereby amended by
deleting the last sentence thereof and inserting the following in lieu thereof:
"If the Borrower is ever required to purchase or redeem any of
the notes issued by Borrower pursuant to that certain Indenture (the
"1996 Indenture") dated as of November 1, 1996 by and among Borrower,
National Energy Group of Oklahoma, Inc. and Bank One, Columbus, N.A.,
as Trustee (the "1996 Senior Unsecured Notes") or pursuant to that
certain Indenture (the "1997 Indenture") (the 1996 Indenture and the
1997 Indenture are hereinafter sometimes collectively referred to as
the "Indenture") dated as of August 15, 1997, by and among Borrower
and Bank One, Columbus, N.A., as Trustee (the "1997 Senior Unsecured
Notes") (the 1996 Senior Unsecured Notes and the 1997 Senior Unsecured
Notes are hereinafter sometimes collectively referred to as the
"Senior Unsecured Notes"), or if any portion of the Senior Unsecured
Notes becomes due for any reason, the Borrowing Base shall
automatically be reduced to $0; provided, however, that with respect
to any redemption required pursuant to Sections 4.11 or 4.17 of either
the
<PAGE> 2
1996 Indenture or the 1997 Indenture, the Borrowing Base shall only be
reduced by an amount equal to the amount of Senior Unsecured Notes
redeemed."
2. The Banks hereby consent to the issuance of the 1997 Senior
Unsecured Notes. described in the 1997 Indenture and waive any Event of Default
that may occur as a result of the execution of the 1997 Indenture and related
documents and the incurrence of the $65,000,000 in 1997 Senior Unsecured Notes.
3. As of the date of this Agreement, the Borrowing Base shall be
$20,000,000 and the Monthly Commitment reduction shall be $0.
4. Except to the extent its provisions are specifically amended,
modified or superseded by this Agreement, the representations, warranties and
affirmative and negative covenants of the Borrower contained in the Loan
Agreement are incorporated herein by reference for all purposes as if copied
herein in full. The Borrower hereby restates and reaffirms each and every term
and provision of the Loan Agreement, as amended, including, without limitation,
all representations, warranties and affirmative and negative covenants. Except
to the extent its provisions are specifically amended, modified or superseded
by this Agreement, the Loan Agreement, as amended, and all terms and provisions
thereof shall remain in full force and effect, and the same in all respects are
confirmed and approved by the Borrower and the Banks.
5. The obligations of Banks under this Agreement shall be subject
to the following conditions precedent:
(a) Execution and Delivery. The Borrower and Guarantor
shall have executed and delivered this Agreement, and other required
documents, all in form and substance satisfactory to Banks;
(b) Corporate Resolutions. Agent shall have received
appropriate certified corporate resolutions of Borrower and Guarantor;
(c) Senior Unsecured Notes. The transaction described in
the 1997 Indenture shall have closed and been funded prior to
September 1, 1997;
(d) Payoff Existing Indebtedness. The Banks shall have
received payment in full of all principal, interest and fees then due
or outstanding under the Loan Agreement from the proceeds of the 1997
Senior Unsecured Notes;
(e) Other Documents. Banks shall have received such
other instruments and documents incidental and appropriate to the
transaction provided for herein as Bank One or
-2-
<PAGE> 3
its counsel may reasonably request, and all such documents shall be in
form and substance satisfactory to Banks; and
(f) Legal Matters Satisfactory. All legal matters
incident to the consummation of the transactions contemplated hereby
shall be satisfactory to special counsel for Banks retained at the
expense of Borrower.
6. Unless otherwise defined herein, all defined terms used herein
shall have the same meaning ascribed to such terms in the Loan Agreement.
7. The Guarantor hereby consents to the provisions of this
Agreement and the transactions contemplated herein, and hereby ratifies and
confirms its Guaranty Agreements, each dated as of August 29, 1996, and agrees
that its obligations and covenants thereunder are unimpaired hereby and shall
remain in full force and effect.
8. This Agreement may be executed in any number of identical
separate counterparts, each of which for all purposes to be deemed an original,
but all of which shall constitute, collectively, one Agreement.
IN WITNESS WHEREOF, the parties have caused this Fourth Amendment to
Restated Loan Agreement to be duly executed as of the date first above written.
BORROWER:
--------
NATIONAL ENERGY GROUP, INC.
a Delaware corporation
By: /s/ MILES D. BENDER
-----------------------------------------
Miles D. Bender, President
GUARANTOR:
---------
BOOMER MARKETING CORPORATION
an Oklahoma corporation
By: /s/ ROBERT A. IMEL
-----------------------------------------
Name: Robert A. Imel
---------------------------------------
Title: Chief Financial Officer
--------------------------------------
-3-
<PAGE> 4
BANKS:
-----
BANK ONE, TEXAS, N.A.
By: /s/ WM. MARK CRANMER
-----------------------------------------
Wm. Mark Cranmer, Vice President
CREDIT LYONNAIS NEW YORK BRANCH
By: /s/ ALAIN PAPIASSE
-----------------------------------------
Name: ALAIN PAPIASSE
---------------------------------------
Title: Executive Vice President
--------------------------------------
ADMINISTRATIVE AGENT:
--------------------
BANK ONE, TEXAS, N.A.
By: /s/ WM. MARK CRANMER
-----------------------------------------
Wm. Mark Cranmer, Vice President
SYNDICATION AGENT:
-----------------
CREDIT LYONNAIS NEW YORK BRANCH
By: /s/ ALAIN PAPIASSE
-----------------------------------------
Name: ALAIN PAPIASSE
---------------------------------------
Title: Executive Vice President
--------------------------------------
-4-
<PAGE> 5
[GARDERE & WYNNE L.L.P. LETTERHEAD]
August 25, 1997
Mr. Robert A. Imel
Chief Financial Officer
National Energy Group, Inc.
4925 Greenville Avenue, Suite 1400
Dallas, Texas 75206
Re: Fourth Amendment to Restated Loan Agreement
Dear Bob:
Enclosed please find an executed original counterpart of the Fourth Amendment
to Restated Loan Agreement between National Energy Group, Inc., et al. and Bank
One, Texas, N.A., et al. for your files.
If you have any questions or problems with the foregoing, please do not
hesitate to call.
Very truly yours,
/s/ ROBERT N. RULE JR.
Robert N. Rule, Jr.
RNR/jat
Enclosures
cc: Mr. Wm. Mark Cranmer (with enclosure)
<PAGE> 1
EXHIBIT 10.51
EXECUTIVE EMPLOYMENT AGREEMENT
This Executive Employment Agreement (the "Agreement") is made the 25th
day of August, 1997, by and between National Energy Group, Inc., a Delaware
corporation acting by and through its hereunto duly authorized officer (the
"Company"), and C. Dewayne Cravens (the "Executive").
WHEREAS, the Executive is presently in the employ of the Company in the
capacity of Vice President of Engineering and Production is willing to provide
certain employment assurances to the Executive in the event of a Change of
Control (as defined below) of the Company as incentive and inducement for the
Executive to continue in such employment in his present capacity after a
Change of Control; and
WHEREAS, in consideration of such employment assurances, the Executive
is willing to remain in the employ of the Company in the capacity of Vice
President of Engineering and Production after a Change of Control of the
Company.
NOW, THEREFORE, in consideration of the premises and the mutual terms
and conditions hereof, the Company and the Executive hereby agree as follows:
1. Employment. In consideration of the benefits hereinafter specified,
the Executive hereby agrees to continue his employment with the Company in the
capacity of Vice President of Engineering and Production after a Change of
Control of the Company and to discharge his duties in such capacity during the
term of this Agreement.
2. Exclusive Services. The Executive shall devote his full working
time, ability and attention to the business of the Company during the term of
this Agreement and shall not, directly or indirectly, render any services of a
business, commercial or professional nature to any other person, corporation or
organization, whether for compensation or otherwise, without the prior knowledge
and consent of the Board of Directors (the "Board") or President and Chief
Executive Officer of the Company; provided, however, that the provisions of this
Agreement shall not be construed as preventing the Executive from investing in
other non-competitive businesses or enterprises if such investments do not
require substantial services on the part of the Executive in the affairs or
operations of any such business or enterprise so as to significantly diminish
the performance by the Executive of his duties, functions and responsibilities
under this Agreement. During the term of this Agreement, the Executive shall
not, directly or indirectly, either through any kind of ownership (other than
ownership of securities of publicly held corporations of which the Executive
owns less than five percent (5%) of any class of outstanding securities) or as a
director, officer, agent, employee or consultant engage in any business that is
competitive with the Company.
3. Authority and Duties. During the term of this Agreement, the
Executive shall have such authority and shall perform such duties, functions and
responsibilities as are specified by the Bylaws of the Company, the Executive
Committee, the Board of Directors, or the President of the Company and/or as are
appropriate for the office of the Vice President of Engineering and Production
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 of Engineering and Production of the Company after a Change of Control
or limits, restricts or reassigns his authority and responsibility after a
Change of Control so as to be less significant than, or not comparable to, that
to which he held immediately preceding such Change of Control in his capacity as
Vice President of Engineering and Production without his prior mutual consent,
the Executive shall be entitled to resign for good reason and receive the
Severance Benefits set
<PAGE> 2
forth in this Agreement.
4. Compensation. In consideration for the services to be rendered by
the Executive to the Company and/or its subsidiaries, the Company shall pay to
the Executive at least the gross cash compensation and shall award to the
Executive at least the bonuses as set forth below:
<TABLE>
<CAPTION>
===================================================================================================================================
ANNUAL PERIOD ANNUAL ANNUAL BONUS
BASE SALARY
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
For the one year period following 100% of the average of the Executive's 100% of the average of the bonuses paid
effective date of a Change of Control annual base salary in effect immediately to the Executive for each of the three
prior to the Change in Control and of fiscal years before the Change in Control
the Executive's annual base salary for
each of the immediately preceding two
years
- -----------------------------------------------------------------------------------------------------------------------------------
For the second year following 100% of the average of the Executive's 100% of the average of the bonuses paid
effective date of a Change of Control annual base salary on the date that is to the Executive for the three
one year after the Change in Control immediately preceding fiscal years
and of the Executive's annual base
salary for each of the immediately
preceding two years
- -----------------------------------------------------------------------------------------------------------------------------------
For the third year following 100% of the average of the Executive's 100% of the average of the bonuses paid
effective date of a Change of Control annual base salary on the date that is to the Executive for the three
two years after the Change in Control immediately preceding fiscal years
and of the Executive's annual base salary
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 his
participation in programs maintained by the Company for the benefit of
its employees and officers and to participate in new or amended
programs, including, but not limited to, medical, health, life,
accident and disability insurance programs, pension plans, incentive
compensation plans, stock option plans, stock appreciation rights
plans, and limited stock appreciation rights plans.
2
<PAGE> 3
The Company shall not terminate nor amend such plans to the detriment
of the Executive.
(b) To the extent that the Company has provided the Officer
with an automobile, club memberships, association and trade memberships
and other memberships prior to the Change of Control, the Company shall
continue to provide the Officer with such items, of a comparable
nature, following a Change of Control. The Company shall pay the
expenses of such automobile, memberships and subscriptions.
(c) The Executive shall be reimbursed for any business
expenses reasonably incurred in carrying out his duties, functions and
responsibilities upon presentation of expense reports to the Company.
6. Term. This Agreement shall have a term of three (3) years commencing
on the effective date of a Change of Control and shall be automatically extended
on the 9th day of each and every calendar month during the term of this
Agreement for an additional calendar month so that at the beginning of each and
every month during the term of this Agreement there shall be a remaining term of
three (3) years (but in no event beyond the time the Executive reaches age 65
unless and until the Company gives written notice to the Executive that the term
of this Agreement shall not be further so extended, in which case the Executive
shall be entitled to resign for good reason. The provisions of this Section 6
shall apply to each Change of Control irrespective of any Changes of Control
which may have occurred previously.
7. Severance Benefits After Change Of Control. In addition to such
compensation and other benefits payable to or provided for the Executive as
authorized by the Board from time to time, Executive shall be entitled to
receive in lieu of the compensation described in paragraph 4 hereof, and the
Company shall pay or provide to the Executive the following severance benefits
(the "Severance Benefits") in the event that, during the term hereof, the
Company discharges the Executive without cause or the Executive resigns for good
reason after a Change of Control, to-wit:
(a) The Company shall pay to the Executive a lump sum cash
payment (multiplied by the applicable factor described below) payable
on such date of termination of employment equal to the Executive's
"base compensation" then in effect, which shall, and is defined to,
consist of the sum of (i) the Executive's annual base salary then in
effect, (ii) the average of the amounts of the last three annual cash
bonuses paid or granted to, or earned by, the Executive, and (iii) the
average of the total amounts of the Company's contributions to its
retirement plan allocable to the Executive on a fully vested basis for
the last three fiscal years of the retirement plan. The amount of the
"base compensation" payable to the Executive pursuant to this Section
7(a) shall be 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.
3
<PAGE> 4
(c) The Company shall continue the participation of the
Executive in all life, accident, disability, medical, dental and all
other health and casualty insurance plans maintained by the Company for
its officers and employees for a period of one (1) year after the date
of such termination of employment or for such longer period as may be
required by applicable law.
(d) Notwithstanding any provision of this Agreement to the
contrary, if the Executive is a disqualified individual (as the term
"disqualified individual" is defined in Section 280G of the Code) and
if any portion of the Severance Benefits under this Section 7 of this
Agreement would be an excess parachute payment (as the term "excess
parachute payment" is defined in Section 280G of the Code) but for the
application of this sentence, then the amount of the Severance Benefits
otherwise payable to the Executive pursuant to this Agreement will be
reduced to the minimum extent necessary (but in no event to less than
zero) so that no portion of the Severance Benefits, as so reduced,
constitutes an excess parachute payment. The determination of whether
any reduction in the amount of the Severance Benefits is required
pursuant to this Section 7(d) will be made by the Company's independent
accountants. The fact that the Executive has his Severance Benefits
reduced as a result of the limitations set forth in this Section 7(d)
will not of itself limit or otherwise affect any rights of the
Executive arising other than pursuant to this Agreement.
(e) The Company has determined that the amounts payable under
this Agreement constitute reasonable compensation for services
rendered. Accordingly, notwithstanding any other provision hereof,
unless such action would be expressly prohibited by applicable law, if
any amount is paid pursuant to this Agreement which is determined to be
subject to the excise tax imposed by Section 4999 of the Code, the
Company will pay to the Executive an additional amount in cash equal to
the amount necessary to cause the aggregate amount payable under this
Agreement, including such additional cash payment (net of all federal,
state and local income taxes and all taxes payable as the result of the
application of Sections 280G and 4999 of the Code), to be equal to the
aggregate amount payable under this Agreement, excluding such
additional payment (net of all federal, state and local income taxes),
as if Sections 280G and 4999 of the Code (and any successor provisions
thereto) had not been enacted into law.
8. Place of Performance. During the term hereof:
(a) The principal office of the Executive and the principal
place for performance by him of his duties, functions and
responsibilities under this Agreement shall be in the City or suburbs
of Dallas, Texas.
(b) It is recognized that the performance of the Executive's
duties hereunder may occasionally require the Executive, on behalf of
the Company, to be away from his principal office for business reasons.
Unless consent of the Executive is obtained, such periods of being away
from his principal office on behalf of the Company shall not exceed
thirty (30) calendar days per year.
9. Definition of Change of Control. For purposes of this Agreement,
"Change of Control" shall mean the occurrence of one or more of the following
events: (i) a person or entity or group (as that term is used in Section
13(d)(3) of the Exchange Act) of persons or entities shall have become the
beneficial owner of a majority of the securities of the Company ordinarily
having the right to vote in the election of directors, (ii) during any
consecutive two-year period,
4
<PAGE> 5
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 66b% of
the directors then still in office who were either directors at the beginning of
such period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board of
Directors of the Company then in office, (iii) any sale, lease, exchange or
other transfer (in one transaction or a series of related transactions) of all,
or substantially all, the assets of the Company to any person or entity or group
(as so defined in Section 13(d)(3) of the Exchange Act) of persons or entities
(other than any wholly owned subsidiary of the Company), or (iv) the merger or
consolidation of the Company into or with another corporation or the merger of
another corporation into the Company with the effect that immediately after such
transaction any person or entity or group (as so defined in Section 13(d)(3) of
the Exchange Act) of persons or entities, or the stockholders of any other
entity, shall have become the beneficial owner of securities of the surviving
corporation of such merger or consolidation representing a majority of the
voting power of the outstanding securities of the surviving corporation
ordinarily having the right to vote in the election of directors. The Alexander
Energy Corporation merger, however it might be structured, shall not constitute
a Change of Control under this Agreement.
10. Discharge with Cause. For the purposes of this Agreement, the
Company shall be deemed to have discharged the Executive for cause only if any
one of the following conditions existed:
(a) If the Executive shall have willfully breached or
habitually neglected his duties and responsibilities as the Vice
President of Engineering and Production 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 his resignation:
(a) If the Company shall have assigned to the Executive
authority and responsibilities less significant than, or not comparable
to, that which he had in his capacity as Vice President of Engineering
and Production immediately preceding a Change of Control or shall
otherwise so limit or restrict his authority and responsibilities after
a Change of Control;
(b) The Company shall have reduced the Executive's annual base
salary below his annual base salary in effect on the effective date of
a Change of Control or the Company shall have reduced the Executive's
annual cash bonus below that of his last annual cash bonus prior to the
effective date of a Change of Control;
5
<PAGE> 6
(c) The Company shall have taken any actions having the
purpose or intent and the effect of inducing the Executive to resign,
such as failing to provide the Executive with all personnel benefits
which are otherwise generally provided to executive officers of the
Company or reasonably necessary or appropriate for the performance by
the Executive of his duties as Vice President of Engineering and
Production of the Company; or
(d) The Company shall have declined to extend the term of this
Agreement pursuant to Section 6 hereof.
12. Termination Upon Death. This Agreement shall terminate immediately
upon the date of the death of the Executive.
13. Remedies. If the Executive shall file any judicial action for
enforcement of this Agreement and successfully recover compensation or damages,
the Executive shall be entitled to recover from the Company an additional amount
equal to interest at ten percent (10%) per annum on the amount recovered from
the date such amount was due and payable together with all expenses and
reasonable attorneys' fees incurred in obtaining legal advice and counselling
respecting his rights under this Agreement and in prosecuting and disposing of
such action. The provisions of this Section shall be cumulative and without
prejudice to any other right or remedy to which the Executive may be entitled
either at law, in equity or under this Agreement and shall not constitute the
exclusive remedy of the Executive for breach of this Agreement.
14. General Provisions.
(a) Notices. Any notices to be given hereunder by either party
to the other may be given either by personal delivery in writing or by
fax, or by mail, registered or certified, postage prepaid, return
receipt requested, addressed to the parties at their respective
addresses set forth below their signatures to this Agreement, or at
such other addresses as they may specify to the other in writing.
(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.
6
<PAGE> 7
(e) Binding Effect. This Agreement shall extend to and be
binding upon and inure to the benefit of the parties hereto, their
respective heirs, representatives, successors and assigns. All of the
provisions of this Agreement shall be fully applicable to any successor
to the Company resulting from a Change of Control. The Company agrees
that in the event of a tender or exchange offer, merger, consolidation
or liquidation or any such similar event involving the Company, its
securities or assets, it shall reveal the existence of this Agreement
to the acquiring person or entity. The Company further agrees that if
such action is not inconsistent with the best interests of the Company,
it shall condition approval of any transactions proposed by the
acquiror upon obtaining the consent, in writing, of the potential
successor to the Company to be bound by this Agreement. In the event
the Executive dies prior to the termination of this Agreement, any
compensation or other payment due and owing to the Executive on or
before the date of the Executive's death shall be paid to his estate,
executors, administrators, heirs or legal representatives. Since the
duties and services of the Executive hereunder are special, personal
and unique in nature, the Executive may not transfer, sell or otherwise
assign his rights, obligations or benefits under this Agreement.
(f) Waiver. The waiver by either party hereto of a breach of
any term or provision of this Agreement shall not operate or be
construed as a waiver of a subsequent breach of the same provisions by
either party or of the breach of any other term or provision of this
Agreement.
(g) Titles. Titles of the paragraphs herein are used solely
for convenience and shall not be used for interpretation or construing
any word, clause, paragraph or provision of this Agreement.
(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 August
13, 1997 (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. 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.
7
<PAGE> 8
IN WITNESS WHEREOF, the Company and the Executive have executed this
Executive Employment Agreement as of the day and year first written above,
effective as of the date specified above.
COMPANY:
NATIONAL ENERGY GROUP, INC.
By: /s/ MILES D. BENDER
------------------------------------------
Miles D. Bender
President and Chief Executive Officer
4925 Greenville Avenue, Suite 1400
Dallas, Texas 75206
(214) 692-9211
(214) 692-5055 (Fax)
EXECUTIVE:
/s/ C. DEWAYNE CRAVENS
---------------------------------------------
C. DEWAYNE CRAVENS
3629 Cross Bend Road
Plano, TX 75023-5826
8
<PAGE> 1
EXHIBIT 12.1
NATIONAL ENERGY GROUP, INC.
COMPUTATION OF HISTORICAL RATIO OF EARNINGS
TO FIXED CHARGES
(IN THOUSAND, EXCEPT FO RATIOS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Earnings:
Income (loss) before income taxes and
extraordinary items $ (299) $ (489) $ 206 $ (40,061) $ (41,624)
Interest expense 137 498 995 3,621 11,256
Amortization of debt issuance cost 51 19 37 151 640
Interest portion of rental expense 8 21 34 37 83
Earnings (loss) $ (103) $ 49 $ 1,272 $ (36,252) $ (29,645)
========= ========= ========= ========== ===========
Fixed charges:
Interest, including capitalized $ 137 $ 498 $ 995 $ 3,621 $ 13,801
portion
Amortization of debt issuance cost 51 19 37 151 640
Interest portion of rental expense 8 21 34 37 83
--------- --------- --------- ---------- -----------
Fixed charges $ 196 $ 538 $ 1,066 $ 3,809 $ 14,524
========= ========= ========= ========== ===========
Ratio of earnings to fixed charges - - 1.2x - -
========= ========= ========= ========== ===========
Deficiency of earnings to fixed charges $ (299) $ (489) - $ (40,061) $ (44,169)
========= ========= ========= ========== ===========
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 333-42981, and 333-41539) pertaining to National Energy Group,
Inc.'s Employee Stock Purchase Plan and 1996 Incentive Compensation Plan and
1996 Individual Compensation Agreement, respectively, of our report dated March
13, 1998, with respect to the consolidated financial statements of National
Energy Group, Inc. included in the Annual Report (Form 10-K) for the year ended
December 31, 1997.
Dallas, Texas
March 24, 1998
<TABLE> <S> <C>
<ARTICLE> CT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<TOTAL-ASSETS> 254,361
0
171
<COMMON> 405
<OTHER-SE> 47,317
<TOTAL-LIABILITY-AND-EQUITY> 254,361
<TOTAL-REVENUES> 54,561
<INCOME-TAX> (7,286)
<INCOME-CONTINUING> (34,338)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (34,338)
<EPS-PRIMARY> (.94)
<EPS-DILUTED> (.94)
</TABLE>
