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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1999
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)
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DELAWARE 58-1922764
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4925 GREENVILLE AVENUE
DALLAS, TEXAS 75206
(Address of principal executive offices) (Zip code)
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(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. [X]
The aggregate market value of the shares of Common Stock held by
non-affiliates of the Registrant, as of March 23, 2000, (based upon the last
sales price of $.22 as reported by the OTC Bulletin Board was $6,317,190.
40,527,482 shares of the Registrant's common stock, $0.01 par value, were
outstanding on March 23, 2000.
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TABLE OF CONTENTS
PART I
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ITEMS 1. AND 2. BUSINESS AND PROPERTIES................................... 3
Forward-Looking Statements.................................. 3
Background and Recent Developments.......................... 3
Principal Areas of Operations............................... 6
Oil and Natural Gas Reserves................................ 8
Oil and Natural Gas Production and Unit Economics........... 9
Productive Well Summary..................................... 10
Leasehold Acreage........................................... 10
Drilling Activity........................................... 11
Title to Oil and Natural Gas Properties..................... 11
Production and Sales Prices................................. 11
Control Over Production Activities.......................... 11
Markets and Customers....................................... 11
Regulation.................................................. 12
Operational Hazards and Insurance........................... 14
Competition................................................. 15
Office Space................................................ 15
Employees................................................... 15
ITEM 3. LEGAL PROCEEDINGS........................................... 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 16
Market Information.......................................... 16
Holders..................................................... 16
Dividends on Common Stock................................... 16
Annual Meeting.............................................. 16
ITEM 6. SELECTED FINANCIAL DATA..................................... 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 20
Overview.................................................... 21
Results of Operations....................................... 21
Liquidity and Capital Resources............................. 24
Future Capital Requirements................................. 25
Financial Reporting Impact of Full Cost Method of
Accounting.................................................. 25
Recent Accounting Pronouncements............................ 26
Changes in Prices........................................... 26
Inflation................................................... 26
Year 2000................................................... 26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.. 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 27
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 27
ITEM 11. EXECUTIVE COMPENSATION...................................... 30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 37
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 42
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K......................................................... 43
Signatures.................................................. 50
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PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES
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 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, drilling of wells, future
production of oil and gas, 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, future oil and gas prices, future operating costs,
severance and excise taxes, actions and approvals of the Bankruptcy Court,
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. In
addition, the approval of a plan of reorganization can potentially have a
material impact on the Company and its future operations. 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. Such statements are not
guarantees of future performance and actual results or developments may differ
materially from those projected in the forward-looking statements.
BACKGROUND AND RECENT DEVELOPMENTS
National Energy Group, Inc. was incorporated under the laws of the State of
Delaware on November 20, 1990. Effective June 11, 1991, Big Piney Oil and Gas
Company and VP Oil, Inc. merged with and into the Company. On August 29, 1996,
Alexander Energy Corporation 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 which has historically engaged
in the exploration, acquisition, exploitation, development and production of oil
and natural gas properties in major producing basins onshore in Texas,
Louisiana, Oklahoma, Arkansas and offshore in the Gulf of Mexico.
On December 4, 1998, certain of the holders of the Senior Notes of National
Energy Group, Inc. filed an Involuntary Petition for an Order for Relief under
Chapter 11 of Title 11 of the United States Bankruptcy Code in the United States
Bankruptcy Court for the Northern District of Texas, Dallas Division, due to
non-payment of interest due December 2, 1998, after expiration of a 30-day grace
period. On December 23, 1998, the Company filed, in the Bankruptcy Court, an
Answer to and Motion to Dismiss the pending Involuntary Petition. The Company's
Motion affirmed that it (i) was meeting its obligations and generally paying its
debts as they become due, unless such debts were the basis of a bona fide
dispute and (ii) had arranged with the lender under its credit facility to
borrow additional funds sufficient to pay the interest due on the Senior Notes,
conditioned upon the Court's dismissal of the Involuntary Petition. However, on
February 8, 1999, the Bankruptcy Court denied the Company's Motion to Dismiss
the Involuntary Petition. An Order for Relief was entered by the Bankruptcy
Court on February 11, 1999. The Order for Relief placed the Company under the
protection of the
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Court and precluded payment of the interest on the Senior Notes until the
conclusion of the Bankruptcy proceeding. Additionally, payment of liabilities
existing as of February 11, 1999 to certain unsecured creditors and dividends in
arrears to holders of the Company's preferred stock and any pending litigation
are stayed during the Bankruptcy proceeding. The Company shall act as
debtor-in-possession and will continue to operate its business and manage its
properties in the ordinary course of business during its Chapter 11 proceeding.
As a result of the Chapter 11 proceeding, the Company discontinued the accrual
of interest on the unsecured Senior Notes and discontinued the accrual of
dividends on the unsecured preferred stock. Approximately $17.7 million
additional interest expense would have been recognized by the Company for 1999
if not for the discontinuation of the interest accrual on the Senior Notes.
On August 4, 1999, the Company and the unsecured creditors' committee (the
"Committee") appeared before the Bankruptcy Court and announced agreement on the
process for marketing the Company and/or its assets. The Court entered an order
which provided that the Company and the Committee would employ CIBC World
Markets Corp. ("CIBC") to solicit bids for sale of the Company and/or its
assets. The Company assisted CIBC in assembling a data room for potential
bidders to view information regarding the Company's assets. CIBC marketed the
Company's assets pursuant to procedures approved by the Company, the Committee
and the Court. In addition, the Court approved the retention of Netherland,
Sewell & Associates, Inc. to (i) complete its reserve evaluation of the
Company's oil and natural gas properties as of December 31, 1998, (ii) update
the reserve evaluation as of July 1, 1999 and (iii) provide assistance to the
Company, CIBC and prospective buyers during the marketing process. The marketing
process culminated in an auction conducted by the Bankruptcy Court on November
1, 1999. At the auction, bidding on the Company's oil and gas properties,
exclusive of the Company's Lake Mongoulois and Mustang Island properties,
ultimately ended at a high bid of $96.25 million given by Arnos, Corp. ("Arnos")
an affiliated subsidiary of the Company's Series D preferred stockholder. The
Committee, after review, concluded that it would recommend to the Court that it
accept the high bid of $96.25 million. An order accepting Arnos as the highest
bidder was signed by the Court on November 16, 1999. Arnos filed a motion to
close the Purchase and Sale Agreement ("Arnos PSA") into escrow pending (i) the
Court's confirmation of a plan of reorganization or (ii) in the event a plan of
reorganization is not confirmed, a court ordered closing of the sale of the
properties to Arnos. On or about January 28, 2000 the substantive purchase and
sale closing documents were delivered into the registry of the Court, however,
the closing of the Arnos PSA is still pending as noted. The Court approved this
motion and ordered Arnos to pay into the Court's registry the sum of $61.625
million which equals the purchase price of $96.25 million less a previously
escrowed deposit of $9.625 million and the principal balance of $25 million
outstanding under the Company's secured credit facility with Arnos.
On February 28, 2000, the Committee filed with the Court a Joint Disclosure
Statement ("Committee Disclosure Statement") and proposed Plan of Reorganization
(the "Committee Plan"). The Committee Plan provides for (i) the possibility of a
limited continuation of the Company's oil and gas business operations; (ii) the
creation of a creditors trust to which will be transferred substantially all of
the cash and cash equivalents remaining in the Company, the funds held in the
Registry of the Court from the auction of the Company's properties, and all
causes of action for the payment and primary benefit of certain allowed
administrative, tax, priority and miscellaneous secured and unsecured creditors;
and (iii) payment in full of the secured claims. The Committee Plan designates
eight (8) classes of claims and equity interests. The Company's Senior
Noteholders are deemed to be Allowed Class 6 Claims in the Committee's Plan and
are entitled to their pro rata share of the remaining proceeds in the creditors
trust after payment of the secured claims. Following distribution of the
creditors trust fund to the various claimants, the Committee retains the right
to sell the Company's remaining assets or sell to third parties the rights of
the Senior Noteholders to retain between 49% and 95% of the outstanding stock of
the reorganized Company in the form of newly issued additional common stock. In
connection therewith, the Senior Noteholders shall have the right to elect all
members of the Company's Board of Directors for a two (2) year term following
the effective date of the Committee's Plan. The Committee's Plan further
provides that all of the Company's preferred stock shall be converted into
Common Stock at a conversion price of $.25 per share, and the existing common
and preferred equity interests of the Company shall remain in existence. Neither
the Company's preferred shareholders, nor the Company's common shareholders are
entitled to vote on the Committee's Plan and have been deemed for all purposes
to have rejected it in its entirety. Both
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the Committee Plan and Committee Disclosure Statement are subject to amendment,
and a hearing in the Bankruptcy Court on the Committee Disclosure Statement is
scheduled on April 17, 2000.
On March 14, 2000, the Company filed with the Court a Joint Disclosure
Statement ("Company Disclosure Statement") and Plan of Reorganization (the
"Company Plan"). The Company Plan provides for (i) continuation of the Company's
oil and gas business operations; (ii) payment in full of all secured claims,
including the Arnos secured claim in the amount of $25 million, plus interest as
may be due; (iii) payment of a cash sum not to exceed $10,000 to certain classes
of claimants involved in litigation with the Company if such class accepts the
Company's Plan or, alternatively, if rejected by such class, cash in the amount
of 56.5% of any Allowed Claim in such class; (iv) acquisition by Arnos of any
Senior Notes, not otherwise held by Arnos, in consideration of a payment equal
to 56.5% of the face value of each such bond acquired, or, alternatively, a pro
rata share of the cash which Senior Noteholders would receive in a liquidation,
plus a pro rata beneficial interest in a creditor's trust consisting of certain
causes of action, two properties of the Company and $250,000 in cash; (v)
payment of a cash sum equal to 75% of any Allowed Claim to trade creditors; (vi)
retention by each of the preferred and common shareholder equity interests;
provided that both the preferred and common equity interests may, at the option
of Arnos, be deemed cancelled and reissued to holders in a form to be determined
by Arnos; (vii) purchase by Arnos, or an affiliate of Arnos, of additionally
issued shares of the reorganized Company's common stock to the extent that Arnos
or its affiliate shall own up to 49% of all the issued and outstanding common
stock of the reorganized Company; and (viii) amendment to the Senior Notes
Indenture. The Company's Plan further proposes that the Company's existing
officers and directors shall continue as the officers and directors of the
reorganized Company until otherwise replaced as provided in the Company's
bylaws. Neither the Company's preferred shareholders, nor the Company's common
shareholders are entitled to vote on the Company's Plan and have been deemed for
all purposes to have rejected it in its entirety. Both the Company Plan and
Company Disclosure Statement are subject to amendment, and a hearing in the
Bankruptcy Court on the Company Disclosure Statement is scheduled on April 20,
2000.
Pursuant to an Order of the Bankruptcy Court dated September 7, 1999, the
Company's severance policy was abated and a Court ordered severance program was
put into effect for all employees of the Company ("Severance Program"). The
Severance Program provides for contingent payments as follows: (a) a "stay-pay"
component payable on the earlier of an employees termination without cause; the
closing of a sale of substantially all the Company's assets or the confirmation
of a plan of reorganization; and (b) a "severance" component, whereby upon
termination any employee who does not obtain new employment, or is not offered a
permanent job in Dallas, Texas for a period of at least one year at the same pay
and benefits provided by the Company, shall be entitled to certain severance
benefits. The Order also provided that any employee who participates in the
Severance Program waives and releases any and all claims arising from any
current Employment Agreement with the Company. Certain employees are not
entitled to any payments under the Severance Program until the earlier of (i)
confirmation of a Plan of Reorganization, (ii) conversion to a Chapter 7
bankruptcy proceeding or (iii) termination of their employment by a trustee
appointed by the Court.
The Company's last annual meeting of shareholders was held on June 4, 1998,
and due to the Company's bankruptcy proceeding, no meeting was held during 1999.
Accordingly, the Company is in violation of its Delaware charter which requires
that an annual meeting of shareholders be held each year or within thirteen
months of the last annual meeting of shareholders. Such failure to hold an
annual meeting of shareholders within the designated period could result in an
order by the Delaware Court of Chancery compelling such a meeting if deemed
appropriate. The Company anticipates that no annual meeting of shareholders will
be convened until such time that the Company's bankruptcy proceeding has
concluded.
The accompanying consolidated financial statements have been prepared on a
going concern basis of accounting and do not reflect any adjustments that might
result should the Company be unable to continue as a going concern. The
Company's prior losses from operations and the related Chapter 11 proceeding
raise concern about its ability to continue as a going concern. The
appropriateness of using the going concern basis is dependent upon, among other
things, (i) confirmation of a plan of reorganization under the Bankruptcy Code
which provides for continuation of the Company's oil and gas operations, (ii)
the ability to achieve profitable operations after such confirmation and (iii)
the ability to generate sufficient cash from operations to meet its obligations.
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Due to the Chapter 11 filing, the Company has suspended its exploratory and
development drilling program. The Company has been limited in its capital
expenditures to ordinary course enhancement of current production through
workovers, recompletions, and other production enhancing activities deemed to be
economic. During the bankruptcy proceeding, development drilling is anticipated
to be limited to (i) ordinary course non-operated wells in which the Company
owns limited working interests and in which the failure to participate may
result in drainage, depletion or loss of current reserves and (ii) operated
wells deemed to be economical given current oil and gas prices. Large
expenditures for developmental drilling may require court approval and none are
planned at this time.
At December 31, 1999, the Company had estimated Proved Reserves, as
determined from reserve reports prepared by Netherland, Sewell & Associates,
Inc., of 96.6 Bcfe with a PV10% at that date of approximately $108.9 million.
The reserves were approximately 65.0% natural gas and 88.1% Proved Developed
Reserves.
PRINCIPAL AREAS OF OPERATIONS
Due to the Chapter 11 filing the Company has suspended its exploratory and
development drilling program. However, the Company currently has an inventory of
exploratory prospects in Louisiana and offshore at Mustang Island.
Historically, the Company has developed and exploited existing properties
by drilling Development Wells, and recompleting and reworking existing wells.
The Company will continue to participate in non-operated wells as described
above and continue its drilling operations where economical in accordance with
the rulings and procedures set forth by the Court.
The following table sets forth the Company's principal areas of operations
and the Company's Proved Reserves of oil and natural gas at December 31, 1999.
See - "Oil and Natural Gas Properties".
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NATURAL
OIL AND NATURAL GAS
CONDENSATE GAS EQUIVALENT % OF
(MBBLS) (MMCF) (MMCFE) TOTAL
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Area:
Mid-Continent......................................... 511 33,184 36,248 37.5%
East and West Texas................................... 2,852 22,058 39,174 40.6
Gulf Coast............................................ 2,251 7,654 21,158 21.9
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Total.............................................. 5,614 62,896 96,580 100.0%
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The following table sets forth the Company's production by principal area
of operation for the year ended December 31, 1999:
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NATURAL
NATURAL GAS
OIL GAS EQUIVALENT % OF
(MBBLS) (MMCF) (MMCFE) TOTAL
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Area:
Mid-Continent........................................... 73 5,145 5,580 34.7%
East and West Texas..................................... 337 2,972 4,997 31.1
Gulf Coast.............................................. 725 1,149 5,501 34.2
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Total................................................ 1,135 9,266 16,078 100.0%
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MID-CONTINENT AREA
At December 31, 1999, approximately 37.5% (36.2 Bcfe) of the Company's
Proved Reserves were located in the Mid-Continent area in Oklahoma and Western
Arkansas which includes the Anadarko and Arkoma Basins.
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ANADARKO BASIN. 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 Basin 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
have 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.
During the year ended December 31, 1999, the Company drilled 3 Gross (.38
Net) Development Wells in the Anadarko Basin all of which were completed as
commercially productive. The Company's wells typically are completed in horizons
ranging in depth between 7,000 and 15,000 feet.
ARKOMA BASIN. Most Arkoma Basin reserves are produced from formations at
depths ranging from approximately 3,000 to 8,000 feet.
During 1999, the Company drilled 2 Gross (.64 Net) Development Wells in the
Arkoma Basin of which 1 Gross (.48 Net) Development Well was completed as
commercially productive. The typical Arkoma Basin well is drilled to a total
depth of approximately 7,500 feet.
EAST AND WEST TEXAS AREA
At December 31, 1999, approximately 40.6% (39.2 Bcfe) of the Company's
Proved Reserves were located in the East and West Texas area, including East
Texas and the Goldsmith Adobe Unit in West Texas.
EAST TEXAS. These reserves are found in the Cotton Valley formation and the
Travis Peak formation. The Cotton Valley formation is generally 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. A significant portion of the cost to complete Cotton
Valley 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 Travis Peak
formation is generally found at a depth of 7,200 feet and principally contains
oil reserves.
During the year ended December 31, 1999, the Company did not drill any
wells in East Texas.
GOLDSMITH ADOBE UNIT ("GAU"). The Goldsmith Adobe Unit is in the Permian
Basin in West Texas. The Company owns approximately a 95% Working Interest in
the GAU, which it operates.
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. Typically, wells drilled by the Company at the GAU are drilled to depths
between 5,600 and 6,000 feet into the Clearfork formation. During 1999, the
Company did not drill any wells at the GAU.
GULF COAST AREA
At December 31, 1999, 21.9% (21.2 Bcfe) of the Company's Proved Reserves
were located in the Gulf Coast areas, principally in the Greater Bayou Sorrel
Area in Iberville Parish, Louisiana and at Mustang Island in offshore Gulf of
Mexico. The Company also has participated in exploratory activity in various
parishes throughout Southern Louisiana.
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 target formations of the
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Company's exploration prospects in this area range from approximately 11,000 to
14,000 feet and include the Marg Vag, Marg Howeii, Camerina, Cib Haz, and Marg
Tex zones. 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 first participated in the successful exploratory
test of the Schwing #1 well in the Company's East Bayou Sorrel prospect in
January 1996. 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 old 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.
During 1997, the Company successfully drilled and completed a second test well,
the Schwing #2. In 1998, the Company successfully drilled and completed the
State Lease 2102 #1 well.
During 1999, the Company did not drill any wells in the Greater Bayou
Sorrel Area.
The Company has completed shooting, processing and interpreting, an
approximate 54 square mile 3-D seismic survey over the Greater Bayou Sorrel
Area. The Company has identified additional potential drilling locations for
prospects in this area through interpretation of the 3-D seismic data. However,
the Company's ability to pursue drilling of these sites is currently limited by
the ongoing Chapter 11 proceeding. 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 prior to the Company's
3-D survey.
In March 1998, the Company acquired Fortune Natural Resources Corporation's
interests in the East Bayou Sorrel field for approximately $4.5 million in cash.
MUSTANG ISLAND. The Mustang Island area is located offshore in shallow
state waters in Nueces County, Texas. The Company currently has approximately a
92% working interest in approximately 16,000 gross acres of leases, majority
interests in 2 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 approximately 90 square miles of data. Several exploratory
opportunities have been identified from this 3-D seismic data. The Company did
not drill any wells at Mustang Island during 1999.
In June 1998, the Company acquired Germany Oil Company's interest in six
state leases and one producing well in the Mustang Island area for $.4 million
in cash.
OTHER SOUTH LOUISIANA. The Company has also participated in exploratory
prospects outside of the Greater Bayou Sorrel area in various parishes in South
Louisiana. During 1999, the Company did not drill any wells in these areas.
OIL AND NATURAL GAS RESERVES
The estimated reserves and related future net revenues as of December 31,
1999, were prepared by Netherland, Sewell & Associates, Inc. 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 SEC. The net weighted average prices used in the
Company's reserve report at December 31, 1999, were $24.97 per barrel of oil and
$2.26 per Mcf of natural gas. The estimation of reserves and future net revenues
can be materially affected by the oil and gas prices used in preparing the
reserve report. 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 Company's credit
facility.
All reserves are evaluated at constant temperature and pressure which can
affect the measurement of natural gas reserves. Estimated operating costs,
development costs, abandonment 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
can 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.
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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 SEC) since December 31, 1998.
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, 1999. Also presented is the
Standardized Measure of the Company's total Proved Reserves of oil and natural
gas.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
-------------------------------------------------
NATURAL NATURAL GAS
OIL GAS EQUIVALENT PV10%
(MBBLS) (MMCF) (MMCFE) (IN THOUSANDS)
-------- ------- ----------- --------------
<S> <C> <C> <C> <C>
Proved Developed Reserves....................... 4,731 56,730 85,115 $ 99,692
Proved Undeveloped Reserves..................... 883 6,166 11,465 9,201
----- ------ ------ --------
Total Proved Reserves........................... 5,614 62,896 96,580 $108,893
===== ====== ====== ========
Standardized Measure............................ $108,893
========
</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,
---------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Net production:
Oil (Mbbls)............................................... 1,110 1,238 1,135
Natural gas (Mmcf)........................................ 13,146 11,255 9,266
Natural gas equivalent (Mmcfe)............................ 19,807 18,685 16,078
Average sales price:
Oil (per Bbl)............................................. $ 19.17 $ 12.66 $ 17.62
Natural gas (per Mcf)..................................... 2.37 2.02 2.08
Unit economics (per Mcfe):
Average sales price....................................... $ 2.65 $ 2.06 $ 2.44
Lease operating expenses.................................. .34 .46 .38
Oil and gas production taxes.............................. .16 .13 .13
Depletion rate (excluding writedowns)..................... 1.11 1.06 .91
General and administrative expenses....................... .22 .33 .25
</TABLE>
9
<PAGE> 11
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, 1999:
<TABLE>
<CAPTION>
OIL NATURAL GAS TOTAL
------------- ------------- -------------
GROSS NET GROSS NET GROSS NET
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Area:
Mid-Continent........................... 63.0 34.3 175.0 89.5 238.0 123.8
East and West Texas..................... 118.0 111.9 36.0 35.0 154.0 146.9
Gulf Coast.............................. 18.0 16.9 4.0 1.5 22.0 18.4
----- ----- ----- ----- ----- -----
Total................................ 199.0 163.1 215.0 126.0 414.0 289.1
===== ===== ===== ===== ===== =====
</TABLE>
LEASEHOLD ACREAGE
The following table shows the approximate Gross and Net Acres in which the
Company had a leasehold interest as of December 31, 1999:
<TABLE>
<CAPTION>
UNDEVELOPED
DEVELOPED ACREAGE ACREAGE
------------------ ---------------
GROSS NET GROSS NET
-------- ------- ------ ------
<S> <C> <C> <C> <C>
Area:
Mid-Continent..................................... 84,477 44,727 1,956 1,294
East and West Texas............................... 14,519 12,976 4,208 2,921
Gulf Coast........................................ 14,047 9,733 24,287 18,374
------- ------ ------ ------
Totals......................................... 113,043 67,436 30,451 22,589
======= ====== ====== ======
</TABLE>
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. Lease rentals usually consist of a fixed
annual charge made prior to obtaining production. Once production has been
established, a royalty is paid to the lessor 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.
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
as 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.
Delay rentals were approximately $.9 million for the year ended December 31,
1998 and were approximately $.5 million for the year ended December 31, 1999,
and could increase in future periods depending on the Company's lease
acquisition activities.
10
<PAGE> 12
DRILLING ACTIVITY
The following table sets forth exploration and development drilling results
for the years ended December 31, 1997, 1998 , and 1999.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1998 1999
------------ ------------ -----------
GROSS NET GROSS NET GROSS NET
----- ---- ----- ---- ----- ---
<S> <C> <C> <C> <C> <C> <C>
Exploratory
Productive.......................................... 2 1.0 1 .3 -- --
Non-productive...................................... 6 2.4 6 3.6 -- --
-- ---- -- ---- -- ---
Total............................................ 8 3.4 7 3.9 -- --
-- ---- -- ---- -- ---
Development
Productive.......................................... 67 58.5 13 8.4 4 .9
Non-productive...................................... 2 1.5 4 2.1 1 .1
-- ---- -- ---- -- ---
Total............................................ 69 60.0 17 10.5 5 1.0
-- ---- -- ---- -- ---
Combined Total........................................ 77 63.4 24 14.4 5 1.0
== ==== == ==== == ===
</TABLE>
TITLE TO OIL AND NATURAL GAS PROPERTIES
The Company has acquired interests in producing wells and undeveloped
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. Prior to an acquisition, due diligence
investigations are made in accordance with standard practices in the industry,
which may include securing an acquisition title opinion.
PRODUCTION AND SALES PRICES
The Company produces oil and natural gas solely in the continental United
States. The Company has no obligations to provide a fixed and determinable
quantity of oil and/or natural gas in the future under existing contracts or
agreements. Nor does the Company refine or process the oil and natural gas it
produces, but sells 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 oil pursuant to a contract with Plains
Marketing and Transportation. See "-- Markets and Customers."
CONTROL OVER PRODUCTION ACTIVITIES
The Company operated 332 of the 414 producing wells in which it owned an
interest as of December 31, 1999. 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.
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;
11
<PAGE> 13
production by and agreements among OPEC members; and the effects of state and
federal governmental regulations on the import, production, transportation, sale
and taxation 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. For the year ended December 31, 1997, Plains Marketing and
Transportation accounted for 84% of the Company's oil sales, and Crosstex Energy
and GPM Natural Gas Corporation accounted for 20% and 14%, respectively, of the
Company's natural gas sales. For the year ended December 31, 1998, Plains
accounted for 85% of the Company's oil sales, and Crosstex and Aquila Energy
Marketing accounted for 23% and 26%, respectively, of the Company's natural gas
sales. For the year ended December 31, 1999, Plains accounted for 90% of the
Company's oil sales, and Aquila and Crosstex accounted for 21% and 17%,
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 purchaser would have a material adverse effect on
its business because, under prevailing market conditions, such purchaser 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 assume the
risk of contracting pipelines and processing plants in return for a portion of
the proceeds of the sale of the gas and liquids. Generally, because the
purchasers are marketing large volumes of hydrocarbons gathered from multiple
producers, higher prices may be obtained for the gas and liquids. The remainder
of the Company's natural gas is sold on the spot market under short-term
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 jurisdictions, 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 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, some 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. The
Company cannot predict what effect any change in prorationing regulations might
have on its production and sales of natural gas.
Certain of the Company's Oil, Gas and Mineral 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
12
<PAGE> 14
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. 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 or threatened 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.
The Resource Conservation and Recovery Act ("RCRA") and regulations
promulgated thereunder govern the generation, storage, transfer and disposal of
hazardous wastes. RCRA, however, currently 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). On August 8, 1998, EPA added
four petroleum refining wastes to the list of RCRA hazardous wastes. While the
full impact of the rule has yet to be determined, the rule may, as of February
1999, impose increased expenditures and operating expenses on the Company, which
may take on increased obligations relating to the treatment, storage,
transportation and disposal of certain petroleum refining wastes that previously
were not regulated as hazardous wastes. The impact 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.
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 some sellers of producing properties from whom the
Company has acquired reserves against certain liabilities for environmental
claims associated with such properties. While the Company does not believe that
costs to be incurred by the Company for compliance and remediating previously or
currently owned or operated properties will be material, there can be no
guarantee that such costs will not result in material expenditures.
Additionally, in the course of the Company's routine oil and natural gas
operations, surface spills and leaks, including casing leaks of oil or other
materials occur, and as a result, the Company incurs costs for waste handling
13
<PAGE> 15
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 in which the Company
owns an interest but is 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.
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. 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
14
<PAGE> 16
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. 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 any future 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 25,000 square feet of office space in
Dallas, Texas. The Company also leases a small amount of office space in Odessa,
Texas, and Yukon, Oklahoma for its business activities.
EMPLOYEES
At March 23, 2000, the Company had 46 full-time employees. Of these
employees, six 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
Other than the Bankruptcy Court proceedings, the Company is not a party to
any additional material pending legal proceedings.
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, 1999.
15
<PAGE> 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock was traded on the Nasdaq National Market since
September 1, 1995 under the symbol "NEGX". On November 9, 1998, Nasdaq notified
the Company that its common stock would be delisted effective at the close of
business that day for failing to meet the net tangible asset test and minimum
bid price requirements set forth in NASD Marketplace Rules 4450(a)(3) and
4450(a)(5). Nasdaq also advised the Company that its common stock was
immediately eligible for trading on the OTC Bulletin Board through authorized
broker-dealers who had been market makers in the Company's stock during the last
30-days. The Company contacted its OTC Market Makers to notify them of Nasdaq's
action and to facilitate future trading activity. The Company's common stock
currently trades on the OTC Bulletin Board under the symbol "NEGXQ". 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 and/or the
OTC Bulletin Board. 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
1999:
First..................................................... $ .27 $ .08
Second.................................................... .13 .06
Third..................................................... .14 .06
Fourth.................................................... .09 .02
1998:
First..................................................... $4.13 $2.31
Second.................................................... 2.78 1.38
Third..................................................... 1.50 .38
Fourth.................................................... .38 .03
</TABLE>
On March 23, 2000, the latest practicable date for providing price
information, the last sales price for the Company's Common Stock was $.22.
HOLDERS
As of March 23, 2000, the Company had approximately 5,000 record holders of
its shares of Common Stock, including multiple 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. Payment of dividends
is prohibited under bankruptcy rules and regulations. 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 Arnos, Inc., which does not permit dividends on
the Common Stock.
ANNUAL MEETING
The Company's last annual meeting of shareholders was held on June 4, 1998,
and due to the Company's bankruptcy proceeding, no meeting was held during 1999.
Accordingly, the Company is in violation of its Delaware charter which requires
that an annual meeting of shareholders be held each year or within thirteen
16
<PAGE> 18
months of the last annual meeting of shareholders. Such failure to hold an
annual meeting of shareholders within the designated period could result in an
order by the Delaware Court of Chancery compelling such a meeting if deemed
appropriate. The Company anticipates that no annual meeting of shareholders will
be convened until such time that the Company's bankruptcy proceeding has
concluded.
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, 1999. The Company acquired significant producing oil
and natural gas properties during certain of 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,
-------------------------------------------------------
1995 1996 1997 1998 1999
------- -------- -------- --------- ---------
(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............... $ 7,827 $ 24,174 $ 52,417 $ 38,440 $ 39,300
Costs and expenses:
Lease operating....................... 1,701 3,596 6,729 8,590 6,101
Oil and natural gas production
taxes.............................. 416 1,285 3,139 2,504 2,095
Depreciation, depletion and
amortization....................... 3,171 9,901 23,205 21,311 15,889
Writedown of oil and natural gas
properties(2)...................... -- 43,497 46,396 148,400 --
Restructuring charges................. -- -- -- 1,869 --
General and administrative............ 1,634 2,157 4,392 6,141 4,098
------- -------- -------- --------- ---------
Total costs and expenses........... 6,922 60,436 83,861 188,815 28,183
------- -------- -------- --------- ---------
Operating income (loss)................. 905 (36,262) (31,444) (150,375) 11,117
Interest expense........................ (1,011) (4,108) (11,212) (14,432) (1,909)
Other income............................ 312 308 1,032 293 --
------- -------- -------- --------- ---------
Income (loss) before reorganization
items, income taxes and extraordinary
item.................................. 206 (40,062) (41,624) (164,514) 9,208
Reorganization items:
Professional fees and other........... -- -- -- -- (4,727)
Writeoff of unamortized debt premium
and issuance costs, net............ -- -- -- -- (3,219)
Interest earned on accumulating cash
resulting from Chapter 11
proceedings........................ -- -- -- -- 762
------- -------- -------- --------- ---------
Income (loss) before income taxes and
extraordinary items................... 206 (40,062) (41,624) (164,514) 2,024
Income tax benefit (provision).......... -- 14,504 7,286 -- --
------- -------- -------- --------- ---------
Income (loss) before extraordinary
item.................................. 206 (25,558) (34,338) (164,514) 2,024
Extraordinary loss...................... (432) (292) -- -- --
------- -------- -------- --------- ---------
Net income (loss)....................... $ (226) $(25,850) $(34,338) $(164,514) $ 2,024
======= ======== ======== ========= =========
Net income (loss) per common share
before extraordinary item............. $ (0.05) $ (1.33) $ (.94) $ (4.08) $ .05
======= ======== ======== ========= =========
Net income (loss) per common share,
basic and diluted..................... $ (0.09) $ (1.34) $ (.94) $ (4.08) $ .05
======= ======== ======== ========= =========
</TABLE>
17
<PAGE> 19
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1995 1996 1997 1998 1999
------- -------- -------- --------- ---------
(IN THOUSANDS, EXCEPT FOR RATIOS AND PER UNIT DATA)
<S> <C> <C> <C> <C> <C>
CASH FLOW DATA:
Net cash provided by operating
activities............................ $ 2,857 $ 11,788 $ 22,864 $ 5,082 $ 27,713
Net cash used in investing activities... (16,726) (49,277) (75,826) (53,303) (1,038)
Net cash provided by financing
activities............................ 17,352 45,595 64,734 24,809 --
OTHER FINANCIAL DATA:
EBITDA(3)............................... $ 4,387 $ 17,443 $ 39,189 $ 19,628 $ N/A(5)
Ratio of EBITDA to interest expense..... 4.3x 4.2x 3.5x 1.4x N/A(5)
Ratio of earnings to fixed charges(4)... 1.2x -- -- -- N/A(5)
BALANCE SHEET DATA (AT PERIOD END):(1)
Cash and cash equivalents............... $ 6,076 $ 14,182 $ 25,954 $ 2,542 $ 29,217
Working capital (deficit)............... (2,335) (1,582) 8,387 (197,834)(7) N/A(6)
Total assets............................ 43,491 216,199 254,361 95,002 100,358
Long-term debt.......................... 13,475 100,000 166,397 N/A(7) N/A(7)
Stockholders' equity/(deficit).......... 17,775 80,426 47,893 (116,933) (114,906)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1995 1996 1997 1998 1999
------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:(1)
Production:
Oil (Mbls)...................................... 283 522 1,110 1,238 1,135
Natural gas (Mmcf).............................. 1,753 5,681 13,146 11,255 9,266
Natural gas equivalent (Mmcfe).................. 3,454 8,811 19,807 18,685 16,078
Average sales price:
Oil (per Bbl)................................... $17.22 $21.70 $ 19.17 $ 12.66 $ 17.62
Natural gas (per Mcf)........................... 1.68 2.26 2.37 2.02 2.08
Unit economics (per Mcfe):
Average sales price............................. $ 2.27 $ 2.74 $ 2.65 $ 2.06 $ 2.44
Lease operating expenses........................ .49 .41 .34 .46 .38
Oil and natural gas production taxes............ .12 .15 .16 .13 .13
Depreciation, depletion and amortization(8)..... .92 1.12 1.17 1.14 .99
General and administrative...................... .47 .24 .22 .33 .25
</TABLE>
- ---------------
(1) Reflects the revenues, results of operations, and production subsequent to
the dates of acquisitions of various oil and natural gas properties that
affect the comparability of the data presented. In August 1996, the Company
completed the Merger with Alexander.
(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 with Alexander.
The results of operations for the year ended December 31, 1997 included 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. The results of operations for the year ended
December 31, 1998, include writedowns of oil and natural gas properties of
approximately $148.4 million in accordance with the full cost method of
accounting.
(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
18
<PAGE> 20
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, 1996, 1997 and 1998, were
approximately $40.0 million, $44.2 million, and $167.9 million,
respectively.
(5) Due to the discontinuance of the accrual of interest on the Company's
unsecured Senior Notes during the Bankruptcy proceeding, these measurements
are not meaningful for the year ended December 31, 1999 and have not been
presented.
(6) Due to the Chapter 11 proceedings, these measurements are not meaningful for
the year ended December 31, 1999 and have not been presented. See Notes 1, 4
and 5 of Notes to Consolidated Financial Statements.
(7) The principal and interest outstanding under the Senior Notes and credit
facility was classified as current at December 31, 1998. Due to the Chapter
11 proceedings, this measurement is not meaningful as of December 31, 1999
and has not been presented. See Note 5 of Notes to Consolidated Financial
Statements.
(8) Excludes the effects of the full cost ceiling writedowns discussed in Note 2
above.
19
<PAGE> 21
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 Financial 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 only represents the best
present assessment by management of the Company.
On December 4, 1998, certain of the holders of the Senior Notes of the
Company filed an Involuntary Petition for an Order for Relief under Chapter 11
of Title 11 of the United States Bankruptcy Code in the United States Bankruptcy
Court for the Northern District of Texas, Dallas Division, due to non-payment of
interest due December 2, 1998, after expiration of a 30-day grace period. On
December 23, 1998, the Company filed, in the Bankruptcy Court, an Answer to and
Motion to Dismiss the pending Involuntary Petition. However, on February 8,
1999, the Bankruptcy Court denied the Company's Motion to Dismiss the
Involuntary Petition. An Order for Relief was entered by the Bankruptcy Court on
February 11, 1999. As a result of the Chapter 11 proceeding, the Company
discontinued the accrual of interest on the unsecured Senior Notes and
discontinued the accrual of dividends on the unsecured preferred stock.
Approximately $17.7 million additional interest expense would have been
recognized by the Company for 1999 if not for the discontinuation of the
interest accrual on the Senior Notes.
On August 4, 1999, the Company and the Committee appeared before the
Bankruptcy Court and announced agreement on the process for marketing the
Company and/or its assets. The marketing process culminated in an auction
conducted by the Bankruptcy Court on November 1, 1999. At the auction, bidding
on the Company's oil and gas properties, exclusive of the Company's Lake
Mongoulois and Mustang Island properties, ultimately ended at a high bid of
$96.25 million given by Arnos. The Committee, after review, concluded that it
would recommend to the Court that it accept the high bid of $96.25 million. An
order accepting Arnos as the highest bidder was signed by the Court on November
16, 1999. Arnos filed a motion to close the Purchase and Sale Agreement ("Arnos
PSA") into escrow pending (i) the Court's confirmation of a plan of
reorganization or (ii) in the event a plan of reorganization is not confirmed, a
court ordered closing of the sale of the properties to Arnos. On or about
January 28, 2000 the substantive purchase and sale closing documents were
delivered into the registry of the Court, however, the closing of the Arnos PSA
is still pending as noted. The Court approved this motion and ordered Arnos to
pay into the Court's registry the sum of $61.625 million which equals the
purchase price of $96.25 million less a previously escrowed deposit of $9.625
million and the principal balance of $25 million outstanding under the Company's
secured credit facility with Arnos.
On February 28, 2000, the Committee Disclosure Statement and Committee Plan
were filed with the Court. The Committee Plan provides for (i) the possibility
of a limited continuation of the Company's oil and gas business operations; (ii)
the creation of a creditors trust to which will be transferred substantially all
of the cash and cash equivalents remaining in the Company, the funds held in the
Registry of the Court from the auction of the Company's properties, and all
causes of action for the payment and primary benefit of certain allowed
administrative, tax, priority and miscellaneous secured and unsecured creditors;
and (iii) payment in full of the secured claims. Both the Committee Plan and
Committee Disclosure Statement are subject to amendment, and a hearing in the
Bankruptcy Court on the Committee Disclosure Statement is scheduled on April 17,
2000.
On March 14, 2000, the Company Disclosure Statement and Company Plan were
filed with the Court. The Company Plan provides for (i) continuation of the
Company's oil and gas business operations; (ii) payment in full of all secured
claims, including the Arnos secured claim in the amount of $25 million, plus
interest as may be due; (iii) payment of a cash sum not to exceed $10,000 to
certain classes of claimants involved in litigation with the Company if such
class accepts the Company's Plan or, alternatively, if rejected by such class,
cash in the amount of 56.5% of any Allowed Claim in such class; (iv) acquisition
by Arnos of any Senior Notes, not otherwise held by Arnos, in consideration of a
payment equal to 56.5% of the face value of each such bond acquired, or,
alternatively, a pro rata share of the cash which Senior Noteholders would
receive in a liquidation, plus a pro rata beneficial interest in a creditor's
trust consisting of certain causes of action, two properties of the Company and
$250,000 in cash; (v) payment of a cash sum equal to 75% of any Allowed Claim to
trade
20
<PAGE> 22
creditors; (vi) retention by each of the preferred and common shareholder equity
interests; provided that both the preferred and common equity interests may, at
the option of Arnos, be deemed cancelled and reissued to holders in a form to be
determined by Arnos; (vii) purchase by Arnos, or an affiliate of Arnos, of
additionally issued shares of the reorganized Company's common stock to the
extent that Arnos or its affiliate shall own up to 49% of all the issued and
outstanding Common Stock of the reorganized Company; and (viii) amendment to the
Senior Notes Indenture. Both the Company Plan and Company Disclosure Statement
are subject to amendment, and a hearing in the Bankruptcy Court on the Company
Disclosure Statement is scheduled on April 20, 2000.
The accompanying consolidated financial statements have been prepared on a
going concern basis of accounting and do not reflect any adjustments that might
result should the Company be unable to continue as a going concern. The
Company's prior losses from operations and the related Chapter 11 proceeding
raise concern about its ability to continue as a going concern. The
appropriateness of using the going concern basis is dependent upon, among other
things, (i) confirmation of a plan of reorganization under the Bankruptcy Code
which provides for continuation of the Company's oil and gas operations, (ii)
the ability to achieve profitable operations after such confirmation and (iii)
the ability to generate sufficient cash from operations to meet its obligations.
OVERVIEW
The revenues generated by the Company's operations are highly dependent
upon the prices of, and demand for, oil and natural gas. The price received by
the Company for its oil and natural gas production depends on numerous factors
beyond the Company's control, including seasonal price fluctuation, the
condition of the U.S. economy, foreign imports, political conditions in other
oil and natural gas producing countries, the actions of the Organization of
Petroleum Exporting Countries and domestic governmental regulations, legislation
and policies. Commodity prices have increased during 1999 as compared to 1998
which has had a positive effect on the Company's revenues, profitability and
cash flows.
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,
---------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Net production:
Oil (Mbbls)...................................... 1,110 1,238 1,135
Natural Gas (Mmcf)............................... 13,146 11,255 9,266
Natural Gas Equivalent (Mmcfe)................... 19,807 18,685 16,078
Oil and natural gas sales (in thousands):
Oil.............................................. $21,276 $15,673 $20,006
Natural gas...................................... 31,141 22,767 19,294
------- ------- -------
Total.................................... $52,417 $38,440 $39,300
======= ======= =======
Average sales price:
Oil (per Bbl).................................... $ 19.17 $ 12.66 $ 17.62
Natural gas (per Mcf)............................ 2.37 2.02 2.08
Unit economics (per Mcfe):
Average sales price.............................. $ 2.65 $ 2.06 $ 2.44
Lease operating expenses......................... .34 .46 .38
Oil and gas production taxes..................... .16 .13 .13
Depletion rate (excluding writedowns)............ 1.11 1.06 .91
General and administrative....................... .22 .33 .25
</TABLE>
21
<PAGE> 23
YEAR ENDED DECEMBER 31, 1999, COMPARED WITH YEAR ENDED DECEMBER 31, 1998
Revenues. Total revenues increased by $.9 million (2.3%) to $39.3 million
for 1999 from $38.4 million in 1998. The increase in revenues is due to the
increase in oil and gas prices from the same period in 1998. Average natural gas
prices increased $.06 per Mcf to $2.08 per Mcf for 1999 from $2.02 for 1998, and
average oil prices increased $4.96 per barrel to $17.62 per barrel for 1999 from
$12.66 for 1998. The increase in average prices increased 1999 revenues by
approximately $6.2 million compared to 1998.
In 1999, the Company produced 1,135 Mbbls of oil, a decrease of 8.3%
compared to 1,238 Mbbls in 1998, and the Company produced 9,266 Mmcf of natural
gas in 1999, a decrease of 17.7% from 11,255 Mmcf in the same period of 1998.
The decrease in oil and gas production was caused by natural production
declines. The Company's ability to offset these natural production declines
through its drilling and exploration program was limited during 1999 due to
Bankruptcy Court restrictions. The reduction in oil production was partially
offset by the successful drilling and completion of the State Lease #2102 well
at the Company's East Bayou Sorrel area which came on line in October of 1998.
The Company expects production to continue to decline unless replaced through
drilling, workovers, recompletions and/or acquisitions.
Costs and Expenses. Lease operating expenses decreased $2.5 million (29.1%)
to $6.1 million for 1999 from $8.6 million in 1998 primarily due to the
Company's efforts to reduce and control these costs. Lease operating expenses
per Mcfe decreased to $.38 for 1999 from $.46 for 1998 due to the 29.1% decrease
in lease operating expenses which more than offset the 14.0% decline in
equivalent production.
Production taxes decreased $.4 million (16.0%) to $2.1 million for 1999
compared to $2.5 million for 1998. This decrease principally resulted from tax
exemptions and refunds obtained by the Company.
Depreciation, depletion and amortization ("DD&A") decreased $5.4 million
(25.4%) to $15.9 million for 1999 compared to $21.3 million for 1998. This
decrease in DD&A is due to the decrease in the depletion rate per Mcfe from
$1.06 in 1998 to $.91 for 1999, caused by the effects on depletion expense of
the full cost ceiling writedowns recorded by the Company during 1998. Also
contributing to the decline in DD&A was the decrease in overall production
discussed above.
At March 31, June 30, September 30, and December 31, 1998, the net book
value of the Company's oil and natural gas properties exceeded the full cost
ceiling, resulting in non-cash writedowns of the oil and natural gas properties
totaling $148.4 million for the year. These writedowns resulted primarily from
the decline in oil and natural gas prices during 1998, costs incurred on
unsuccessful exploratory wells drilled during such periods and unfavorable
revisions to estimates of oil and gas reserves. The Company did not incur
ceiling writedowns during 1999.
During 1998, the Company recorded non-recurring restructuring charges of
approximately $1.9 million for severance and related costs resulting from the
restructuring of its executive management team and other personnel changes.
General and administrative costs decreased $2.0 million (32.8%) to $4.1
million for 1999 compared to $6.1 million for 1998. The decrease in general and
administrative expenses compared to 1998 was primarily due to the Company's
restructuring of its management team and other personnel during 1998 as well as
continuing efforts to control other costs. General and administrative costs per
Mcfe decreased 24.2% to $.25 for 1999 from $.33 for 1998. This decrease per Mcfe
is attributable to the decrease in general and administrative costs noted above
which more than offset the decline in overall production. As discussed in Note 2
to the consolidated financial statements, the Company capitalizes internal
general and administrative costs that can be directly identified with
acquisition, development and exploration activities. The Company's capitalized
general and administrative expenses totaled $1.9 million and $.8 million for the
years ended December 31, 1998 and 1999, respectively.
Other Income and Expenses. The decrease of $12.5 million in interest
expense to $1.9 million for 1999 from $14.4 million for 1998, was due to the
discontinuation of the accrual of interest on the Senior Notes due to the
Chapter 11 proceeding. Approximately $17.7 million additional interest expense
would have been recognized by the Company if not for the discontinuation of the
interest accrual on the Senior Notes. The average balance of
22
<PAGE> 24
debt outstanding during 1999 was $190.0 million as compared to average debt
outstanding of $180.6 million for 1998. The weighted average interest rate for
1999 was 8.2% for interest accrued compared to 9.9% for 1998. The decline in the
weighted average interest rate is due to the discontinuation of the accrual of
interest on the Senior Notes.
Reorganization Items. During 1999, the Company incurred $4.7 million of
professional fees and other expenses associated with the Chapter 11 filing. In
addition, the Company wrote off a total of $3.2 million of unamortized debt
issuance costs and premiums related to the Senior Notes due to the Chapter 11
proceeding, and earned approximately $761,000 in interest income on cash
accumulating during the Chapter 11 proceeding.
Net Income. Net income of $2.0 million was recognized for 1999, compared
with a net loss of $164.5 million for 1998. Net income for 1999 excludes
approximately $17.7 million in interest expense and includes expenses of
approximately $7.2 million, net, relating to the bankruptcy proceeding, as
discussed above. The net loss for 1998 included writedowns of oil and natural
gas properties of $148.4 million. Excluding the effects of these amounts a net
loss of $9.3 million would have been generated for 1999 compared to a net loss
of $16.1 million for 1998.
YEAR ENDED DECEMBER 31, 1998, COMPARED WITH YEAR ENDED DECEMBER 31, 1997
Revenues. Total revenues decreased by $14.0 million (26.7%) to $38.4
million for 1998 from $52.4 million in 1997. The reduction in revenues is
primarily due to the decrease in commodity prices from the same period in 1997.
Average natural gas prices decreased $.35 per Mcf to $2.02 per Mcf for 1998 from
$2.37 for 1997, and average oil prices decreased $6.51 per barrel to $12.66 for
1998 from $19.17 for 1997. The decrease in average prices reduced 1998 revenues
by approximately $12.0 million compared to 1997.
Also contributing to the decrease in revenues was the Mmcfe equivalent
decrease in production. In 1998, the Company produced 1,238 Mbbls of oil, an
increase of 11.5% over 1,110 Mbbls in 1997, and 11,255 Mmcf of natural gas, a
decrease of 14.4% over 13,146 Mmcf in the same period of 1997. The increase in
oil production is due primarily to the completion of four GAU wells in the first
quarter of 1998, the completion of the State Lease #2102 well (in the Greater
Bayou Sorrel area) in October of 1998 and the drilling activity on the Company's
Anadarko Basin properties. The decline in gas production is primarily due to the
flush production in 1997 from the drilling program on the East Texas and Arkoma
properties. The Company had limited drilling activity in these areas during
1998.
Also affecting 1998 production was the temporary shut-in of the East Bayou
Sorrel field to allow for a pipeline repair, which reduced 1998 production by
291 Mmcfe, the 1997 sale of certain non-strategic properties and natural decline
of production not replaced by additional drilling activity. The East Bayou
Sorrel field was also shut-in for seven days to allow for the completion of the
State Lease #2102 and Hurricane George. The Company expects production to
continue to decline unless replaced through drilling, workovers, recompletions
and/or acquisitions.
Costs and Expenses. Lease operating expenses increased $1.9 million (28.4%)
to $8.6 million for 1998 from $6.7 million for 1997 primarily due to additional
wells brought into production during 1998 and 1997. The Company also entered
into a saltwater disposal lease and $.4 million was paid for this lease during
the fourth quarter of 1998. The increase in lease operating expenses was in part
offset by the 1997 sale of non-strategic properties and the Company's efforts to
reduce operating costs. Lease operating expenses per Mcfe increased to $.46 for
1998 from $.34 for 1997 due to increased costs combined with the Mmcfe
equivalent decline in production during the period.
Production taxes decreased $.6 million (19.4%) to $2.5 million for 1998
compared to $3.1 million for 1997. This decrease principally resulted from the
decrease in total oil and natural gas revenues discussed above.
Depreciation, depletion and amortization decreased $1.9 million (8.2%) to
$21.3 million for 1998 compared to $23.2 million for 1997. This decrease is due
to the decrease in the depletion rate per Mcfe from $1.11 in 1997 to $1.06 for
1998. This decrease in the depletion rate was primarily due to the effects on
depletion expense of the full cost ceiling writedowns discussed below in 1998.
23
<PAGE> 25
At March 31, June 30, September 30, and December 31, 1998, the net book
value of the Company's oil and natural gas properties exceeded the full cost
ceiling, resulting in non-cash writedowns of the oil and natural gas properties
totaling $148.4 million for the year. These writedowns resulted primarily from
the decline in oil and natural gas prices, costs incurred on unsuccessful
exploratory wells drilled during such period and unfavorable revisions to
estimates of oil and gas reserves.
During 1998, the Company recorded non-recurring charges of approximately
$1.9 million for severance and related costs resulting from the restructuring of
its executive management team, other personnel changes and costs associated with
the Chapter 11 filing.
General and administrative costs increased $1.7 million (38.6%) to $6.1
million compared to $4.4 million for 1997. The increase in general and
administrative expenses compared to 1997 was primarily due to increased
personnel and office space due to the increase in the scope of the Company's
operations. In 1998, in an effort to reduce general and administrative costs the
Company restructured its executive management team and other personnel. The
Company also renegotiated its office lease and implemented other cost cutting
strategies. The Company's capitalized general and administrative expenses
totaled $1.6 million and $1.9 million for the years ended December 31, 1997 and
1998, respectively. General and administrative costs per Mcfe increased 50.0% to
$.33 for 1998 from $.22 for 1997. This increase per Mcfe is attributable to the
decrease in production, combined with additional general and administrative
costs noted above.
Other Income and Expenses. The increase of $3.2 million in interest expense
to $14.4 million for 1998 from $11.2 million for 1997, was due to the issuance
of the Series C Notes in August 1997, and interest on borrowings under the
credit facility, partially offset by an increase of $.8 million of interest
costs which were capitalized during 1998 related to the Company's unproved oil
and natural gas properties. The average balance of debt outstanding during 1998
was $180.6 million as compared to average debt outstanding of $133.4 million for
1997. The weighted average interest rate for 1998 was 9.9% compared to 10.3% for
1997. As of December 4, 1998, the Company discontinued the accrual of interest
on unsecured liabilities subject to compromise, which primarily consisted of the
Senior Notes, as a result of filing the Involuntary Petition. Approximately $1.3
million additional interest expense would have been recognized by the Company if
not for the discontinuation of the interest accrual on the Senior Notes.
Net Loss. A net loss of $164.5 million was generated for 1998, compared
with net loss of $34.3 million for 1997. The net losses for 1998 and 1997
included writedowns of oil and natural gas properties of $148.4 million and
$37.5 million, respectively, net of deferred taxes. Excluding these charges,
income decreased $19.3 million in 1998 compared with 1997 due to the decrease in
operating income and increased interest expense.
LIQUIDITY AND CAPITAL RESOURCES
YEAR ENDED DECEMBER 31, 1999, COMPARED WITH YEAR ENDED DECEMBER 31, 1998
Net cash provided by operating activities was $27.7 million for the year
ended December 31, 1999, compared to $5.1 million for the same period in 1998.
The increase in cash flow from operating activities is due, in part, to the
increase in income from operations before non-cash charges, resulting from
increased oil and gas revenues from higher commodity prices as well as
significantly lower lease operating expenses and general and administrative
expenses. Also largely contributing to the increase in net cash provided by
operations is the fact that the Company discontinued accruing interest on the
Senior Notes as a result of the Chapter 11 proceeding.
Net cash used by investing activities was $1.0 million for 1999 compared
with $53.3 million for 1998. The cash used by investing activities for 1999
sharply declined due to the Company's discontinuation of its drilling program
pursuant to Court restrictions.
No cash was provided by financing activities during 1999 compared with
$24.8 million for the same period in 1998. The net cash provided by financing
activities during 1998 consisted primarily of proceeds from the credit facility.
24
<PAGE> 26
YEAR ENDED DECEMBER 31, 1998, COMPARED WITH YEAR ENDED DECEMBER 31, 1997
Net cash provided by operating activities was $5.1 million for the year
ended December 31, 1998, compared to $22.9 million for the same period in 1997.
The decrease in cash flow from operating activities is primarily due to the
decrease in income from operations before non-cash charges, resulting from
depressed sales prices for oil and gas and reduced production at such prices.
Net cash used by investing activities was $53.3 million for 1998 compared
with $75.8 million for 1997. The cash used by investing activities for 1998
included $52.0 million for exploration and development expenditures pursuant to
the Company's drilling program, including acquisitions of leasehold interests
and seismic costs.
Net cash provided by financing activities was $24.8 million for 1998
compared with $64.7 million for the same period in 1997. The net cash provided
by financing activities during 1998 consisted primarily of proceeds from the
credit facility. In 1997, cash provided by financing activities consisted
primarily of proceeds from the issuance of the Series C Notes.
The Company's working capital deficit at December 31, 1998, was $197.8
million compared to a working capital surplus at December 31, 1997 of $8.4
million. The decrease in working capital was due primarily to the classification
as a current liability of the $25.0 million due under the Arnos credit facility,
the $166.2 million due on the Senior Notes and the accrued interest on the
Senior Notes.
FUTURE CAPITAL REQUIREMENTS
During the period of the bankruptcy proceeding, the Company has suspended
its development and exploratory drilling program. The Company has been limited
in its capital expenditures to ordinary course enhancement of current production
through workovers, recompletions, and other production enhancing activities
deemed to be economic given current oil and gas prices. Also during the
bankruptcy period, development drilling is anticipated to be limited to (i)
ordinary course nonoperated wells in which we have limited working interests and
in which the failure to participate may result in drainage, depletion or loss of
current reserves and (ii) operated wells deemed to be economical given current
oil and gas prices. Large expenditures for developmental drilling may require
court approval and none are planned at this time.
The Company currently expects that existing cash and cash flows from
operations will be sufficient to fund planned capital expenditures for its
existing properties through 2000. However, the Company could require additional
capital to fund any large acquisitions and access to these markets could be
limited due to the Chapter 11 proceeding.
Subject to Court approval, 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, even if approved by the Court,
that the Company would be able to access additional capital or that, if
available, it will be at prices or on terms acceptable to the Company. In
addition, the Chapter 11 proceeding and restrictions from the Bankruptcy Court
could limit the Company's ability to access additional capital markets.
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.
FINANCIAL REPORTING IMPACT OF FULL COST METHOD OF ACCOUNTING
The Company follows the full cost method of accounting for oil and natural
gas properties. Under such method, the net book value of such properties, less
related deferred income taxes, may not exceed a calculated "ceiling." The
ceiling is the estimated after-tax future net revenues from proved oil and
natural gas properties, discounted at 10% per year. In calculating future net
revenues, prices and costs in effect at the time of the calculation are held
constant indefinitely, except for changes which are fixed and determinable by
existing contracts. The net book value is compared to the ceiling on a quarterly
and yearly basis. The excess, if any, of the net book value above the ceiling is
required to be written off as a non-cash expense. During the years ended
25
<PAGE> 27
December 31, 1997 and 1998, 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 non-cash
writedowns totaling $37.5 million, net of deferred taxes and $148.4 million,
respectively. The Company had no ceiling limitation writedowns during 1999.
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 June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS No. 133"), which will be adopted by the Company
January 1, 2001. The statement will require the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a hedge's change in fair value will be immediately
recognized in earnings. The Company is currently evaluating the effect of SFAS
No. 133 on its financial statements.
CHANGES IN PRICES
The prices received by the Company for its oil and natural gas production
declined dramatically during 1998. In 1998 the prices received for crude oil
reached their lowest level in 50 years and were the lowest inflation-adjusted
oil prices since the Depression. The Company's revenue and value of its oil and
natural gas properties were adversely affected by such prices. However, oil and
gas prices recovered during 1999 and had a positive effect on the results of
operations for 1999. Oil and gas prices are subject to seasonal and other
fluctuations that are beyond the Company's ability to control or predict.
INFLATION
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, 1999.
YEAR 2000
The year 2000 ("Y2K") problem arose because of computer programs which use
two digits rather than four digits to define a year and which had the potential
to result in errors or system failures. In prior years, the Company discussed
the nature and progress of its plans to become Y2K ready. In 1999, the Company
completed its remediation and testing of systems. As a result of those planning
and implementation efforts, the Company experienced no significant disruptions
in information technology and non-information technology systems and believes
those systems successfully responded to the year 2000 date change. The Company's
expenses during 1999 in connection with remediating its systems were nominal.
The Company is not aware of any material problems resulting from Y2K issues,
either with its products, its internal systems, or the products and services of
third parties. The Company will continue to monitor its computer applications to
ensure that any latent Y2K matters that may arise are addressed promptly.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the past, the Company has utilized various derivative instruments and
may do so in the future, principally to hedge the prices received for its gas
production. While the use of hedging arrangements limits the downside risk of
adverse price movements, it may also limit future gains from favorable
movements. 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
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<PAGE> 28
required to provide collateral relating to hedging activities. At December 31,
1998 and 1999, the Company had no hedging or basis swap agreements outstanding.
At December 31, 1998, the Company had entered into forward sales contracts
with two purchasers covering the future production of natural gas. Deliveries
under these contracts were priced based on NYMEX prices less a differential
whereby the Company may fix the price for deliveries under these contracts at
any time three days prior to the close of the then current contract based on the
NYMEX prices at that time. The Company pays the cost of transportation of the
natural gas to the delivery point specified in the contracts. At December 31,
1999, the Company was not a party to any forward sale contracts.
The Company's exposure to interest rates relates primarily to its
borrowings under its credit facility. The Company does not currently use
derivatives to manage interest rate risk. Interest is payable on borrowings
under the credit facility based on a floating rate. If short-term interest rates
average 10% higher in 2000 than they were in 1999, the Company's interest
expense would increase by approximately $225,000. This amount was determined by
applying the hypothetical interest rate change to the Company's outstanding
borrowings under the credit facility at December 31, 1999.
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. These Financial Statements also serve
as financial statements required pursuant to Rule 15d-21 and Form 11-K of the
Exchange Act for the National Energy Group, Inc. Employee Stock Purchase Plan,
as such Plan invests solely in the Company's common stock.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The following table lists the name, age as of March 3, 2000 and present
position with the Company for each of the Company's directors and executive
officers:
<TABLE>
<CAPTION>
NAME AGE PRESENT POSITION WITH THE COMPANY(1)
- ---- --- ------------------------------------
<S> <C> <C>
Bob G. Alexander............................ 66 Chairman of the Board of Directors,
President and Chief Executive Officer
Jim L. David................................ 60 Director, Assistant to the President
Russell D. Glass............................ 37 Director
Martin Hirsch............................... 45 Director
Robert H. Kite.............................. 45 Director
Robert J. Mitchell.......................... 52 Director
Jack G. Wasserman........................... 63 Director
Philip D. Devlin............................ 55 Vice President, General Counsel and
Secretary
R. Kent Lueders............................. 43 Vice President, Corporate Development
Melissa H. Rutledge......................... 34 Vice President, Controller and Chief
Accounting Officer
</TABLE>
- ---------------
(1) Messrs. Alexander, David and Mitchell were appointed to the Board on August
29, 1996, and Mr. Alexander was appointed President and Chief Executive
Officer of the Company effective November 23, 1998. Messrs. Glass, Hirsch
and Wasserman were appointed to the Board on December 1, 1998. Pursuant to
the terms of the Series B Preferred Stock, Series C Preferred Stock and
Series D Preferred Stock, the holders of a majority of the outstanding
shares of each series have the right to appoint one member to the Company's
Board of Directors at all times while such series are outstanding. Mr.
Elwood Schafer, the Series C Preferred Stock appointee, resigned from the
Board of Directors effective, December 31, 1998, and no new
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<PAGE> 29
appointment has been made. Mr. Mitchell is the Series D Preferred Stock
appointee. Directors generally serve for a term of one year (until the next
annual meeting of shareholders) and until their successors are duly elected
and qualified, or until their death, resignation or removal, at which time
the Board of Directors has the authority to appoint replacements to fill any
such vacancies until the next annual meeting of shareholders.
Bob G. Alexander. Mr. Alexander, a founder of Alexander Energy Corporation,
was appointed a Director of the Company when Alexander merged into NEG-OK on
August 29, 1996 and was appointed President and Chief Executive Officer of the
Company on November 23, 1998. From 1980 until the Merger, Mr. Alexander served
as Chairman of the Board, President and Chief Executive Officer of Alexander.
From 1976 to 1980, Mr. Alexander was Vice President and General Manager of the
Northern Division of Reserve Oil, Inc. and President of Basin Drilling Corp.
(subsidiaries of Reserve Oil and Gas Company). Mr. Alexander attended the
University of Oklahoma and graduated with a Bachelor of Science degree in
geological engineering.
Jim L. David. Mr. David, a founder of Alexander Energy Corporation, was
appointed a Director of the Company when Alexander merged into NEG-OK on August
29, 1996. From August 1996 until July 1998, Mr. David served as Vice President,
Exploration of the Company. In December 1998, he became Assistant to the
President of the Company. From 1980 until the Merger, Mr. David served as
Executive Vice President of Alexander. From 1977 to 1980, Mr. David was employed
as exploration manager for Reserve Oil, Inc., Northern Division. Mr. David
served as Alaska chief geologist and senior staff geologist for Texas
International from 1973 to 1976. Mr. David graduated with a B.A. degree in
geology from Louisiana Tech University and obtained a Master of Arts in geology
from the University of Missouri.
Russell D. Glass. Effective December 1, 1998 Mr. Glass was appointed to the
Board of Directors of the Company. Mr. Glass has been President and Chief
Investment Officer of Icahn Associates Corp., a diversified investment firm,
since April 1998. Since August 1998 he has also served as Vice-Chairman of
Lowestfare.com, Inc., an internet travel reservations company. Previously, Mr.
Glass had been a Partner in Relational Investors LLC, from 1996 to 1998, and in
Premier Partners Inc., from 1988 to 1996, firms engaged in investment research
and management. From 1984 to 1986 he served as an investment banker with Kidder,
Peabody & Co. Mr. Glass currently serves as a Director of Automated Travel
Systems, Inc., a travel industry software development firm; Cadus Pharmaceutical
Corporation, a genetic pharmaceutical research company; Delicious Brands, Inc.,
a branded food products company; Lowestfare.com, Inc., an internet travel
reservations company; and the A.G. Spanos Corporation, a national real estate
development firm and owner of the NFL San Diego Chargers Football Club. Mr.
Glass earned a B.A. degree in Economics from Princeton University and an M.B.A.
from the Stanford University Graduate School of Business.
Martin Hirsch. Effective December 1, 1998, Mr. Hirsch was appointed to the
Board of Directors of the Company. Mr. Hirsch has served as a Vice President of
American Property Investors since March 18, 1991 where he is involved in
investing, managing and disposing of real estate properties and securities. From
January 1986 to January 1991, he was at Integrated Resources, Inc. as a Vice
President and where he was involved in the acquisition of commercial real estate
properties and asset management. From 1985 to 1986, he was a Vice President of
Hall Financial Group where he was involved in acquiring and financing commercial
and residential properties. Mr. Hirsch received his M.B.A. from The Emory
University Graduate School of Business.
Robert H. Kite. Effective December 17, 1990, Mr. Kite was appointed a
Director of the Company. From November 1987 until June 11, 1991, Mr. Kite served
as a Director of VP. Since 1980, Mr. Kite has been President and Chief Operating
Officer of KFC, Ltd., a family-owned company with operations which include real
estate development, investments and medical MRI clinics. He has also been Chief
Executive Officer of Roamin' Korp., Inc. since 1982, which is engaged in the
businesses of construction, recording, mining and equity investments. Mr. Kite
graduated from Southern Methodist University with a B.S. degree in Psychology
and Political Science.
Robert J. Mitchell. Effective August 29, 1996, Mr. Mitchell was appointed a
Director of the Company. Mr. Mitchell is Chief Executive Officer of ACF
Industries Inc., has served as Senior Vice President -- Finance of such company
from March 1995 to the present and was Treasurer from December 1984 to March
1995.
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<PAGE> 30
Mr. Mitchell has also served as President and Treasurer of ACF Industries
Holdings Inc. since August 1993 and as Vice President, Liaison Officer of Icahn
& Co., Inc. since November 1984. From 1987 to January 1993, Mr. Mitchell served
as Treasurer of TransWorld Airlines, Inc. and was the Treasurer of TransWorld
Airlines, Inc. when it filed for reorganization under Chapter 11 of the United
States Bankruptcy Code, as amended, in January 1992. Mr. Mitchell is also a
director of Cadus Pharmaceutical Corporation, a NASDAQ National Market listed
pharmaceutical company.
Jack G. Wasserman. Effective December 1, 1998, Mr. Wasserman was appointed
to the Board of Directors of the Company. Mr. Wasserman is a senior partner of
Wasserman, Schneider, Babb and Reed, a New York law firm, and has been a partner
of that firm and its predecessors since 1966. Mr. Wasserman is admitted to
practice before the Supreme Court of the United States and in the states of New
York, Florida and the District of Columbia. He serves as a Director of American
Property Investors, Inc., the general partner of American Real Estate Partners,
L.P. whose units are traded on the New York Stock Exchange, and Cadus
Pharmaceutical Corporation whose shares are traded on the NASDAQ National
Market. Mr. Wasserman holds a B.A. degree from Adelphi University, a J.D. degree
from Georgetown University, and a Graduate Diploma from the Johns Hopkins
University School of Advanced International Studies in Bologna, Italy.
Philip D. Devlin. Effective March 1, 1997, Mr. Devlin was appointed Vice
President and General Counsel of the Company and, effective March 20, 1997, the
Board of Directors appointed him Secretary of the Company. From September 1984
to October 1994, Mr. Devlin served as Executive Vice President, General Counsel
and Secretary for Sunrise Energy Services, Inc., a publicly-held natural gas
marketing company. From October 1994 through February 1997, Mr. Devlin acted as
President and Chief Executive Officer of Sunrise Energy Services, Inc. In July
1995, Sunrise Energy Services, Inc. filed to reorganize under Chapter 11 of the
Bankruptcy Code and in February 1997 a Plan of Reorganization was confirmed by
the Bankruptcy Court. Mr. Devlin is licensed by the State Bar of Texas, admitted
to practice before the Supreme Court of the United States and is a past
President and Director of the Natural Gas and Electric Power Association of
North Texas. Mr. Devlin holds a B.A. degree and an M.A. degree from the
University of California and J.D. degree with honors from California Western
School of Law, San Diego, California.
R. Kent Lueders. Effective April 13, 1998, Mr. Lueders was appointed
Director of Corporate Development and in September 1998 was made a Vice
President of the Company. From 1996 to 1998, Mr. Lueders was Manager of
Acquisitions for Merit Energy. From 1994 to 1996, Mr. Lueders worked as a
consulting evaluation engineer for RK Engineering. Prior to this Mr. Lueders was
the Product Line Manager with Munro Garrett International from 1993 to 1994.
From 1982 to 1993, Mr. Lueders was Manager of Engineering Services for Pacific
Enterprises Oil Company (USA) where he managed the reserves, budget and
engineering systems. Mr. Lueders began his career with Amoco Production Company
in 1979 as an engineer working East and West Texas. He received a B.S. degree in
Petroleum Engineering from the University of Missouri at Rolla in 1979.
Melissa H. Rutledge. Effective August 15, 1994, Ms. Rutledge was appointed
Controller and Chief Accounting Officer of the Company and in December 1997 was
made a Vice President of the Company. From September 1990 to August 1994, Ms.
Rutledge was a Senior Auditor for Ernst & Young LLP in Dallas. Ms. Rutledge
received her B.B.A. degree in Accounting from Texas Tech University and is
currently licensed as a CPA in the State of Texas.
All of the Company's Executive Officers and Directors were acting in such
capacity upon the granting of the United States Bankruptcy Court for the
Northern District of Texas of an involuntary petition for an Order for Relief
under Chapter 11 of Title 11 of the United States Bankruptcy Code on February
11, 1999.
The Company had a number of Committees which were dissolved October 26,
1998 in favor of the entire Board of Directors acting en banc in all matters.
Accordingly, the various Committees held no formal meetings during 1999, and all
matters were handled by the Board acting en banc.
The Board of Directors held eight (8) regular and special meetings during
the year ended December 31, 1999.
Due to the ongoing Bankruptcy Proceeding and because the Board of Directors
are currently acting en banc, the Company has not yet evaluated what the effect,
if any, of the recommendations contained in the report of the
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<PAGE> 31
Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit
Committees will be with respect to the Company's audit committee composition and
practices.
The executive officers of the Company are elected annually at the first
meeting of the Company's Board of Directors held after each annual meeting of
shareholders. Each executive officer holds office until the first meeting of the
Board after the annual meeting of shareholders next succeeding his or her
election and until his or her successor is duly elected and qualified, or until
his or her death or resignation or until he or she shall have been removed in
the manner provided in the Company's bylaws. Due to the Bankruptcy Proceeding,
no annual meeting of shareholders was held during 1999 and none is expected
until such time that the Company's Bankruptcy Proceeding is concluded.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company has no delinquent filers and no former officers of the Company
who resigned during the year ended December 31, 1999 were required to file a
Form 5 for that period.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following tables set forth the cash compensation received by the
Company's Chief Executive Officer and each of the next four most highly
compensated executive officers of the Company whose cash compensation exceeded
$100,000 for the fiscal year ended December 31, 1999, and whose base salary plus
bonus equaled or exceeded $100,000. Such tables also include option grants in
the last fiscal year for such officers and aggregate option/SAR exercises during
the last fiscal year and year end option/SAR values.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS
--------------------------
ANNUAL RESTRICTED
COMPENSATION(1) STOCK SECURITIES ALL
-------------------- AWARDS UNDERLYING OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($) OPTIONS(#)(2) COMPENSATION($)
- --------------------------- ---- --------- -------- ---------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Bob G. Alexander................ 1999 $278,843 -- -- -- $112,500(4)
President and Chief 1998 148,910 -- -- 37,500 --
Executive Officer(3) 1997 148,645 -- -- -- --
Jim L. David.................... 1999 132,290 -- -- -- --
Assistant to the President 1998 105,000 -- -- -- 197,000(5)
1997 132,500 $35,000 -- 75,000 --
Philip D. Devlin................ 1999 178,825 -- -- -- --
Vice President, 1998 193,882 -- -- -- --
General Counsel(6) 1997 137,500 25,000 203,500(7) 60,000 50,885(8)
Melissa H. Rutledge............. 1999 111,515 -- -- -- --
Vice President, Controller and 1998 107,000 -- -- -- --
and Chief Accounting
Officer(9) 1997 80,000 15,000 -- 30,000 --
R. Kent Lueders................. 1999 118,825 -- -- -- --
Vice President, Corporate 1998 80,556 -- -- 25,000 --
Development(10) 1997 -- -- -- -- --
</TABLE>
- ---------------
(1) Excludes the aggregate, incremental cost to the Company of perquisites and
other personal benefits, securities or property, the aggregate amount of
which, with respect to the named individual, does not equal or exceed the
lesser of $50,000 or 10% of reported annual salary and bonus for such
person.
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<PAGE> 32
(2) All options granted since June 1996 were granted pursuant to the 1996
Incentive Compensation Plan which was approved by the shareholders June 4,
1996 and registered by the Company on December 5, 1997. All previous
options had been registered by the Company prior to January 1, 1997.
(3) Effective November 23, 1998, Mr. Alexander was appointed President and
Chief Executive Officer of the Company.
(4) Mr. Alexander was paid $112,500, the amount remaining on his Consulting
Agreement with the Company pursuant to the acquisition of Alexander Energy,
as partial compensation for his appointment as the Company's President and
Chief Executive Officer in November 1998.
(5) Mr. David's employment with the Company was terminated July 31, 1998, and
these amounts were paid pursuant to a Separation Agreement with the
Company. Mr. David was subsequently rehired by the Company on December 1,
1998 as an assistant to the President.
(6) Effective March 1, 1997, Mr. Devlin was appointed Vice President and
General Counsel of the Company.
(7) Mr. Devlin was granted 50,000 shares of the Company's common stock during
1997 which was subsequently registered and had a market value of $203,500
as of December 31, 1997.
(8) Mr. Devlin earned $50,885 as consulting fees from the Company during 1997
prior to joining the Company as an employee and officer.
(9) Effective December 4, 1997, Ms. Rutledge was appointed Vice President of
the Company and has served as its Controller and Chief Accounting Officer
since August 1994.
(10) Mr. Lueders was employed by the Company April 13, 1998 and effective
September 2, 1998, Mr. Lueders was appointed Vice President, Corporate
Development of the Company.
OPTION/GRANTS IN LAST FISCAL YEAR
There were no options granted by the Company to its Chief Executive Officer
and the next four most highly compensated executive officers during 1999.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT AT FISCAL
SHARES FISCAL YEAR-END(#) YEAR-END($)
ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE(1)
- ---- ----------- -------- ------------------ --------------------
(#) ($)
<S> <C> <C> <C> <C>
Bob G. Alexander(2)............... -- -- 75,000/-- --
Jim L. David(2)................... -- -- 105,000/-- --
Philip D. Devlin(2)............... -- -- 60,000/-- --
Melissa H. Rutledge(2)............ -- -- 70,000/-- --
R. Kent Lueders(2)................ -- -- 12,500/12,500 --
</TABLE>
- ---------------
(1) Based on the closing price of the Company's common stock at December 31,
1999 of $0.03 per share.
(2) These individuals did not exercise any options during 1999.
The Company does not have any long-term incentive plans or defined benefit
or actuarial plans. Therefore, the tables on long-term incentive plan awards and
pension plans are omitted.
EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan (the "Plan") pursuant to
Section 423(b) of the United States Internal Revenue Code of 1986, as amended.
Pursuant to the Plan, all Eligible Participants may
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<PAGE> 33
participate in each semi-annual offering in an amount of not less than 1% or
more than 10% of his or her base pay in effect as of the Offering Commencement
Date of each offering. At the end of each offering, the employee shall be
entitled to purchase stock of the Company from the payroll deductions through
the Offering Period at a price equal to the lower of:
(a) 85% of the closing price of the stock on the Offering Commencement Date
or the nearest prior business day on which trading occurred on the
NASDAQ National Market System; or
(b) 85% of the closing price of the stock on the Offering Termination Date
or the nearest prior business day on which trading occurred on the
NASDAQ National Market System; or
(c) if the Common Stock of the Company is not admitted to trading on any of
the aforesaid dates for which closing prices of the stock are to be
determined, then reference shall be made to the fair market value of
the stock on that date, as determined on such basis as shall be
established or specified for purposes of the offering by the Board of
Directors.
During 1999, no employees participated in the Company's Stock Purchase Plan.
COMPENSATION OF DIRECTORS
The Company compensates non-employee Board of Directors members in the
amount of $1,000 for each official Board of Directors' meeting and $500 for each
Board of Directors' committee meeting unless such committee meeting is held at
the time of, or in conjunction with, an official Board of Directors' meeting. In
addition, members of the Board of Directors have been granted stock options in
past years. During 1999, no stock options were granted to directors.
Incorp Inc. (which acts as a petroleum consultant and independent oil and
gas producer) and an affiliated company of former Director, Mr. Norman Miller,
was paid $35,000 for consulting services rendered to the Company by Mr. Miller
during 1998, but no payments were made in 1999. Pursuant to an agreement
effective as of November 11, 1994, Mr. Miller was entitled to receive $500 for
each day he worked on Company matters. Incorp Inc. terminated its relationship
with the Company on December 7, 1998, and Mr. Miller resigned from the Board of
Directors effective February 10, 1999.
Upon consummation of the Alexander merger, Mr. Bob G. Alexander entered
into a consulting agreement with the Company for a term running from September
1996 to September 1999 at a compensation level of $150,000 per year. Effective
November 23, 1998, Mr. Alexander was appointed President and Chief Executive
Officer of the Company at an annual salary of $250,000 per year. In January
1999, Mr. Alexander was paid the outstanding amount of $112,500 due under his
consulting agreement as partial compensation for his appointment as the
Company's President and Chief Executive Officer.
In addition, the Company pays other incidental compensation to executive
officers and directors from time to time, consisting primarily of health
insurance and reimbursement for travel and entertainment expenses on behalf of
the Company.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
In January 1996, the Company executed an employment agreement with Melissa
H. Rutledge, Vice President, Controller and Chief Accounting Officer, which has
a term of three years from the effective date of a "change in control" of the
Company. In March 1997 and April 1998, respectively, the Company executed a
similar employment agreement with each of Philip D. Devlin, Vice President,
General Counsel and Secretary and R. Kent Lueders, Vice President, Corporate
Development, (together with Ms. Rutledge's employment agreement, the "Employment
Agreements"). The Employment Agreements each provide that the three-year term
will continuously roll over (so that at any time during the term of such
agreements there is a remaining term of three years, but in no event beyond the
time the executive and/or officer reaches age 65).
The Employment Agreements define the "change in control" to have occurred
when (i) a person, entity or group becomes the beneficial owner of a majority of
the securities of the Company ordinarily having the right to
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<PAGE> 34
vote for election of directors, (ii) during any consecutive two year period, the
directors at the beginning of the period (together with directors approved by a
vote of 66 2/3% of such initial directors plus directors previously approved by
such 66 2/3% margin) cease to constitute a majority of the Company's Board of
Directors, (iii) any sale, lease, exchange or transfer of all, or substantially
all, of the Company's assets occurs, or (iv) a merger or consolidation occurs
with the effect that any person, entity or group, or the shareholders thereof,
become the owner of securities of the surviving corporation representing a
majority of the voting power of such surviving corporation for the election of
directors.
The Employment Agreements provide for a three year employment term during
which the executive and/or officer receives for each year (i) 100% of the
average of the executive's annual base salary at the time in question and the
executive's annual base salary for each of the preceding two years, and (ii)
100% of the average of the bonuses paid to the executive and/or officer for each
of the preceding three fiscal years. If the executive and/or officer is
discharged without cause or resigns for "good reason" (as defined therein) after
a change in control, then in lieu of the compensation described in the preceding
sentence, the executive and/or officer is entitled to a lump sum cash severance
payment equal to three times the sum of (a) the executive's annual base salary
then in effect, (b) the average of cash bonuses for each of the three previous
years, and (c) the average of fully-vested contributions to retirement plans for
such executive and/or officer for each of the three preceding years. In
addition, at such time, all options and all other retirement or pension
contributions or benefits become fully vested and remain fully exercisable for
360 days.
Pursuant to an agreement with the Company dated December 3, 1998, each of
Ms. Rutledge, Mr. Devlin and Mr. Lueders agreed to terminate their existing
Employment Agreements; provided that no court (including the bankruptcy court)
reduces or dismisses any of the Severance Pay Benefits (described below)
available to such executives pursuant to the Company's Severance Policy.
In addition to the Employment Agreements discussed above, the Company
entered into an employment agreement with Jim L. David in March 1997, then Vice
President, Exploration for a two year term, commencing with the date of
consummation of the merger of the Company with Alexander Energy Corporation.
Under such agreement, in the event Mr. David resigned for a good reason after a
"change of control" as defined above, or upon the discharge of Mr. David without
cause during the employment term, Mr. David would receive severance benefits
equal to the sum of (i) his annual base salary then in effect, (ii) his last
annual cash bonus and (iii) the average retirement plan contributions by the
Company on his behalf on a fully vested bases for the last two fiscal years,
multiplied by three (3). Mr. David would also have all stock options previously
granted to him become fully vested and exercisable for a three-year period (360
days) following termination. Mr. David's Employment Agreement was terminated in
July, 1998 and the benefits payable under this Employment Agreement were paid
and made a part of his separation agreement. Effective December 1, 1998, Mr.
David was re-employed with the Company as an Assistant to the President;
however, he does not have a new employment agreement in conjunction therewith.
SEVERANCE POLICY
Effective November 23, 1998, the directors initiated a Severance Policy for
all employees which provides that for a period ending October 31, 2000, all
Eligible Participants shall be entitled to a Severance Pay Benefit up to 18
months (as defined in the Policy) in the event such Eligible Participant is
terminated by the Company for any reason other than "cause" (as defined in the
Policy). The Policy provides that payments to such terminated employee shall be
subject to the employee's execution of a Separation Agreement which shall
include the following provisions:
(i) a release of all claims against the Company;
(ii) a confidentiality provision; and
(iii) an agreement to give notice to the Company and not accept or retain
any further Severance Pay Benefit in the event the Eligible Participant
shall accept the same or substantially similar employment with any other
employer.
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<PAGE> 35
Payments under the Policy shall be made to each such terminated employee on a
monthly basis; provided that in the event the Company is sold pursuant to a
merger or liquidation proceeding and the Eligible Participant is not offered the
same or substantially similar employment, such Severance Pay Benefit shall be
paid to each Eligible Participant in a lump sum. During 1999, no employees were
terminated by the Company who would be eligible for Severance Pay Benefits under
the Policy.
Pursuant to an Order of the Bankruptcy Court dated September 7, 1999, the
Company's Severance Policy was abated and a Court ordered Severance Program was
put into effect for all employees of the Company. The Severance Program provides
for contingent payments as follows: (a) a "stay-pay" component payable on the
earlier of an employees termination without cause; the closing of a sale of
substantially all the Company's assets or the confirmation of a Plan of
Reorganization; and (b) a "severance" component, whereby upon termination any
employee who does not obtain new employment, or is not offered a permanent job
in Dallas, Texas for a period of at least one year at the same pay and benefits
provided by the Company, shall be entitled to certain severance benefits. The
Order also provided that any employee who participates in the Severance Program
waives and releases any and all claims arising from any current Employment
Agreement with the Company. Effective October 1, 1999, each of Ms. Rutledge, Mr.
Devlin and Mr. Lueders agreed to participate in the Severance Program and void
their Employment Agreements; provided that all benefits described in the
Severance Program are paid to each, respectively, as prescribed. The Order
further provided that Mr. Alexander and Mr. Devlin would not be entitled to any
payments under the Severance Program until the earlier of (i) confirmation of a
Plan of Reorganization, (ii) conversion to a Chapter 7 bankruptcy proceeding or
(iii) termination of their employment by a trustee appointed by the Court.
In connection with the Severance Program the following payments will be
made to the below listed officers of the Company upon the occurrence of the
contingent event:
<TABLE>
<CAPTION>
NAME STAY-PAY SEVERANCE
- ---- -------- ---------
<S> <C> <C>
Bob G. Alexander.................................. $125,000 $125,000
Philip D. Devlin.................................. 90,000 90,000
R. Kent Lueders................................... 60,000 40,000
Melissa H. Rutledge............................... 57,500 38,333
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As the Board of Directors functioned en banc on all matters during 1999,
there are no reportable Compensation Committee interlocks or insider
participation matters affecting the actions of the directors with respect to the
business of the Company.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Prior to its dissolution in October 1998, the Compensation Committee was
composed of four Directors, including the former President and Chief Executive
Officer of the Company who acted as an ad hoc member. The Compensation Committee
advises the Company's Board of Directors and management concerning compensation
for its executive officers. Upon dissolution of the Compensation Committee, the
Board of Directors acting en banc assumed responsibility for all matters
relating to compensation; provided that directors who are executive officers or
employees of the Company shall abstain from all matters in which they have a
vested interest. Compensation for executive officers is based on the principles
that compensation must be competitive to enable the Company to motivate, attract
and retain highly qualified and talented employees to lead and grow the
Company's business and, at the same time, provide rewards which are closely
linked to the Company's and the individual's performance.
The Compensation Committee considers management skills, long term
performance, operating results, unusual accomplishments as well as economic
conditions and other external events that affect the Company's operations.
In addition to salaries, bonuses and stock options are generally granted
once annually based on performance, length of service or other noted
accomplishments in helping to increase the performance, reserves and/or cash
34
<PAGE> 36
flows of the Company. Options are granted under the National Energy Group, Inc.,
1996 Incentive Compensation Plan which was approved by the Board of Directors
and was approved by the shareholders at the 1997 Annual Meeting. Shares have
been issued annually to executives at market price on the grant date. The Board
of Directors believes that the award of long-term stock options aligns the
interests of the executive officers with the interests of the Company by
creating value for the executives through positive results of the Company.
During 1999, no bonuses were granted and no options were given to any executive
officers of the Company. No severance payments were made to any executive
officer whose employment with the Company terminated during 1999 and none are
due and owing as a result of such termination.
With respect to Mr. Alexander's base compensation, the Board of Directors
recognized that the growth and performance of the Company is dependent on the
efforts and results of its executive officers and in particular its Chief
Executive Officer. Mr. Alexander's base salary was determined to reflect his
increased responsibilities to the Company during the Company's period of
financial instability which eventually culminated in an involuntary bankruptcy
proceeding.
35
<PAGE> 37
COMPENSATION COMMITTEE
(CONSISTING OF THE BOARD OF DIRECTORS ACTING EN BANC)
CORPORATE PERFORMANCE
The following graph shows a five year comparison of cumulative total
stockholder returns for the Company, the NASDAQ Market Index (the "Broad
Market") and an index of peer companies in the oil and gas industry selected by
the Company (the "Peer Group").
[GRAPH]
Assumes $100 Invested On January 1, 1995
Assumes Dividend Reinvested
Fiscal Year Ending December 31, 1999
The total cumulative return in investment (change in the year end stock
price plus reinvested dividends) for each of the years for the Company, the
NASDAQ Market Index and the Peer Group is based on the stock price or composite
index beginning at the end of the calendar year 1995. The Company has never paid
dividends on the Company's Common Stock.
The Peer Group Index, is a diversified group of independent oil and gas
companies comprised of Abraxas Petroleum, C.P. N.V.; Basin Exploration, Inc.;
Coho Energy, Inc.; Comstock Resources, Inc.; Gothic Energy Corp.; Panaco, Inc.;
and Petrocorp, Inc. Two companies formerly used as part of the peer group, Arch
Petroleum, Inc. and Lomak Petroleum, Inc., have been acquired by other entities
and no longer exist.
36
<PAGE> 38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth, to the best knowledge of the Company,
information as to the ownership of the Company's Common Stock and all series of
Preferred Stock held by (i) each person or entity who owns of record or who is
known by the Company to own beneficially 5% or more of the outstanding shares of
such stock, (ii) directors, and (iii) all directors and officers as a group, as
of March 23, 2000. Except as otherwise indicated, ownership of shares by the
persons named below includes sole voting and investment power held by such
persons.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth as of March 23, 2000, the individuals or
entities known to the Company to own more than 5% of the Company's outstanding
shares of capital stock.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER PERCENT
OF BENEFICIAL OWNER TITLE OF CLASS OF SHARES OF CLASS(1)
- ------------------- -------------- --------- -----------
<S> <C> <C> <C>
COMMON STOCK
Carl C. Icahn................................... Common Stock 8,847,044(2) 19.2%
114 West 47th Street
19th Floor
New York, NY 10036
Kayne, Anderson Investment Management, Inc...... Common Stock 4,414,068(3) 9.9%
1800 Avenue of Stars
Suite 1424
Los Angeles, CA 90067
Croft-Leominster, Inc........................... Common Stock 2,161,710(4) 5.3%
207 E. Redwood St.
Suite 802
Baltimore, MD 21202
SERIES B PREFERRED STOCK
Kayne, Anderson Investment Management, Inc...... Series B Preferred Stock 38,687(5) 100%
1800 Avenue of Stars
Suite 1424
Los Angeles, CA 90067
Arbco Associates, L.P........................... Series B Preferred Stock 13,928(5) 36%
1800 Avenue of Stars
Suite 1424
Los Angeles, CA 90067
Offense Group Associates, L.P................... Series B Preferred Stock 11,607(5) 30%
1800 Avenue of Stars
Suite 1424
Los Angeles, CA 90067
Kayne, Anderson Non-Traditional Investments,
L.P............................................. Series B Preferred Stock 10,832(5) 28%
1800 Avenue of Stars
Suite 1424
Los Angeles, CA 90067
Opportunity Associates L.P...................... Series B Preferred Stock 2,320(5) 6%
1800 Avenue of Stars
Suite 1424
Los Angeles, CA 90067
</TABLE>
37
<PAGE> 39
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER PERCENT
OF BENEFICIAL OWNER TITLE OF CLASS OF SHARES OF CLASS(1)
- ------------------- -------------- --------- -----------
<S> <C> <C> <C>
SERIES C PREFERRED STOCK
Kayne, Anderson Investment Management, Inc...... Series C Preferred Stock 23,000(6) 100%
1800 Avenue of Stars
Suite 1424
Los Angeles, CA 90067
Arbco Associates, L.P........................... Series C Preferred Stock 8,280(6) 36%
1800 Avenue of Stars
Suite 1424
Los Angeles, CA 90067
Offense Group Associates, L.P................... Series C Preferred Stock 7,240(6) 31%
1800 Avenue of Stars
Suite 1424
Los Angeles, CA 90067
Kayne, Anderson Non-Traditional Investments,
L.P............................................. Series C Preferred Stock 6,100(6) 27%
1800 Avenue of Stars
Suite 1424
Los Angeles, CA 90067
Opportunity Associates L.P...................... Series C Preferred Stock 1,380(6) 6%
1800 Avenue of Stars
Suite 1424
Los Angeles, CA 90067
SERIES D PREFERRED STOCK
Carl C. Icahn................................... Series D Preferred Stock 100,000(2) 100%
114 West 47th Street
19th Floor
New York, NY 10036
SERIES E PREFERRED STOCK
Kayne, Anderson Investment Management, Inc...... Series E Preferred Stock 9,500(7) 100%
1800 Avenue of Stars
Suite 1424
Los Angeles, CA 90067
Foremost Insurance Company...................... Series E Preferred Stock 7,500(7) 79%
5230 33rd Street, S.E.
Grand Rapids, MI 49512
Topa Insurance Company.......................... Series E Preferred Stock 2,000(7) 21%
c/o Kayne, Anderson Investment Management,
Inc.
1800 Avenue of Stars
Suite 1424
Los Angeles, CA 90067
</TABLE>
- ---------------
(1) Based upon the 40,527,482 shares of Common Stock, 38,687 shares of issued
and outstanding Series B Preferred Stock, 23,000 shares of issued and
outstanding Series C Preferred Stock, 100,000 shares of issued and
outstanding Series D Preferred Stock and 9,500 shares of issued and
outstanding Series E Preferred Stock that are outstanding as of April 20,
1999. For each person or group, the percentages are calculated on the basis
of the amount of outstanding securities of the particular class plus any
securities that such person or group has the right to acquire within 60 days
of March 23, 2000 pursuant to options, warrants, conversion privileges or
other rights.
38
<PAGE> 40
(2) High River Limited Partnership, the record owner of these shares, is a
Delaware limited partnership, and has pledged these shares to ING Capital.
Riverdale Investors Corp., Inc. is a Delaware corporation and is the general
partner of High River. Mr. Carl C. Icahn is the sole stockholder and a
director of Riverdale. Riverdale's principal business address is 90 South
Bedford Road, Mount Kisco, New York 10549, and Mr. Icahn's principal
business address is c/o Icahn Associates Corp., 114 West 47th Street, 19th
Floor, New York, New York 10036. Gascon Partners, a New York general
partnership, an affiliate of Mr. Icahn, High River and Riverdale holds
warrants to purchase 300,000 shares of Common Stock. High River also holds
700,000 warrants issued in August 1996 in connection with the Company's
acquisition of and merger with Alexander Energy Company. The ownership
figures in the table assume that all the shares of Series D Preferred Stock
are converted and warrants for 1,000,000 shares of Common Stock are
exercised. Riverdale and Mr. Icahn, by virtue of their relationships to High
River and Gascon, may be deemed to beneficially own (as that term is defined
in Rule 13d-3 under the Exchange Act) the shares which High River directly
beneficially owns and the shares which Gascon has warrants to purchase. Each
of Riverdale and Mr. Icahn disclaims beneficial ownership of such shares for
all other purposes. Mr. Robert J. Mitchell has been appointed a director of
the Company as the representative of the holders of the Series D Preferred
Stock. Mr. Mitchell does not have dispositive or voting power over any of
the shares owned by High River. Mr. Russell Glass and Mr. Martin Hirsch,
directors of the Company and affiliates of High River, disclaim any
beneficial ownership of these shares.
(3) Richard A. Kayne ("Kayne") is President, Chief Executive Officer and
Director of Kayne Anderson Investment Management Inc. ("KAIM") and of KA
Associates, Inc., a registered broker/dealer. KAIM is the general partner of
KAIM Non-Traditional, L.P. ("L.P."), registered investment advisor, which is
the general partner of and investment advisor to the investment partnerships
referred to in this footnote. Mr. Kayne is also a limited partner in each
investment partnership and a general partner on one of them. Mr. Kayne and
L.P. have shared dispositive and voting power through investment
partnerships for 38,687 shares of Series B Preferred Stock, 23,000 shares of
Series C Preferred Stock, and 9,500 shares of Series E Preferred Stock,
which may be converted at anytime into 2,380,738, 1,150,000 and 422,222
shares of Common Stock, respectively, and for warrants to purchase 217,000
shares of Common Stock. The percentage ownership figures in the table assume
that all shares of Series B Preferred Stock, Series C Preferred Stock and
Series E Preferred Stock are converted, the warrants to purchase 217,000
shares of Common Stock are exercised and 4,169,960 shares of Common Stock
are issued, and such shares are added to the shares of Common Stock
outstanding. Mr. Kayne disclaims beneficial ownership of the shares held by
the investment partnerships in excess of the amount attributable to him by
virtue of his direct interest as a limited or general partner and by virtue
of his indirect interest in L.P.'s interest in the investment partnerships.
L.P. disclaims beneficial ownership of the shares held by the investment
partnerships in excess of the amount attributable to them by virtue of their
percentage interest in the investment partnerships.
(4) Croft-Leominster, Inc. the record owner of the shares, is a Maryland
corporation.
(5) Beneficial ownership of all the Series B Preferred Stock is attributed to
KAIM. For information on Richard A. Kayne, KAIM and L.P., see footnote (3)
above. Arbco Associates L.P. has shared dispositive and voting power with
Mr. Kayne, and L.P. of 13,928 shares of Series B Preferred Stock, which is
convertible at any time into 857,107 shares of Common Stock. Offense Group
Associates has shared dispositive and voting power with Mr. Kayne, and L.P.
for 11,607 shares of Series B Preferred Stock, which is convertible at any
time into 714,276 shares of Common Stock. Kayne, Anderson Non-Traditional
Investments has shared dispositive and voting power with Mr. Kayne and L.P.
for 10,832 shares of Series B Preferred Stock, which is convertible at any
time into 666,584 shares of Common Stock. Opportunity Associates L.P. has
shared dispositive and voting power with Mr. Kayne, and L.P. of 2,320 shares
of Series B Preferred Stock, which is convertible at any time into 142,769
shares of Common Stock.
(6) Beneficial ownership of all the Series C Preferred Stock is attributed to
KAIM. For information on Richard A. Kayne, KAIM and L.P., see footnote (3)
above. Arbco Associates L.P. has shared dispositive and voting power with
Mr. Kayne, and L.P. of 8,280 shares of Series C Preferred Stock, which is
convertible at any time into 414,000 shares of Common Stock. Offense Group
Associates has shared dispositive and voting power with Mr. Kayne, and L.P.
for 7,240 shares of Series C Preferred Stock, which is convertible at any
time into 362,000 shares of Common Stock. Kayne, Anderson Non-Traditional
Investments has shared
39
<PAGE> 41
dispositive and voting power with Mr. Kayne, and L.P. for 6,100 shares of
Series C Preferred Stock, which is convertible at any time into 305,000
shares of Common Stock. Opportunity Associates L.P. has shared dispositive
and voting power with Mr. Kayne, and L.P. for 1,380 shares of Series C
Preferred Stock, which is convertible at any time into 69,000 shares of
Common Stock.
(7) Beneficial ownership of all the Series E Preferred Stock is attributed to
KAIM, except with respect to Foremost Insurance Company which owns 7,500
shares of Series E Preferred Stock (convertible at any time into 333,333
shares of Common Stock) and warrants for 105,000 shares of Common Stock.
Topa Insurance Company has dispositive and voting power for 2,000 shares of
Series E Preferred Stock, which is convertible at any time into 88,888
shares of Common Stock and warrants for 28,000 shares of Common Stock.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information concerning the beneficial
ownership of the Company's capital stock as of March 23, 2000 by each of the
Company's present directors and executive officers and certain other parties,
and the directors and executive officers of the Company as a group, all as
reported by each such person as of March 24, 2000.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER
BENEFICIAL OWNER TITLE OF CLASS OF SHARES % OF CLASS(1)
- ------------------- -------------- --------- -------------
<S> <C> <C> <C>
Bob G. Alexander............................. Common Stock 475,002(2) 1.2%
4925 Greenville Avenue
Suite 1400
Dallas, TX 75206
Robert H. Kite............................... Common Stock 518,955(3) 1.3%
6910 East Fifth Street
Scottsdale, AZ 85251
Jim L. David................................. Common Stock 512,889(4) 1.3%
4925 Greenville Avenue
Suite 1400
Dallas, TX 75206
R. Kent Lueders.............................. Common Stock 212,500(5) --(6)
4925 Greenville Avenue
Suite 1400
Dallas, Texas 75206
Philip D. Devlin............................. Common Stock 166,473(7) --(6)
4925 Greenville Avenue
Suite 1400
Dallas, TX 75206
Melissa H. Rutledge.......................... Common Stock 81,800(8) --(6)
4925 Greenville Avenue
Suite 1400
Dallas, TX 75206
Robert J. Mitchell........................... Common Stock 50,000(9) --(6)
767 Fifth Avenue
New York, NY 10153
Jack G. Wasserman............................ Common Stock --(10) --(6)
111 Broadway
New York, NY 10006
Russell D. Glass............................. Common Stock --(11) --(6)
767 Fifth Avenue
New York, NY 10153
</TABLE>
40
<PAGE> 42
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER
BENEFICIAL OWNER TITLE OF CLASS OF SHARES % OF CLASS(1)
- ------------------- -------------- --------- -------------
<S> <C> <C> <C>
Martin Hirsch................................ Common Stock --(12) --(6)
767 Fifth Avenue
New York, NY 10153
All officers and directors as a group (10 Common Stock 2,017,619(13) 5.0%
people)....................................
All officers and directors as a group (10 Series B Preferred Stock
people)....................................
All officers and directors as a group (10 Series C Preferred Stock
people)....................................
All officers and directors as a group (10 Series D Preferred Stock
people)....................................
All officers and directors as a group (10 Series E Preferred Stock
people)....................................
</TABLE>
- ---------------
(1) As of March 23, 2000 there were 40,527,482 shares of the Company's common
stock outstanding.
(2) Includes 340,000 shares held directly by Mr. Alexander and 60,002 shares
owned by Mr. Alexander's wife, Donna Ports Alexander, and immediately
exercisable options to purchase 75,000 shares. Mr. Alexander disclaims any
beneficial interest in the shares owned by his wife.
(3) Robert H. Kite is Chief Operating Officer and a 33.0% beneficial owner of
KFT, Ltd. and may be deemed to be the beneficial owner of shares held by
KFT, Ltd. KFT, Ltd. holds 176,297 shares and Mr. Kite holds 257,658 shares
directly and immediately exercisable options to purchase 85,000 shares.
(4) Includes 407,889 shares held directly by Mr. David and immediately
exercisable options to purchase 105,000 shares.
(5) Includes 200,000 shares held directly by Mr. Lueders and immediately
exercisable options to purchase 12,500 shares, but does not include options
to purchase 12,500 shares which are not yet exercisable.
(6) Less than one percent.
(7) Includes 106,473 shares of Common Stock held directly by Mr. Devlin and
immediately exercisable options to purchase 60,000 shares.
(8) Includes 11,800 shares held directly by Ms. Rutledge and immediately
exercisable options to purchase 70,000 shares.
(9) Includes immediately exercisable options to purchase 50,000 shares, and Mr.
Mitchell disclaims any beneficial ownership of stock attributable to High
River.
(10) Mr. Wasserman holds no stock or options of the Company.
(11) Mr. Glass holds no stock or options of the Company and disclaims beneficial
ownership of any stock attributable to High River.
(12) Mr. Hirsch holds no stock or options of the Company and disclaims
beneficial ownership of any stock attributable to High River.
(13) Includes a total of 1,560,119 shares held directly or indirectly by the
executive officers and directors and options and warrants to purchase
457,500 shares which are immediately exercisable or exercisable within 60
days.
Under the terms of the Series D Preferred Stock, a change in control of the
Company may occur if any of the events occur that trigger the Series D Preferred
Stock Contingent Voting Rights (as defined) to elect one-half of the Board of
Directors plus one member and if such rights are exercised by such holder.
Pursuant to an order dated February 11, 1999 of the United States Bankruptcy
Court for the Northern District of Texas, the Company was placed into a Title
11, Chapter 11 of the United States Code bankruptcy reorganization proceeding.
Such proceeding gives rise to the Series D Preferred stockholder to exercise its
right to control the Company's Board of Directors. To date, the Series D
Preferred Stockholder has not exercised such right. However, Messrs. Mitchell,
Glass and Hirsch are affiliated with the Series D Preferred Stockholder. See
"Description of Capital Stock -- Series D Preferred Stock."
41
<PAGE> 43
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company entered into an agreement in 1997 (the "IAC Agreement") with
Icahn Associates Corp. ("IAC"), an affiliate of Mr. Carl C. Icahn, who is a
beneficial owner of more than 5% of the Company's Common Stock. Pursuant to the
IAC Agreement, IAC committed and subsequently spent $10 million to participate
for specified interests in each of the prospects generated or acquired by the
Company through September 30, 1998. Each party is entitled to certain rights of
first refusal in the event that the other party decides to sell all or part of
its participation interest in a prospect in which both parties are
participating. As partial consideration for IAC's obligations under the
participation agreement, the Company has also granted Gascon Partners, an
affiliate of IAC, certain warrants, which became exercisable prior to December
31, 1997 and will expire July 11, 2002, to purchase 300,000 shares of Common
Stock at an exercise price of three dollars ($3.00) per share.
Effective December 22, 1998, the Company's credit facility and related $25
million outstanding balance was assigned jointly by Bank One Texas, N.A. and
Credit Lyonnais New York Branch Bank to Arnos Corp., another affiliate of Mr.
Carl C. Icahn. During 1999 the Company has paid fees and interest associated
with the credit facility in the amount of $2.1 million to Arnos Corp. Pursuant
to a Bankruptcy Court ordered auction sale on November 1, 1999 of the Company's
oil and gas properties, Arnos Corp. acquired substantially all of such
properties for a purchase price of $96.25 million, which has been deposited into
the registry of the Bankruptcy Court with a final closing pending (i) the
Court's confirmation of a plan of reorganization or (ii) in the event a plan of
reorganization is not confirmed, a court ordered closing of the sale of the
properties to Arnos. The Court approved this motion and ordered Arnos to pay
into the Court's registry the sum of $61.25 million which equals the purchase
price of $96.25 million less the previously escrowed deposit of $9.625 million
and the principal balance of $25 million outstanding under the Arnos credit
facility.
During the year ended December 31, 1999, the Company sold $18.2 million, or
90.1% of the Company's total oil sales to Plains. KAIM and investment
partnerships associated with KAIM, and other accounts managed by affiliates of
KAIM, own on a fully diluted basis approximately 27.82% of the issued and
outstanding shares of Common Stock of Plains Resources, Inc. The Company has
agreements with Plains that were entered into in 1993 pursuant to which Plains
purchases oil produced from the major oil-producing properties which the Company
operates, at West Texas Intermediate posted prices plus a premium. The premium
is based on Plains purchasing substantially all the production of the Company.
Sales to Plains will account for a significant percentage of the Company's total
oil and natural gas sales in 2000.
42
<PAGE> 44
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report.
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:
<TABLE>
<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)
2.4 Debtor's Joint Disclosure Statement under Section 1125 of
the Bankruptcy Code Regarding Debtor's Joint Plan of
Reorganization under Chapter 11 of the Bankruptcy Code dated
March 14, 2000(20)
2.5 Debtors Joint Plan of Reorganization under Chapter 11 of the
Bankruptcy Code dated March 14, 2000(20)
2.6 Joint Disclosure Statement under Section 1125 of the
Bankruptcy Code with Respect to the Plan of Reorganization
proposed by the Official Committee of Unsecured Creditors
dated February 28, 2000(20)
2.7 Plan of Reorganization Submitted by the Official Committee
of Unsecured Creditors dated February 28, 2000(20)
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)
</TABLE>
43
<PAGE> 45
<TABLE>
<S> <C>
4.6 Indenture dated August 21, 1997, among the Company and Bank
One, N.A.(14)
4.7 Instrument of Resignation, Appointment and Acceptance, dated
October 23, 1998, between the Company, Bank One, N.A. and
Norwest Bank Minnesota, N.A.(19)
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)
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 Agreement for Purchase and Sale (Mustang Island) dated April
20, 1995, between the Company and Sierra Mineral
Development, L.C.(6)
10.5 Agreement for Purchase and Sale (Oak Hill) dated April 12,
1995, between the Company and Sierra 1994 I Limited
Partnership(6)
10.6 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)
10.7 High River Limited Partnership Warrant to purchase 700,000
shares of Common Stock, dated August 29, 1996(3)
10.8 Form of Series E Investors' Warrants to purchase an
aggregate 350,000 shares of Common Stock, dated August 29,
1996(3)
10.9 Gascon Partners Warrant to Purchase 300,000 shares of the
Company's Common Stock(13)
10.10 Prudential Securities Incorporated Warrant to Purchase
100,000 shares of the Company's Common Stock(3)
10.11 Gaines Berland, Inc. Warrant to Purchase 300,000 shares of
the Company's Common Stock dated August 29, 1996(3)
10.12 Gaines Berland, Inc. Warrant to Purchase 700,000 shares of
the Company's Common Stock dated August 29, 1996(3)
10.13 Executive Employment Agreement, dated January 1, 1996,
between the Company and Miles D. Bender(9)
10.14 Separation Agreement, dated November 24, 1998, between the
Company and Miles D. Bender(19)
10.15 Executive Employment Agreement, dated January 1, 1996,
between the Company and Melissa Rutledge(9)
10.16 Separation Agreement between the Company and Robert A. Imel
dated October 31, 1997(15)
10.17 Separation Agreement, dated May 18, 1998, between the
Company and William T. Jones(17)
10.18 Executive Employment Agreement, dated June 6, 1996, between
the Company and Jim L. David(1)
10.19 Executive Employment Agreement dated March 20, 1997, between
the Company and Philip D. Devlin(10)
10.20 Separation Agreement, dated May 19, 1998, between the
Company and Gene W. Anderson(19)
</TABLE>
44
<PAGE> 46
<TABLE>
<S> <C>
10.21 Executive Employment Agreement dated August 25, 1997,
between the Company and C. Dewayne Cravens(19)
10.22 Separation Agreement, dated May 18, 1998, between the
Company and C. Dewayne Cravens(19)
10.23 Executive Employment Agreement, dated January 29, 1998,
between the Company and Fred R. Miller(15)
10.24 Executive Employment Agreement, dated March 5, 1998, between
the Company and Chuck Elsey(16)
10.25 Termination Notice and Agreement, dated October 28, 1998,
between the Company and Chuck Elsey(19)
10.26 Executive Employment Agreement, dated April 13, 1998,
between the Company and Kent Lueders(16)
10.27 Executive Employment Agreement, dated June 1, 1998, between
the Company and Leslie Wylie(17)
10.28 National Energy Group, Inc. 1996 Incentive Compensation
Plan(11)
10.29 National Energy Group, Inc. Employee Stock Purchase Plan(12)
10.30 National Energy Group, Inc. Employee Severance Policy(19)
10.31 Agreement dated January 1, 1996 between the Company and
Sandefer Oil & Gas, Inc.(1)
10.32 Consulting Agreement dated January 1, 1996 between Sandefer
Oil & Gas, Inc. and Potosky Oil & Gas, Inc. and Atocha
Exploration, Inc.(1)
10.33 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.(15)
10.34 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.(15)
10.35 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)
10.36 $50,000,000 Revolving Note dated August 29, 1996 payable to
Bank One(3)
10.37 $50,000,000 Revolving Note dated August 29, 1996 payable to
Credit Lyonnais(3)
10.38 Assignment of $50,000,000 Revolving Note to Arnos Corp. from
Bank One, Texas, N.A.(19)
10.39 Assignment of $50,000,000 Revolving Note to Arnos Corp. from
Credit Lyonnais New York Branch(19)
10.40 Unlimited Guaranty of NEG-OK dated August 29, 1996 for the
benefit of Bank One(3)
10.41 Unlimited Guaranty of NEG-OK, dated August 29, 1996 for the
benefit of Credit Lyonnais(3)
10.42 Unlimited Guaranty of Boomer dated August 29, 1996 for the
benefit of Bank One(3)
10.43 Unlimited Guaranty of Boomer dated August 29, 1996 for the
benefit of Credit Lyonnais(3)
10.44 First Amendment to Restated Loan Agreement dated October 31,
1996 among Bank One and Credit Lyonnais and the Company,
Guarantor and Boomer(9)
10.45 Second Amendment to Restated Loan Agreement dated October
31, 1996, among Bank One and Credit Lyonnais and the
Company, Guarantor and Boomer(10)
</TABLE>
45
<PAGE> 47
<TABLE>
<S> <C>
10.46 Third Amendment to Restated Loan Agreement dated October 31,
1996, among Bank One and Credit Lyonnais and the Company,
Guarantor and Boomer(10)
10.47 Fourth Amendment to Restated Loan Agreement dated October
31, 1996, among Bank One and Credit Lyonnais and the
Company, Guarantor and Boomer(15)
10.48 Multi-State Assignment Agreement dated December 22, 1998
between Bank One, Texas, N.A., Credit Lyonnais New York
Branch and Arnos Corp.(19)
10.49 Multi-State Assignment Agreement, LaFourche Parish,
Louisiana, dated December 22, 1998, between Bank One, Texas,
N.A., Credit Lyonnais New York Branch and Arnos Corp.(19)
10.50 Multi-State Assignment Agreement, Iberville Parish,
Louisiana, dated December 22, 1998, between Bank One, Texas,
N.A., Credit Lyonnais New York Branch and Arnos Corp.(19)
10.51 Oklahoma Assignment Agreement, dated December 22, 1998,
between Bank One, Texas, N.A., Credit Lyonnais New York
Branch and Arnos Corp.(19)
10.52 Arnos Corporation Letter dated December 23, 1998(19)
10.53 Purchase and Sale Agreement between National Energy Group,
Inc. as Seller and Arnos Corporation as buyer dated November
1, 1999(20)
12.1 Computation of Ratio of Earnings to Fixed Charges(20)
23.1 Consent of Ernst & Young LLP, Independent Auditors(20)
23.2 Consent of Netherland Sewell & Associates, Inc., Independent
Engineers(20)
24.1 Power of Attorney (included in signature pages to this Form
10-K)(20)
27.1 Financial Data Schedule(20)
99.1 Order of Bankruptcy Court Granting Relief on Involuntary
Petition(19)
99.2 Order of Bankruptcy Court Implementing Auction Sale
Closing(20)
</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 the Company's Form S-4 (No. 333-38075), filed
October 16, 1997.
46
<PAGE> 48
(15) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
(16) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998.
(17) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998.
(18) Incorporated by reference to the Company's Current Report on Form 8-K,
dated February 8, 1999.
(19) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
(20) Filed herewith.
(b) The Company filed a report on Form 8-K, dated February 8, 1999,
reporting the entry of an Order for Relief Under Chapter 11 of the Bankruptcy
Code by the United States Bankruptcy Court for the Northern District of Texas,
Dallas Division. Under the Order, the Court assumed jurisdiction and supervision
of the Company and its assets and business.
47
<PAGE> 49
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.
NYMEX -- New York Mercantile Exchange.
Oil, Gas and Mineral 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.
48
<PAGE> 50
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.
49
<PAGE> 51
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.
<TABLE>
<S> <C> <C>
NATIONAL ENERGY GROUP, INC.
By: /s/ Bob G. Alexander March 30, 2000
-------------------------------------------------
Bob G. Alexander
President and Chief Executive Officer
By: /s/ Melissa H. Rutledge March 30, 2000
-------------------------------------------------
Melissa H. Rutledge
Vice President, Principal Financial Officer and
Controller
</TABLE>
POWER OF ATTORNEY AND SIGNATURES
The undersigned directors and officers of National Energy Group, Inc.
hereby constitute and appoint Bob G. Alexander 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 30, 2000.
<TABLE>
<S> <C>
/s/ Bob G. Alexander President, Chief Executive Officer and
- ---------------------------------------------- Director
Bob G. Alexander
/s/ Jim L. David Assistant to President and Director
- ----------------------------------------------
Jim L. David
/s/ Russell D. Glass Director
- ----------------------------------------------
Russell D. Glass
/s/ Martin Hirsch Director
- ----------------------------------------------
Martin Hirsch
/s/ Robert H. Kite Director
- ----------------------------------------------
Robert H. Kite
/s/ Robert J. Mitchell Director
- ----------------------------------------------
Robert J. Mitchell
/s/ Jack G. Wasserman Director
- ----------------------------------------------
Jack G. Wasserman
</TABLE>
50
<PAGE> 52
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, 1998, and
1999...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998, and 1999......................... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998, and 1999......................... F-5
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1997, 1998, and 1999..... F-6
Notes to Consolidated Financial Statements.................. F-7
</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> 53
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, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the three years in the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States. 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, 1998 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 of the Notes to the Consolidated Financial Statements, on February 11, 1999,
the United States Bankruptcy Court granted an Involuntary Petition for an Order
for Relief under Chapter 11 of Title 11 of the United States Bankruptcy Code.
This matter raises substantial doubt about the ability of the Company to
continue as a going concern. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
ERNST & YOUNG LLP
Dallas, Texas
March 23, 2000
F-2
<PAGE> 54
NATIONAL ENERGY GROUP, INC.
DEBTOR-IN-POSSESSION
CONSOLIDATED BALANCE SHEETS
(NOTE 1)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1999
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,542,235 $ 29,216,751
Marketable securities..................................... 339,250 342,937
Accounts receivable -- oil and natural gas sales.......... 5,030,155 5,057,904
Accounts receivable -- joint interest and other........... 1,918,411 490,339
Other..................................................... 1,905,050 1,411,783
------------- -------------
Total current assets................................... 11,735,101 36,519,714
Oil and natural gas properties, at cost (full cost method):
Subject to ceiling limitation............................. 327,459,034 327,330,494
Accumulated depreciation, depletion, and amortization..... (251,712,879) (266,282,860)
------------- -------------
Net oil and natural gas properties........................ 75,746,155 61,047,634
Other property and equipment................................ 2,601,163 2,495,606
Accumulated depreciation.................................... (989,905) (1,361,349)
------------- -------------
Net other property and equipment.......................... 1,611,258 1,134,257
Other assets and deferred charges, net...................... 5,909,344 1,656,521
------------- -------------
Total assets........................................... $ 95,001,858 $ 100,358,126
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities not subject to compromise:
Current liabilities:
Accounts payable -- trade.............................. $ 2,019,114 $ 4,437,802
Accounts payable -- revenue............................ 4,446,696 2,545,610
Credit facility........................................ 25,000,000 25,000,000
Accrued interest on credit facility.................... 280,160 --
Senior Notes including unamortized issuance premium.... 166,238,513 --
Accrued interest on Senior Notes....................... 10,537,601 --
Current portion of gas prepayments..................... 485,845 --
Other.................................................. 561,049 --
------------- -------------
Total current liabilities......................... 209,568,978 31,983,412
Long-term liabilities:
Gas balancing and prepayments............................. 2,052,691 --
Other..................................................... 312,957 --
Liabilities subject to compromise:
Accounts payable -- trade................................. -- 2,154,158
Accounts payable -- revenue............................... -- 2,879,469
Senior Notes.............................................. -- 165,000,000
Accrued interest on Senior Notes.......................... -- 10,537,601
Gas balancing and prepayments............................. -- 2,685,645
Other..................................................... -- 23,341
------------- -------------
Total liabilities subject to compromise................ -- 183,280,214
Commitments and contingencies (Note 6)
Stockholders' equity (deficit):
Convertible preferred stock, $1.00 par:
Authorized shares -- 1,000,000; Issued and outstanding
shares -- 171,187
Aggregate liquidation preference -- $17,118,700........ 171,187 171,187
Common stock, $.01 par value:
Authorized shares -- 100,000,000; Issued and
outstanding shares -- 40,527,482 at December 31, 1998
and 1999, respectively................................ 405,275 405,275
Additional paid-in capital................................ 113,089,872 113,089,872
Unrealized loss on marketable securities, net............. (176,094) (172,407)
Accumulated deficit....................................... (230,423,008) (228,399,427)
------------- -------------
Total stockholders' equity (deficit)................... (116,932,768) (114,905,500)
------------- -------------
Total liabilities and stockholders' equity
(deficit)....................................... $ 95,001,858 $ 100,358,126
============= =============
</TABLE>
See accompanying notes.
F-3
<PAGE> 55
NATIONAL ENERGY GROUP, INC.
DEBTOR-IN-POSSESSION
CONSOLIDATED STATEMENTS OF OPERATIONS
(NOTE 1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999
------------ ------------- -----------
<S> <C> <C> <C>
Revenues:
Oil and natural gas sales.......................... $ 52,417,108 $ 38,440,260 $39,300,183
Costs and expenses:
Lease operating.................................... 6,728,684 8,589,663 6,101,334
Oil and natural gas production taxes............... 3,138,644 2,503,616 2,095,221
Depreciation, depletion and amortization........... 23,205,462 21,310,754 15,889,266
Writedowns of oil and natural gas properties....... 46,396,334 148,400,000 --
Restructuring charges.............................. -- 1,869,169 --
General and administrative......................... 4,392,469 6,141,837 4,097,529
------------ ------------- -----------
83,861,593 188,815,039 28,183,350
------------ ------------- -----------
Operating income (loss).............................. (31,444,485) (150,374,779) 11,116,833
Other income (expense):
Interest expense................................... (11,211,607) (14,431,794) (1,908,749)
Interest income and other, net..................... 1,031,980 292,242 --
------------ ------------- -----------
Income (loss) before reorganization items and income
taxes.............................................. (41,624,112) (164,514,331) 9,208,084
Reorganization items:
Professional fees and other........................ -- -- (4,726,587)
Writeoff of unamortized debt premium and issuance
costs, net...................................... -- -- (3,219,428)
Interest earned on accumulating cash resulting from
Chapter 11 proceedings.......................... -- -- 761,512
------------ ------------- -----------
Income (loss) before income taxes.................... (41,624,112) (164,514,331) 2,023,581
Benefit (provision) for income taxes................. 7,285,765 -- --
------------ ------------- -----------
Net income (loss).................................... (34,338,347) (164,514,331) 2,023,581
Preferred stock dividend requirements................ 883,435 628,380 --
------------ ------------- -----------
Net income (loss) applicable to common
shareholders....................................... $(35,221,782) $(165,142,711) $ 2,023,581
============ ============= ===========
Net income (loss) per common share, basic and
diluted............................................ $ (.94) $ (4.08) $ .05
============ ============= ===========
Weighted average number of common shares outstanding,
basic and diluted.................................. 37,380,343 40,499,911 40,527,482
============ ============= ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 56
NATIONAL ENERGY GROUP, INC.
DEBTOR-IN-POSSESSION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(NOTE 1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999
------------ ------------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income (loss) from operations........................ $(41,624,112) $(164,514,331) $ 9,208,084
Chapter 11 proceeding reorganization costs, net...... -- -- (3,965,075)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and depletion........................... 22,521,612 20,374,833 15,026,217
Writedowns of oil and natural gas properties......... 46,396,334 148,400,000 --
Amortization of loan costs and issuance premium...... 573,705 777,804 704,937
Amortization of deferred compensation................ 39,094 42,366 59,260
Common stock, options, and warrants issued for
services........................................... 151,365 -- --
Other................................................ 11,936 290,701 (121,647)
Changes in operating assets and liabilities excluding
effects of business acquisitions:
Accounts receivable................................ (7,771,430) 8,581,932 1,392,085
Other current assets............................... (1,350,230) 194,926 640,568
Accounts payable and accrued liabilities........... 3,915,896 (9,066,079) 4,768,533
------------ ------------- -----------
Net cash provided by operating activities.......... 22,864,170 5,082,152 27,712,962
------------ ------------- -----------
INVESTING ACTIVITIES
Purchases of marketable securities................... (515,344) -- --
Purchases of other property and equipment............ (1,910,904) (687,613) --
Oil and natural gas acquisition, exploration, and
development expenditures........................... (77,902,861) (51,999,775) (3,785,889)
Proceeds from sales of oil and gas properties........ 5,419,581 50,881 3,357,928
Other................................................ (916,639) (666,956) (610,485)
------------ ------------- -----------
Net cash used in investing activities.............. (75,826,167) (53,303,463) (1,038,446)
------------ ------------- -----------
FINANCING ACTIVITIES
Proceeds from issuance of 10 3/4% Notes due 2006,
net................................................ 64,483,206 -- --
Proceeds from issuance of other long-term debt,
net................................................ 32,978,502 30,000,000 --
Repayments of other long-term debt................... (33,000,000) (5,000,000) --
Repayments of other long-term liabilities............ (776,034) (26,918) --
Proceeds from exercise of stock options and
warrants........................................... 1,917,561 93,750 --
Proceeds from employee stock purchase plan........... -- 56,420 --
Preferred stock dividends............................ (786,685) (314,185) --
Other................................................ (82,320) -- --
------------ ------------- -----------
Net cash provided by financing activities.......... 64,734,230 24,809,067 --
------------ ------------- -----------
Increase (decrease) in cash and cash equivalents..... 11,772,233 (23,411,244) 26,674,516
Cash and cash equivalents at beginning of period..... 14,182,246 25,954,479 2,542,235
------------ ------------- -----------
Cash and cash equivalents at end of period........... $ 25,954,479 $ 2,542,235 $29,216,751
============ ============= ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid in cash................................ $ 12,403,910 $ 9,940,420 $ 2,146,295
============ ============= ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 57
NATIONAL ENERGY GROUP, INC.
DEBTOR-IN-POSSESSION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(NOTE 1)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
------------------ ---------------------
SHARES AMOUNT SHARES AMOUNT
------- -------- ---------- --------
<S> <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
Common stock issued upon
exercise of options and
warrants.................. -- -- 25,000 250
Common stock issued under
employee stock purchase
plan...................... -- -- 46,162 462
Preferred stock dividends... -- -- -- --
Unrealized loss on
marketable securities..... -- -- -- --
Net loss.................... -- -- -- --
------- -------- ---------- --------
Balance at December 31,
1998........................ 171,187 $171,187 40,527,482 $405,275
Unrealized gain on
marketable securities..... -- -- -- --
Net income.................. -- -- -- --
------- -------- ---------- --------
Balance at December 31,
1999........................ 171,187 $171,187 40,527,482 $405,275
======= ======== ========== ========
<CAPTION>
GAIN
(LOSS) ON TOTAL
ADDITIONAL AVAILABLE STOCKHOLDERS'
PAID-IN FOR SALE ACCUMULATED EQUITY
CAPITAL SECURITIES DEFICIT (DEFICIT)
------------ ---------- ------------- -------------
<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
Common stock issued upon
exercise of options and
warrants.................. 93,500 -- -- 93,750
Common stock issued under
employee stock purchase
plan...................... 55,958 -- -- 56,420
Preferred stock dividends... -- -- (314,185) (314,185)
Unrealized loss on
marketable securities..... -- (147,500) -- (147,500)
Net loss.................... -- -- (164,514,331) (164,514,331)
------------ --------- ------------- -------------
Balance at December 31,
1998........................ $113,089,872 $(176,094) $(230,423,008) $(116,932,768)
Unrealized gain on
marketable securities..... -- 3,687 -- 3,687
Net income.................. -- -- 2,023,581 2,023,581
------------ --------- ------------- -------------
Balance at December 31,
1999........................ $113,089,872 $(172,407) $(228,399,427) $(114,905,500)
============ ========= ============= =============
</TABLE>
See accompanying notes.
F-6
<PAGE> 58
NATIONAL ENERGY GROUP, INC.
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. BACKGROUND AND BANKRUPTCY FILING
National Energy Group, Inc. was incorporated under the laws of the State of
Delaware on November 20, 1990. Effective June 11, 1991, Big Piney Oil and Gas
Company and VP Oil, Inc. merged with and into the Company. On August 29, 1996,
Alexander Energy Corporation 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 which has historically engaged
in the exploration, acquisition, exploitation, development and production of oil
and natural gas properties in major producing basins onshore in Texas,
Louisiana, Oklahoma, Arkansas and offshore in the Gulf of Mexico.
On December 4, 1998, certain of the holders of the Senior Notes of National
Energy Group, Inc. (the "Company") filed an Involuntary Petition for an Order
for Relief under Chapter 11 of Title 11 of the United States Bankruptcy Code in
the United States Bankruptcy Court for the Northern District of Texas, Dallas
Division, due to non-payment of interest due December 2, 1998, after expiration
of a 30-day grace period. On December 23, 1998, the Company filed, in the
Bankruptcy Court, an Answer to and Motion to Dismiss the pending Involuntary
Petition. The Company's Motion affirmed that it (i) was meeting its obligations
and generally paying its debts as they become due, unless such debts were the
basis of a bona fide dispute and (ii) had arranged with the lender under its
credit facility to borrow additional funds sufficient to pay the interest due on
the Senior Notes, conditioned upon the Court's dismissal of the Involuntary
Petition. However, on February 8, 1999, the Bankruptcy Court denied the
Company's Motion to Dismiss the Involuntary Petition. An Order for Relief was
entered by the Bankruptcy Court on February 11, 1999. The Order for Relief
placed the Company under the protection of the Court and precluded payment of
the interest on the Senior Notes until the conclusion of the Bankruptcy
proceeding. Additionally, payment of liabilities existing as of February 11,
1999 to certain unsecured creditors and dividends in arrears to holders of the
Company's preferred stock and any pending litigation are stayed during the
Bankruptcy proceeding. The Company shall act as debtor-in-possession and will
continue to operate its business and manage its properties in the ordinary
course of business during its Chapter 11 proceeding. As a result of the Chapter
11 proceeding, the Company discontinued the accrual of interest on the unsecured
Senior Notes and discontinued the accrual of dividends on the unsecured
preferred stock. Approximately $17.7 million additional interest expense would
have been recognized by the Company for 1999 if not for the discontinuation of
the interest accrual on the Senior Notes.
On August 4, 1999, the Company and the unsecured creditors' committee (the
"Committee") appeared before the Bankruptcy Court and announced agreement on the
process for marketing the Company and/or its assets. The Court entered an order
which provided that the Company and the Committee would employ CIBC World
Markets Corp. ("CIBC") to solicit bids for sale of the Company and/or its
assets. The Company assisted CIBC in assembling a data room for potential
bidders to view information regarding the Company's assets. CIBC marketed the
Company's assets pursuant to procedures approved by the Company, the Committee
and the Court. In addition, the Court approved the retention of Netherland,
Sewell & Associates, Inc. to (i) complete its reserve evaluation of the
Company's oil and natural gas properties as of December 31, 1998, (ii) update
the reserve evaluation as of July 1, 1999 and (iii) provide assistance to the
Company, CIBC and prospective buyers during the marketing process. The marketing
process culminated in an auction conducted by the Bankruptcy Court on November
1, 1999. At the auction, bidding on the Company's oil and gas properties,
exclusive of the Company's Lake Mongoulois and Mustang Island properties,
ultimately ended at a high bid of $96.25 million given by Arnos, Corp. ("Arnos")
an affiliated subsidiary of the Company's Series D preferred stockholder. The
Committee, after review, concluded that it would recommend to the Court that it
accept the high bid of $96.25 million. An order accepting Arnos as the highest
bidder was signed by the Court on November 16, 1999. Arnos filed a motion to
close the Purchase and Sale Agreement ("Arnos PSA") into escrow pending (i) the
Court's confirmation of a plan of reorganization or (ii) in the event a plan of
reorganization is not confirmed, a
F-7
<PAGE> 59
NATIONAL ENERGY GROUP, INC.
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. BACKGROUND AND BANKRUPTCY FILING (CONTINUED)
court ordered closing of the sale of the properties to Arnos. On or about
January 28, 2000 the substantive purchase and sale closing documents were
delivered into the registry of the Court, however, the closing of the Arnos PSA
is still pending as noted. The Court approved this motion and ordered Arnos to
pay into the Court's registry the sum of $61.625 million which equals the
purchase price of $96.25 million less a previously escrowed deposit of $9.625
million and the principal balance of $25 million outstanding under the Company's
secured credit facility with Arnos.
On February 28, 2000, the Committee filed with the Court a Joint Disclosure
Statement ("Committee Disclosure Statement") and proposed Plan of Reorganization
(the "Committee Plan"). The Committee Plan provides for (i) the possibility of a
limited continuation of the Company's oil and gas business operations; (ii) the
creation of a creditors trust to which will be transferred substantially all of
the cash and cash equivalents remaining in the Company, the funds held in the
Registry of the Court from the auction of the Company's properties, and all
causes of action for the payment and primary benefit of certain allowed
administrative, tax, priority and miscellaneous secured and unsecured creditors;
and (iii) payment in full of the secured claims. The Committee Plan designates
eight (8) classes of claims and equity interests. The Company's Senior
Noteholders are deemed to be Allowed Class 6 Claims in the Committee's Plan and
are entitled to their pro rata share of the remaining proceeds in the creditors
trust after payment of the secured claims. Following distribution of the
creditors trust fund to the various claimants, the Committee retains the right
to sell the Company's remaining assets or sell to third parties the rights of
the Senior Noteholders to retain between 49% and 95% of the outstanding stock of
the reorganized Company in the form of newly issued additional common stock. In
connection therewith, the Senior Noteholders shall have the right to elect all
members of the Company's Board of Directors for a two (2) year term following
the effective date of the Committee's Plan. The Committee's Plan further
provides that all of the Company's preferred stock shall be converted into
Common Stock at a conversion price of $.25 per share, and the existing common
and preferred equity interests of the Company shall remain in existence. Neither
the Company's preferred shareholders, nor the Company's common shareholders are
entitled to vote on the Committee's Plan and have been deemed for all purposes
to have rejected it in its entirety. Both the Committee Plan and Committee
Disclosure Statement are subject to amendment, and a hearing in the Bankruptcy
Court on the Committee Disclosure Statement is scheduled on April 17, 2000.
On March 14, 2000, the Company filed with the Court a Joint Disclosure
Statement ("Company Disclosure Statement") and Plan of Reorganization (the
"Company Plan"). The Company Plan provides for (i) continuation of the Company's
oil and gas business operations; (ii) payment in full of all secured claims,
including the Arnos secured claim in the amount of $25 million, plus interest as
may be due; (iii) payment of a cash sum not to exceed $10,000 to certain classes
of claimants involved in litigation with the Company if such class accepts the
Company's Plan or, alternatively, if rejected by such class, cash in the amount
of 56.5% of any Allowed Claim in such class; (iv) acquisition by Arnos of any
Senior Notes, not otherwise held by Arnos, in consideration of a payment equal
to 56.5% of the face value of each such bond acquired, or, alternatively, a pro
rata share of the cash which Senior Noteholders would receive in a liquidation,
plus a pro rata beneficial interest in a creditor's trust consisting of certain
causes of action, two properties of the Company and $250,000 in cash; (v)
payment of a cash sum equal to 75% of any Allowed Claim to trade creditors; (vi)
retention by each of the preferred and common shareholder equity interests;
provided that both the preferred and common equity interests may, at the option
of Arnos, be deemed cancelled and reissued to holders in a form to be determined
by Arnos; (vii) purchase by Arnos, or an affiliate of Arnos, of additionally
issued shares of the reorganized Company's common stock to the extent that Arnos
or its affiliate shall own up to 49% of all the issued and outstanding common
stock of the reorganized Company; and (viii) amendment to the Senior Notes
Indenture. The Company's Plan further proposes that the Company's existing
officers and directors shall continue as the officers and directors of the
reorganized Company until otherwise replaced as provided in the Company's
bylaws.
F-8
<PAGE> 60
NATIONAL ENERGY GROUP, INC.
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. BACKGROUND AND BANKRUPTCY FILING (CONTINUED)
Neither the Company's preferred shareholders, nor the Company's common
shareholders are entitled to vote on the Company's Plan and have been deemed for
all purposes to have rejected it in its entirety. Both the Company's Plan and
Disclosure Statement are subject to amendment, and a hearing in the Bankruptcy
Court on the Disclosure Statement is scheduled on April 20, 2000.
Pursuant to an Order of the Bankruptcy Court dated September 7, 1999, the
Company's severance policy was abated and a Court ordered severance program was
put into effect for all employees of the Company ("Severance Program"). The
Severance Program provides for contingent payments as follows: (a) a "stay-pay"
component payable on the earlier of an employees termination without cause; the
closing of a sale of substantially all the Company's assets or the confirmation
of a plan of reorganization; and (b) a "severance" component, whereby upon
termination any employee who does not obtain new employment, or is not offered a
permanent job in Dallas, Texas for a period of at least one year at the same pay
and benefits provided by the Company, shall be entitled to certain severance
benefits. The Order also provided that any employee who participates in the
Severance Program waives and releases any and all claims arising from any
current Employment Agreement with the Company. Certain employees are not
entitled to any payments under the Severance Program until the earlier of (i)
confirmation of a Plan of Reorganization, (ii) conversion to a Chapter 7
bankruptcy proceeding or (iii) termination of their employment by a trustee
appointed by the Court. Maximum potential payments due to employees under the
Severance Program total approximately $2.2 million.
The accompanying consolidated financial statements have been prepared on a
going concern basis of accounting and do not reflect any adjustments that might
result should the Company be unable to continue as a going concern. The
Company's prior losses from operations and the related Chapter 11 proceeding
raise concern about its ability to continue as a going concern. The
appropriateness of using the going concern basis is dependent upon, among other
things, (i) confirmation of a plan of reorganization under the Bankruptcy Code
which provides for continuation of the Company's oil and gas operations, (ii)
the ability to achieve profitable operations after such confirmation and (iii)
the ability to generate sufficient cash from operations to meet its obligations.
During 1999, the Company incurred professional fees and other expenses of
$4.7 million and wrote off $3.2 million of unamortized debt issuance costs and
premium associated with the Senior Notes due to the bankruptcy proceedings. At
December 31, 1999, substantially all of the Company's unsecured liabilities are
subject to compromise under the terms of the bankruptcy proceeding. During 1999,
the Company recognized interest income of approximately $761,000 on cash
balances accumulating during the Chapter 11 proceeding.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements as of and for the year ended December
31, 1999 have been presented in accordance with Statement of Position 90-7,
Financial Reporting by Entities in Reorganization under the Bankruptcy Code
("SOP 90-7"). In accordance with SOP 90-7, no interest has been accrued on
unsecured debt, no dividends on preferred stock have been accrued, unamortized
premiums and debt issuance costs relating to unsecured debt have been expensed,
costs relating to the bankruptcy proceeding and interest earned on accumulating
cash resulting from the bankruptcy proceeding have been reported as
reorganization items in the accompanying statement of operations, and
liabilities subject to compromise have been separately reported in the
accompanying balance sheet.
F-9
<PAGE> 61
NATIONAL ENERGY GROUP, INC.
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 may include demand deposits, short-term
commercial paper, and/or money-market investments with maturities of three
months or less when purchased. At December 31, 1999, all cash and cash
equivalents were invested with Bank One, Texas, N.A.
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. 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.
Under the full cost method, the net book value of oil and natural gas
properties, less related deferred income taxes, may not exceed the estimated
after-tax future net revenues from proved oil and natural gas properties,
discounted at 10% per year (the ceiling limitation). In arriving at estimated
future net revenues, estimated lease operating expenses, development costs,
abandonment costs, and certain production related and ad-valorem taxes are
deducted. In calculating future net revenues, prices and costs in effect at the
time of the calculation are held constant indefinitely, except for changes which
are fixed and determinable by existing contracts. The net book value is compared
to the ceiling limitation on a quarterly and yearly basis. The excess, if any,
of the net book value above the ceiling limitation is required to be written off
as a non-cash expense. During 1997 and 1998, the net book value of the Company's
oil and natural gas properties exceeded the ceiling limitation resulting in non-
cash writedowns totaling $46.4 million and $148.4 million, respectively. The
Company did not incur ceiling limitation writedowns during 1999. 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.
Oil and natural gas properties excluded from the ceiling limitation consist
primarily of unevaluated acreage, acquisition costs, and related seismic and
other geological and geophysical costs (unproven properties). During 1998,
unproven properties with a carrying value of approximately $32.0 million were
transferred to proved properties, largely as a result of drilling activities,
and became subject to the full cost ceiling limitation. At December 31, 1998,
due to uncertainty relating to the Company's ability to obtain Court approval
for exploration of its remaining portfolio of unproven properties and due to low
oil prices which make the projects uneconomical,
F-10
<PAGE> 62
NATIONAL ENERGY GROUP, INC.
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the remaining carrying value of the unproven properties, approximately $9.1
million, was transferred to proved properties and became subject to the ceiling
limitation.
The Company has capitalized internal costs of $1,582,021, $1,950,914 and
$814,476 for the years ended December 31, 1997, 1998, and 1999, 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 years ended December 31, 1997 and 1998, the Company capitalized
interest costs of $2,545,617 and $3,371,279, respectively, related to its
unproved oil and gas properties. The Company did not capitalize interest during
1999.
Other Property and Equipment
Other property and equipment includes 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.
Income Taxes
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using enacted tax rates. The effect on deferred tax assets and
liabilities of a change in tax rate is recognized in the period that includes
the enactment date. The measurement of deferred tax assets is adjusted by a
valuation allowance, if necessary, to recognize the extent to which, based on
available evidence, the future tax benefits more likely than not will be
realized.
Financial Instruments
The Company does not hold or issue financial instruments for trading
purposes.
See Notes 4 and 5 for disclosure of the fair value of borrowings under the
Company's credit facility and the 10 3/4% Senior Notes, respectively.
The Company from time to time utilizes certain derivative financial
instruments to hedge future gas prices. (Note 9). Gains and losses arising from
the use of these instruments are deferred until realized and are reported as oil
and natural gas sales.
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 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,
1998 and 1999:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Common stocks at December 31, 1998......... $515,344 $ -- $176,094 $339,250
======== ======== ======== ========
Common stocks at December 31, 1999......... $515,344 $ -- $172,407 $342,937
======== ======== ======== ========
</TABLE>
F-11
<PAGE> 63
NATIONAL ENERGY GROUP, INC.
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company had no sales of marketable securities during 1997, 1998 or
1999.
The Company's investment in marketable securities is comprised of
securities of another independent oil and gas company.
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.
Allowances for bad debt totaled approximately $150,000 and $149,000 at
December 31, 1998 and 1999, respectively. At December 31, 1998 and 1999, the
carrying value of the Company's accounts receivable approximates fair value.
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.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees, 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
Earnings (loss) per share is computed in accordance with Financial
Accounting Standards Board Statement No. 128, Earnings per Share. Basic earnings
per share data is computed by dividing net 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.
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 7) if such
conversion has a dilutive effect. For the years ended December 31, 1997, 1998,
and 1999, 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.
Comprehensive Income
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. For 1997, 1998 and 1999, the differences between the
Company's net earnings and total comprehensive income were not material.
F-12
<PAGE> 64
NATIONAL ENERGY GROUP, INC.
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities, ("SFAS No. 133") which will be adopted by the Company
January 1, 2001. The Statement will require the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a hedge's change in fair value will be immediately
recognized in earnings. The Company is currently evaluating the effect of SFAS
No. 133 on its financial statements.
Reclassifications
Certain previously reported amounts have been reclassified to conform with
the current presentation.
3. ACQUISITIONS AND DISPOSALS
In March 1998, the Company acquired Fortune Natural Resources Corporation's
interests in the East Bayou Sorrel field for approximately $4.5 million in cash.
In June 1998, the Company acquired Germany Oil Company's interest in six state
leases and one producing well in the Mustang Island area for $.4 million in
cash. These acquisitions did not have a significant impact on the Company's
results of operations for 1998.
In December 1999, the Company sold its interest at an oil and gas auction
in 142 marginal and non-producing oil and gas properties to various purchasers.
Net proceeds from this sale approximated $3.0 million. The sale of these
properties did not have a significant impact on the Company's results of
operations for 1999.
4. CREDIT FACILITIES
In 1996, the Company and its subsidiaries, NEG-OK and Boomer Marketing,
entered into an amended 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 had a
borrowing base of $25.0 million, maturing August 29, 2000.
The Company 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 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.
On December 7, 1998, Bank One and Credit Lyonnais gave notice to the
Company that all outstanding obligations under the credit facility were
accelerated and were immediately due and payable due to certain unspecified
Events of Default as defined in the loan agreement.
Effective December 22, 1998, the credit facility and all associated liens
were assigned by the Banks to Arnos, Inc., ("Arnos") an affiliated subsidiary of
the Company's Series D Preferred Stockholder. In a letter
F-13
<PAGE> 65
NATIONAL ENERGY GROUP, INC.
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
4. CREDIT FACILITIES (CONTINUED)
dated December 23, 1998, Arnos (1) rescinded the acceleration of the loan, (2)
waived all defaults existing at that time and (3) made sufficient borrowings
available to pay the interest on the Senior Notes that was due on November 2,
1998 conditioned upon the Bankruptcy Court's dismissal of the Involuntary
Petition. The Company is currently paying interest under the Arnos credit
facility. The Company had $25,000,000 outstanding under the Arnos credit
facility as of December 31, 1999 and 1998. At December 31, 1999 and 1998, the
Company was in violation of the minimum interest coverage ratio and current
ratio covenants under the Arnos credit facility and as a result has classified
the borrowings under the credit facility as a current liability.
On August 4, 1999, the Company and the Committee appeared before the
Bankruptcy Court and announced agreement on the process for marketing the
Company and/or its assets. The marketing process culminated in an auction
conducted by the Bankruptcy Court on November 1, 1999. At the auction, bidding
on the Company's oil and gas properties, exclusive of the Company's Lake
Mongoulois and Mustang Island properties, ultimately ended at a high bid of
$96.25 million given by Arnos. The Committee, after review, concluded that it
would recommend to the Court that it accept the high bid of $96.25 million. An
order accepting Arnos as the highest bidder was signed by the Court on November
16, 1999. Arnos filed a motion to close the Purchase and Sale Agreement ("Arnos
PSA") into escrow pending (i) the Court's confirmation of a plan of
reorganization or (ii) in the event a plan of reorganization is not confirmed, a
court ordered closing of the sale of the properties to Arnos. The Court approved
this motion and ordered Arnos to pay into the Court's registry the sum of
$61.625 million which equals the purchase price of $96.25 million less the
previously escrowed deposit of $9.625 million and the principal balance of $25
million outstanding under the Arnos credit facility.
At December 31, 1999, the fair value of borrowings under the Arnos credit
facility approximates the carrying value of the liability.
5. 10 3/4 SENIOR NOTES DUE 2006
In 1996, the Company issued $100 million aggregate principal amount of
unregistered Series A 10 3/4% Senior Notes due 2006 which were exchanged in 1997
for registered Series B 10 3/4% Senior Notes due 2006 with substantially
identical terms. 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 Series C 10 3/4% Senior
Notes. In December 1997, the Company exchanged substantially all of the Series
A/B Notes and all of the Series C Notes for registered Series D 10 3/4% Senior
Notes due 2006. The Series D Notes are substantially identical to the Series A/B
Notes and the Series C Notes. The Series A/B Notes, the Series C Notes and the
Series D Notes are collectively referred to as the "Senior Notes." The Senior
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 Senior 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 Senior Notes (the "Indenture"), the
Company and its subsidiaries may incur additional senior indebtedness and other
indebtedness.
Due to the non-payment of interest due December 2, 1998, the Notes were in
default at December 31, 1998 and 1999, and have been classified as a current
liability in the accompanying December 31, 1998 balance sheet.
On December 4, 1998, certain holders of the Senior Notes filed an
Involuntary Petition for an Order for Relief under Chapter 11 of Title 11 of the
United States Bankruptcy Code. See Note 1. Accrual of interest on the Senior
Notes has been discontinued during the Chapter 11 proceeding. Approximately
$17.7 million additional
F-14
<PAGE> 66
NATIONAL ENERGY GROUP, INC.
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
5. 10 3/4 SENIOR NOTES DUE 2006 (CONTINUED)
interest expense would have been recognized by the Company during 1999 if not
for the discontinuation of the interest accrual.
During 1999, the Company wrote off the remaining $3.2 million of
unamortized issuance premiums and deferred debt issuance costs associated with
the Senior Notes in accordance with the provisions of SOP 90-7.
The Indenture contains certain covenants limiting the Company with respect
to the following: (i) assets sales; (ii) restricted payments; (iii) the
incurrence of additional indebtedness and the issuance of certain redeemable
preferred stock; (iv) liens; (v) sale and leaseback transactions; (vi) lines of
business; (vii) dividend and other payment restrictions affecting subsidiaries;
(viii) mergers and consolidations; and (ix) transactions with affiliates.
At December 31, 1999, the fair value of the Senior Notes, as determined by
quoted market prices, was approximately $82.5 million.
6. COMMITMENTS AND CONTINGENCIES
The Company leases office space under an operating lease. Rental expense
charged to operations was approximately $275,000, $364,000 and $449,000 during
the years ended December 31, 1997, 1998 and 1999, respectively. Minimum lease
payments under future operating lease commitments at December 31, 1999, are as
follows:
<TABLE>
<S> <C>
2000........................................................ 487,442
2001........................................................ 487,442
2002........................................................ 487,442
2003........................................................ 549,934
2004........................................................ 549,934
Thereafter.................................................. 1,649,802
----------
$4,211,996
==========
</TABLE>
Other than the Bankruptcy Court proceeding, the Company is not a party to
any additional material pending legal proceedings.
F-15
<PAGE> 67
NATIONAL ENERGY GROUP, INC.
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
7. STOCKHOLDERS' EQUITY
Preferred Stock
At December 31, 1999, 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, 1997............... 38,687 23,000 100,000 9,500
December 31, 1998............... 38,687 23,000 100,000 9,500
December 31, 1999............... 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
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Dividend rights (stayed during the
Chapter 11 proceeding).......... 10% payable 10 1/2% Participation Participation
semi-annually payable with common with common
(cumulative) semi-annually stock stock
(cumulative)
</TABLE>
The Series B has a liquidation and dividend preference over the Company's
Common Stock. The Series B has a 10% dividend, payable semi-annually. In
December 1998, the Board of Directors declared a dividend on Series B to be made
in shares of Series B. To date, the dividends have not been paid and therefore
there are $193,435 dividends in arrears at December 31, 1999, which are
unsecured claims subject to compromise for purposes of the Chapter 11
proceeding. The Series B is redeemable by the Company 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.
In December 1998, the Board of Directors declared a dividend on Series C to
be made in shares of Series C. To date, the dividend is unpaid and therefore
there are $120,750 dividends in arrears at December 31, 1999, which are
unsecured claims subject to compromise for purposes of the Chapter 11
proceeding. The Series C is redeemable by the Company 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 B and C, respectively, 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 and C, respectively, each 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 or
C, (ii) authorize or issue additional shares of Series B or C, (iii) issue
preferred stock equal to or senior to the Series B or 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 of 100,000 shares of its Convertible Preferred Stock,
Series D, $1.00 par value per share and warrants to purchase 700,000 shares of
Common Stock exercisable immediately at $2.50 per share, which warrants expire
five years
F-16
<PAGE> 68
NATIONAL ENERGY GROUP, INC.
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
7. STOCKHOLDERS' EQUITY (CONTINUED)
from their date of issuance. The Series D Preferred Stock is convertible into
4,444,444 shares of Common Stock, based upon a conversion price of $2.25 per
share.
The holder of the Series D is entitled to one vote for each share when
entitled to vote as described below and as to matters upon which by law it is
entitled to vote as a class. The holder of Series D has the right to appoint one
member to the Board of Directors. The Company may not, without the consent of
the director appointed by the holder of Series D, voluntarily file for
protection under federal or other bankruptcy laws. In addition, the holder of
Series D currently has 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 it elects to exercise such right. Currently, the holder of the
Series D has appointed a total of three directors to the Board.
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., a registered investment adviser, of 50,000 shares
of Convertible Preferred Stock, Series E, $1.00 par value per share 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 Preferred Stock is convertible into 2,222,222 shares of Common Stock,
based upon a 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.
Warrants
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 preferred stock and Series E preferred stock 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 Company's merger with Alexander Energy in 1996, 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 Alexander merger. During 1997, 353,515 of
these warrants were exercised and the remainder expired during 1998. During
1997, the Company issued
F-17
<PAGE> 69
NATIONAL ENERGY GROUP, INC.
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
7. STOCKHOLDERS' EQUITY (CONTINUED)
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, 1999:
<TABLE>
<CAPTION>
NUMBER OF SHARES EXPIRATION WARRANTS EXERCISE
UNDER WARRANT DATE EXERCISABLE PRICES
- ---------------- --------------- ----------- --------
<S> <C> <C> <C>
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
300,000 July 11, 2002 300,000 3.00
--------- ---------
2,450,000... 2,450,000
========= =========
</TABLE>
Stock Options
A summary of the Company's stock option activity, and related information
for the years ended December 31, 1997, 1998, and 1999, follows:
<TABLE>
<CAPTION>
1997 1998 1999
--------------------- ---------------------- --------------------
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................... 873,486 $2.28 3,072,201 $3.62 1,637,850 $3.40
Granted..................... 2,707,500 3.92 415,000 2.65 -- --
Exercised................... (266,785) 2.44 (25,000) 3.75 -- --
Canceled.................... (242,000) 3.52 (1,824,351) 3.58 (988,350) 3.27
---------- ----------- ---------
Outstanding at end of
year...................... 3,072,201 3.62 1,637,850 3.40 649,500 3.61
========== =========== =========
Exercisable at end of
year...................... 936,450 $2.84 1,148,600 $3.45 613,250 $3.73
========== =========== =========
Weighted-average fair value
of options granted or
assumed during the year... $ 1.46 $ 1.11
========== ===========
</TABLE>
F-18
<PAGE> 70
NATIONAL ENERGY GROUP, INC.
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
7. STOCKHOLDERS' EQUITY (CONTINUED)
Information related to options outstanding and exercisable at December 31,
1999, 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>
$1.31 -- $2.99 97,500 2.84 $1.88 61,250 $2.07
$3.32 -- $4.00 543,500 2.57 3.89 543,500 3.89
$5.75 8,500 2.79 5.75 8,500 5.75
------- -------
649,500 $3.61 613,250 $3.73
======= =======
</TABLE>
Statement of Financial Accounting Standards No. 123, Accounting for Stock
Based Compensation, 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 1997 and 1998, respectively: risk-free interest
rates of 5.5% and 5.5%, a dividend yield of 0%, and volatility factors of .53
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.
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.
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,
-----------------------------------------
1997 1998 1999
------------ ------------- ----------
<S> <C> <C> <C>
Pro forma net income (loss)................... $(35,226,665) $(164,914,586) $2,038,132
============ ============= ==========
Pro forma net income (loss) per common
share....................................... $ (.97) $ (4.09) $ .05
============ ============= ==========
</TABLE>
Stock Purchase Plan
During 1998, the Company's shareholders approved the Company's Employee
Stock Purchase Plan ("ESPP"). Pursuant to the ESPP, employees can purchase the
common stock of the Company at a specified price through payroll deductions
during an offering period, currently established on a semi-annual basis. In June
1998, approximately 46,000 shares were issued to employees under the ESPP.
During 1999, no shares were issued to employees under the ESPP.
F-19
<PAGE> 71
NATIONAL ENERGY GROUP, INC.
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
8. INCOME TAXES
The reconciliation of income taxes computed at the U.S. federal statutory
tax rates to the benefit for income taxes on net income is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1998 1999
----------- ------------ ---------
<S> <C> <C> <C>
Income tax benefit (expense) at statutory rate... $14,568,439 $ 57,580,016 $(708,167)
Valuation allowance on deferred tax assets....... (7,294,578) (57,560,222) 708,167
Other............................................ 11,904 (19,794) --
----------- ------------ ---------
$ 7,285,765 $ -- $ --
=========== ============ =========
</TABLE>
The computation of the net deferred tax asset (liability) follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1999
------------ ------------
<S> <C> <C>
Deferred tax assets (liabilities):
Property and equipment..................................... $ 36,718,003 $ 32,427,965
Net operating loss carryforwards........................... 29,766,440 31,262,503
Statutory depletion carryforwards.......................... 1,340,763 1,340,763
Other, net................................................. 1,000,148 1,085,538
------------ ------------
68,825,354 66,116,769
Less valuation allowance................................... (68,825,354) (66,116,769)
------------ ------------
$ -- $ --
============ ============
</TABLE>
At December 31, 1999, the Company had net operating loss carryforwards
available for federal income tax purposes of approximately $89.3 million which
begin expiring in 2000. Utilization of approximately $31.0 million 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 Energy. Additional net operating loss
limitations may be imposed as a result of subsequent changes in stock ownership
of the Company. Bankruptcy proceedings may eliminate all or a portion of the
Company's net operating loss carryforwards. For federal income tax purposes, the
Company also has statutory depletion carryforwards of $3.8 million, which do not
expire.
9. 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. 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.
At December 31, 1999, the Company had not entered into any forward sales
contracts.
At December 31, 1998, the Company had entered into forward sales contracts
with two purchasers covering future production of natural gas which expired
during 1999.
F-20
<PAGE> 72
NATIONAL ENERGY GROUP, INC.
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
10. RESTRUCTURING CHARGES
During 1998, the Company recorded non-recurring restructuring charges of
$1,869,169 related to severance and related costs resulting from restructuring
of the Company's executive management team, and other personnel changes and
costs associated with the Chapter 11 filing. The components of the restructuring
charges are as follows:
<TABLE>
<S> <C>
Severance.................................................. $1,401,537
Lease termination costs.................................... 154,946
Cost associated with Chapter 11 filing..................... 312,686
----------
$1,869,169
==========
</TABLE>
Substantially all of the restructuring charges required cash outlays which
had been made as of December 31, 1998.
11. 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, 1997, 1998, and 1999, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1998 1999
----------- ----------- ---------
<S> <C> <C> <C>
Acquisitions of properties:
Proved.......................................... $ -- $ 5,093,000 --
Unproved........................................ 2,074,339 -- --
Exploration costs................................. 31,126,227 9,012,942 --
Development costs................................. 54,475,373 25,022,494 3,785,889
Depletion rate per Mcfe........................... 1.11 1.06 .91
</TABLE>
During 1997 and 1998, the net book value of the Company's oil and natural
gas properties exceeded the full cost ceiling resulting in writedowns of the oil
and natural gas properties of $46.4 million and $148.4 million, respectively.
The Company did not incur ceiling limitation writedowns during 1999. 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.
Revenues from individual purchasers that exceed 10% of total crude oil and
natural gas sales are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Plains Marketing and Transportation............. $17,918,762 $13,291,379 $18,203,851
Crosstex Energy................................. 6,471,157 5,140,693 --
GPM Natural Gas Corporation..................... 4,547,352 -- --
Aquila Energy Corp.............................. -- 5,897,799 4,298,281
</TABLE>
The Company believes that the loss of these purchasers would not have a
significant impact on the Company's results of operations or financial
condition.
F-21
<PAGE> 73
NATIONAL ENERGY GROUP, INC.
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
12. SUPPLEMENTARY CRUDE OIL AND NATURAL GAS RESERVE INFORMATION (UNAUDITED)
The revenues generated by the Company's operations are highly dependent
upon the prices of, and demand for, oil and natural gas. The price received by
the Company for its oil and natural gas production depends on numerous factors
beyond the Company's control, including seasonality, the condition of the U.S.
economy, foreign imports, political conditions in other oil and natural gas
producing countries, the actions of the Organization of Petroleum Exporting
Countries and domestic governmental regulations, legislation and policies.
The Company has made, and will continue to make, ordinary course capital
expenditures for the development, and exploitation of oil and natural gas
reserves, subject to economic conditions and in accordance with the rulings and
procedures set forth by the Court. Due to the Chapter 11 filing, the Company has
suspended its development and exploratory drilling program. The Company will
limit its capital expenditures to ordinary course enhancement of current
production through workovers, recompletions, and other production enhancing
activities deemed to be economic. Development drilling is anticipated to be
limited to (i) ordinary course nonoperated wells in which the Company has
limited working interests and in which the failure to participate may result in
drainage, depletion or loss of current reserves and (ii) operated wells deemed
to be economical. Large expenditures for developmental drilling may require
Court approval and none are planned at this time. 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 1997 and 1998, estimates of the Company's future net recoverable crude
oil, natural gas, and natural gas liquid reserves were prepared by the Company's
in-house reserve engineers. In 1999, such estimates were prepared by Netherland,
Sewell & Associates, Inc. Estimated proved net recoverable reserves as shown
below include only those quantities that can be expected to be recoverable at
prices and costs in effect at the balance sheet dates under existing regulatory
practices and with conventional equipment and operating methods.
Proved developed reserves represent only those reserves expected to be
recovered through existing wells. Proved undeveloped reserves include those
reserves expected to be recovered from new wells on undrilled acreage or from
existing wells on which a relatively major expenditure is required for
recompletion.
F-22
<PAGE> 74
NATIONAL ENERGY GROUP, INC.
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
12. SUPPLEMENTARY CRUDE OIL AND NATURAL GAS RESERVE INFORMATION (UNAUDITED)
(CONTINUED)
Net quantities of proved developed and undeveloped reserves of natural gas
and crude oil, including condensate and natural gas liquids, are summarized as
follows:
<TABLE>
<CAPTION>
NATURAL GAS
CRUDE OIL (THOUSAND
(BARRELS) CUBIC FEET)
---------- -----------
<S> <C> <C>
December 31, 1997........................................... 9,778,204 110,481,231
Extensions and discoveries................................ 74,000 1,857,000
Revisions of previous estimates........................... (4,346,951) (24,279,454)
Production................................................ (1,238,379) (11,254,797)
Purchase of reserves in place............................. 347,000 438,000
---------- -----------
December 31, 1998........................................... 4,613,874 77,241,980
Sales of reserves in place................................ (125,228) (3,165,588)
Extensions and discoveries................................ -- 623,000
Revisions of previous estimates........................... 2,260,635 (2,537,069)
Production................................................ (1,135,253) (9,266,140)
---------- -----------
December 31, 1999........................................... 5,614,028 62,896,183
========== ===========
Proved developed reserves:
December 31, 1997......................................... 5,780,958 89,939,678
December 31, 1998......................................... 4,187,831 67,039,255
December 31, 1999......................................... 4,730,828 56,730,406
</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, production and abandonment
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 and net operating loss carryforwards.
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.
F-23
<PAGE> 75
NATIONAL ENERGY GROUP, INC.
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
12. SUPPLEMENTARY CRUDE OIL AND NATURAL GAS RESERVE INFORMATION (UNAUDITED)
(CONTINUED)
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,
----------------------------
1998 1999
------------ -------------
<S> <C> <C>
Future cash inflows....................................... $207,087,600 $ 282,297,800
Future production and development costs................... (85,893,140) (115,829,000)
Future income tax expenses................................ -- --
------------ -------------
Future net cash flows..................................... 121,194,460 166,468,800
10% annual discount for estimated timing of cash flows.... (45,316,980) (57,576,100)
------------ -------------
Standardized measure of discounted future net cash
flows................................................... $ 75,877,480 $ 108,892,700
============ =============
</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,
-------------------------------------------
1997 1998 1999
------------- ------------ ------------
<S> <C> <C> <C>
Sales and transfers of crude oil and natural
gas produced, net of production costs..... $ (42,549,780) $(27,705,832) $(31,103,628)
Net changes in prices and production
costs..................................... (136,971,646) (70,032,540) 40,307,593
Development costs incurred during the period
and changes in estimated future
development costs......................... 24,893,672 16,451,276 9,938,121
Purchases of reserves in place.............. -- 4,783,270 --
Sales of reserves in place.................. (8,489,852) -- (5,122,521)
Extensions and discoveries, less related
costs..................................... 24,388,228 1,663,986 702,422
Revisions of previous quantity estimates.... (5,219,509) (36,419,059) 12,049,069
Accretion of discount....................... 19,576,509 16,175,055 7,587,748
Net change in income taxes.................. 54,258,990 7,633,978 --
Changes in production rates (timing) and
other..................................... 2,084,308 1,576,794 (1,343,584)
------------- ------------ ------------
Net change.................................. $ (68,029,080) $(85,873,072) $ 33,015,220
============= ============ ============
</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, 1997, 1998, and 1999, used
in the above table were $17.03, $10.46 and $24.97 per barrel of crude oil,
respectively, and $2.38, $2.06 and $2.26 per thousand cubic feet of natural gas,
respectively.
F-24
<PAGE> 76
NATIONAL ENERGY GROUP, INC.
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
13. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
The Company's operating results for each quarter of 1998 and 1999 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, 1998:
Total revenues............................... $10,529 $10,544 $ 8,573 $ 8,794
======== ======== ======== ========
Writedowns of oil and gas properties......... $(26,500) $(24,800) $(38,650) $(58,450)
======== ======== ======== ========
Operating loss............................... $(25,757) $(25,280) $(39,690) $(59,289)
======== ======== ======== ========
Net loss..................................... $(29,044) $(28,968) $(43,592) $(62,910)
======== ======== ======== ========
Income (loss) per common share............... $ (.72) $ (.72) $ (1.08) $ (1.56)
======== ======== ======== ========
Production:
Oil (Bbl)................................. 293 335 278 332
Natural gas (Mcf)......................... 3,080 2,913 2,682 2,580
Natural gas equivalent (Mcfe)............. 4,835 4,925 4,350 4,575
YEAR ENDED DECEMBER 31, 1999:
Total revenues............................... $ 7,244 $ 9,346 $ 11,209 $ 11,501
======== ======== ======== ========
Operating income (loss)...................... $ (183) $ 2,102 $ 4,171 $ 5,027
======== ======== ======== ========
Net income (loss)............................ $(1,156) $ 1,266 $ 3,167 $ (1,253)
======== ======== ======== ========
Income (loss) per common share............... $ (.03) $ .03 $ .08 $ (.03)
======== ======== ======== ========
Production:
Oil (Bbl)................................. 294 291 280 270
Natural gas (Mcf)......................... 2,494 2,403 2,291 2,078
Natural gas equivalent (Mcfe)............. 4,260 4,149 3,971 3,698
</TABLE>
F-25
<PAGE> 77
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 Agreement and Plan of Merger, dated June 6, 1996, among the
Company, NEG-OK, Inc. ("NEG OK"), and Alexander Energy
Corporation ("Alexander")(1)
2.2 First Amendment to Agreement and Plan of Merger, dated as of
June 20, 1996, among the Company, NEG-OK and Alexander(2)
2.3 Mutual Waiver Agreement dated as of August 29, 1996 by and
among the Company, NEG-OK and Alexander(3)
2.4 Debtor's Joint Disclosure Statement under Section 1125 of
the Bankruptcy Code Regarding Debtor's Joint Plan of
Reorganization under Chapter 11 of the Bankruptcy Code dated
March 14, 2000(20)
2.5 Debtors Joint Plan of Reorganization under Chapter 11 of the
Bankruptcy Code dated March 14, 2000(20)
2.6 Joint Disclosure Statement under Section 1125 of the
Bankruptcy Code with Respect to the Plan of Reorganization
proposed by the Official Committee of Unsecured Creditors
dated February 28, 2000(20)
2.7 Plan of Reorganization Submitted by the Official Committee
of Unsecured Creditors dated February 28, 2000(20)
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.(14)
4.7 Instrument of Resignation, Appointment and Acceptance, dated
October 23, 1998, between the Company, Bank One, N.A. and
Norwest Bank Minnesota, N.A.(19)
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)
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 Agreement for Purchase and Sale (Mustang Island) dated April
20, 1995, between the Company and Sierra Mineral
Development, L.C.(6)
</TABLE>
<PAGE> 78
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.5 Agreement for Purchase and Sale (Oak Hill) dated April 12,
1995, between the Company and Sierra 1994 I Limited
Partnership(6)
10.6 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)
10.7 High River Limited Partnership Warrant to purchase 700,000
shares of Common Stock, dated August 29, 1996(3)
10.8 Form of Series E Investors' Warrants to purchase an
aggregate 350,000 shares of Common Stock, dated August 29,
1996(3)
10.9 Gascon Partners Warrant to Purchase 300,000 shares of the
Company's Common Stock(13)
10.10 Prudential Securities Incorporated Warrant to Purchase
100,000 shares of the Company's Common Stock(3)
10.11 Gaines Berland, Inc. Warrant to Purchase 300,000 shares of
the Company's Common Stock dated August 29, 1996(3)
10.12 Gaines Berland, Inc. Warrant to Purchase 700,000 shares of
the Company's Common Stock dated August 29, 1996(3)
10.13 Executive Employment Agreement, dated January 1, 1996,
between the Company and Miles D. Bender(9)
10.14 Separation Agreement, dated November 24, 1998, between the
Company and Miles D. Bender(19)
10.15 Executive Employment Agreement, dated January 1, 1996,
between the Company and Melissa Rutledge(9)
10.16 Separation Agreement between the Company and Robert A. Imel
dated October 31, 1997(15)
10.17 Separation Agreement, dated May 18, 1998, between the
Company and William T. Jones(17)
10.18 Executive Employment Agreement, dated June 6, 1996, between
the Company and Jim L. David(1)
10.19 Executive Employment Agreement dated March 20, 1997, between
the Company and Philip D. Devlin(10)
10.20 Separation Agreement, dated May 19, 1998, between the
Company and Gene W. Anderson(19)
10.21 Executive Employment Agreement dated August 25, 1997,
between the Company and C. Dewayne Cravens(19)
10.22 Separation Agreement, dated May 18, 1998, between the
Company and C. Dewayne Cravens(19)
10.23 Executive Employment Agreement, dated January 29, 1998,
between the Company and Fred R. Miller(15)
10.24 Executive Employment Agreement, dated March 5, 1998, between
the Company and Chuck Elsey(16)
10.25 Termination Notice and Agreement, dated October 28, 1998,
between the Company and Chuck Elsey(19)
10.26 Executive Employment Agreement, dated April 13, 1998,
between the Company and Kent Lueders(16)
10.27 Executive Employment Agreement, dated June 1, 1998, between
the Company and Leslie Wylie(17)
10.28 National Energy Group, Inc. 1996 Incentive Compensation
Plan(11)
10.29 National Energy Group, Inc. Employee Stock Purchase Plan(12)
10.30 National Energy Group, Inc. Employee Severance Policy(19)
</TABLE>
<PAGE> 79
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.31 Agreement dated January 1, 1996 between the Company and
Sandefer Oil & Gas, Inc.(1)
10.32 Consulting Agreement dated January 1, 1996 between Sandefer
Oil & Gas, Inc. and Potosky Oil & Gas, Inc. and Atocha
Exploration, Inc.(1)
10.33 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.(15)
10.34 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.(15)
10.35 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)
10.36 $50,000,000 Revolving Note dated August 29, 1996 payable to
Bank One(3)
10.37 $50,000,000 Revolving Note dated August 29, 1996 payable to
Credit Lyonnais(3)
10.38 Assignment of $50,000,000 Revolving Note to Arnos Corp. from
Bank One, Texas, N.A.(19)
10.39 Assignment of $50,000,000 Revolving Note to Arnos Corp. from
Credit Lyonnais New York Branch(19)
10.40 Unlimited Guaranty of NEG-OK dated August 29, 1996 for the
benefit of Bank One(3)
10.41 Unlimited Guaranty of NEG-OK, dated August 29, 1996 for the
benefit of Credit Lyonnais(3)
10.42 Unlimited Guaranty of Boomer dated August 29, 1996 for the
benefit of Bank One(3)
10.43 Unlimited Guaranty of Boomer dated August 29, 1996 for the
benefit of Credit Lyonnais(3)
10.44 First Amendment to Restated Loan Agreement dated October 31,
1996 among Bank One and Credit Lyonnais and the Company,
Guarantor and Boomer(9)
10.45 Second Amendment to Restated Loan Agreement dated October
31, 1996, among Bank One and Credit Lyonnais and the
Company, Guarantor and Boomer(10)
10.46 Third Amendment to Restated Loan Agreement dated October 31,
1996, among Bank One and Credit Lyonnais and the Company,
Guarantor and Boomer(10)
10.47 Fourth Amendment to Restated Loan Agreement dated October
31, 1996, among Bank One and Credit Lyonnais and the
Company, Guarantor and Boomer(15)
10.48 Multi-State Assignment Agreement dated December 22, 1998
between Bank One, Texas, N.A., Credit Lyonnais New York
Branch and Arnos Corp.(19)
10.49 Multi-State Assignment Agreement, LaFourche Parish,
Louisiana, dated December 22, 1998, between Bank One, Texas,
N.A., Credit Lyonnais New York Branch and Arnos Corp.(19)
10.50 Multi-State Assignment Agreement, Iberville Parish,
Louisiana, dated December 22, 1998, between Bank One, Texas,
N.A., Credit Lyonnais New York Branch and Arnos Corp.(19)
10.51 Oklahoma Assignment Agreement, dated December 22, 1998,
between Bank One, Texas, N.A., Credit Lyonnais New York
Branch and Arnos Corp.(19)
10.52 Arnos Corporation Letter dated December 23, 1998(19)
10.53 Purchase and Sale Agreement between National Energy Group,
Inc. as Seller and Arnos Corporation as buyer dated November
1, 1999(20)
12.1 Computation of Ratio of Earnings to Fixed Charges(20)
23.1 Consent of Ernst & Young LLP, Independent Auditors(20)
23.2 Consent of Netherland Sewell & Associates, Inc., Independent
Engineers(20)
24.1 Power of Attorney (included in signature pages to this Form
10-K)(20)
</TABLE>
<PAGE> 80
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
27.1 Financial Data Schedule(20)
99.1 Order of Bankruptcy Court Granting Relief on Involuntary
Petition(19)
99.2 Order of Bankruptcy Court Implementing Auction Sale
Closing(20)
</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 the Company's Form S-4 (No. 333-38075), filed
October 16, 1997.
(15) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
(16) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998.
(17) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998.
(18) Incorporated by reference to the Company's Current Report on Form 8-K,
dated February 8, 1999.
(19) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
(20) Filed herewith.
<PAGE> 1
EXHIBIT 2.4
--------------------------
U.S. BANKRUPTCY COURT
NORTHERN DISTRICT OF TEXAS
FILED
MARCH 14 2000
TAWANA C. MARSHALL, CLERK
BY_____________
DEPUTY
--------------------------
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
IN RE: )
)
NATIONAL ENERGY GROUP, INC. and ) CASE NO. 98-80258-HCA-11
BOOMER MARKETING CORPORATION, ) (Jointly Administered)
)
DEBTORS. ) Hearing: April 20, 2000
) 9:15 a.m.
DEBTORS' JOINT DISCLOSURE STATEMENT UNDER SECTION 1125 OF
THE BANKRUPTCY CODE REGARDING DEBTORS' JOINT PLAN OF
REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
Patrick J. Neligan, Jr.
State Bar No. 14866000
Mark E. Andrews
State Bar No. 01253520
NELIGAN, ANDREWS, BRYSON &
FOLEY, L.L.P.
1717 Main Street, Suite 4050
Dallas, Texas 75201
COUNSEL FOR THE DEBTORS
AND DEBTORS IN POSSESSION
Dated: March 14, 2000
Dallas, Texas
<PAGE> 2
I. INTRODUCTION
National Energy Group, Inc. ("NEG") and its wholly owned subsidiary,
Boomer Marketing Corporation ("BMC"), the above-captioned debtors and debtors in
possession herein (collectively, the "Debtors"), submit this Joint Disclosure
Statement Pursuant to Section 1125 of the Bankruptcy Code with Respect to
Debtors' Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code
(the "Disclosure Statement"). This Disclosure Statement is to be used in
connection with the solicitation of votes on the Debtors' Joint Plan of
Reorganization Under Chapter 11 of the Bankruptcy Code, dated March 14, 2000
(the "Plan"). A copy of the Plan is attached hereto as EXHIBIT A. Unless
otherwise defined herein, capitalized terms used herein have the meanings
ascribed thereto in the Plan (see Article I of the Plan entitled "Definitions
and Construction of Terms").
For a summary of the proposed treatment of your Claim or Equity
Interest under the Plan, please see the chart below.
II. NOTICE TO HOLDERS OF CLAIMS
The purpose of this Disclosure Statement is to enable creditors of the
Debtors whose Claims are impaired to make an informed decision in exercising
their right to vote to accept or reject the Plan.
THIS DISCLOSURE STATEMENT CONTAINS INFORMATION THAT MAY BEAR UPON YOUR
DECISION TO ACCEPT OR REJECT THE PLAN. PLEASE READ THIS DOCUMENT CAREFULLY.
On April ____, 2000, the Bankruptcy Court entered an order pursuant to
section 1125 of the Bankruptcy Code (the "Disclosure Statement Order") approving
this Disclosure Statement as containing information of a kind, and in sufficient
detail, adequate to enable a hypothetical, reasonable investor, typical of the
solicited holders of Claims against and Equity Interests in the Debtors, to make
an informed judgment with respect to the acceptance or rejection of the Plan. A
copy of the Disclosure Statement Order is included in the materials accompanying
this Disclosure Statement. APPROVAL OF THIS DISCLOSURE STATEMENT BY THE
BANKRUPTCY COURT DOES NOT CONSTITUTE A DETERMINATION BY THE BANKRUPTCY COURT
REGARDING THE FAIRNESS OR MERITS OF THE PLAN.
THIS DISCLOSURE STATEMENT HAS NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THE STATEMENTS CONTAINED HEREIN.
Each holder of a Claim or Equity Interest entitled to vote to accept or
reject the Plan should read this Disclosure Statement and the Plan in their
entirety before voting. No solicitation of votes to accept or reject the Plan
may be made except pursuant to this Disclosure Statement and section 1125 of the
Bankruptcy Code. Except for the Debtors and their professionals, no person has
been authorized to use or promulgate any information concerning the Debtors,
their
2
<PAGE> 3
business, or the Plan, other than the information contained herein, in
connection with the solicitation of votes to accept or reject the Plan. No
holder of a Claim entitled to vote on the Plan should rely upon any information
relating to the Debtors, their business, or the Plan other than that contained
in the Disclosure Statement and the exhibits hereto. Unless otherwise indicated,
the source of all information set forth herein is the Debtors and their
professionals.
After carefully reviewing this Disclosure Statement, including the
attached exhibits, please indicate your acceptance or rejection of the Plan by
voting in favor of or against the Plan on the enclosed ballot and returning the
same to the address set forth on the ballot, in the enclosed return envelope so
that it will be received by the Debtors' tabulation agent, Gloria Myers, no
later than 5:00 p.m., Central Time, on May ____, 2000.
If you do not vote to accept the Plan, or if you are the holder of an
unimpaired Claim or an unimpaired Equity Interest, you may be bound by the Plan
if it is accepted by the requisite holders of Claims or Equity Interests. See
"Confirmation of the Plan -- Solicitation of Votes; Vote Required for Class
Acceptance," and "Cramdown" below.
TO BE SURE YOUR BALLOT IS COUNTED, YOUR BALLOT MUST BE RECEIVED NO
LATER THAN 5:00 P.M., CENTRAL TIME, ON MAY ___, 2000. For detailed voting
instructions and the name, address, and phone number of the person you may
contact if you have questions regarding the voting procedures, see "Confirmation
of the Plan -- Solicitation of Votes; Voting Procedures -- Parties In Interest
Entitled to Vote" below.
Pursuant to section 1128 of the Bankruptcy Code, the Bankruptcy Court
has scheduled a hearing to consider confirmation of the Plan (the "Confirmation
Hearing"), on May ____, 2000, at ___________ __.m., Central Time, in the United
States Bankruptcy Court for the Northern District of Texas, Dallas Division. The
Bankruptcy Court has directed that objections, if any, to confirmation of the
Plan be filed and served on or before May ____, 2000, in the manner described
under the caption, "Confirmation of the Plan -- Confirmation Hearing" below.
THE DEBTORS SUPPORT CONFIRMATION OF THE PLAN AND URGE ALL HOLDERS OF
IMPAIRED CLAIMS AND IMPAIRED EQUITY INTERESTS TO ACCEPT THE PLAN.
III. EXPLANATION OF CHAPTER 11
A. OVERVIEW OF CHAPTER 11
Chapter 11 is the principal reorganization chapter of the Bankruptcy
Code. Pursuant to chapter 11, the debtor in possession attempts to reorganize
its business for the benefit of the debtor, its creditors, and other parties in
interest.
The commencement of a chapter 11 case creates an estate comprising all
the legal and equitable interests of the debtor in property as of the date the
petition is filed. Sections 1101, 1107, and 1108 of the Bankruptcy Code provide
that a debtor may continue to operate its
3
<PAGE> 4
business and remain in possession of its property as a "debtor in possession"
unless the bankruptcy court orders the appointment of a trustee. In the present
Chapter 11 Cases, the Debtors have remained in possession of their properties
and have continued to operate their businesses as debtors in possession.
The filing of a chapter 11 petition also triggers the automatic stay
provisions of the Bankruptcy Code. Section 362 of the Bankruptcy Code provides,
inter alia, for an automatic stay of all attempts to collect prepetition claims
from the debtor or otherwise interfere with its property or business. Except as
otherwise ordered by the bankruptcy court, the automatic stay remains in full
force and effect until the effective date of a confirmed plan of reorganization.
The formulation of a plan of reorganization is the principal purpose of
a chapter 11 case. The plan sets forth the means for satisfying the claims
against and interests in the debtor. Generally, unless a trustee is appointed,
only the debtor may file a plan during the first 120 days of a chapter 11 case
(the "Exclusive Period"). However, section 1121(d) of the Bankruptcy Code
permits the court to extend or reduce the Exclusive Period upon a showing of
"cause." After the Exclusive Period has expired, a creditor or any other party
in interest may file a plan, unless the debtor has filed a plan within the
Exclusive Period, in which case, the debtor is generally given 60 additional
days (the "Solicitation Period") during which it may solicit acceptances of its
plan. The Solicitation Period may also be extended or reduced by the court upon
a showing of "cause."
B. PLAN OF REORGANIZATION
Although referred to as a plan of reorganization, a plan may provide
anything from a complex restructuring of a debtor's business and its related
obligations to a simple liquidation of the debtor's assets. After a plan of
reorganization has been filed, the holders of claims against or interests in a
debtor are permitted to vote to accept or reject the plan. Before soliciting
acceptances of the proposed plan, section 1125 of the Bankruptcy Code requires
the debtor to prepare a disclosure statement containing adequate information of
a kind, and in sufficient detail, to enable a hypothetical reasonable investor
to make an informed judgment about the plan. This Disclosure Statement is
presented to holders of Claims against and Equity Interests in the Debtors to
satisfy the requirements of section 1125 of the Bankruptcy Code.
If all classes of claims and equity interests accept a plan of
reorganization, the bankruptcy court may nonetheless still not confirm the plan
unless the court independently determines that the requirements of section 1129
of the Bankruptcy Code have been satisfied. Section 1129 sets forth the
requirements for confirmation of a plan and, among other things, requires that a
plan meet the "best interests" test and be "feasible." The "best interests" test
generally requires that the value of the consideration to be distributed to the
holders of claims and equity interests under a plan may not be less than those
parties would receive if the debtor were liquidated pursuant to a hypothetical
liquidation occurring under chapter 7 of the Bankruptcy Code. Under the
"feasibility" requirement, the court generally must find that there is a
reasonable probability that the debtor will be able to meet its obligations
under its plan without the need for further financial reorganization.
4
<PAGE> 5
The Debtors believe that the Plan satisfies all the applicable
requirements of section 1129(a) of the Bankruptcy Code, including, in
particular, the "best interests of creditors" test and the "feasibility"
requirement. The Debtors support confirmation of the Plan and urge all holders
of impaired Claims and Equity Interests to accept the Plan.
Chapter 11 does not require that each holder of a claim against or
interest in a debtor vote in favor of a plan of reorganization in order for the
bankruptcy court to confirm the plan. At a minimum, however, the plan must be
accepted by a majority in number and two-thirds in amount of those claims
actually voting in at least one class of impaired claims under the plan. The
Bankruptcy Code also defines acceptance of the plan by a class of equity
interests (equity securities) as acceptance by holders of two-thirds of the
number of shares actually voting. In the present case, only the holders of
Claims or Equity Interests who actually vote will be counted as either accepting
or rejecting the Plan.
In addition, classes of claims or equity interests that are not
"impaired" under a plan of reorganization are conclusively presumed to have
accepted the plan and thus are not entitled to vote. Accordingly, acceptances of
a plan will generally be solicited only from those persons who hold claims or
equity interests in an impaired class. A class is "impaired" if the legal,
equitable, or contractual rights attaching to the claims or equity interests of
that class are modified in any way under the plan. Modification for purposes of
determining impairment, however, does not include curing defaults and
reinstating maturity or payment in full in cash. ALL CLASSES OF CLAIMS AND
EQUITY INTERESTS ARE IMPAIRED UNDER THE PLAN. CLASS 13 (PREFERRED EQUITY
INTERESTS), CLASS 14 (COMMON EQUITY INTERESTS), AND CLASS 15 (BMC EQUITY
INTERESTS) ARE DEEMED TO HAVE REJECTED THE PLAN AND THEREFORE ARE NOT ENTITLED
TO VOTE ON THE PLAN. ADMINISTRATIVE CLAIMS, PRIORITY TAX CLAIMS, AND INVOLUNTARY
GAP CLAIMS ARE UNCLASSIFIED; THEIR TREATMENT IS PRESCRIBED BY THE BANKRUPTCY
CODE, AND THE HOLDERS OF SUCH CLAIMS ARE NOT ENTITLED TO VOTE ON THE PLAN.
ACCORDINGLY, EACH HOLDER OF A CLAIM (OTHER THAN AN ADMINISTRATIVE CLAIM, A
PRIORITY TAX CLAIM, OR AN INVOLUNTARY GAP CLAIM) IS ENTITLED TO VOTE TO ACCEPT
OR REJECT THE PLAN.
The bankruptcy court may also confirm a plan of reorganization even
though fewer than all the classes of impaired claims and interests accept it.
For a plan of reorganization to be confirmed despite its rejection by a class of
impaired claims or interests, the proponents of the plan must show, among other
things, that the plan does not "discriminate unfairly" and that the plan is
"fair and equitable" with respect to each impaired class of claims or interests
that has not accepted the plan.
Under section 1129(b) of the Bankruptcy Code, a plan is "fair and
equitable" as to a class of rejecting claims if, among other things, the plan
provides: (a) with respect to secured claims, that each such holder will receive
or retain on account of its claim property that has a value, as of the effective
date of the plan, equal to the allowed amount of such claim; and (b) with
respect to unsecured claims and equity interests, that the holder of any claim
or equity interest that is junior to the claims or equity interests of such
class will not receive or retain on account of such junior claim or equity
interest any property at all unless the senior class is paid in full.
5
<PAGE> 6
A plan does not "discriminate unfairly" against a rejecting class of
Claims if (a) the relative value of the recovery of such class under the plan
does not differ materially from that of any class (or classes) of similarly
situated Claims, and (b) no senior class of Claims is to receive more than 100%
of the amount of the Claims in such class.
The Debtors believe that the Plan has been structured so that it will
satisfy these requirements as to any rejecting Class of Claims or Equity
Interests, and can therefore be confirmed, if necessary, over the objection of
any Classes of Claims or Equity Interests. The Debtors, however, reserve the
right to request confirmation of the Plan under the "cramdown" provisions of
section 1129 of the Bankruptcy Code.
IV. SUMMARY OF THE PLAN
A. GENERAL OVERVIEW
The Plan sets up an efficient and cost-effective mechanism for the
payment of Claims. The Plan provides for (i) continuation of NEG's oil and gas
business operations; (ii) for Secured Claims, including the Amos Secured Claim
in the amount of $25 million, payment in full; (iii) for certain Classes of
claimants involved in litigation with NEG, payment of Cash not to exceed $10,000
if such Class accepts the Plan or, alternatively, if rejected by such Class,
Cash in the amount of 56.5% of any Allowed Claim in such class; (iv) for small
unsecured Claims, payment of Cash equal to 80% of the Allowed Claim; (v) for
Bondholders (excluding Amos), depending on whether the Class of Bondholder
Claims accepts the Plan and subject to the Bankruptcy Court's determination,
either (A) payment of Cash equal to 56.5% of the face value of each Bond or (B)
a pro rata share of the Cash that Bondholders would receive in a liquidation of
the Debtors plus a pro rata beneficial interest in a trust consisting of certain
causes of action, two properties of NEG, and $250,000 in Cash(2); (vi) for trade
creditors, payment of Cash equal to 75% of any Allowed Claim; and (vii)
retention by each of the preferred and common shareholder equity interests in
NEG; provided that both the preferred and common equity interests may, at the
option of Amos, be deemed cancelled and reissued to holders in a form to be
determined by Amos. Neither NEG's preferred shareholders, nor NEG's common
shareholders are entitled to vote on the Plan and have been deemed for all
purposes to have rejected it in its entirety. The Plan further provides that
NEG's existing officers and directors shall continue as the officers and
directors of reorganized NEG until otherwise replaced in accordance with NEG's
bylaws.
The Debtors believe, and will demonstrate at the Confirmation Hearing,
that confirmation and consummation of the Plan are in the best interests of
creditors and that the Plan will provide maximum return to creditors.
- ----------
(2) In any event, all Bonds not currently held by Amos will be deemed
transferred Amos in consideration of the treatment provided to Bondholders
in the Plan.
6
<PAGE> 7
B. CLASSIFICATION AND TREATMENT
The following is a summary of the classification and treatment of
Claims and Equity Interests under the Plan. The Administrative Claims, Priority
Tax Claims, and Involuntary Gap Claims shown below constitute the Debtors'
estimate of the amount of such Claims to be paid in Cash on the Initial
Distribution Date, taking into account amounts paid or projected to be paid
prior to that date. The total amount of Claims shown below reflects the Debtors'
current estimate of the likely amount of such Claims, after the resolution by
settlement or litigation of Claims that the Debtors believe are subject to
disallowance or reduction. Reference should be made to the entire Disclosure
Statement and to the Plan for a complete description of the classification and
treatment of Claims and Equity Interests.
THIS IS ONLY A SUMMARY OF CERTAIN PROVISIONS OF THE PLAN. THE PLAN
INCLUDES OTHER PROVISIONS THAT MAY AFFECT YOUR RIGHTS. YOU ARE URGED TO READ THE
PLAN IN ITS ENTIRETY BEFORE VOTING ON THE PLAN.
1. UNCLASSIFIED CLAIMS AGAINST THE DEBTORS
Unclassified Claims against the Debtors consist of Administrative
Claims, Priority Tax Claims, and Involuntary Gap Claims in accordance with
section 1123(a)(1) of the Bankruptcy Code. Based on their books and records and
their projections for future expenses, the Debtors presently estimate the
amounts of such Claims as follows:
<TABLE>
<S> <C>
Administrative Claims $6,600,000
Priority Tax Claims $ 500,000
Involuntary Gap Claims $1,750,000
</TABLE>
The above estimate of Administrative Claims consists of the following:
<TABLE>
<S> <C>
Post-Petition Trade Claims $2,250,000
Professional Fees and Expenses 2,250,000
Severance/Stay Bonus 2,000,000
Miscellaneous 100,000
</TABLE>
All professional fees and expenses are subject to review and approval
by the Bankruptcy Court pursuant to section 330 of the Bankruptcy Code.
The holder of any Administrative Claim, other than (i) a Fee Claim,
(ii) a liability incurred and paid in the ordinary course of business by the
Debtors, or (iii) an Allowed Administrative Claim, must file with the Bankruptcy
Court, and serve on the Debtors and their counsel, notice of such Administrative
Claim within thirty (30) days after the Effective Date. Such notice must include
at a minimum (i) the Debtor(s) that are liable for the Claim, (ii) the name of
the holder of the Claim, (iii) the amount of the Claim, and (iv) the basis of
the Claim.
7
<PAGE> 8
Failure to file timely and properly the notice required under section 2.1(a) of
the Plan shall result in the Administrative Claim being forever barred and
discharged.
Each Professional who holds, or asserts, an Administrative Claim that
is a Fee Claim for compensation for services rendered and reimbursement of
expenses incurred prior to the Effective Date shall be required to file with the
Bankruptcy Court and serve on all parties required to receive such notice, a Fee
Application within sixty (60) days of the Effective Date. Failure to file timely
a Fee Application as required under section 2.1(b) of the Plan shall result in
the Fee Claim being forever barred and discharged.
An Administrative Claim with respect to which notice has been properly
filed pursuant to section 2.1(a) of the Plan shall become an Allowed
Administrative Claim if no objection is filed within thirty (30) days after its
filing and service. If an objection is filed within such thirty (30) day period,
the Administrative Claim shall become an Allowed Administrative Claim only to
the extent Allowed by Final Order. An Administrative Claim that is a Fee Claim,
and with respect to which a Fee Application has been properly filed pursuant to
section 2.1(b) of the Plan, shall become an Allowed Administrative Claim only to
the extent allowed by Final Order of the Bankruptcy Court.
Each holder of an Allowed Administrative Claim shall receive the amount
of such holder's Allowed Administrative Claim in Cash on or before the Initial
Distribution Date, or shall receive such other treatment as agreed upon in
writing by the Debtors and such holder; provided, however, that an
Administrative Claim representing a liability incurred in the ordinary course of
business by the Debtors may be paid in the ordinary course of business by the
Debtors; and provided, further, that the payment of an Allowed Administrative
Claim representing a right to payment under sections 365(b)(1)(A) and
365(b)(1)(B) of the Bankruptcy Code may be made in one or more Cash payments
over a period of eighteen (18) months or such other period as is determined to
be appropriate by the Bankruptcy Court.
Each holder of an Allowed Priority Tax Claim shall receive, at the
option of the Reorganized Debtor, (i) the full amount of such holder's Allowed
Claim in one Cash payment on or before the Initial Distribution Date; (ii) the
amount of such holder's Allowed Claim, with interest accruing after the
Confirmation Date thereon, in equal quarterly Cash payments of principal and
interest at 7% per annum commencing on July 1, 2000, and continuing to that the
entire Allowed Priority Tax Claim is satisfied in full on or prior to the sixth
(6th) anniversary of the date of assessment of such Claim; or (iii) such other
treatment as may be agreed upon in writing by the Reorganized Debtor and such
holder.
Each holder of an Allowed Involuntary Gap Claim shall receive the full
amount of such Allowed Involuntary Gap Claim in one Cash payment on or before
the Initial Distribution Date.
Pursuant to 28 U.S.C. Section 1930(a)(6), the statutory fees of the
United States Trustee shall be paid in Cash as such fees become due and payable.
8
<PAGE> 9
2. CLASSIFIED CLAIMS AND INTERESTS
The following is an estimate of the numbers and amounts of classified
Claims and Equity Interests to receive treatment under the Plan:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
CLASS TREATMENT
- -----------------------------------------------------------------------------------------
<S> <C>
Class 1 -- Other Priority Claims Impaired.
Holder shall receive (i) amount of Allowed
Claim in one Cash payment on or as soon as
practicable after Initial Distribution Date;
or (ii) other treatment as agreed in writing
by Debtors and holder.
- -----------------------------------------------------------------------------------------
Class lA -- Other Priority Claims Impaired.
Holder shall receive (i) amount of Allowed
Claim in one Cash payment on or as soon as
practicable after Initial Distribution Date;
or (ii) other treatment as agreed in writing
by Debtors and holder.
- -----------------------------------------------------------------------------------------
Class lB -- BMC Other Priority Claims Impaired.
Holder shall receive (i) amount of Allowed
Claim in one Cash payment on or as soon as
practicable after Initial Distribution Date;
or (ii) other treatment as agreed in writing
by Debtors and holder.
- -----------------------------------------------------------------------------------------
Class 2 -- Amos Secured Claim Impaired.
Indebtedness giving rise to Allowed Amos
Claim shall remain in place, and Amos shall
receive payments as agreed to in writing by
Debtors and Amos. As security for payments,
Amos shall retain all rights provided in all
documents creating, evidencing, or securing
Allowed Amos Secured Claim.
- -----------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
CLASS TREATMENT
- -----------------------------------------------------------------------------------------
<S> <C>
Class 2 -- Amos Secured Claim Impaired.
Indebtedness giving rise to Allowed Amos
Secured Claim shall remain in place, and
Amos shall receive payments as agreed to in
writing by Debtors and Amos. As security for
payments, Amos shall retain all rights
provided in all documents creating,
evidencing, or securing Allowed Amos Secured
Claim.
- -----------------------------------------------------------------------------------------
Class 3 -- Kauffman County Secured Claim Impaired.
Holder shall receive four equal quarterly
payments of Cash, beginning on the Initial
Distribution Date. The amount of such
payments shall be calculated to provide full
satisfaction of the Allowed Kauffman County
Secured Claim plus accrued interest thereon,
from and after the Effective Date, at the
federal civil judgment rate.
- -----------------------------------------------------------------------------------------
Class 4 -- Baker Atlas Secured Claim Impaired.
Holder shall receive, on or before the
Initial Distribution Date, Cash in full
amount of Allowed Baker Atlas Secured Claim.
- -----------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CLASS TREATMENT
- --------------------------------------------------------------------------------
<S> <C>
Class 5 -- Other Secured Claims Impaired.
Holder shall receive, on or before
the Initial Distribution Date, (i)
return of Collateral in full
satisfaction of Other Secured Claim;
(ii) payment in Cash in an amount
equivalent to the lesser of (A) the
value of party's Collateral or (B)
the full amount of Other Secured
Claim; (iii) treatment of Other
Secured Claim in accordance with
sections 1124(2) or 1129(b)(2) of
the Bankruptcy Code; (iv) return of
a portion of such party's Collateral
and deferred Cash payments totaling
the remaining value of such party's
Collateral retained by the Debtors;
or (v) other treatment as may be
agreed to in writing by Secured
Creditor and Debtors.
Class 5A -- Other Secured Claims Impaired.
Holder shall receive, on or before
the Initial Distribution Date, (i)
return of Collateral in full
satisfaction of Other Secured Claim;
(ii) payment in Cash in an amount
equivalent to the lesser of (A) the
value of party's Collateral or (B)
the full amount of Other Secured
Claim; (iii) treatment of Other
Secured Claim in accordance with
sections 1124(2) or 1129(b)(2) of
the Bankruptcy Code; (iv) return of
a portion of such party's Collateral
and deferred Cash payments totaling
the remaining value of such party's
Collateral retained by the Debtors;
or (v) other treatment as may be
agreed to in writing by Secured
Creditor and Debtors.
- --------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
CLASS TREATMENT
- -----------------------------------------------------------------------------------------
<S> <C>
Class 5B -- BMC Secured Claims Impaired.
Holder shall receive, on or before the Initial
Distribution Date, (i) return of Collateral in
full satisfaction of Other Secured. Claim;
(ii) payment in Cash in an amount equivalent
to the lesser of (A) the value of party's
Collateral or (B) the full amount of Other
Secured Claim; (iii) treatment of Other
Secured Claim in accordance with sections
1124(2) or 1129(b)(2) of the Bankruptcy Code;
(iv) return of a portion of such party's
Collateral and deferred Cash payments totaling
the remaining value of such party's Collateral
retained by the Debtors; or (v) other
treatment as may be agreed to in writing by
Secured Creditor and Debtors.
- -----------------------------------------------------------------------------------------
Class 6 -- Southerland Tort Claims Impaired.
If Class 6 accepts Plan, (A) holders shall
receive, in aggregate, $10,000 in Cash on or
before Initial Distribution Date; and (B)
nothing in Plan shall prejudice right of any
holder to seek recovery under any insurance
policy maintained by Debtors as of Petition
Date.
If Class 6 does not accept Plan, each holder
shall receive, within 30 days after Claim
becomes Allowed Claim, Cash equal to 56.5%
of Allowed Claim.
- -----------------------------------------------------------------------------------------
Class 7 -- Buckles Class Action Claim Impaired.
If Class 7 accepts Plan, holder shall
receive $10,000 in Cash on or before Initial
Distribution Date.
If Class 7 does not accept Plan, holder
shall receive, within 30 days after Claim
becomes Allowed Claim, Cash equal to 56.5%
of Allowed Claim.
- -----------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 13
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
CLASS TREATMENT
- -----------------------------------------------------------------------------------------
<S> <C>
Class 8 -- Milton Vaughn Claim Impaired.
If Class 8 accepts Plan, (A) holders shall
receive, in aggregate, $10,000 in Cash on or
before Initial Distribution Date; and (B)
nothing in Plan shall prejudice right of any
holder to seek recovery under any insurance
policy maintained by Debtors as of Petition
Date.
If Class 8 does not accept Plan, each holder
shall receive, within 30 days after Claim
becomes Allowed Claim, Cash equal to 56.5%
of Allowed Claim.
- -----------------------------------------------------------------------------------------
Class 9 -- Landry Claim Impaired.
If Class 9 accepts Plan, (A) holder shall
receive $1,000 in Cash on or before Initial
Distribution Date; and (B) nothing in Plan
shall prejudice right of any holder to seek
recovery under any insurance policy
maintained by Debtors as of Petition Date.
If Class 9 does not accept Plan, holder
shall receive, within 30 days after Claim
becomes Allowed Claim, Cash equal to 56.5%
of Allowed Claim.
- -----------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 14
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
CLASS TREATMENT
- -----------------------------------------------------------------------------------------
<S> <C>
Class 10 -- Bondholder Claims Impaired.
If Class 10 accepts Plan, holder shall
receive Cash equal to 56.5% of principal
amount of Bonds owned by holder.
If Class 10 does not accept Plan, holder
shall receive, as determined by Bankruptcy
Court, either (i) Cash equal to 56.5% of
principal amount of Bonds owned by holder or
(ii)(A) Cash equal to Non-Arnos Bondholder
Recovery Percentage of principal amount of
Claim and (B) beneficial interest in
Creditors' Trust equal to percentage that
such Creditor's Allowed Non-Arnos Bondholder
Claim bears to total of all Allowed Non-Arnos
Bondholder Claims.
In any event, in consideration for treatment
under Plan, holder shall be deemed to have
transferred Bondholder Claim to Arnos as of
Effective Date. Payment and transfer shall
occur by delivery to Exchange Agent of such
holder's Bonds in transferable form for
delivery to Arnos.
- -----------------------------------------------------------------------------------------
Class 11 -- Trade Claims Impaired.
Holder shall receive, on or before Initial
Distribution Date, Cash equal to 75% of
amount of such Claim.
- -----------------------------------------------------------------------------------------
Class 1lA -- Trade Claims Impaired.
Holder shall receive, on or before Initial
Distribution Date, Cash equal to 75% of
amount of such Claim.
- -----------------------------------------------------------------------------------------
Class 1lB -- BMC Trade Claims Impaired.
Holder shall receive, on or before Initial
Distribution Date, Cash equal to 75% of
amount of such Claim.
- -----------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
CLASS TREATMENT
- -----------------------------------------------------------------------------------------
<S> <C>
Class 12 -- Intercompany Claims Impaired.
All Intercompany Claims shall be disallowed
and shall not receive any distribution under
the Plan.
- -----------------------------------------------------------------------------------------
Class 13 -- Preferred Equity Interests Impaired.
Holder shall retain such interest; provided,
however, that as partial consideration for
capitalization of Reorganized Debtor by
Arnos, Preferred Equity Interests may, at
option of Arnos, be deemed canceled and
reissued to holders of Preferred Equity
Interests in form to be determined by Arnos.
- -----------------------------------------------------------------------------------------
Class 14 -- Common Equity Interests Impaired.
Holder shall retain such interest; provided,
however, that as partial consideration for
capitalization of Reorganized Debtor by
Arnos, Common Equity Interests may, at option
of Arnos, be deemed canceled and reissued to
holders of Common Equity Interests in form
to be determined by Arnos.
- -----------------------------------------------------------------------------------------
Class 15 -- BMC Equity Interests Impaired.
Upon substantive consolidation of NEG and
BMC, BMC Equity Interests will be cancelled
as of Effective Date, and holder shall not
receive any distribution or retain any
interest on account of BMC Equity Interests.
- -----------------------------------------------------------------------------------------
</TABLE>
C. MEANS OF IMPLEMENTATION OF THE PLAN
1. DISTRIBUTIONS
The Reorganized Debtor shall make all distributions from Cash on hand
to holders of Allowed Claims, other than the distributions to be made to holders
of Allowed Non-Arnos Bondholder Claims. Distributions to holders of Allowed
Bondholder Claims will be made as follows:
15
<PAGE> 16
(i) Cash Package. If Class 10 accepts the Plan (or if Class 10
rejects the Plan and the Bankruptcy Court determines that the 56.5%
Cash option is in the better interests of holders of Non-Arnos
Bondholder Claims), Arnos shall deliver to the Exchange Agent, within
five (5) business days after the Effective Date, a portion of the
Escrowed Funds equal to 56.5% of the aggregate principal amount of the
Non-Arnos Bondholder Claims for distribution to holders of such Claims
in accordance with Article 4.11(b)(i) of the Plan. Arnos shall retain
the remainder of the Escrowed Funds.
(ii) Liquidation/Creditors' Trust Package. If Class 10 does
not accept the Plan and the Bankruptcy Court determines that the
combination of the liquidation-amount recovery and the Creditors' Trust
is in the better interests of holders of Non-Arnos Bondholder Claims,
within five (5) business days after the Effective Date, (i) Arnos shall
deliver to the Exchange Agent a portion of the Escrowed Funds equal to
the Non-Arnos Bondholder Recovery Percentage of the aggregate principal
amount of the Non-Arnos Bondholder Claims, and (ii) NEG shall transfer
all of the Creditors' Trust Assets to the Creditors' Trust. Arnos shall
retain the remainder of the Escrowed Funds.
2. EXCHANGE AGENT
The Exchange Agent shall have the powers, duties and obligations
specified in the Plan and in the Exchange Agent Agreement, which will be filed
no fewer than fifteen (15) days prior to the Confirmation Hearing. The liability
of the Exchange Agent will be limited so that he shall not be liable for his
actions in connection with his performance of his obligations under this Plan
unless he has been guilty of willful fraud or gross negligence. The Exchange
Agent shall not be required to give a bond for the faithful performance of his
duties hereunder.
3. CREDITORS' TRUST
Generally. If Class 10 does not accept the Plan and the Bankruptcy
Court determines that the combination of the liquidation-amount recovery and the
Creditors' Trust is in the better interests of holders of Non-Arnos Bondholder
Claims, the Creditors' Trust shall be established as of the Effective Date by
execution of the Creditors' Trust Agreement and the transfer of the Creditors'
Trust Assets to the Creditors' Trustee pursuant to the terms and conditions
thereof.
Creditors' Trust Assets. The Creditors' Trust Assets consist of all of
the Debtors' and their Estates' right, title, and interest in and to the
following assets: (i) Avoidance Actions, defined as any action arising in the
Chapter 11 Cases for avoidance and recovery of obligations, transfers of
property or interests in property pursuant to sections 544, 545, 547, 548, 550
and/or 551 of the Bankruptcy Code, subject to the limitation set forth in
section 13.1 of the Plan; plus the Transferred Causes of Action, defined as all
causes of action held by the Debtors as of the Petition Date and which are
unrelated to the operating assets retained by the Reorganized Debtor pursuant to
the Plan; (ii) the Lake Mongoulois Property; (iii) the Mustang Island Property,
and (iv) Cash in the amount of $250,000.
Lake Mongoulois Property. The Lake Mongoulois Property consists of
NEG's 50% working interest in the Lake Mongoulois Field in St. Martin Parish,
Louisiana, which working
16
<PAGE> 17
interest NEG acquired from EEX Corporation ("EEX") in February 1998. The LMU #17
has been the lone producing well that has held the unit, although the LMU #17
has not produced in the past several months. When the well has produced, it has
been capable of producing one day a month for +/- 10 barrels of oil after an
extended shut-in period. NEG operates the field with existing personnel out of
the Bayou Sorrel Area. Texaco discovered the Lake Mongoulois Field in 1938 and
by the late 1950s had drilled 71 wells, of which 47 were productive and 24 were
plugged and abandoned as dry holes. Peak production for the field averaged 1,870
Bopd and 5,900 Mcf/d. Cumulative production for the field is +/- 20 Mmbo and +/-
62 Bcf of gas. Ten Miocene and ten Oligocene sands (2100' to 12,000') have
produced around the faulted salt dome structure, with the majority of the
production coming from the Marg. Vag. and Cib. Haz. sands. NEG has projected a
$1.9 million net plugging and abandonment liability ($1.7 million negative PV-10
value). Netherland, Sewell & Associates, Inc., a leading petroleum engineering
and geologic consulting firm, concurred with this estimate for purposes of
preparing its reserve report for NEG. NEG has solicited nonbinding bids from
several third-party contractors and the average of those bids, net to NEG, has
been approximately $3.4 million.
Mustang Island Property. The Mustang Island Property consists of NEG's
various interests in leases, wells, and equipment in the Mustang Island area in
Nueces County, Texas. NEG acquired these interests between 1994 and 1998 from
LLOG, Petrotex Engineering, UMC Petroleum, Germany Oil, and the State of Texas.
Offshore equipment consists of three monopods and two platforms with nine
wells. Two wells are active, the SL904 GU #1 and 773-L (NW/4) #1. The 773-L #1
produces only one day a month for leasehold purposes, although NEG has also paid
shut-in royalties under the lease. Another well, the ST 901 #2, became loaded
with water and went offline effective as of February 5, 2000. The current
respective rates of the SL 904 GU #1 are 640 Mcf/d, 42 Bopd and 210 Bwpd at
2,700 psig FTP and 45 Bopd, 105 Mcf/d and 640 Bwpd at 450 psig FTP. Produced
waste is disposed offshore via separation at the platform. Oil and gas are
transported through NEG pipelines to a shore facility located on Mustang Island.
Additional processing equipment and storage tanks are located at this site and
allow for the trucking of crude oil. Gas is transported through an NEG pipeline
that crosses the Laguna Madre into a gas plant facility located in the Flour
Bluff community. Custody transfer of the gas occurs at the sales meter located
on plant property. NEG has projected a $3.5 million net plugging and abandonment
liability. Netherland, Sewell & Associates, Inc. has concurred with this
estimate for purposes of preparing its reserve report. The City of Corpus
Christi requires storm choke inspections on wellbores every two years, and the
inspection on the NEG properties is due before the end of 1999.
4. REVESTING OF ASSETS
Except as otherwise provided in the Plan or the Confirmation Order,
upon the Effective Date, all property of the Debtors' Estates, wherever
situated, shall vest in, or remain the property of, the Reorganized Debtor free
and clear of all Claims. All causes of action of the Debtors' Estates, including
all Avoidance Actions, shall be preserved and vest in the Reorganized Debtor;
provided, however, that if Class 10 does not accept the Plan and the Bankruptcy
Court confirms the Plan in accordance with Article 4.11(b)(ii)(B) thereof, all
of the Transferred Causes of Action shall be transferred to the Creditors'
Trust.
17
<PAGE> 18
5. DISCHARGE OF DEBTORS
Except as otherwise provided in the Plan, all consideration distributed
under the Plan shall be in exchange for, and in complete satisfaction,
discharge, and release of, all Claims of any nature whatsoever against the
Debtors or any of their assets or properties; and except as otherwise provided
herein, upon the Effective Date, the Debtors and their successors in interest
shall be deemed discharged and released pursuant to section 1141(d)(1)(A) of
the Bankruptcy Code from any and all Claims treated in the Plan, as well as all
other Claims, demands and liabilities that arose before the Effective Date, and
all debts of the kind specified in section 502(g), 502(h), or 502(i) of the
Bankruptcy Code, whether or not (a) a proof of Claim based upon such debt is
filed or deemed filed under section 501 of the Bankruptcy Code; (b) a Claim
based upon such debt is Allowed under section 502 of the Bankruptcy Code; (c)
the holder of a Claim based upon such debt has accepted this Plan; or (d) the
Claim has been Allowed, disallowed, or estimated pursuant to section 502(c) of
the Bankruptcy Code. Except as otherwise provided in the Plan, the Confirmation
Order shall be a judicial determination of discharge of all liabilities of the
Debtors and their successors in interest other than those obligations
specifically set forth pursuant to this Plan.
6. INJUNCTION
Except as otherwise provided in the Plan, from and after the
Confirmation Date, all holders of Claims against and Equity Interests in the
Debtors are permanently restrained and enjoined (a) from commencing or
continuing in any manner, any action or other proceeding of any kind with
respect to any such Claim or Equity Interest against the Debtors, their Assets,
or the Reorganized Debtor or against their financial advisors or attorneys; (b)
from enforcing, attaching, collecting, or recovering by any manner or means, any
judgment, award, decree, or order against the Reorganized Debtor, its Assets,
the Debtors, the Committee or against their financial advisors or attorneys; (c)
from creating, perfecting, or enforcing any encumbrance of any kind against the
Reorganized Debtor, its Assets, the Debtors or the Committee or against their
financial advisors or attorneys; (d) from asserting any setoff, right of
subrogation, or recoupment of any kind against any obligation due the Debtors;
and (e) from performing any act, in any manner, in any place whatsoever, that
does not conform to or comply with the provisions of the Plan; provided,
however, that each holder of a Contested Claim may continue to prosecute its
proof of Claim in the Bankruptcy Court and all holders of Claims and Equity
Interests shall be entitled to enforce their rights under the Plan and any
agreements executed or delivered pursuant to or in connection with the Plan.
7. REVOCATION OF PLAN
The Debtors reserve the right to revoke and withdraw the Plan before
the entry of the Confirmation Order. If the Debtors revoke or withdraw this
Plan, or if confirmation of this Plan does not occur, then, with respect to the
Debtors, this Plan shall be deemed null and void and nothing contained herein
shall be deemed to constitute a waiver or release of any Claims by or against
the Debtors, as the case may be, or any other Person or to prejudice in any
manner the
18
<PAGE> 19
rights of such Debtors or Debtor, as the case may be, or person in any further
proceedings involving such Debtors.
8. REORGANIZED DEBTOR'S BOARD OF DIRECTORS
The initial board of directors of the Reorganized Debtor shall consist
of the following persons: Bob G. Alexander (Chairman), Jim L. David, Russell L.
Glass, Martin Hirsch, Robert H. Kite, Robert J. Mitchell, and Jack G. Wasserman.
9. REORGANIZED DEBTOR'S EXECUTIVE OFFICERS
The initial executive officers of the Reorganized Debtor shall include
the following persons: Bob G. Alexander (President and Chief Executive Officer),
Jim L. David (Assistant to the President), Philip D. Devlin (Vice President,
General Counsel and Secretary), R. Kent Lueders (Vice President, Corporate
Development), and Melissa H. Rutledge (Vice President, Controller and Chief
Accounting Officer). Such executive officers shall be compensated at their
current compensation levels or such other levels as may be determined by the
Board of Directors of the Reorganized Debtor.
10. CHARTER AND BYLAWS
The charter and bylaws of the Reorganized Debtor shall be created or
amended as of the Effective Date as necessary (a) to satisfy the provisions of
this Plan; (b) to prohibit the issuance of nonvoting equity securities as
required by section 1123(a)(6) of the Bankruptcy Code; and (c) to prohibit the
transfer of any Equity Interest in the Reorganized Debtor to or by any Person
who is, was or would become as a result of such transfer, a "5% shareholder"
within the meaning of 26 U.S.C. Section 382.
11. AMENDMENT TO INDENTURE FOR BONDS
The Indenture for the Bonds shall be amended substantially in the
manner reflected in the Amended Indenture attached as Exhibit "1" to the Plan.
12. BONDS NOT DISCHARGED
Pursuant to the Plan, Arnos shall acquire all of the Bonds. Following
Confirmation of the Plan, the Bonds shall remain outstanding and shall be paid
either under the terms of the Amended Indenture attached to the Plan as Exhibit
"1" or on such other terms as are agreed between the Reorganized Debtor and
Arnos.
13. PURCHASE OF ADDITIONAL COMMON AND/OR PREFERRED STOCK
On the Effective Date, Arnos or an affiliate of Arnos shall pay at
least $2.0 million to the Reorganized Debtor to purchase from the Reorganized
Debtor additionally issued shares of the Reorganized Debtor's common and/or
preferred stock such that Arnos or its affiliate will own up
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to 49.9% of the value of all issued and outstanding common and preferred stock
of the Reorganized Debtor.
D. EXECUTORY CONTRACTS AND UNEXPIRED LEASES
1. GENERAL TREATMENT; ASSUMED IF NOT REJECTED
The Plan constitutes and incorporates a motion by the Debtors to
assume, as of the Effective Date, all prepetition executory contracts and
unexpired leases to which the Debtors are a party, except for executory
contracts or unexpired leases that (a) have been assumed or rejected pursuant to
Final Order of the Bankruptcy Court, (b) are the subject of a separate motion
pursuant to section 365 of the Bankruptcy Code to be filed and served by the
Debtors on or before the Confirmation Date, or (c) are designated on Exhibit "2"
of the Plan as executory contracts and unexpired leases which the Debtors intend
to reject.
2. CURE PAYMENTS AND RELEASE OF LIABILITY
All cure payments which may be required by section 365(b)(1) of the
Bankruptcy Code under any executory contract or unexpired lease that is assumed,
or assumed and assigned, under this Plan shall be made on or before the Initial
Distribution Date; provided, however, that in the event of a dispute regarding
the amount of any cure payments, the cure of any other defaults, the ability of
any party to provide adequate assurance of future performance, or any other
matter pertaining to assumption or assignment, the Reorganized Debtor shall make
such cure payments and cure such other defaults and provide adequate assurance
of future performance, all as may be required by section 365(b)(l), of the
Bankruptcy Code only following the entry of a Final Order resolving such
dispute. To the extent that a party to an assumed executory contract or
unexpired lease has not filed an appropriate pleading with the Bankruptcy Court
on or before the thirtieth (30th) day after the Effective Date disputing the
amount of any cure payments offered to it, disputing the cure of any other
defaults, disputing the promptness of the cure payments, or disputing the
provisions of adequate assurance of future performance, then such party shall be
deemed to have waived its right to dispute such matters.
3. BAR TO REJECTION DAMAGES
If the rejection of an executory contract or an unexpired lease by the
Debtors results in damages to the other party or parties to such contract or
lease, a Claim for such damages shall be forever barred and shall not be
enforceable against the Debtors or their respective properties or agents,
successors, or assigns, unless a proof of Claim is filed with the Bankruptcy
Court and served upon the Reorganized Debtor by the earlier of (a) 30 days after
the Confirmation Date or (b) such other deadline as the Bankruptcy Court may set
for asserting a Claim for such damages.
4. REJECTION CLAIMS
Any Claim arising from the rejection of an unexpired lease or executory
contract and not barred by section 10.3 of the Plan shall be treated as a Trade
Claim pursuant to the Plan; provided, however, that any Claim based upon the
rejection of an unexpired lease of real
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<PAGE> 21
property shall be limited in accordance with section 502(b)(6) of the Bankruptcy
Code and state law mitigation requirements. Nothing contained herein shall be
deemed an admission by the Debtors that such rejection gives rise to or results
in a Claim or shall be deemed a waiver by the Debtors of any objections to such
Claim if asserted.
In connection with the Lake Mongoulois Property, discussed above, NEG
entered into a Participation Agreement with EEX on January 13, 1998. Pursuant to
the Participation Agreement, EEX assigned to NEG an undivided 50% interest in
EEX's right, title, and interest in and to certain oil and gas properties in St.
Martin Parish, Louisiana. In addition, NEG agreed to spend a total of $7.0
million for its account and for the account of EEX for operations to drill,
complete, deepen, rework, and recomplete wells (or, if dry holes, to plug and
abandon such wells and restore the surface locations) within the Lake Mongoulois
area, by December 31, 1999. NEG also agreed to assume 50% of the plugging and
abandonment ("P&A") liability. NEG is advised that its P&A liability under the
Participation Agreement will be approximately $3.4 million. NEG intends to
reject the Participation Agreement as an executory contract. Following
rejection, however, EEX will be entitled to assert an unsecured prepetition
Claim against NEG's Estate for any damages arising as a result of the rejection
or otherwise under the Participation Agreement, including the unsatisfied
development obligation and the unpaid P&A liability.
V. DESCRIPTION OF THE DEBTORS
A. OVERVIEW
NEG was incorporated under the laws of the State of Delaware on
November 20, 1990. Effective June 11, 1991, Big Piney Oil and Gas Company and VP
Oil, Inc. merged with and into NEG. On August 29, 1996, Alexander Energy
Corporation was merged with and into a wholly owned subsidiary of NEG, which
subsidiary was merged with and into NEG on December 31, 1996.
NEG is an independent energy company which has historically 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.
B. BUSINESS OF THE DEBTORS
1. PRINCIPAL AREAS OF OPERATIONS
Due to the chapter 11 filing, NEG has suspended its exploratory and
development drilling program. However, NEG currently has an inventory of
exploratory prospects in Louisiana and offshore at Mustang Island.
Historically, NEG has developed and exploited existing properties by
drilling Development Wells, and recompleting and reworking existing wells. NEG
will continue to
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participate in non-operated wells as described above and continue its drilling
operations where economical in accordance with the rulings and procedures set
forth by the Bankruptcy Court.
The following table sets forth NEG's principal areas of operations and
NEG's Proved Reserves of oil and natural gas at December 31, 1999. See -- "Oil
and Natural Gas Properties".
<TABLE>
<CAPTION>
NATURAL
OIL AND NATURAL GAS
CONDENSATE GAS EQUIVALENT % OF
(Mbbls) (Mmcf) (Mmcfe) TOTAL
---------- ------- ---------- -----
<S> <C> <C> <C> <C>
Area:
Mid-Continent 511 33,184 36,248 37.5%
East and West Texas 2,852 22,058 39,174 40.6%
Gulf Coast 2,251 7,654 21,158 21.9%
----- ------ ------ -----
Total 5,614 62,896 96,580 100.0%
===== ====== ====== =====
</TABLE>
The following table sets forth NEG's production by principal area of
operation for the year ended December 31, 1999:
<TABLE>
<CAPTION>
NATURAL
NATURAL GAS
OIL GAS EQUIVALENT % OF
(Mbbls) (Mmcf) (Mmcfe) TOTAL
---------- ------- ---------- -----
<S> <C> <C> <C> <C>
Area:
Mid-Continent 73 5,145 5,580 34.7%
East and West Texas 337 2,972 4,997 31.1%
Gulf Coast 725 1,149 5,501 34.2%
------ ------ ------ -----
Total 1,135 9,266 16,078 100.0%
====== ====== ====== =====
</TABLE>
(a) Mid-Continent area
At December 31, 1999, approximately 37.5% (36.2 Bcfe) of NEG's Proved
Reserves were located in the Mid-Continent area in Oklahoma and Western
Arkansas, which includes the Anadarko and Arkoma Basins.
ANADARKO BASIN. 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 NEG's leasehold acreage.
NEG's Anadarko Basin 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
have obtained authorization for increased density drilling on smaller acreage
units. Further, under the forced pooling rules in Oklahoma, even if NEG is not
the operator of the property for which increased density drilling has been
approved, NEG 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.
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<PAGE> 23
During the year ended December 31, 1999, NEG drilled 3 Gross (.38 Net)
Development Wells in the Anadarko Basin, of which 3 Gross (.38 Net) Development
Wells were completed as commercially productive. NEG's wells typically are
completed in horizons ranging in depth between 7,000 and 15,000 feet.
ARKOMA BASIN. Most Arkoma Basin reserves are produced from formations at depths
ranging from approximately 3,000 to 8,000 feet.
During 1999, NEG drilled 2 Gross (.64 Net) Development Wells in the
Arkoma Basin of which 1 Gross (.48 Net) Development Well was completed as
commercially productive. The typical Arkoma Basin well is drilled to a total
depth of approximately 7,500 feet.
(b) East and West Texas Area
At December 31, 1999, approximately 40.6% (39.2 Bcfe) of NEG's Proved
Reserves were located in the East and West Texas area, including East Texas and
the Goldsmith Adobe Unit in West Texas.
EAST TEXAS. These reserves are found in the Cotton Valley formation and the
Travis Peak formation. The Cotton Valley formation is generally found at depths
of 8,500 to 10,500 feet in NEG's area of interest. These properties produce from
low permeability reservoirs that generally contain relatively long life natural
gas reserves. A significant portion of the cost to complete Cotton Valley 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 Travis Peak formation is generally
found at a depth of 7,200 feet and principally contains oil reserves.
During the year ended December 31, 1999, NEG did not drill any wells in
the East and West Texas Areas.
GOLDSMITH ADOBE UNIT ("GAU"). The Goldsmith Adobe Unit is in the Permian Basin
in West Texas. NEG owns approximately a 95% Working Interest in the GAU, which
it operates.
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,
NEG began a drilling program in July 1994 to develop the GAU on 20 acre spacing
units. Typically, wells drilled by NEG at the GAU are drilled to depths between
5,600 and 6,000 feet into the Clearfork formation. During 1999, NEG did not
drill any wells at the GAU.
(c) Gulf Coast Area
At December 31, 1999, 21.9% (21.1 Bcfe) of NEG's Proved Reserves were
located in the Gulf Coast areas, principally in the Greater Bayou Sorrel Area in
Iberville Parish, Louisiana and
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<PAGE> 24
at Mustang Island in offshore Gulf of Mexico. NEG also has participated in
exploratory activity in various parishes throughout Southern Louisiana.
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 target formations of NEG's exploration
prospects in this area range from approximately 11,000 to 14,000 feet and
include the Marg Vag, Marg Howeii, Camerina, Cib Haz, and Marg Tex zones. 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. NEG first participated in the successful exploratory test of the
Schwing #1 well in NEG's East Bayou Sorrel prospect in January 1996. 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 old 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. During 1997, NEG successfully
drilled and completed a second test well, the Schwing #2. In 1998, NEG added a
third producing well to the East Bayou Sorrel Field, the #1 State Lease 2102.
During 1999, NEG did not drill any wells in the Greater Bayou Sorrel
Area.
NEG has completed shooting, processing and interpreting, an approximate
54 square mile 3-D seismic survey over the Greater Bayou Sorrel Area. NEG has
identified additional potential drilling locations for prospects in this area
through interpretation of the 3-D seismic data. 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 prior to NEG's
3-D survey. NEG controls approximately 13,400 acres either by lease or option
to lease, within the Greater Bayou Sorrel Area.
In March 1998, NEG acquired Fortune Natural Resources Corporation's
interests in the East Bayou Sorrel field for approximately $4.5 million in cash.
MUSTANG ISLAND. The Mustang Island area is located offshore in shallow state
waters in Nueces County, Texas. NEG currently has approximately a 92% working
interest in approximately 16,000 gross acres of leases, majority interests in 2
producing wells, 11 miles of pipeline, and an onshore tank facility. In
addition, NEG participated in a 3-D seismic survey over the area, which provided
approximately 90 square miles of data. Three exploratory opportunities have been
identified from this 3-D seismic data. NEG did not drill any wells at Mustang
Island during 1999.
In June 1998, NEG acquired Germany Oil Company's interest in six state
leases and one producing well in the Mustang Island area for $.4 million in
cash.
OTHER SOUTH LOUISIANA. NEG has also participated in exploratory prospects
outside of the Greater Bayou Sorrel area in various parishes in South Louisiana.
During 1999, NEG did not drill any wells in these areas.
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<PAGE> 25
2. OIL AND NATURAL GAS RESERVES
The estimated reserves and related future net revenues as of December
31, 1999, were prepared by independent outside petroleum engineers. All of NEG's
reserves are located in the continental United States. Each of the This reserve
reports was prepared using constant prices and costs in accordance with the
published guidelines of the SEC. The net weighted average prices used in NEG's
reserve report at December 31, 1999, were $24.97 per barrel of oil and $2.26 per
Mcf of natural gas. The estimation of reserves and future net revenues can be
materially affected by the oil and gas prices used in preparing the reserve
report. Substantially all of NEG'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 NEG's credit facility.
All reserves are evaluated at constant temperature and pressure, which
can affect the measurement of natural gas reserves. Estimated operating costs,
development costs, abandonment 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
can differ from the Standardized Measure of discounted future net cash flows set
forth in the notes to the Financial Statements of NEG, 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 NEG with, or included in any report to, any United States authority or agency
(other than the SEC) since December 31, 1998.
The following table sets forth certain information for NEG's total
Proved Reserves of oil and natural gas and the PV 10% of estimated future net
revenues from such reserves, at December 31, 1999.
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<PAGE> 26
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
---------------------------------------------
NATURAL NATURAL GAS PV 10%
OIL GAS EQUIVALENT (IN
(Mbbls) (Mmcf) (Mmcfe) THOUSANDS)
----- ------ ------- ----------
<S> <C> <C> <C> <C>
Proved Developed Reserves 3,549 51,215 72,509 80,801
Proved Developed Nonproducing Reserves 1,182 5,516 12,608 18,849
Proved Undeveloped Reserves 883 6,166 11,464 9,243
Total Proved Reserves 5,614 62,897 96,581 108,893
Probable 765 5,313 9,903 7,403
Total Company 6,379 68,210 106,484 116,296
----- ------ ------- -------
</TABLE>
3. OIL AND NATURAL GAS PRODUCTION AND UNIT ECONOMICS
The following table shows the approximate net production attributable
to NEG'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 NEG'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,
-----------------------------
1997 1998 1999
------ ------ -----
<S> <C> <C> <C>
Net production:
Oil (Mbbls) 1,110 1,238 1,135
Natural gas (Mmcf) 13,146 11,255 9,266
Natural gas equivalent (Mmcfe) 19,807 18,685 16,078
Average sales price:
Oil (per Bbl) $ 19.17 $ 12.66 $ 17.62
Natural gas (per Mcf) 2.37 2.02 2.08
Unit economics (per Mcfe):
Average sales price $ 2.65 $ 2.06 $ 2.44
Lease operating expenses .34 .46 .38
Oil and gas production taxes .16 .13 .13
Depletion rate (excluding writedowns) 1.11 1.06 .96
General and administrative expenses .22 .33 .25
</TABLE>
4. LEASEHOLD ACREAGE
The following table shows the approximate Gross and Net Acres in which
NEG had a leasehold interest as of December 31, 1999:
<TABLE>
<CAPTION>
DEVELOPED ACREAGE UNDEVELOPED ACREAGE
------------------- -------------------
GROSS NET GROSS NET
------- ------- ------- -------
<S> <C> <C> <C> <C>
Area:
Mid-Continent 84,477 44,727 1,956 1,294
East and West Texas 14,519 12,976 4,208 2,921
Gulf Coast 14,047 9,733 24,287 18,374
------- ------- ------ ------
Totals 113,043 67,436 30,451 22,589
======= ====== ====== ======
</TABLE>
NEG 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. Lease rentals usually consist of a fixed
annual charge made prior to obtaining production. Once production has been
established, a royalty is paid to the lessor based upon the gross proceeds from
the sale of oil and natural gas. Once wells are drilled, a lease generally
continues as long as
26
<PAGE> 27
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.
Substantially all of NEG's producing oil and natural gas properties are
located on leases held by NEG for an indeterminate number of years as long as
production is maintained. All of NEG's non-producing acreage is held under
leases from mineral owners or a government entity which expire at varying dates.
NEG is obligated to pay annual delay rentals to the lessors of certain
properties in order to prevent the leases from terminating. Delay rentals were
approximately $.9 million for the year ended December 31, 1998 and were
approximately $.6 million for the year ended December 31, 1999, and could
increase in future periods depending on NEG's lease acquisition activities.
5. TITLE TO OIL AND NATURAL GAS PROPERTIES
NEG has acquired interests in producing wells and undeveloped acreage
in the form of Working Interests, Royalty Interests, and Overriding Royalty
Interests. To reduce NEG's financial exposure in any one exploratory prospect,
NEG often acquires less than 100% of the Working Interest in a prospect. Working
Interests held by NEG may, from time to time, become subject to minor liens.
Prior to an acquisition, due diligence investigations are made in accordance
with standard practices in the industry, which may include securing an
acquisition title opinion.
6. PRODUCTION AND SALES PRICES
NEG produces oil and natural gas solely in the continental United
States. NEG has no obligations to provide a fixed and determinable quantity of
oil and/or natural gas in the future under existing contracts or agreements. Nor
does NEG refine or process the oil and natural gas it produces, but sells the
production to unaffiliated oil and natural gas purchasing companies in the area
in which it is produced. NEG 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. NEG currently sells a significant portion of oil
pursuant to a contract with Plains Marketing and Transportation. See "-- Markets
and Customers."
7. CONTROL OVER PRODUCTION ACTIVITIES
The non-operated properties are operated by unrelated third parties
pursuant to operating agreements that are generally standard in the industry.
Significant decisions about operations regarding non-operated properties may be
determined by the outside operator rather than by NEG. If NEG declines to
participate in additional activities proposed by the outside operator under
certain operating agreements, NEG will not receive revenues from, and/or will
lose its interest in the activity in which it declined to participate.
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<PAGE> 28
8. MARKETS AND CUSTOMERS
The availability of a ready market for any oil and natural gas produced
by NEG 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, sale and taxation of oil and natural
gas. The occurrence of any factor that affects a ready market for NEG's oil and
natural gas or reduces the price obtained for such oil and natural gas, may
adversely affect NEG.
A large percentage of NEG's oil and natural gas sales are made to a
small number of purchasers. NEG normally sells its oil under six month
contracts. For the year ended December 31, 1997, Plains Marketing and
Transportation ("Plains") accounted, for 84% of NEG's oil sales, and Crosstex
Energy ("Crosstex") and GPM Natural Gas Corporation accounted for 20% and 14%,
respectively, of NEG's natural gas sales. For the year ended December 31, 1998,
Plains accounted for 85% of NEG's oil sales, and Crosstex and Aquila Energy
Marketing ("Aquila") accounted for 23% and 26%, respectively, of NEG's natural
gas sales. For the year ended December 31, 1999, Plains accounted for 90% of
NEG's oil sales, and Crosstex and Aquila accounted for 21% and 17%,
respectively, of NEG's natural gas sales. The agreement with Plains, entered
into in 1993, provides for Plains to purchase NEG's oil pursuant to West Texas
Intermediate posted prices plus a premium. NEG does not believe that the loss of
any purchaser would have a material adverse effect on its business because,
under prevailing market conditions, such purchaser could be replaced.
A portion of NEG'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 assume the risk of
contracting pipelines and processing plants in return for a portion of the
proceeds of the sale of the gas and liquids. 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 NEG's
natural gas production is also sold under forward sales contracts. See Note 9 of
Notes to Consolidated Financial Statements, attached hereto as EXHIBIT B.
Deliveries under these contracts are priced based on NYMEX prices less a
differential whereby NEG 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. NEG pays the cost of transportation of the
natural gas to the delivery point specified in these contracts. The remainder of
NEG's natural gas is sold on the spot market under short-term contracts.
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<PAGE> 29
9. REGULATION
GENERAL. NEG'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 NEG'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 jurisdictions, NEG is unable to predict the future cost or
impact of complying with such laws.
EXPLORATION AND PRODUCTION. NEG'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. NEG'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 size of drilling and
spacing units or proration units, the density of wells that 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, some 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 NEG can produce from its wells and to limit the number of wells or
the locations at which NEG can drill. Legislation in Oklahoma and regulatory
action in Texas governs the methodology by which the regulatory agencies
establish permissible monthly production allowables. NEG cannot predict what
effect any change in prorationing regulations might have on its production and
sales of natural gas.
Certain of NEG's Oil, Gas and Mineral 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. NEG 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
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<PAGE> 30
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 NEG, as well as the oil and gas industry in general. It is
not anticipated that NEG 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, NEG 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.
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 NEG 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 NEG's operations are exempt from
RCRA regulation. Nevertheless, NEG 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).
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<PAGE> 31
Because oil and natural gas exploration and production, and possibly
other activities, have been conducted at some of NEG'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, NEG has
agreed to indemnify some sellers of producing properties from whom NEG has
acquired reserves against certain liabilities for environmental claims
associated with such properties. While NEG does not believe that costs to be
incurred by NEG 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 NEG's routine oil and natural gas
operations, surface spills and leaks, including casing leaks of oil or other
materials occur, and as a result, NEG incurs costs for waste handling and
environmental compliance. Moreover, NEG is able to control directly the
operations of only those wells for which it acts as the operator.
Notwithstanding NEG's lack of control over wells in which NEG owns an interest
but is operated by others, the failure of the operator to comply with applicable
environmental regulations may, in certain circumstances, be attributable to NEG.
NEG is also subject to laws and regulations concerning occupational
safety and health. While it is not anticipated that NEG will be required in the
near future to expend amounts that are material in the aggregate to NEG's
overall operations by reason of occupational safety and health laws and
regulations, NEG 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 NEG 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.
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
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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. While Order No.
636 does not directly regulate natural gas producers such as NEG, the FERC has
stated that Order No. 636 is intended to foster increased competition within the
gas industry.
10. OPERATIONAL HAZARDS AND INSURANCE
NEG'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 NEG 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. NEG maintains insurance of various types customary
in the industry to cover its operations. NEG believes it is insured prudently
against certain of these risks. In addition, NEG maintains operator's extra
expense coverage that provides coverage for the care, custody and control of
wells drilled by NEG. NEG's insurance does not cover every potential risk
associated with the drilling and production of oil and natural gas. NEG 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 NEG's financial
condition and results of operations. Moreover, no assurance can be given that
NEG will be able to maintain adequate insurance in the future at rates it
considers reasonable. NEG believes that it operates in compliance with
government regulations and in accordance with safety standards which meet or
exceed industry standards.
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11. COMPETITION
The oil and gas industry is intensely competitive in all of its phases.
NEG, 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 NEG.
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. NEG cannot predict the effect
these factors will have on its operations. NEG owns no drilling rigs, and it is
anticipated that its drilling will be conducted by third parties. Furthermore,
the oil and gas industry also competes with other industries in supplying the
energy and fuel requirements of industrial, commercial, and individual
consumers.
12. OFFICE SPACE
NEG leases approximately 25,000 square feet of office space in Dallas,
Texas. NEG also leases a small amount of office space in Odessa, Texas, Fort
Smith, Arkansas and Yukon, Oklahoma for its business activities.
13. EMPLOYEES
At March 3, 2000, NEG had 46 full-time employees. Of these employees,
six are field-related personnel. NEG does not have any collective bargaining
agreements with employees and believes that relations with its employees are
generally satisfactory.
C. CAPITAL STRUCTURE OF NEG
1. SENIOR NOTES
In November 1996, NEG 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 a prior facility and to increase
NEG'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, NEG 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 credit facility and to increase NEG's working capital. In
December 1997, NEG 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 "Bonds."
The Bonds bear interest at an annual rate of 10 3/4%, payable
semiannually in arrears on May 1 and November 1 of each year. The Bonds are
senior, unsecured obligations of NEG,
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<PAGE> 34
ranking pari passu with all existing and future senior indebtedness of NEG, and
senior in right of payment to all future subordinated indebtedness of NEG.
Subject to certain limitations set forth in the indenture covering the Bonds
(the "Indenture"), NEG and its subsidiaries may incur additional senior
indebtedness and other indebtedness.
At December 31, 1998 and 1999, unamortized issuance premiums associated
with the Bonds totaled $1,238,513 and $1,080,405, respectively.
The Indenture provides that the Bonds will be unconditionally
guaranteed (the "Guarantee") by any subsidiary designated by NEG as a Restricted
Subsidiary (a "Guarantor"). As a result of the merger of NEG-OK into NEG on
December 31, 1996, NEG has no Restricted Subsidiaries.
The Indenture contains certain covenants limiting NEG 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.
The Bonds mature on November 1, 2006. At any time on or after November
1, 2001, NEG may, at its option, redeem all or any portion of the Bonds at the
redemption prices expressed as percentages of the principal amount of the Bonds
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> <C>
2001 105.375%
2002 102.688%
2003 and thereafter 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to November 1, 2001,
NEG may, at its option, redeem all or any portion of the Bonds at the Make-Whole
Price, as defined, plus accrued and unpaid interest to the date of redemption.
In addition, in the event NEG consummates one or more Equity Offerings, as
defined, on or prior to November 1, 1999, NEG, at its option, may redeem up to
$35.0 million of the aggregate principal amount of the Bonds with all or a
portion of the aggregate net proceeds received by NEG from such Equity Offering
or Equity Offerings at a redemption price of 110.75% of the aggregate principal
amount of the Bonds 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 Bonds remains
outstanding.
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Upon a Change of Control, as defined, NEG will be required, subject to
certain conditions, to offer to repurchase all Bonds at 101% of the principal
amount thereof, plus accrued and unpaid interest to the date of purchase.
Due to the nonpayment of interest due December 2, 1998, the Bonds were
in default at December 31, 1999.
2. CREDIT FACILITIES
On August 29, 1996, NEG, NEG-OK, and Boomer Marketing, entered into a
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, as adjusted. The proceeds from the
credit facility were used to repay a prior credit facility and the existing
indebtedness of NEG-OK, resulting in an extraordinary charge of $292,372 or $.0l
per common share in 1996.
In November 1996, NEG 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% Bonds due 2006 (the "Series A Notes"), as discussed
above.
Also in November 1996, in connection with the issuance of the Series A
Notes, NEG revised the credit facility. The credit facility had a borrowing base
of $25.0 million. The borrowing base may be redetermined at least semi-annually
and may require mandated monthly principal reductions from time to time. The
principal amount of any borrowings is due at maturity, August 29, 2000 and
interest is payable monthly.
NEG granted liens to the Banks on substantially all of NEG's oil and
natural gas properties, whether currently owned or hereafter acquired, and a
negative pledge on all other oil and natural gas properties. The credit facility
requires, among other things, semiannual engineering reports covering oil and
natural gas properties, and maintenance of certain financial ratios, including
the maintenance of a minimum interest coverage, a current ratio, and a minimum
tangible net worth.
The credit facility 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 NEG is
required to purchase or redeem any portion of the Bonds, or if any portion of
the Bonds becomes due, the borrowing base is subject to reduction.
NEG was required to pay a commitment fee on the unused portion of the
borrowing base equal to 1% per annum.
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<PAGE> 36
On December 7, 1998, Bank One and Credit Lyonnais gave notice to NEG
that all outstanding obligations under the credit facility were accelerated and
were immediately due and payable due to certain unspecified Events of Default as
defined in the loan agreement. Effective December 22, 1998, the Banks assigned
the credit facility and all associated liens to Arnos, an affiliated subsidiary
of NEG's Series D preferred stockholder. In a letter dated December 23, 1998,
Arnos (1) rescinded the acceleration of the loan, (2) waived all defaults
existing at that time and (3) made sufficient borrowings available to pay the
interest on the Bonds that was due on November 2, 1998, conditioned upon the
Bankruptcy Court's dismissal of the Involuntary Petition. NEG is currently
paying interest under the Arnos credit facility. NEG had $25 million outstanding
under the Arnos credit facility as of December 31, 1999.
In connection with its proposed purchase of substantially all of the
oil and gas properties of NEG as of November 1, 1999, Arnos credit bid the $25
million principal indebtedness as permitted by section 363(k) of the Bankruptcy
Code.
3. PREFERRED STOCK
In June 1994, NEG 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 NEG 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.
The board of directors declared dividends on the Series B in December of 1998,
which would be made in shares of Series B Preferred Stock. This dividend-in-kind
has not been made and is currently in arrears.
In June 1995, NEG 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 NEG 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. The board of directors declared dividends
on the Series C in December of 1998, which would be made in shares of Series C
Preferred Stock. This dividend-in-kind has not been made and is currently in
arrears.
In August 1996, NEG 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. As part of such sale, NEG 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.
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<PAGE> 37
D. SELECTED FINANCIAL DATA
Attached hereto as Exhibit B is the Form 10-K filed by NEG with the
Securities and Exchange Commission for the fiscal year ended December 31, 1999.
Holders of Claims and Equity Interests are directed to the Form 10-K for current
financial and other information concerning the Debtors. In particular, parties
may wish to review Item 6, Selected Financial Data, together with Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
E. DIRECTORS AND OFFICERS
The following table lists the name, age as of March 3, 2000, and
present position with NEG for each of NEG's directors and executive officers:
<TABLE>
<CAPTION>
NAME AGE PRESENT POSITION WITH NEG(1)
- ---- --- ----------------------------
<S> <C> <C>
Bob G. Alexander 66 Chairman of the Board of Directors, President and
Chief Executive Officer
Jim L. David 60 Director, Assistant to the President
Russell D. Glass 37 Director
Martin Hirsch 45 Director
Robert H. Kite 45 Director
Robert J. Mitchell 52 Director
Jack G. Wasserman 63 Director
Philip D. Devlin 55 Vice President, General Counsel and Secretary
R. Kent Lueders 43 Vice President, Corporate Development
Melissa H. Rutledge 34 Vice President, Controller and Chief Accounting
Officer
</TABLE>
(1) Messrs. Alexander, David and Mitchell were appointed to the Board on
August 29, 1996, and Mr. Alexander was appointed President and Chief
Executive Officer of NEG effective November 23, 1998. Messrs. Glass,
Hirsch and Wasserman were appointed to the Board on December 1, 1998.
Pursuant to the terms of the Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock, the holders of a majority
of the outstanding shares of each series have the right to appoint one
member to NEG's Board of Directors at all times while such series are
outstanding. Mr. Elwood Schafer, the Series C Preferred Stock
appointee, resigned from the Board of Directors effective, December 31,
1998, and no new appointment has been made. Mr. Mitchell is the Series
D Preferred Stock appointee. Directors generally serve for a term of
one year (until the next annual meeting of shareholders) and until
their successors are duly elected and qualified, or until their death,
resignation or removal, at which time the Board of Directors has the
authority to appoint replacements to fill any such vacancies until the
next annual meeting of shareholders.
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<PAGE> 38
Bob G. Alexander. Mr. Alexander, a founder of Alexander Energy
Corporation, was appointed a Director of NEG when Alexander merged into NEG-OK
on August 29, 1996 and was appointed President and Chief Executive Officer of
NEG on November 23, 1998. From 1980 until the Merger, Mr. Alexander served as
Chairman of the Board, President and Chief Executive Officer of Alexander. From
1976 to 1980, Mr. Alexander was Vice President and General Manager of the
Northern Division of Reserve Oil, Inc. and President of Basin Drilling Corp.
(subsidiaries of Reserve Oil and Gas Company). Mr. Alexander attended the
University of Oklahoma and graduated with a Bachelor of Science degree in
geological engineering.
Jim L. David. Mr. David, a founder of Alexander Energy Corporation, was
appointed a Director of NEG when Alexander merged into NEG-OK on August 29,
1996. From August 1996 until July 1998, Mr. David served as Vice President,
Exploration of NEG. In December 1998, he became Assistant to the President of
NEG. From 1980 until the Merger, Mr. David served as Executive Vice President of
Alexander. From 1977 to 1980, Mr. David was employed as exploration manager for
Reserve Oil, Inc., Northern Division. Mr. David served as Alaska chief geologist
and senior staff geologist for Texas International from 1973 to 1976. Mr. David
graduated with a B.A. degree in geology from Louisiana Tech University and
obtained a Master of Arts in geology from the University of Missouri.
Russell D. Glass. Effective December 1, 1998, Mr. Glass was appointed
to the Board of Directors of NEG. Mr. Glass has been President and Chief
Investment Officer of Icahn Associates Corporation and Starfire Holding
Corporation, privately held investment companies, since April 1998. From March
1996 to March 1998, he was a partner in Relational Investors LLC, an investment
management firm. From 1988 to 1996, he was President of Premier Partners Inc., a
private investment firm. From 1984 to 1986 he served as an investment banker
with Kidder, Peabody & Company. Mr. Glass is a director of Cadus Pharmaceutical
corporation, a biotechnology research company; Global Discount Travel Services
LLC, an internet travel reservations company; and the A.G. Spanos Corporation, a
privately held national real estate development company and owner of the NFL San
Diego Chargers. Mr. Glass received his B.A. from Princeton University and an
M.B.A. from the Stanford University Graduate School of Business.
Martin Hirsch. Effective December 1, 1998, Mr. Hirsch was appointed to
the Board of Directors of NEG. Mr. Hirsch has served as a Vice President of
American Property Investors since March 18, 1991 where he is involved in
investing, managing and disposing of real estate properties and securities. From
January 1986 to January 1991, he was at Integrated Resources, Inc. as a Vice
President and where he was involved in the acquisition of commercial real estate
properties and asset management. From 1985 to 1986, he was a Vice President of
Hall Financial Group where he was involved in acquiring and financing commercial
and residential properties. Mr. Hirsch received his M.B.A. from The Emory
University Graduate School of Business.
Robert H. Kite. Effective December 17, 1990, Mr. Kite was appointed a
Director of NEG. From November 1987 until June 11, 1991, Mr. Kite served as a
Director of VP. Since 1980, Mr. Kite has been President and Chief Operating
Officer of KFC, Ltd., a family-owned company with operations that include real
estate development, investments and medical MRI
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<PAGE> 39
clinics. He has also been Chief Executive Officer of Roamin' Korp., Inc. since
1982, which is engaged in the businesses of construction, recording, mining and
equity investments. Mr. Kite graduated from Southern Methodist University with a
B.S. degree in Psychology and Political Science.
Robert J. Mitchell. Effective August 29, 1996, Mr. Mitchell was
appointed, a Director of NEG. Mr. Mitchell is Chief Executive Officer of ACF
Industries Inc., has served as Senior Vice President -- Finance of such company
from March 1995 to the present and was Treasurer from December 1984 to March
1995. Mr. Mitchell has also served as President and Treasurer of ACF Industries
Holdings Inc. since August 1993 and as Vice President, Liaison Officer of Icahn
& Co., Inc. since November 1984. From 1987 to January 1993, Mr. Mitchell served
as Treasurer of TransWorld Airlines, Inc. and was the Treasurer of TransWorld
Airlines, Inc. when it filed for reorganization under Chapter 11 of the United
States Bankruptcy Code, as amended, in January 1992. Mr. Mitchell is also a
director of Cadus Pharmaceutical Corporation, a NASDAQ National Market listed
pharmaceutical company.
Jack G. Wasserman. Effective December 1, 1998, Mr. Wasserman was
appointed to the Board of Directors of NEG. Mr. Wasserman is a senior partner of
Wasserman, Schneider, Babb and Reed, a New York law firm, and has been a partner
of that firm and its predecessors since 1966. Mr. Wasserman is admitted to
practice before the Supreme Court of the United States and in the states of New
York, Florida and the District of Columbia. He serves as a Director of American
Property Investors, Inc., the general partner of American Real Estate Partners,
L.P. whose units are traded on the New York Stock Exchange, and Cadus
Pharmaceutical Corporation whose shares are traded on the NASDAQ National
Market. Mr. Wasserman holds a B.A. degree from Adelphi University, a J.D. degree
from Georgetown University, and a Graduate Diploma from the Johns Hopkins
University School of Advanced International Studies in Bologna, Italy.
Philip D. Devlin. Effective March 1, 1997, Mr. Devlin was appointed
Vice President and General Counsel of NEG and, effective March 20, 1997, the
Board of Directors appointed him Secretary of NEG. From September 1984 to
October 1994, Mr. Devlin served as Executive Vice President, General Counsel and
Secretary for Sunrise Energy Services, Inc., a publicly-held natural gas
marketing company. From October 1994 through February 1997, Mr. Devlin acted as
President and Chief Executive Officer of Sunrise Energy Services, Inc. In July
1995, Sunrise Energy Services, Inc. filed to reorganize under Chapter 11 of the
Bankruptcy Code, and in February 1997 a Plan of Reorganization was confirmed.
Mr. Devlin is licensed by the State Bar of Texas, admitted to practice before
the Supreme Court of the United States and is a past President and Director of
the Natural Gas and Electric Power Association of North Texas. Mr. Devlin holds
a B.A. degree and an M.A. degree from the University of California and J.D.
degree with honors from California Western School of Law, San Diego, California.
R. Kent Lueders. Effective April 13, 1998, Mr. Lueders was appointed
Director of Corporate Development and in September 1998 was made a Vice
President of NEG. From 1996 to 1998, Mr. Lueders was Manager of Acquisitions for
Merit Energy. From 1994 to 1996, Mr. Lueders worked as a consulting evaluation
engineer for RK Engineering. Prior to this
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<PAGE> 40
Mr. Lueders was the Product Line Manager with Munro Garrett International from
1993 to 1994. From 1982 to 1993, Mr. Lueders was Manager of Engineering Services
for Pacific Enterprises Oil Company (USA) where he managed NEG reserves, budget
and engineering systems. Mr. Lueders began his career with Amoco Production
Company in 1979 as an engineer working East and West Texas. He received a B.S.
degree in Petroleum Engineering from the University of Missouri at Rolla in
1979.
Melissa H Rutledge. Effective August 15, 1994, Ms. Rutledge was
appointed Controller and Chief Accounting Officer of NEG and in December 1997
was made a Vice President of NEG. From September 1990 to August 1994, Ms.
Rutledge was a Senior Auditor for Ernst & Young LLP in Dallas. Ms. Rutledge
received her B.B.A. degree in Accounting from Texas Tech University and is
currently licensed as a CPA in the State of Texas.
F. EXECUTIVE COMPENSATION
1. CASH COMPENSATION
The following tables set forth the cash compensation received by NEG's
Chief Executive Officer and each of the next four most highly compensated
executive officers of NEG whose cash compensation exceeded $100,000 for the
fiscal year ended December 31, 1999, and whose base salary plus bonus equaled or
exceeded $100,000. Such tables also include option grants in the last fiscal
year for such officers and aggregate option/SAR exercises during the last fiscal
year and year-end option/SAR values.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS
--------------------------
RESTRICTED ALL
ANNUAL STOCK SECURITIES OTHER
COMPENSATION (1) AWARDS UNDERLYING COMPENSATION
---------------------------
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($) OPTIONS(2) ($)
--------------------------- ---- --------- -------- ----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Bob G. Alexander 1999 $278,843 -- -- -- $112,500(4)
President and Chief 1998 148,910 -- -- 37,500 --
Executive Officer(3) 1997 148,645 -- -- -- --
Jim L. David 1999 132,290 -- -- -- 197,000(5)
Assistant to the President 1998 105,000 -- -- -- --
1997 132,500 $35,000 -- 75,000 --
Philip D. Devlin 1999 178,825 -- -- -- --
Vice President, 1998 193,882 -- -- -- --
General Counsel(6) 1997 137,500 25,000 203,500(7) 60,000 50,885(8)
Melissa H. Rutledge 1999 111,515 -- -- -- --
Vice President, Controller 1998 107,000 -- -- -- --
and Chief Accounting 1997 80,000 15,000 -- 30,000 --
Officer(7)
R. Kent Lueders 1999 118,825 -- -- -- --
Vice President, Corporate 1998 80,556 -- -- 25,000 --
Development(10) 1997 -- -- -- -- --
</TABLE>
40
<PAGE> 41
(1) Excludes the aggregate, incremental cost to NEG of perquisites and
other personal benefits, securities or property, the aggregate amount
of which, with respect to the named individual, does not equal or
exceed the lesser of $50,000 or 10% of reported annual salary and bonus
for such person.
(2) All options granted since June 1996 were granted pursuant to the 1996
Incentive Compensation Plan, which was approved by the shareholders
June 4, 1996 and registered by NEG on December 5, 1997. All previous
options had been registered by NEG prior to January 1, 1997.
(3) Effective November 23, 1998, Mr. Alexander was appointed President and
Chief Executive Officer of NEG.
(4) Mr. Alexander was paid $112,500, the amount remaining on his Consulting
Agreement with NEG pursuant to the acquisition of Alexander Energy, as
partial compensation for his appointment as NEG's President and Chief
Executive Officer in November 1998.
(5) Mr. David's employment with NEG was terminated July 31, 1998, and these
amounts were paid pursuant to a Separation Agreement with NEG. Mr.
David was subsequently rehired by NEG on December 1, 1998 as an
assistant to the President.
(6) Effective March 1, 1997, Mr. Devlin was appointed Vice President and
General Counsel of NEG.
(7) Mr. Devlin was granted 50,000 shares of NEG's common stock during 1997,
which was subsequently registered and had a market value of $203,500 as
of December 31, 1997.
(8) Mr. Devlin earned $50,885 as consulting fees from NEG during 1997 prior
to joining NEG as an employee and officer.
(9) Effective December 4, 1997, Ms. Rutledge was appointed Vice President
of NEG and has served as its Controller and Chief Accounting Officer
since August 1994.
(10) Mr. Lueders was employed by NEG April 13, 1998 and effective September
2, 1998, Mr. Lueders was appointed Vice President, Corporate
Development of NEG.
2. STOCK OPTIONS/GRANTS
NEG did not make any stock options or grants in 1999.
41
<PAGE> 42
3. OPTION EXERCISES/VALUES
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL OPTIONS AT FISCAL
SHARES YEAR-END (#) YEAR-END ($)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- ---- ------------- ------------ ----------------- --------------------
<S> <C> <C> <C> <C>
Bob G. Alexander(2)............ -- -- 75,000/0 --
Jim L. David(2)................ -- -- 105,000/0 --
Philip D. Devlin(2)............ -- -- 60,000/0 $0/$0
Melissa H. Rutledge(2)......... -- -- 70,000/0 $0/$0
R. Kent Lueders(2)............. -- -- 12,500/12,500 $0/$0
</TABLE>
(1) Based on the closing price of NEG's common stock at December 31, 1999
of $0.03 per share.
(2) These individuals did not exercise any options during 1999.
NEG does not have any long-term incentive plans or defined benefit or
actuarial plans. Therefore, the tables on long-term incentive plan awards and
pension plans are omitted.
4. EMPLOYEE STOCK PURCHASE PLAN
NEG has an Employee Stock Purchase Plan (the "Plan") pursuant to
Section 423(b) of the United States Internal Revenue Code of 1986, as amended.
Pursuant to the Plan, all Eligible Participants may participate in each
semi-annual offering in an amount of not less than 1% or more than 1O% of his
or her base pay in effect as of the Offering Commencement Date of each offering.
At the end of each offering, the employee shall be entitled to purchase stock of
NEG from the payroll deductions through the Offering Period at a price equal to
the lower of:
(a) 85% of the closing price of the stock on the Offering
Commencement Date or the nearest prior business day on which
trading occurred on the NASDAQ National Market System; or
42
<PAGE> 43
(b) 85% of the closing price of the stock on the Offering
Termination Date or the nearest prior business day on which
trading occurred on the NASDAQ National Market System; or
(c) if the Common Stock of NEG is not admitted to trading on any
of the aforesaid dates for which closing prices of the stock
are to be determined, then reference shall be made to the fair
market value of the stock on that date, as determined on such
basis as shall be established or specified for purposes of the
offering by the Board of Directors.
During 1999, as a result of the pendency of the Chapter 11 Cases, no employees
participated in NEG's Stock Purchase Plan.
5. COMPENSATION OF DIRECTORS
NEG compensates non-employee Board of Directors members in the amount
of $1,000 for each official Board of Directors' meeting and $500 for each Board
of Directors' committee meeting unless such committee meeting is held at the
time of, or in conjunction with, an official Board of Directors' meeting. In
addition, members of the Board of Directors have been granted stock options in
past years. During 1999, no stock options were granted to directors.
Incorp Inc. (which acts as a petroleum consultant and independent oil
and gas producer) and an affiliated company of former Director, Mr. Norman
Miller, was paid $35,000 for consulting services rendered to NEG by Mr. Miller
during 1998, but no payments were made in 1999. Pursuant to an agreement
effective as of November 11, 1994, Mr. Miller was entitled to receive $500 for
each day he worked on Company matters. Incorp Inc. terminated its relationship
with NEG on December 7, 1998, and Mr. Miller resigned from the Board of
Directors effective February 10, 1999.
Upon consummation of the Alexander merger, Mr. Bob G. Alexander entered
into a consulting agreement with NEG for a term running from September 1996 to
September 1999 at a compensation level of $150,000 per year. Effective November
23, 1998, Mr. Alexander was appointed President and Chief Executive Officer of
NEG at an annual salary of $250,000 per year. In January 1999, Mr. Alexander was
paid the outstanding amount of $112,500 due under his consulting agreement as
partial compensation for his appointment as NEG's President and Chief Executive
Officer.
In addition, NEG pays other incidental compensation to executive
officers and directors from time to time, consisting primarily of health
insurance and reimbursement for travel and entertainment expenses on behalf of
NEG.
43
<PAGE> 44
6. EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND
CHANGE-IN-CONTROL ARRANGEMENTS
In January 1996, NEG executed an employment agreement with Melissa H.
Rutledge, Vice President, Controller and Chief Accounting Officer, which has a
term of three years from the effective date of a "change in control" of NEG. In
March 1997 and April 1998, respectively, NEG executed a similar employment
agreement with each of Philip D. Devlin, Vice President, General Counsel and
Secretary and R. Kent Lueders, Vice President, Corporate Development, (together
with Ms. Rutledge's employment agreement, the "Employment Agreements"). The
Employment Agreements each provide that the three-year term will continuously
roll over (so that at any time during the term of such agreements there is a
remaining term of three years, but in no event beyond the time the executive
and/or officer reaches age 65).
The Employment Agreements define the "change in control" to have
occurred when (i) a person, entity or group becomes the beneficial owner of a
majority of the securities of NEG ordinarily having the right to vote for
election of directors, (ii) during any consecutive two year period, the
directors at the beginning of the period (together with directors approved by a
vote of 66 2/3% of such initial directors plus directors previously approved by
such 66 2/3% margin) cease to constitute a majority of NEG's Board of Directors,
(iii) any sale, lease, exchange or transfer of all, or substantially all, of
NEG's assets occurs, or (iv) a merger or consolidation occurs with the effect
that any person, entity or group, or the shareholders thereof, become the owner
of securities of the surviving corporation representing a majority of the voting
power of such surviving corporation for the election of directors.
The Employment Agreements provide for a three year employment term
during which the executive and/or officer receives for each year (i) 100% of the
average of the executive's annual base salary at the time in question and the
executive's annual base salary for each of the preceding two years, and (ii)
100% of the average of the bonuses paid to the executive and/or officer for each
of the preceding three fiscal years. If the executive and/or officer is
discharged without cause or resigns for "good reason" (as defined therein) after
a change in control, then in lieu of the compensation described in the preceding
sentence, the executive and/or officer is entitled to a lump sum cash severance
payment equal to three times the sum of (a) the executive's annual base salary
then in effect, (b) the average of cash bonuses for each of the three previous
years, and (c) the average of fully-vested contributions to retirement plans for
such executive and/or officer for each of the three preceding years. In
addition, at such time, all options and all other retirement or pension
contributions or benefits become fully vested and remain fully exercisable for
360 days.
Pursuant to an agreement with NEG dated December 3, 1998, each of Ms.
Rutledge, Mr. Devlin and Mr. Lueders agreed to terminate their existing
Employment Agreements; provided that no court (including the bankruptcy court)
reduces or dismisses any of the Severance Pay Benefits (described below)
available to such executives pursuant to NEG's Severance Policy.
In addition to the Employment Agreements discussed above, NEG entered
into an employment agreement with Jim L. David in March 1997, then Vice
President, Exploration for a
44
<PAGE> 45
two-year term, commencing with the date of consummation of the merger of NEG
with Alexander Energy Corporation. Under such agreement, in the event Mr. David
resigned for a good reason after a "change of control" as defined above, or upon
the discharge of Mr. David without cause during the employment term, Mr. David
would receive severance benefits equal to the sum of (i) his annual base salary
then in effect, (ii) his last annual cash bonus and (iii) the average retirement
plan contributions by NEG on his behalf on a fully vested basis for the last two
fiscal years, multiplied by three (3). Mr. David would also have all stock
options previously granted to him become fully vested and exercisable for a
three-year period (360 days) following termination. Mr. David's Employment
Agreement was terminated in July, 1998 and the benefits payable under this
Employment Agreement were paid and made a part of his separation agreement.
Effective December 1, 1998, Mr. David was re-employed with NEG as an Assistant
to the President; however, he does not have a new employment agreement in
conjunction therewith.
G. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of the date of this Disclosure
Statement, the individuals or entities known to NEG to own more than 5% of NEG's
outstanding shares of capital stock.
45
<PAGE> 46
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER PERCENT
OF BENEFICIAL OWNER TITLE OF CLASS OF SHARES OF CLASS(1)
- ------------------- -------------- --------- -----------
COMMON STOCK
<S> <C> <C> <C>
Carl C. Icahn Common Stock 8,847,044(2) 19.2%
114 West 47th Street
19th Floor
New York, NY 10036
Kayne, Anderson Common Stock 4,414,068(3) 9.9%
Investment Management, Inc.
1800 Avenue of Stars
Suite 1424
Los Angeles, CA 90067
Croft-Leominster, Inc. Common Stock 2,161,710(4) 5.3%
207 E. Redwood St.
Suite 802
Baltimore, MD 21202
SERIES B PREFERRED STOCK
Kayne, Anderson Investment Series B Preferred 38,687(5) 100%
Management, Inc. Stock
1800 Avenue of Stars
Suite 1424
Los Angeles, CA 90067
Arbco Associates, L.P. Series B Preferred 13,928(5) 36%
1800 Avenue of Stars Stock
Suite 1424
Los Angeles, CA 90067
Offense Group Associates, L.P. Series B Preferred 11,607(5) 30%
1800 Avenue of Stars Stock
Suite 1424
Los Angeles, CA 90067
Kayne, Anderson Non- Series B Preferred 10,832(5) 28%
Traditional Investments, L.P. Stock
1800 Avenue of Stars
Suite 1424
Los Angeles, CA 90067
</TABLE>
46
<PAGE> 47
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER PERCENT
OF BENEFICIAL OWNER TITLE OF CLASS OF SHARES OF CLASS(1)
- ------------------- -------------- --------- -----------
<S> <C> <C> <C>
Opportunity Associates L.P. Series B Preferred 2,320(5) 6%
1800 Avenue of Stars Stock
Suite 1424
Los Angeles, CA 90067
SERIES C PREFERRED STOCK
Kayne, Anderson Investment Series C Preferred 23,000(6) 100%
Management, Inc. Stock
1800 Avenue of Stars
Suite 1424
Los Angeles, CA 90067
Arbco Associates, L.P. Series C Preferred 8,280(6) 36%
1800 Avenue of Stars Stock
Suite 1424
Los Angeles, CA 90067
Offense Group Associates, L.P. Series C Preferred 7,240(6) 31%
1800 Avenue of Stars Stock
Suite 1424
Los Angeles, CA 90067
Kayne, Anderson Non- 6,100(6) 27%
Traditional Investments, L.P. Series C Preferred
1800 Avenue of Stars Stock
Suite 1424
Los Angeles, CA 90067
Opportunity Associates L.P. Series C Preferred 1,380(6) 6%
1800 Avenue of Stars Stock
Suite 1424
Los Angeles, CA 90067
SERIES D PREFERRED STOCK
Carl C. Icahn Series D Preferred 100,000(2) 100%
114 West 47th Street Stock
19th Floor
New York, NY 10036
</TABLE>
47
<PAGE> 48
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER PERCENT
OF BENEFICIAL OWNER TITLE OF CLASS OF SHARES OF CLASS(1)
- ------------------- -------------- --------- -----------
SERIES E PREFERRED STOCK
<S> <C> <C> <C>
Kayne, Anderson Investment Series E Preferred 9,500(7) 100%
Management, Inc. Stock
1800 Avenue of Stars
Suite 1424
Los Angeles, CA 90067
Foremost Insurance Company Series E Preferred 7,500(7) 79%
5230 33rd Street, S.E. Stock
Grand Rapids, Ml 49512
Topa Insurance Company Series E Preferred 2,000(7) 21%
c/o Kayne, Anderson Stock
Investment Management,
Inc.
1800 Avenue of Stars
Suite 1424
Los Angeles, CA 90067
</TABLE>
(1) Based upon the 40,527,482 shares of Common Stock, 38,687 shares of
issued and outstanding Series B Preferred Stock, 23,000 shares of
issued and outstanding Series C Preferred Stock, 100,000 shares of
issued and outstanding Series D Preferred Stock and 9,500 shares of
issued and outstanding Series E Preferred Stock that are outstanding as
of April 20, 1999. For each person or group, the percentages are
calculated on the basis of the amount of outstanding securities of the
particular class plus any securities that such person or group has the
right to acquire within 60 days 1999 pursuant to options, warrants,
conversion privileges or other rights.
(2) High River Limited Partnership, the record owner of these shares, is a
Delaware limited partnership, and has pledged these shares to lNG
Capital. Riverdale Investors Corp., Inc. is a Delaware corporation and
is the general partner of High River. Mr. Carl C. Icahn is the sole
stockholder and a director of Riverdale. Riverdale's principal business
address is 90 South Bedford Road, Mount Kisco, New York 10549, and Mr.
Icahn's principal business address is c/o Icahn Associates Corp., 114
West 47th Street, l9th Floor, New York, New York 10036. Gascon
Partners, a New York general partnership, an affiliate of Mr. Icahn,
High River and Riverdale holds warrants to purchase 300,000 shares of
Common Stock. High River also holds 700,000 warrants issued in August
1996 in connection with NEG's acquisition of and merger with Alexander
Energy Company. The ownership figures in the table assume that all the
shares of Series D Preferred Stock are converted and warrants for
1,000,000 shares of Common Stock are exercised. Riverdale and Mr.
Icahn, by virtue of their relationships to High River and Gascon, may
be deemed to beneficially own (as that term is defined in Rule 13d-3
under the Exchange Act) the shares which High River directly
beneficially owns and
48
<PAGE> 49
the shares which Gascon has warrants to purchase. Each of Riverdale and
Mr. Icahn disclaims beneficial ownership of such shares for all other
purposes. Mr. Robert J. Mitchell has been appointed a director of NEG
as the representative of the holders of the Series D Preferred Stock.
Mr. Mitchell does not have dispositive or voting power over any of the
shares owned by High River. Mr. Russell Glass and Mr. Martin Hirsch,
directors of NEG and affiliates of High River, disclaim any beneficial
ownership of these shares.
(3) Richard A. Kayne ("Kayne") is President, Chief Executive Officer and
Director of Kayne Anderson Investment Management Inc. ("KAIM") and of
KA Associates, Inc., a registered broker/dealer. KAIM is the general
partner of KAIM Non-Traditional, L.P. ("L.P."), registered investment
advisor, which is the general partner of and investment advisor to the
investment partnerships referred to in this footnote. Mr. Kayne is also
a limited partner in each investment partnership and a general partner
on one of them. Mr. Kayne and L.P. have shared dispositive and voting
power through investment partnerships for 38,687 shares of Series B
Preferred Stock, 23,000 shares of Series C Preferred Stock, and 9,500
shares of Series E Preferred Stock, which may be converted at anytime
into 2,380,738, 1,150,000 and 422,222 shares of Common Stock,
respectively, and for warrants to purchase 217,000 shares of Common
Stock. The percentage ownership figures in the table assume that all
shares of Series B Preferred Stock, Series C Preferred Stock and Series
E Preferred Stock are converted, the warrants to purchase 217,000
shares of Common Stock are exercised and 4,169,959 shares of Common
Stock are issued, and such shares are added to the shares of Common
Stock outstanding. Mr. Kayne disclaims beneficial ownership of the
shares held by the investment partnerships in excess of the amount
attributable to him by virtue of his direct interest as a limited or
general partner and by virtue of his indirect interest in L.P.'s
interest in the investment partnerships. L.P. disclaims beneficial
ownership of the shares held by the investment partnerships in excess
of the amount attributable to them by virtue of their percentage
interest in the investment partnerships.
(4) Croft-Leominster, Inc. the record owner of the shares, is a Maryland
corporation.
(5) Beneficial ownership of all the Series B Preferred Stock is attributed
to KAIM. For information on Richard A. Kayne, KAIM and L.P., see
footnote (3) above. Arbco Associates L.P. has shared dispositive and
voting power with Mr. Kayne, and L.P. of 13,928 shares of Series B
Preferred Stock, which is convertible at any time into 857,107 shares
of Common Stock. Offense Group Associates has shared dispositive and
voting power with Mr. Kayne, and L.P. for 11,607 shares of Series B
Preferred Stock, which is convertible at any time into 714,276 shares
of Common Stock. Kayne, Anderson Non-Traditional Investments has shared
dispositive and voting power with Mr. Kayne and L.P. for 10,832 shares
of Series B Preferred Stock, which is convertible at any time into
666,584 shares of Common Stock. Opportunity Associates L.P. has shared
dispositive and voting power with Mr. Kayne, and L.P. of 2,320 shares
of Series B Preferred Stock, which is convertible at any time into
142,769 shares of Common Stock.
(6) Beneficial ownership of all the Series C Preferred Stock is attributed
to KAIM. For information on Richard A. Kayne, KAIM and L.P., see
footnote (3) above. Arbco Associates
49
<PAGE> 50
L.P. has shared dispositive and voting power with Mr. Kayne, and L.P.
of 8,280 shares of Series C Preferred Stock, which is convertible at
any time into 414,000 shares of Common Stock. Offense Group Associates
has shared dispositive and voting power with Mr. Kayne, and L.P. for
7,240 shares of Series C Preferred Stock, which is convertible at any
time into 362,000 shares of Common Stock. Kayne, Anderson
Non-Traditional Investments has shared dispositive and voting power
with Mr. Kayne, and L.P. for 6,100 shares of Series C Preferred Stock,
which is convertible at any time into 305,000 shares of Common Stock.
Opportunity Associates L.P. has shared dispositive and voting power
with Mr. Kayne, and L.P. for 1,380 shares of Series C Preferred Stock,
which is convertible at any time into 69,000 shares of Common Stock.
(7) Beneficial ownership of all the Series E Preferred Stock is attributed
to KAIM, except with respect to Foremost Insurance Company which owns
7,500 shares of Series E Preferred Stock (convertible at any time into
333,333 shares of Common Stock) and warrants for 105,000 shares of
Common Stock. Topa Insurance Company has dispositive and voting power
for 2,000 shares of Series E Preferred Stock, which is convertible at
any time into 88,888 shares of Common Stock and warrants for 28,000
shares of Common Stock.
H. SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information concerning the
beneficial ownership of NEG's capital stock as of March 1, 2000 by
each of NEG's present directors and executive officers and certain
other parties, and the directors and executive officers of NEG as
a group, all as reported by each such person as of March 1, 2000.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER PERCENT
OF BENEFICIAL OWNER TITLE OF CLASS OF SHARES OF CLASS(1)
- ------------------- -------------- --------- -----------
<S> <C> <C> <C>
Bob G. Alexander Common Stock 475,002(2) 1.2%
4925 Greenville Avenue
Suite 1400
Dallas, TX 75206
Robert H. Kite Common Stock 518,955(3) 1.3%
2722 N. 7th Street
Phoenix, AZ 85006
Jim L. David Common Stock 5l2,889(4) 1.3%
4925 Greenville Avenue
Suite 1400
Dallas, TX 75206
R. Kent Lueders Common Stock 212,500(5) ______(6)
4925 Greenville Avenue
Suite 1400
Dallas, Texas 75206
</TABLE>
50
<PAGE> 51
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER PERCENT
OF BENEFICIAL OWNER TITLE OF CLASS OF SHARES OF CLASS(1)
- ------------------- -------------- --------- -----------
<S> <C> <C> <C>
Philip D. Devlin Common Stock 166,473 (7) ______(6)
4925 Greenville Avenue
Suite 1400
Dallas, TX 75206
Melissa H. Rutledge Common Stock 81,800 (8) ______(6)
4925 Greenville Avenue
Suite 1400
Dallas, TX 75206
Robert J. Mitchell Common Stock 50,000 (9) ______(6)
767 Fifth Avenue
New York, NY 10153
Jack G. Wasserman Common Stock _____(10) ______(6)
111 Broadway
New York, NY 10006
Russell D. Glass Common Stock _____(11) ______(6)
767 Fifth Avenue
New York, NY 10153
Martin Hirsch Common Stock _____(12) ______(6)
767 Fifth Avenue
New York, NY 10153
All officers and directors as Common Stock 2,017,619(14) 5.0%
a group (10 people)
All officers and directors Series B Preferred _____ ______
as a group (10 people) Stock
All officers and directors Series C Preferred _____ ______
as a group (10 people) Stock
All officers and directors Series D Preferred _____ ______
as a group (10 people) Stock
All officers and directors Series E Preferred _____ ______
as a group (10 people) Stock
</TABLE>
(1) As of March __, 2000 there were 40,527,482 shares of NEG's common
stock outstanding.
51
<PAGE> 52
(2) Includes 340,000 shares held directly by Mr. Alexander and 60,002
shares owned by Mr. Alexander's wife, Donna Ports Alexander, and
immediately exercisable options to purchase 75,000 shares. Mr.
Alexander disclaims any beneficial interest in the shares owned by his
wife.
(3) Robert H. Kite is Chief Operating Officer and a 33.0% beneficial owner
of KFT, Ltd. and may be deemed to be the beneficial owner of shares
held by KFT, Ltd. KFT, Ltd. holds 176,297 shares and Mr. Kite holds
257,658 shares directly and immediately exercisable options to purchase
85,000 shares.
(4) Includes 407,889 shares held directly by Mr. David and immediately
exercisable options to purchase 105,500 shares.
(5) Includes 200,000 shares held directly by Mr. Lueders and immediately
exercisable options to purchase 12,500 shares, but does not include
options to purchase 12,500 shares which are not yet exercisable.
(6) Less than one percent.
(7) Includes 106,473 shares of Common Stock held directly by Mr. Devlin and
immediately exercisable options to purchase 60,000 shares.
(8) Includes 11,800 shares held directly by Ms. Rutledge and immediately
exercisable options to purchase 70,000 shares.
(9) Includes immediately exercisable options to purchase 50,000 shares, and
Mr. Mitchell disclaims any beneficial ownership of stock attributable
to High River.
(10) Mr. Wasserman holds no stock or options of NEG.
(11) Mr. Glass holds no stock or options of NEG and disclaims beneficial
ownership of any stock attributable to High River.
(12) Mr. Hirsch holds no stock or options of NEG and disclaims beneficial
ownership of any stock attributable to High River.
(13) Includes a total of 1,560,119 shares held directly or indirectly by the
executive officers and directors and options and warrants to purchase
457,500 shares which are immediately exercisable or exercisable within
60 days.
Under the terms of the Series D Preferred Stock, a change in control of
NEG may occur if any of the events occur that trigger the Series D
Preferred Stock Contingent Voting Rights (as defined) to elect one-half
of the Board of Directors plus one member and if such rights are
exercised by such holder. The Bankruptcy Court's entry of the Order for
Relief on February 11, 1999 gives rise to the Series D Preferred
stockholder to exercise its right to control NEG's Board of Directors.
To date, the Series D Preferred
52
<PAGE> 53
Stockholder has not exercised such right. However, Messrs. Mitchell,
Glass and Hirsch are affiliated with the Series D Preferred
Stockholder.
VI. THE CHAPTER 11 CASES
A. FACTORS LEADING TO CHAPTER 11 FILING
Due to the significant decline in oil prices in 1998, coupled with
unfavorable revisions in estimates of oil and gas reserves during the year, NEG
experienced disappointing operating results in 1998. The revenues generated by
NEG's operations are highly dependent upon the prices of, and demand for, oil
and natural gas. The price received by NEG for its oil and natural gas
production depends on numerous factors beyond NEG's control, including seasonal
price fluctuation, the condition of the U.S. economy, foreign imports, political
conditions in other oil- and natural-gas-producing countries, the actions of the
Organization of Petroleum Exporting Countries and domestic governmental
regulations, legislation and policies. Declines during 1998 in the prices of oil
and gas had a material adverse effect on the carrying value of NEG's oil and gas
properties and NEG's revenues, profitability and cash flows.
B. COMMENCEMENT OF THE CHAPTER 11 CASES
On December 4, 1998, certain holders of the Bonds filed an Involuntary
Petition against NEG for an order for relief under chapter 11 of Bankruptcy Code
in the Bankruptcy Court, due to nonpayment of interest due December 2, 1998,
after expiration of a 30-day grace period. On December 23, 1998, NEG filed, in
the Bankruptcy Court, an Answer to and Motion to Dismiss the pending Involuntary
Petition. NEG's Motion affirmed that it (i) was meeting its obligations and
generally paying its debts as they become due, unless such debts were the basis
of a bona fide dispute and (ii) had arranged with the lender under its credit
facility to borrow additional funds sufficient to pay the interest due on the
Bonds, conditioned upon the Bankruptcy Court's dismissal of the Involuntary
Petition. However, on February 8, 1999, the Bankruptcy Court denied NEG's Motion
to Dismiss the Involuntary Petition. On February 11, 1999, the Bankruptcy Court
entered an order for relief with respect to NEG, and BMC filed a voluntary
petition for relief under chapter 11.
C. SIGNIFICANT EVENTS SINCE COMMENCEMENT OF CHAPTER 11 CASES
1. CONTINUATION OF DEBTORS' BUSINESS
Since the Relief Date, the Debtors have continued to operate their
business and manage their properties as debtors in possession. Due to the
chapter 11 filing, NEG has suspended its exploratory drilling program. NEG has
limited its capital expenditures to ordinary course enhancement of current
production through workovers, recompletions, and other production enhancing
activities deemed to be economic given current oil and gas prices. Development
drilling has been limited to (i) ordinary course non-operated wells in which NEG
owns limited working interests and in which the failure to participate may
result in drainage, depletion or loss of current reserves and (ii) operated
wells deemed to be economical given current oil and gas
53
<PAGE> 54
prices. Large expenditures for developmental drilling may require court
approval, and none are planned at this time.
2. STAY OF LITIGATION
An immediate effect of the filing of a bankruptcy case is the
imposition of the automatic stay under the Bankruptcy Code, which, with limited
exceptions, enjoins the commencement or continuation of all litigation against
the Debtors. This injunction will remain in effect until the Effective Date
unless otherwise modified by the order of the Bankruptcy Court.
3. OPERATING ORDERS
On February 11, 1999, upon entry of the order for relief with respect
to NEG and commencement of the voluntary case with respect to BMC, the Debtors
obtained a number of orders, supported by motions and applications, to authorize
the continued day-to-day operations of the Debtors. These orders included, among
others, (i) an order authorizing the maintenance of business forms and bank
accounts, (ii) an order to pay prepetition wages, reimbursable employee expenses
and employee benefits, (iii) an order to maintain utility services, (iv) an
order authorizing payment of certain critical vendors, (v) an order authorizing
the use of cash collateral, and (vi) an order authorizing the joint
administration of the Chapter 11 Cases.
4. APPOINTMENT OF COMMITTEE
The Committee was originally appointed on February 19, 1999, by the
United States Trustee. The Committee selected the law firm of Andrews & Kurth,
L.L.P. to represent it in the Chapter 11 Cases.
5. REPRESENTATION OF THE DEBTORS
(a) Reorganization Counsel
In July 9, 1999, the Bankruptcy Court entered an order authorizing the
Debtors to engage the law firm of Neligan, Andrews, Bryson & Foley, L.L.P.
(formerly known as Neligan & Averch, L.L.P.) as reorganization counsel in the
Chapter 11 Cases. The firm replaced Weil, Gotshal & Manges, L.L.P. as the
Debtors' reorganization counsel.
(b) Financial Advisors/Accountants
On February 11, 1999, the Debtors filed an application to retain
PricewaterhouseCoopers ("PwC") as their financial advisors. On February 11,
1999, the Debtors filed an application to retain Ernst & Young as their
accountants. On February 24, 1999, the Bankruptcy Court entered an interim order
authorizing the Debtors' retention of PwC, and on March 9, 1999, the Bankruptcy
Court entered an order authorizing the Debtors retention of Ernst & Young. On
June 29, 1999, the Court entered an order expanding the employment of PwC.
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(c) Labor, Corporate and Securities Counsel
On February 11, 1999, the Debtors filed an application to retain, the
law firm of Akin, Gump, Strauss, Hauer & Feld, L.L.P. ("Akin Gump") as special
counsel for labor, corporate, and securities matters. On March 18, 1999, the
Bankruptcy Court entered an order authorizing the Debtors' retention of Akin,
Gump.
(d) Official Claims Administrator
On February 11, 1999, the Debtors filed an application to retain
Poorman-Douglas Corporation to act as the official claims administrator of these
Estates. On March 1, 1999, the Bankruptcy Court entered an order authorizing the
employment of Poorman-Douglas for the limited purpose of mailing notice of
commencement of cases pursuant to section 341 of the Bankruptcy Code.
6. TERMINATION OF EXCLUSIVITY AND FILING OF COMMITTEE PLAN
On April 2, 1999, the Committee filed a motion to terminate the
Debtors' exclusive right to file a plan of reorganization pursuant to section
1121 of the Bankruptcy Code. As a hearing conducted on April 22, 1999, the
Bankruptcy Court entered an order granting the motion in part and denying it in
part. The Bankruptcy Court's order required both the Debtors and the Committee
to file a comprehensive summary plan of reorganization by the close of business
on Monday, May 24, 1999. The Debtors did not file a plan of reorganization
within the exclusive period for doing so; therefore, the exclusive period has
expired.
On February 28, 2000, the Committee filed with the Bankruptcy Court a
joint disclosure statement and proposed plan of reorganization (the "Committee
Plan"). The Committee Plan provides for (i) the possibility of a limited
continuation of NEG's oil and gas business operations; (ii) the creation of a
creditors' trust to which would be transferred substantially all of the cash and
cash equivalents remaining in NEG, the funds held in the registry of the
Bankruptcy Court from the auction of NEG's properties, and all causes of action
for the payment and primary benefit of certain allowed administrative, tax,
priority and miscellaneous secured and unsecured creditors; and (iii) payment in
full of the Arnos Secured Claim in the amount of $25 million, plus interest as
may be due.
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7. MARKETING AND SALE OF DEBTORS' ASSETS
On August 4, 1999, NEG and the Committee appeared before the Bankruptcy
Court and announced agreement on the process for marketing NEG and/or its
assets. The Bankruptcy Court entered an order which provided that NEG and the
Committee would employ CIBC World Markets Corp. ("CIBC") to solicit bids for
sale of NEG and/or its assets. NEG assisted CIBC in assembling a data room for
potential bidders to view information regarding NEG's assets. CIBC marketed
NEG's assets pursuant to procedures approved by NEG, the Committee, and the
Bankruptcy Court. In addition, the Bankruptcy Court approved the retention of
Netherland, Sewell & Associates, Inc. to (i) complete its reserve evaluation of
NEG's oil and natural gas properties as of December 31, 1998; (ii) update the
reserve evaluation as of July 1, 1999; and (iii) provide assistance to NEG,
CIBC, and prospective buyers during the marketing process.
The marketing process culminated in an auction conducted by the
Bankruptcy Court on November 1, 1999. At the auction, bidding on the bulk
properties, without Lake Mongoulois and Mustang Island, ultimately ended at a
high bid of $96.25 million given by Arnos, an affiliated subsidiary of NEG's
Series D preferred stockholder. The Committee, after review, concluded that it
would recommend to the Court that it accept the high bid of $96.25 million. The
Bankruptcy Court signed an order accepting Arnos as the highest bidder on
November 16, 1999. Arnos filed a motion to close the Purchase and Sale Agreement
(the "Arnos PSA") into escrow pending the Bankruptcy Court's approval of either
(i) a plan of reorganization or (ii) a closing of the sale of the properties to
Arnos. The Bankruptcy Court approved this motion and ordered Arnos to pay into
the Bankruptcy Court's registry the sum of $61.25 million, which equals the
purchase price of $96.25 million less the previously escrowed deposit of $9.625
million and the principal balance of $25 million outstanding under the Arnos
credit facility.
8. SEVERANCE PROGRAM
Pursuant to an agreed order between NEG and the Committee, the
Bankruptcy Court entered an order (the "Severance Order") on September 7, 1999,
approving a severance program (the "Severance Program") for NEG's employees. The
Severance Program provides for contingent payments as follows: (a) a "stay-pay"
component payable on the earlier of an employees termination without cause; the
closing of a sale of substantially all NEG's assets or the confirmation of a
Plan of Reorganization; and (b) a "severance" component, whereby upon
termination any employee who does not obtain new employment, or is not offered a
permanent job in Dallas, Texas for a period of at least one year at the same pay
and benefits provided by NEG, shall be entitled to certain severance benefits.
The Severance Order also provided that any employee who participates in the
Severance Program waives and releases any and all claims arising from any
current employment agreement with NEG.
Effective October 1, 1999, each of Ms. Rutledge, Mr. Devlin and Mr.
Lueders agreed to participate in the Severance Program and void their employment
agreements, provided that all benefits described in the Severance Program are
paid to each, respectively, as prescribed. The Severance Order further provided
that Mr. Alexander and Mr. Devlin would not be entitled to any payments under
the Severance Program until the earlier of (i) confirmation of a plan of
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reorganization, (ii) conversion to a chapter 7 bankruptcy proceeding, or (iii)
termination of their employment by a trustee appointed by the Bankruptcy Court.
Payments under this program could be approximately $2 million if both
the stay bonus and severance portions are paid in full.
VII. CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN
The following is a brief summary of certain federal income tax
consequences that holders of Claims and Equity Interests should consider. This
summary does not address all aspects of federal income taxation that may be
relevant to all persons considering the Plan. Special federal income tax
considerations not discussed in this summary may be applicable to, among other
persons, financial institutions, insurance companies, foreign corporations,
tax-exempt institutions and persons who are not citizens or residents of the
United States. In addition, this summary does not discuss the effect of any
foreign, state or local tax law, the effect of which may be significant.
This summary is based on the Internal Revenue Code of 1986, as amended
("IRC"), the regulations promulgated thereunder, judicial decisions, and
administrative positions of the Internal Revenue Service (the "Service"). All
section references in this summary are to sections of the IRC. Any change in the
foregoing authorities may be applied retroactively in a manner that could
adversely affect persons considering the Plan.
No ruling will be sought from the Service with respect to the federal
income tax aspects of the Plan and there can be no assurance that the
conclusions set forth in this summary will be accepted by the Service. No
opinion has been sought or obtained with respect to the tax aspects of the Plan.
THIS SUMMARY IS INTENDED FOR GENERAL INFORMATION ONLY. PERSONS
CONSIDERING THE PLAN ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS CONCERNING
THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE REORGANIZATION OF THE DEBTORS,
THE RECEIPT OF ANY PAYMENT UNDER THE PLAN, AND THE IMPACT ON THAT PERSON OR ANY
OTHER PERSON OF ANY OBLIGATION IMPOSED UNDER THE PLAN.
A. TAX CONSEQUENCES TO THE DEBTORS
1. DISCHARGE OF INDEBTEDNESS INCOME
The IRC generally provides that a debtor must include in income the
amount of discharge of indebtedness ("DOI") it realizes when a creditor accepts
less than full payment in satisfaction of its debt. The realized amount of DOI
is generally the difference between the amount of indebtedness and the amount
received by the creditor in exchange therefor. However, the IRC also provides in
Section 108(a) that DOI will not be included in the debtor's taxable income if
the debtor is under the jurisdiction of a court in a case under Title 11 of the
United States Code
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(related to bankruptcy) and the DOI is granted by the court or is pursuant to a
plan approved by the court. In the event IRC Section 108(a) excludes DOI from
the debtor's income, the debtor's tax attributes will be reduced by the amount
of DOI income so excluded. The tax attributes are generally reduced in a
prescribed order and include NOLs, general business credit carryovers, capital
loss carryovers and the tax basis of its assets. In the alternative, the debtor
may make an election to alter the order of attribute reduction such that the tax
basis of depreciable property would be reduced first.
Subject to the discussion below, the Debtors believe that they should
not (i) realize DOI or (ii) suffer a reduction in tax attributes with respect to
any Bondholder Claim because the Bonds will be purchased by Arnos and not
discharged by the Debtors. The Debtors will realize DOI with respect to any
other Claim that is discharged in connection with the Plan to the extent of the
difference between the amount of such Claim and the amount of consideration paid
to the respective holder pursuant to the Plan.
IRC Section 108(e)(4) provides that an acquisition of outstanding debt
by a person related to the debtor from a person unrelated to the debtor will be
treated as an acquisition by the debtor of the debt for purposes of determining
the amount of DOI realized by the debtor. Generally, a corporate acquiror and a
corporate debtor may be related if (in addition to certain additional
requirements) certain persons (actually or constructively) own, directly or
indirectly, more than 50% of the value of all outstanding stock of both
corporations or more than 50% of all classes of voting stock. In the event IRC
Section 108(e)(4) applies, the debtor will be treated as retiring the amount of
the debt acquired by the related person in exchange for the amount of
consideration paid by the related person for such debt. In such a case, the
debtor will realize, as DOI income, the difference between the deemed amount
retired and the consideration paid. To the extent applicable, IRC Section 108(a)
may then preclude recognition of such DOI income and require reduction of tax
attributes in the amount thereof.
Upon consummation of the Plan, Arnos affiliates will not own no more
than 50% of the voting classes of the Debtors or more than 50% of the value of
the stock of the Debtors. Accordingly, Arnos and the Debtors should not be
related within the meaning of IRC Section 108(e)(4). Even if Arnos and the
Debtors were related, any resulting DOI income to the Debtors should be excluded
from taxable income (but would reduce tax attributes) under IRC Section 108(a)
as discussed herein. The foregoing assumes that the Bonds constitute debt for
federal income tax purposes. If the Bonds were treated as exchanged for equity,
the Bonds would be deemed discharged and would result in DOI income to the
Debtors. In such a case, the DOI income should, in a manner similar to that
discussed below with respect to discharged Claims, be excluded from income under
IRC Section 108(a) and reduce tax attributes. While the Debtors believe that the
Bonds will constitute debt for federal income tax purposes upon consummation of
the Plan, there can be no assurance that the Service would agree with that
conclusion.
In the case of any discharged Claim with respect to which DOI is
realized by the Debtors, the DOI will be excluded from the Debtors' taxable
income because the discharge of such Claims will occur pursuant to the Plan as
approved by the Bankruptcy Court. As a result of the exclusion from income, the
NOLs of the Debtors will be reduced by the amount of the DOI.
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2. LIMITATION ON NET OPERATING LOSSES
Based on current available information, the total consolidated NOL
carryforward available with respect to the Debtors is approximately $100 million
as of December 31, 1999. A portion of these NOLs is limited as a result of an
ownership change that occurred with respect to the Debtors in 1996.
IRC Sections 382 and 383 provide that in the event of an "ownership
change" a loss corporation's ability to use its pre-change NOLs, tax credits and
certain built-in losses will be limited. An ownership change generally occurs
when the percentage of a corporation's stock owned by "5% shareholders" has
increased by more than fifty (50) percentage points over a testing period that
is generally three (3) years. If an ownership change occurs, the corporation's
annual use of its NOL carryovers (and certain built-in losses recognized during
the 5 years following the ownership change) is limited to the "Section 382
Limitation." The Section 382 Limitation is calculated as the value of the
corporation's equity immediately before the ownership change multiplied by the
applicable federal long-term tax-exempt rate (for example, for ownership changes
in March 2000, the rate is 5.84%). IRC Section 382 also provides however that,
in certain cases, a loss corporation may utilize additional pre-change NOLs if
the corporation is treated as having "built-in gains" in excess of certain
statutory thresholds.
A 5% shareholder is any person that holds five percent (5%) or more of
the stock of the corporation at any time during the testing period. Assuming
that the Bonds are debt for general federal income tax purposes, a holder of
Bonds will not be treated as a shareholder with respect to the Debtors (except
as discussed below). Accordingly, the Debtors believe that they will not incur
an ownership change as a result of the Plan. However, if the Bonds are treated
as exchanged for equity, an ownership change would result and the Debtors would
be subject to the Section 382 Limitation with respect to its NOLs and any other
tax attributes described above. While the Debtors believe that the Bonds will
constitute debt for federal income tax purposes upon consummation of the Plan,
there can be no assurance that the Service would agree with that conclusion.
However, the temporary treasury regulations under IRC Section 382
provide that an ownership interest in a corporation that is not stock will
nevertheless be treated as stock for purposes of IRC Section 382 if (i) at the
time of issuance or transfer to or by a 5% shareholder of such interest, such
interest offers a potential significant participation in the growth of the
corporation; (ii) treating such interest as stock would result in an ownership
change; and (iii) the amount of pre-change losses at such time exceeds twice the
Section 382 Limitation at such time. At the time of transfer of the Bonds to
Arnos, the Bonds may be viewed as offering a potential significant participation
in the growth of the Debtors. In such a case, the Bonds may be treated as stock
for purposes of IRC Section 382 and an ownership change would result. There can
be no assurance that the Bonds will be treated as debt under IRC Section 382.
Any shift (deemed or actual) in the ownership of stock of the Debtors,
directly or by attribution, outside the scope of the Plan may trigger (or may
have already triggered) the application of IRC Section 382 and other IRC
provisions which may affect the availability of the
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Debtors' NOLs. Because the federal income tax consequences of any shift would
depend on the particular facts and circumstances at such time and the
application of complex legislation and regulations, there can be no assurances
as to the effect of any transactions outside the scope of the Plan or the
survival of any NOLs or other carryovers. The charter and the bylaws of the
Reorganized Debtor will be amended to prohibit the transfer of any stock of the
Reorganized Debtor to or by any Person who is, was or would become as a result
of such transfer a 5% shareholder within the meaning of IRC Section 382.
3. ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK
No gain or loss will be recognized by the Debtors upon the receipt of
money in exchange for the issuance of additional shares of common stock of the
Reorganized Debtor to Arnos or its affiliate pursuant to the Plan.
4. ALTERNATIVE MINIMUM TAX
A corporation's federal income tax liability for a taxable year is
generally the greater of its regular income tax liability or its alternative
minimum tax ("AMT") liability (which is calculated at a 20% tax rate). The
regular corporate tax rate is applied to the corporation's regular taxable
income which may generally be offset by its available NOLs for the taxable year.
In contrast, in calculating alternative minimum taxable income ("AMTI"), NOLs
(as determined for these purposes) may not offset more than 90% of the pre-NOL
AMTI. Thus, if the Debtors have any AMTI, they will be required to pay tax at an
effective rate of 2% of such income (10% of the 20% AMT rate). In addition,
under IRC Section 59A, such AMTI (as adjusted by the rules therein) may be
subject to an environmental tax applicable at the rate of 0.12%.
B. TAX CONSEQUENCES TO HOLDERS OF EQUITY INTERESTS
Under the Plan, the holders of Class 14 Preferred Equity Interests and
Class 15 Common Equity Interests will retain their currently held interests.
Although the percentage ownership of the holders of these Equity Interests will
be diluted as a result of the issuance of additional shares of common stock of
the Reorganized Debtor to Arnos or an affiliate, no federal income tax
consequences are anticipated with respect to such holders as a result thereof.
C. TAX CONSEQUENCES TO HOLDERS OF CLAIMS
Generally, a holder of a Non-Arnos Bondholder Claim will recognize gain
or loss with respect to its Claim to the extent of the difference between the
amount of consideration paid by Arnos and the adjusted tax basis of the Claim. A
holder of any other Claim discharged by the Debtors under the Plan will
generally recognize gain or loss with respect to its Claim to the extent of the
difference between the consideration received by the holder and the adjusted tax
basis of the Claim. In both instances, the amount of the consideration is
generally the sum of any Cash and the fair market value of any property received
by the holder in exchange for the Claim. Subject to the discussion below, a
holder of a Claim will generally recognize capital gain or loss if the Claim was
a capital asset in the hands of such holder and as long-term or short-term gain
or
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loss depending generally on the length of time the Claim was held. However, gain
recognized by a holder of a Claim who acquired the Claim at a market discount
and who did not elect to include such discount in income currently will
generally be treated as recognizing ordinary income to the extent of any accrued
market discount with respect to such Claim.
With respect to any Allowed Non-Arnos Bondholder Claim, a portion of
the consideration received by a holder may be viewed as attributable to accrued
but unpaid interest. In that event, a holder would recognize ordinary income to
the extent that the consideration received is attributable to interest accrued
during the period the holder held the Allowed Non-Arnos Bondholder Claim and not
previously included in income. The gain (or loss) that a holder would otherwise
recognize with respect to its Claim would decrease (or increase) by the amount
of such recognized ordinary income. A holder that was previously required to
include interest income under its method of accounting would recognize a loss to
the extent that the consideration attributable to such interest is less than the
amount previously included in income by such holder. In the case of a cramdown
under Alternative B of the treatment of the Bondholder Claims, the Debtors
intend to treat the distribution of a beneficial interest in the Creditors'
Trust to a Bondholder as a payment of accrued interest.
THE FOREGOING IS INTENDED TO BE A SUMMARY ONLY AND IS NOT INTENDED AND SHALL NOT
CONSTITUTE A TAX OPINION, TAX ADVICE OR ANY REPRESENTATION OR FORM OF LEGAL
OPINION BY THE DEBTORS AND THEIR COUNSEL REGARDING THE TAX CONSEQUENCES OF
CONFIRMATION AND EXECUTION OF THE PLAN AS TO ANY HOLDER OF A CLAIM OR EQUITY
INTEREST WITH RESPECT TO THE DEBTORS. IT IS NOT A SUBSTITUTE FOR CAREFUL TAX
PLANNING OR CONSULTATION WITH A TAX ADVISOR. THE FEDERAL, STATE, LOCAL, AND
FOREIGN TAX CONSEQUENCES OF THE PLAN ARE COMPLEX AND, IN SOME CASES, UNCERTAIN.
SUCH CONSEQUENCES MAY ALSO VARY BASED UPON THE INDIVIDUAL CIRCUMSTANCES OF EACH
HOLDER OF A CLAIM OR EQUITY INTEREST. ACCORDINGLY, EACH HOLDER OF A CLAIM OR
EQUITY INTEREST IS STRONGLY URGED TO CONSULT SUCH HOLDER'S OWN TAX ADVISOR
REGARDING THE FEDERAL, STATE, LOCAL, AND FOREIGN TAX CONSEQUENCES OF THE PLAN.
VIII. LITIGATION
A. LITIGATION CLAIMS AGAINST NEG
The following is a description of the material litigation Claims
against NEG. Each of these Claims is provided specific treatment in the Plan.
1. BUCKLES V. NEG
Plaintiff filed suit as a putative class representative on September 5,
1997, in state court in Canadian County, Oklahoma, for allegedly due and unpaid
royalties. NEG filed its answer on September 29, 1997, with an offer of judgment
for $3,000. The plaintiff rejected the offer of
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judgment. Discovery is pending, and the hearing on class certification has been
delayed. Proceedings are stayed due to the pendency of the Chapter 11 Cases.
2. SOUTHERLAND V. NEG
Plaintiff filed suit on January 16, 1998, in state court in Harrison
County, Texas, asserting that NEG wells caused damage to the plaintiff's wells.
NEG filed an answer of denial on February 20, 1998. NEG believes that it is
insured for the amount of any loss. Discovery is stayed, and the parties are in
negotiations for a release of the plaintiff's claim. Proceedings are stayed due
to the pendency of the Chapter 11 Cases.
3. MILTON VAUGHN V. NEG AND EAGLE SERVICES
Plaintiff filed suit on February 10, 1998, in state court in Iberville
Parish, Louisiana, for injuries allegedly suffered in a fall. NEG's
insurance carrier is handling the defense, and NEG believes it is fully insured
for any loss in respect of such litigation. An answer was filed on April 2,
1998. Discovery is pending, and proceedings are stayed due to the pendency of
the Chapter 11 Cases.
4. LANDRY AND DUPREE V. EXXON, PANACO, NEG, ET AL.
Plaintiffs filed suit on August 21, 1998, in state court in Iberville
Parish, Louisiana, for unspecified damages and restoration costs associated with
an oil spill on the plaintiffs' property. Two of NEG's insurance carriers are
handling the defense, and NEG believes it is fully insured for any loss in
respect of such litigation. Discovery is pending. The state court has ordered
production of NEG's and Panaco's records regarding oil spills and remediation
efforts.
B. CAUSES OF ACTION TO BE TRANSFERRED TO THE CREDITORS' TRUST
1. AVOIDANCE ACTIONS
Section 547 of the Bankruptcy Code enables a debtor in possession to
avoid a transfer to a creditor made within ninety days before the petition date
(or within one year before the petition date in the case of a transfer to an
insider) if the transfer was made on account of an antecedent debt and enabled
the creditor to receive more than it would in a liquidation. A creditor has
defenses to the avoidance of such a preferential transfer based upon, among
other things, the transfer's occurring as part of the ordinary course of the
debtor's business or that, subsequent to the transfer, the creditor provided the
debtor with new value. Section 548 of the Bankruptcy Code allows a debtor in
possession to avoid a transfer to a creditor made within one year before the
petition date if (i) the transfer was made with actual intent to hinder, delay,
or defraud other creditors or (ii) the transfer was for less than reasonably
equivalent value and the debtor was insolvent or undercapitalized at the time of
the transfer or became insolvent or undercapitalized as a result of the
transfer.
The Debtors have begun their analysis of payments by the Debtors to
creditors prior to
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the Petition Date, to determine whether such payments may be avoidable as
preferential or fraudulent transfers. The Debtors are reviewing files containing
payment histories for all operating accounts of the Debtors for the period
September 5, 1998, though December 4, 1998. Based on the Debtors' analysis of
these records, it appears that the Debtors, in the aggregate, made prepetition
disbursements in excess of approximately $1.5 million.
This section is intended only as a general description of payments made
within the time period set forth above, and does not constitute an admission of
any fact relevant to a cause of action to avoid a preferential or fraudulent
transfer. Moreover, the payment totals set forth above are preliminary and are
likely to change as the Debtors' analysis of preferences and fraudulent
transfers progresses.
2. D&O AND RELATED LITIGATION
The Debtors, the Committee and/or specific creditors will evaluate
whether the Debtors have meritorious causes of action against their former and
present directors, officers, and auditors. In the event the Creditors' Trust is
created, the Debtors will transfer to the Creditors' Trust all of their right,
title, and interest in and to such causes of action. The Creditors' Trustee will
be responsible for final evaluation and, if deemed appropriate, filing,
prosecution and/or settlement of such causes of action. The Committee has
already notified the Debtors that the Committee believes such causes of action
may exist. The Debtors believe that any such causes of action are without merit.
IX. CONFIRMATION OF THE PLAN
A. SOLICITATION OF VOTES; VOTING PROCEDURES
1. BALLOTS AND VOTING DEADLINES
A ballot to be used for voting to accept or reject the Plan, together
with a postage-paid return envelope, is enclosed with all copies of this
Disclosure Statement mailed to all holders of Claims and Equity Interests
entitled to vote. BEFORE COMPLETING YOUR BALLOT, PLEASE READ CAREFULLY THE
INSTRUCTION SHEET THAT ACCOMPANIES THE BALLOT.
The Bankruptcy Court has directed that, in order to be counted for
voting purposes, ballots for the acceptance or rejection of the Plan must be
received no later than 5:00 p.m., Central Time, on May ,2000, at the following
address:
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Ms. Gloria Myers
Neligan, Andrews, Bryson & Foley, L.L.P.
1717 Main Street, Suite 4050
Dallas, Texas 75201
YOUR BALLOT MAY NOT BE COUNTED IF IT IS RECEIVED AT THE ABOVE ADDRESS
AFTER 5:00 P.M., CENTRAL TIME, ON MAY ,2000.
2. PARTIES IN INTEREST ENTITLED TO VOTE
Any holder of a Claim against or Equity Interest in the Debtors at the
date on which the order is entered approving the Disclosure Statement whose
Claim or Equity Interest has not previously been disallowed by the Bankruptcy
Court is entitled to vote to accept or reject the Plan, if such Claim or Equity
Interest is impaired under the Plan and either (i) such holder's Claim or Equity
Interest has been scheduled by the Debtors (and such Claim or Equity Interest is
not scheduled as disputed, contingent, or unliquidated) or (ii) such holder
has filed a proof of claim or proof of interest on or before June 21, 2000, the
last date set by the Bankruptcy Court for such filings. Any Claim or Equity
Interest as to which an objection has been filed is not entitled to vote, unless
the Bankruptcy Court, upon application of the holder to whose Claim or Equity
Interest an objection has been made, temporarily allows such Claim or Equity
Interest in an amount that it deems proper for the purpose of accepting or
rejecting the Plan. Any such application must be heard and determined by the
Bankruptcy Court on or before commencement of the Confirmation Hearing. A vote
may be disregarded if the Bankruptcy Court determines, after notice and a
hearing, that such vote was not solicited or procured in good faith or in
accordance with the provisions of the Bankruptcy Code.
3. DEFINITION OF IMPAIRMENT
As set forth in section 1124 of the Bankruptcy Code, a class of claims
or equity interests is impaired under a plan of reorganization unless, with
respect to each claim or equity interest of such class, the plan:
(a) leaves unaltered the legal, equitable, and
contractual fights of the holder of such claim or
equity interest; or
(b) notwithstanding any contractual provision or
applicable law that entitles the holder of a claim or
equity interest to demand or receive accelerated
payment of such claim or equity interest after the
occurrence of a default:
(i) cures any such default that occurred before
or after the commencement of the case under
the Bankruptcy Code, other than a default of
a kind specified in section 365(b)(2) of the
Bankruptcy Code;
(ii) reinstates the maturity of such claim or
interest as it existed before such default;
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(iii) compensates the holder of such claim or
interest for any damages incurred as a
result of any reasonable reliance on such
contractual provision or such applicable
law; and
(iv) does not otherwise alter the legal,
equitable or contractual rights to which
such claim or interest entitles the holder
of such claim or interest.
4. CLASSES IMPAIRED UNDER THE PLAN
The following Classes of Claims and Equity Interests are impaired under
the Plan, and holders of Claims and Equity Interests in such Classes are
entitled to vote to accept or reject the Plan:
Class 1A -- Other Priority Claims
Class 1B -- BMC Other Priority Claims
Class 2 -- Arnos Secured Claim
Class 3 -- Kauffman County Secured Claim
Class 4 -- Baker Atlas Secured
Class 5A -- Other Secured Claims
Class 5B -- BMC Secured Claims
Class 6 -- Southerland Tort Claims
Class 7 -- Buckles Class Action Claim
Class 8 -- Milton Vaughn Claim
Class 9 -- Landry Claim
Class 10 -- Bondholder Claims
Class 11A -- Trade Claims
Class 11B -- BMC Trade Claims
Class 12 -- Intercompany Claims
Class 13 -- Preferred Equity Interests
Class 14 -- Common Equity Interests
Class 15 -- BMC Equity Interests
Class 13 (Preferred Equity Interests), Class 14 (Common Equity
Interests), and Class 15 (BMC Equity Interests) are deemed to have rejected the
Plan and therefore are not entitled to vote on the Plan. Administrative Claims,
Priority Tax Claims, and Involuntary Gap Claims are unclassified; their
treatment is prescribed by the Bankruptcy Code, and the holders of such Claims
are not entitled to vote on the Plan. Accordingly, each holder of a Claim (other
than an Administrative Claim, a Priority Tax Claim, or an Involuntary Gap Claim)
is entitled to vote to accept or reject the Plan.
5. VOTE REQUIRED FOR CLASS ACCEPTANCE
The Bankruptcy Code defines acceptance of a plan by a class of claims
as acceptance by holders of at least two-thirds in dollar amount, and more than
one-half in number, of the claims of that class which actually cast ballots for
acceptance or rejection of the Plan. Thus, class
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acceptance takes place only if at least two-thirds in amount and a majority in
number of the holders of claims voting cast their ballots in favor of
acceptance.
The Bankruptcy Code defines acceptance of a plan by a class of equity
interests as acceptance by holders of at least two-thirds in amount of the
equity interests of that class that actually cast ballots for acceptance or
rejection of the plan. Thus, class acceptance takes place only if at least
two-thirds in amount of the holders of equity interests voting cast their
ballots in favor of acceptance.
B. CONFIRMATION HEARING
Section 1128(a) of the Bankruptcy Code requires the Bankruptcy Court,
after notice, to hold a hearing on confirmation of a plan. By order of the
Bankruptcy Court, the Confirmation Hearing has been scheduled for May --, 2000,
at _______ __.m., Central Time, in the United States Bankruptcy Court for the
Northern District of Texas, Dallas Division. The Bankruptcy Court may adjourn
the Confirmation Hearing from time to time without further notice except for an
announcement made at the confirmation hearing or any adjournment thereof.
Section 1128(b) of the Bankruptcy Code provides that any party in
interest may object to confirmation of a plan. Any objection to confirmation of
the Plan must be made in writing and filed with the Bankruptcy Court on or
before May ____,2000, at the following address:
Clerk of the United States Bankruptcy Court
1100 Commerce Street, Room 12A24
Dallas, Texas 75242-1496
In addition, any such objection must be served upon the following parties,
together with proof of service, on or before May ____, 2000:
<TABLE>
<S> <C>
National Energy Group, Inc. Patrick J. Neligan, Jr.
Attn: Philip D. Devlin, General Counsel Neligan, Andrews, Bryson & Foley LLP
4925 Greenville Avenue 1717 Main Street, Suite 4050
Dallas, Texas 75206 Dallas, Texas 75201
Robert J. Mitchell Alan Forman
767 Fifth Avenue, 47th Floor Berlack, Israels & Libermann, L.L.P.
New York, New York 10153 120 West 45th Street
New York, New York 10036
Robin E. Phelan
Haynes and Boone, LLP George McElreath
901 Main Street, Suite 3100 Assistant U.S. Trustee
Dallas, Texas 75202 1100 Commerce Street, Room 9C60
Dallas, Texas 75242
</TABLE>
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Hugh M. Ray
Andrews & Kurth L.L.P.
1717 Main Street, Suite 3700
Dallas, Texas 75201
Objections to confirmation of the Plan are governed by Bankruptcy Rule
9014. UNLESS AN OBJECTION TO CONFIRMATION IS TIMELY SERVED AND FILED, THE
BANKRUPTCY COURT MAY NOT CONSIDER IT.
C. REQUIREMENTS FOR CONFIRMATION OF A PLAN
At the Confirmation Hearing, the Bankruptcy Court must determine
whether the Bankruptcy Code's requirements for confirmation of the Plan have
been satisfied, in which event the Bankruptcy Court will enter an order
confirming the Plan. As set forth in section 1129 of the Bankruptcy Code, these
requirements are as follows:
1. The plan complies with the applicable provisions of the
Bankruptcy Code.
2. The proponents of the plan complied with the applicable
provisions of the Bankruptcy Code.
3. The plan has been proposed in good faith and not by any
means forbidden by law.
4. Any payment made or promised by the debtors, by the plan
proponents, or by a person issuing securities or acquiring property
under the plan, for services or for costs and expenses in, or in
connection with, the case, or in connection with the plan and incident
to the case, has been approved by, or is subject to the approval of the
Bankruptcy Court as reasonable.
5. (a) (i) The proponent of the plan has disclosed the
identity and affiliations of any individual proposed to serve, after
confirmation of the plan, as a director, officer, or voting trustee of
the debtors, an affiliate of the debtors participating in a joint plan
with the debtors, or a successor to the debtors under the plan; and
(ii) the appointment to, or continuance in, such
office of such individual, is consistent with the interests of
creditors and equity security holders and with public policy; and
(b) the proponent of the plan has disclosed the identity
of any insider that will be employed or retained by the reorganized
debtors, and the nature of any compensation for such insider.
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6. Any governmental regulatory commission with jurisdiction,
after confirmation of the plan, over the rates of the debtor has
approved any rate change provided for in the plan, or such rate change
is expressly conditioned on such approval.
7. With respect to each impaired class of claims or interests:
(a) each holder of a claim or interest of such class
has accepted the plan or will receive or retain under the plan on
account of such claim or interest property of a value, as of the
effective date of the plan, that is not less than the amount that such
holder would so receive or retain if the Debtors were liquidated on
such date under chapter 7 of the Bankruptcy Code on such date; or
(b) if section 1111 (b)(2) of the Bankruptcy Code
applies to the claims of such class, the holder of a claim of such
class will receive or retain under the plan on account of such claim
property of a value, as of the effective date of the plan, that is not
less than the value of such holder's interest in the estate's interest
in the property that secures such claims.
8. With respect to each class of claims or interests:
(a) such class has accepted the plan; or
(b) such class is not impaired under the plan.
9. Except to the extent that the holder of a particular claim
has agreed to a different treatment of such claim, the plan provides
that:
(a) with respect to a claim of a kind specified in
section 507(a)(l) or 507(a)(2) of the Bankruptcy Code, on the effective
date of the plan, the holder of such claim will receive on account of
such claim cash equal to the allowed amount of such claim;
(b) with respect to a class of claims of a kind
specified in section 507(a)(3), 507(a)(4), 507(a)(5) or 507(a)(6) of
the Bankruptcy Code, each holder of a claim of such class will receive:
(a) (i) if such class has accepted the plan, deferred
cash payments of a value, as of the effective date of the plan, equal
to the allowed amount of such claim; or
(ii) if such class has not accepted the plan,
cash on the effective date of the plan equal to the allowed amount of
such claim; and
(c) with respect to a claim of a kind specified in
section 507(a)(7) of the Bankruptcy Code, the holder of a claim will
receive on account of such claim deferred cash payments, over a period
not exceeding six years after the date of
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assessment of such claim, of a value, as of the effective date of the
plan, equal to the allowed amount of such claim.
10. If a class of claims is impaired under the plan, at least
one class of claims that is impaired has accepted the plan, determined
without including any acceptance of the plan by any insider holding a
claim of such class.
11. Confirmation of the plan is not likely to be followed by
the liquidation, or the need for further financial reorganization, of
the debtors or any successor to the debtors under the plan, unless such
liquidation or reorganization is proposed in the plan.
12. All fees payable under 28 U.S.C. Section 1930, as
determined by the Bankruptcy Court at the hearing on confirmation of
the plan, have been paid or the plan provides for the payments of all
such fees on the effective date of the plan.
13. The plan provides for the continuation after its effective
date of payment of all retiree benefits, as that term is defined in
section 1114 of the Bankruptcy Code, at the level established pursuant
to subsection (e)(1)(B) or (g) of section 1114, at any time prior to
confirmation of the plan, for the duration of the period the Debtors
has obligated itself to provide such benefits.
The Debtors believe that the Plan satisfies all the statutory
requirements of chapter 11 of the Bankruptcy Code, that the Debtors has complied
or will have complied with all the requirements of chapter 11, and that the Plan
is proposed in good faith.
The Debtors believe that holders of all Allowed Claims and Equity
Interests impaired under the Plan will receive payments under the Plan having a
present value as of the Effective Date not less than the amounts likely to be
received if the Debtors were liquidated in a case under chapter 7 of the
Bankruptcy Code. At the Confirmation Hearing, the Bankruptcy Court will
determine whether holders of Allowed Claims or Allowed Equity Interests would
receive greater distributions under the Plan than they would receive in a
liquidation under chapter 7.
The Debtors also believe that the feasibility requirement for
confirmation of the Plan is satisfied by the fact that the Debtors' future
operating revenues will be sufficient to satisfy the Debtors' obligations under
the Plan in addition to supporting sustainable growth of the enterprise. These
facts and others demonstrating the confirmability of the Plan will be shown at
the Confirmation Hearing.
D. CRAMDOWN
In the event that any impaired Class of Claims or Equity Interests does
not accept the Plan, the Bankruptcy Court may still confirm the Plan at the
request of the Debtors if, as to each impaired Class which has not accepted the
Plan, the Bankruptcy Court determines that the Plan "does not discriminate
unfairly" and is "fair and equitable" with respect to that Class. A plan of
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reorganization "does not discriminate unfairly" within the meaning of the
Bankruptcy Code if no Class receives more than it is legally entitled to receive
for its claims or equity interests.
"Fair and equitable" has different meanings with respect to the
treatment of secured and unsecured claims. As set forth in section 1129(b)(2)
of the Bankruptcy Code, those meanings are as follows:
1. With respect to a class of secured claims, the plan
provides:
(a) (i) that the holders of such claims retain the
liens securing such claims, whether the property subject to such liens
is retained by the Debtors or transferred to another entity, to the
extent of the allowed amount of such claims; and
(ii) that each holder of a claim of such class
receive on account of such claim deferred cash payments totaling at
least the allowed amount of such claim, of a value, as of the effective
date of the plan, of at least the value of such holder's interest in
the estate's interest in such property;
(b) for the sale, subject to section 363(k) of the
Bankruptcy Code, of any property that is subject to the liens securing
such claims, free and clear of such liens, with such liens to attach to
the proceeds of such sale, and the treatment of such liens on proceeds
under clause (a) and (b) of this subparagraph; or
(c) the realization by such holders of the
"indubitable equivalent" of such claims.
2. With respect to a class of unsecured claims, the plan
provides:
(a) that each holder of a claim of such class receive
or retain on account of such claim property of a value, as of the
effective date of the plan, equal to the allowed amount of such claim;
or
(b) the holder of any claim or interest that is
junior to the claims of such class will not receive or retain under the
plan on account of such junior claim or interest any property.
3. With respect to a class of equity interests, the plan
provides:
(a) that each holder of an interest of such class
receive or retain on account of such interest property of a value, as
of the effective date of the plan, equal to the greatest of the allowed
amount of any fixed liquidation preference to which such holder is
entitled, any fixed redemption price to which such holder is entitled
or the value of such interest; or
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(b) that the holder of any interest that is
junior to the interests of such class will not receive or retain under
the plan on account of such junior interest any property.
In the event that one or more Classes of impaired Claims or Equity
Interests reject the Plan, the Bankruptcy Court will determine at the
Confirmation Hearing whether the Plan is fair and equitable with respect to, and
does not discriminate unfairly against, any rejecting impaired Class of claims
or equity interests. For the reasons set forth above, the Debtors believe the
Plan does not discriminate unfairly against, and is fair and equitable with
respect to, each impaired Class of Claims or Equity Interests.
X. RISK FACTORS
The following is intended as a summary of certain risks associated with
the Plan, but it is not exhaustive and must be supplemented by the analysis and
evaluation made by each holder of a Claim or Equity Interest of the Plan and
this Disclosure Statement as a whole with such holder's own advisors.
A. INSUFFICIENT ACCEPTANCES
For the Plan to be confirmed, each impaired Class of Claims and Equity
Interests is given the opportunity to vote to accept or reject the Plan. With
regard to such impaired voting Classes; the Plan will be deemed accepted by a
Class of impaired Claims if the Plan is accepted by claimants of such Class
actually voting on the Plan who hold at least two-thirds (2/3) in amount and
more than one-half (1/2) in number of the total Allowed Claims of the Class
voted. In addition, the Plan will be deemed accepted by an impaired Class of
Equity Interests if at least two-thirds (2/3) of the holders of Equity Interests
in such Class cast ballots voting to accept the Plan. Only those members of a
Class who vote to accept or reject the Plan will be counted for voting purposes.
The Debtors reserve the right to request confirmation pursuant to the cramdown
provisions in section 1129(b) of the Bankruptcy Code, which will allow
confirmation of the Plan regardless of the fact that a particular Class of
Claims or Equity Interests has not accepted the Plan. However, there can be no
assurance that any impaired Class of Claims under the Plan will accept the Plan
or that the Debtors would be able to use the cramdown provisions of the
Bankruptcy Code for confirmation of the Plan.
B. CONFIRMATION RISKS
The following specific risks exist with respect to confirmation of the
Plan:
(i) Any objection to confirmation of the Plan filed by a
member of a Class of Claims or Equity Interests can either prevent
confirmation of the Plan or delay confirmation for a significant period
of time.
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(ii) Since the Debtors may be seeking to obtain approval of
the Plan over the rejection of one or more impaired Classes of Claims,
the cramdown process could delay confirmation.
C. CONDITIONS PRECEDENT
Confirmation of the Plan and occurrence of the Effective Date are
subject to certain conditions precedent that may never occur. The Debtors,
however, are working diligently with all parties in interest to ensure that all
conditions precedent are satisfied.
XI. ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PLAN
The Debtors have evaluated several reorganization alternatives to the
Plan, including the continued operation of the Debtors under their current
operating and debt structures, consummating the Arnos acquisition transaction as
an asset sale under section 363 of the Bankruptcy Code, and the liquidation of
the Debtors. After studying these alternatives, the Debtors concluded that the
Plan is the best alternative and will maximize recoveries by holders of Claims,
assuming confirmation of the Plan and consummation of the transactions
contemplated by the Plan. The following discussion provides a summary of the
Debtors' analysis leading to its conclusion that the Plan will provide the
highest value to holders of Claims.
A. CONTINUED OPERATION UNDER PREPETITION OPERATING AND DEBT STRUCTURE
The Debtors' pre-Petition Date operating and debt structure provided
insufficient income to meet the Debtor's obligations. As noted above, the
operating losses of the recent past and the uncertainty of achieving future
profits under the existing operating structure, raised substantial doubt
regarding the Debtors' ability to continue as a going concern without a
substantial reorganization.
Accordingly, the Debtors determined that to continue operation under
their existing operating and debt structure, or implementing the needed
restructuring outside of chapter 11, would not have remedied the financial
problems to which the Debtors were subject.
B. SALE ALTERNATIVE
The Bankruptcy Court has approved the sale of certain of the Debtors'
assets to Arnos, and the transaction can be consummated as an asset sale under
section 363 of the Bankruptcy Code. However, Arnos will provide an additional $2
million in cash for unsecured creditors if the transaction is consummated upon
the terms set forth in the Plan. Accordingly, the Debtors believe that
confirmation and consummation of the Plan will provide at least $2 million in
additional value for unsecured creditors that if the Arnos transaction occurs as
a standalone sale under section 363 of the Bankruptcy Code.
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C. LIQUIDATION ALTERNATIVE
The Debtors also have analyzed whether a chapter 7 liquidation of the
assets of the Debtors would be in the best interest of holders of Claims and
Equity Interests. That analysis reflects a liquidation value that is
substantially lower than the value that may be realized through the Plan. The
Debtors believe that liquidation would result in substantial diminution in the
value to be realized by holders of Claims because of (i) the failure to realize
the greater going-concern value of the Debtors' assets; (ii) additional
administrative expenses involved in the appointment of a trustee or trustees,
attorneys, accountants, and other professionals to assist such trustee(s) in the
case of a chapter 7 proceeding); (iii) additional expenses and claims, some of
which would be entitled to priority in payments, which would arise by reason of
the liquidation and from the rejection of leases and other executory contracts
in connection with a cessation of the Debtors' operations; and (iv) the
substantial time which would elapse before creditors would receive any
distribution in respect of their Claims. Consequently, the Debtors believe that
the Plan, which provides for the continuation of the Debtors' core business,
provides a substantially greater return to holders of Claims than would
liquidation.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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XII. CONCLUSION
The Debtors urge holders of Claims to vote to ACCEPT the Plan and to
evidence such acceptance by returning their ballots so that they will be
received by 5:00 p.m., Central Time, on May ____,2000.
Dated: March 14, 2000 NATIONAL ENERGY GROUP, INC.
Dallas, Texas
By: /s/ BOB G. ALEXANDER
-----------------------------------------
Bob G. Alexander
President and Chief Executive Officer
BOOMER MARKETING CORPORATION
By: /s/ BOB G. ALEXANDER
-----------------------------------------
Bob G. Alexander
President and Chief Executive Officer
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EXHIBIT A
PLAN OF REORGANIZATION
<PAGE> 1
EXHIBIT 2.5
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
IN RE: )
)
NATIONAL ENERGY GROUP, INC. and ) CASE NO. 98-80258-HCA-11
BOOMER MARKETING CORPORATION, ) (Jointly Administered)
) Chapter 11
DEBTORS. )
---------------------------------------
DEBTORS' JOINT PLAN OF REORGANIZATION
UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
---------------------------------------
Patrick J. Neligan, Jr.
State Bar No. 14866000
Mark E. Andrews
State Bar No. 01253520
NELIGAN, ANDREWS, BRYSON &
FOLEY, L.L.P.
1717 Main Street, Suite 4050
Dallas, Texas 75201
COUNSEL FOR THE DEBTORS AND
DEBTORS-IN-POSSESSION
Dated: March 14, 2000
Dallas, Texas
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ARTICLE 1 DEFINITIONS AND CONSTRUCTION OF TERMS ............................ 1
ARTICLE 2 TREATMENT OF UNCLASSIFIED CLAIMS ................................. 9
2.1 Administrative Claims ............................................ 9
(a) Time for Filing Administrative Claims ........................ 9
(b) Time for Filing Fee Claims ................................... 9
(c) Allowance of Administrative Claims ........................... 9
(d) Payment of Allowed Administrative Claims ..................... 9
(e) Treatment of Priority Tax Claims ............................. 9
(f) Treatment of Involuntary Gap Claims .......................... 10
2.2 Treatment of Statutory Fees Due the United States Trustee ........ 10
ARTICLE 3 CLASSIFICATION OF CLAIMS AND EQUITY INTERESTS .................... 10
ARTICLE 4 TREATMENT OF CLAIMS AND EQUITY INTERESTS ......................... 11
4.1 Class lA - Other Priority Claims ................................. 11
4.2 Class lB - BMC Other Priority Claims ............................. 11
4.3 Class 2 - Arnos Secured Claim .................................... 11
4.4 Class 3 - Kauffman County Secured Claim .......................... 11
4.5 Class 4 - Baker Atlas Secured Claim .............................. 12
4.6 Class 5A - Other Secured Claims .................................. 12
4.7 Class 5B - BMC Secured Claims .................................... 12
4.8 Class 6 - Southerland Tort Claims ................................ 13
4.9 Class 7 - Buckles Class Action Claim ............................. 13
4.10 Class 8 - Milton Vaughn Claim .................................... 14
4.11 Class 9 - Landry Claim ........................................... 14
4.12 Class 10 - Bondholder Claims ..................................... 15
4.13 Class 11A - Trade Claims ......................................... 16
4.14 Class 11B - BMC Trade Claims ..................................... 16
4.15 Class 12 - Intercompany Claims ................................... 16
4.16 Class 13 - Preferred Equity Interests ............................ 16
4.17 Class 14 - Common Equity Interests ............................... 17
4.18 Class 15 - BMC Equity Interests .................................. 17
ARTICLE 5 SUBSTANTIVE CONSOLIDATION OF DEBTORS' ESTATES .................... 17
5.1 Request for Substantive Consolidation ............................ 17
5.2 Effect of Substantive Consolidation .............................. 17
ARTICLE 6 ACCEPTANCE OR REJECTION OF PLAN .................................. 18
6.1 Class Acceptance Requirement ..................................... 18
6.2 Cramdown ......................................................... 18
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C> <C>
ARTICLE 7 MEANS OF IMPLEMENTATION OF THE PLAN ........................ 18
7.1 Distributions .............................................. 18
7.2 Exchange Agent ............................................. 19
7.3 Creditors' Trust ........................................... 19
7.4 Revesting of Assets ........................................ 19
7.5 Discharge of Debtors ....................................... 19
7.6 Injunction ................................................. 20
7.7 Revocation of Plan ......................................... 20
7.8 Reorganized Debtor's Board of Directors .................... 20
7.9 Reorganized Debtor's Executive Officers .................... 20
7.10 Charter and Bylaws ......................................... 21
7.11 Amendment to Indenture for Bonds ........................... 21
7.12 Bonds Not Discharged ....................................... 21
7.13 Purchase of Additional Common and/or Preferred Stock ....... 21
ARTICLE 8 PROVISIONS GOVERNING DISTRIBUTION .......................... 21
8.1 Distributions .............................................. 21
8.2 Means of Cash Payment ...................................... 21
8.3 Delivery of Distributions .................................. 21
8.4 Deadline for Claims for Undeliverable Distributions ........ 22
8.5 Time Bar to Cash Payments .................................. 22
8.6 No Interest Unless Otherwise Provided ...................... 22
8.7 Prepayment ................................................. 22
8.8 Timing of Distributions .................................... 22
8.9 No De Minimis Distributions ................................ 22
ARTICLE 9 PROCEDURES FOR RESOLVING AND TREATING
CONTESTED AND CONTINGENT CLAIMS ............................ 22
9.1 Objection Deadline ......................................... 22
9.2 Responsibility for Objecting to Claims ..................... 23
9.3 No Distribution Pending Allowance .......................... 23
9.4 Distribution After Allowance ............................... 23
ARTICLE 10 EXECUTORY CONTRACTS AND UNEXPIRED LEASES ................... 23
10.1 General Treatment; Assumed If Not Rejected ................. 23
10.2 Cure Payments and Release of Liability ..................... 23
10.3 Bar to Rejection Damages ................................... 23
10.4 Rejection Claims ........................................... 24
ARTICLE 11 CONDITIONS PRECEDENT TO EFFECTIVENESS OF PLAN .............. 24
11.1 Conditions to Effectiveness of Plan ........................ 24
ARTICLE 12 CONSUMMATION OF THE PLAN ................................... 24
12.1 Retention of Jurisdiction .................................. 24
12.2 Abstention and Other Courts ................................ 26
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<S> <C> <C>
12.3 Nonmaterial Modifications ....................................... 26
12.4 Material Modifications .......................................... 26
ARTICLE 13 MISCELLANEOUS PROVISIONS ........................................ 26
13.1 Limitation on Avoidance Actions ................................. 26
13.2 Setoffs ......................................................... 26
13.3 Compliance With All Applicable Laws ............................. 27
13.4 Limitation of Liability ......................................... 27
13.5 Binding Effect .................................................. 27
13.6 Governing Law ................................................... 27
13.7 Filing of Additional Documents .................................. 27
13.8 Dissolution of Committee ........................................ 27
13.9 Exemption from Transfer Taxes ................................... 27
13.10 Retiree Benefits ................................................ 27
13.11 Section 1125(e) of the Bankruptcy Code .......................... 28
13.12 Notices ......................................................... 28
</TABLE>
-iii-
<PAGE> 5
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
IN RE: )
)
NATIONAL ENERGY GROUP, INC. and ) CASE NO. 98-80258-HCA-11
BOOMER MARKETING CORPORATION, ) (Jointly Administered)
) Chapter 11
DEBTORS. )
DEBTORS' JOINT PLAN OF REORGANIZATION
UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
National Energy Group, Inc. and Boomer Marketing Corporation, the
Debtors and Debtors-in-Possession in the above-styled jointly administered
cases, propose the following joint plan of reorganization under section 1121(a)
of title 11 of the United States Code:
ARTICLE 1
DEFINITIONS AND CONSTRUCTION OF TERMS
Definitions. As used in this Plan, the following terms have the respective
meanings specified below:
1.1 Administrative Claim means any right to payment constituting a cost
or expense of administration of any of the Chapter 11 Cases under sections
503(b) and 507(a)(1) of the Bankruptcy Code, including, without limitation, any
actual and necessary costs and expenses of preserving the estates of the
Debtors, any actual and necessary costs and expenses of operating the business
of the Debtors, any indebtedness or obligations incurred or assumed by the
Debtors in connection with the conduct of their business, including, without
limitation, for the acquisition or lease of property or an interest in property
or the rendition of services, all compensation and reimbursement of expenses to
the extent Allowed by the Bankruptcy Court under sections 330 or 503 of the
Bankruptcy Code and any fees or charges assessed against the estates of the
Debtors under section 1930 of chapter 123 of title 28 of the United States Code.
1.2 Allowed, when used with respect to a Claim, means a Claim (a) to
the extent it is not Contested or (b) a Contested Claim as to which a Final
Order allowing such Claim has been entered by the Bankruptcy Court or another
court of competent jurisdiction. "Allowed," when used with respect to an Equity
Interest, means an Equity Interest, proof of which was timely and properly filed
or, if no proof of interest was filed, which has been or hereafter is listed by
the Debtors on their Schedules as liquidated in amount and not disputed or
contingent and, in either case, as to which no objection to the allowance
thereof has been interposed on or before the applicable period of limitation
fixed by the Bankruptcy Code, the Bankruptcy Rules, the Bankruptcy Court, or the
Plan, or as to which any objection has been determined by a Final Order to the
extent such objection is
DEBTORS' JOINT PLAN OF REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
1
<PAGE> 6
determined in favor of the respective holder. "Allowed," when used with respect
to an Administrative Claim of a Professional, means an Administrative Claim
approved by application to the Bankruptcy Court and entry of a Final Order
approving such Administrative Claim.
1.3 Arnos means Arnos Corp., a Nevada corporation.
1.4 Arnos Bondholder Claim means any Bondholder Claim held by Arnos.
1.5 Arnos Sale means the proposed sale of substantially all of NEG's
assets to Arnos, which was approved by the Bankruptcy Court pursuant to an Order
entered on___________, 1999.
1.6 Arnos Secured Claim means the Secured Claim asserted against NEG
held by Arnos, in the approximate amount of $_____________.
1.7 Avoidance Action means any action arising in the Chapter 11 Cases
for avoidance and recovery of obligations, transfers of property or interests in
property pursuant to sections 544, 545, 547, 548, 550 and/or 551 of the
Bankruptcy Code, subject to the limitation set forth in section 13.1 of the
Plan.
1.8 Baker Atlas means __________________________________.
1.9 Baker Atlas Secured Claim means the Secured Claim asserted against
NEG held by Baker Atlas.
1.10 Ballot means the form distributed to each holder of an impaired
Claim or Equity Interest on which is to be indicated acceptance or rejection of
the Plan.
1.11 Bankruptcy Code means title 11 of the United States Code, as
amended from time to time, as applicable to the Chapter 11 Cases.
1.12 Bankruptcy Court means the United States Bankruptcy Court for the
Northern District of Texas, Dallas Division, having jurisdiction over the
Chapter 11 Cases.
1.13 Bankruptcy Rules means the Federal Rules of Bankruptcy Procedure
as promulgated by the United States Supreme Court under section 2075 of title 28
of the United States Code, and any Local Rules of the Bankruptcy Court of the
Northern District of Texas.
1.14 BMC means Boomer Marketing Corporation, a debtor and
debtor-in-possession in the Chapter 11 Cases.
1.15 BMC Equity Interest means any Equity Interest in BMC.
1.16 BMC Other Priority Claim means any Claim asserted against
BMC (other than an Administrative Claim, a Priority Tax Claim, or an Involuntary
Gap Claim) that is entitled to priority in right of payment pursuant to section
507 of the Bankruptcy Code.
DEBTORS' JOINT PLAN OF REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
2
<PAGE> 7
1.17 BMC Secured Claim means any Secured Claim asserted against BMC.
1.18 BMC Trade Claim means any Claim asserted against BMC other than an
Administrative Claim, a Priority Tax Claim, an Involuntary Gap Claim, a BMC
Secured Claim, and a BMC Other Priority Claim.
1.19 Bonds means, collectively, the issued and outstanding (i)
registered 10 3/4% Series B Notes in the aggregate principal amount of $100
million due 2006 that were issued by NEG in 1997 in exchange for the
unregistered 10 3/4% Series A Notes due 2006, which were issued by NEG in
November 1996 (together, the "Series A/B Notes"); (ii) unregistered 10 3/4%
Series C Notes in the aggregate principal amount of $65.0 million due 2006 that
were issued by NEG in August 1997 (the "Series C Notes"); and (iii) registered
10 3/4% Series D Notes due 2006 that were issued by NEG in December 1997 in
exchange for substantially all of the Series A/B Notes and the Series C Notes,
which are substantially identical to the Series A/B Notes and the Series C
Notes. The Bonds bear interest at 10 3/4% per annum, payable semi-annually on
May 1 and November 1. The Bonds mature November 1, 2006, but may be redeemed
after November 1, 2001, at NEG's option.
1.20 Bondholder means a holder of one or more Bond.
1.21 Bondholder Claim means any Claim by the holder of Bonds.
1.22 Buckles Class Action Claim means, collectively, any and all
Claims by the plaintiffs in the litigation styled Buckles v. National Energy
Group, Inc. commenced on or about September 5, 1997, in Canadian County,
Oklahoma.
1.23 Business Day means any day other than a Saturday, Sunday, or any
other day on which commercial banks in New York, New York are required or
authorized to close by law or executive order.
1.24 Cash means legal tender of the United States of America and
equivalents thereof.
1.25 Chanter 11 Cases means the Debtors' cases under Chapter 11 of the
Bankruptcy Code.
1.26 Claim means (a) a right to payment from one or both of the
Debtors, whether or not such right is reduced to judgment, liquidated,
unliquidated, fixed, contingent, matured, unmatured (including potential and
unmatured tort and contract claims), disputed, undisputed, legal, equitable,
secured or unsecured or (b) a right to an equitable remedy for breach of
performance if such breach gives rise to a right of payment from one or both of
the Debtors, whether or not such right to an equitable remedy is reduced
to judgment, fixed, contingent, matured, unmatured (including potential and
unmatured tort and contract claims), disputed, undisputed, secured or unsecured.
1.27 Class means a category of Claims or Equity Interests as set forth
in Article 3 of the Plan.
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1.28 Collateral means any property or interest in property of the
estates of the Debtors subject to a Lien or Security Interest to secure the
payment or performance of a Claim, which Lien or Security Interest is not
subject to avoidance under the Bankruptcy Code or otherwise invalid under the
Bankruptcy Code or applicable nonbankruptcy law.
1.29 Committee means the statutory committee of unsecured creditors
appointed in the Chapter 11 Cases pursuant to section 1102 of the Bankruptcy
Code.
1.30 Common Equity Interest means any Equity Interest in NEG
(including, without limitation, any outstanding common stock in NEG) other than
a Preferred Equity Interest.
1.31 Confirmation Date means the date on which the Clerk of the
Bankruptcy Court enters the Confirmation Order on the docket.
1.32 Confirmation Hearing means the hearing held by the Bankruptcy
Court to consider confirmation of the Plan pursuant to section 1129 of the
Bankruptcy Code, as such hearing may be adjourned or continued from time to
time.
1.33 Confirmation Order means the order of the Bankruptcy Court
confirming the Plan pursuant to section 1129 of the Bankruptcy Code.
1.34 Contested, when used with respect to a Claim, means a Claim
against the Debtors (i) that is listed in the Debtors' Schedules as disputed,
contingent, or unliquidated; (ii) that is listed in the Debtors' Schedules as
undisputed, liquidated, and not contingent and as to which a proof of Claim has
been filed with the Bankruptcy Court, to the extent the proof of Claim amount
exceeds the scheduled amount; (iii) that is the subject of a pending action in a
forum other than the Bankruptcy Court unless such Claim has been determined by
Final Order in such other forum and Allowed by Final Order of the Bankruptcy
Court; or (iv) as to which an objection has been or may be timely filed and has
not been overruled by a Final Order. To the extent an objection relates to the
allowance of only a part of a Claim, such Claim shall be a Contested Claim only
to the extent of the objection.
1.35 Creditors' Trust means that certain trust to be created as of the
Effective Date pursuant to the Creditors' Trust Agreement to preserve and
liquidate the Creditors' Trust Assets.
1.36 Creditors' Trust Agreement means that certain trust instrument, in
a form to be filed by the Committee not later than twenty (20) days before the
Effective Date, pursuant to which the Creditors' Trust shall be created.
1.37 Creditors' Trust Assets means all of the Debtors' and their
Estates' right, title, and interest in and to the following assets: (i) the
Transferred Causes of Action; (ii) the Lake Mongoulois Property; (iii) the
Mustang Island Property, and (iv) Cash in the amount of $250,000.
1.38 Creditors' Trustee means the trustee (or, collectively, the
trustees) of the Creditors' Trust, in and only in such capacity. The initial
Creditors' Trustee shall be
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1.39 Debtors means, collectively, NEG and BMC.
1.40 Debtors-in-Possession means the Debtors in their capacity as
debtors-in-possession in the Chapter 11 Cases pursuant to sections 1101,
1107(a), and 1108 of the Bankruptcy Code.
1.41 Deemed Collateral Value means, unless a Valuation Motion is timely
filed, a value equal to the amount, as of the Petition Date, of the Allowed
Claim it secures.
1.42 Disallowed means, when used with respect to a Claim or Equity
Interest, a Claim or Equity Interest that has been disallowed by Final Order.
1.43 Disclosure Statement means the disclosure statement relating to
the Plan, including, without limitation, all exhibits and schedules thereto, as
approved by the Bankruptcy Court pursuant to section 1125 of the Bankruptcy
Code.
1.44 Effective Date means the first Business Day on which all of the
conditions to the effectiveness of the Plan have been satisfied or waived as set
forth herein.
1.45 Equity Interest means any share of common stock or other
instrument evidencing an ownership interest in either of the Debtors, whether or
not transferable, and any option, warrant or right, contractual or otherwise, to
acquire any such interest.
1.46 Escrowed Funds means those funds originally paid by Arnos into the
registry of the Bankruptcy Court and into an escrow account at Bank One in
connection with the Arnos Sale, together with all interest and income earned on
such funds. The total amount of the Escrowed Funds is approximately $71 million.
1.47 Estates means the Debtors' Chapter 11 bankruptcy estates.
1.48 Exchange Agent means ____________ or such other individual or
entity designated by the Debtors to serve as the Exchange Agent and approved by
the Bankruptcy Court at the Confirmation Hearing.
1.49 Fee Claim means an Administrative Claim by a Professional or any
other party in interest under section 330 or 503 of the Bankruptcy Code for
compensation or reimbursement in the Chapter 11 Cases.
1.50 Final Order means an order or judgment of the Bankruptcy Court or
any other court or adjudicative body as to which order or judgment the time to
appeal or seek rehearing or petition for certiorari shall have expired or which
order or judgment shall no longer be subject to appeal, rehearing, or certiorari
proceeding and with respect to which no appeal, motion for rehearing, or
certiorari proceeding or stay shall then be pending.
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1.51 Initial Distribution Date, when used with respect to a particular
Claim, means the later of (i) the thirtieth day after the Effective Date or
(b) the date as soon as practicable, but within thirty days, after the date on
which a Contested Claim becomes an Allowed Claim.
1.52 Intercompany Claim means any Claim by either of the Debtors
against the other Debtor.
1.53 Involuntary Gap Claim means any Claim entitled to priority in
payment under section 507(a)(2) of the Bankruptcy Code.
1.54 Kauffman County Secured Claim means the Secured Claim asserted
against NEG held by Kauffman County, Texas.
1.55 Lake Mongoulois Property means NEG's 50% working interest in the
Lake Mongoulois Field in St. Martin Parish, Louisiana, which working interest
NEG acquired from EEX Corporation in February 1998. The Lake Mongoulois Property
includes all environmental and plugging and abandonment liabilities associated
with NEG's working interest.
1.56 Landry Claim means, collectively, any and all Claims by the
plaintiffs in the litigation styled Landry and Dupree v. Exxon, Panaco, National
Energy Group, Inc., et al. commenced on or about August 21, 1998, in Iberville
Parish, Louisiana.
1.57 Lien shall have the meaning set forth in section 101 of the
Bankruptcy Code.
1.58 Milton Vaughn Claim means, collectively, any and all Claims by the
plaintiffs in the litigation styled Milton Vaughn v. National Energy Group,
Inc., commenced on or about February 10, 1998, in Iberville Parish, Louisiana.
1.59 Mustang Island Property means NEG's various interests in leases,
wells, and equipment in the Mustang Island area in Nueces County, Texas, which
interests NEG acquired between 1994 and 1998 from LLOG, Petrotex Engineering,
UMC Petroleum, Germany Oil, and the State of Texas. The Mustang Island Property
includes all environmental and plugging and abandonment liabilities associated
with NEG's interests.
1.60 Non-Arnos Bondholder Claim means any Bondholder Claim other than
an Arnos Bondholder Claim held by Arnos.
1.61 NEG means National Energy Group, Inc., a debtor and
debtor-in-possession in the Chapter 11 Cases.
1.62 Non-Arnos Bondholder Recovery Percentage means 52.5% of the
aggregate principal amount of the Non-Arnos Bondholder Claims or such other
amount that the Bankruptcy Court determines at the Confirmation Hearing to be
equal to (a) the recovery that the holders of Non-Arnos Bondholder Claims would
have received on account of their Bondholder Claims under Chapter 7 of the
Bankruptcy Code if the Arnos Sale were consummated, without taking into account
the
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<PAGE> 11
liquidation proceeds of the Creditors' Trust Assets, plus (b) $1.75 million.
1.63 Other Priority Claim means any Claim asserted against NEG (other
than an Administrative Claim, a Priority Tax Claim, or an Involuntary Gap Claim)
that is entitled to priority in right of payment pursuant to section 507 of the
Bankruptcy Code.
1.64 Other Secured Claim means any Secured Claim asserted against NEG
other than the Arnos Secured Claim, the Kauffman County Secured Claim, and the
Baker Atlas Secured Claim.
1.65 Petition Date means December 4, 1998.
1.66 Person means any individual, corporation, general partnership,
limited partnership, association, joint stock company, joint venture, estate,
trust, unincorporated organization, government, or any political subdivision
thereof or other entity.
1.67 Plan means this Chapter 11 joint plan of reorganization dated
March 14, 2000, including all exhibits, supplements, appendices and schedules
hereto, either in the present form thereof or as the same may be altered,
amended, or modified from time to time.
1.68 Preferred Equity Interest means any issued and outstanding share
of NEG's Series B, Series C, Series D, and Series E Convertible Preferred Stock.
1.69 Priority Tax Claim means any Claim asserted against NEG or BMC by
a governmental unit of the kind specified in sections 502(i) and 507(a)(8) of
the Bankruptcy Code.
1.70 Professional means any Person (a) retained by the Debtors or the
Committee pursuant to an order of the Bankruptcy Court in accordance with
sections 327 and 1103 of the Bankruptcy Code or (b) who seeks compensation or
reimbursement pursuant to sections 503(b)(3), 503(b)(4), 503(b)(5), or 506(b) of
the Bankruptcy Code.
1.71 Relief Date means February 11, 1999, the date on which the
Bankruptcy Court entered the order for relief for NEG.
1.72 Reorganized Debtor means, collectively, NEG and BMC from and after
the Effective Date.
1.73 Schedules means the schedules of assets and liabilities, the list
of holders of Equity Interests, and the statements of financial affairs filed by
the Debtors under section 521 of the Bankruptcy Code and Bankruptcy Rule 1007,
and all amendments and modifications thereto through the Confirmation Date.
1.74 Secured Claim means any Claim, to the extent reflected in the
Schedules or a proof of Claim as being secured by a Lien or Security Interest
(whether consensual or otherwise), to the extent it is secured by a valid,
unavoidable Lien or Security Interest in Collateral, to the extent of the value
of the Estates' interest in such Collateral, as determined in accordance with
section 506(a) of
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the Bankruptcy Code and taking into account any other Secured Claims with
respect to such Collateral not inferior in priority to such Secured Claim or, in
the event that such Claim is subject to setoff under section 553 of the
Bankruptcy Code, to the extent of such setoff.
1.75 Secured Tax Claim means any Secured Claim which, absent its
secured status, would be entitled to priority in right of payment under section
507(a)(8) of the Bankruptcy Code.
1.76 Security Interest has the meaning set forth in section 101 of the
Bankruptcy Code.
1.77 Southerland Tort Claim means, collectively, any and all Claims by
the plaintiffs in the litigation styled Southerland v. National Energy Group,
Inc., commenced on or about January 16, 1998, in Harrison County, Texas.
1.78 Trade Claim means any Claim asserted against NEG other than an
Administrative Claim, a Priority Tax Claim, an Involuntary Gap Claim, an Other
Priority Claim, the Arnos Secured Claim, the Kauffman County Secured Claim, the
Baker Atlas Secured Claim, an Other Secured Claim, a Southerland Tort Claim, the
Buckles Class Action Claim, the Milton Vaughn Claim, the Landry Claim, a
Bondholder Claim, and an Intercompany Claim.
1.79 Transferred Causes of Action means all of the Debtors' or the
Estates' right, title, and interest in and to the following causes of action:
(i) all Avoidance Actions; and (ii) all causes of action held by the Debtors as
of the Petition Date and which are unrelated to the operating assets retained by
the Reorganized Debtor pursuant to the Plan.
1.80 Valuation Motion means a motion filed by the Debtors, Arnos, the
Committee, or the holder of a Secured Claim seeking to obtain a determination by
the Bankruptcy Court of the value of Collateral.
Interpretation: Application of Definitions and Rules of Construction. Wherever
from the context it appears appropriate, each term stated in either the singular
or the plural shall include both the singular and the plural and pronouns stated
in the masculine, feminine, or neuter gender shall include the masculine,
feminine, and neuter. Unless otherwise specified, all section, article,
schedule, or exhibit references in the Plan are to the respective Section in,
Article of, Schedule to, or Exhibit to, the Plan. The words "herein," "hereof,"
"hereto," "hereunder" and other words of similar import refer to the Plan as a
whole and not to any particular section, subsection or clause contained in the
Plan. The rules of construction contained in section 102 of the Bankruptcy Code
shall apply to the construction of the Plan. A term used herein that is not
defined herein, but that is used in the Bankruptcy Code, shall have the meaning
ascribed to that term in the Bankruptcy Code. The headings in the Plan are for
convenience of reference only and shall not limit or otherwise affect the
provisions of the Plan.
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ARTICLE 2
TREATMENT OF UNCLASSIFIED CLAIMS
2.1 ADMINISTRATIVE CLAIMS. All Administrative Claims shall be treated
as follows:
(a) TIME FOR FILING ADMINISTRATIVE CLAIMS. The holder of any
Administrative Claim, other than (i) a Fee Claim, (ii) a liability incurred and
paid in the ordinary course of business by the Debtors, or (iii) an Allowed
Administrative Claim, must file with the Bankruptcy Court, and serve on the
Debtors and their counsel, notice of such Administrative Claim within thirty
(30) days after the Effective Date. Such notice must include at a minimum (i)
the Debtor(s) that are liable for the Claim, (ii) the name of the holder of the
Claim, (iii) the amount of the Claim, and (iv) the basis of the Claim. Failure
to file timely and properly the notice required under this section 2.1(a) of the
Plan shall result in the Administrative Claim being forever barred and
discharged.
(b) TIME FOR FILING FEE CLAIMS. Each Professional who holds,
or asserts, an Administrative Claim that is a Fee Claim for compensation for
services rendered and reimbursement of expenses incurred prior to the Effective
Date shall be required to file with the Bankruptcy Court and serve on all
parties required to receive such notice, a Fee Application within sixty (60)
days of the Effective Date. Failure to file timely a Fee Application as required
under this section 2.1(b) of the Plan shall result in the Fee Claim being
forever barred and discharged.
(c) ALLOWANCE OF ADMINISTRATIVE CLAIMS. An Administrative
Claim with respect to which notice has been properly filed pursuant to section
2.1(a) of the Plan shall become an Allowed Administrative Claim if no objection
is filed within thirty (30) days after its filing and service. If an objection
is filed within such thirty (30) day period, the Administrative Claim shall
become an Allowed Administrative Claim only to the extent Allowed by Final
Order. An Administrative Claim that is a Fee Claim, and with respect to which a
Fee Application has been properly filed pursuant to section 2.1(b) of the Plan,
shall become an Allowed Administrative Claim only to the extent allowed by Final
Order of the Bankruptcy Court.
(d) PAYMENT OF ALLOWED ADMINISTRATIVE CLAIMS. Each holder of
an Allowed Administrative Claim shall receive the amount of such holder's
Allowed Administrative Claim in Cash on or before the Initial Distribution Date,
or shall receive such other treatment as agreed upon in writing by the Debtors
and such holder; provided, however, that an Administrative Claim representing a
liability incurred in the ordinary course of business by the Debtors may be paid
in the ordinary course of business by the Debtors; and provided, further, that
the payment of an Allowed Administrative Claim representing a right to payment
under sections 365(b)(l)(A) and 365(b)(1)(B) of the Bankruptcy Code may be made
in one or more Cash payments over a period of eighteen (18) months or such other
period as is determined to be appropriate by the Bankruptcy Court.
(e) TREATMENT OF PRIORITY TAX CLAIMS. Each holder of an
Allowed Priority Tax Claim shall receive, at the option of the Reorganized
Debtor (i) the full amount of such holder's Allowed Claim in one Cash payment on
or before the Initial Distribution Date; (ii) the amount of
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<PAGE> 14
such holder's Allowed Claim, with interest accruing after the Confirmation Date
thereon, in equal quarterly Cash payments of principal and interest at 7% per
annum commencing on July 1, 2000 and continuing so that the entire Allowed
Priority Tax Claim is satisfied in full on or prior to the sixth (6th)
anniversary of the date of assessment of such Claim; or (iii) such other
treatment as may be agreed upon in writing by the Reorganized Debtor and such
holder.
(f) TREATMENT OF INVOLUNTARY GAP CLAIMS. Each holder of an
Allowed Involuntary Gap Claim shall receive the full amount of such Allowed
Involuntary Gap Claim in one Cash payment on or before the Initial Distribution
Date.
2.2 TREATMENT OF STATUTORY FEES DUE THE UNITED STATES TRUSTEE. Pursuant
to 28 U.S.C. Section 1930(a)(6), the statutory fees of the United States Trustee
shall be paid in Cash as such fees become due and payable.
ARTICLE 3
CLASSIFICATION OF CLAIMS AND EQUITY INTERESTS
3.1 Claims (other than Administrative Claims, Priority Tax Claims, and
Involuntary Gap Claims) and Equity Interests are classified for all purposes,
including voting, confirmation and distribution pursuant to the Plan, as
follows:
<TABLE>
<CAPTION>
-----------------------------------------------------
CLASS STATUS
-----------------------------------------------------
<S> <C>
Class lA - Other Priority Claims Impaired
-----------------------------------------------------
Class lB - BMC Other Priority Claims Impaired
-----------------------------------------------------
Class 2 - Arnos Secured Claim Impaired
-----------------------------------------------------
Class 3 - Kauffman County Secured Claim Impaired
-----------------------------------------------------
Class 4 - Baker Atlas Secured Claim Impaired
-----------------------------------------------------
Class 5A - Other Secured Claims Impaired
-----------------------------------------------------
Class 5B - BMC Secured Claims Impaired
-----------------------------------------------------
Class 6 - Southerland Tort Claims Impaired
-----------------------------------------------------
Class 7 - Buckles Class Action Claim Impaired
-----------------------------------------------------
Class 8 - Milton Vaughn Claim Impaired
-----------------------------------------------------
Class 9 - Landry Claim Impaired
-----------------------------------------------------
Class 10 - Bondholder Claims Impaired
-----------------------------------------------------
Class 11A - Trade Claims Impaired
-----------------------------------------------------
Class 11B - BMC Trade Claims Impaired
-----------------------------------------------------
Class 12 - Intercompany Claims Impaired
-----------------------------------------------------
Class 13 - Preferred Equity Interests Impaired
-----------------------------------------------------
Class 14 - Common Equity Interests Impaired
-----------------------------------------------------
Class 15 - BMC Equity Interests Impaired
-----------------------------------------------------
</TABLE>
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ARTICLE 4
TREATMENT OF CLAIMS AND EQUITY INTERESTS
4.1 CLASS 1A -- OTHER PRIORITY CLAIMS
(a) Impairment and Voting. Class lA is impaired by the Plan.
Each holder of an Allowed Other Priority Claim is entitled to vote to accept or
reject the Plan.
(b) Treatment. Each holder of an Allowed Other Priority Claim
shall receive (i) the amount of such holder's Allowed Claim in one Cash payment
on or as soon as practicable after the Initial Distribution Date or (ii) such
other treatment as may be agreed upon in writing by the Reorganized Debtor and
the holder of such Claim.
4.2 CLASS 1B -- BMC OTHER PRIORITY CLAIMS
(a) Impairment and Voting. Class lB is impaired by the Plan.
Each holder of an Allowed BMC Other Priority Claim is entitled to vote to accept
or reject the Plan.
(b) Treatment. Each holder of an Allowed BMC Other Priority
Claim shall receive (i) the amount of such holder's Allowed Claim in one Cash
payment on or as soon as practicable after the Initial Distribution Date or (ii)
such other treatment as may be agreed upon in writing by the Reorganized Debtor
and the holder of such Claim.
4.3 CLASS 2 -- ARNOS SECURED CLAIM
(a) Impairment and Voting. Class 2 is impaired by the Plan.
The holder of the Arnos Secured Claim is entitled to vote to accept or reject
the Plan.
(b) Treatment. The indebtedness giving rise to the Allowed
Arnos Secured Claim shall remain in place, and Arnos shall receive, on account
of the Allowed Arnos Secured Claim, such payments as shall be agreed to in
writing by the Reorganized Debtor and Arnos. As security for such payments,
Arnos shall retain all rights provided in all documents creating, evidencing, or
securing the Allowed Arnos Secured Claim.
4.4 CLASS 3 -- KAUFFMAN COUNTY SECURED CLAIM
(a) Impairment and Voting. Class 3 is impaired by the Plan.
The holder of the Kauffman County Secured Claim is entitled to vote to accept or
reject the Plan.
(b) Treatment. The holder of the Allowed Kauffman County
Secured Claim shall receive four (4) equal quarterly payments of Cash, beginning
on the Initial Distribution Date. The amount of such payments shall be
calculated to provide full satisfaction of the Allowed Kauffman
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County Secured Claim plus accrued interest thereon, from and after the Effective
Date, at the rate provided for civil judgments pursuant to 28 U.S.C. Section
1961.
4.5 CLASS 4 -- BAKER ATLAS SECURED CLAIM
(a) Impairment and Voting. Class 4 is impaired by the Plan.
The holder of the Baker Atlas Secured Claim is entitled to vote to accept or
reject the Plan.
(b) Treatment. The holder of the Allowed Baker Atlas Secured
Claim shall receive Cash in the full amount of the Allowed Baker Atlas Secured
Claim on the later of (i) the Effective Date and (ii) ten (10) days after the
date that the Claim is Allowed.
4.6 CLASS 5A -- OTHER SECURED CLAIMS.
(a) Impairment and Voting. Class 5A is impaired by the Plan.
The holders of the Other Secured Claims are entitled to vote to accept or reject
the Plan.
(b) Treatment. Each holder of an Other Secured Claim shall be
placed within a separate subclass of this Class 5A. Accordingly, each such Class
5A Claim shall, for purposes of accepting or rejecting the Plan and for
receiving distributions under the Plan, be treated as though in a separate
Class. Each holder of an Allowed Class 5A Claim secured by a Lien on Collateral
shall have, or be deemed to have, an Allowed Other Secured Claim to the extent
of the value of its Collateral as determined by the Bankruptcy Court or, if no
Valuation Motion is filed within thirty (30) days after the Confirmation
Hearing, an Allowed Other Secured Claim equivalent to the Deemed Collateral
Value. The holder of each Allowed Other Secured Claim shall receive, on or
before the Initial Distribution Date, (i) return of such party's Collateral in
full satisfaction of such Other Secured Claim; (ii) payment in Cash in an amount
equivalent to the lesser of (A) the value of such party's Collateral or (B) the
full amount of the Other Secured Claim; (iii) treatment of such Other Secured
Claim in accordance with sections 1124(2) or 1129(b)(2) of the Bankruptcy Code;
(iv) return of a portion of such party's Collateral and deferred Cash payments
totaling the remaining value of such party's Collateral retained by the Debtors;
or (v) such other treatment as may be agreed to in writing by such Secured
Creditor and the Reorganized Debtor. If, as the result of any Valuation Motion,
it is determined that any Allowed Class 5A Claim exceeds the value of such
party's Collateral securing such Claim, any such excess (exclusive of
postpetition interest, fees or other charges that such Secured Creditor could
otherwise assert) shall constitute a Claim and be treated in Class 1lA (Trade
Claims) for purposes of the Plan.
4.7 CLASS 5B -- BMC SECURED CLAIMS
(a) Impairment and Voting. Class SB is impaired by the Plan.
The holders of the BMC Secured Claims are entitled to vote to accept or reject
the Plan.
(b) Treatment. Each holder of a BMC Secured Claim shall be
placed within a separate subclass of this Class 5B. Accordingly, each such Class
5B Claim shall for purposes of accepting or rejecting the Plan and for receiving
distributions under the Plan, be treated as though
DEBTORS' JOINT PLAN OF REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
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<PAGE> 17
in a separate Class; Each holder of an Allowed Class 5B Claim secured by a Lien
on Collateral shall have, or be deemed to have, an Allowed BMC Secured Claim to
the extent of the value of its Collateral as determined by the Bankruptcy Court
or, if no Valuation Motion is filed within thirty (30) days after the
Confirmation Hearing, an Allowed BMC Secured Claim equivalent to the Deemed
Collateral Value. The holder of each Allowed BMC Secured Claim shall receive, on
or before the Initial Distribution Date, (i) return of such party's Collateral
in full satisfaction of such BMC Secured Claim; (ii) payment in Cash in an
amount equivalent to the lesser of (A) the value of such party's Collateral or
(B) the full amount of the BMC Secured Claim; (iii) treatment of such BMC
Secured Claim in accordance with sections 1124(2) or 1129(b)(2) of the
Bankruptcy Code; (iv) return of a portion of such party's Collateral and
deferred Cash payments totaling the remaining value of such party's Collateral
retained by the Debtors; or (v) such other treatment as may be agreed to in
writing by such Secured Creditor and the Reorganized Debtor. If, as the result
of any Valuation Motion, it is determined that any Allowed Class 5B Claim
exceeds the value of such party's Collateral securing such Claim, any such
excess (exclusive of postpetition interest, fees or other charges that such
Secured Creditor could otherwise assert) shall constitute a Claim and be treated
in Class 1lB (BMC Trade Claims) for purposes of the Plan.
4.8 CLASS 6 -- SOUTHERLAND TORT CLAIMS
(a) Impairment and Voting. Class 6 is impaired by the Plan.
Each holder of an Allowed Southerland Tort Claim is entitled to vote to accept
or reject the Plan.
(b) Treatment. The Allowed Southerland Tort Claims shall be
treated as follows:
(i) If Class 6 accepts the Plan as provided by
section 1126(c) of the Bankruptcy Code, (A) the holders of the Allowed
Southerland Tort Claims shall receive, in the aggregate, the sum of $10,000 in
Cash on or before the Initial Distribution Date and (B) nothing in the Plan
shall prejudice the right of any holder of an Allowed Southerland Tort Claim to
seek recovery under any insurance policy maintained by the Debtors as of the
Petition Date.
(ii) If Class 6 does not accept the Plan as provided
by section 1126(c) of the Bankruptcy Code, each holder of an Allowed Southerland
Tort Claim shall receive, within thirty (30) days after such Claim becomes an
Allowed Claim, Cash equal to 56.5% of its Allowed Southerland Tort Claim.
4.9 CLASS 7 -- BUCKLES CLASS ACTION CLAIM
(a) Impairment and Voting. Class 7 is impaired by the Plan.
The holder of the Allowed Buckles Class Action Claim is entitled to vote to
accept or reject the Plan.
(b) Treatment. The Allowed Buckles Class Action Claim shall be
treated as follows:
(i) If Class 7 accepts the Plan as provided by
section 1126(c) of the Bankruptcy Code, the holder of the Allowed Buckles Class
Action Claim shall receive the sum of
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$10,000 in Cash on or before the Initial Distribution Date.
(ii) If Class 7 does not accept the Plan as provided
by section 1126(c) of the Bankruptcy Code, the holder of the Allowed Buckles
Class Action Claim shall receive, within thirty (30) days after such Claim
becomes an Allowed Claim, Cash equal to 56.5% of its Allowed Buckles Class
Action Claim.
4.10 CLASS 8 -- MILTON VAUGHN CLAIM
(a) Impairment and Voting. Class 8 is impaired by the Plan.
The holder of the Allowed Milton Vaughn Claim is entitled to vote to accept or
reject the Plan.
(b) Treatment. The Allowed Milton Vaughn Claim shall be
treated as follows:
(i) If Class 8 accepts the Plan as provided by
section 1126(c) of the Bankruptcy Code, (A) the holder of the Allowed Milton
Vaughn Claim shall receive the sum of $1,000 in Cash on or before the Initial
Distribution Date and (B) nothing in the Plan shall prejudice the right of any
holder of an Allowed Milton Vaughn Claim to seek recovery under any insurance
policy maintained by the Debtors as of the Petition Date.
(ii) If Class 8 does not accept the Plan as provided
by section 1126(c) of the Bankruptcy Code, the holder of the Allowed Milton
Vaughn Claim shall receive, within thirty (30) days after such Claim becomes an
Allowed Claim, Cash equal to 56.5% of its Allowed Milton Vaughn Claim.
4.11 CLASS 9 -- LANDRY CLAIM
(a) Impairment and Voting. Class 9 is impaired by the Plan.
The holder of the Allowed Landry Claim is entitled to vote to accept or reject
the Plan.
(b) Treatment. The Allowed Landry Claim shall be treated as
follows:
(i) If Class 9 accepts the Plan as provided by
section 1126(c) of the Bankruptcy Code, (A) the holder of the Allowed Landry
Claim shall receive the sum of $1,000 in Cash on or before the Initial
Distribution Date and (B) nothing in the Plan shall prejudice the right of the
holder of the Allowed Landry Claim to seek recovery under any insurance policy
maintained by the Debtors as of the Petition Date.
(ii) If Class 9 does not accept the Plan as provided
by section 1126(c) of the Bankruptcy Code, the holder of the Allowed Landry
Claim shall receive, within thirty (30) days after such Claim becomes an Allowed
Claim, Cash equal to 56.5% of its Allowed Landry Claim.
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4.12 CLASS 10 -- BONDHOLDER CLAIMS
(a) Impairment and Voting. Class 10 is impaired by the Plan.
Each holder of an Allowed Bondholder Claim is entitled to vote to accept or
reject the Plan.
(b) Treatment. Arnos will acquire all of the Bonds pursuant to
the Plan. To effectuate Arnos' acquisition of the Bonds, Allowed Bondholder
Claims shall be treated as follows:
(i) If Class 10 accepts the Plan, each holder of an
Allowed Non-Arnos Bondholder Claim will receive a Cash payment from Arnos
through the Exchange Agent in an amount equal to 56.5% of the principal amount
of such Creditor's Bondholder Claim. In consideration for such payment, each
holder of a Non-Arnos Bondholder Claim shall be deemed to have transferred its
Bondholder Claim to Arnos as of the Effective Date. The holder of a Non-Arnos
Bondholder Claim shall receive its Cash distribution as soon as practicable
after the holder delivers the Bonds to the Exchange Agent in transferable form
for delivery to Arnos. To the extent that the holder of an Allowed Non-Arnos
Bondholder Claim has not delivered its Bonds to the Exchange Agent within 120
days following the Effective Date, (i) the Bonds shall be deemed lost, (ii) the
Exchange Agent shall deliver to the record holder of such Bonds Cash equal to
56.5% of the principal amount of that holder's Bonds, (iii) the Indenture
Trustee shall reflect the transfer of the Bonds to Arnos in the applicable
Register, and (iv) the Indenture Trustee shall issue to Arnos replacement Bonds
in transferable form in the amount of such holder's Bonds. Arnos shall retain
its Bonds and receive no distribution under the Plan on account of its Arnos
Bondholder Claim.
(ii) If Class 10 does not accept the Plan, the
Debtors will ask the Bankruptcy Court to confirm the Plan pursuant to the "cram
down" provisions of section 1129(b) of the Bankruptcy Code. In that event, the
Debtors will ask the Bankruptcy Court to approve whichever of the following
alternative treatments that the Bankruptcy Court determines satisfies the
requirements of section 1129(b) of the Bankruptcy Code and is in the better
interests of the holders of Non-Arnos Bondholder Claims:
(A) Alternative A: Each holder of an Allowed
Non-Arnos Bondholder Claim will receive a Cash payment from Arnos through the
Exchange Agent in an amount equal to 56.5% of the principal amount of such
Creditor's Bondholder Claim. In consideration for such payment, each holder of a
Non-Arnos Bondholder Claim shall be deemed to have transferred its Bondholder
Claim to Arnos as of the Effective Date. The holder of a Non-Arnos Bondholder
Claim shall receive its Cash distribution as soon as practicable after the
holder delivers the Bonds to the Exchange Agent in transferable form for
delivery to Arnos. To the extent that the holder of an Allowed Non-Arnos
Bondholder Claim has not delivered its Bonds to the Exchange Agent within 120
days following the Effective Date, (i) the Bonds shall be deemed lost, (ii) the
Exchange Agent shall deliver to the record holder of such Bonds Cash equal to
56.5% of the principal amount of that holder's Bonds, (iii) the Indenture
Trustee shall reflect the transfer of the Bonds to Arnos in the applicable
Register, and (iv) the Indenture Trustee shall issue to Arnos replacement Bonds
in transferable form in the amount of such holder's Bonds. Arnos shall retain
its Bonds and receive no distribution under the Plan on account of its Arnos
Bondholder Claim.
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(B) Alternative B: Each holder of a Non-Arnos
Bondholder Claim shall receive (i) a Cash payment from Arnos through the
Exchange Agent equal to the Non-Arnos Bondholder Recovery Percentage of the
principal amount of such Creditor's Bondholder Claim and (ii) a beneficial
interest in the Creditors' Trust equal to the percentage that such Creditor's
Allowed Non-Arnos Bondholder Claim bears to the total of all Allowed Non-Arnos
Bondholder Claims. In consideration for the foregoing, each holder of an Allowed
Non-Arnos Bondholder Claim shall be deemed to have transferred its Bondholder
Claim to Arnos as of the Effective Date. The holder of a Non-Arnos Bondholder
Claim shall receive its Cash distribution as soon as practicable after the
holder delivers the Bonds to the Exchange Agent in transferable form for
delivery to Arnos. To the extent that the holder of an Allowed Non-Arnos
Bondholder Claim has not delivered its Bonds to the Exchange Agent within 120
days following the Effective Date, (i) the Bonds shall be deemed lost, (ii) the
Exchange Agent shall deliver to the record holder of such Bonds Cash equal to
the Non-Arnos Bondholder Recovery Percentage of the principal amount of the
holder's Bonds, (iii) the Indenture Trustee shall reflect the transfer of the
Bonds to Arnos in the applicable Register, and (iv) the Indenture Trustee shall
issue to Arnos replacement Bonds in transferable form in the amount of such
holder's Bonds. Arnos shall retain its Bonds and receive no distribution under
the Plan on account of its Arnos Bondholder Claim.
4.13 CLASS 11A -- TRADE CLAIMS
(a) Impairment and Voting. Class 1lA is impaired by the Plan.
Each holder of an Allowed Trade Claim is entitled to vote to accept or reject
the Plan.
(b) Treatment. Each holder of a Trade Claim shall receive, on
or before the Initial Distribution Date, Cash equal to seventy-five percent
(75%) of the amount of such Allowed Trade Claim.
4.14 CLASS 11B -- BMC TRADE CLAIMS
(a) Impairment and Voting. Class 1lB is impaired by the Plan.
Each holder of an Allowed BMC Trade Claim is entitled to vote to accept or
reject the Plan.
(b) Treatment. Each holder of an Allowed BMC Trade Claim shall
receive, on or before the Initial Distribution Date, Cash equal to seventy-five
percent (75%) of the amount of such Allowed BMC Trade Claim.
4.15 CLASS 12 -- INTERCOMPANY CLAIMS
(a) Impairment and Voting. Class 12 is impaired by the Plan.
Each holder of an Allowed Intercompany Claim is entitled to vote to accept or
reject the Plan.
(b) Treatment. All Intercompany Claims shall be disallowed and
shall not receive any distribution under the Plan.
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4.16 CLASS 13 -- PREFERRED EQUITY INTERESTS
(a) Impairment and Voting. Class 13 is impaired by the Plan.
Each holder of an Allowed Preferred Equity Interest is deemed to have rejected
the Plan.
(b) Treatment. Each holder of an Allowed Preferred Equity
Interest shall retain such interest; provided, however, that as partial
consideration for the capitalization of the Reorganized Debtor by Arnos,
Preferred Equity Interests may, at the option of Arnos, be deemed canceled and
reissued to holders of Preferred Equity Interests in a form to be determined by
Arnos.
4.17 CLASS 14 -- COMMON EQUITY INTERESTS
(a) Impairment and Voting. Class 14 is impaired by the Plan.
Each holder of an Allowed Common Equity Interest is deemed to have rejected the
Plan.
(b) Treatment. Each holder of an Allowed Common Equity
Interest shall retain such interest; provided, however, that as partial
consideration for the capitalization of the Reorganized Debtor by Arnos, Common
Equity Interests may, at the option of Arnos, be deemed canceled and reissued to
holders of Common Equity Interests in a form to be determined by Arnos. In
addition, the Reorganized Debtor may, at its discretion, effectuate a 7 for 1
reverse stock split of the Common Equity Interests as of the Effective Date.
4.18 CLASS 15 -- BMC EQUITY INTERESTS
(a) Impairment and Voting. Class 15 is impaired by the Plan.
Each holder of an Allowed BMC Equity Interest is deemed to have rejected the
Plan.
(b) Treatment. As set forth below, the Plan provides for the
substantive consolidation of NEG and BMC. Accordingly, all of the BMC Equity
Interests, which are held by NEG, will be canceled as of the Effective Date, and
the holder of the BMC Equity Interests will not receive a distribution on
account of such Equity Interests.
ARTICLE 5
SUBSTANTIVE CONSOLIDATION OF DEBTORS' ESTATES
5.1 REQUEST FOR SUBSTANTIVE CONSOLIDATION. This Plan constitutes a
motion for substantive consolidation of the liabilities and properties of the
Debtors. Confirmation of the Plan shall constitute approval of the motion by the
Bankruptcy Court, and the Confirmation Order shall contain findings supporting,
and conclusions providing for, substantive consolidation of the Debtors'
Estates.
5.2 EFFECT OF SUBSTANTIVE CONSOLIDATION. As a result of the substantive
consolidation of the liabilities and properties of the Debtors, (a) the Chapter
11 Cases shall be consolidated into the case of NEG as a single consolidated
case; (b) all property of the Estate of each Debtor shall be deemed to be the
property of the consolidated Estates; (c) all Claims against each Estate shall
be
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deemed to be Claims against the consolidated Estates, any proof of claim filed
against one of the Debtors shall be deemed to be a single Claim filed against
the consolidated Estates, and all duplicate proofs of claim for the same Claim
filed against more than one Debtor shall be deemed expunged; (d) all
Intercompany Claims shall be eliminated, and no distributions under this Plan
shall be made on account of Intercompany Claims; (e) all guarantees by one
Debtor in favor of the other Debtor shall be eliminated, and no distributions
under the Plan shall be made on account of Claims based upon such guarantees;
and (f) for purposes of determining the availability of the right of setoff
under section 553 of the Bankruptcy Code, the Debtors shall be treated as one
consolidated entity so that, subject to the other provisions of section 553,
debts due to one of the Debtors may be set off against the debts of the other
Debtor. Substantive consolidation shall not merge or otherwise affect the
separate legal existence of each Debtor, other than with respect to distribution
rights under this Plan; substantive consolidation shall have no effect on valid,
enforceable and unavoidable liens, except for liens that secure a Claim that is
eliminated by virtue of substantive consolidation and liens against Collateral
that are extinguished by virtue of substantive consolidation; and substantive
consolidation shall not have the effect of creating a Claim in a class different
from the class in which a Claim would have been placed in the absence of
substantive consolidation.
ARTICLE 6
ACCEPTANCE OR REJECTION OF PLAN
6.1 CLASS ACCEPTANCE REQUIREMENT. A Class of Claims shall have accepted
the Plan if it is accepted by at least two-thirds (2/3) in amount and more than
one-half (1/2) in number of the Allowed Claims in such Class that have voted on
the Plan.
6.2 CRAMDOWN. This section shall constitute the Debtors' request,
pursuant to section 1129(b)(1), that the Bankruptcy Court confirm the Plan
notwithstanding the fact that the requirements of section 1129(a)(8) may not be
met.
ARTICLE 7
MEANS OF IMPLEMENTATION OF THE PLAN
7.1 DISTRIBUTIONS. Distributions under the Plan shall be made as
follows:
(a) ALLOWED CLAIMS, OTHER THAN BONDHOLDER CLAIMS. The
Reorganized Debtor shall make all distributions from Cash on hand to holders of
Allowed Claims, other than the distributions to be made to holders of Allowed
Non-Arnos Bondholder Claims.
(b) ALLOWED BONDHOLDER CLAIMS. Distributions to holders of
Allowed. Bondholder Claims will be made as follows:
(i) ACCEPTANCE BY CLASS 10. If Class 10 accepts the
Plan, within five (5) business days after the Effective Date, a portion of the
Escrowed Funds equal to-56.5% of the aggregate principal amount of the Non-Arnos
Bondholder Claims shall be delivered by Arnos to the
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Exchange Agent for distribution to holders of Allowed Non-Arnos Bondholder
Claims in accordance with Article 4.12(b)(i) of the Plan. The remainder of the
Escrowed Funds shall be retained by Arnos.
(ii) NON-ACCEPTANCE BY CLASS 10.
(A) If Class 10 does not accept the Plan and
the Bankruptcy Court confirms the Plan in accordance with Article 4.12(b)(ii)(A)
hereof, within five (5) business days after the Effective Date, a portion of the
Escrowed Funds equal to 56.5% of the aggregate principal amount of the Non-Arnos
Bondholder Claims shall be delivered by Arnos to the Exchange Agent for
distribution to holders of Allowed Non-Arnos Bondholder Claims in accordance
with Article 4.12(b)(ii)(A) of the Plan. The remainder of the Escrowed Funds
shall be retained by Arnos.
(B) If Class 10 does not accept the Plan and
the Bankruptcy Court confirms the Plan in accordance with Article 4.12(b)(ii)(B)
hereof, within five (5) business days after the Effective Date, (i) a portion of
the Escrowed Funds equal to the Non-Arnos Bondholder Recovery Percentage of the
aggregate principal amount of the Non-Arnos Bondholder Claims shall be delivered
by Arnos to the Exchange Agent for distribution to holders of Allowed Non-Arnos
Bondholder Claims in accordance with Article 4.12(b)(ii)(B) of the Plan and (ii)
all of the Creditors' Trust Assets shall be transferred by NEG to the Creditors'
Trust. The remainder of the Escrowed Funds shall be retained by Arnos.
7.2 EXCHANGE AGENT. The Exchange Agent shall have the powers, duties
and obligations specified in the Plan and in the Exchange Agent Agreement, which
will be filed no fewer than fifteen (15) days prior to the Confirmation Hearing.
The liability of the Exchange Agent will be limited so that he shall not be
liable for his actions in connection with his performance of his obligations
under this Plan unless he has been guilty of willful fraud or gross negligence.
The Exchange Agent shall not be required to give a bond for the faithful
performance of his duties hereunder.
7.3 CREDITORS' TRUST. In the event that Class 10 does not accept the
Plan and the Bankruptcy Court confirms the Plan in accordance with Article
4.12(b)(ii)(B) hereof, the Creditors' Trust shall be established as of the
Effective Date by execution of the Creditors' Trust Agreement and the transfer
of the Creditors' Trust Assets to the Creditors' Trustee pursuant to the terms
and conditions thereof.
7.4 REVESTING OF ASSETS. Except as otherwise provided in the Plan or
the Confirmation Order, upon the Effective Date, all property of the Debtors'
Estates, wherever situated, shall vest in, or remain the property of, the
Reorganized Debtor free and clear of all Claims. All causes of action of the
Debtors' Estates, including all Avoidance Actions, shall be preserved and vest
in the Reorganized Debtor; provided, however, that if Class 10 does not accept
the Plan and the Bankruptcy Court confirms the Plan in accordance with Article
4.12(b)(ii)(B) hereof, all of the Transferred Causes of Action shall be
transferred to the Creditors' Trust.
7.5 DISCHARGE OF DEBTORS. Except as otherwise provided in the Plan, all
consideration distributed under the Plan shall be in exchange for, and in
complete satisfaction, discharge, and release of, all Claims of any nature
whatsoever against the Debtors or any of their. assets or
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properties; and except as otherwise provided herein, upon the Effective Date,
the Debtors and their successors in interest shall be deemed discharged and
released pursuant to section 1141(d)(l)(A) of the Bankruptcy Code from any and
all Claims treated in the Plan, as well as all other Claims, demands and
liabilities that arose before the Effective Date, and all debts of the kind
specified in section 502(g), 502(h), or 502(i) of the Bankruptcy Code, whether
or not (a) a proof of Claim based upon such debt is filed or deemed filed under
section 501 of the Bankruptcy Code; (b) a Claim based upon such debt is Allowed
under section 502 of the Bankruptcy Code; (c) the holder of a Claim based upon
such debt has accepted this Plan; or (d) the Claim has been Allowed, disallowed,
or estimated pursuant to section 502(c) of the Bankruptcy Code. Except as
otherwise provided in the Plan, the Confirmation Order shall be a judicial
determination of discharge of all liabilities of the Debtors and their
successors in interest other than those obligations specifically set forth
pursuant to this Plan.
7.6 INJUNCTION. Except as otherwise provided in the Plan, from and
after the Confirmation Date, all holders of Claims against and Equity Interests
in the Debtors are permanently restrained and enjoined (a) from commencing or
continuing in any manner, any action or other proceeding of any kind with
respect to any such Claim or Equity Interest against the Debtors, their Assets,
or the Reorganized Debtor or against their financial advisors or attorneys; (b)
from enforcing, attaching, collecting, or recovering by any manner or means, any
judgment, award, decree, or order against the Reorganized Debtor, its Assets,
the Debtors, the Committee or against their financial advisors or attorneys; (c)
from creating, perfecting, or enforcing any encumbrance of any kind against the
Reorganized Debtor, its Assets, the Debtors or the Committee or against their
financial advisors or attorneys; (d) from asserting any setoff, right of
subrogation, or recoupment of any kind against any obligation due the Debtors;
and (e) from performing any act, in any manner, in any place whatsoever, that
does not conform to or comply with the provisions of the Plan; provided,
however, that each holder of a Contested Claim may continue to prosecute its
proof of Claim in the Bankruptcy Court and all holders of Claims and Equity
Interests shall be entitled to enforce their rights under the Plan and any
agreements executed or delivered pursuant to or in connection with the Plan.
7.7 REVOCATION OF PLAN. The Debtors reserve the right to revoke and
withdraw this Plan before the entry of the Confirmation Order. If the Debtors
revoke or withdraw this Plan, or if confirmation of this Plan does not occur,
then, with respect to the Debtors, this Plan shall be deemed null and void and
nothing contained herein shall be deemed to constitute a waiver or release of
any Claims by or against the Debtors, as the case may be, or any other Person or
to prejudice in any manner the rights of such Debtors or Debtor, as the case may
be, or person in any further proceedings involving such Debtors.
7.8 REORGANIZED DEBTOR'S BOARD OF DIRECTORS. The initial board of
directors of the Reorganized Debtor shall consist of the following persons: Bob
G. Alexander (Chairman), Jim L. David, Russell L. Glass, Martin Hirsch, Robert
H. Kite, Robert J. Mitchell, and Jack G. Wasserman.
7.9 REORGANIZED DEBTOR'S EXECUTIVE OFFICERS. The initial executive
officers of the Reorganized Debtor shall include the following persons: Bob G.
Alexander (President and Chief Executive Officer), Jim L. David (Assistant to
the President), Philip D. Devlin (Vice President,
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General Counsel and Secretary), R. Kent Lueders (Vice President, Corporate
Development), and Melissa H. Rutledge (Vice President, Controller and Chief
Accounting Officer). Such executive officers shall be compensated at their
current compensation levels or such other levels as may be determined by the
Board of Directors of the Reorganized Debtor.
7.10 CHARTER AND BYLAWS. The charter and bylaws of the Reorganized
Debtor shall be created or amended as of the Effective Date as necessary (a) to
satisfy the provisions of this Plan; (b) to prohibit the issuance of nonvoting
equity securities as required by section 1123(a)(6) of the Bankruptcy Code; and
(c) to prohibit the transfer of any Equity Interest in the Reorganized Debtor to
or by any Person who is, was or would become as a result of such transfer, a "5%
shareholder" within the meaning of 26 U.S.C. Section 382.
7.11 AMENDMENT TO INDENTURE FOR BONDS. The Indenture for the Bonds
shall be amended substantially in the manner reflected in the Amended Indenture
attached as Exhibit "1" to this Plan.
7.12 BONDS NOT DISCHARGED. Pursuant to the Plan, Amos shall acquire all
of the Bonds. Following Confirmation of the Plan, the Bonds shall remain
outstanding and shall be paid either under the terms of the Amended Indenture
attached hereto as Exhibit "1" or on such other terms as are agreed between the
Reorganized Debtor and Amos.
7.13 PURCHASE OF ADDITIONAL COMMON AND/OR PREFERRED STOCK. On the
Effective Date, Amos or an affiliate of Amos shall pay at least $2.0 million to
the Reorganized Debtor to purchase from the Reorganized Debtor additionally
issued shares of the Reorganized Debtor's common stock and/or preferred stock
such that Amos or its affiliate will own up to 49.9% of the value of all issued
and outstanding common stock and preferred stock of the Reorganized Debtor.
ARTICLE 8
PROVISIONS GOVERNING DISTRIBUTION
8.1 DISTRIBUTIONS. Any payments or distributions to be made by the
Reorganized Debtor pursuant to the Plan shall be made on or before the Initial
Distribution Date except as otherwise provided for in the Plan, or as may be
ordered by the Bankruptcy Court. Any payment or distribution by the Reorganized
Debtor pursuant to this Plan, to the extent delivered by the United States Mail,
shall be deemed made when deposited by the Reorganized Debtor into the United
States Mail. Any payments or distributions to be made by the Creditors' Trustee
shall be made in accordance with the Creditors' Trust Agreement.
8.2 MEANS OF CASH PAYMENT. Payments of Cash to be made by the
Reorganized Debtor or the Exchange Agent pursuant to the Plan shall be made by
check drawn on a domestic bank or by wire transfer from a domestic bank.
8.3 DELIVERY OF DISTRIBUTIONS. Distributions and deliveries by the
Reorganized Debtor to holders of Allowed Claims shall be made at the addresses
set forth on the proofs of Claim or
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proofs of interest filed by such holders (or at the last known addresses of such
holders if no proof of Claim or proof of interest is filed; or if the Debtors
have been notified of a change of address, at the address set forth in such
notice). If any holder's distribution is returned as undeliverable, no further
distributions to such holder shall be made unless and until the Reorganized
Debtor is notified of such holder's then current address, at which time all
unpaid distributions shall be made to such holder.
8.4 DEADLINE FOR CLAIMS FOR UNDELIVERABLE DISTRIBUTIONS. All claims for
undeliverable distributions shall be made on or before the second (2nd)
anniversary of the Initial Distribution Date. After such date, all Unclaimed
Property shall revert to the Reorganized Debtor, and the Claim of any holder
with respect to such property shall be discharged and forever barred.
8.5 TIME BAR TO CASH PAYMENTS. Checks issued by the Reorganized Debtor
in respect of Allowed Claims shall be null and void if not cashed within ninety
(90) days after the date of delivery thereof. Requests for re-issuance of any
check shall be made directly to the Reorganized Debtor by the holder of the
Allowed Claim to whom such check originally was issued. Any claim in respect of
such a voided check shall be made on or before the later of the first
anniversary of the Initial Distribution Date or ninety (90) days after the date
of delivery of such check. After such date, all Claims in respect of void checks
shall be discharged and forever barred.
8.6 NO INTEREST UNLESS OTHERWISE PROVIDED. No interest shall be paid on
any Claim unless, and only to the extent that, the Plan specifically provides
otherwise.
8.7 PREPAYMENT. The Debtors expressly reserve the right, in their sole
discretion, to prepay, in whole or in part, any obligation created pursuant to
the Plan, and no interest shall accrue with respect to the prepaid portion of
such obligation from and after the date of such prepayment.
8.8 TIMING OF DISTRIBUTIONS. Any payment or distribution required to be
made hereunder on a day other than a Business Day shall be due and payable on
the next succeeding Business Day.
8.9 NO DE MINIMIS DISTRIBUTIONS. Notwithstanding any other provision of
the Plan to the contrary, no distribution of less than $25 shall be made to any
holder of an Allowed Claim. Such undistributed amount will be retained by the
Reorganized Debtor.
ARTICLE 9
PROCEDURES FOR RESOLVING AND TREATING
CONTESTED AND CONTINGENT CLAIMS
9.1 OBJECTION DEADLINE. Unless a different date is set by order of the
Bankruptcy Court, all objections to Claims shall be served and filed no later
than 90 days after the Confirmation Date or 90 days after a particular proof of
Claim is filed, whichever is later. Any proof of claim filed more than 30 days
after the Confirmation Date shall be of no force and effect, shall be deemed
disallowed, and will not require objection. All Contested Claims shall be
litigated to Final Order;
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provided, however, that the Debtors or the Reorganized Debtor may compromise and
settle any Contested Claim, subject to the approval of the Bankruptcy Court.
9.2 RESPONSIBILITY FOR OBJECTING TO CLAIMS. The Reorganized Debtor
shall have the responsibility for objecting to the allowance of Claims following
the Effective Date.
9.3 NO DISTRIBUTION PENDING ALLOWANCE. Notwithstanding any other
provision of the Plan, no payment or distribution shall be made with respect to
any Contested Claim unless and until such Contested Claim becomes an Allowed
Claim.
9.4 DISTRIBUTION AFTER ALLOWANCE. Distributions to each holder of a
Contested Claim, to the extent that such Claim becomes an Allowed Claim, shall
be made in accordance with the provisions of the Plan governing the Class of
Claims to which such Claim belongs, and such holders shall receive all
distributions to which such holders would have been entitled had such Claim been
an Allowed Claim on the Effective Date.
ARTICLE 10
EXECUTORY CONTRACTS AND UNEXPIRED LEASES
10.1 GENERAL TREATMENT; ASSUMED IF NOT REJECTED. The Plan constitutes
and incorporates a motion by the Debtors to assume, as of the Effective Date,
all prepetition executory contracts and unexpired leases to which the Debtors
are a party, except for executory contracts or unexpired leases that (a) have
been assumed or rejected pursuant to Final Order of the Bankruptcy Court, (b)
are the subject of a separate motion pursuant to section 365 of the Bankruptcy
Code to be filed and served by the Debtors on or before the Confirmation Date,
or (c) are designated on Exhibit "2" of the Plan as executory contracts and
unexpired leases which the Debtors intend to reject.
10.2 CURE PAYMENTS AND RELEASE OF LIABILITY. All cure payments which
may be required by section 365(b)(l) of the Bankruptcy Code under any executory
contract or unexpired lease that is assumed, or assumed and assigned, under this
Plan shall be made on or before the Initial Distribution Date; provided,
however, that in the event of a dispute regarding the amount of any cure
payments, the cure of any other defaults, the ability of any party to provide
adequate assurance of future performance, or any other matter pertaining to
assumption or assignment, the Reorganized Debtor shall make such cure payments
and cure such other defaults and provide adequate assurance of future
performance, all as may be required by section 365(b)(l), of the Bankruptcy Code
only following the entry of a Final Order resolving such dispute. To the extent
that a party to an assumed executory contract or unexpired lease has not filed
an appropriate pleading with the Bankruptcy Court on or before the thirtieth
(30th) day after the Effective Date disputing the amount of any cure payments
offered to it, disputing the cure of any other defaults, disputing the
promptness of the cure payments, or disputing the provisions of adequate
assurance of future performance, then such party shall be deemed to have waived
its right to dispute such matters.
10.3 BAR TO REJECTION DAMAGES. If the rejection of an executory
contract or an unexpired lease by the Debtors results in damages to the other
party or parties to such contract or lease, a Claim
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for such damages shall be forever barred and shall not be enforceable against
the Debtors or their respective properties or agents, successors, or assigns,
unless a proof of Claim is filed with the Bankruptcy Court and served upon the
Reorganized Debtor by the earlier of (a) 30 days after the Confirmation Date or
(b) such other deadline as the Bankruptcy Court may set for asserting a Claim
for such damages.
10.4 REJECTION CLAIMS. Any Claim arising from the rejection of an
unexpired lease or executory contract and not barred by section 10.3 of the Plan
shall be treated as a Trade Claim pursuant to the Plan; provided, however, that
any Claim based upon the rejection of an unexpired lease of real property shall
be limited in accordance with section 502(b)(6) of the Bankruptcy Code and state
law mitigation requirements. Nothing contained herein shall be deemed an
admission by the Debtors that such rejection gives rise to or results in a Claim
or shall be deemed a waiver by the Debtors of any objections to such Claim if
asserted.
ARTICLE 11
CONDITIONS PRECEDENT TO EFFECTIVENESS OF PLAN
11.1 CONDITIONS TO EFFECTIVENESS OF PLAN. The Effective Date of the
Plan shall not occur unless and until the following conditions shall have been
satisfied or waived in writing by the Debtors and Amos, as determined in their
sole discretion:
(a) The Bankruptcy Court shall have entered the Confirmation
Order, in form and substance reasonably acceptable to the Debtors and Amos;
(b) all actions, documents, and agreements necessary to
implement the Plan shall have been effected or executed;
(c) the Debtors shall have received all authorizations,
consents, regulatory approvals, rulings, letters, no-action letters, opinions or
documents that are determined by the Debtors to be necessary to implement the
Plan; and
(d) the Confirmation Order shall have become a Final Order.
ARTICLE 12
CONSUMMATION OF THE PLAN
12.1 RETENTION OF JURISDICTION. Pursuant to sections 1334 and 157 of
title 28 of the United States Code, the Bankruptcy Court shall retain
nonexclusive jurisdiction of all matters arising in, arising under, and related
to the Chapter 11 Cases and the Plan, for the purposes of sections 105(a) and
1142 of the Bankruptcy Code, and for, among other things, the following
purposes:
DEBTORS' JOINT PLAN OF REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
24
<PAGE> 29
(a) To hear and to determine any and all objections to or
applications concerning the allowance of Claims or the allowance,
classification, priority, compromise, estimation, or payment of any Claim, or
Equity Interest;
(b) To hear and determine any and all applications for payment
of fees and expenses from the Debtors' estates made by attorneys or any other
Professional pursuant to sections 330 or 503 of the Bankruptcy Code, or for
payment of any other fees or expenses authorized to be paid or reimbursed from
the Debtors' estates under the Bankruptcy Code, and any and all objections
thereto;
(c) To hear and determine pending applications for the
rejection, assumption, or assumption and assignment of unexpired leases and
executory contracts and the allowance of Claims resulting therefrom, and to
determine the rights of any party in respect of the assumption or rejection of
any executory contract or lease;
(d) To hear and determine any and all adversary proceedings,
applications, or contested matters, including any remands from any appeals;
(e) To hear and to determine all controversies, disputes, and
suits that may arise in connection with the execution, interpretation,
implementation, consummation, or enforcement of the Plan or in connection with
the enforcement of any remedies made available under the Plan;
(f) To liquidate any disputed, contingent, or unliquidated
Claims;
(g) To ensure that distributions to holders of Allowed Claims
are accomplished as provided herein;
(h) To enter and to implement such orders as may be
appropriate in the event the Confirmation Order is for any reason stayed,
reversed, revoked, modified, or vacated;
(i) To enable the Reorganized Debtor to prosecute any and all
proceedings which may be brought to set aside liens or encumbrances and to
recover any transfers, assets, properties or damages to which the Debtors may be
entitled under applicable provisions of the Bankruptcy Code or any other
federal, state or local laws, including causes of action, controversies,
disputes and conflicts between the Debtors and any other party, including but
not limited to, any causes of action or objections to Claims, preferences or
fraudulent transfers and obligations or equitable subordination;
(j) To consider any modification of the Plan pursuant to
section 1127 of the Bankruptcy Code, to cure any defect or omission, or to
reconcile any inconsistency in any order of the Bankruptcy Court, including,
without limitation, the Confirmation Order;
(k) To enter and to implement such orders as may be necessary
or appropriate to execute, interpret, implement, consummate, or to enforce the
terms and conditions of the Plan and the transactions contemplated thereunder;
DEBTORS' JOINT PLAN OF REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
25
<PAGE> 30
(l) To hear and to determine any other matter not inconsistent
with the Bankruptcy Code and title 28 of the United States Code that may arise
in connection with or related to the Plan; and
(m) To enter a final decree closing the Chapter 11 Cases.
12.2 ABSTENTION AND OTHER COURTS. If the Bankruptcy Court abstains from
exercising, or declines to exercise, jurisdiction or is otherwise without
jurisdiction over any matter arising out of or relating to these Chapter 11
Cases, this section of the Plan shall have no effect upon and shall not control,
prohibit, or limit the exercise of jurisdiction by any other court having
competent jurisdiction with respect to such matter.
12.3 NONMATERIAL MODIFICATIONS. The Debtors may, with the approval
of the Bankruptcy Court and without notice to all holders of Claims and Equity
Interests, correct any nonmaterial defect, omission, or inconsistency in the
Plan in such manner and to such extent as may be necessary or desirable. The
Debtors may undertake such nonmaterial modification pursuant to this section
insofar as it does not adversely change the treatment of the Claim of any
Creditor or the interest of any Equity Interest holder who has not accepted in
writing the modification.
12.4 MATERIAL MODIFICATIONS. Modifications of this Plan may be proposed
in writing by the Debtors at any time before confirmation, provided that this
Plan, as modified, meets the requirements of sections 1122 and 1123 of the
Bankruptcy Code, and the Debtors shall have complied with section 1125 of the
Bankruptcy Code. This Plan may be modified at any time after confirmation and
before the Initial Distribution Date, provided that the Plan, as modified, meets
the requirements of sections 1122 and 1123 of the Bankruptcy Code and the
Bankruptcy Court, after notice and a hearing, confirms the Plan, as modified,
under section 1129 of the Bankruptcy Code, and the circumstances warrant such
modification.
ARTICLE 13
MISCELLANEOUS PROVISIONS
13.1 LIMITATION ON AVOIDANCE ACTIONS. Any monetary recovery in an
Avoidance Action shall be limited to twenty-five percent (25%) of the amount to
which the holder of such Avoidance Action would be entitled absent this
provision. No Claims arising under section 502(h) of the Bankruptcy Code shall
be allowed.
13.2 SETOFFS. The Debtors or Reorganized Debtor may, but shall not be
required to, set off against any Claim and the payments or other distributions
to be made pursuant to this Plan in respect of such Claim, claims of any nature
whatsoever that the Debtors may have against the holder of such Claim, but
neither the failure to do so nor the allowance of any Claim hereunder shall
constitute a waiver or release by the Debtors of any such claim that the Debtors
may have against such holder.
13.3 COMPLIANCE WITH ALL APPLICABLE LAWS. If notified by any
governmental authority
DEBTORS' JOINT PLAN OF REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
26
<PAGE> 31
that they are in violation of any applicable law, rule, regulation, or order of
such governmental authority relating to their businesses, the Debtors and
Reorganized Debtor shall comply with such law, rule, regulation, or order;
provided that nothing contained herein shall require such compliance if the
legality or applicability of any such requirement is being contested in good
faith in appropriate proceedings and, if appropriate, an adequate reserve has
been set aside on the books of the Debtors or Reorganized Debtor.
13.4 LIMITATION OF LIABILITY. Neither the Debtors, the Reorganized
Debtors, Amos or its affiliates, the Committee, nor any of their respective
members, officers, directors, employees, advisors or agents shall have or incur
any liability to any holder of a Claim or Equity Interest for any act or
omission in connection with, related to, or arising out of, the Chapter 11
Cases, the pursuit of confirmation of the Plan, the consummation of the Plan, or
the administration of the Plan or the property to be distributed under the Plan,
except for willful misconduct or gross negligence. In all respects, the Debtors,
the Reorganized Debtors, Amos and its affiliates, the Committee, and each of
their respective members, officers, directors, employees, advisors, and agents
shall be entitled to rely upon the advice of counsel with respect to their
duties and responsibilities under the Plan.
13.5 BINDING EFFECT. The Plan shall be binding upon, and shall inure to
the benefit of, the Debtor, the holders of the Claims, the holders of Equity
Interests, and their respective successors and assigns.
13.6 GOVERNING LAW. Unless a rule of law or procedure supplied by
federal law (including the Bankruptcy Code and Bankruptcy Rules) is applicable,
or a specific choice of law provision is provided, the internal laws of the
State of Texas shall govern the construction and implementation of the Plan and
any agreements, documents, and instruments executed in connection with the Plan,
without regard to conflicts of law.
13.7 FILING OF ADDITIONAL DOCUMENTS. The Debtors shall file such
agreements and other documents as may be necessary or appropriate to effectuate
and further evidence the terms and conditions of the Plan.
13.8 DISSOLUTION OF COMMITTEE: The Committee shall dissolve and cease
to exist as of the Effective Date.
13.9 EXEMPTION FROM TRANSFER TAXES. Pursuant to section 1146(c) of the
Bankruptcy Code, the issuance, transfer or exchange of notes or equity
securities as contemplated under the Plan, the creation of any mortgage, deed of
trust, or other security interest, the making or assignment of any lease or
sublease, or the making or delivery of any deed or other instrument of transfer
under, in furtherance of, or in connection with the Plan, including, without
limitation, any merger agreements or agreements of consolidation, deeds, bills
of sale or assignments executed in connection with any of the transactions
contemplated under the Plan shall not be subject to any stamp, real estate
transfer, mortgage recording or other similar tax.
13.10 RETIREE BENEFITS. On and after the Effective Date, pursuant to
section 1129(a)(13) of the Bankruptcy Code, the Reorganized Debtor shall
continue to pay any retiree benefits (within
DEBTORS' JOINT PLAN OF REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
27
<PAGE> 32
the meaning of section 1114 of the Bankruptcy Code), at the level established in
accordance with section 1114 of the Bankruptcy Code, at any time prior to the
Confirmation Date, or the duration of the period for which the Reorganized
Debtor is obligated to provide such benefits.
13.11 SECTION 1125(e) OF THE BANKRUPTCY CODE. As of the Confirmation
Date, the Debtors shall be deemed to have solicited acceptances of the Plan in
good faith and in compliance with the applicable provisions of the Bankruptcy
Code.
13.12 NOTICES. To be effective, all notices, requests, and demands to
or upon the Debtors, the Reorganized Debtor, Amos, or the Committee shall be in
writing and, unless otherwise expressly provided herein, shall be deemed to have
been duly given or made when actually delivered or, in the case of notice by
facsimile transmission, when received and telephonically confirmed, with a copy
by mail, addressed as follows:
Remainder of Page Left Intentionally Blank
DEBTORS' JOINT PLAN OF REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
28
<PAGE> 33
<TABLE>
<CAPTION>
If to the Debtors or the Reorganized Debtor: If to Arnos:
<S> <C>
National Energy Group, Inc. Mr. Robert J. Mitchell
Attn: Philip D. Devlin, General Counsel 767 Fifth Avenue, 47th Floor
4925 Greenville Avenue New York, New York 10153
Dallas, Texas 75206 Telephone: (212) 702-4302
Telephone: (214) 692-9211 Facsimile: (212) 750-5815
Facsimile: (214) 692-5055
with a copy to: with copies to:
Patrick J. Neligan, Jr., Esq. Alan Forman, Esq.
Neligan, Andrews, Bryson & Foley LLP Berlack, Israels & Libermann, L.L.P.
1717 Main Street, Suite 4050 120 West 45th Street
Dallas, Texas 75201 New York, New York 10036
Telephone: (214) 653-4333 Telephone: (212) 704-0100
Facsimile: (214) 745-2533 Facsimile: (212) 704-0196
and
Robin E. Phelan, Esq.
Haynes and Boone, LLP
901 Main Street, Suite 3100
Dallas, Texas 75202
Telephone: (214) 651-5000
Facsimile: (214) 651-5940
If to the Committee:
Hugh M. Ray, Esq.
Andrews & Kurth L.L.P.
1717 Main Street, Suite 3700
Dallas, Texas 75201
Telephone: (214) 659-4400
Facsimile: (214) 659-4401
</TABLE>
DEBTORS' JOINT PLAN OF REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
29
<PAGE> 34
Dated: March 14, 2000 NATIONAL ENERGY GROUP, INC.
Dallas, Texas
By: /s/ BOB G. ALEXANDER
-----------------------------
Name: Bob G. Alexander
-----------------------------
Its: President
-----------------------------
BOOMER MARKETING CORPORATION
By: /s/ BOB G. ALEXANDER
-----------------------------
Name: Bob G. Alexander
-----------------------------
Its: President
-----------------------------
DEBTORS' JOINT PLAN OF REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
<PAGE> 35
EXHIBIT 1
AMENDED INDENTURE
TO BE SUPPLIED ON OR BEFORE HEARING
TO CONSIDER ADEQUACY OF DISCLOSURE STATEMENT
DEBTORS' JOINT PLAN OF REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
<PAGE> 36
EXHIBIT 2
LIST OF EXECUTORY CONTRACTS AND LEASES TO BE REJECTED
TO BE SUPPLIED ON OR BEFORE HEARING
TO CONSIDER ADEQUACY OF DISCLOSURE STATEMENT
DEBTORS' JOINT PLAN OF REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
<PAGE> 37
EXHIBIT B
FORM 10-K
[TO BE PROVIDED WHEN FILED WITH SECURITIES
AND EXCHANGE COMMISSION.
ESTIMATED DATE: MARCH 31, 2000]
<PAGE> 1
EXHIBIT 2.6
Hugh M. Ray
State Bar No. 16611000
J. Van Oliver
State Bar No. 15258700
ANDREWS & KURTH L.L.P.
3700 Bank One Center, 1717 Main Street
Dallas, Texas 75201a
Telephone: (214) 659-4400
Telecopier: (214) 659-4401
ATTORNEYS FOR CREDITORS COMMITTEE
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
IN RE: )
)
NATIONAL ENERGY GROUP, INC. ) CASE NO. 98-80258-HCA-11
AND BOOMER MARKETING ) (JOINTLY ADMINISTERED)
CORPORATION )
) HEARING DATE: APRIL 17, 2000
DEBTOR. ) 9:15 A.M.
)
)
JOINT DISCLOSURE STATEMENT UNDER SECTION 1125
OF THE BANKRUPTCY CODE WITH RESPECT TO THE
PLAN OF REORGANIZATION PROPOSED BY
THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS
DATED: February 28, 2000
Dallas, Texas
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C>
INTRODUCTORY STATEMENT ............................................................................. iv
I. INTRODUCTION .............................................................................. 1
II. NOTICE TO HOLDERS OF CLAIMS AND EQUITY INTERESTS .......................................... 2
III. PLAN OVERVIEW ............................................................................. 5
IV. SUMMARY OF CLASSIFICATION AND TREATMENT ................................................... 7
V. VOTING PROCEDURES AND REQUIREMENTS ........................................................ 11
A. Ballots and Voting Deadline ....................................................... 11
B. Holders of Claims Solicited to Vote ............................................... 13
C. Definition of Impairment .......................................................... 14
D. Vote Required for Class Acceptance ................................................ 14
VI. CONFIRMATION OF THE PLAN .................................................................. 15
A. Confirmation Hearing .............................................................. 15
B. Requirements for Confirmation of the Plan ......................................... 16
C. Cramdown .......................................................................... 18
VII. DESCRIPTION OF THE DEBTORS ................................................................ 20
A. Business .......................................................................... 20
1. General Overview of the Company .......................................... 20
2. Business Prior to Bankruptcy ............................................. 20
a. MidContinent Area ............................................... 24
b. Anadarko Basin .................................................. 24
c. East and West Texas Area ........................................ 25
d. Gulf Coast Area ................................................. 26
e. Greater Bayou Sorrel Area ....................................... 26
3. Oil and Natural Gas Reserves ............................................. 27
4. Leasehold Acreage ........................................................ 28
5. Title to Oil and Natural Gas Properties .................................. 28
6. Control over Production Activities ....................................... 28
7. Markets and Customers .................................................... 29
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C> <C> <C> <C>
8. Office Space ............................................................... 30
9. Employees .................................................................. 31
10. Legal Proceedings .......................................................... 31
11. Abandonment Costs .......................................................... 32
B. Selected Financial Information .................................................... 33
1. Market Information ........................................................ 33
a. 10 3/4% Senior Notes Due 2006 Approximately $165 Million
Outstanding ...................................................... 33
b. Arnos Secured Claims Purchase from Bank Group .................... 34
c. NEG Preferred Stock .............................................. 36
2. Significant Events Occurring During Chapter 11 ............................ 37
a. Granting Petitioning Creditors Relief and
Declaring NEG Insolvent .......................................... 37
b. Cessation of Most Drilling Activities ............................ 38
c. Termination of the Exclusive Right to File a Plan of
Reorganization ................................................... 38
d. Joint Employment of CIBC World Capital Markets ................... 38
e. Proposed Sale to Arnos ........................................... 39
f. EBCO Auction Sale of Nominally Valued Properties ................. 40
3. Liquidity and Cash Resources for Funding Plan ............................. 40
4. Directors and Officers of NEG ............................................. 41
5. Employment Contracts and Termination of Employment and Change
in Control Arrangements ............................................ 43
6. Severance Policy .......................................................... 45
7. Security Ownership of Certain Beneficial Owners ........................... 47
8. Security Ownership of Management .......................................... 51
VIII. FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN ................................................ 53
A. Federal Income Tax Consequences to the Debtors .................................... 53
1. General Discussion ........................................................ 53
2. Cancellation of Indebtedness .............................................. 54
3. NOLs and Future Utilization ............................................... 55
4. Alternative Minimum Tax ................................................... 57
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<S> <C> <C> <C> <C>
B. Federal Income Tax Consequences to Holders of Claims .............................. 58
1. Realization and Recognition of Gain or Loss in General .................... 58
2. Holders of Claims Whose Allowed Claims Constitute Securities .............. 59
3. Holders of Claims Whose Allowed Claims
Do Not Constitute Securities .............................................. 60
4. Character of Gain or Loss ................................................. 60
IX. BANKRUPTCY CAUSES OF ACTION ................................................................ 62
A. Preferences ....................................................................... 62
B. Fraudulent Conveyances ............................................................ 63
C. D&O and Related Litigation ........................................................ 63
X. ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE
PLAN ....................................................................................... 63
A. Continuation of the Chapter 11 Cases .............................................. 64
B. Alternative Plans of Reorganization ............................................... 64
C. Chapter 7 Liquidation ............................................................. 64
XI. SIGNATURES ................................................................................. 67
</TABLE>
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<PAGE> 5
INTRODUCTORY STATEMENT
THIS DISCLOSURE STATEMENT UNDER SECTION 1125 OF THE BANKRUPTCY CODE
WITH RESPECT TO THE JOINT PLAN OF REORGANIZATION PROPOSED BY THE CREDITORS
COMMITTEE (THIS "DISCLOSURE STATEMENT") CONTAINS A SUMMARY OF CERTAIN PROVISIONS
OF THE JOINT PLAN OF REORGANIZATION PROPOSED BY THE CREDITORS COMMITTEE (THE
"PLAN"), AND SUMMARIES OF CERTAIN OTHER DOCUMENTS RELATING TO THE CONSUMMATION
OF THE PLAN OR THE TREATMENT OF CERTAIN CLAIMS AND EQUITY INTERESTS OF
PARTIES-IN-INTEREST, AND CERTAIN FINANCIAL INFORMATION RELATING THERETO. WHILE
THE CREDITORS COMMITTEE BELIEVE THAT THESE SUMMARIES PROVIDE ADEQUATE
INFORMATION WITH RESPECT TO THE DOCUMENTS SUMMARIZED, SUCH SUMMARIES ARE
QUALIFIED TO THE EXTENT THAT THEY DO NOT SET FORTH THE ENTIRE TEXT OF SUCH
DOCUMENTS. EACH HOLDER OF AN IMPAIRED CLAIM SHOULD REVIEW THE ENTIRE PLAN AND
SEEK THE ADVICE OF ITS OWN COUNSEL BEFORE CASTING A BALLOT.
NO PARTY IS AUTHORIZED BY THE CREDITORS COMMITTEE TO PROVIDE ANY
INFORMATION WITH RESPECT TO THE PLAN OTHER THAN THAT CONTAINED IN THIS
DISCLOSURE STATEMENT. THE CREDITORS COMMITTEE HAVE NOT AUTHORIZED ANY
REPRESENTATIONS CONCERNING THE CREDITORS COMMITTEE, THEIR ANTICIPATED FINANCIAL
POSITION OR OPERATIONS AFTER CONFIRMATION OF THE PLAN, OR THE VALUE OF THE
BUSINESS AND PROPERTY OF THE CREDITORS COMMITTEE OTHER THAN AS SET FORTH IN THIS
DISCLOSURE STATEMENT. TO THE EXTENT INFORMATION IN THIS DISCLOSURE STATEMENT
RELATES TO THE CREDITORS COMMITTEE, THE CREDITORS COMMITTEE HAS PROVIDED THE
INFORMATION IN THIS DISCLOSURE STATEMENT.
NOTHING CONTAINED IN THIS DISCLOSURE STATEMENT, EXPRESS OR IMPLIED, IS
INTENDED TO GIVE RISE TO ANY COMMITMENT OR OBLIGATION OF THE CREDITORS COMMITTEE
OR SHALL CONFER UPON ANY PERSON ANY RIGHTS, BENEFITS OR REMEDIES OF ANY NATURE
WHATSOEVER.
EXCEPT AS HEREAFTER NOTED, THE INFORMATION CONTAINED HEREIN IS
GENERALLY INTENDED TO DESCRIBE FACTS AND CIRCUMSTANCES ONLY AS OF FEBRUARY 1,
2000, AND NEITHER THE DELIVERY OF THIS DISCLOSURE STATEMENT NOR THE CONFIRMATION
OF THE PLAN WILL CREATE ANY IMPLICATION, UNDER ANY CIRCUMSTANCES, THAT THE
INFORMATION CONTAINED HEREIN OR THEREIN IS CORRECT AT ANY TIME AFTER THE DATE
HEREOF OR THEREOF OR THAT THE CREDITORS COMMITTEE WILL BE UNDER ANY OBLIGATION
TO UPDATE SUCH INFORMATION IN THE FUTURE.
-iv-
<PAGE> 6
JOINT DISCLOSURE STATEMENT UNDER SECTION 1125 OF THE
BANKRUPTCY CODE WITH RESPECT TO THE JOINT PLAN OF
REORGANIZATION PROPOSED BY THE CREDITORS COMMITTEE
I.
INTRODUCTION
On December 4, 1998 ("Commencement Date"), certain holders of Notes (as
defined in the Plan) filed an involuntary petition in bankruptcy under Section
303 (11 U.S.C. Section 101 et. seq.) of the Bankruptcy Code against National
Energy Group, Inc. ("NEG" or the "Company"). After a trial on the merits, the
Bankruptcy Court presiding over the case ruled in favor of the petitioning
noteholders and on February 12, 1999 entered an order for relief. Shortly
thereafter, NEG, together with Boomer Marketing, Inc. converted the cases to
voluntary ones under Chapter 11 with the United States Bankruptcy Court for the
Northern District of Texas (the "Bankruptcy Court"). Subsequently, the Chapter
11 cases were administratively consolidated under Case No. 98-80258-HCA-l1.
Since February, 1999, the Debtors have continued to operate their businesses as
debtors-in-possession pursuant to Sections 1107 and 1108 of the Bankruptcy Code.
On or about February 19, 1999, the Office of the United States Trustee (the
"U.S. Trustee") appointed an Official Committee of Unsecured Creditors (the
"Creditors' Committee") in the Chapter 11 Cases.
On or about February 14, 2000, the Creditors Committee filed its Plan
of Reorganization (the "Plan") and this Disclosure Statement. The Creditors
Committee submits this Disclosure Statement under Section 1125 of the Bankruptcy
Code with respect to the Plan in connection with the solicitation of votes to
accept or reject the Plan. A copy of the Plan is attached hereto as Exhibit "A".
Capitalized terms used herein, if not defined herein, have the defined meanings
set forth in the Plan.
-1-
<PAGE> 7
II.
NOTICE TO HOLDERS OF CLAIMS AND EQUITY INTERESTS
The purpose of this Disclosure Statement is to enable you, as the
holder of a Claim against the Debtors, to make an informed decision with respect
to voting on acceptance or rejection of the Plan.
All persons receiving this Disclosure Statement and the Plan attached
hereto are urged to review fully the provisions of the Plan and all other
exhibits attached hereto, in addition to reviewing the text of this Disclosure
Statement. This Disclosure Statement is not intended to replace careful review
and analysis of the Plan. Rather, it is submitted as an aid in your review of
the Plan and in an effort to explain the terms and implications of the Plan.
However, to the extent any questions arise, the Creditors Committee urges you to
seek independent legal advice.
On April 17,2000, after notice and a hearing, the Bankruptcy Court
approved this Disclosure Statement as containing information of a kind and in
sufficient detail, adequate to enable holders of Claims against or Equity
Interests in the Debtors, whose votes on the Plan are being solicited, to make
an informed judgment whether to accept or reject the Plan.
You should read this Disclosure Statement in its entirety prior to
voting on the Plan. No solicitation of votes on the Plan may be made except
pursuant to this Disclosure Statement and Section 1125 of the Bankruptcy Code,
and no person has been authorized to utilize any information concerning the
Debtors or their businesses other than the information contained in this
Disclosure Statement or in other information approved for dissemination to
holders of Claims by the Bankruptcy Court. You should not rely on any
information relating to the Debtors and their businesses, other than that
contained in this Disclosure Statement, the exhibits attached hereto the
-2-
<PAGE> 8
Plan, the exhibits attached thereto and the Plan Supplement, except as otherwise
approved by the Bankruptcy Court.
SECTION 1125(b) OF THE BANKRUPTCY CODE PROHIBITS SOLICITATION OF AN
ACCEPTANCE OR REJECTION OF A PLAN OF REORGANIZATION UNLESS A COPY OF THE PLAN OF
REORGANIZATION OR A SUMMARY THEREOF IS ACCOMPANIED OR PRECEDED BY A COPY OF A
DISCLOSURE STATEMENT APPROVED BY THE BANKRUPTCY COURT.
THE DESCRIPTION HEREIN OF THE PLAN IS A SUMMARY ONLY AND HOLDERS OF
CLAIMS AND EQUITY INTERESTS ARE URGED TO REVIEW THE ENTIRE PLAN WHICH IS
ATTACHED AS EXHIBIT "A" HERETO, AS WELL AS THE PLAN SUPPLEMENT. IN THE EVENT
THAT ANY INCONSISTENCY OR CONFLICT EXISTS BETWEEN THIS DISCLOSURE STATEMENT AND
THE PLAN, THE TERMS OF THE PLAN SHALL CONTROL.
EXCEPT AS SET FORTH IN THIS DISCLOSURE STATEMENT, THE EXHIBITS AND PLAN
SUPPLEMENT, NO REPRESENTATIONS CONCERNING THE DEBTORS, THEIR ASSETS, PAST OR
FUTURE BUSINESS OPERATIONS, OR THE PLAN ARE AUTHORIZED, NOR ARE ANY SUCH
REPRESENTATIONS TO BE RELIED UPON IN ARRIVING AT A DECISION WITH RESPECT TO THE
PLAN. ANY REPRESENTATIONS MADE TO SECURE ACCEPTANCE OR REJECTION OF THE PLAN
OTHER THAN AS CONTAINED IN THIS DISCLOSURE STATEMENT SHOULD BE REPORTED TO
COUNSEL FOR THE DEBTORS.
THERE HAS BEEN NO INDEPENDENT AUDIT OF THE FINANCIAL INFORMATION
CONTAINED IN THIS DISCLOSURE STATEMENT AND NO FAIRNESS OPINION HAS BEEN OBTAINED
REGARDING THE VALUE OF THE ASSETS AND THE AMOUNT OF THE LIABILITIES. THE FACTUAL
INFORMATION REGARDING THE DEBTORS AND THEIR ASSETS AND LIABILITIES HAS BEEN
DERIVED FROM THE DEBTORS' SCHEDULES, AVAILABLE PUBLIC RECORDS, PLEADINGS AND
REPORTS ON FILE WITH THE BANKRUPTCY COURT, THE DEBTORS' INTERNAL DOCUMENTS, AND
RELATED DOCUMENTS SPECIFICALLY IDENTIFIED HEREIN. WHILE EVERY EFFORT HAS BEEN
MADE BY THE CREDITORS COMMITTEE TO PROVIDE ACCURATE INFORMATION HEREIN, THE
CREDITORS COMMITTEE AND ITS RESPECTIVE LEGAL AND FINANCIAL ADVISORS, CANNOT AND
DO NOT WARRANT OR REPRESENT THAT THE INFORMATION CONTAINED IN THIS DISCLOSURE
STATEMENT IS WITHOUT ANY INACCURACY.
THE APPROVAL BY THE BANKRUPTCY COURT OF THIS DISCLOSURE STATEMENT DOES
NOT CONSTITUTE AN ENDORSEMENT BY THE BANKRUPTCY COURT OF THE PLAN OR A GUARANTEE
OF THE ACCURACY AND COMPLETENESS OF THE INFORMATION CONTAINED HEREIN.
-3-
<PAGE> 9
THIS DISCLOSURE STATEMENT HAS NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY SECURITIES REGULATORY AUTHORITY OF ANY
STATE, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY SECURITIES
REGULATORY AUTHORITY OF ANY STATE PASSED UPON THE ACCURACY OR ADEQUACY OF THE
STATEMENTS CONTAINED HEREIN.
EACH HOLDER OF AN IMPAIRED CLAIM OR AN IMPAIRED EQUITY INTEREST SHOULD
REVIEW THE ENTIRE PLAN AND SEEK THE ADVICE OF ITS OWN COUNSEL BEFORE CASTING A
BALLOT.
After carefully reviewing this Disclosure Statement and all exhibits
attached hereto, the Plan and the Plan Supplement, if you have received a ballot
to vote for or against the Plan, please indicate your acceptance or rejection of
the Plan by voting in favor of or against the Plan on such ballot, in accordance
with the instructions thereon, and return the ballot in the enclosed
self-addressed, return envelope by 5:00 p.m. Central Time on May ___, 2000, to
Van Oliver, Andrews & Kurth L.L.P., Suite 3700, 1717 Main Street, Dallas, Texas
75201. PLEASE NOTE THAT FACSIMILE COPIES OF THE BALLOT WILL BE ACCEPTED BUT A
BALLOT BEARING AN ORIGINAL SIGNATURE MUST ALSO BE FORWARDED TO THE TALLYING
AGENT.
ANY BALLOTS RECEIVED
AFTER 5:00 P.M. CENTRAL TIME
ON MAY __, 2000 WILL NOT BE COUNTED.
For further information concerning voting, see Section V herein
("Voting Procedures and Requirements").
On April 17, 2000, the Bankruptcy Court entered an order (i) fixing May
___, 2000 at ____ __.m., Central Time, United States Bankruptcy Court, Northern
District of Texas, United States Courthouse, Earl Cabell Federal Office
Building, 12th Floor, 1100 Commerce, Dallas, Texas 75201, Louisiana 70130, as
the date, time and place for a hearing on confirmation of the Plan, and (ii)
fixing May ___, 2000 at ______ ____.m., Central Time, as the last date for the
filing with the Bankruptcy Court and serving upon counsel for the Creditors
Committee any objections to
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<PAGE> 10
confirmation of the Plan. The hearing on confirmation may be adjourned from
time to time without further written notice.
III.
PLAN OVERVIEW
The Plan treats all Claims and Equity Interests fairly and equitably.
The following is a brief summary of the Plan's treatment of Claims against and
Equity Interests in the Debtors. This summary is qualified in its entirety by
reference to the provisions of the entire Plan. A copy of the Plan is attached
hereto as Exhibit "A". You are urged to read the Plan in its entirety. To the
extent there is any conflict between this Disclosure Statement and the Plan, the
terms of the Plan control.
The Plan provides for the possibility of a limited continuation of the
Debtors oil and natural gas business operations. The Plan contemplates the
creation of a Creditors Trust to which will be transferred at confirmation
substantially all the cash and cash equivalents of the Debtors, the funds held
in escrow from the Arnos Corporation purchase of oil and gas assets from the
Debtors and all the Debtors' causes of action for the payment and primary
benefit of allowed claims of administrative, tax, priority, miscellaneous
secured and unsecured trade and note creditors.
Allowed Administrative Expense Claims, including Allowed Claims of
professionals, Allowed Other Priority Claims and Involuntary Gap Claims of trade
creditors who provided materials, services or goods between December 4, 1998 and
February 12, 1999, will be paid in full, in Cash on the later of the Effective
Date and the date such Claim becomes an Allowed Claim, or as soon thereafter as
is practicable. Allowed Priority Tax Claims will be paid in full, in Cash on the
later of the Effective Date and the date such Priority Tax Claim becomes an
Allowed Priority Tax Claim, or as soon thereafter as is practicable.
-5-
<PAGE> 11
Other Allowed Secured Claims will either be (a) paid, at the sole
option of the Creditors' Committee, in full, in Cash on the later of the
Effective Date and the date such Secured Claim becomes an Allowed Secured Claim,
or as soon thereafter as is practicable, (b) will retain the Lien (or
replacement Lien) until full and final payment of such Allowed Secured Claim, at
which time such Lien shall be deemed null and void and shall be unenforceable
for all purposes; (c) receive the collateral securing its claim in satisfaction
of its secured claim.
The remaining portion of the Secured Arnos Claim shall be satisfied by
the payment of remaining interest on its claim for the period December 1, 1999
through December 13, 1999 in Cash on the later of the Effective Date or the date
such Claim becomes an Allowed Claim, or as soon thereafter as is practicable.
Holders of Allowed Class 6 Claims will receive their pro rata share of (i) NEG's
cash, Arnos Corp. sale proceeds and related assets contributed to the Creditors
Trust created for the benefit of holders of Allowed Claims and Classes 1-6 have
been paid or provided for. The Creditors Committee has the right at that point
to sell the remaining assets of the Debtors or sell the rights of Noteholders to
retain in the form of Additional Common Stock the rights to receive between 49%
and 95% of all outstanding stock of the reorganized debtor on a fully diluted
basis to a third party or parties. The Noteholders shall have the right to elect
all members of the board of directors for NEG for a two (2) year term after the
Plan's Effective Date. Acting on behalf of the Class 6 Noteholders, they provide
the Creditors Committee the right to negotiate and sell such 49%-95% of fully
diluted Common Stock (available for distribution as Additional Common Stock) to
a third party or parties at any time before the Confirmation Date and thirty
(30) days following the Plan's Effective Date.
-6-
<PAGE> 12
Allowed Convenience Claims will receive on the later of the Effective
Date and the date such Convenience Claim becomes an Allowed Convenience Claim,
or as soon thereafter as is practicable, payment in Cash in the full amount of
such Allowed Convenience Claim.
Allowed Class 5 Trade Claims incurred pre-December 4, 1998 will be
satisfied by distribution made from the Creditors' Trust to the holders of such
Allowed Trade Claims equal to seventy percent (70%) of such Allowed Claim,
provided all such Allowed General Unsecured Trade Claims do not exceed
$1,500,000 ("Trade Cap"). To the extent the aggregate of such Class 5 Allowed
Trade Claims exceeds $1,500,000, they will be treated as Allowed Class 6 Claims.
Finally, with respect to the Equity Interests in the Debtors, all
existing NEG Equity Interests will remain in existence, except that all NEG
preferred stock will be converted into Common Stock at the conversion price of
$.25 per share. In the event the Creditors Committee elects to maximize the
return to Class 6 Note Claims by causing the Remaining Assets of the Debtors to
be liquidated, the Debtors will also be liquidated and/or wind up their
corporate affairs. The Creditors Trust will receive such liquidation proceeds
and distribute them in accordance with the terms of the Plan.
IV.
SUMMARY OF CLASSIFICATION AND TREATMENT
The Plan designates eight (8) Classes of Claims and Equity Interests
taking into account their differing nature and priority as established under the
Bankruptcy Code. The following is a summary of the Classes, Claims and Equity
Interest types, and the treatment of Allowed Claims and Allowed Equity Interests
under the Plan. The Debtors have prepared the following chart in an effort to
provide holders of Claims and holders of Equity Interests with the Debtors'
estimates of the expected outstanding amounts due owing with respect to each
Class of Claims as of the projected Confirmation Date, November 1, 1999. The
calculations, percentages and amounts set forth below are estimates which shall
not affect the obligations of any party under the Plan.
-7-
<PAGE> 13
Unclassified. Allowed Administrative Expense Claims
Total estimated amount of unpaid Allowed Administrative Expense Claims,
including trade claims incurred during the Section 303 "Gap Period" between the
involuntary petition date of December 4, 1998 and February 12, 1999, are
estimated at $1,500,000
Payment of ordinary course expenses incurred by the Debtors-in-Possession shall
be made in the ordinary course of business. Other Administrative Expense Claims
shall be paid in full, in Cash on the later of the Effective Date or within ten
(10) days after the date upon which an Administrative Expense Claim is Allowed,
or as soon thereafter as is practicable.
Estimated percentage recovery: 100%
Unclassified. Allowed Professional Compensation and Reimbursement Claims
Total estimated amount of unpaid Allowed Professional Compensation and
Reimbursement Claims: $2,000,000
Payment in full, in Cash (or by setoff against any retainer on hand) on the
later of the Effective Date and within ten (10) days after the date upon which a
Professional Compensation and Reimbursement Claim is Allowed, or as soon
thereafter as is practicable.
Estimated percentage recovery: 100%
Unclassified. Allowed Priority Tax Claims
Total estimated amount of Unpaid Priority Tax Claims: Less than $500,000
At the sole option of the Reorganized Debtors, payment in full, in Cash on the
later of the Effective Date and within ten (10) days after the date upon which a
Priority Tax Claim is Allowed, or as soon thereafter as is practicable.
Estimated percentage recovery: 100%
Class 1. Allowed Other Priority Claims
Total estimated amount of Allowed Other Priority Claims: $___________________
Unimpaired. Payment in full, in Cash on the later of the Effective Date and the
date within ten (10) days after upon which an Other Priority Claim is Allowed by
Final Order, or as soon thereafter as is practicable.
Estimated percentage recovery: 100%
Class 2. Allowed Arnos Secured Claim
Total estimated amount of unpaid Allowed Arnos Secured Claim: $l00,000
Unimpaired. The Arnos Secured Claim shall receive a payment of unpaid accrued
interest due on its claim for the period December 1, 1999 through December 13,
1999.
Estimated percentage recovery: 100%
-8-
<PAGE> 14
Class 3. Allowed Miscellaneous Secured Claims
Total estimated amount of Allowed
Miscellaneous Secured Claims:
Less than $100,000
Impaired. At the sole option of the Reorganized Debtors, either (a) payment in
full, in Cash on the later of the Effective Date and within ten (10) days after
the date upon which an Other Secured Claim becomes an Allowed Other Secured
Claim, or a soon thereafter as is practicable, or (b) satisfied in full by the
tender of all Collateral securing such Allowed Miscellaneous Secured Claim, or
(c) such other agreement as the Creditors Committee and such claimant can reach.
Estimated percentage of recovery: 100%
Class 4. Allowed Convenience Claims of $1,000 or greater amount reduced to
$1,000
Total estimated amount of Allowed Convenience Claims: $500,000
Impaired. Each holder of an Allowed Convenience Claim as of the Record Date
shall receive Cash in an amount equal to 80% of such Allowed Convenience Claim
on the later of the Effective Date and ten (10) days after the date upon which a
Convenience Claim is Allowed, or as soon thereafter as is practicable.
Estimated percentage recovery: 80%
Class 5. Allowed General Unsecured Trade Claims Total estimated amount of
Allowed General Unsecured Trade Claims: $1 ,200.000-$1,500,000
Impaired. Each holder of an Allowed General Unsecured Claim shall receive Cash
in an amount equal to 70% of such Allowed General Unsecured Claim or the latter
of the Effective Date or within ten (10) days after the Date when the Unsecured
Trade Claim has been allowed, or as soon thereafter as practicable.
Estimated percentage recovery: 70%
-9-
<PAGE> 15
- --------------------------------------------------------------------------------
Class 6: Allowed Note Claims
Total estimated amount of Allowed Note Claims:
Principal Amount of $165,000,000
Impaired. The Allowed Note Claims shall be the primary beneficiary of the
Creditors Trust. The Creditors Trust shall utilize the Cash, Arnos Escrow Funds
and any Proceeds recovered from prosecution of the Causes of Action ("Litigation
Proceeds"), together with any proceeds received from the liquidation of
miscellaneous Remaining Assets of the Debtor or rights of Noteholders to receive
up to 95% of the fully diluted Common Stock of the Reorganized Debtors, to pay
in the order of their priority, Allowed Administrative Claims, Allowed Priority
Tax Claims, Allowed Priority Non-Tax Claims, Allowed Convenience Claims, Allowed
Miscellaneous Secured Claims and the Allowed Arnos Secured Claim ("Superior
Claims") and Allowed Trade Claims. After establishing a sufficient reserve to
cover Dispute Claims and an administrative reserve to insure the continued
viability and operation of the Trust, the Creditor Trust shall make the Initial
Distribution and any Subsequent and Surplus Distributions to Norwest Bank, N.A.,
the Note Indenture Trustee, which, in turn, shall immediately distribute such
proceeds to the holders of Allowed Class 6 Note Claims on a Pro-Rata basis.
Estimated percentage recovery: 50%-65%
- --------------------------------------------------------------------------------
Class 7. Allowed NEG Preferred Stock Interests.
Impaired. As of the Effective Date, each holder of NEG Preferred Stock as of the
Record Date shall be deemed to have converted their holdings of Preferred Stock
into NEG Common Stock on the assumed basis of NEG's Common Stock being traded at
25 cents a share immediately prior to such conversion.
- --------------------------------------------------------------------------------
Class 8. Allowed NEG Common Stock
Unimpaired. Each holder of Common Stock as of the Record Date shall retain its
Common Stock in NEG.
- --------------------------------------------------------------------------------
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<PAGE> 16
V.
VOTING PROCEDURES AND REQUIREMENTS
A. BALLOTS AND VOTING DEADLINE.
ONLY HOLDERS OF IMPAIRED CLAIMS IN CLASSES 3,4, AND 7 UNDER THE
PLAN ARE BEING SOLICITED TO VOTE TO ACCEPT OR REJECT THE PLAN.
The Claims classified in Classes 1, 2, 3 and 4 and the Equity Interests
classified in Class 8 are UNIMPAIRED under the Plan. Therefore, no votes on the
Plan are being solicited from the holders of Claims and Equity Interests in such
Classes pursuant to Section 1126(f) of the Bankruptcy Code.
The Claims classified in Classes 4, 5, 6 and the Preferred Stock
Interests classified in Class 7 are IMPAIRED under the Plan. The holders of
Claims in Classes 4, 5, and 6 are being solicited to vote to accept or reject
the Plan. The holders of NEG Preferred Stock Interests in Class 7 are deemed to
have rejected the Plan and, therefore, are not being solicited to vote to accept
or reject the Plan.
A ballot to be used for voting to accept or reject the Plan is enclosed
with this Disclosure Statement for those entitled to vote. The holder of a Claim
or Equity Interest, as the case may be, that is entitled to vote must (1)
carefully review the ballot and the instructions thereon, (2) complete and
execute the ballot, and (3) return the ballot to the address indicated thereon
by the deadline to enable the ballot to be considered for voting purposes. Any
ballot received by the Debtors that does not reflect an affirmative vote for
either the acceptance or rejection of the Plan will be deemed a vote for
acceptance of the Plan.
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<PAGE> 17
The Bankruptcy Court has directed that, in order to be counted for
voting purposes, ballots for the acceptance or rejection of the Plan must be
received no later than_____ __.m., Central Time. on May ___, 2000 at the
following address:
Van Oliver
Andrews & Kurth L.L.P.
Suite 3700, 1717 Main Street
Dallas, Texas 75201
(214) 659-4400 (Phone)
(214) 659-4401 (Facsimile)
TO BE COUNTED, YOUR BALLOT MUST BE RECEIVED AT THE ABOVE
ADDRESS BY NO LATER THAN _____ __.M., CENTRAL TIME, ON MAY ____,
2000.
YOUR BALLOT WILL NOT BE COUNTED IF IT IS RECEIVED AT THE ABOVE
ADDRESS AFTER _____ __.M., CENTRAL TIME, ON MAY ___, 2000.
NOTE: FAXED BALLOTS OR BALLOTS WITHOUT AN ORIGINAL SIGNATURE
WILL NOT BE COUNTED.
You may be contacted by representatives of the Creditors Committee with
regard to your vote on the Plan. Votes cast by holders of Claims will be
irrevocable once received by the Creditors' Committee, unless the Bankruptcy
Court, after application, notice and hearing, permits a change of vote. If any
ballot received by the Creditors Committee is not discernible as to the Class of
the Claim or the name of the holder thereof, such ballot will be disregarded and
not counted. If a ballot is damaged or lost, please contact Creditors Committee
counsel. If you have any questions regarding the procedures for voting on the
Plan, please contact your legal counsel for advice.
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<PAGE> 18
B. HOLDERS OF CLAIMS SOLICITED TO VOTE.
Any holder whose Claim is within a Class impaired under the Plan and
who is eligible (upon Allowance of such Claim) to receive distributions under
the Plan, is being solicited to vote to accept or reject the Plan if either (i)
its Claim has been scheduled by the Debtors, but such Claim is not scheduled by
the Debtors as disputed, contingent or unliquidated, or (ii) it has filed a
proof of Claim (a) on or before June 21, 1999 (the "Bar Date"), or (b) after the
Bar Date with leave of the Bankruptcy Court pursuant to a Final Order, and as to
which no timely objection has been filed, or if a timely objection has been
filed, to the extent which such Claim is Allowed by a Final Order of the
Bankruptcy Court or temporarily Allowed for purposes of voting only. As of the
filing of this Disclosure Statement, the Creditors Committee are continuing to
review Claims to assess their validity and intend to identify objectionable
Claims and file objections thereto.
Any Claim as to which an objection has been filed (and such objection
is still pending on the voting date) is not entitled to have its vote counted
unless the Bankruptcy Court temporarily allows the Claim for voting purposes in
an amount which the Bankruptcy Court deems proper upon motion by the holder to
whose Claim has been objected. Such a motion must be heard and determined by the
Bankruptcy Court prior to the date and time established by the Bankruptcy Court
for commencement of the Confirmation Hearing. In addition, a vote may be
disregarded if the Bankruptcy Court determines that such vote was not solicited
or procured in good faith, in accordance with the provisions of the Bankruptcy
Code.
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<PAGE> 19
C. DEFINITION OF IMPAIRMENT.
Under Section 1124 of the Bankruptcy Code, a class of claims or
interests is impaired under a plan of reorganization unless, with respect to
each claim or interest of such class, the Plan:
1. leaves unaltered the legal, equitable, and contractual rights of
the holder of such claim or interest; or
2. notwithstanding any contractual provision or applicable law that
entitles the holder of a claim or interest to receive accelerated
payment of such claim or interest after the occurrence of a
default:
a. cures any such default that occurred before or after the
commencement of the case under the Bankruptcy Code, other
than a default of a kind specified in Section 365(b)(2) of
the Bankruptcy Code;
b. reinstates the maturity of such claim or interest as it
existed before the default;
c. compensates the holder of such claim or interest for damages
incurred as a result of reasonable reliance on such
contractual provision or applicable law; and
d. does not otherwise alter the legal, equitable, or
contractual rights to which such claim or equity interest
entitles the holder of such claim or interest.
D. Vote Required for Class Acceptance.
As a condition of confirmation, the Bankruptcy Code requires acceptance
of a plan of reorganization by all impaired classes (except as discussed below).
The Bankruptcy Code defines acceptance of a plan by a class of claims as
acceptance by holders of two-thirds (2/3rds) in dollar amount and one-half (1/2)
in number of the claims of that class which actually cast ballots for acceptance
or rejection of the plan, i.e., acceptance takes place only if two-thirds
(2/3rds) in amount and majority in number of the holders of claims in a given
class actually voting cast their ballots in favor of acceptance. The Bankruptcy
Code defines acceptance of a plan by a class of equity interest.
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<PAGE> 20
holders as acceptance by holders of two-thirds in amount of the interests of
that class which actually cast ballots for acceptance or rejection of the plan.
Notwithstanding the requirement of class acceptance, a plan may be confirmed
even if one or more impaired classes does not accept the plan if at least one
impaired class of non-insider claims has accepted the plan and the Court
determines that the plan does not discriminate unfairly, and is fair and
equitable, with respect to each class that is impaired and has not accepted the
plan.
If the Plan is confirmed, all holders of Claims against and Equity
Interests in the Debtors, whether voting or non-voting and, if voting, whether
accepting or rejecting the Plan, will be bound by the terms of the Plan.
VI.
CONFIRMATION OF THE PLAN
Under the Bankruptcy Code, the following steps must be taken to confirm
the Plan:
A. CONFIRMATION HEARING.
Section 1128(a) of the Bankruptcy Code requires the Bankruptcy Court,
after notice, to hold a hearing to determine whether all requirements for
confirmation of the Plan have been satisfied. By Order of the Bankruptcy Court
entered on April 17, 2000 the Confirmation Hearing has been scheduled for May
____, 2000, at ______ ___.m., Central Time, at the United States Bankruptcy
Court, Northern District of Texas, United States Courthouse, l4th Floor, Earl
Cabell Federal Office Building, 1100 Commerce, Dallas, Texas 75242 (the
"Confirmation Hearing"). The Confirmation Hearing may be adjourned from time to
time by the Bankruptcy Court without further notice, except for an announcement
made at the Confirmation Hearing or any adjournment thereof.
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<PAGE> 21
ANY ANNOUNCEMENT OF ADJOURNMENT OF THE DATE AND TIME OF THE
CONFIRMATION HEARING MADE IN COURT SHALL BE THE ONLY NOTICE PROVIDED TO HOLDERS
OF CLAIMS AND EQUITY INTERESTS, UNLESS THE BANKRUPTCY COURT ORDERS OTHERWISE.
Section 1128(b) of the Bankruptcy Code provides that any party in
interest may object to confirmation of the Plan. Any objection to confirmation
must be made in writing and filed with the Bankruptcy Court with proof of
service and served upon the Debtors' counsel and Creditors' Committee's counsel
listed below on or before May ___,2000 at _____ __.m. Central Time.
COUNSEL FOR CREDITORS COMMITTEE OF
NATIONAL ENERGY GROUP, INC.:
Hugh Ray
Van Oliver
ANDREWS & KURTH L.L.P.
Suite 3700, 1717 Main Street
Dallas, Texas 75201
COUNSEL FOR NATIONAL ENERGY GROUP, INC.:
Patrick J. Neligan
Mark A. Andrews
Neligan, Andrews, Bryson & Foley
Suite 4050, 1717 Main St.
Dallas, Texas 75201
UNLESS AN OBJECTION TO CONFIRMATION IS TIMELY SERVED UPON THE CREDITORS'
COMMITTEE'S COUNSEL AND FILED WITH THE BANKRUPTCY COURT, IT WILL NOT BE
CONSIDERED BY THE BANKRUPTCY COURT.
B. REQUIREMENTS FOR CONFIRMATION OF THE PLAN.
At the Confirmation Hearing, the Bankruptcy Court shall determine
whether the confirmation requirements of Section 1129 of the Bankruptcy Code
have been satisfied, in which event the
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<PAGE> 22
Bankruptcy Court shall enter an order confirming the Plan. The applicable
requirements for confirmation are as follows:
1. The Plan complies with the applicable provisions of the Bankruptcy
Code.
2. The Creditors Committee has complied with the applicable
provisions of the Bankruptcy Code.
3. The Plan has been proposed in good faith and not by any means
forbidden by law.
4. Any payment made or promised by the Debtors or Creditors
Committee, or by a person acquiring property under the Plan, for
services or for costs and expenses in or in connection with the
Chapter 11 Cases, or in connection with the Plan and incident to
the Chapter 11 Cases, has been disclosed to the Bankruptcy Court,
and any such payment made before the confirmation of the Plan is
reasonable, or if such payment is to be fixed after confirmation
of the Plan, such payment is subject to the approval of the
Bankruptcy Court as reasonable.
5. The Creditors Committee has disclosed the identity and
affiliations of any individual proposed to serve, after
confirmation of the Plan, as a director, officer, or voting
trustee of the Debtors, an affiliate of the Debtors participating
in a Plan with the Debtors, or a successor to the Debtors under
the Plan, and the appointment to, or continuance in, such office
of such individual, is consistent with the interests of creditors
and equity security holders and with public policy, and the
Creditors Committee has disclosed the identity of any insider that
will be employed or retained by the reorganized Debtors, and the
nature of any compensation for such insider.
6. With respect to each Class of impaired Claims or Equity Interests,
either each holder of a Claim or Equity Interest of such class has
accepted the Plan, or will receive or retain under the Plan on
account of such Claim or Equity Interest property of a value, as
of the Effective Date of the Plan, that is not less than the
amount that such holder would so receive or retain if the Debtors
were liquidated on such date under Chapter 7 of the Bankruptcy
Code; or if Section 1111(b)(2) of the Bankruptcy Code applies to
the Claims of such Class, each holder of a Claim will receive or
retain under the Plan on account of such Claim property of a
value, as of the Effective Date of the Plan, that is not less than
the value of such holder's interest in the Debtors' estates'
interest in the property that secures such Claims.
7. Each Class of Claims or Equity Interests has either accepted the
Plan or is not impaired under the Plan.
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<PAGE> 23
8. Except to the extent that the holder of a particular Claim has
agreed to a different treatment of such Claim, the Plan provides
that Allowed Administration Expense Claims and Allowed Other
Priority Claims will be paid in full on the Effective Date and
that Allowed Priority Tax Claims will receive on account of such
Allowed Claims deferred cash payments, over a period not exceeding
six years after the date of assessment of such Claim, of a value,
as of the Effective Date, equal to the Allowed amount of such
Claim.
9. At least one Class of Claims has accepted the Plan, determined
without including any acceptance of the Plan by any insider
holding a Claim of such Class.
10. Confirmation of the Plan is not likely to be followed by the
liquidation, or the need for further financial reorganization, of
the Debtors or any successor to the Debtors under the Plan, unless
such liquidation or reorganization is proposed in the Plan.
11. The Plan must provide that the quarterly fees required under 28
U.S.C. Section 1930 have been paid or that they will be paid on
the Effective Date of the Plan.
The Creditors Committee believes that the Plan satisfies all of the
statutory requirements of Chapter 11 of the Bankruptcy Code, that it has
complied or will have complied with all of the requirements of Chapter 11, and
that the proposal of the Plan is made in good faith. As to NEG Preferred and
Common Stock Interests, the Creditors Committee intends to seek confirmation of
the Plan under the cramdown provisions of the Bankruptcy Code discussed below.
C. CRAMDOWN.
Generally, under the Bankruptcy Code, a plan of reorganization must be
approved by each impaired class of creditors. A Bankruptcy Court, however, may
confirm a plan that has not been approved by each impaired class if at least one
impaired class accepts the plan by the requisite vote and the Bankruptcy Court
determines that the plan "does not discriminate unfairly" and is "fair and
equitable" with respect to each class that is impaired and has not accepted the
plan. A plan of reorganization does not discriminate unfairly within the meaning
of the Bankruptcy Code if each
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<PAGE> 24
dissenting class is treated equally with other classes of equal rank. "Fair and
equitable" has different meanings with respect to the treatment of secured
claims, unsecured claims and equity interests.
As set forth in Section 1129(b)(2) of the Bankruptcy Code, the
condition that a plan of reorganization be fair and equitable with respect to a
class includes the following requirements. With respect to a secured claim,
"fair equitable" means either (i) the impaired secured creditor retains its
liens to the extent of its allowed claim and receives deferred cash payments at
least equal to the allowed amount of its claims with a present value as of the
effective date at least equal to the value of such creditor's interest in the
property securing its liens, (ii) property subject to the lien of the impaired
secured creditor is sold free and clear of that lien, with that lien attaching
to the proceeds of sale, and such lien proceeds must be treated in accordance
with clauses (i) and (iii) hereof, or (iii) the impaired secured creditor
realizes the "indubitable equivalent" of its claim under the plan.
With respect to an unsecured claim, "fair and equitable" means either,
(i) each impaired unsecured creditor receives or retains property of a value
equal to the amount of its allowed claim, or (ii) the holders of claims and
interests that are junior to the claims of the dissenting class will not receive
any property under the plan.
With respect to equity interests, "fair and equitable" means either (i)
each impaired equity interest receives or retains on account of such interest
property of a value equal to the greatest of the allowed amount of any fixed
liquidation preference to which such holder is entitled, any fixed redemption
price to which such holder is entitled, or the value of such interest; and (ii)
the holder of any interest that is junior to the interest of such class will not
receive under the plan any property on account of such junior interest.
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<PAGE> 25
In the event one or more Classes of impaired Claims rejects the Plan,
the Creditors Committee reserves the right to proceed with confirmation pursuant
to Section 1129(b) of the Bankruptcy Code, and the Bankruptcy Court will
determine at the Confirmation Hearing whether the Plan is fair and equitable and
does not discriminate unfairly against any rejecting impaired Class of Claims.
VII.
DESCRIPTION OF THE DEBTORS
A. BUSINESS.
1. GENERAL OVERVIEW OF THE COMPANY.
National Energy Group, Inc. was incorporated under the laws of the
State of Delaware on November 20, 1990. Effective June 11, 1991, Big Piney Oil
and Gas Company and VP Oil, Inc. merged with and into the Company. On August 29,
1996, Alexander Energy Corporation 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 which has historically
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.
2. BUSINESS PRIOR TO BANKRUPTCY.
Historically, the Company has developed and exploited existing
properties by drilling Development Wells, and recompleting and reworking
existing wells. The Company in late 1998
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<PAGE> 26
continued to participate in non-operated wells as described above and limited
drilling operations in 1998.
The following table sets forth the Company's principal areas of
operations and the Company's Proved Reserves of oil and natural at July 1, 1999.
SUMMARY OF RESERVES AND FUTURE NET REVENUE
AS OF JULY 1, 1999
NATIONAL ENERGY GROUP, INC. INTEREST
<TABLE>
<CAPTION>
Net Reserves Future Net Revenue
------------ ------------------
Oil Gas Present Worth
Area/Category (MBBL) (MMCF) Total at 10%
- ------------- ------ ------ ----- -------------
<S> <C> <C> <C> <C>
ANADARKO
Proved Developed
Producing 481,005 24,835,779 $ 58,377,100 $ 33,194,000
Non-Producing 68,426 2,889,907 8,588,600 1,942,300
Proved Undeveloped 19,415 1,695,960 2,384,100 930,700
---------- ----------- ------------ -------------
Total Proved 568,846 29,421,646 $ 69,349,800 $ 36,067,000
Probable(1) 73,330 1,297,471 $ 2,576,800 $ 617,300
ARKOMA
Proved Developed
Producing 31,332 7,308,900 $ 13,635,700 $ 8,819,300
Non-Producing 0 305,738 914,000 101,300
Proved Undeveloped 0 277,710 286,600 176,600
---------- ----------- ------------ -------------
Total Proved 31,332 7,892,348 $ 14,836,300 $ 9,097,200
Probable(1) 0 936,763 $ 1,140,200 $ 652,000
GULF COAST
Proved Developed
</TABLE>
-21-
<PAGE> 27
<TABLE>
<CAPTION>
Net Reserves Future Net Revenue
------------ ------------------
Oil Gas Present Worth
Area/Category (MBBL) (MMCF) Total at 10%
- ------------- ------ ------ ----- -------------
<S> <C> <C> <C> <C>
Producing 1,417,289 2,347,359 $ 13,466,300 $ 13,362,600
Non-Producing 936,849 2,017,409 16,246,400 10,819,500
Proved Undeveloped 78,173 3,938,268 6,573,800 4,790,100
---------- ----------- ------------ -------------
Total Proved 2,432,311 8,303,036 $ 36,286.500 $ 28,972,200
Probable(1) 876,938 1,773,464 $ 18,588,800 $ 10,173,500
</TABLE>
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<PAGE> 28
<TABLE>
<CAPTION>
Net Reserves Future Net Revenue
------------ ------------------
Oil Gas Present Worth
Area/Category (MBBL) (MMCF) Total at 10%
- ------------- ------ ------ ----- -------------
<S> <C> <C> <C> <C>
EAST TEXAS
Proved Developed
Producing 132,382 21,525,430 $ 44,420,200 $ 25,086,400
Non-Producing 18,777 196,542 608,900 102,200
Proved Undeveloped 1,564 1,564,336 1,540,500 346,800
---------- ----------- ------------ -------------
Total Proved 152,723 23,286,308 $ 46,569,600 $ 25,535,400
Probable(1) 13,044 2,276,604 $ 2,412,200 $ 484,600
WEST TEXAS
Proved Developed
Producing 1,679,616 1,622,377 $ 12,896,600 $ 10,101,300
Non-Producing 47,145 47,653 219,500 151,300
Proved Undeveloped 450,784 495,180 3,444,200 1,528,700
---------- ----------- ------------ -------------
Total Proved 2,177,545 2,165,210 $ 16,560,300 $ 11,781,300
Probable(1) 0 0 $ 0 $ 0
TOTAL ALL AREAS
Proved Developed
Producing 3,741,624 57,639,845 $142,795,900 $ 90,563,600
Non-Producing 1,071,197 5,457,249 26,577,400 13,116,600
Proved Undeveloped 549,936 7,971,454 14,229,200 7,772,900
---------- ----------- ------------ -------------
Total Proved 5,362,757 71,068,548 $183,602,500 $ 111,453,100
Probable(1) 963,312 6,284,302 $ 24,718,000 $ 11,927,400
</TABLE>
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<PAGE> 29
a. Mid-Continent Area
At July 1, 1999, approximately 52.5% (37.3 Bcfe) of the Company's
Proved Reserves were located in the Mid-Continent area in Oklahoma and western
Arkansas which includes the Anadarko and Arkoma Basins.
b. Anadarko Basin.
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 Basin 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 have 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.
During the year ended December 31, 1998, the Company drilled 7 Gross
(2.4 Net) Development Wells in the Anadarko Basin of which 5 Gross (1.6 Net)
Development Wells were completed as commercially productive. The Company's wells
typically are completed in horizons
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<PAGE> 30
ranging in depth between 7,000 and 15,000 feet Since Chapter 11, the Company has
drilled no additional wells.
c. East and West Texas Area
At December 31, 1998 approximately 35.8% (25.4 Bcfe) of the Company's
Proved-Reserves were located in the East and West Texas area, including East
Texas and the Goldsmith Adobe Unit in West Texas.
(1) East Texas.
These reserves are found in the Cotton Valley formation and the Travis
Peak formation. The Cotton Valley formation is generally 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. A significant portion of the cost to complete Cotton
Valley 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 Travis Peak
formation is generally found at a depth of 7,200 feet and principally contains
oil reserves.
(2) Goldsmith Adobe Unit ("Gau").
The Goldsmith Adobe Unit is in the Permian Basin in West Texas. The
Company owns approximately a 95% Working Interest in the GAU, which it operates.
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
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<PAGE> 31
develop the GAU on 20 acre spacing units. During 1998, the Company drilled and
completed as commercially productive, 4 Gross (3.8 Net) Development Wells on the
GAU.
Typically, wells drilled by the Company in the GAU in 1998 were drilled
to depths between 5,600 and 6,000 feet into the Clearfork formation.
d. Gulf Coast Area
At July 11, 1999 approximately 11.7% (8.3 Bcfe) of the Company's Proved
Reserves were located in the Gulf Coast areas, principally in the Greater Bayou
Sorrel Area in Iberville Parish, Louisiana and at Mustang Island in offshore
Gulf of Mexico. The Company also has participated in exploratory activity in
various parishes throughout Southern Louisiana.
e. 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 target formations of the Company's exploration prospects in this area
range from approximately 11,000 to 14,000 feet and include the Marg Vag, Marg
Howeii, Camerina, Cib Haz, and Marg Tex zones. 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 first
participated in the successful exploratory test of the Schwing #1 well in the
Company's East Bayou Sorrel prospect in January 1996. 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 old 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. During 1997, the Company successfully drilled
and completed a second test well, the Schwing #2.
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<PAGE> 32
During 1998, the Company drilled 2 Gross (1.2 Net) Exploratory Wells in
the Greater Bayou Sorrel area both of which were determined to be dry holes.
Also during 1998, the Company successfully drilled and completed 1 Gross (.8
Net) Development Well in the Greater Bayou Sorrel area.
The Company has completed shooting, processing and interpreting, an
approximate 54 square mile 3-D seismic survey over the Greater Bayou Sorrel
Area. The Company has identified additional potential drilling locations for
prospects in this area through interpretation of the 3-D seismic data. 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 prior to the Company's 3-D survey. The Company controls approximately
13,400 acres either by lease or option to lease, within the Greater Bayou Sorrel
Area.
In March 1998, the Company acquired Fortune Natural Resources
Corporations interests in the East Bayou Sorrel field for approximately $4.5
million in cash.
3. OIL AND NATURAL GAS RESERVES
The estimated reserves and related future net revenues as of July 1,
1999 were prepared by the Company's outside engineers Netherland, Sewell &
Associates, Inc. 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 SEC. The net weighted average
prices used in the Company's reserve report at July 1, 1999 were $20.065 per
barrel of oil, increasing through 12/31/99 and then decreasing to $17.610 per
barrel of oil on December 31, 2002 and $2.30 per MMBTU of gas on July 1, 1999
and increasing to a high of $3.06 on December 31, 1999 and then decreasing to
$2.57 on December 31, 2002. The estimation of
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<PAGE> 33
reserves and future net revenues materially affected by the oil and gas prices
used in preparing the reserve report.
4. LEASEHOLD ACREAGE.
The following table shows the approximate Gross and Net Acres in which
the Company had a leasehold interest as of July 31, 1999
<TABLE>
<CAPTION>
DEVELOPED ACREAGE UNDEVELOPED ACREAGE
----------------- -------------------
GROSS NET GROSS NET
------- ------- ------- -------
<S> <C> <C> <C> <C>
Area:
Mid-Continent 104,654 53,900 3,700 2.4
East and West Texas 17,863 14,315 6,374 3.6
Gulf Coast 15,778 10,657 30,832 22.0
======= ======= ======= =======
Totals 138,295 78,872 40,906 28.1
</TABLE>
5. Title to Oil and Natural Gas Properties.
The Company has acquired interests in producing wells and undeveloped
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 acquired less than 100% of the Working
Interest in a prospect.
6. Control over Production Activities.
The Company operated 394 of the 550 producing wells in which it owned
an interest as of December 31, 1998. 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
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<PAGE> 34
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.
7. 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, sale and taxation 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 1996, Plains Marketing and Transportation accounted for
83% of the Company's oil sales, while Crosstex Energy and GPM Natural Gas
Corporation 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 20W and 14%, respectively, of the
Company's natural gas sales. For the year ended December 31, 1998, Plains
accounted for 85% of the Company's oil sales, and Crosstex and Aquila Energy
Marketing accounted for 23% and 26%, respectively, of the Company's natural gas
sales. The agreement with Plains, entered into in 1993, provides for Plains
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<PAGE> 35
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 purchaser
would have a material adverse effect on its business because, under prevailing
market conditions, such purchaser could be replaced.
A portion of the Company's natural gas production has been sold in the
past 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 assume the risk of contracting pipelines and processing plants in
return for a portion of the proceeds of the sale of the gas and liquids.
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 contracts. See Note 9 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. The remainder of the Company's natural gas is sold on the spot market
under short-term contracts.
8. OFFICE SPACE.
The Company leases approximately 25,000 square feet of office space in
Dallas, Texas. The Company also leases a small amount of office space in Odessa,
Texas, Fort Smith, Arkansas and Yukon, Oklahoma for its business activities.
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<PAGE> 36
9. EMPLOYEES.
In late 1999, the Company had approximately 50 full-time
employees. Of these employees, eight 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.
10. LEGAL PROCEEDINGS.
The Company filed suit against Mr. R.E. Steakley in August
1995 to enjoin Mr. Steakley from interfering with the operations of the Company.
Mr. Steakley counterclaimed against the Company for surface damages, alleging
certain environmental claims. In February 1999, without admitting any liability,
the Company and Mr. R.E. Steakley entered into a Settlement and Release
Agreement which provided that each of the Company and Mr. Steakley release and
discharge the other from all claims and damages which may have occurred through
January 31, 1999 and dismiss the pending lawsuits against each other. The
Company further agreed to pay Mr. Steakley an amount of $75,000, purchase
certain materials from Mr. Steakley at market value which the Company shall use
to maintain roads incidental to its operations on the Steakley property and
limit the Company's ingress and egress to specified entrances on the Steakley
property.
Other than the Bankruptcy Court proceedings, the Company is a
defendant in one additional material pending legal proceedings that it
anticipates settling.
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.
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<PAGE> 37
11. ABANDONMENT COSTS.
NEG is generally responsible for the costs associated with the plugging
of wells, the removal of facilities and equipment and site restoration on its
oil and gas properties, pro rata to its working interest. Historically, NEG has
provided for expected future abandonment liabilities by accruing for such costs
as a component of depletion, depreciation and amortization as production occurs.
Between $1 and $2 million in abandonment costs are anticipated to be incurred in
connection with transactions involving the sale or NEG divestiture of Lake
Mongoulois. Estimates of abandonment costs and their timing may change due to
many factors, including actual drilling and production results, inflation rates,
changes in abandonment techniques and technology and changes in environmental
laws and regulations.
If a sale of the Debtors' interest in the Lake Mongoulois
properties does not occur, the Creditors' Trust may seek to rescind the
acquisition of such properties from EEX Corp. or, alternatively recover damages
from EEX Corp., in a minimal amount to cover such plugging and abandonment
costs. EEX may assert defenses to any such litigation, such that the ultimate
outcome cannot be predicted.
Other plugging and abandonment costs will be assumed and paid
by Arnos Corp. except with respect to Mustang Island where the expected
production of which may carry such costs as part of its operations.
The Company and Creditors Committee have been in negotiations
with third parties relative to their acquiring NEG's interest in both Lake
Mongoulois and Mustang Island and the assumption of the related plugging and
abandonment costs. Two such parties have executed letters
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<PAGE> 38
of intent which are subject to negotiations, Court approval and consummation of
a finalized agreement.
B. SELECTED FINANCIAL INFORMATION.
1. MARKET INFORMATION.
The Company's Common Stock traded on the NASDAQ National market since
September 1, 1995 under the symbol 11NEGX11. On November 9, 1998, NASDAQ
notified the Company that its common stock would be delisted effective at the
close of business that day for failing to meet the net tangible asset test and
minimum bid price requirements set forth in NASD Marketplace Rules 4450(a)(3)
and 4450(a)(5). NASDAQ also advised the Company that its common stock was
immediately eligible for trading on the OTC Bulletin Board through authorized
broker-dealers who had been market makers in the Company's stock during the last
30-days. The Company contacted its OTC Market Makers to notify them of NASDAQ's
action and to facilitate future trading activity. The Company's common stock has
traded in 1999 on the OTC Bulletin Board under the symbol 11NEGXQ11.
a. 10-3/4% SENIOR NOTES DUE 2006 - APPROXIMATELY $165
MILLION OUTSTANDING.
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 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
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<PAGE> 39
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 Bank One Credit Facility, to fund that year's 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.
b. ARNOS SECURED CLAIMS PURCHASE FROM BANK GROUP.
On August 29, 1996, the Company, NEG-OK and Boomer Marketing,
entered into a 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, as adjusted. The
proceeds from the credit facility were used to repay a 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"). 5.
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<PAGE> 40
Also in November 1996, in connection with the issuance of the
Series A Notes, the Company revised the credit facility. The credit facility had
a borrowing base of $25.0 million. The principal amount of borrowings was due at
maturity, August 29, 2000 and interest is payable monthly.
The Company granted liens to the Banks on substantially all of
the Company's oil and natural gas properties, whether currently owned or
thereafter acquired, and a negative pledge on all other oil and natural gas
properties. The credit facility required, among other things, semiannual
engineering reports covering oil and natural gas properties, and maintenance of
certain financial ratios, including the maintenance of a minimum interest
coverage, a current ratio, and a minimum tangible net worth.
The credit facility contained 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.
The Company was required to pay a commitment fee on the unused
portion of the borrowing base equal to 1% per annum.
On December 7, 1998, Bank one and Credit Lyonnais gave notice
to the Company that all outstanding obligations under the credit facility were
accelerated and were immediately due and payable due to certain unspecified
Events of Default as defined in the loan agreement. Effective December 22, 1998,
the credit facility and all associated liens were assigned by the Banks to
Arnos, Corp. ("Arnos") an affiliated subsidiary of the Company's Series D
Preferred Stockholder and entity controlled by Carl Icahn. In a letter dated
December 23, 1998 to the Company, Arnos (1) rescinded the acceleration of the
loan, (2) waived all defaults existing at that
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<PAGE> 41
time and (3) made sufficient borrowings available to pay the interest on the
Senior Notes that was due on November 2, 1998 conditioned upon the Bankruptcy
Court's dismissal of the Involuntary Petition. The Company had $25,000,000
outstanding under the Arnos credit facility as of December 1, 1999.
In connection with its proposed purchase of substantially all
the oil and gas properties of NEG as of November 1, 1999, Arnos Corp. credit bid
under Section 363(k) of the Bankruptcy Code the $25 million of principal owed it
by NEG, leaving only approximately $100,000 in accrued interest to be paid to
Arnos Corp. on that debt.
c. NEG 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. The board of directors declared dividends on the Series B in
December of 1998, which would be made in shares of Series B Preferred Stock.
That dividend-in-kind was not made and is currently in arrears.
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
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<PAGE> 42
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. The
board of directors declared dividends on the Series C in December of 1998, which
would be made in shares of Series C Preferred Stock. This dividend-in-kind was
not made and is currently in arrears.
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. As part of such sale, 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.
2. SIGNIFICANT EVENTS OCCURRING DURING CHAPTER 11
A number of significant events have occurred to National Energy Group,
Inc. and Boomer Marketing, Inc. since the filing of the involuntary petition in
bankruptcy against National Energy Group, Inc. on December 4 1998. The more
significant events include the following:
a. GRANTING PETITIONING CREDITORS RELIEF AND DECLARING
NEG INSOLVENT.
At a hearing conducted before the Honorable Robert C. McGuire
on February 9, 1999, the Court after considering evidence, testimony and
arguments determined that the Company was not paying its debts as they generally
came due within the meaning of Section 303 of the
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<PAGE> 43
Bankruptcy Code, that an order for relief should be entered against the Company
and that the Company was insolvent.
b. CESSATION OF MOST DRILLING ACTIVITIES.
On February 26, 1999, the Creditors Committee filed an
"Emergency Motion to Compel Debtors to Justify and Comply with Budget and to
Prohibit Future Drilling Activities in Chapter 11." Subsequently, the Company
agreed and the Court ordered that the Company discontinue exploratory or
development drilling programs commenced by it.
c. TERMINATION OF THE EXCLUSIVE RIGHT TO FILE A PLAN OF
REORGANIZATION
On April 2, 1999, the Creditors Committee filed a "Motion to Terminate
the Exclusive Right of the Debtors to File a Plan of Reorganization." At a
hearing conducted on April 22, 1999, the Court entered an order granting in part
and denying in part that motion by requiring the Company to file a comprehensive
summary plan of reorganization by the close of business on Monday, May 24, 1999
and for the Creditors Committee to submit an outline of a plan by the same date.
At subsequent hearings conducted before the Court on June 4, 1999 and
thereafter, the Company and the Creditors Committee agreed to a general
procedure for selling substantially all the oil and gas assets of the Company
through an auction to be conducted in the courtroom of and pursuant to sale
procedures approved by the Court. The Debtors did not to file a plan of
reorganization and disclosure statement, and as a consequence, its exclusive
right for doing so has expired.
d. JOINT EMPLOYMENT OF CIBC WORLD CAPITAL MARKETS
On July 30, 1999, the Company and the Creditors Committee jointly filed
an Application to Employ CIBC World Markets Corporation ("CIBC") as marketing
agent for the sale of the
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<PAGE> 44
more substantially valued oil and gas assets of the Company located in the
Arkoma and Anadarko Basins of Oklahoma, the East Texas and Gulf Coast fields of
Louisiana and Texas and the Company's Gau Unit in West Texas. The professionals
of CIBC worked with the land department, petroleum engineers, geologists,
financial and other personnel of the Company to develop a comprehensive
marketing brochure which was distributed to in excess of 400 industry parties,
announcing the intended sale of the Company's assets. The Company, together with
the assistance of PricewaterhouseCoopers and CIBC organized and oversaw the
operations of a data room, including visits of in excess of 30 companies
interested in purchasing all or sub-parts of the Company's oil and gas assets.
At an auction conducted before the Bankruptcy Court on November 1, 1999, Arnos
Corp.("Arnos") was determined to be the high bidder for substantially all the
oil and gas assets of the Debtors. Exco Resources, Inc. was determined to be the
back-up bidder.
e. PROPOSED SALE TO ARNOS
In connection with the November 1, 1999 auction sale, Arnos deposited
with Bank One, Texas as escrow agent for that auction sale, $9,250,000, to be
held pending a sale closing. Subsequently, Arnos indicated its desire to
negotiate with the Creditors Committee toward a consensual plan of
reorganization pursuant to which Arnos would either buy or end up controlling
all of NEG, including its common stock, intangible and other assets remaining
that were not sold as part of the November 1, 1999 auction sale. Pursuant to the
Court's directives, Arnos deposited into the Registry of the Court the sum of
$61,825,000 on or about December 9, 1999. As part of that registry deposit, the
Court permitted Arnos to credit bid pursuant to Section 363(k) of the Bankruptcy
Code $25,000,000 as the principal amount of its secured credit
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<PAGE> 45
facility purchased on December 22, 1998 from Bank One and Credit Lyonnais. As a
result, Arnos Corp. is left with only interest accruing on its debt from
December 1, 1999 through approximately December 13, 1999. As of the date of this
filing, the Creditors Committee and Arnos have yet to negotiate or finalize the
terms of a consensual plan of reorganization to address the Company's remaining
assets.
f. EBCO AUCTION SALE OF NOMINALLY VALUED PROPERTIES
In order to facilitate the auction sale and not complicate its process
with smaller and lesser valued and, in certain instances, non-contiguous
properties to those of the more highly valued assets, the Company and the
Creditors Committee filed a joint application to retain EBCO Auction Company and
include in its December, 1999 Oklahoma City, Oklahoma auction approximately 100
miscellaneous oil and gas assets of the Debtors. After accounting for offset,
secured and miscellaneous claims relating directly to those properties, the fee
commissions and other costs of sale, the net sale proceeds generated for the
benefit of creditors approximate $2.9 million.
3. LIQUIDITY AND CASH RESOURCES FOR FUNDING PLAN
The following schedule sets forth the estimates of funds and
other assets on hand or available with which to pay Allowed Claims of creditors
under the Plan. This information, including an estimate of liabilities, was
compiled from information provided the Creditors' Committee by the Company:
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<PAGE> 46
ASSETS
o Net Sales Provided from November 1, 1999 Auction Sale to Arnos Corp.,
<TABLE>
<S> <C>
Bank One $ 9.625 million
Court Registry $ 61.875 million
------------------------
$ 71.5 million
o EBCO Auction Net Proceeds $ 2.9 million
o Marketable Securities $ 0.4 million
o Cash as of 10/31/99 $ 24.35 million
o Accounts Receivable $ 492-million
o Oil and Gas Assets
o Miscellaneous Assets (AR-Joint $ 1-2.5 million
Interest Billings; Office
Property; Office Lease; Mustang
Island)
o Litigation Proceeds (unknown)
o Value of Intangible Assets and
Remaining Assets, including
claims against Arnos Corp. for
operating Debtor's oil and gas
properties since November 1,
1999 $ 5-10 million (estimate)
------------------------
Assets Total $ 105-117 million
</TABLE>
LIABILITIES
<TABLE>
<S> <C>
o Ad Valorem; Severance; Sales and
Use Taxes $ 0.5 million
o Pre-Petition Trade Claims $ 1.5 million
o Post-Petition Trade Claims $ 2.25 million
o Involuntary Petition Gap Claims $ 1.75 million
o Rejection of Office Lease $ 0.5 million
o Professional Chapter II Fees $ 2-2.5 million
o Severance/Stay Bonus $ l-2.5 million
o Gas Pre-Payment: Gas Imbalances $ 1-3 million
(Suspense Liability not being paid by Arnos)
o Sr. Notes-Principal $ 165 million
o Sr. Notes-Interest at Petition Date $ 10 million
----------------
Liabilities Total $185-190 million
</TABLE>
-41-
<PAGE> 47
4. DIRECTORS AND OFFICERS OF NEG.
The following table lists the name, age as of December 31,
1999 and present position with the Company for each of the Company's directors
and executive officers.
<TABLE>
<CAPTION>
NAME AGE PRESENT POSITION WITH THE COMPANY
- ---- --- ---------------------------------
<S> <C> <C>
Bob G. Alexander 65 Chairman of the Board of Directors. Executive Officer
Jim L. David 59 Director, Assistant to the President
Russell D. Glass 36 Director
Martin Hirsch 44 Director
Robert H. Kite 44 Director
Robert J. Mitchell 51 Director
Jack G. Wasserman 62 Director
Philip D. Devlin 54 Vice President. General Counsel
R. Kent Lueders 42 Vice President. Corporate Development
Melissa H. Rutledge 33 Vice President. Controller
</TABLE>
Messrs. Alexander, David and Mitchell were appointed to the
Board on August 29, 1996 and Mr. Alexander was appointed President and Chief
Executive Officers of the Company effective November 23, 1998. Messrs. Glass,
Hirsch and Wasserman were appointed to the Board on December 1, 1998. Pursuant
to the terms of the Series B. Preferred Stock, Series C. Preferred Stock and
Series D Preferred Stock, the holders of a majority of the outstanding shares of
each series have the right to appoint one member to the Company's Board of
Directors at all times while such series are outstanding. Mr. Elwood Schafer,
the Series C Preferred Stock appointees, resigned from the Board of Directors
effective December 31, 1998 Directors generally serve for a term of one year
(until the net annual meeting of shareholders) and until
-42-
<PAGE> 48
their successors are duly elected and qualified, or until their death,
resignation or removal, at which time the Board of Directors has the authority
to appoint replacements to fill any such vacancies until the next annual meeting
of shareholders.
The following table sets forth compensation for Officers and
Directors as of December 31, 1999:
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS
- --------------------------- ---- ------ -----
<S> <C> <C> <C>
BOB G. Alexander 1999 148,910
President and Chief Executive Officer 1998 148,645
1997 132,008
Jim L. David 1998 105,000
(former Vice President. Exploration 1997 132,500 35,000
1996 115,000 10,000
Philip D. Devlin 1998 193,882 --
Vice President. General Counsel 1997 137,500 25,000
1996 --
Melissa Rutledge 1998 107,000 --
Vice President. Controller and Chief 1997 80,000 15,000
Accounting Officer 1996 80,000 15,000
R. Kent Lueders 1998 80,556 --
Vice President. Corporate Development 1997 -- --
1996 -- --
</TABLE>
a. New Directors and Officers
Upon the Plan's Effective Date, all present directors of NEG
will be terminated and replaced by Chris Ryan, Kate Kutasi, Darryl Schall and
Joseph Radecki, who shall serve temporarily as Chairman of the Board.
-43-
<PAGE> 49
5. EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND
CHANGE-IN-CONTROL ARRANGEMENTS
In January 1996, the Company executed an employment agreement
with Melissa H. Rutledge, Vice President, Controller and Chief Accounting
Officer, which has a term of three years from the effective date of a "change in
control" of the Company. In March 1997, April 1998 and June 1998, respectively,
the Company executed a similar employment agreement with Philip D. Devlin, Vice
President, General Counsel and Secretary; R. Kent Leuders, Vice President,
Corporate Development; Leslie J. Wylie, Vice President, Land, which has a term
of three years from the effective date of a "change of control" of the Company
(together with the above-referenced employment agreements, the "Employment
Agreements"). The Employment Agreements each provided that the three-year term
would continuously roll over (so that at any time during the term of such
agreements there is a remaining term of three years, but in no event beyond the
time the executive and/or officer reaches age 65).
The Employment Agreements defined the "change in control" to
have occurred when (i) a person, entity or group becomes the beneficial owner of
a majority of the securities of the Company ordinarily having the right to vote
for election of directors, (ii) during any connective two year period, the
directors at the beginning of the period (together with directors approved by a
vote of 66-2/3% of such initial directors plus directors previously approved by
such 66-2/3% margin) cease to constitute a majority of the Company's Board of
Directors, (iii) any sale, lease, exchange or transfer of all, or substantially
all, of the Company's assets occurs or (iv) a merger or consolidation occurs
with the effect that any person, entity or group, or the shareholders thereof,
become the owner of securities of the surviving corporation representing a
majority of the voting power of such surviving corporation for the election of
directors.
-44-
<PAGE> 50
The Employment Agreements provided for a three year employment
term during which the executive and/or officer received for each year (i) 100%
of the average of the executive's annual base salary at the time in question and
the executive's annual base salary for each of the preceding two years, and (ii)
100% of the average of the bonuses paid to the executive and/or officer for
each of the preceding three fiscal years. If the executive and/or officer were
discharged without cause or resigns for "good reason" (as defined therein) after
a change in control, then in lieu of the compensation described in the
preceding sentence, the executive and/or officer claimed to be entitled to a
lump sum cash severance payment equal to three times the sum of (a) the
executive's annual base salary then in effect, (b) the average of cash bonuses
for each of the three previous years, and (c) the average of fully-vested
contributions to retirement plans for such executive and/or officer for each of
the three preceding year. In addition, at such time, all options and all other
retirement or pension contributions or benefits were to become fully vested and
remain fully exercisable for 360 days. Pursuant to an agreement with the Company
dated December 2, 1998, each of Ms. Rutledge, Mr. Devlin, Mr. Lueders and Ms.
Wylie agreed to terminate their existing Employment Agreements; provided that no
court (including the bankruptcy court) reduces or dismisses any of the Severance
Pay Benefits (described below) available to such executive pursuant to the
Company's Severance Policy.
6. SEVERANCE POLICY.
While the Company was in default of its Notes, the Company's
directors initiated a Severance Policy effective November 23, 1998 for all
employees which provides that for a period ending October 31,2000, all Eligible
Participants would be entitled to a Severance Pay
-45-
<PAGE> 51
Benefit up to 18 months (as defined in the Policy) in the event such Eligible
Participant was terminated by the Company for any reason other than "cause" (as
defined in the Policy). The Policy also provide that payments to such terminated
employee were to be subject to the employee's execution of a Separation
Agreement which would include the following provisions:
(i) a release of all claims against the Company;
(ii) a confidentiality provision; and
(iii) an agreement to give notice to the Company and not
accept or retain any further Severance Pay Benefit in
the event the Eligible Participants were to accept
the same or substantially similar employment with any
other employer.
Payments under the Policy were to have been made to each such terminated
employee on a monthly basis; provided that in the event the Company was sold
pursuant to a merger or liquidation proceeding and the Eligible Participant was
not offered the same or substantially similar employment, such Severance Pay
Benefit would be paid to each Eligible Participant in a lump sum. To date, no
employees have been terminated by the Company who would be eligible for
Severance Pay Benefits under the Policy. Arnos has indicated to the Creditors
Committee that it is considering making a proposal either to pay this liability
or employ substantially all employees post-reorganization and thereby reduce
significantly the maximum estimated liability of $2.5 million.
-46-
<PAGE> 52
7. SECURITY OWNERSHIP Of CERTAIN BENEFICIAL OWNERS.
The following table sets forth as of April 20, 1999, the
individuals or entities known to the Company to own more than 5% of the
Company's outstanding shares of capital stock(1):
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNER TITLE OF CLASS NUMBER OF SHARES
<S> <C> <C>
Carl C. Icahn(2) Common Stock 8,847,033
114 West 47th St.
19th Floor
New York, NY 10036
</TABLE>
- --------------------
(1) Based upon the 40,527,482 shares of Common Stock, 38,687 shares of
issued and outstanding Series B Preferred Stock, 23,000 shares of issued and
outstanding Series C Preferred Stock, 100,000 shares of issued and outstanding
Series D Preferred Stock and 9,500 shares of issued and outstanding Series E
Preferred Stock that are outstanding as of April 20, 1999. For each person or
group, the percentages are calculated on the basis of the amount of outstanding
securities of the particular class plus and securities that such person or
group has the right to acquire within 60 days of April 20, 1999 pursuant to
options, warrants, conversion privileges or other rights.
(2) High River Limited Partnership, the record owner of these shares,
is a Delaware limited partnership, and has pledged these shares to ING Capital.
Riverdale Investors Corp. Inc. is a Delaware corporation and is the general
partner of High River. Mr. Carl C. Icahn is the sole stockholder and a director
of Riverdale. Riverdale's principal business address is 90 South Bedford Road,
Mount Kisco, New York 10549, and Mr. Icahn's principal business address is c/o
lcahn Associates Corp., 114 West 47th Street, 19th Floor, New York, New York
10036. Gascon Partners, a New York general partnership, an affiliate of Mr.
Icahn, High River and Riverdale holds warrants to purchase 300,000 shares of
Common Stock. High River also holds acquisition of and merger with Alexander
Energy Company. The ownership figures in the table assume that all the shares of
Series D Preferred Stock are converted and warrants for 1,000,000 shares of
Common Stock are exercised. Riverdale and Mr. lcahn, by virtue of their
relationships to High River and Gascon, may be deemed to beneficially own (as
that term is defined in Rule 13d-3 under the Exchange Act) the shares which High
River directly beneficially owns and the shares which Gascon has warrants to
purchase. Each of Riverdale and Mr. Icahn disclaims beneficial ownership of such
shares for all other purposes. Mr. Robert J. Mitchell has been appointed a
director of the Company as the representative of the holders of the Series D
Preferred Stock. Mr. Mitchell does not have dispositive or voting power over any
of the shares owned by High River.
-47-
<PAGE> 53
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNER TITLE OF CLASS NUMBER OF SHARES
<S> <C> <C>
Kayne Anderson(3) Common Stock 4,547,069
Investment Management, Inc.
1800 Avenue of the Stars
Suite 1424
Los Angeles, CA 90067
Croft-Leominster, Inc.(4) Common Stock 2,161,710
207 E. Redwood St.
Suite 802
Baltimore, MD 21202
Kayne Anderson Investment Series B Preferred Stock 38,687
Management, Inc.
1800 Avenue of the Stars
Suite 1424
Los Angeles, CA 90067
</TABLE>
- --------------------
(3) Richard A. Kayne ("Kayne") is President, Chief Executive Officer
and Director of Kayne Anderson Investment Management Inc. ("KAIM") and of KA
Associates, Inc., a registered broker/dealer. KAIM is the general partner of
KAIM NonTraditional, L.P. ("L.P."), registered investment advisor, which is the
general partner of and investment advisor to the investment partnerships
referred to in this footnote. Mr. Kayne is also a limited partner in each
investment partnership and a general partner on one of them. Mr. Kayne and L.P.
have shared dispositive and voting power through investment partnerships for
38,687 shares of Series B Preferred Stock, 23,000 shares of Series C Preferred
Stock, and 9,500 shares of Series E Preferred Stock, which may be converted at
any time into 2,380,738, 1,150,000 and 422,222 shares of Common Stock,
respectively, and for warrants to purchase 350,000 shares of Common Stock. The
percentage ownership figures in the table assume that all shares of Series B
Preferred Stock. Series C Preferred Stock and Series E Preferred Stock are
converted, the warrants to purchase 350,000 shares of Common Stock are exercised
and 4,302,960 shares of Common Stock are issued, and such shares are added to
the shares of Common Stock outstanding. Mr. Kayne disclaims beneficial ownership
of the shares held by the investment partnerships in excess of the amount
attributable to him by virtue of his direct interest as a limited or general
partner and by virtue of his indirect interest in L.P.'s interest in the
investment partnerships. L.P. disclaims beneficial ownership of the shares held
by the investment partnerships in excess of the amount attributable to them by
virtue of their percentage interest in the investment partnerships.
(4) Croft-Leominsser, Inc. the record owner of the shares, is a
Maryland corporation.
-48-
<PAGE> 54
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNER TITLE OF CLASS NUMBER OF SHARES
<S> <C> <C>
Arbco Associates, L.P.(5) Series B Preferred Stock 13,928
1800 Avenue of Stars
Suite 1424
Los Angeles, CA 90067
Offense Group Associates L.P. Series B Preferred Stock 11,607
1800 Avenue of Stars
Suite 1424
Los Angeles, CA 90067
Kayne Anderson Non-Traditional Series B Preferred Stock 10,382
Investments, L.P.
1800 Avenue of the Stars
Suite 1424
Los Angeles, CA 90067
Opportunity Associates L.P. Series B Preferred Stock 2,320
1800 Avenue of the Stars
Suite 1424
Los Angeles, CA 90067
Kayne Anderson Investment(6) Series C Preferred Stock 23,000
Management, Inc.
1800 Avenue of the Stars
Suite 1424
Los Angeles, CA 90067
</TABLE>
- ------------------
(5) Beneficial ownership of all the Series B Preferred Stock is
attributed to KAIM. For information on Richard A. Kayne, KAIM and L.P., see
footnote (3) above. Arbco Associates L.P. has shares dispositive and voting
power with Mr. Kayne and L.P. of 13,928 shares of Series B Preferred Stock
which is convertible at anytime into 857,107 shares of Common Stock. Offense
Group Associates has shared dispositive and voting power with Mr. Kayne, and
L.P. for 11,607 shares of Series B Preferred Stock which is convertible at any
time into 7 14,276 shares of Common Stock. Kayne Anderson Non-Traditional
Investments has shared dispositive and voting power with Mr. Kayne and L.P. for
10,832 shares of Series B Preferred Stock, which is convertible at an~' time
into 666,584 shares of Common Stock. Opportunity Associates L.P. has shared
dispositive and voting power with Mr. Kayne and L.P. of 2,320 shares of Series
B Preferred Stock, which is convertible at any time into 142,769 shares of
Common Stock.
(6) Beneficial ownership of all the Series C Preferred Stock is
attributed to KAIM. For information on Richard A. Kayne, KAIM and L.P., see
footnote (3) above. Arbco Associates L.P. has shared dispositive and voting
power with Mr. Kayne and L.P. of 8,280 shares of Series C Preferred Stock,
which is convertible at any time into 414,000 shares of Common Stock. Offense
Group Associates has shared dispositive and voting power with Mr. Kayne and
L.P. for 7,240 shares of Series C Preferred Stock, which is convertible at any
time into 362,000 shares of Common Stock. Kayne Anderson Non-Traditional
Investments has shared dispositive and voting power with Mr. Kayne and L.P. for
6,100 shares of Series C Preferred Stock, which is convertible at any time into
305,000 shares of Common Stock. Opportunity Associates L.P. has shared
dispositive and voting power with Mr. Kayne and L.P. for 1,380 shares of Series
C Preferred Stock, which is convertible at anytime into 69,000 shares of Common
Stock.
-49-
<PAGE> 55
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNER TITLE OF CLASS NUMBER OF SHARES
<S> <C> <C>
Arbco Associates, L.P. Series C Preferred Stock 8,280
1800 Avenue of the Stars
Suite 1424
Los Angeles, CA 90067
Offense Group Associates, L.P. Series C Preferred Stock 7,240
1800 Avenue of the Stars
Suite 1424
Los Angeles, CA 90067
Kayne Anderson Non-Traditional Series C Preferred Stock 6,100
Investments, L.P.
1800 Avenue of the Stars
Suite 1424
Los Angeles, CA 90067
Opportunity Associates L.P. Series C Preferred Stock 1,380
1800 Avenue of the stars
Suite 1424
Los Angeles, CA 90067
Carl C. Icahn Series D Preferred Stock 100,000
114 West 47th Street
19th Floor
New York, NY 10036
Kayne Anderson Investment(7) Series E Preferred Stock 9,500
Management, Inc.
1800 Avenue of the stars
Suite 1424
Los Angeles, CA 90067
Foremost Insurance Company Series E Preferred Stock 7,500
5230 33rd St., S.E.
Grand Rapids, MI 49512
</TABLE>
- -----------------
(7) Beneficial ownership of all the Series E Preferred Stock is
attributed to KAIM. Foremost Insurance Company has dispositive and voting power
for 7,500 shares of Series E Preferred Stock, which is convertible at any time
into 333,333 shares of Common Stock and warrants for 105,000 shares of Common
Stock. Topa Insurance Company has dispositive and voting power for 2,000 shares
of Series E Preferred Stock, which is convertible at any time into 88,888 shares
of Common Stock and warrants for 28,000 shares of Common Stock.
-50-
<PAGE> 56
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNER TITLE OF CLASS NUMBER OF SHARES
<S> <C> <C>
Topa Insurance Company Series E Preferred Stock 2,000
c/o Kayne Anderson Investment
1800 Avenue of the Stars
Suite 1424
Los Angeles, CA 90067
</TABLE>
8. SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information concerning the
beneficial ownership of the Company's capital stock as of April 20, 1999 by each
of the Company's present directors and executive officers and certain other
parties, and the directors and executive officers of the Company as a group, all
as reported by each such person as of April 20, 1999.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNER TITLE OF CLASS NUMBER OF SHARES
<S> <C> <C>
Miles D. Bender (former CEO) Common Stock 847,944
4925 Greenville Avenue
Suite 1400
Dallas, Texas 75206
Jim L. David Common Stock 475,389
4925 Greenville Avenue
Suite 1400
Dallas, Texas 75206
Bob G. Alexander Common Stock 456,252
4925 Greenville Avenue
Suite 1400
Dallas, Texas 75206
Robert H. Kite Common Stock 406,455
2722 N. 7th st.
Phoenix, AZ 85006
Melissa H. Rutledge Common Stock 66,800
4925 Greenville Avenue
Suite 1400
Dallas, Texas 75206
</TABLE>
-51-
<PAGE> 57
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNER TITLE OF CLASS NUMBER OF SHARES
<S> <C> <C>
Philip D. Devlin Common Stock 41,473
4925 Greenville Avenue
Suite 1400
Dallas, Texas 75206
Robert J. Mitchell Common Stock 37,500
767 Fifth Avenue
New York, NY 10153
All officers and directors as a Common Stock 2,336,813
group (12 people)
</TABLE>
-52-
<PAGE> 58
VIII.
FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN
THE DISCUSSION SET FORTH BELOW IS INCLUDED FOR GENERAL INFORMATION
ONLY. THE DEBTORS AND THEIR COUNSEL AND FINANCIAL ADVISORS ARE NOT MAKING ANY
REPRESENTATIONS REGARDING THE PARTICULAR TAX CONSEQUENCES OF CONFIRMATION AND
CONSUMMATION OF THE PLAN, WITH RESPECT TO THE DEBTORS, HOLDERS OF CLAIMS,
HOLDERS OF EQUITY INTERESTS, OR REORGANIZED DEBTORS, NOR ARE THEY RENDERING ANY
FORM OF LEGAL OPINION OR TAX ADVICE ON SUCH TAX CONSEQUENCES. THE TAX LAWS
APPLICABLE TO CORPORATIONS IN BANKRUPTCY ARE EXTREMELY COMPLEX, AND THE
FOLLOWING SUMMARY IS NOT EXHAUSTIVE. HOLDERS OF CLAIMS AND HOLDERS OF EQUITY
INTERESTS ARE STRONGLY URGED TO CONSULT THEIR TAX ADVISORS REGARDING TAX
CONSEQUENCES OF THE PLAN, INCLUDING FEDERAL, FOREIGN, STATE AND LOCAL TAX
CONSEQUENCES.
A. FEDERAL INCOME TAX CONSEQUENCES TO THE DEBTORS.
1. GENERAL DISCUSSION.
In general, the Creditors Committee does not expect the Debtors to
incur any substantial tax liability as a result of implementation of the Plan.
Based on the current state of the law and the facts known to Debtors the
Creditors Committee at this time, it is contemplated that the Plan
-53-
<PAGE> 59
may permit the retention of a portion of the accumulated net operating loss
carryforwards ("NOLS") of the Debtors for future use if the Creditors Committee
elects to sell its rights to receive Additional Common Stock to a third party.
Accordingly, subject to the possible adjustment of the NOLs in connection with
future IRS examinations, and further subject to the limitations in the Tax Code
on the use of NOLs in calculating the alternative minimum tax ("AMT"), the NOLs
may be available to reduce at least a portion of the Debtors' future taxable
income.
2. CANCELLATION OF INDEBTEDNESS.
In general, the Tax Code, with certain exceptions, provides that
taxpayers that realize a "cancellation of indebtedness" must include the amount
of cancelled indebtedness in gross income to the extent that the indebtedness
canceled exceeds any consideration given for such cancellation. The Tax Code
further provides, however, that where the taxpayer is in a Chapter 11 case and
the cancellation of indebtedness is pursuant to a plan approved by the
bankruptcy court, such cancellation of indebtedness will not be included in
gross income, but the taxpayer must generally reduce tax attributes in a
specified order.
The Debtors may realize a material amount of cancellation of
indebtedness ("COD") income as a result of the Plan. With certain exceptions, to
the extent that any creditor receives a distribution under the Plan in an amount
less than such creditor's Claim, the Debtor will realize COD income. Because the
Debtors are in bankruptcy, they will not be required to include COD income in
taxable income, but rather will be required to reduce their NOLs (and possibly
certain other tax attributes, including tax basis of assets) by the amount of
the COD income. Tax attributes must be reduced in the order specified as
follows: (i) NOLs, (ii) business credits,
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<PAGE> 60
(iii) minimum tax credits, (iv) capital loss carryovers, (v) tax basis in
assets, (vi) passive activity losses and credits, and (vii) foreign tax credit
carryovers. In lieu of this order, however, the Debtors may elect to apply any
portion of the reduction to reduce the basis of its depreciable assets first.
3. NOLs AND FUTURE UTILIZATION.
The total consolidated NOL carryforward available to the Debtors as of
December 31, 1999, is presently estimated to be approximately $90 million. The
foregoing amount, however, is only an estimate. It is not binding on the IRS and
is subject to adjustment as a result of future IRS audits of the Debtors' tax
returns, which may not take place for several years. Such losses are also
subject to reduction, as discussed in paragraph 2 above. It is expected that COD
realized by the Debtors pursuant to the Plan will subsequently reduce the
Debtors' NOLs and could reduce certain other tax attributes, including the tax
basis of assets.
Section 382 (in conjunction with Section 383) of the Tax Code imposes
limitations upon the utilization of a corporation's NOLs, built-in losses and
credit carryforwards following significant changes in the corporation's stock
ownership, called an "ownership change." Issuance of Additional Common Stock
pursuant to the Plan may result in an "ownership change" as defined in Section
382 of the Tax Code. Thus, subject to certain exceptions applicable to Chapter
11 proceedings as discussed below, the Debtors' utilization of their NOLs
remaining after application of the COD rules described above (and also certain
"built-in losses") to reduce taxable income generated after the ownership change
may generally be subject to an annual limitation equal to the equity value of
the Debtors as a group multiplied by the Section 382 federal rate prescribed by
the IRS for the month in which the ownership change occurs.
-55-
<PAGE> 61
If the Debtors have a "net unrealized built-in loss" (excess of
aggregate adjusted tax basis of assets over aggregate fair market value of such
assets immediately before the ownership change) that exceeds certain thresholds,
such loss will be subject to the annual limitation to the extent it is
recognized during any of the first five years after the Effective Date. For
these purposes, in addition to recognized built-in losses resulting from the
disposition of these assets, any depreciation, amortization or depletion that is
deductible during the five year period and attributable to the built-in loss
existing on the Effective Date is treated as a recognized built-in loss subject
to these rules. If a deduction for any portion of a recognized built-in loss is
disallowed, such portion is carried forward. Accordingly, the utilization of any
portion of the Debtors' built-in loss (including depreciation deductions
attributable thereto) that is recognized during the five year period will be
subject to limitation under Section 382.
Section 382(1)(5) of the Tax Code and the regulations thereunder
provide that the foregoing limitations on the utilization of NOLs after an
ownership change do not apply if (i) immediately before the ownership change,
the loss corporation is under the jurisdiction of a court in a Title 11 or
similar case, (ii) the transaction resulting in such ownership change is ordered
by the court or is pursuant to a plan approved by the court, and (iii) the
pre-change shareholders and "qualified creditors" of the loss corporation
determined immediately before the ownership change own in the aggregate 50% or
more of the value and voting power of the reorganized corporation after the
ownership change. Qualified creditors are creditors who held their indebtedness
for at least 18 months before the date of the filing of the title 11 case or who
hold debt that arose in the ordinary course of the trade or business if such
other creditors have, at all
-56-
<PAGE> 62
times, been the beneficial holders thereof. The taxpayer may elect not to have
Section 382(l)(5) apply.
If Section 382(1)(5) applies then the NOLs must be computed as if no
deduction had been allowed for interest paid by the corporation on any
obligations that were exchanged for stock pursuant to the plan during any
taxable year ending during the three-year period preceding the taxable year in
which the ownership change occurs. However, if an ownership change to which
Section 382(l)(5) applied were to occur pursuant to the Plan, the NOLs and other
tax attributes of the Debtors would be eliminated in their entirety if there
were a second ownership change during the two-year period following the date of
the ownership change pursuant to the Plan.
The Reorganized Debtors can determine whether the requirements of
Section 382(1)(5) have been satisfied and, if so, whether to elect to have
Section 382(l)(5) not apply. Whether Section 382(l)(5) or Section 382(l)(6)
applies to the Plan, however, it appears that the application of Section 382
will limit the future use of the Debtors' remaining NOLs.
4. ALTERNATIVE MINIMUM TAX.
A corporation may be subject to the AMT even if its regular taxable
income is entirely offset by NOL carryforwards. For purposes of computing a
taxpayer's regular federal tax liability, all of the income recognized in a
taxable year may be reduced by NOL carryovers. For purposes of the AMT, however,
only 90% of a taxpayer's alternative minimum taxable income ("AMTI") may be
reduced by NOL carryovers ("AMTNOL carryovers"), the amount of which is
determined separately from the amount of regular NOL carryovers. Therefore, any
alternative minimum taxable income recognized by the Debtors will be taxable at
a rate of at least 2% (10% of the 20% AMT tax rate). Moreover, the Debtors' AMTI
(after certain adjustments and without
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<PAGE> 63
taking into account any deduction for AMTNOL carryovers) may be subject to a
.12% environmental tax under Section 59A of the Tax Code.
B. FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS OF CLAIMS.
1. REALIZATION AND RECOGNITION OF GAIN OR LOSS IN
GENERAL.
Generally, the holder of an Allowed Claim will realize a gain or loss
on the exchange of his Allowed Claim for the consideration received by the
holder under the Plan. The amount of realized gain will be equal to the
difference between (a) the sum of the amount of any Cash, and the fair market
value (generally issue price in the case of debt obligations received under the
Plan) of other consideration received (including Additional Common Stock) and
(b) the adjusted basis of the Allowed Claim exchanged therefor. (The adjusted
basis would generally be equal to the amount paid for the Allowed Claim,
increased by any amounts previously accrued as original issue or market
discount, and reduced to the extent that a bad debt deduction has been claimed
for federal income tax purposes with respect to the Allowed Claim.) However,
whether such realized gain or loss will be recognized (i.e., taken into account)
for federal income tax purposes will depend in part upon whether such exchange
qualifies as a "recapitalization" as defined in the Tax Code. Furthermore, even
if the exchange constitutes a recapitalization, it will nevertheless be fully
taxable unless the Claim exchanged is classified as a "security" for federal
income tax purposes and any note received in the exchange may be treated for
this purpose as if it were cash unless such note also constitutes a "security"
for federal income tax purposes.
The term "security" is not defined in the Tax Code or the Regulations.
Whether a debt instrument constitutes a "security" depends on an overall
evaluation of the facts and circumstances surrounding the nature of the debt
instrument, with the term of the debt instrument
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usually regarded as the most important factor. In general, the longer the term
of an instrument, the greater the likelihood that it will be considered a
security. As a rule of thumb, a corporate debt obligation evidenced by written
instruments having a term often or more years, when issued, will be classified
as a security, and an instrument having an original maturity of five years or
less, or arising out of the extension of trade credit, will not. Debt
instruments having a term of between five years and ten years are often treated
as securities, but may not be, depending on all the relevant factors.
The Creditors Committee expresses no view with respect to whether
Claims or any new obligations exchanged therefor constitute securities for tax
purposes. Each holder of a Claim is urged to consult such holder's own tax
advisor in this regard.
Under current law, if the terms of an obligation are significantly
modified, the modified obligation may be treated for federal income tax purposes
as a new obligation issued in exchange for the original obligation. Thus,
modifications to certain holder's Claims under the Plan, if treated as
significant, could cause such holder to be treated for federal income tax
purposes as receiving new obligations in exchange for the Debtors' original
obligations. However, the Creditors Committee expresses no view with respect to
whether any particular holder will be so treated. Each holder is urged to
consult such holder's own tax advisor in this regard. Each holder is also urged
to consult such holders own tax advisor as to the treatment of any new
obligations under the original discount rules.
2. HOLDERS OF CLAIMS WHOSE ALLOWED CLAIMS CONSTITUTE SECURITIES.
The exchange of securities for stock and/or securities pursuant to the
Plan will likely constitute a recapitalization for federal income tax purposes.
As such, holders of Claims whose
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Allowed Claims constitute securities (as defined for federal income tax
purposes) generally will not recognize gain or loss to the extent that their
securities are exchanged in part for Additional Common Stock and/or debt
obligations constituting securities. Such creditors will, however, recognize
gain to the extent of cash and the value (generally issue price in the case of
debt obligations) of other property received (e.g., any debt obligations that do
not constitute securities).
The tax basis of stock and/or securities received in exchange for
securities will equal the exchanging holder's tax basis in the surrendered
securities increased by the amount of any gain recognized on the exchange, and
decreased by cash and the fair market value of any other consideration received.
3. HOLDERS OF CLAIMS WHOSE ALLOWED CLAIMS DO NOT
CONSTITUTE SECURITIES.
A holder of a Claim who exchanges an Allowed Claim that does not
constitute a security will recognize gain or loss on the exchange in an amount
equal to the difference between the holder's tax basis in the Allowed Claim and
the amount realized on the exchange. For tax purposes, the amount realized will
be the amount of Cash received, if any, plus the fair market value of any stock
or other property received (in the case of debt obligations received, generally
the issue price of such obligations). The tax basis of property received will be
the fair market value of such property on the date of exchange, and the holding
period for such property will begin on the day following such date.
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4. CHARACTER OF GAIN OR LOSS.
In general, except for market discount discussed below, and except to
the extent that a bad debt deduction has been claimed (with corresponding tax
benefit) with respect to the Allowed Claims, any gain or loss recognized on the
exchange will be capital gain or loss if the Allowed Claims were capital assets
in the hands of a holder, and such gain or loss will be long-term capital gain
or loss if such holder's holding period for the Allowed Claim surrendered
exceeds one year at the time of the exchange. However, it should be noted that
Section 582(c) of the Tax Code provides that the sale or exchange of a bond,
debenture, note or certificate, or other evidence of indebtedness by a bank or
certain other financial institutions, shall not be considered the sale or
exchange of a capital asset. Accordingly, any gain recognized by such holders of
Claims as a result of the implementation of the Plan will be ordinary income,
notwithstanding the nature of their Allowed Claims.
Under current law, net long-term capital gains of individuals are
subject to a maximum federal income tax rate of 20% (not taking into account any
phaseout of personal exemptions and certain itemized deductions), whereas the
maximum federal income tax rate on ordinary income (and net short-term capital
gains) of an individual is currently 39.6% (not taking into account any phaseout
of personal exemptions and certain itemized deductions). For corporations,
capital gains and ordinary income are taxed at the same maximum rate of 35%.
Capital losses are currently deductible only to the extent of capital gains
plus, in the case of taxpayers other than corporations, $3,000 of ordinary
income. In the case of individuals and other noncorporate taxpayers, capital
losses that are not currently deductible may be carried forward to other years,
subject to certain limitations. In the case of corporations, capital losses that
are not currently
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deductible may generally be carried back to each of the three years preceding
the loss year and forward to each of the five years succeeding the loss year,
subject to certain limitations.
IX.
BANKRUPTCY CAUSES OF ACTION
A. PREFERENCES.
Pursuant to the Bankruptcy Code, a debtor may recover certain
preferential transfers of property, including cash, made while insolvent during
the ninety (90) days immediately prior to the filings of its bankruptcy petition
in respect of pre-existing debts to the extent the transferee received more than
it would have in respect of the pre-existing debt had the debtor been liquidated
under chapter 7 of the Bankruptcy Code. The recovery period is one year if the
recipient of the preferential transfer is an insider of the debtors. There are
certain defenses to such recoveries. Transfers made in the ordinary course of
the debtor's and the transferee's business according to the ordinary business
terms in respect to debt less than ninety (90) days old are not recoverable.
Furthermore, if the transferee extended credit subsequent to the transfer (and
prior to the commencement of the bankruptcy case) for which transferee was not
repaid, such extension constitutes an offset against any otherwise recoverable
transfer of property. If a transfer is recovered by the debtor, the transferee
has a general unsecured claim against the debtor to the extent of the recovery.
The Creditors Committee is continuing to review the payments made during the
ninety (90) days prior to the Commencement Date to creditors and during the one
(1) year prior to the Commencement Date to Insiders to determine whether the
Debtors should seek recovery of any such payments under Section 547 of the
Bankruptcy Code. The Creditors Committee's review is not yet complete, and
therefore, the Creditors Trust
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reserves the right to commence an avoidance action under Sections 547 and 550 of
the Bankruptcy Code against any creditor or Insider that received a payment from
the Debtors during the ninety (90) days or one (1) year, respectively, prior to
the Commencement Date.
B. FRAUDULENT CONVEYANCES.
Under the Bankruptcy Code and under various state laws, a debtor may
recover certain transfers or property, including the grant of a security
interest in property, made while insolvent or which rendered it insolvent if and
to the extent the debtor received less than fair value for such property. The
Creditors Committee is continuing to review all transfers or transactions that
may constitute fraudulent transfers to determine whether the Creditors Trust
should seek recovery of any such payments or transfers under Section 548 of the
Bankruptcy Code.
C. D&O AND RELATED LITIGATION.
The Creditors Committee and/or the creditors will evaluate whether
claims the Debtors may have against former and present officers and directors
and auditors exist and have merit. The rights to bring such causes of action are
being conveyed to the Creditors' Trust which will be responsible for final
evaluation and, if deemed appropriate, filing, prosecution and/or settlement.
The Creditors Committee has already notified the Debtors that such causes of
action may exist.
X.
ALTERNATIVES TO CONFIRMATION AND
CONSUMMATION OF THE PLAN
The Creditors Committee believes that the Plan affords the holders of
Claims and Equity Interests the potential for the greatest realization on their
Claims and Equity Interests and,
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therefore, is in the best interest of such holder. If the Plan is not confirmed,
however, the theoretical alternatives include: (a) continuation of the pending
Chapter 11 Cases; (b) alternative plans of reorganization; or (c) liquidation of
the Debtors under Chapter 7 of the Bankruptcy Code.
A. CONTINUATION OF THE CHAPTER 11 CASES.
If the Debtors remain in Chapter 11 and the Plan as currently proposed
is not confirmed within the time period projected, the Debtors could continue to
operate their business and manage their properties as debtors-in-possession. The
value of assets and cash flow would be affected by the expenses of operating
under the jurisdiction of the Bankruptcy Court for an extended period of time.
Such delay would, therefore, in all probability, significantly reduce the
recoveries received by Creditors and Equity Interest holders under any future
plan or reorganization.
B. ALTERNATIVE PLANS OF REORGANIZATION.
If the Plan is not confirmed, it is possible that another party in
interest in the Chapter 11 Cases could attempt to formulate and propose a
different plan or plans on such terms as they may desire. Such alternative plan
would still have to meet the requirements of confirmation.
C. CHAPTER 7 LIQUIDATION.
If no plan can be confirmed, the Debtors' Chapter 11 Cases may be
converted to cases under Chapter 7 of the Bankruptcy Code. A business undergoing
a Chapter 7 liquidation typically has no prospect of rehabilitation. In a
Chapter 7 case a trustee would be elected or appointed to liquidate the Debtors'
assets. The proceeds of the liquidation would be distributed
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to the respective holders of Claims against the Debtors in accordance with the
priorities established by the Bankruptcy Code.
In a Chapter 7 case, the amount distributed to unsecured creditors
depends upon the net estate available after all assets of the Debtors have been
reduced to cash. The cash realized from liquidation of the Debtors' assets would
be distributed in accordance with the priorities set forth in Section 507 of the
Bankruptcy Code. Claims entitled to priority under the Bankruptcy Code would be
paid in full before any distribution to general unsecured creditors. Whether a
bankruptcy case is one under Chapter 7 or Chapter 11, Administrative Expense
Claims, Professional Compensation and Reimbursement Claims, Involuntary Gap
Claims, Priority Tax Claims and Other Priority Claims are entitled to be paid in
cash and in full before general unsecured creditors receive any funds.
If the Chapter 11 Cases were converted to ones under Chapter 7 of the
Bankruptcy Code, the present priority claims may have a priority lower than
priority claims generated by the Chapter 7 case, such as the Chapter 7 trustee's
fees or the fees of attorneys, accountants and other professionals the trustee
may engage. Conversion to Chapter 7, then, would create an additional layer of
priority claims, including significantly the additional fees of a Chapter 7
Trustee (3-5% of total assets) and the expenses of any professionals hired by
the Trustee.
The Creditors Committee believes that liquidation under Chapter 7 would
result in a substantial diminution of the value of the estates to unsecured
creditors because of (i) the additional administrative expenses involved in the
appointment of a trustee, hiring of attorneys, accountants and other
professionals to assist such trustee and other additional expenses and claims,
some of which would be entitled to priority, that would arise by reason of the
liquidation;
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and (ii) of the failure to realize the potential going concern value of the
Debtors' assets; and (iii) the lost returns on distributions delayed by at least
a year as a consequence of conversion to Chapter 7. As a result, the Creditors
Committee believes that all Creditors will receive more under the Plan than they
would receive in the event of a Chapter 7.
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XI.
SIGNATURES
The undersigned have executed this Disclosure Statement as of the 28th
day of February 2000.
Respectfully submitted,
OFFICIAL CREDITORS COMMITTEE FOR
NATIONAL ENERGY GROUP, INC./BOOMER
MARKETING CORPORATION
By: /s/ KATALIN KUTASI -with permission
-----------------------------------
Katalin Kutasi, Chairman
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SIGNATURES
The undersigned have executed this Disclosure Statement as of the 28th
day of February 2000.
Respectfully submitted,
ANDREWS & KURTH L.L.P.
By: /s/ HUGH M. RAY
-----------------------------------
Hugh M. Ray
State Bar No. 16611000
Van Oliver
State Bar No. 15258700
1717 Main Street, Suite 3700
Dallas, Texas 75201
Telephone: (214) 659-4400
Facsimile: (214) 659-4401
ATTORNEYS FOR THE
COMMITTEE
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EXHIBIT 2.7
Hugh M. Ray
State Bar No. 16611000
J. Van Oliver
State Bar No. 15258700
ANDREWS & KURTH L.L.P.
3700 Bank One Center, 1717 Main Street
Dallas, Texas 75201a
Telephone: (214) 659-4400
Telecopier: (214) 659-4401
ATTORNEYS FOR CREDITORS COMMITTEE
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
IN RE: (
(
NATIONAL ENERGY GROUP, INC. ( CASE NO. 98-80258-HCA-11
and BOOMER MARKETING CORPORATION ( (JOINTLY ADMINISTERED)
(
DEBTOR (
(
(
PLAN OF REORGANIZATION SUBMITTED BY THE
OFFICIAL COMMITTEE OF UNSECURED CREDITORS
Dated: February 28, 2000
Dallas, Texas
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE I. DEFINITIONS ...................................................... 1
ARTICLE II. CLASSIFICATION AND IDENTIFICATION OF IMPAIRMENT
OF CLAIMS AND INTERESTS .......................................... 10
2.1 Administrative Expense Claims ..................................... 10
2.2 Professional Compensation, Reimbursement Claims and Administrative
Claims Bar Date ................................................... 10
2.3 Priority Tax Claims ............................................... 11
2.4 Statutory Fees Due the United States Trustee ...................... 11
2.5 Involuntary Gap Claims ............................................ 11
2.6 Cancellation of Warrants .......................................... 11
2.7 The Classes of Claims and Equity Interest in the Debtors .......... 11
ARTICLE III. TREATMENT OF CLASSES OF CLAIMS AND EQUITY INTEREST ............... 11
3.1 CLASS 1 Other Priority Claims: .................................. 11
3.2 Class 2 Secured Arnos Claim ..................................... 12
3.3 Class 3 Other Secured Claims: ................................... 12
3.4 Class 4 Convenience Claims: ..................................... 13
3.5 Class 5 Trade Claims (General Unsecured Claims): ................ 13
3.6 Class 6 Note Claims: ............................................ 14
3.7 Class 7 NEG Preferred Stock: .................................... 15
3.8 Class 8 NEG Common Stock: ....................................... 15
ARTICLE IV. TREATMENT OF IMPAIRED CLASSES OF CLAIMS AND INTERESTS ............ 15
4.1 Voting of Claims and Equity Interests ............................. 15
4.2 Nonconsensual Confirmation ........................................ 15
4.3 Method of Distributions Under the Plan ............................ 16
4.4 Objections to and Resolution of Administrative Expense
Claims, Claims and Equity Interests ............................... 17
4.5 Record Date for Distributions to Holders of Notes ................. 18
4.6 Fees and Expenses of Norwest Trust ................................ 18
4.7 Waiver of Subordination ........................................... 18
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C> <C>
ARTICLE V. TREATMENT OF EXECUTING CONTRACTS AND UNEXPIRED LEASES............ 19
5.1 Assumption or Rejection of Executory Contracts
and Unexpired Leases ............................................. 19
5.2 Compensation and Benefit Programs ................................ 21
ARTICLE VI. MEANS OF IMPLEMENTING THIS PLAN ................................. 21
6.1 General .......................................................... 21
6.2 Meetings of Stockholders of Reorganized Debtors .................. 21
6.3 Directors and Officers of the Reorganized Debtors ................ 21
6.4 Confidentiality Agreements with Interested Third
Party Purchasers.................................................. 22
6.5 Court Approved Format to Sell Rights of Noteholders to Receive
New NEG Common Stock ............................................. 22
6.6 New Board of Directors ........................................... 22
ARTICLE VII. MEANS OF EXECUTION OF THIS PLAN, CREATION OF THE CREDITORS TRUST,
PROSECUTION OF CAUSES OF ACTION, AND DISTRIBUTION OF ANY CASH,
TRUST ASSETS AND LITIGATION PROCEEDS ............................ 22
7.1 Orderly Prosecution .............................................. 22
ARTICLE VIII. CONDITIONS PRECEDENT TO CONFIRMATION AND CONSUMMATION OF
THE PLAN ........................................................ 27
8.1 Conditions to Confirmation ....................................... 27
8.2 Conditions to Effective Date ..................................... 27
8.3 Waiver of Conditions ............................................. 27
8.4 Cramdown ......................................................... 27
ARTICLE IX. RETENTION OF JURISDICTION ....................................... 28
9.1 Jurisdiction ..................................................... 28
9.2 Examination of Claims ............................................ 28
9.3 Determination of Disputes ........................................ 27
9.4 Additional Purposes .............................................. 27
</TABLE>
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<PAGE> 4
<TABLE>
<CAPTION>
<S> <C>
ARTICLE X. MISCELLANEOUS PROVISIONS ........................................ 29
10.1 Amendment of the Plan ............................................. 29
10.2 Revocation of Plan ................................................ 29
10.3 Effective of Withdrawal or Revocation ............................. 29
10.4 Effective of Withdrawal or Revocation ............................. 29
10.5 Due Authorization By Creditors .................................... 29
10.6 Implementation .................................................... 29
10.7 Limitation of Liability in Connection with the Plan,
Disclosure Statement and Related Documents and
Related Indemnity: .............................................. 30
10.8 Section Headings .................................................. 30
10.9 Successors and Assigns. ........................................... 30
10.10 Severability ...................................................... 30
10.11 Recordable Order .................................................. 30
ARTICLE XI. SIGNATURES ...................................................... 30
</TABLE>
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<PAGE> 5
Hugh M. Ray
State Bar No. 16611000
J. Van Oliver
State Bar No. 15258700
ANDREWS & KURTH L.L.P.
3700 Bank One Center, 1717 Main Street
Dallas, Texas 75201a
Telephone: (214) 659-4400
Telecopier: (214) 659-4401
ATTORNEYS FOR CREDITORS COMMITTEE
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
IN RE: (
(
NATIONAL ENERGY GROUP, INC. ( CASE NO. 98-80258-HCA-11
and BOOMER MARKETING ( (Jointly Administered)
CORPORATION (
(
DEBTOR. (
(
PLAN OF REORGANIZATION SUBMITTED BY THE
OFFICIAL COMMITTEE OF UNSECURED CREDITORS
The Official Committee of Unsecured Creditors of National Energy Group,
Inc. and Boomer Marketing Corporation, proposes the following plan of
reorganization pursuant to section 1121 of the Bankruptcy Code (as defined
herein). Reference is made to the Disclosure Statement (as defined herein) for,
among other matters, a discussion of the Debtor's history and business
operations, financial information concerning the Debtor's results of operations
and a summary and analysis of this Plan.
ARTICLE I.
DEFINITIONS
Unless the context otherwise requires, the following words and phrases
have the meanings set forth below when used in initially capitalized form in
this Plan. Words and phrases defined in the Bankruptcy Code and initially
capitalized but not otherwise defined in this Plan have the meanings set forth
in the Bankruptcy Code. In addition, the rules of construction contained in.
section 102 of the Bankruptcy Code apply to the construction of this Plan.
1.1 Administrative Expense Claim means any right to payment
constituting a cost or expense of administration of any of the Chapter 11 Cases
under Sections 503(b) and 507(a)(l) of the
<PAGE> 6
Bankruptcy Code, including, without limitation, any actual and necessary costs
and expenses of preserving the estates of the Debtors, any actual and necessary
costs and expenses of operating the business of the Debtors, any indebtedness or
obligations incurred or assumed by the Debtors in Possession in connection with
the conduct of their business, including, without limitation, for the
acquisition or lease of property or an interest in property or the rendition of
services, all compensation and reimbursement of expenses to the extent Allowed
by the Bankruptcy Court under Sections 330 or 503 of the Bankruptcy Code and any
fees or charges assessed against the estates of the Debtors under Section 1930
of Chapter 123 of Title 28 of the United States Code.
1.2 Administrative Claims Bar Date means with respect to an
Administrative Expense Claim, thirty (30) days after the Effective Date.
1.3 Allowed means, with reference to any Claim or Equity Interest, (a)
any Claim against or Equity Interest in the Debtors which has been listed by the
Debtors in their Schedules, as such Schedules may be amended by the Debtors from
time to time in accordance with Bankruptcy Rule 1009, as liquidated in amount
and not disputed or contingent and for which no contrary proof of Claim or
Equity Interest has been filed, (b) any Claim or Equity Interest Allowed
hereunder, (c) any Claim or Equity Interest which is not Disputed, or (d) any
Claim or Equity Interest which, if Disputed, (i) as to which, pursuant to the
Plan or a Final Order of the Bankruptcy Court, the liability of the Debtors and
the amount thereof are determined by a Final Order of a court of competent
jurisdiction other than the Bankruptcy Court, or (ii) has been Allowed by Final
Order; provided, however, that any Claim or Equity Interest allowed solely for
the purpose of voting to accept or reject the Plan pursuant to a Final Order of
the Bankruptcy Court shall not be considered an "Allowed Claim" or "Allowed
Equity Interest" hereunder. Unless otherwise specified herein or by Final Order
of the Bankruptcy Court, "Allowed Administrative Expense Claim," "Allowed
Claim," or "Allowed Equity Interest" shall not, for purposes of computation of
distributions under the Plan, include interest on such Administrative Expense
Claim, Claim or Equity Interest from and after the Commencement Date.
1.4 Amended NEG Certificate of Incorporation means the amended and
restated Bylaws of Reorganized National Energy Group, that are approved pursuant
to this Plan and shall go into effective on the Effective Date.
1.5 Amended NEG Bylaws means the amended and restated Bylaws of
Reorganized National Energy Group, Inc., which shall be in substantially the
form contained in the Plan Supplement.
1.6 Arnos or Arnos Corp. mean Arnos Corporation, a Delaware
corporation.
1.7 Arnos Escrow Funds proposes the $9.65 million deposit and in escrow
with Bank One, N.A. in accordance with the Bid Order, together with the
$61,250,0000 on deposit with the registry of the Court pursuant to the Court's
prior order directing such deposit be made by Monday, December 17, 1999.
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1.8 Arnos Group means those certain affiliates of Arnos Corp.,
including, but not limited to Robert Mitchell, Carl Icahn and entities
controlled directly or indirectly by Mr. Icahn.
1.9 Arnos Secured Claim means the Claim asserted by Arnos Corp. with
respect to the Debtors' indebtedness to Arnos Corp.
1.10 Ballot means the form distributed to each holder of an impaired
Claim or Equity Interest on which is to be indicated acceptance or rejection of
the Plan.
1.11 Bankruptcy Code means Title 11 of the United States Code, as
amended from time to time, as applicable to the Chapter 11 Cases.
1.12 Bankruptcy Court means the United States Bankruptcy Court for the
Eastern District of Louisiana having jurisdiction over the Chapter 11 Cases.
1.13 Bankruptcy Rules means the Federal Rules of Bankruptcy Procedure
as promulgated by the United States Supreme Court under Section 2075 of Title 28
of the United States Code, and any Local Rules of the Bankruptcy Court.
1.14 Bar Date means the deadline fixed by the Bankruptcy Court pursuant
to Bankruptcy Rule 3003(c)(3) for filing proofs of Claims or Interests, except
for Claims of governmental units under Bankruptcy Rule 3002(c)(1).
1.15 Business Day means any day other than a Saturday, Sunday or any
other day on which commercial banks in New York, New York are required or
authorized to close by law or executive order.
1.16 Cash means Cash of the Debtors, cash equivalents and other readily
marketable securities or instruments issued by a Person other than a Debtor,
including readily marketable direct obligations of the United States of America,
certificates of deposit issued by banks and commercial paper of any entity,
including interest accrued or earned thereon as determined by the Court at
Confirmation.
1.17 Causes of Action means (a) all claims recoverable under Chapter 5
of the Bankruptcy Code, including, but not limited to, all claims assertable
under Sections 544,546,546,548 and 550 of the Bankruptcy Code, (b) all claims
owned by the Debtors pursuant to Section 541 of the Bankruptcy Code, including,
without limitation, any and all other actions, causes of action, liabilities,
obligations, rights, suits, debts, sums of money, damages, judgments, claims and
demands whatsoever, whether known or unknown, in law, equity or otherwise of the
Debtor, against third parties or otherwise on account of any indebtedness, and
(c) all other claims owed to or in favor of the Debtors to the extent not
specifically compromised and released pursuant to this Plan or an agreement
referred to or incorporated herein, including claims of NEG against present or
former officers, directors, accountants and other professionals. Such Causes of
Action will be preserved, retained and transferred to and owned thereafter by
the Creditors Trust for enforcement by the Creditors Trust on the Effective
Date.
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1.18 Chapter 11 Cases means the cases under Chapter 11 of the
Bankruptcy Code commenced by the Debtors, styled In re National Energy Group,
Inc., Chapter 11 Case No. 98-80258-A and In re Boomer Marketing, Inc., Case No.
98-80259, Jointly Administered, currently pending in the Bankruptcy Court.
1.19 Claim means any right against the Debtor to (i) payments, whether
or not such right is reduced to judgment, liquidated, unliquidated, fixed,
contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured
or unsecured or (ii) an equitable remedy for a breach of performance, if the
breach would give rise to a right to payment, whether or not such right to an
equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured,
disputed, undisputed, secured or unsecured, or otherwise defined in the
Bankruptcy Code and which was timely filed in the Case by the Bar Date.
1.20 Claimant means the holder of a Claim against either of the
Debtors.
1.21 Claims Register shall mean the list of proofs of Claim prepared
and maintained by the Clerk of the Bankruptcy Court.
1.22 Class means a category of holder of Claims or Equity Interests as
set forth in Article III of the Plan.
1.23 Common Stock means the outstanding common stock of NEG.
1.24 Confirmation Date means the date on which the Clerk of the
Bankruptcy Court enters the Confirmation Order on the docket.
1.25 Confirmation Hearing means the hearing held by the Bankruptcy
Court enters the Confirmation Order on the docket.
1.26 Confirmation Order means the Final Order of the Bankruptcy Court
confirming the Plan pursuant to Section 1129 of the Bankruptcy Code.
1.27 Convenience Claim means a General Unsecured Creditor Claim in an
Allowed Amount of $1,000 or less or a claim in a greater filed or scheduled
amount of the holder which agrees to reduce such creditor to $1,000 by so
indicating on the Bank for noting on the Plan.
1.28 Creditors' Committee means the statutory committee of unsecured
creditors appointed in the Chapter 11 Cases pursuant to Section 1102 of the
Bankruptcy Code.
1.29 Debtors: National Energy Group, Inc. and Boomer Marketing
Corporation.
1.30 Debtors in Possession means the Debtors in their capacity as
debtors in possession in the Chapter 11 Cases pursuant to Sections 1101,
1107(a) and 1108 of the Bankruptcy Code.
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1.31 Debtors' Schedules means the Schedules of Assets and Liabilities,
Statement of Financial Affairs and Statement of Executory Contracts, as each may
be amended, filed by the Debtors with the Bankruptcy Court in accordance with
Section 521(1) of the Bankruptcy Code.
1.32 Disclosure Statement means the Disclosure Statement filed by the
Creditors' Committee under section 1125 of the Bankruptcy Code to accompany this
Plan, as amended or modified from time to time in accordance with the provisions
of the Bankruptcy Code and Bankruptcy Rules.
1.33 Disputed means the portion (including, when appropriate, the
whole) of any Claim as to which: (a) a proof of Claim has been or been deemed
timely and properly filed under applicable law or Final Order of the Bankruptcy
Court, (b) an objection, motion to estimate, or complaint to determine the
validity, priority or extent of any Lien asserted by the claimant with respect
to the Claim has been timely filed; and (c) such objection, motion or complaint
has not been withdrawn or granted, denied or otherwise determined by Final
Order. Before the time that such an objection, motion or complaint has been
filed, a Claim shall be considered Disputed (w) to the extent, if any, that the
amount of the Claim specified in a proof of Claim exceeds the amount of any
corresponding Claim scheduled by the Debtors in their Schedules; (x) in its
entirety, if any corresponding Claim scheduled by the Debtors has been scheduled
as disputed, contingent or unliquidated in the Schedules; (y) in its entirety,
if any corresponding Claim scheduled by the Debtors in their Schedules places
the Claim in a separate classification from that asserted in a proof of Claim,
or (z) in its entirety, if no corresponding Claim has been scheduled by the
Debtors in their Schedules.
1.34 Disputed Claim means a claim against a Debtor (a) as to which an
objection has been filed on or before the deadline for objecting to a claim by
the Debtor or any party in interest in and which objection has not been
withdrawn or resolved by entry of a Final Order, (b) a Claim that has been
asserted in an amount greater than that listed in the Debtors' Schedules as
liquidated in an amount and not disputed or contingent, or (c) that the Debtors'
Schedules list as contingent, unliquidated or disputed.
1.35 Disputed Claim Amount means the higher of the amount set forth in
the proof of Claim or listed on the Schedules relating to a Disputed Claim;
provided, however, if a Disputed Claim is estimated for allowance purposes under
Section 502 (c) of the Bankruptcy Code, the amount so estimated pursuant to
Final Order of the Bankruptcy Court shall be the Disputed Claim Amount.
1.36 Disputed Claims Reserve means a segregated account to be held in
trust by the Debtor for the benefit of holders of Disputed Claims in accordance
with the provisions of Article IV of the Plan.
1.37 Effective Date means the first Business Day on which the
conditions specified in the Plan have been satisfied, or waived in accordance
with the Plan.
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1.38 Equity Interest means any share of common stock or other
instrument evidencing an ownership interest in any of the Debtors, whether or
not transferable, and any option, warrant or right, contractual or otherwise, to
acquire any such interest.
1.39 Estates means the Debtors' Chapter 11 bankruptcy estates.
1.40 Executory Contract means an unexpired lease or executory contract,
within the meaning of section 365 of the Bankruptcy Code, in effect between or
among the Debtors and any other Persons as of the Petition Date.
1.41 Final Order means an order of the Bankruptcy Court or any other
court of competent jurisdiction that has been entered on the docket of the
Bankruptcy Court or such other court for ten (10) or more days and that is not
then stayed or reversed.
1.42 General Unsecured Claim means any Unsecured Claim other than a
Convenience Claim.
1.43 Initial Distribution Date means the date that is thirty (30) days
subsequent to the Effective Date, or within ten (10) days thereof.
1.44 Intercompany Claim means any Claim asserted against each other by
either of the Debtors.
1.45 Interpretation; Application of Definitions and Rules
of Construction. Wherever from the context it appears appropriate, each term
stated in either the singular or the plural shall include both the singular and
the plural and pronouns stated in the masculine, feminine or neuter gender shall
include the masculine, feminine and neuter. Unless otherwise specified, all
section, article, schedule or exhibit references in the Plan are to the
respective Section in, Article of, Schedule to, or Exhibit to, the Plan. The
words "herein," "hereof," "hereto," "hereunder" and other words of similar
import refer to the Plan as a whole and not to any particular section,
subsection or clause contained in the Plan. The rules of construction contained
in Section 102 of the Bankruptcy Code shall apply to the construction of the
Plan. A term used herein that is not defined herein, but that is used in the
Bankruptcy Code, shall have the meaning ascribed to that term in the Bankruptcy
Code. The headings in the Plan are for convenience of reference only and shall
not limit or otherwise affect the provisions of the Plan.
1.46 Involuntary Gap Claim means any Unsecured Claim or Trade Claim
entitled to priority and payment under Section 507(a)(2) of the Bankruptcy Code
for the period December 4, 1998 through February 12, 1999.
1.47 Lien shall have the meaning set forth in Section 101 of the
Bankruptcy Code.
1.48 Mineral Leases means any agreement pursuant to which NEG, as
lessee, has been granted the right to explore for and produce oil, gas or other
minerals.
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1.49 NEG Preferred Stock means collectively the series of preferred
stock of NEG issued and outstanding by NEG as of the Petition Date, as defined
hereinafter.
1.50 New NEG Common Stock means the common stock of Reorganized NEG
authorized and to be issued pursuant to the Plan. The New NEG Common Stock shall
have a par value of $.01 per share and such rights with respect to dividends,
liquidation, voting and other matters as are provided for by applicable
nonbankruptcy law or in the Amended NEG Certificate of Incorporation and the
Amended NEG Bylaws.
1.51 NOL: Net operating losses of NEG.
1.52 Note Claim means the holder of a Claim based upon holdings
of Notes.
1.53 Note Indentures means those Indenture relating to the 10 3/4%
Series A, B, C and D Notes, of which Norwest Bank, N.A. or any affiliate
thereof acts as an indenture trustee, and all successors thereto.
1.54 Notes means that certain Series A of Senior Notes issued in
November, 1996 in the aggregate principal amount of $100 million accruing
interest at 10 3/4% and all such Notes issued in August, 1997 in the aggregate
principal amount of $65.0 million and accruing interest thereon, together with
the Series D Notes issued in December, 1997 for Series A, B, and C Notes which
bear interest at 10 3/4% and mature November 1, 2006.
1.55 Noteholders means holders of any Notes that were outstanding on
the Petition Date.
1.56 Office Lease means the Debtors' non-residential leases of real
property for office space located at 1400 One Energy Square, 4925 Greenville
Avenue, Dallas, Texas 75206.
1.57 Oil and Gas Purchase Contracts means any agreement pursuant to
which either of the Debtors has agreed with a third party for the purchase and
sale of oil and/or gas produced from designated leases, fields or areas, and
which sets forth the terms and conditions of purchase and sale.
1.58 Operating Assets means the furniture, fixtures and equipment
located at the office leave on the Petition Date.
1.59 Other Priority Claim means any Claim, other than an Administrative
Expense Claim or a Priority Tax Claim, entitled to priority in right of payment
under Section 507(a) of the Bankruptcy Code.
1.60 Person means an individual corporation, partnership, limited
liability company, association, joint-stock company, joint venture, estate,
trust, unincorporated organization, government, governmental unit or any
political substitution thereof.
1.61 Petition Date means December 4, 1998, the date on which certain
bondholders filed an Involuntary Petition in Bankruptcy Court against NEG in
this Court
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1.62 Plan means this Chapter 11 Creditor's Committee plan of
reorganization for NEG, including, without limitation, the Plan Supplement and
all exhibits, supplements, appendices and schedules hereto, either in its
present form or as the same may be altered, amended or modified from time to
time.
1.63 Plan Supplement means the forms of documents specified in Article
__ of the Plan.
1.64 Preferred Stock; Series B issued in June, 1994 and convertible
into NEG common Stock at conversion rate of 1.625 per share. As of October,
1997, 38,687 shares were outstanding.
1.65 Preferred Stock Series C issued in June, 1995 and convertible into
NEG Common Stock at $2.00 per share. As of October, 1997, 23,000 shares were
outstanding.
1.66 Preferred Stock Series D: Issued in August, 1996, convertible into
Common Stock at a rate of $2.25 per share.
1.67 Preferred Stock Series E: Also issued in August 1996 and
convertible into Common Stock at the conversion price of $2.25 per share. As of
October 1997, 9,500 shares were outstanding.
1.68 Prime Rate means the rate of interest charged by Bank One, N.A.,
to its best customers, as reported publicly.
1.69 Priority Tax Claim means any Claim of a governmental unit of the
kind specified in Sections 502(i) and 507(a)(8) of the Bankruptcy Code.
1.70 Pro Rata Share means a proportionate share, so that the ratio of
the consideration distributed on account of an Allowed Claim or Allowed Equity
Interest in a Class to the amount of such Allowed Claim or Allowed Equity
Interest is the same as the ratio of the amount of the consideration distributed
on account of all Allowed Claims or Allowed Equity Interests in such Class to
the amount of all Allowed Claims or Allowed Equity Interests in such Class.
1.71 Purchase and Sale Agreement means that certain Purchase and Sale
Agreement between National Energy Group, Inc., as Seller and Arnos Corp., as
Buyer dated as of November 1, 1999, as amended and as described in Exhibit "A"
to the "Order Declaring Arnos Corporation and Exco as Respective High Bidder and
Back Up Bidder signed by the Court on November 10, 1999. ("Bid Order").
1.72 Quarter means the period beginning on the Effective Date and
ending on the next of December 31, March 31, June 30 and September 30, and each
three month period thereafter.
1.73 Record Date means the date the Bankruptcy Court enters the order
approving the Disclosure Statement
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1.74 Reorganized Debtors means Reorganized NEG and Reorganized Boomer.
1.75 Reorganized NEG means NEG and Boomer Marketing Inc., or any
successor thereto by merger, consolidation or otherwise, on and after the
Effective Date.
1.76 Reserve shall have the meaning set forth in Articles III and VII
of the Plan.
1.77 Schedules means the schedules of assets and liabilities, the list
of holders of Equity Interests, and the statements of financial affairs filed by
the Debtors under Section 521 of the Bankruptcy Code and Bankruptcy Rule 1007,
and all amendments and modifications thereto through the Confirmation Date.
1.78 SEC means the Securities and Exchange Commission.
1.79 Secured Claim means any Claim, to the extent reflected in the
Schedules or a proof of Claim as being secured by a Lien or Security Interest
(whether consensual or otherwise), to the extent it is secured by a valid,
unavoidable Lien or Security Interest in Collateral, to the extent of the value
of the Estates' interest in such Collateral, as determined in accordance with
Section 506(a) of the Bankruptcy Code and taking into account any other Secured
Claims with respect to such Collateral not inferior in priority to such Secured
Claim, or, in the event that such Claim is subject to setoff under Section 553
of the Bankruptcy Code, to the extent of such setoff.
1.80 Securities Act of 1933 means the Securities Act of 1933, as
amended, including all rules and regulations thereunder.
1.81 Subsequent Distribution Date means the date or dates after the
Initial Distribution Date upon which the Reorganization Debtors make
distributions in accordance with and pursuant to the terms of the Plan.
1.82 Surplus Distributions shall have the meaning set forth in Article
IV of the Plan.
1.83 Tax Claims means a Claim by a governmental unit of the kind
specified in Section 507(a)(8) of the Bankruptcy Code.
1.84 Trade Claim means an Unsecured Claim for goods, materials or
services provided to the Debtors or rendered to the Debtors in a ordinary course
of business prior to the Petition Date. A Trade Claim shall not include a Bond
Claim or a Rejection Claim.
1.85 Unsecured Claim means any Claim that is not a Secured Claim,
Administrative Expense Claim, Priority Tax Claim, Other Priority Claim.
1.86 Warrants means any warrants authorized, issued or outstanding to
purchase shares of Preferred Common Stock of the Debtors existing as of the
Petition Date.
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The words "herein", "hereof and "hereunder" and other words of similar
import refer to this Plan as a whole and not to any particular section,
subsection or cause contained in this Plan, unless the contest requires
otherwise. Whenever from the context it appears appropriate, each term stated in
either the singular or the plural includes both the singular and the plural, and
pronouns stated in the masculine, feminine or neuter gender include each of the
masculine, feminine and the neuter gender. The section headings contained in the
Plan are for reference purposes only and shall not affect in any way the
meaning or interpretation of the Plan. In this Plan, "including" means
"including without limitation."
A term used in this Plan, not defined in this Plan and defined in the
Bankruptcy Code has the meaning assigned to it in the Bankruptcy Code. A term
used in this Plan, not defined in this Plan, not defined in the Bankruptcy Code
and defined in the Bankruptcy Rules has the meaning assigned to it in the
Bankruptcy Rules.
ARTICLE II.
CLASSIFICATION AND IDENTIFICATION OF
IMPAIRMENT OF CLAIMS AND INTERESTS
2.1 Administrative Expense Claims means except to the extent that any
entity entitled to payment of any Allowed Administrative Expense Claim has been
paid by the Debtors prior to the Effective Date or agrees to a different
treatment, each holder of an Allowed Administrative Expense Claim shall receive
Cash in an amount equal to such Allowed Administrative Expense Claim on the
later of the Effective Date and the date such Administrative Expense Claim
becomes an Allowed Administrative Expense Claim, or within ten (10) days
thereof; provided, that Allowed Administrative Expense Claims representing
liabilities incurred in the ordinary course of business by the Debtors in
Possession or liabilities arising under loans or advances to or other
obligations incurred by the Debtors in Possession, to the extent authorized and
approved by the Bankruptcy Court if such authorization and approval was
required under the Bankruptcy Code, shall be paid in full and performed by the
Reorganized Debtors in the ordinary course of business in accordance with the
terms and subject to the conditions of any agreements governing, instruments
evidencing or other documents relating to, such transactions.
2.2 Professional Compensation, Reimbursement Claims and Administrative
Claims Bar Date means all entities, including without limitation, the
professionals employed by Court order and Norwest Bank & Trust Co., seeking an
award by the Bankruptcy Court of compensation for services rendered or
reimbursement of expenses incurred through and including the Effective Date
under Sections 503(b)(2), 503(b)(3), 503(b)(4) or 503(b)(5) of the Bankruptcy
Code or otherwise (a) shall file their respective final applications for
allowances of compensation for services rendered and reimbursement of expenses
incurred through the Effective Date by the date that is thirty (30 days after
the Effective Date ("Administrative Claims Bar Date") or such other date as may
be fixed by the Bankruptcy Court, and (b) if granted such an award by the
Bankruptcy Court, shall be paid in full, in Cash such amounts as are Allowed by
the Bankruptcy Court on the date such Administrative Expense Claim becomes an
Allowed Administrative Expense Claim, or within ten (10) days thereof.
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2.3 Priority Tax Claims means except to the extent that a holder of an
Allowed Priority Tax Claim has been paid by the Debtors prior to the Effective
Date or agrees to a different treatment, each holder of an Allowed Priority Tax
Claim shall receive Cash in an amount equal to such Allowed Priority Tax Claim
on the later of the Effective Date and the date such Priority Tax Claim becomes
an Allowed Priority Tax Claim, or within ten (10) days thereof.
2.4 Statutory Fees Due the United States Trustee means pursuant to 28
U.S.C. Section 1930(a)(6), the statutory fees of the United States Trustee
shall be paid in Cash as such fees become due and payable.
2.5 Involuntary Gap Claims. On the later of the Effective Date and the
date an Involuntary Gap Claim becomes an Allowed Involuntary Gap Claim, or with
ten (10) days thereof, and except to the extent a holder of an Allowed
Involuntary Gap Claim agrees to a different treatment of such claim, each holder
of an Allowed Involuntary Gap Claim shall receive cash in an amount equal to
such Allowed Involuntary Gap Claim.
2.6 Cancellation of Warrants. Any and all warrants of the Debtors shall
be cancelled and be of no force and effect before and after the Effective Date.
2.7 The Classes of Claims and Equity Interest in the Debtors are as set
forth below:
Class 1 -- Other Priority Claims Unimpaired
Class 2 -- Secured Arnos Claim Unimpaired
Class 3 -- Other Secured Claims Unimpaired
Class 4 -- Convenience Claims Impaired
Class 5 -- General Unsecured Trade Claims Impaired
Class 6 -- Note Claims Impaired
Class 7 -- NEG Preferred Stock (Series, B, C, D and E) Impaired
Class 8 -- NEG Common Stock Impaired
ARTICLE III.
TREATMENT OF CLASSES OF CLAIMS AND EQUITY INTEREST
3.1 CLASS 1 - OTHER PRIORITY CLAIMS:
(a) Impairment and Voting. Class 1 is unimpaired by the Plan.
Each holder of an Allowed Other Priority Claim is deemed to have accepted the
Plan and is not entitled to vote to accept or reject the Plan.
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(b) Treatment. Except to the extent that a holder of an Allowed Other
Priority Claim has been paid by the Debtors prior to the Effective Date or
agrees to a different treatment, each holder of an Allowed Other Priority Claim
shall receive Cash in an amount equal to such Allowed Other Priority Claim on
the later of the Effective Date and the date such Other Priority Claim becomes
an Allowed Other Priority Claim, or within ten (10) days thereof.
3.2 CLASS 2 - SECURED ARNOS CLAIM:
(a) Impairment and Voting. Class 2 is unimpaired by the Plan. The Arnos
Claim is not entitled to vote to accept or reject the Plan.
(b) Treatment. The remaining unpaid portion of Arnos Secured Claim that
equals the accrued interest due thereon from December 1, 1999 through December
13, 1999 will be paid in full on the later of the Effective Date, the date that
the Arnos Secured Claim becomes an Allowed Claim, or within ten (10) days
thereafter.
3.3 CLASS 3 - OTHER SECURED CLAIMS:
(a) Impairment and Voting. Class 3 Other Secured Claims are not
impaired and are not entitled to vote to accept or reject the Plan.
(b) Treatment. At the option of the Creditors Committee or Creditors
Trust, as the case may be, Allowed Other Secured Claims will be satisfied in one
of the following manners:
(i) notwithstanding any contractual provisions or applicable
laws that entitle the holder of an Other Secured Claim to demand or
receive accelerated payment after the occurrence of a default, the
legal, equitable and contractual rights to which the Claim entitles the
holder thereof will be left unaltered and unimpaired. If applicable,
any defaults that occurred before or after the Petition Date, other
than defaults of the kind specified in Section 365(b)(2) of the
Bankruptcy Code, will be cured on the Effective Date or as soon
thereafter as is practicable; the maturity of such Claim shall be
reinstated as it existed before such default; and the holder of such
Claim shall be compensated for any damages incurred as a result of its
reasonable reliance on such contractual provision or applicable law. In
the alternative, at the option of the Creditors Committee or Creditors
Trust, as the case may be, any Allowed Other Secured Claim may be
satisfied in cash on the later of the Effective Date and the date such
Claim is Allowed, or as soon thereafter as is practicable, in an amount
equal to the Allowed Claim, provided that the aggregate amount of all
Other Secured Claims which the Creditors Committee and Creditors Trust
elect to satisfy in such manner shall not exceed $200,000 without the
consent of the Creditors' Committee;
(ii) the collateral securing a particular Allowed Other
Secured Claims will be abandoned to the holder of the Claim on the
Effective Date or as soon thereafter as is practicable;
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(iii) the Allowed Other Secured Claim will be paid in full in
annual installments equal to the net cash flow attributable to the
collateral which secures the Claim commencing on the first anniversary
of the Effective Date, with final payment of all then-remaining amounts
on the tenth anniversary of the Effective Date, with simple interest
from the later of the Effective Date and the date such Claim is Allowed
at the rate in effect under 26 U.S.C. Section 6621(b)(3) on the
Confirmation Date unless the Bankruptcy Court determines that a
different rate of interest should be used; or
(iv) such other treatment as the holder of the Other Secured
Claim and the Creditors Committee or Creditors Trust, as the case may
be, may otherwise agree.
Pursuant to Section 1111(b) of the Bankruptcy Code, if the
Creditors Trust or Creditors' Committee elects to retain in the
Creditors Trust or the Reorganized Debtor the collateral securing a
non-recourse Other Secured Claim which is an Allowed Claim (and
assuming the value of such collateral is not inconsequential), the
holder of such Claim will be entitled to be treated as the holder of
(x) an Other Secured Claim in an amount equal to the value of the
Estate's interest in such collateral and (y) a General Unsecured Claim
in an amount equal to the difference, if any, between the value of the
Estate's interest in such collateral and the amount of such Allowed
Claim, unless the application of Section 1111(b)(2) of the Bankruptcy
Code is elected.
3.4 CLASS 4 - CONVENIENCE CLAIMS:
(a) Impairment and Voting. Class 4 is unimpaired by the Plan. Each
holder of an Allowed Convenience Claim is unimpaired and is not entitled to vote
to accept or reject the Plan.
(b) Treatment. Except to the extent that an Allowed Convenience Claim
has been paid by the Debtors prior to the Effective Date or agrees to a
different treatment, each holder of an Allowed Convenience Claim as of the
Record Date shall receive Cash in an amount equal to 90% of such Allowed
Convenience Claim on the later of the Effective Date and the date such Allowed
Convenience Claim becomes an Allowed Convenience Claim, or within ten (10) days
thereof.
3.5 CLASS 5 - TRADE CLAIMS (GENERAL UNSECURED CLAIMS):
(a) Impairment and Voting. Class 5 is impaired by the Plan. Each
holder of an Allowed General Unsecured Claim (excluding Notes) is entitled to
vote to accept or reject the Plan.
(b) Treatment. To the extent that holders of Allowed Trade Claims total
in the aggregate less than $1.5 million, then each holder of an Allowed Trade
Claim shall receive a Pro Rata Share equal to 70% of each such Allowed Trade
Claim; provided, however to the extent that the aggregate of Allowed Trade
Claims exceed $1.5 million, then such Class 5 Trade Claims shall be treated as
part of Class 6 Note Claims under Section 3.6 hereof.
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3.6 CLASS 6 - NOTE CLAIMS:
(a) Impairment and Voting. Class 6 is impaired by the Plan. Each
Noteholder is entitled to vote to accept or reject the Plan.
(b) Treatment. The Allowed Note Claims shall be the primary beneficiary
of the Creditors Trust. The Creditors Trust shall utilize the Cash, Arnos Escrow
Funds and any Proceeds recovered from prosecution of the Causes of Action
("Litigation Proceeds"), together with any proceeds received from the
liquidation of miscellaneous assets of the Debtor, to pay in the order of their
priority, Allowed Administrative Claims, Allowed Priority Claims, Allowed
Priority Non-Tax Claims, Allowed Convenience Claims, Allowed Other Secured
Claims and the Allowed Arnos Secured Claim ("Superior Claims"). After
establishing a sufficient reserve to cover Dispute Claims and an administrative
reserve to insure the continued viability and operation of the Trust, the
Creditor Trust shall make the Initial Distribution and any Subsequent
Distribution and Surplus Distribution to Norwest Bank, N.A., the Note Indenture
Trustee, which, in turn, shall immediately distribute such proceeds to the
holders of Allowed Note Claims on a Pro-Rata basis.
(c) Additional Consideration to Class 6 Claims. In order to maximize
the recovery of Allowed Class 6 Note Claims, the Creditors Committee shall have
the right for a period of thirty (30) days following the latter of the entry
date of the Confirmation Order or the Effective Date, within which to dispose of
the remaining assets of the Debtors not otherwise specifically dealt with
herein, including, but not limited to, the corporate entity itself, goodwill,
net operating losses, Office Lease, furniture fixtures and equipment,
miscellaneous oil and gas assets (collectively the "Remaining Assets") in one of
two manners:
(i) First, to cause such Remaining Assets to be transferred,
conveyed and assigned to the Creditors Trust for its liquidation, with
the resulting proceeds to be distributed in accordance with the other
provisions of this Plan. In that event, the Debtors shall be considered
to be in the mode of a liquidation or be winding up their corporate
affairs. To the extent necessary, the Creditors Committee may appoint
one or more individuals, persons or entities to assume control of the
winding up of the corporate affairs of the Debtors, including the
Trustee of the Creditors Trust.
(ii) Second, and alternatively, the Creditors Committee may
elect, within the above-described period of time, to cause the
Reorganized Debtor to distribute to each holder of an Allowed Note
Claim, determined as of the Record Date, such shares of Additional
Common Stock as shall equal, in the sole discretion of the Creditors
Committee, between 49% and 95% of then issued and outstanding Common
Stock of the Reorganized Debtors, determined as of the Effective Date
on a fully diluted basis (calculated after giving effect to the
conversion of all series of Preferred Stock into Common Stock, as
provided herein). To the extent that such distributions are, in fact,
made, they shall be to the holders of Allowed Note Claims determined as
of the Record Date and mailed to their addresses as they appear in the
records of the Trustee under the Note Indenture. Prior to such
distributions of Additional Common Stock, the Creditors Committee may
sell, assign, or otherwise convey either the Remaining Assets or the
rights to receive such Additional Common Stock to a third party
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or parties. The resulting proceeds received from the sale of such
rights or Remaining Assets, as the case may be, shall be distributed by
the Creditors Trust in accordance with the other terms of the Plan.
(d) Right to Appoint Board of Directors. For a period of two years
after the Effective Date, the Creditors Committee, if then acting, and, if not,
then the Trust Committee or, in the alternative, if the Creditors Committee has
elected to issue Additional Common Stock to the holders of Allowed Senior Note
Claims or to sell such related rights to a third party or parties, then the
Creditors Committee or such third party or parties shall respectively have the
right to appoint all members of the Board of Directors of the reorganized
Debtors for such period of time.
3.7 CLASS 7 - NEG PREFERRED STOCK:
(a) Impairment and Voting. Class 7 is impaired by the Plan. Each holder
of Series B-E of NEG Preferred Stock is deemed to have rejected the Plan and
shall not be entitled to vote to support or reject the Plan.
(b) Treatment. As of the Effective Date, each holder of NEG Preferred
Stock as of the Record Date shall be deemed to have converted their holdings of
Preferred Stock into NEG Common Stock on the assumed basis of NEG's Common Stock
being traded at 25 cents a share immediately prior to such conversion.
3.8 CLASS 8 - NEG COMMON STOCK:
(a) Impairment and Voting. Class 8 is impaired by the Plan. Each holder
NEG Common Stock is deemed to have rejected the Plan and is not entitled to vote
to accept or reject the Plan.
(b) Treatment. Each holder of Common Stock as of the Record Date shall
retain its Common Stock in NEG.
ARTICLE IV.
TREATMENT OF IMPAIRED CLASSES OF CLAIMS AND INTERESTS
4.1 Voting of Claims and Equity Interests. Each holder of an Allowed
Claim in an impaired Class of Claims shall be entitled to vote separately to
accept or reject the Plan as provided in such Final Order as is entered by the
Bankruptcy Court establishing certain procedures with respect to the
solicitation and tabulation of votes to accept or reject the Plan, or in any
other Final Order of the Bankruptcy Court.
4.2 Nonconsensual Confirmation. If any impaired Class of Claims
entitled to vote shall not accept the Plan by the requisite statutory majorities
provided in Sections 1126(c) or 1126(d) of the Bankruptcy Code, as applicable,
the Creditors Committee reserves the right to amend the Plan or undertake to
have the Bankruptcy Court confirm the Plan under Section 1129(b) of the
Bankruptcy Code or both.
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4.3 Method of Distributions Under the Plan.
(a) In General. Subject to Bankruptcy Rule 9010, all distributions
under the Plan shall be made by the Creditors Trust to the holder of each
Allowed Claim at the address of such holder as listed on the Schedules as of the
Record Date, unless the Creditors Trust has been notified in writing of a change
of address by such holder that provides an address for such holder different
from the address reflected on the Schedules (for holders of Allowed Claims). All
distributions under the Plan to holders of Notes with respect to their Allowed
Claims shall be made to Norwest Bank, N.A., indenture trustee of the Notes and
as disbursing agent for the holders of the Notes. Norwest Bank shall be entitled
to receive reasonable compensation for such efforts.
(b) Distributions of Cash. Any payment of Cash made by the Creditors
Trust pursuant to the Plan shall be made, at the sole option of the Creditors
Trust, by check drawn on a domestic bank, wire transfer, or any other method
mutually agreeable between the Creditors Trust and the payee.
(c) Timing of Distributions. Any payment or distribution required to be
made under the Plan on a day other than a Business Day shall be made on the next
succeeding Business Day.
(e) Minimum Distributions. No payment of Cash less than one-hundred
dollars ($100.00) shall be made by the Creditors Trust to any holder of a Claim
unless a request therefor is made in writing to Creditors Trust.
(f) Fractional Shares. No fractional shares of New NEG Common Stock or
Cash in lieu thereof shall be distributed under the Plan. When any distribution
on account of an Allowed Claim or Allowed Equity Interest pursuant to the Plan
would otherwise result in the issuance of a number of shares of New NEG Common
Stock that is not a whole number, the actual distribution of shares of New NEG
Common Stock shall be rounded as follows: (i) fractions of 1/2 or greater shall
be rounded to the next higher whole number, and (ii) fractions of less than 1/2
shall be rounded to the next lower whole number. The total number of shares
of New NEG Common Stock to be distributed to a Class of Claims or NEG Equity
Interests, as the case may be, shall be adjusted as necessary to account for the
rounding provided in this Section 4.3(f).
(g) Distributions to Holders as of the Record Date. As of the close of
business on the Record Date, the claims register (for Claims) shall be closed,
and there shall be no further changes in the record holders of any Claims. The
Creditors' Trust and Reorganized Debtors shall have no obligation to recognize
any transfer of any Claims occurring after the Record Date. The Creditors' Trust
and Reorganized Debtors shall instead be entitled to recognize and deal for all
purposes under the Plan (except as to voting to accept or reject the Plan
pursuant to Section 4.1 of the Plan) with only those record holders stated on
either the Claims Register (for Claims) or Records of Norwest Bank, N.A. (for
Notes) as of the close of business on the Record Date.
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(h) Distribution Withheld for Disputed Claims.
(i) Establishment and Maintenance of Reserve. On the Initial
Distribution Date and each Subsequent Distribution Date, the Creditors
Trust shall reserve from the distributions to be made on such dates to
the holders of Allowed Claims in a particular Class, an amount of Cash
equal to 100% of the distributions to which holders of Disputed Claims
in such Class would be entitled under the Plan as of such dates as if
such Disputed Claims were Allowed Claims in their Disputed Claim
Amounts (the "Reserve").
(ii) Cash Held in Reserve. Any dividends to be paid on with
respect to NEG Claims held in the Reserve shall be deposited in a
segregated bank account or accounts in the name of Creditors Trust and
designated as held in trust for the benefit of holders of Disputed
Claims to the extent such Disputed Claim is ultimately Allowed. Cash
held in the Reserve shall not constitute property of the Reorganized
Debtors. The Creditors Trust shall invest the Cash held in the Reserve
in a manner consistent with investment guidelines, which investment
guidelines shall be included in the Plan Supplement. The Creditors
Trust shall pay, or cause to be paid, out of the funds held in the
Reserve, any tax imposed on the Reserve by any governmental unit with
respect to income generated by the property held in the Reserve. The
yield earned on such invested Cash (net of applicable taxes) shall be
held in trust for the benefit of holders of Disputed Claims to the
extent such Disputed Claim is ultimately Allowed.
(i) Distributions Upon Allowance of Disputed Claims. The holder of a
Disputed Claim that becomes an Allowed Claim subsequent to the Initial
Distribution Date shall receive distributions from the Reserve in accordance
with and pursuant to the terms of the Plan on the next Subsequent Distribution
Date selected by the Trust Committee during the Quarter that follows the Quarter
during which such Disputed Claim becomes an Allowed General Unsecured Claim
pursuant to a Final Order. Such distributions shall be made in accordance with
the Plan based upon the distributions that would have been made to such holder
under the Plan if the Disputed Claim had been an Allowed Claim on or prior to
the Effective Date, without any post-Effective Date interest thereon.
(j) Surplus Distributions to Holders of Allowed General Unsecured
Claims. The following consideration shall constitute surplus distributions (the
"Surplus Distributions") pursuant to the Plan: (i) distributions under the Plan
to holders of Allowed Claims that are unclaimed for a period of one (1) year
after distribution thereof; and (ii) to the extent that a Disputed Claim is not
Allowed or becomes an Allowed Claim in an amount less than the Disputed Claim
Amount, the excess of the amount in the Reserve over the amount actually
distributed on account of such Disputed Claim. The Surplus Distributions shall
be distributed to the holders of Allowed Note Claims pursuant to the Plan;
provided, however, that the Creditors' Trust shall not be under any obligation
to make any Surplus Distributions on a Subsequent Distribution Date unless the
Cash to be distributed on a Subsequent Distribution Date aggregates $100,000 or
more, unless the distribution is the last distribution under the Plan.
4.4 Objections to and Resolution of Administrative Expense Claims,
Claims and Equity Interests. Except as to applications for allowances of
compensation and reimbursement of
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expenses under Sections 330 and 503 of the Bankruptcy Code, the Creditors
Committee or Creditors Trust shall have the exclusive right to make and file
objections to Administrative Expense Claims, Claims and Equity Interests
subsequent to the Confirmation Date. All objections shall be litigated to Final
Order; provided, however, that the Creditors Committee or Creditors Trust shall
have the authority to compromise, settle, otherwise resolve or withdraw any
objections, without approval of the Bankruptcy Court. Unless otherwise ordered
by the Bankruptcy Court, the Creditors Committee or Creditors Trust shall file
all objections to Administrative Expense Claims that are the subject of proofs
of Claim or requests for payment filed with the Bankruptcy Court (other than
applications for allowances of compensation and reimbursement of expenses),
Claims and Equity Interests and serve such objections upon the holder of the
Administrative Expense Claim, Claim or Equity Interest as to which the objection
is made as soon as is practicable, but in no event later than ninety (90) days
after the Effective Date or such later date as may be approved by the Bankruptcy
Court.
4.5 Record Date for Distributions to Holders of Notes. At the close of
business on the Record Date, the transfer ledgers of Norwest Trust, as
indenture trustee, agent and servicer of the Notes, shall be closed and there
shall be no further changes in the record holders of the Notes. On or before the
Effective Date, Norwest Trust shall certify to the Creditors Trust or the
Reorganized Debtors the names and addresses of all holders of the Notes and the
face amount of the Notes held by them as of the Record Date. Norwest Trust, as
indenture trustee, agent and servicers of the Notes, and the Creditors Trust and
Reorganized Debtors shall have no obligation to recognize any transfer of Notes
occurring after the Record Date.
4.6 Fees and Expenses of Norwest Trust. Notwithstanding anything to the
contrary contained in the Plan, any fees and expenses of Norwest Trust incurred
through the Effective Date with regard to any of the Notes, including reasonable
legal fees and expenses incurred in connection with the Chapter 11 Cases, as
determined by the Bankruptcy Court in accordance with the standard for allowance
and payment of such charges under the respective Note Indenture (and not with
reference to any "substantial contribution" or other standard applicable under
Bankruptcy Code Section 503(b)(3), (4) or (5) or otherwise), shall be paid in
full, in Cash as part of the Plan. As of the date hereof, Norwest Trust
estimates that its fees and expenses, including legal fees and expenses,
aggregate approximately $________.
4.7 Waiver of Subordination. Subject to the provisions of this Plan,
the distributions to the holders of Notes shall not be subject to levy,
garnishment, attachment or other legal process by any holder of Senior
Indebtedness (as such term is defined in each of the Note Indentures) by reason
of claimed contractual subordination rights. On the Effective Date, all
creditors shall be deemed to have waived any and all contractual subordination
rights which they may have with respect to such distributions. The Bankruptcy
Court in the Confirmation Order shall permanently enjoin, effective as of the
Confirmation Date, all holders of Senior Indebtedness from enforcing or
attempting to enforce any such rights with respect to such distributions to the
subordinated creditors, including the holders of the Notes.
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ARTICLE V.
TREATMENT OF EXECUTING CONTRACTS
AND UNEXPIRED LEASES
5.1 Assumption or Rejection of Executory Contracts and Unexpired
Leases.
(a) Executory Contracts and Unexpired Leases. Pursuant to Sections
365(a) and 1123(b)(2) of the Bankruptcy Code, all executory contracts and
unexpired leases entered into prior to the Commencement Date that exist between
the Debtors and any person shall be assumed or rejected (as set forth below) by
the Debtors and/or Reorganized Debtors as of the Effective Date. Notwithstanding
anything contained herein to the contrary, any executory contract or unexpired
lease (i) which has been assumed pursuant to a Final Order of the Bankruptcy
Court entered prior to the Confirmation Date, (ii) which has been rejected
pursuant to a Final Order of the Bankruptcy Court entered prior to the
Confirmation Date, or (iii) as to which a motion for approval of the rejection
of such executory contract or unexpired lease has been filed prior to the
Confirmation Date shall be rejected or assumed in accordance with such motion or
Final Order. Subject to the immediately preceding sentence, the executory
contracts and unexpired leases described below and identified in Exhibits to the
Plan or Disclosure Statement shall be deemed to be, respectively, assumed or
rejected as follows:
(i) Joint Assumed Operating Agreements. Any Joint Operating
Agreements not sold to Arnos Corp. under the Purchase and Sale
Agreement shall be assumed and be rejected, as indicated in exhibits or
pleadings filed with the Court prior to Confirmation. Subject to
satisfactory agreement, regarding adequate assurance of future
performance, all other Joint Operating or other similar Agreements that
are not specifically listed in such exhibits or pleadings shall be
deemed assumed.
(ii) Seismic Contracts. The Seismic Contracts specifically
identified in Exhibit "A" shall be deemed rejected. All other Seismic
Contracts shall be deemed assumed.
(iii) Oil and Gas Purchase Contracts. Any Oil and Gas Purchase
Contracts not specifically identified and sold to Arnos Corp. under the
Purchase and Sale Agreement shall be deemed rejected.
(iv) NEG Operating Agreements. All NEG Operating Agreements
not sold to Arnos Corp. under the Purchase and Sale Agreement shall be
deemed assumed or rejected depending on whether the Creditors Committee
sells the Miscellaneous Asset and/or Class 6 Noteholders' rights to
receive Additional Stock to a third party or parties.
(v) Office Leases. The Office Lease shall be deemed assumed or
rejected depending on whether the Creditors Committee sells the
Miscellaneous Asset and/or Class 6 Noteholders' rights to receive
Additional Stock to a third party or parties.
(vi) Farmout Agreements, Easements, and Surface Rights. All
Farmout Agreements, Easements, and Surface Rights, to the extent that
they constitute executory
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contract and not sold to Arnos Corp. under the Purchase and Sale
Agreement, shall be deemed assumed or rejected as indicated in the
exhibits or pleadings filed by the Creditors Committee prior to the
Confirmation Date.
(vii) Indemnification Agreements. All Indemnification
Agreements of NEG shall be deemed rejected.
(viii) Notwithstanding the foregoing, any executory contract
or unexpired lease not specifically rejected as heretofore provided
(and not otherwise assumed or rejected), except as specifically
identified in the exhibits or pleadings filed by the Creditors
Committee prior to the Confirmation Date shall be deemed assumed.
(ix) To the extent that the holder of a Claim arising from the
rejection of any contract, agreement or lease asserts a Secured Claim,
the Debtors may file a motion under Section 506 of the Bankruptcy Code
to limit the amount of such Secured Claim, an adversary proceeding to
avoid the Security Interest taken for such Claim, and/or an objection
to the Claim itself. To the extent such Claim is Unsecured, such Claim
shall be treated as a General Unsecured Claim under Class 6 of the
Plan.
(x) The listing of a document on exhibits or pleadings filed
by the Debtors shall not constitute an admission by the Debtors or
Reorganized Debtors that such document is an executory contract or an
unexpired lease or that the Debtors or Reorganized Debtors have any
liability thereunder.
(b) Approval of Assumption or Rejection of Executory Contracts and
Unexpired Leases. Entry of the Confirmation Order shall constitute (i) the
approval, pursuant to Sections 365(a) and 1123(b)(2) of the Bankruptcy Code, of
the assumption of the executory contracts and unexpired leases assumed pursuant
to the Plan, (ii) the extension of time, pursuant to Section 365(d)(4) of the
Bankruptcy Code, within which the Debtors may assume or reject the unexpired
leases hereof through the date of entry of a Final Order approving the
assumption or rejection of such unexpired leases, and (iii) the approval,
pursuant to Sections 365(a) and 1123(b)(2) of the Bankruptcy Code, of the
rejection of the executory contracts and unexpired leases rejected pursuant to
the Plan.
(c) Cure of Defaults. Except as may otherwise be agreed to by the
parties, within ninety (90) days after the Effective Date, the Reorganized
Debtors shall cure any and all undisputed defaults under any executory contract
or unexpired lease assumed pursuant to the Plan in accordance with Section
365(b)(l) of the Bankruptcy Code.
(d) Bar Date for Filing Proofs of Claim Relating to Executory Contracts
and Unexpired Leases Rejected Pursuant to the Plan. Claims arising out of the
rejection of an executory contract or unexpired lease pursuant to the Plan must
be filed with the Bankruptcy Court and served upon the Debtors or Reorganized
Debtors, or as otherwise may be provided in the Confirmation Order, by no later
than thirty (30) days after the later of (i) notice of entry of an order
approving the rejection of such executory contract or unexpired lease, and (ii)
notice of entry of the Confirmation Order. Any Claims not filed within such time
will be forever barred from assertion against the Debtors, their
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estates, the Reorganized Debtors and their property. Notwithstanding anything to
the contrary contained in the Plan, the Creditors Trust shall have until sixty
(60) days after a proof of Claim filed in accordance with this Article, to file
an objection to such Claim.
5.2 Compensation and Benefit Programs. Except as otherwise provided in
the Plan, all employment and severance practices and policies, and all
compensation and benefit plans, policies, and programs of the Debtors applicable
to their directors, officers or employees, including, without limitation, all
savings plans, retirement plans, health care plans, severance benefit plans,
indemnity agreements, incentive plans, workers' compensation programs and life,
disability and other insurance plans are treated as executory contracts under
the Plan and are hereby rejected pursuant to Sections 365(a) and 1123 (b)(2) of
the Bankruptcy Code. Notwithstanding the foregoing, the "Stayput" Bonus and
Employee's Severance Programs approved by the Court by order dated September 7,
1999 shall be assumed and the benefits due thereunder shall be paid to the
designated recipients thereof by the Creditors' Trust. Any disputes as to the
entitlement to such payments by any employee shall be treated as a Disputed
Claim and resolved by the Court, after notice and hearing.
ARTICLE VI.
MEANS OF IMPLEMENTING THIS PLAN
6.1 General. On the Effective Date, the Management, Control and
Operation of the Reorganized Debtors shall become the general responsibility of
the Boards of Director of the Reorganized Debtors, who shall, thereafter, have
the responsibility for the management, control and operation of the Reorganized
Debtors.
6.2 Meetings of Stockholders of Reorganized Debtors. In accordance with
the Amended NEG Certificate of Incorporation, the Amended NEG Bylaws, as the
same may be amended from time to time, the first annual meeting of the
stockholders of the Reorganized Debtors shall be held on a date in calendar year
2000 selected by the respective Board of Directors of the Reorganized Debtors,
and subsequent meetings of the stockholders of the Reorganized Debtors shall be
held at least once annually each year thereafter.
6.3 Directors and Officers of the Reorganized Debtors.
(a) Boards of Directors.
(i) Reorganized NEG. Unless the Creditors Committee decides in
its discretion to liquidate the Remaining Assets or sell the Class 6
Noteholder Rights to Remaining Additional stock to a third party or
parties under Article V, the initial Board of Directors of Reorganized
NEG shall consist of the following five individuals:
a. Katalin Kutasi
b. Joe Radecki
c. Darryl Schall
d. Peter Ehret
e. Chris Ryan
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6.4 Confidentiality Agreements with Interested Third Party Purchasers.
6.4.1 All Third Parties interested in purchasing the
Noteholders' Rights to receive Additional Common Stock should execute a
Confidentiality Agreement with the Committee. The Court shall approve
the form of such Confidentiality Agreements and the Debtors will be
third party beneficiaries.
6.4.2 The Debtors, senior management, accounting personnel,
land, exploration, operating personnel shall make themselves available
to answer questions of interested parties.
6.5 Court Approved Format to Sell Rights of Noteholders to Receive
Additional NEG Common Stock.
The Creditors Committee may submit to the Debtors a form of bid for the
sale of the rights of the Noteholders to receive Additional NEG Common Stock
under the Plan. Such a sale shall not include the rights of Noteholders as
beneficiaries under the Creditors Trust. The bid form shall contemplate a cash
and/or stock format.
Sealed offers shall be received three days in advance of, and reviewed
by the Creditors Committee by the Effective Date. After evaluation by the
Creditors Committee and its consultants, the Creditors Committee may select the
highest and best offer and the bid deemed acceptable by the Creditors Committee
in its sole discretion. The holders of Notes designate the Creditors Committee
hereunder as their agent with full power of attorney and authority to negotiate
the sale of such rights to receive Additional NEG Common Stock to a high bidder.
6.6 New Board of Directors. The new Board of Directors will be
appointed by the Creditors Committee in conjunction with the successor bidder,
if any, of the Noteholders Rights to receive Additional Common Stock. In the
event the Creditors Committee chooses not to proceed forward with a sale of the
Noteholders' Rights to receive Additional NEG Common Stock, the Creditors
Committee will have the exclusive right to appoint a Board of Directors
consisting of at least five (5) members. The specific names of the slate of new
directors will be submitted by the Creditors Committee at the conclusion of the
hearing to approve the Disclosure Statement, if different from those discussed
herein.
ARTICLE VII.
MEANS OF EXECUTION OF THIS PLAN, CREATION OF THE CREDITORS
TRUST, PROSECUTION OF CAUSES OF ACTION, AND
DISTRIBUTION OF ANY CASH, TRUST ASSETS AND LITIGATION PROCEEDS
7.1 Orderly Prosecution. As of the Effective Date, all Causes of Action
shall be conveyed to and become the exclusive property of the Creditors Trust
with a view to a subsequent prosecution and liquidation by the Trustee. In order
to carry out an orderly prosecution of the Causes of Action, the Creditors
Trust, its agents and professionals may appoint necessary personnel
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and may carry on operations, including the prosecution, trial and settlement of
the Causes of Action, to obtain a fair and reasonable value for the Causes of
Action for the benefit of creditors.
(a) Creation of Trust. The Confirmation Order shall ratify the
Creditors' Trust created by the Creditors' Committee. The Creditors Trust shall
be established for the purpose of receiving as of the Effective Date (i) all
Causes of Action, (ii) all Cash of the Debtors, (iii) Arnos Escrow Funds, plus
accrued interest thereof as of the Confirmation Date, and (iv) other assets of
NEG, including the Remaining Assets and Operating Assets, as provided in Section
3.6 herein, (collectively the "Trust Accounts").
(b) Authorization. Except as otherwise provided in this Plan, the
Creditors Trust shall have all of the following rights and powers:
(i) Maintain and administer the Causes of Action;
(ii) Employ, retain or replace professional persons;
(iii) Receive reimbursement of expenses;
(iv) Employ necessary personnel;
(v) Sell, liquidate, or otherwise dispose of the Trust Assets
for cash, individually or in bulk, by public or private sale;
(vi) Invest the proceeds of such Trust Assets in accordance
with this Plan;
(vii) Distribute the cash and proceeds from the sale,
liquidation, settlement, prosecuting or other distribution of Trust
Assets as soon as practicable; object to, settle, liquidate, or
otherwise resolve all liabilities and undetermined claims; maintain
possession of the originals of any and all instruments and documents
pertaining thereto; pay all expenses incurred in connection with the
administration of the Trust; calculate and make distribution to the
holders of Allowed Claims all as set forth in this Plan;
(viii) Utilize such other powers as may be vested in the
Creditor Trust by provision of this Plan under the Confirmation Order;
(ix) Sue and be sued;
(x) Release, convey, or assign any right, title or interest in
or about the Trust Assets;
(xi) Such other activities are necessary to effectuate the
provisions of the Plan; and
(xii) Prosecution to trial, judgment, final claim or
settlement of all Causes of Action deemed appropriate by the Trustee,
in its discretion to prosecute and/or litigate.
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(a) Operations of Trust. The Creditors Trust shall be directed in all
things by the Trust Committee representatives provided for under this Plan and
adopted in accordance with the procedures set forth in the Plan. Full and
complete authority is conferred upon the Trustee to do and perform all acts,
execute all documents, and make all payments and disbursement of funds directed
to be done, executed, performed, paid and distributed by the provisions of this
Plan.
(b) Payment of Fees and Expenses: All fees and expenses of the
Creditors Trust, the Trustee, its agents professionals and employees incurred in
connection with objections to Claims, and in settlement, litigation and
prosecution of Causes of Action and claims of NEG against third portions shall
be paid by the Creditors' Trust. The Creditors Trust may establish reserves and
accounts it may deem necessary to provide for the payment of fees, expenses and
fund liabilities. All Trust Assets and proceeds shall be held in trust for the
benefit of holders of Superior Claims and thereafter for the payment of Allowed
Note Claims. Such funds shall not be subject to any Claim by Equity Interest
Holders.
NEG shall execute all necessary documents and cooperate fully with the
Creditors Trust in effectuating the transfer of Causes of Action and Assets to
the Trust. To the extent the Debtor has not designated an officer or
representative to execute such documents, the Chairman of the Creditors
Committee shall be vested with such powers hereunder and under Section 1142 of
the Bankruptcy Code.
(c) Allocation of Proceeds. The proceeds shall be allocated and
distributed by the Creditors Trust in the following priority:
(i) reserves sufficient, in the judgment of the Trustee to pay
for the ongoing Creditors Trust;
(ii) distribution on account of Allowed Superior Claims and
then Allowed Note Claims as provided in this Plan. From time to time,
prior to the complete liquidation of all Trust Assets, the Creditors
Trust may make interim distributions in accordance with the Plan.
(d) Investment of Funds. All Investment Amounts, including all sole
proceeds and cash shall be invested and reinvested by the Creditors Trust in
United States Treasury Bills or in certificated of deposits, demand deposit or
interest-bearing accounts of banking institution acceptable to the Creditors
Trust or such other investments as shall be prudent and appropriate under the
circumstances, in such amounts and upon which term as a reasonable and prudent
fiduciary would select and with a view toward sufficient liquidity to make the
distributions contemplated by this Plan. All interest earned on such proceeds
and other cash shall be retained by the Creditors Trust and distributed in
accordance with this Plan.
(e) Documents. All necessary documents for the implementation of this
Plan shall be filed with the Court by the Confirmation Date and executed by the
Creditor's Committee, Trustee and/or Trust Committee within thirty (30) days of
the Effective Date.
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(f) Distribution. On the Distribution Dates, the Creditors Trust shall
apply the proceeds and other Cash then on hand to the payment of expenses and
claims in accordance with this Plan and the Bankruptcy Code.
In the event the aggregate funds of the Creditors Trust on the
Distribution Date, after establishment of reserves, are not sufficient to pay
Allowed Claims required to be paid at that time, allocation, distribution and
payment shall be in the priority established in this Plan and any partial
payment to a Class shall be pro rata.
Upon payment of all Allowed Superior Claims required to be paid prior
to Class 6 Allowed Note Claims in accordance with this Plan and the Bankruptcy
Code, the remaining process shall be distributed pro rata to the Class 6 Allowed
Note Claims in accordance with the terms of this Plan. Prior to any distribution
of cash or proceeds with respect to Class 6 Allowed Note Claims, the NEG Trust
shall establish adequate reserves for undetermined or Disputed Claims that may
become Allowed Claims after the Effective Date.
If and when, in the opinion of the Creditors Trust, there is sufficient
cash and proceeds to justify an interim distribution to creditors holding Class
6 Allowed Note Claims, it may make such interim distributions to holders of a
Class 6 Allowed Note Claims as it deems appropriate in its sole and absolute
discretion; provided that is shall maintain sufficient reserves as required in
this Section.
(g) Report to Trust Beneficiaries Court. Every six months after the
Confirmation Date until the prosecution and liquidation of the Trust Assets and
the distribution of the proceeds thereof is complete, the Creditors Trust shall
submit a written report regarding the status of the Litigation and the
distributions made during the preceding period.
(h) Authorization. The Trust Committee shall be composed of three
members: Katalin Kutasi, Chris Ryan; and Darryl Schall. The initial Trustee
shall be _____________. All Classes of creditors that vote to accept the Plan
hereby authorized the Creditors Trust to act on behalf and in place of such
creditor to the extent provided herein and in any document and instrument
delivered hereunder or in connection herewith, and to take such other action as
may be incidental thereto including, without limitation, the exercise of any
discretion in connection with any determination or decision required for the
administration of the Plan and the granting of any waive, consent, amendment,
suspension, supplementation, extension, renewal or other modification with
respect to any and all provisions of this Plan on a conditional or unconditional
basis.
(i) Liability of the Creditors Trust. Neither the Creditors Trust, the
Trust Committee, the individual representatives nor any of their respective
employees or agents shall be liable for the payment of any estate liabilities,
and no entity shall look to any of the foregoing parties for payment of such
estate liabilities or obligations. The Trust Committee shall have no liability
to any holder of an Allowed Claim except for intentional misconduct, and shall
not be liable for any act or omission of any of its respective employees or
agents.
(j) Exculpation. Each Trust Committee member shall be entitled to rely
upon advice of counsel concerning legal matters, and upon this Plan and any
schedule, certificate, statement, report
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<PAGE> 30
notice or other writing which it believes to be genuine or to have been
presented by a proper entity. Except for it or their own intentional misconduct;
neither the Trust Committee members, not any of their respective directors,
officers, employees or agents shall (a) be responsible for any recitals,
representations or warranties in contained in, or for the execution validity,
genuineness, effectiveness or enforceability of this Plan (b) be under any duty
to inquire into or pass upon any matter or to make any inquiry concerning the
validity of any representation or warranty of the Debtor or the performance by
the Debtor of its obligations or (c) in any event, be liable as such for any
action taken or omitted by it or them. Each creditor agrees and acknowledges
that the Trust Committee members make no representations or warranties will
respect to the legality, validity, sufficiently or enforceability of this Plan.
(k) Delegation of Powers. The Creditors Trust delegates such authority
to the Trustee, its employees and agent as it shall reasonably deem necessary to
perform its responsibilities under this Plan.
(l) Resignation. Death or Removal. The Trustee may resign at any time
upon thirty (30) days prior written notice to the other members of the Trust
Committee. A member of this Trust Committee may be removed only for cause and
upon notice and an opportunity for hearing. Appointment of a successor shall be
by designation of each respective creditor.
(m) Termination. Upon termination of the Creditors Trust created in
this Article of the Plan, the powers and responsibilities of the Creditors Trust
and its representatives shall terminate.
(n) Amended and Restated Articles of Incorporation. The Amended and
Restated Articles of Incorporation of the Reorganized Debtors, as amended, will
satisfy the provisions of the Plan and Section 1129(a) and (b) of the Bankruptcy
Code.
(o) Implementing Documents. To implement this Plan, several documents
will be signed and delivered or otherwise made effective, including the
following documents:
o Amended and Restated Articles of Incorporation of National
Energy Group, Inc.
o Creditors Trust Agreement
o Shareholders Agreement
o Order Directing the Payment of Arnos Escrow Funds to the
Creditors Trust.
Forms of these documents will be filed with the Bankruptcy Court by
April 2, 2000. Thereafter, the Creditors Committee will provide a copy of the
form of each of the documents to any party interest who requests it in writing.
Written requests should be sent to: Van Oliver, Andrews & Kurth L.L.P. 37th
Floor, 1717 Main St., Dallas, Texas 75201.
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ARTICLE VIII.
CONDITIONS PRECEDENT TO CONFIRMATION
AND CONSUMMATION OF THE PLAN
8.1 Conditions to Confirmation. The Bankruptcy Court will not enter
the Confirmation Order unless and until each of the following conditions has
been satisfied or duly waived (if waivable) pursuant to Section 8.3 below.
(a) The documents implementing the Plan listed in Section 13.9 above
and the terms and conditions embodies therein will be acceptable in form and
substance to the Debtors, the Creditors Committee, Chase, the Standby Lenders
and Bank Group; provided that no Creditor or committee shall have standing to
object to the form of a document that has no material impact on them.
(b) Entry of a Confirmation Order, acceptable in form and substance to
the Debtors and the Creditors Committee, which will, among other things, make
findings that particular sections of 1129 have been met, including, without
limitation, (i) that the Debtors, the Creditors Committee Plan Participants and
each of their Representatives has proposed and obtained confirmation of the Plan
in good faith; (ii) that the Plan is in the best interest of Creditors and (iii)
that the Plan is fair and equitable to holders of Claims and Equity Interests.
8.2 Conditions to Effective Date. The Plan will not be consummated
and the Effective Date will not occur unless and until each of the following
conditions has been satisfied or duly waived (if waivable) pursuant to Section
18.3 below:
(a) The Confirmation Order shall have been entered by the Bankruptcy
Court in a form satisfactory to the Debtors, the Creditors Committee, Chase. the
Standby Lenders and the Bank Group.
(b) The Confirmation Order will authorize and direct the Creditors
Committee and Creditors Trust, Debtors, and the Reorganized Debtors to take all
actions necessary or appropriate to enter into, implement and consummate the
contracts, instruments, releases, leases, indentures and other agreements or
documents created in connection with the Plan, including those actions
contemplated by the provisions of the Plan set forth hereinabove.
8.3 Waiver of Conditions. The conditions to Confirmation and the
Effective Date, may be waived in whole or in part by the Creditors Committee, at
any time, without notice.
8.4 Cramdown. The Creditors Committee hereby requests confirmation of
the Plan under Section 1129(b) of the Bankruptcy Code if any Impaired Class does
not accept the Plan in accordance with Section 1126 of the Bankruptcy Code, or
if Classes 7 and 8 object to confirmation. The Creditors Committee reserves the
right to modifY the Plan to the extent, if any, that confirmation pursuant to
Section 1129(B) of the Bankruptcy Code requires modification.
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ARTICLE IX.
RETENTION OF JURISDICTION
9.1 Jurisdiction. Until this Chapter 11 Case is closed, the Bankruptcy
Court will retain such jurisdiction as is legally permissible, including that
necessary to ensure that the purpose and intent of this Plan are carried out and
to hear and determine all Claims set forth herein that could have been brought
before the entry of the Confirmation Order. The Bankruptcy Court will retain
jurisdiction to hear and determine all Claims against the Debtors and to enforce
all causes of action that may exist on behalf of the Debtors. Nothing contained
in this Plan will prevent the Creditors Committee or Creditors Trust from taking
such action as may be necessary in the enforcement of any cause of action that
may exist on behalf of the Debtors and that may not have been enforced or
prosecuted by the Debtors.
9.2 Examination of Claims. Following the Confirmation Date, the
Bankruptcy Court will further retain jurisdiction to decide disputes concerning
the classification and allowance of the Claim of any Creditor and the
re-examination of Claims that have been allowed for the purposes of voting, and
the determination of such objections as may be filed to Creditors' Claims. The
failure by the Creditors Committee to object to, or to examine, any Claims for
the purposes of voting will not be deemed a waiver of their right to object to,
or to re-examine, the Claim in whole or in part.
9.3 Determination of Disputes. The Bankruptcy Court will retain
jurisdiction after the Confirmation Date to determine all questions and disputes
regarding title to the assets of the Debtors' estate, disputes concerning the
Allowance of Claims, and determination of all causes of action, controversies,
disputes, or conflicts, whether or not subject to any pending action, as of the
Confirmation Date, for the Debtors to recover assets pursuant to the provisions
of the Bankruptcy Code.
9.4 Additional Purposes. The Bankruptcy Court will retain jurisdiction
for the following additional purposes after the Effective Date:
(a) to modify this Plan after confirmation pursuant to the Bankruptcy
Rules and the Bankruptcy Code;
(b) to assure the performance by the Creditors Trust to make
Distributions under this Plan.
(c) to enforce and interpret the terms and conditions of this Plan;
(d) to adjudicate matters arising in these bankruptcy cases, including
matters relating to the formulation and consummation of the Committee's Plan;
(e) to enter such orders, including injunctions, as are necessary to
enforce the title, rights, and powers of the Creditors Trust and Reorganized
Debtor and to impose such limitations, restrictions, terms and conditions on
such title, rights, and powers at this Bankruptcy (court may deem necessary;
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<PAGE> 33
(f) to enter an order terminating this Chapter 11 Case;
(g) to correct any defect, cure any omission, or reconcile any
inconsistency in this Plan or the order of confirmation as may be necessary to
carry out the purposes and intent of this Plan;
(h) to allow applications for fees and expenses pursuant to Section
503(b) of the Bankruptcy Code; and
(i) to decide issues concerning federal tax reporting and withholding
which arise in connection with the confirmation or consummation of this Plan.
ARTICLE X.
MISCELLANEOUS PROVISIONS
10.1 Amendment of the Plan. This Plan may be amended by the Creditors
Committee before or after the Effective Date as provided in Section 1127 of the
Bankruptcy Code.
10.2 Revocation of Plan. Creditors Committee reserves the right to
revoke and withdraw this Plan at any time before the Confirmation Date.
10.3 Effective of Withdrawal or Revocation. If the Creditors Committee
revokes or withdraws this Plan before the Confirmation Date, or if the
Confirmation Date or the Effective Date does not occur, then this Plan will be
null and void. In such event, nothing contained herein will be deemed to
constitute a waiver or release of any Claims by or against the Debtors or any
other person, or to prejudice in any manner the rights of the Debtors or any
person in any further proceeding involving the Debtors.
10.4 Effective of Withdrawal or Revocation. If the Creditors Committee
revoke or withdraws this Plan before the Confirmation Date, or if the
Confirmation Date or the Effective Date does not occur, then this Plan will be
null and void. In such event, nothing contained herein will be deemed to
constitute a waiver or release of any Claims by or against the Debtors or any
other person, or to prejudice in any manner the rights of the Debtors or any
person in any further proceedings involving the Debtors.
10.5 Due Authorization By Creditors. Each and every Creditor who elects
to participate in the Distributions provided for herein warrants that it is
authorized to accept in consideration of the Claim against the Debtors the
Distributions provided for in this Plan and that there are no outstanding
commitments, agreements, or understandings, express or implied, that may or can
in any way defeat or modify the rights conveyed or obligations undertaken by it
under this Plan.
10.6 Implementation. The Creditors Committee will be authorized to
take-all necessary steps, and perform all necessary acts, to consummate the
terms and conditions of the Plan.
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<PAGE> 34
10.7 Limitation of Liability in Connection with the Plan, Disclosure
Statement and Related Documents and Related Indemnity:
(a) The Creditors Committee and its members, attorneys and
agents will neither have nor incur any liability to any entity for any
act taken or omitted to be taken in connection with or related to the
formulation, preparation, dissemination, implementation, confirmation
or consummation of the Plan, the Disclosure Statement, the Confirmation
Order or any contract, instrument, release or other agreement or
document created or entered into, or any other act taken or omitted to
be taken in connection with the Plan, the Disclosure Statement or the
Confirmation Order, including solicitation of acceptances of the Plan;
provided, however, that the provisions of this Section shall have no
effect on the liability of any Plan Participant that would otherwise
result from any such act or omission to the extent that such act or
omission is determined in a Final Order to have constituted gross
negligence or willful misconduct.
10.8 Section Headings. The section headings used in this Plan are for
reference purposes only and will not affect in any way the meaning or
interpretation of this Plan.
10.9 Successors and Assigns. The rights and obligations of any Person
named or referred to in this Plan shall be binding upon, and shall inure to the
benefit of, the successors and assigns of such Persons.
10.10 Severability. Should any provision in this Plan be determined to
be unenforceable in whole or in part, such determination shall in no way limit
or affect the enforceability and operating effect of any or all other provisions
of this Plan.
10.11 Recordable Order. The Confirmation Order shall be declared to be
in recordable form and shall be accepted by any recording officer for filing and
recording purposes without further or additional orders, certification or other
supporting documents.
ARTICLE XI.
SIGNATURES
The undersigned have executed this Plan as of the 25th day of February,
2000.
Respectfully submitted,
OFFICIAL CREDITORS COMMITTEE FOR
NATIONAL ENERGY GROUP, INC./BOOMER
MARKETING CORPORATION
By: /s/ KATALIN KUTASI
----------------------------------
Katalin Kutasi, Chairman
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<PAGE> 35
SIGNATURES
The undersigned have executed this Plan as of 28th day of Feb., 2000.
Respectfully submitted,
ANDREWS & KURTH L.L.P.
By: /s/ VAN OLIVER
--------------------------------
Hugh M. Ray
State Bar No. 16611000
Van Oliver
State Bar No. 15258700
1717 Main Street, Suite 3700
Dallas, Texas 75201
Telephone: (214) 659-4400
Facsimile: (214) 659-4401
ATTORNEYS FOR THE COMMITTEE
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<PAGE> 1
EXHIBIT 10.53
PURCHASE AND SALE AGREEMENT
BETWEEN
NATIONAL ENERGY GROUP, INC.
AS SELLER
----------
AND
ARNOS CORPORATION
----------
AS BUYER
DATED
AS OF NOVEMBER 1,1999
<PAGE> 2
PURCHASE AND SALE AGREEMENT
This Purchase and Sale Agreement ("AGREEMENT") is entered into this __ day
of November, 1999, by and between NATIONAL ENERGY GROUP, INC. ("SELLER"), whose
mailing address is 1400 One Energy Square, 4925 Greenville Avenue, Dallas, Texas
75206, and Arnos Corporation ("BUYER"), whose mailing address is 767 5th Avenue,
47th Floor, New York, New York 10153. Seller and Buyer are sometimes referred to
herein individually as a "PARTY," and collectively as the "PARTIES."
W I T N E S S E T H:
WHEREAS, Seller is engaged in the business of exploring for, developing,
and producing oil, gas and other hydrocarbons from onshore and offshore areas of
the United States for its own account and for the joint account of itself and
others; and
WHEREAS, Seller is the debtor in the pending bankruptcy proceeding in Case
No. 398-80258-RCA-11 ("CASE") in the United States District Court for the
Northern District of Texas (the "COURT") and is subject to the jurisdiction
thereof; and
WHEREAS, pursuant to an order dated October 18, 1999, the Court has
approved certain bid procedures (the "BID PROCEDURES") attached hereto and
incorporated herein by reference as Exhibit A-1 for the sale by auction of
Seller's Oil and Gas Properties and Assets (as such terms are hereafter
defined), the terms and provisions of which are hereby incorporated by reference
herein as though set forth in their entirety; and
WHEREAS, CIBC World Markets Corp. ("CIBC") has been engaged by Seller and
the Official Creditors Committee appointed by the Court to market Seller's Oil
and Gas Properties and Assets; and
WHEREAS, Buyer acknowledges receipt of the Bid Procedures relating to the
purchase and sale of Assets, and agrees to perform in accordance with the terms
and conditions of this Agreement and any order of the Court;
NOW, THEREFORE, in consideration of the mutual promises and agreements
herein contained and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Parties mutually agree as
follows:
1. ASSETS TO BE SOLD AND PURCHASED. Seller agrees to sell and Buyer agrees
to purchase, for the consideration hereinafter set forth, and subject to the
terms and provisions herein contained, the following described properties,
rights and interests:
(a) All of Seller's right, title and interest in and to the oil, gas
and/or mineral leases described in Exhibit A hereto, any ratifications
and/or amendments to such leases
<PAGE> 3
(whether or not such ratifications or amendments are described in Exhibit
A), subject to the exceptions and reservations contained in Exhibit A; and
(b) Without limitation of the foregoing, all of Seller's right, title
and interest (of whatever kind or character, whether legal or equitable,
and whether vested or contingent) in and to the oil, gas and other minerals
in and under or that may be produced from the lands or leases described in
Exhibit A hereto, including, without limitation, interests in all oil, gas
and/or mineral leases covering such lands, overriding royalties, production
payments and net profits interests, fee mineral interests, fee royalty
interests and all other interests in such oil, gas and other minerals, even
though Seller's interest in such oil, gas and other minerals may be
incorrectly described in, or omitted from, such Exhibit A but subject in
each case to the exceptions and reservations contained in such Exhibit A;
and
(c) All of Seller's right, title and interest in and to, or otherwise
derived from, all presently existing and valid oil, gas and/or mineral
unitization, pooling, and/or communitization agreements, declarations
and/or orders and in and to the properties covered and the units created
thereby (including, without limitation, all units formed under orders,
rules, regulations, or other official acts of any federal, state, or other
authority having jurisdiction, and voluntary unitization agreements,
designations and/or declarations) relating to the properties described in
subsections (a) and (b) above; and
(d) Subject to Section 1(g) below, all of Seller's right, title and
interest in and to all presently existing and valid and, if necessary,
affirmed rights-of-way, easements, licenses, permits, servitudes, surface
leases and other surface rights, which relate to any of the Oil and Gas
Properties described in subsections (a), (b) and (c) above; and
(e) All of Seller's right, title and interest in and to all materials,
supplies, machinery, equipment, improvements and other personal property
and fixtures (including, but not by way of limitation, all wells, wellhead
equipment, pumping units, flowlines, tanks, buildings, injection
facilities, saltwater disposal facilities, compression facilities,
gathering systems, and other equipment) located on the properties described
in subsections (a), (b), (c), and (d) above and used in connection with
the exploration, development, operation or maintenance thereof; and
(f) All of Seller's original lease files, abstracts and title
opinions, production records, well files, accounting records (but not
including general financial accounting or tax accounting records), electric
and all other logs, engineering files, proprietary geological and
geophysical maps, data and records (subject to any contractual or other
restrictions relating to the transfer of such data and records), and all
other files, documents and records which relate to the Assets, subject to
Seller's right to retain copies of the same, at Seller's expense; and
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<PAGE> 4
(g) All of Seller's interest in executory contracts, including, without
limitation, service agreements, operating agreements, oil and gas
production, gas gathering, transportation, treating, processing, and
similar such contracts and related contracts insofar as they pertain to the
Oil and Gas Properties in this Agreement, which will be assumed, to the
extent requested by the Seller and Buyer in accordance with paragraph 17.3
and assigned and conveyed to Buyer pursuant to Section 365 of the
Bankruptcy Code (11 U.S.C. Section 101, et seq., herein the "BANKRUPTCY
CODE") (collectively referred to herein as the "RELATED CONTRACTS"), less
and except those contracts listed on Schedule 1 hereto or those contracts
submitted by Buyer(s) on or before November 5, 1999 and agreed to by Seller
and the Official Creditors' Committee ("Committee") to be added to Schedule
1, which shall be rejected by Seller; and
(h) All proceeds, benefits, income or revenue attributable to the
Assets, from and after November 1, 1999 (including joint interest billings
under applicable operating agreements and proceeds from the sale of oil and
gas attributable to the Oil and Gas Properties from and after November 1,
1999) shall belong to Buyer, and all such proceeds, benefits, income and
revenue attributable to the Assets prior to November 1, 1999 shall belong
to Seller. If there are production imbalances related to the Oil and Gas
Properties, Seller shall transfer to Buyer such imbalances effective as of
November 1, 1999; and
(i) All of Seller's interest in and to all claims, causes of actions
and rights against third parties in connection with, arising out of, or
related to, the ownership or operation of the Assets prior to the Closing
Date; provided, however, that all claims of Seller against officers and
directors, outside accountants, and claims of the type covered by the
Bankruptcy Code, including but not limited to those in Sections 544-550
thereof, shall be retained by Seller's bankruptcy estate; and
(j) All funds held, allocated, deposited, escrowed, or set aside by
Seller in connection with actual or potential Environmental Defects
(hereafter defined).
The interests of the Seller in the properties and interests specified in the
foregoing subsections (a), through (h) are herein sometimes collectively called
the "OIL AND GAS PROPERTIES," and the interests of the Seller in the Oil and Gas
Properties and interests specified in the foregoing subsections (a) through (j)
are herein sometimes collectively called the "ASSETS."
1.1 OWNERSHIP OF PRODUCTION FROM THE OIL AND GAS PROPERTIES AND OTHER
ASSETS.
1.1.1 Production Before November 1, 1999.
(a) Seller will own all merchantable oil, gas, condensate and gas
liquids ("HYDROCARBONS") produced from or attributable to the Oil and
Gas Properties before November 1, 1999. If; on the Closing Date,
Hydrocarbons produced from the Oil and Gas Properties and Assets before
November 1, 1999 are stored on the Oil and
3
<PAGE> 5
Gas Properties unit stock tanks or are located within unit gathering
lines or production facilities upstream of the sale or custody transfer
meters of the Seller or in connection with Hydrocarbon production from
the Oil and Gas Properties, Buyer shall purchase from Seller the
merchantable stock tank oil and/or gas above the pipeline connections
in the stock tanks at the field posting price for such oil and gas or
such price being paid for production under the Seller's relevant
existing sales contract of each such property existing as of the
Effective Date, and any pipeline inventory at the mutually agreed upon
market price of such inventory. Buyer will pay Seller for the stock
tank oil and any pipeline inventory related thereto as an adjustment to
the Base Purchase Price at Closing. The stock tank oil and pipeline
inventories will be gauged and measured as of 7:00 a.m. local time
where the Oil and Gas Properties and Assets may be located on the
Effective Date. Seller and Buyer will accept the lease or unit
operator's tank gauge readings, meters, meter tickets or other
inventory records of the stock tank oil and pipeline inventory.
1.1.2 PRODUCTION AFTER NOVEMBER 1, 1999. Buyer will own all
Hydrocarbons produced from the Oil and Gas Properties and Assets from and after
November 1, 1999, assuming that the December 6, 1999 Closing Date occurs.
Subject to any continuing sale obligations under Related Contracts, Buyer may
sell Hydrocarbons produced from the Oil and Gas Properties on and after the
Closing Date as it deems appropriate.
2. PRICE FOR ASSETS. The initial, unadjusted Purchase Price to be paid by
Buyer to Seller for the Assets is Ninety-Six Million Two Hundred Fifty Thousand
and No/100 Dollars ($96,250,000.00) (excluding Lake Mongoulois and Mustang
Island, as defined in Schedule 2) (the "BASE PURCHASE PRICE"). In accordance
with the Bid Procedures, Buyer has previously tendered to an escrow account for
the benefit of Seller with Bank One Texas, N.A. ("Escrow Agent") the amount of
Three Million, Four Hundred Thousand and No/100 Dollars ($3,400,000.00) (the
"INITIAL DEPOSIT"). Buyer has deposited with the Escrow Agent an additional
escrow sum for the benefit of Seller in an additional amount of Six Million Two
Hundred Twenty Five Thousand and No/100 Dollars ($6,225,000.00)(the "ADDITIONAL
DEPOSIT"), which deposits shall together total 10% of the Base Purchase Price.
2.1 ALLOCATION OF PURCHASE PRICE. The Buyer(s) and Seller agree that, on
or before the Closing Date, they will attempt to mutually agree as to the
allocation of the Base Purchase Price among each of the assets under the
Internal Revenue Code, as amended, and its regulations, including the relative
portions of those values attributable to leasehold costs and depreciable
equipment (the "Allocated Value"). If there is a disagreement concerning any
such allocation(s), such dispute will be resolved by the Court.
4
<PAGE> 6
3. REPRESENTATIONS OF SELLER. Seller represents to Buyer that:
(a) Seller is a corporation duly organized, legally existing, and in
good standing under the laws of the State of Delaware. Seller is qualified
to do business and is in good standing at Closing in each state in which
the Assets are located where the laws of such state require a corporation
owning the Assets located in such state to qualify to do business. Seller
has, or will have at Closing, full power to enter into and perform its
obligations hereunder, and has, or will have at Closing, taken all
necessary action to authorize entering into this Agreement and to perform
its obligations hereunder.
(b) The Oil and Gas Properties and Assets shall be sold free and clear
of all liens, claims, encumbrances, and interests pursuant to Section
363(f) of the Bankruptcy Code in an order to be approved by the Court.
(c) Other than requirements (if any) that consents to assignment, or
waivers of preferential rights to purchase, be obtained from third parties,
and except for approvals required to be obtained from governmental entities
who are lessors under leases forming a part of the Oil and Gas Properties,
or who administer such leases on behalf of such lessors, which are
customarily obtained post-closing, or as otherwise set forth on Schedule
3(c), neither the execution and delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, nor the compliance
with the terms hereof, will result in any default under any agreement or
instrument to which Seller is a party or by which the Assets are bound, or
violate any order, writ, injunction, decree, statute, rule or regulation
applicable to Seller or to the Assets.
(d) This Agreement and the Conveyance provided for herein to be
delivered at Closing will, when executed and delivered, constitute the
legal, valid, and binding obligation of Seller, except as subject to notice
provisions and order of the Court.
(e) Take-or-Pay Arrangements. Except with respect to Reliant Energy,
Inc., gas balancing agreements, wells subject to calls on production, and
preferential rights as set forth in Exhibit B, none of the Oil and Gas
Properties are subject to any take or pay arrangements, advance payment or
similar provision, whereby any party has the right to take production
without full payment therefore, or at a reduced or prearranged price or to
a call on production.
(f) New Well Operations. From November 1, 1999 until Closing, Seller
shall not make any election with respect to any operation for the drilling
of any new well or the fracing, recompletion, deepening, reworking,
plugging back, plugging and abandonment or other operation with respect to
any well, unit or lease constituting part of the Oil and Gas Properties,
without the prior written consent of Buyer (as the Winning Bidder), which
consent will not be unreasonably withheld. Buyer shall respond promptly to
any written requests for such consent.
5
<PAGE> 7
(g) Maintenance of Interest. Seller will use its reasonable commercial
efforts from the date of this Agreement until Closing, to maintain and
operate the Assets in a reasonable and prudent manner, in compliance with
law and orders of any governmental authority, to maintain insurance now in
force with respect to the Assets, to pay when due all costs and expenses
coming due and payable in connection with the Assets, and to perform all of
the covenants and conditions contained in the Related Contracts. Without
the prior written consent of Buyer, which consent will not be unreasonably
withheld, Seller will not: (i) develop, maintain or operate the Assets in a
manner inconsistent with prior operations or introduce any new method of
operation or accounting with respect to the Assets; (ii) enter into any new
agreements or commitments with respect to the Assets; (iii) incur any
liabilities other than in the ordinary course for normal operating expenses
on the Assets; (iv) abandon, or consent to abandonment of, any producing,
shut-in or injection well located on the Assets, nor release or abandon all
or any portion of the Assets; (v) modify or terminate any of the Assets or
waive any right thereunder; (vi) encumber, sell or otherwise dispose of any
of the Assets other than personal property that is replaced with equivalent
property or consumed in the ordinary course of operation of the Assets and
other than Hydrocarbons sold in the ordinary course of business; or (vii)
enter into any new production purchase or sale agreement with a term
greater than 30 days relating to the Assets. If selected as a Winning Bid,
Buyer will respond promptly to any written requests for such consent.
(h) Filings. Seller has timely filed or caused to be filed all federal,
state, local and foreign tax and information returns, and all material
reports, certificates and other instruments required by law.
(i) Operating Agreements. Except as disclosed to Buyer, as to any and
all operating agreements affecting any of the Oil and Gas Properties, each
of which operating agreements constitutes a Related Contract: (i) there are
no outstanding calls, advances or payments that have been advanced on
behalf of or are due from Seller or that Seller has committed to make that
have not been paid, (ii) there are no operations with respect to which
Seller is a non-consenting party, and (iii) except for an emergency, and
payment for any materials or services rendered prior to the date of this
Agreement, Seller will not authorize any expenditure after the date of this
Agreement without first obtaining the written consent to such expenditure
from Buyer, once selected as a Winning Bid, which consent will not be
unreasonably withheld, conditioned or delayed
4. REPRESENTATIONS OF BUYER. Buyer represents to Seller that:
(a) Buyer is a corporation duly organized and legally existing and under
the laws of the State of Nevada, and as of the Closing, Buyer will be
qualified to do business and in good standing in each of the states in
which the Assets are located where the laws of such state would require a
corporation owning the Assets located in such state to qualify to do
business.
6
<PAGE> 8
(b) Buyer has full power to enter into and perform its obligations under
this Agreement and has taken all proper action to authorize entering into
this Agreement and performance of its obligations hereunder.
(c) Neither the execution and delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, nor the compliance
with the terms hereof, will result in any default under any agreement or
instrument to which Buyer is a party.
(d) This Agreement and the Conveyance provided for herein to be
delivered at Closing will, when executed and delivered, constitute the
legal, valid, and binding obligation of Buyer, enforceable in accordance
with its terms, except as limited by bankruptcy or other laws applicable
generally to creditor's rights and as limited by general equitable
principles.
(e) There are no pending suits, actions, or other proceedings except the
Seller's bankruptcy proceeding described in the recitals hereto, in which
Buyer is a party which affect the execution and delivery of this Agreement
or the consummation of the transactions contemplated hereby.
(f) Buyer is a knowledgeable purchaser, sophisticated investor of oil
and gas and has the ability to evaluate oil and gas properties, and in fact
has evaluated the Assets for purchase, and is acquiring the Assets based
upon its own evaluation, and for its own account and not with the intent to
make a distribution within the meaning of the Securities Act of 1933 (and
the rules and regulations pertaining thereto) or a distribution thereof in
violation of any other applicable securities laws.
(g) With regard to those Assets which Buyer seeks to operate, Buyer (or
Buyer's contract operator) is qualified to operate such Assets under the
applicable laws, rules and regulations of the jurisdiction in which such
Assets are located, or Buyer, an affiliate or agent thereof; will become so
qualified before operating such Assets.
5. CERTAIN COVENANTS OF SELLER PENDING CLOSING. Between the Sale Hearing
(as defined in the Bid Procedures) and the Closing:
(a) Seller will give Buyer and its attorneys and other representatives
access at all reasonable times to the Assets and, at Seller's office, to
Seller's records (including, without limitation, title files, division
order files, well files, production records, accounting records, marketing
files, equipment inventories, and production, severance and ad valorem tax
records) pertaining to the ownership and/or operation of the Assets. Seller
shall not be obligated to provide Buyer with access to any records or data
which Seller considers to be proprietary or confidential to it, which would
constitute a waiver of attorney-client privilege in any pending litigation,
or which Seller cannot legally provide to Buyer without, in its opinion,
breaching, or risking a breach of, confidentiality agreements with other
parties.
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<PAGE> 9
Buyer recognizes and agrees that all materials made available to it
(whether pursuant to this Section or otherwise) in connection with the
transaction contemplated hereby are made available to it as an
accommodation, and without representation or warranty of any kind as to the
accuracy and completeness of such materials. Buyer waives and releases all
claims against Seller, its parent or subsidiary companies or other
affiliates, and its and their directors, officers, employees and agents,
for injury to, or death of, persons or for damage to property arising in
any way from the conduct of the investigations and examinations
contemplated by this Section or the conduct of its employees, agents, or
contractors in connection with such investigations and examinations (or the
exercise of such rights of access). BUYER SHALL RELEASE, INDEMNIFY, DEFEND,
AND HOLD HARMLESS SELLER, AND ITS PARENT OR SUBSIDIARY COMPANIES AND OTHER
AFFILIATES, AND THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, ATTORNEYS,
CONTRACTORS, AND AGENTS (HEREINAFTER COLLECTIVELY REFERRED TO AS THE
"SELLER GROUP"), FROM ANY AND ALL CLAIMS, ACTIONS, CAUSES OF ACTION,
LIABILITIES, DAMAGES, LOSSES, COSTS, OR EXPENSES (INCLUDING, WITHOUT
LIMITATION, COURT COSTS AND ATTORNEYS' FEES), OR LIENS OR ENCUMBRANCES FOR
LABOR OR MATERIALS ARISING OUT OF OR IN ANY WAY CONNECTED WITH SUCH ACCESS,
EXAMINATIONS, OR INSPECTIONS. THE FOREGOING RELEASE AND INDEMNIFICATION
SHALL APPLY WHETHER OR NOT SUCH CLAIMS, ACTIONS, CAUSES OF ACTION,
LIABILITIES, DAMAGES, LOSSES, COSTS, OR EXPENSES ARISE OUT OF (i)
NEGLIGENCE (INCLUDING SOLE NEGLIGENCE, SINGLE NEGLIGENCE, CONCURRENT
NEGLIGENCE, ACTIVE NEGLIGENCE, OR PASSIVE NEGLIGENCE, BUT EXPRESSLY NOT
INCLUDING GROSS NEGLIGENCE OR WILLFUL MISCONDUCT) OF SELLER OR ANY OTHER
INDEMNIFIED PARTY, OR (ii) STRICT LIABILITY.
(b) In addition to its obligations under Section 3(g) of this Agreement,
Seller will continue the operation of the Assets in the ordinary course of
its business. Where Seller is not the operator of an Oil and Gas Property,
Seller will continue to act as a non-operator in the ordinary course of its
business. From and after the date of this Agreement, Seller will not sell
or dispose of any portion of the Assets listed in Exhibit A except for the
few miscellaneous assets listed in Schedule 5(b) without the prior consent
of Buyer.
(c) Seller will use reasonable efforts, consistent with industry
practices in transactions of this type, to identify (i) all preferential
rights to purchase and all rights to require that consents to assignment be
obtained which would be applicable to the transactions contemplated hereby,
and (ii) the parties holding such rights. In attempting to identify the
same, Seller shall in no event be obligated to go beyond its own records.
Seller will request from the parties so identified (and in accordance with
the documents creating such rights) waivers of the preferential rights to
purchase and requirements that consents to assignment be obtained which
were so identified. Seller shall have no obligation hereunder other than to
so attempt to identify such preferential rights and requirements for
consents to
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<PAGE> 10
assignment and to so request such waivers, and shall in no event be under
any obligation to obtain such waivers. Except to the extent that Buyer can
establish that Seller failed to fulfill the obligations set forth above in
this subsection, Buyer shall indemnify and hold Seller harmless from and
against all claims, actions, liabilities, damages, losses, costs or
expenses, including, without limitation, court costs and attorney's fees,
whatsoever that arise out of the failure to obtain waivers of preferential
rights to purchase or requirements for consents to assignment with respect
to any transfer by Seller to Buyer of any part of the Assets and with
respect to any subsequent transfers.
(d) Notwithstanding any other provision in this Section, (i) Seller may
take any action prohibited by this Section if reasonably necessary under
emergency conditions provided that Buyer is notified as soon as practicable
thereafter; (ii) except to the extent that a Title Defect (as hereinafter
defined) may result therefrom, Seller shall have no liability to Buyer for
any incorrect payment of delay rentals, royalties, shut-in royalties, or
similar payments or for any failure to make such payments; and (iii)
Seller's failure to comply with any of the requirements of this Section 5
shall not be deemed to be a default by Seller hereunder or grant to Buyer
the right not to close the transaction contemplated hereby, unless such
failure has a material adverse effect upon the value of the Assets taken as
a whole.
(e) Seller shall give prompt written notice to Buyer of any notice of
default (or written threat of default, whether disputed or denied by
Seller) received or given by Seller subsequent to the Effective Date under
any instrument or agreement affecting the Assets to which Seller is a party
or by which it or any of the Assets is bound.
6. DUE DILIGENCE/TITLE/ENVIRONMENTAL MATTERS
(a) Due Diligence Investigation. Buyer shall, to the extent it deems
appropriate, conduct, at its sole cost, risk, and expense, such title
examination or investigation, and other examinations and investigations, as
it may choose to conduct with respect to the Assets.
(b) As used in this Agreement, the term "TITLE DEFECT" shall mean any
matter, other than a "Permitted Encumbrance" (as hereinafter defined),
which causes one or more of the following to be a correct statement:
(i) Seller's ownership of the Assets is such that, with respect
to a well or unit listed on Exhibits A or B attached hereto, such
ownership (a) is not sufficient to entitle it to receive its decimal
share of the oil, gas and other hydrocarbons produced from, or
allocated to, such well or unit which is at least that decimal share
set forth on Exhibit B in connection with such well or unit in the
column headed "NET REVENUE INTEREST" or (b) obligates it to bear its
decimal share of the cost of operation of such well or unit (herein
called the "OPERATING INTEREST") greater than the decimal share set
forth on Exhibit B in connection with such well or unit in the
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column headed "Operating Interest" (without a proportionate increase
in Net Revenue Interest above that set forth on such exhibits); or
(ii) Seller's ownership of an Oil and Gas Property is subject
to an outstanding mortgage (other than that set forth in Section
6(c)(xii)), deed of trust, or other enforceable lien or
encumbrance, or other adverse claim or imperfection in title that is
not resolved or cured by the 363 Order (as defined in Section 17
hereinafter); or
(iii) Seller has materially misrepresented the amount of any
gas imbalances as to assets listed in Exhibit B.
(iv) Seller has inaccurately represented outstanding
preferential rights.
(c) As used herein, the term "PERMITTED ENCUMBRANCE" shall mean any
and all of the following:
(i) The terms, conditions, restrictions, exceptions,
reservations, limitations, and other matters contained in the
agreements, instruments, and other documents which create or reserve
to Seller its interest in any Asset, provided that the same do not
reduce the Net Revenue Interest of Seller in the Asset affected
thereby to less than that set forth on Exhibit B hereto;
(ii) Royalties, overriding royalties (including, without
limitation, those specifically described on Exhibit A hereto),
division orders, reversionary interests, production payments, net
profits interests, and similar burdens affecting any Oil and Gas
Property if the net cumulative effect of such burdens does not
operate to reduce the Net Revenue Interest in the Asset affected
thereby to less than the Net Revenue Interest set forth beside the
same on Exhibit B hereto;
(iii) Preferential rights to purchase and required third party
consents to assignment and similar agreements with respect to which
waivers or consents shall have been obtained from the appropriate
parties, or the appropriate time period for asserting such rights
shall have expired without an exercise of such rights;
(iv) Liens for taxes and assessments which are not yet
delinquent or which are being contested by Seller in good faith;
(v) Rights existing under applicable laws (including without
limitation statutory liens) or operating agreements or similar
contracts to assert liens against the Assets, but not including
liens and other rights which have actually been asserted, unless
Seller disputes the validity of such liens or the amount claimed to
be owed in
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connection therewith, or such lien or other right is not enforceable
against the interest of Seller;
(vi) Conventional rights of reassignment requiring ninety (90)
days or less notice to the holder of such rights;
(vii) Easements, rights-of-way, servitudes, permits, surface
leases, and other rights in respect to surface operations,
pipelines, logging, canals, ditches, reservoirs, or the like;
conditions, covenants, or other restrictions; easements of streets,
alleys, highways, pipelines, telephone lines, power lines, railways,
and other easements or rights-of-way on, over or with respect of any
Asset which does not materially and adversely affect the Asset
affected thereby or its current use;
(viii) Any obligations or duties affecting an Asset to any
municipality or public authority with respect to any franchise,
grant, license, or permit and all applicable laws, rules, and order
of any governmental authority;
(ix) All rights to consent by, required notices to, filings
with, or other action by governmental entities in connection with
the sale or conveyance of oil and gas leases, permits, or interests
therein, if the same are customarily obtained contemporaneously with
or subsequent to such sale or conveyance;
(x) Existing operating agreements, unit agreements, gas
purchase contracts, and any and all other agreements which are
customary in the oil and gas exploration, development, production,
or extraction business or in the business of processing of gas and
gas condensate, or production for the extraction of proper products
therefrom, to the extent that the same do not reduce the Net Revenue
Interest of Seller in the Asset affected thereby below that set
forth on Exhibit B hereto, or increase the Operating Interest of the
Seller in the affected Asset above that set forth on Exhibit B
(without a proportionate increase is the corresponding Net Revenue
Interest);
(xi) That certain Mortgage, Security Agreement, Assignment of
Production and Finance Statement effective as of September 1,
1998, by National Energy Group, Inc. as Mortgagor for the use and
benefit of Bank One, Texas N.A., Administrative Agent, filed and
recorded in Iberville Parish, Louisiana on September 8, 1998 in
Mortgage Book 319, Page 197 and Conveyance Book 511, Page 174,
(herein called "Mortgage"); and
(xii) Any matter waived or deemed to be waived by Buyer.
(d) Title Defects. Should, as a result of such examinations and
investigations, or otherwise, matters come to Buyer's attention which Buyer
believes would constitute Title
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Defects, Buyer shall notify Seller in writing of such Title Defects as soon
as practicable, but in no event later than sixty (60) days after the
Closing. To be effective, Buyer's notice of Title Defects (a "TITLE DEFECT
NOTICE") must include (i) a brief description of the matter constituting
the Title Defect so asserted, (ii) the title opinion, other reports of
experts, or other documentation on which Buyer's assertion of a Title
Defect is based, (iii) such supporting documents reasonably necessary for
Seller to verify the existence of any such Title Defect, and (iv) Buyer's
estimate of the diminution in the value of the affected Asset resulting
from such alleged Title Defect. In the event that Buyer notifies Seller of
Title Defects, Seller (i) shall have the right (but not the obligation) to
attempt to cure such Title Defects to the reasonable satisfaction of Buyer,
or (ii) shall have the right to elect not to cure the Title Defect and
adjust the Base Purchase Price as set forth in Section 7 below, subject to
the limits of Section 6(h) below. Should the title opinion or other
materials reviewed by Buyer indicate that Seller has a higher "Net Revenue
Interest" than that specified on Exhibit (an "NRI INCREASE"), then Buyer
shall inform Seller of the same as soon as possible and Seller will receive
an appropriate accounting adjustment as set forth in Section 7 below.
(e) Environmental Review. Seller has provided or caused to be provided
to Buyer that Phase I environmental summary October 16, 1999 and prepared
by LFC Environmental, Inc. covering certain of Seller's Oil and Gas
Properties; provided, that Seller makes no representation or warranty as to
the accuracy or completeness of such Phase I environmental summary. In
addition, Buyer shall have the right, at its sole cost, risk, and expense,
to conduct its own Phase I environmental assessment of the Assets during
the period beginning November 1, 1999 and ending sixty (60) days after the
Closing. As used herein, a Phase I environmental assessment shall consist
of the following: Buyer and its agents shall have the right to enter upon
the Assets and all buildings and improvements thereon during normal
business hours, and physically inspect the same, contact all relevant
local, state, and federal environmental agencies, and conduct a review of
all public filings with respect to the Assets. WITHOUT THE PRIOR WRITTEN
CONSENT OF SELLER, BUYER MAY NOT CONDUCT, OR CAUSE TO BE CONDUCTED, ANY
SOIL, AIR, OR WATER TESTS, ANALYSES, SAMPLES, OR BORINGS WITH RESPECT TO
ANY OF THE ASSETS, except, however, after Closing Buyer shall have the
right to conduct any soil, air, or water tests, analyses, samples, or
borings with respect to any of the Assets and any results from such
investigation may be used as documentation to support an Environmental
Defect Notice as provided in Section 6(t) below.: Buyer shall provide
Seller with a copy of any environmental assessment promptly upon Buyer's
completion thereof; including any reports, data, and conclusions. Buyer
shall keep any data or information acquired by such examinations and the
results of all analyses of such data and information strictly confidential
and shall not disclose same to any person or agency without the prior
written approval of Seller. BUYER SHALL RELEASE, INDEMNIFY, DEFEND, AND
HOLD HARMLESS THE SELLER GROUP FROM AND AGAINST ANY AND ALL LOSS, COST,
DAMAGE, EXPENSE, OR LIABILITY WHATSOEVER, INCLUDING ATTORNEYS' FEES,
ARISING OUT OF ANY INJURY TO OR DEATH OF PERSONS OR DAMAGE TO PROPERTY
OCCURRING IN, ON, OR ABOUT THE ASSETS AS A RESULT OF SUCH
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ENVIRONMENTAL ASSESSMENT (EXCEPT ANY SUCH INJURIES OR DAMAGES CAUSED SOLELY
BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF ANY MEMBER OF THE SELLER
GROUP).
(f) Environmental Defects. If; as a result of Phase I or Phase II, as
provided in Section 6(e) above, examinations and investigations, or
otherwise, matters come to Buyer's attention which Buyer believes would
constitute a violation of an Applicable Environmental Law (hereafter
defined) (an "ENVIRONMENTAL DEFECT"), Buyer shall notify Seller in writing
of such Environmental Defect as soon as practicable (the "ENVIRONMENTAL
DEFECT NOTICE"), but in no event later than sixty (60) days after the
Closing. To be effective, Buyer's Environmental Defect Notice must include
(i) a brief description of the Environmental Defect constituting the
violation of Applicable Environmental Law so asserted, (ii) the reports of
experts or other documentation on which Buyer's Environmental Defect Notice
is based, (iii) such supporting documents reasonably necessary for Seller
to verify the existence of any violation of an Applicable Environmental
Law, and (iv) Buyer's estimate of the diminution in the value of the
affected Asset resulting from such alleged Environmental Defect, or if such
exceeds the diminution in value, the amount to remediate such alleged
Environmental Defect. In the event that Buyer notifies Seller of
Environmental Defects, Seller (i) shall have the right (but not the
obligation) to attempt to cure such Environmental Defects to the reasonable
satisfaction of Buyer; or (ii) shall have the right to elect not to cure
the Environmental Defect and adjust the Base Purchase Price as set forth in
Section 7 below, subject to the limits of Section 6 (h) below. Any plugging
and abandonment obligation with respect to any well, and any surface
restoration liability with respect to any oil, gas and/or mineral lease
shall not constitute or be deemed an Environmental Defect
(g) Environmental Indemnity and Assumption. As of sixty (60) days after
the Closing Date, Buyer shall assume full responsibility for, and (except
to the extent that Buyer shall have received a reduction in the Base
Purchase Price pursuant to this Agreement by virtue of an Environmental
Defect) agrees to indemnify, hold harmless, and defend the Seller Group
from, and against all loss, liability, claims, fines, expenses, costs
(including attorney's fees and expenses), and causes of action caused by or
arising out of any violation of any environmental law, rule, or regulation
(including common law), relating to the protection of health or the
environment of any kind or character ("APPLICABLE ENVIRONMENTAL LAW(S)")
or the presence, disposal, release or threatened release of any Hazardous
Substance (as the terms "HAZARDOUS SUBSTANCE" and "RELEASE" are defined in
the Comprehensive Environmental Response, Compensation and Liability Act,
42 U.S.C. Sec. 9601, et seq.) from, with respect to, or in connection with
the Assets into the atmosphere, into or upon land (surface or subsurface),
or into any water course or body of water, including groundwater, whether
or not attributable to the Seller's activities or the activities of third
parties (regardless of whether or not the Seller was or is aware of such
activities) and regardless of whether the event or occurrence was prior to,
during, or after the period of Seller's ownership of the Assets. This
indemnification and assumption shall
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apply, but is not limited to, liability for response actions undertaken
pursuant to the Comprehensive Environmental Response, Compensation and
Liability Act or any other Applicable Environmental Law or regulation.
(h) Defect Basket/Limits. Notwithstanding any other provision contained
herein, with respect to any Asset, the amount claimed by Buyer in any Title
Defect Notice related to a given Asset shall not exceed the Allocated Value
(as defined in Section 7 below) of such Asset. The amount claimed by Buyer
for the remediation of an Environmental Defect shall not be limited to the
Allocated Value of the affected Asset, but is subject to the limits set
forth in this section. If the aggregate Base Purchase Price reduction which
would result from all Title Defects and Environmental Defects does not
exceed One Million Dollars ($1,000,000.00) (the "DEFECT BASKET AMOUNT"),
then the Base Purchase Price shall not be adjusted. If the total amount of
the Base Purchase Price reduction agreed to by the Parties (or determined
by the Court) exceeds the Defect Basket Amount, the Base Purchase Price
shall be reduced in the amount by which the aggregate amount of Title
Defects and Environmental Defects exceeds One Million Dollars
($1,000,000.00); provided, however, regardless of the total amount of Title
and Environmental Defects asserted by Buyer and agreed to by Seller (or
determined by the Court) in excess of the Defect Basket Amount, in no event
shall the Base Purchase Price be reduced by an amount greater than Two
Million Dollars ($2,000,000.00).
7. CERTAIN BASE PURCHASE PRICE ADJUSTMENTS. If, as a part of the due
diligence review provided for in Section 6 above, (i) Title Defects or
Environmental Defects are presented to Seller and Seller is unable (or
unwilling) to cure such Title or Environmental Defects, (ii) Buyer has elected
to treat an Oil and Gas Property affected by a casualty loss as if it was an Oil
and Gas Property affected by a Title Defect, or (iii) there be a NRI Increase,
then:
(a) Subject to Section 6 (h) above, Buyer and Seller shall, with
respect to each Oil and Gas Property affected by such matters, attempt to
agree upon an appropriate value to account for such matters; and
(b) with respect to each Oil and Gas Property as to which Buyer and
Seller are unable to agree upon appropriate adjustment with respect to all
such matters affecting such Oil and Gas Property, then:
(i) If the Title Defect is a mortgage, lien, encumbrance or
other charge which is undisputed and liquidated in amount, then
(subject to the provisions of paragraph (iv) below) the value shall
be the amount necessary to be paid to remove the Title Defect from
the affected Asset; provided, however, that an order conveying such
Oil and Gas Properties to Buyer free and clear of liens or interests
under Section 363(f) of the Bankruptcy Code shall suffice to cure or
resolve such defect ("363(f) ORDER");
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(ii) If there shall be a Title Defect or NRI Increase which (a)
represents a discrepancy between (1) the Net Revenue Interest to
which Seller is entitled to receive from any Asset and (2) the Net
Revenue Interest stated on Exhibit B, and (b) there is a Operating
Interest change proportionate to the change in the Net Revenue
Interest resulting from the Title Defect or NRI Increase, then the
amount of the adjustment shall be the product of the Allocated Value
as set forth on Exhibit B, multiplied by a fraction, the numerator
shall be the change in the Net Revenue Interest and the denominator
of which shall be the Net Revenue Interest set forth on Exhibit B;
or
(iii) If the Title Defect represents an obligation,
encumbrance, burden, discrepancy, or charge upon or other defect in
title to the affected Asset of a type not described in paragraphs
(i) or (ii) above, the adjustment amount shall be determined by
taking into account the Allocated Value of the Asset so affected,
the portion of the Asset affected by the Title Defect, the legal
effect of the Title Defect, the potential economic effect of the
Title Defect over the life of the affected Asset, and such other
factors as are necessary to make a proper evaluation of the value of
the Title Defect;
(iv) With respect to Environmental Defects, the value shall be
determined by taking into account the Allocated Value of the Asset
so affected, the portion of the Asset affected by the Environmental
Defect, the legal effect of the Environmental Defect (including
governmental agency-imposed fines or sanctions, if any), the
potential economic effect of the Environmental Defect over the life
of the affected Asset, and such other factors as are necessary to
make a proper evaluation of the value of the Environmental Defect
including the cost of remediation;
(v) The Parties shall negotiate in good faith to reach
agreement with respect to the existence of and diminution in value
caused by Title and Environmental Defects with respect to the Assets
hereunder. If the Parties are unable to agree upon an appropriate
adjustment within 45 days following notice of such Title and/or
Environmental Defect in light of the factors set forth above, then,
subject to Section 6 (h) and the final paragraph of this Section
7, either Party may elect to submit a dispute regarding the value of
any Environmental or Title Defect(s) to the Court for final
determination.
Any Base Purchase Price adjustment hereunder shall be made as a
post-Closing accounting adjustment in accordance with Section 13 below.
8. CERTAIN COVENANTS OF BUYER AFTER CLOSING. From and after the date of
this Agreement, Buyer will give Seller and its attorneys and other
representatives access at all reasonable times and upon
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reasonable notice for a period of two (2) years from and after the Closing, to
all files and records (including all computer records) delivered by or on behalf
of Seller in connection with the transaction contemplated hereby, and shall
permit Seller to make copies of any such files and records. Should the Assets be
subsequently transferred by Buyer, Buyer agrees to take all action in its
contractual arrangements relating to such transfer necessary to allow Seller to
have continued access to all such files and records.
9. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER. The obligations of
Buyer under this Agreement are subject to each of the following conditions being
met:
(a) Each and every representation of Seller under this Agreement shall
be true and accurate in all material respects as of Closing except as to
changes specifically contemplated by this Agreement or consented to by
Buyer.
(b) Seller shall have performed and complied in all material respects
with (or compliance therewith shall have been waived by Buyer) each and
every covenant, agreement, and condition required by the Court and this
Agreement to be performed or complied with by Seller prior to or at the
Closing.
(c) No suit, action, or other proceedings shall, on the date of
Closing, be pending or threatened before any court or governmental agency
seeking to restrain, prohibit, or obtain damages or other relief in
connection with the consummation of the transactions contemplated by this
Agreement.
(d) The 363(t) and 365 Orders of the Court shall have been entered
authorizing the transaction(s) contemplated by this Agreement, and either
have become final orders or orders as to which an appeal has been filed but
no stay and no supersedes or other form of bond in an amount of the Base
Purchase Price has been filed or posted in the proper Court.
(e) Seller has obtained a resolution from its board of directors
authorizing the sale of the Assets.
10. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLER. The obligations of
Seller under this Agreement are subject to each of the following conditions
being met:
(a) Each and every representation of Buyer under this Agreement shall
be true and accurate in all material respects as of Closing except as to
changes specifically contemplated by this Agreement or consented to by
Seller.
(b) Buyer shall have performed and complied in all material respects
with (or compliance therewith shall have been waived by Seller) each and
every covenant, agreement, and condition required by the Court and this
Agreement to be performed or complied with by Buyer prior to or at the
Closing.
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(c) No suit, action or other proceedings shall, on the date of Closing,
be pending or threatened before any court or governmental agency seeking to
restrain, prohibit, or obtain damages or other relief in connection with
the consummation of the transactions contemplated by this Agreement.
(d) An order of the Court authorizing the transaction(s) described in
this Agreement shall have been entered and either have become final orders
or orders as to which an appeal has been filed but no stay and no
supersedes or other form of bond in an amount of the Base Purchase Price,
as the case maybe, has been filed or posted in the proper Court.
11. TERMINATION OF AGREEMENT.
(a) If any condition on the obligations of Buyer as set forth in
Section 9 above is not met as of the Closing Date, or in the event the
Closing does not occur on or before the Closing Date, and in either case
Buyer is not in breach of its obligations hereunder, this Agreement may, at
the option of Buyer, be terminated as of the Closing Date, and Seller shall
cause Escrow Agent to promptly remit or release the respective Initial and
Additional Deposit including interest calculated on each deposit to Buyer.
Upon such termination, the parties shall have no further obligations to one
another hereunder (other than the obligations under Section 16 hereof and
under Section 5(a) hereof, which will survive such termination).
(b) If any condition to the obligations of Seller as set forth in
Sections 10(a) or (b) is not met as of the Closing Date, or in the event
the Closing does not occur due to a breach of Buyer's obligations
hereunder, and in either case Seller is not in breach of its obligations
hereunder, this Agreement may, at the option of Seller, be terminated, and
Seller shall retain the Initial and Additional Deposit, including interest
calculated in each Deposit as liquidated damages. Thereafter, the parties
shall have no further obligations to one another hereunder (other than the
obligations under Section 16 hereof and under Section 5(a) hereof, which
will survive such termination).
(c) If any condition to the obligations of Seller as set forth in
Sections 10(c)or (d) above is not met as of the Closing Date, or in the
event the Closing does not occur on or before the Closing Date, and in
either case Seller is not in breach of its obligations hereunder, this
Agreement may, at the option of Seller, be terminated, and Seller shall
take all steps necessary to cause the Escrow Agent to promptly remit or
release the respective Initial and Additional Deposit including interest
calculated on each deposit to Buyer.
(d) Upon the termination of this Agreement, whether pursuant to
paragraph (a), (b), or (c) above, Seller shall be free to sell the Assets
(or any portion thereof) to any other party without any limitation under or
by reason of this Agreement, unless at such time a
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condition of Seller Default shall exist. Buyer shall cooperate with Seller
in effectuating any such sale and shall promptly execute any instrument
evidencing the termination of Buyer's right to acquire the Assets as may be
reasonably requested by Seller. Buyer shall also immediately return to
Seller all data and other information (and all copies thereof) furnished to
Buyer by or on behalf of Seller in connection with this transaction.
Thereafter, the parties shall have no further obligations to one another
hereunder (other than the obligations under Section 16 hereof and under
Section 5(a) hereof, which will survive such termination.
12. THE CLOSING. The closing (herein called the "CLOSING") of the
transaction contemplated hereby shall take place in the offices of Seller, in
Dallas, Texas, on December 6, 1999, at 10:00 a.m. Central Time, or up to
fourteen (14) days later if requested by either Buyer or the Committee on behalf
of the Seller, or at such other date and time as the Buyer and Seller may
mutually agree upon, being herein called the "CLOSING DATE"). At the Closing:
(a) Seller shall upon issuance of the 363(f) and 365 Orders (as defined
in Section 17 hereinafter) authorizing the transaction:
(i) execute, acknowledge and deliver to Buyer a conveyance of the
Assets, (herein called the "CONVEYANCE"), in the form attached hereto
as Exhibit C (and with Exhibit A and Exhibit B-l hereto being attached
thereto), effective as to runs of oil and deliveries of gas as of 7
o'clock a.m., Central Standard Time on November 1, 1999 (herein called
the "EFFECTIVE DATE"); and
(ii) execute and deliver to Buyer letters in lieu of transfer
orders (or similar documentation), in form acceptable to both parties;
and
(iii) deliver to Buyer a release of the Mortgage and 363(f) Order
insofar as it covers the Assets; and
(iv) deliver to Buyer an affidavit or other certification that
Seller is not a "foreign person" within the meaning of Section 1445 (or
similar provisions) of the Internal Revenue Code of 1986 as amended;
and
(v) turn over possession of the Assets; and
(vi) provide Buyer with Seller's Officer Certificate having the
form and language of Exhibit D-l which is attached hereto and made a
part hereof for all purposes. Such certificate shall certify that
Seller has complied with and performed (or Buyer has waived) all
provisions and conditions pertaining to Seller, to be performed prior
to the Closing.
(b) Buyer shall:
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(i) deliver to the Seller, (a) by wire transfer in immediately
available funds to an account designated by Seller in a bank located in
the United States, an amount equal to the Base Purchase Price (or, if
applicable, the Subgroup Price) less the Initial Subgroup Deposit and
the Additional Subgroup Deposit and interest calculated upon each
deposit. In addition to and consistent with Section 363(k) of the
Bankruptcy Code, Buyer shall be entitled to credit bid against the Base
Purchase Bid the amount of its loan to Seller of $25,000,000 plus any
accrued and unpaid interest; and
(ii) deliver to Seller appropriate evidence reflecting change of
operator as required by applicable authorities, and such evidence as
Seller may require that Buyer is qualified with such authorities to
succeed Seller as operator; and
(iii) provide Seller with Buyer's Officer Certificate having the
form and language of Exhibit D-2 which is attached hereto and made a
part hereof for all purposes. Such Certificate shall certify that Buyer
has complied with and performed (or Seller has waived) all provisions
and conditions pertaining to Buyer, to be performed prior to the
Closing.
At the Closing, at Buyer's election, Seller and Buyer shall enter
into a transition services agreement with respect to the Assets on
terms and conditions mutually acceptable to the Parties. The transition
services agreement shall provide, among other things, for (i) the
operation of the Assets by Seller, and (ii) the payment by Buyer to
Seller of fees and expenses customarily charged by firms providing such
services. The Transition Services Agreement shall terminate one hundred
twenty (120) days following the Closing Date, unless extended by the
Parties or terminated by Buyer upon thirty (30) days prior written
notice.
Within ten (10) days after Closing, Seller will deliver to Buyer
the original records and other materials described in Section 1(f)
above. Sellers shall have the right to retain a copy of such records
for use only in connection with the Case, at Seller's expense. With
respect to each Oil and Gas Property with respect to which Seller is
disbursing proceeds of production attributable to other patties
entitled thereto, (i) Seller shall continue to collect proceeds of
production during the month in which Closing occurs and shall be
responsible for making disbursements, in accordance with its normal
procedures (and at normal times), of such proceeds of production so
collected to the parties entitled to same, with any proceeds of
production thereafter collected by Seller to be promptly forwarded to
Buyer (who shall thereafter account for same to the parties entitled
thereto), (ii) Seller shall, as promptly as possible after Closing,
deliver to Buyer (a) a copy of its "proceeds distribution list" for
each such Asset (which proceeds distribution list shall include the
name, address, social security number and applicable share of proceeds
of production for each party to whom Seller is disbursing proceeds of
production with
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respect to such Asset), (b) a list of all parties for whom it is
holding in suspense proceeds of production, (c) a list of all parties
for whom it is holding any advance payments made by other working
interest owners for operations to be conducted on the Assets, and (d) a
check (which shall be delivered within 30 days after the end of the
month in which Closing occurs) in an amount equal to all suspended
funds and advance payments. Following delivery of the materials
referred to in clause (ii), Buyer shall become responsible for all
disbursements of proceeds of production (including suspense and other
disbursements attributable to periods prior to the Effective Date) and
such disbursement activities shall be included in the matters which
Buyer assumes, and indemnifies Seller with respect to, under Section 14
below. It is understood and agreed that Seller does not represent or
warrant to Buyer the accuracy of the "proceeds distribution lists" so
delivered.
13. CERTAIN POST-CLOSING ACCOUNTING ADJUSTMENTS.
(a) Appropriate post-Closing adjustments shall be made between Buyer
and Seller so that (i) all expenses which are incurred in the operation of
the Assets before the Effective Date will be borne by Seller and all
proceeds (net of applicable production, severance, and similar taxes) from
sale of oil, gas and/or other minerals produced therefrom before the
Effective Date will be received by Seller, and (ii) all expenses which are
incurred in the ownership and/or operation of the Assets after the
Effective Date will be borne by Buyer and all proceeds (net of applicable
production, severance, and similar taxes) from the sale of oil, gas and/or
other minerals produced therefrom after the Effective Date will be received
by Buyer. It is agreed that, in making such adjustments: (i) oil which was
produced from the Oil and Gas Properties and which was, on the Effective
Date, stored in tanks located on the Oil and Gas Properties (or located
elsewhere but used by Seller to store oil produced from the Oil and Gas
Properties prior to delivery to oil purchasers) and above pipeline
connections shall be deemed to have been produced before the Effective
Date, (ii) ad valorem and similar such taxes assessed with respect to a
period which the Effective Date splits, regardless of the basis on which
such taxes are computed, shall be prorated based on the number of days in
such period which fall on each side of the Effective Date (with the day on
which the Effective Date falls being counted in the period after the
Effective Date), and shall, where the current year's taxes are not yet
known, be based on the previous year's taxes, and (iii) no consideration
shall be given to the local, state or federal income tax liabilities of any
party. In addition, there shall be a post-Closing accounting adjustment, to
the extent necessary, to adjust the Base Purchase Price as provided in
Sections 6 and 7 above, in the event that Title or Environmental Defects
exceed the Defect Basket Amount or there is an NRI Increase in favor of the
Seller in any Asset.
(b) As soon as practicable after Closing, but in any event within sixty
(60) days thereafter, Seller shall prepare and submit to Buyer, in
accordance with this Agreement a proposed statement (herein called the
"FINAL STATEMENT"), which shall show the final calculation of the Purchase
Price, which may include good faith estimates or accruals for oil
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<PAGE> 22
and gas receivables and all other post-Closing adjustments (herein called
the "FINAL SETTLEMENT PRICE"). As soon as possible after receipt of the
Final Statement, but in any event within fifteen (15) days after receipt
thereof, Buyer shall deliver to Seller a written report containing the
changes, if any, which Buyer proposes being made to the Final Statement. In
the event no response is made by Buyer within such fifteen (15) day period,
it shall be conclusively presumed that Buyer concurs with the Final
Statement, and such Final Statement shall be the basis for the Final
Settlement Price. In the event that Buyer submits a response, the parties
shall exercise all reasonable efforts to agree with respect to the amounts
due not later than sixty (60) days after the Closing, but in any event
prior to March 1, 2000. After agreement upon a Final Settlement Price
setting forth the amount by which the Purchase Price shall be adjusted
(either upward or downward), the amount due shall be paid within five (5)
business days thereafter by the party owing the same in immediately
available funds.
14. ASSUMPTION AND INDEMNIFICATION.
(a) Buyer shall, on the date of Closing, assume within the meaning of
Section 365 of the Bankruptcy Code and otherwise, and timely pay and
perform, all duties, obligations, and liabilities relating to the Assets
including, without limitation, Seller's ownership and operation of the
Assets and the condition of the Assets, including all responsibilities and
liabilities of Seller under the Related Contracts, whether arising on or
after the Effective Date (including, without limitation, all obligations to
properly plug and abandon, or replug and re-abandon, wells located on
the Assets, to restore the surface of the Assets, and to comply with, or to
bring the Assets into compliance with, Applicable Environmental Laws,
including all liability and expense for any restoration, clean-up,
disposal, or removal that may be incurred as a result of the existence or
discovery of Hazardous Substances or other deleterious substances in, on,
or under the Assets, regardless of when the events occurred that give rise
to such condition).
(b) Buyer shall, on the date of Closing, RELEASE, INDEMNIFY, and HOLD
the Seller Group HARMLESS from and against any and all claims, actions,
liabilities, losses, damages, costs, or expenses (including court costs and
attorneys' fees) of any kind or character arising out of or otherwise
relating to the Assets whether arising on or after the Effective Date.
(c) THE ASSUMPTION AND INDEMNIFICATION SET FORTH IN SUBSECTIONS (a) AND
(b) OF THIS SECTION SHALL APPLY WHETHER OR NOT SUCH DUTIES, OBLIGATIONS, OR
LIABILITIES, OR SUCH CLAIMS, ACTIONS, CAUSES OF ACTION, LIABILITIES,
DAMAGES, LOSSES, COSTS, OR EXPENSES ARISE OUT OF (i) NEGLIGENCE (INCLUDING
SOLE NEGLIGENCE, SINGLE NEGLIGENCE, CONCURRENT NEGLIGENCE, ACTIVE OR
PASSIVE NEGLIGENCE, BUT EXPRESSLY NOT INCLUDING GROSS
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NEGLIGENCE OR WILLFUL MISCONDUCT) OF SELLER OR ANY OTHER INDEMNIFIED PARTY,
OR (ii) STRICT LIABILITY.
(d) In order for Seller to seek indemnification under this Agreement,
Seller shall give written notice to Buyer of the facts and circumstances
giving rise to the claim. In that regard, if any suit, action, claim,
liability or obligation (a "PROCEEDING") shall be brought or asserted by
any third party which, if adversely determined, would entitle the Seller to
indemnity under this Agreement, the Seller shall promptly notify the Buyer
of the same in writing, specifying in detail the basis of such claim and
the facts pertaining thereto. The Buyer, if it so elects, shall assume and
control the defense of such Proceeding, including the employment of
counsel reasonably satisfactory to the Seller and the payment of expenses.
If the Buyer elects to assume and control the defense of a Proceeding, it
will provide notice thereof within thirty (30) days after the Seller has
given notice of the matter and the Seller shall have the right to employ
counsel separate from counsel employed by the Buyer in any such action and
to participate in the defense thereof, but the fees and expenses of such
separate counsel employed by the Seller shall be at the sole cost and
expense of the Seller.
15. DISCLAIMER OF WARRANTIES. THE EXPRESS REPRESENTATIONS AND WARRANTIES OF
SELLER CONTAINED IN SECTION 3 (EXCEPT FOR THE DUE DILIGENCE RIGHTS UNDER SECTION
6 HEREOF OR IN THE CONVEYANCE EXECUTED PURSUANT TO THIS AGREEMENT) ARE EXCLUSIVE
AND ARE IN LIEU OF ALL OTHER REPRESENTATIONS AND WARRANTIES, EXPRESS, IMPLIED,
STATUTORY, OR OTHERWISE, AND SELLER EXPRESSLY DISCLAIMS ANY AND ALL SUCH OTHER
REPRESENTATIONS AND WARRANTIES. WITHOUT LIMITATION OF THE FOREGOING, THE ASSETS
SHALL BE CONVEYED PURSUANT HERETO WITH SPECIAL WARRANTY OF TITLE BY, THROUGH AND
UNDER SELLER, BUT NOT OTHERWISE, AND WITHOUT ANY OTHER WARRANTY OR
REPRESENTATION, WHETHER EXPRESS, IMPLIED, STATUTORY, OR OTHERWISE RELATING TO
THE CONDITION, QUANTITY, QUALITY, FITNESS FOR A PARTICULAR PURPOSE, CONFORMITY
TO THE MODELS OR SAMPLES OF MATERIALS, OR MERCHANTABILITY OF ANY EQUIPMENT OR
ITS FITNESS FOR ANY PURPOSE, AND, EXCEPT AS PROVIDED OTHERWISE IN THE FIRST
SENTENCE OF THIS PARAGRAPH, WITHOUT ANY OTHER EXPRESS, IMPLIED, STATUTORY, OR
OTHER WARRANTY OR REPRESENTATION WHATSOEVER, BUYER SHALL HAVE INSPECTED, OR
WAIVED (AND UPON CLOSING SHALL BE DEEMED TO HAVE WAIVED) ITS RIGHT TO INSPECT
THE ASSETS FOR ALL PURPOSES AND SATISFIED ITSELF AS TO THEIR PHYSICAL AND
ENVIRONMENTAL CONDITION, BOTH SURFACE AND SUBSURFACE, INCLUDING, BUT NOT LIMITED
TO, CONDITIONS SPECIFICALLY RELATED TO THE PRESENCE, RELEASE, OR DISPOSAL OF
HAZARDOUS SUBSTANCES, SOLID WASTES, ASBESTOS OR OTHER MANMADE FIBERS OR
NATURALLY OCCURRING RADIOACTIVE MATERIALS ("NORM") IN, ON, OR UNDER THE ASSETS.
BUYER IS RELYING SOLELY UPON ITS OWN INSPECTION OF THE ASSETS, AND BUYER SHALL
ACCEPT ALL OF THE
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SAME "AS IS, WHERE IS AND WITH ALL FAULTS." WITHOUT LIMITATION OF THE FOREGOING,
SELLER MAKES NO WARRANTY OR REPRESENTATION, EXPRESS, IMPLIED, STATUTORY, OR
OTHERWISE, AS TO THE ACCURACY OR COMPLETENESS OF ANY DATA REPORTS, RECORDS,
PROJECTIONS, INFORMATION, OR MATERIALS NOW HERETOFORE, OR HEREAFTER FURNISHED OR
MADE AVAILABLE TO BUYER IN CONNECTION WITH THIS AGREEMENT, INCLUDING, WITHOUT
LIMITATION PRICING ASSUMPTIONS OR QUALITY OR QUANTITY OF HYDROCARBON RESERVES
(IF ANY) ATTRIBUTABLE TO THE ASSETS OR THE ABILITY OR POTENTIAL OF THE ASSETS TO
PRODUCE HYDROCARBONS OR THE ENVIRONMENTAL CONDITION OF THE ASSETS OR ANY OTHER
MATERIALS FURNISHED OR MADE AVAILABLE TO BUYER BY SELLER OR BY SELLER'S AGENTS
OR REPRESENTATIVES. ANY AND ALL SUCH DATA, RECORDS, REPORTS, PROJECTIONS,
INFORMATION, AND OTHER MATERIALS (WRITTEN OR ORAL) FURNISHED BY SELLER OR
OTHERWISE MADE AVAILABLE OR DISCLOSED TO BUYER ARE PROVIDED TO BUYER AS A
CONVENIENCE AND SHALL NOT CREATE OR GIVE RISE TO ANY LIABILITY OF OR AGAINST
SELLER, AND ANY RELIANCE ON OR USE OF THE SAME SHALL BE AT BUYER'S SOLE RISK TO
THE MAXIMUM EXTENT PERMITTED BY LAW.
16. COMMISSIONS. Seller agrees to indemnify and hold harmless Buyer from
and against any and all claims, obligations, actions, liabilities, losses,
damages, costs or expenses (including court costs and attorneys fees) of any
kind or character arising out of or resulting from any agreement, arrangement or
understanding alleged to have been made by, or on behalf of, Seller with any
broker or finder in connection with this Agreement or the transaction
contemplated hereby. Buyer agrees to indemnify and hold harmless Seller from and
against any and all claims, obligations, actions, liabilities, losses, damages,
costs or expenses (including court costs and attorneys fees) of any kind or
character arising out of or resulting from any agreement, arrangement or
understanding alleged to have been made by, or on behalf of; Buyer with any
broker or finder in connection with this Agreement or the transaction
contemplated hereby.
17. BANKRUPTCY COURT PROCESS.
17.1 This Agreement is entered into by both parties with the express
understanding that it is subject to (i) approval by the Bankruptcy Court, (ii)
any other offers which may be timely submitted to the Bankruptcy Court, in
accordance with the bid procedures and (iii) the applicable provisions of the
Bankruptcy Code and the Federal Rules of Bankruptcy Procedure.
17.2 As soon as practicable following the selection of Buyer and this
Agreement as a Winning Bid in accordance with the Bid Procedures, Seller shall
file with the Bankruptcy Court a motion ("363 MOTION") with supporting papers
(including a copy this Agreement). The 363 Motion shall seek approval of the
sale of the Oil and Gas Properties, and other Assets to Buyer free and clear of
any interest of an entity other than the Debtor's bankruptcy estate. Such 363
Motion, proposed findings of fact and conclusion of law, if any, and form of
order shall be in a form reasonably
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<PAGE> 25
satisfactory to Buyer and Buyer's counsel and the proposed findings of fact and
conclusion of law, if any, and form of order shall include the provisions and
relief described below as the 363 Order. Seller shall obtain a hearing on the
363 Motion as soon as practicable.
17.3 As soon as practicable following the selection of Buyer and this
Agreement as a Winning Bid in accordance with the Bid Procedures, Seller shall
file with the Bankruptcy Court a motion (or otherwise seek the relief set forth
in this Section 17.3 in the 363 Motion) ("365 Motion") with supporting papers.
The 365 Motion shall seek (i) approval of the assumption by Seller and
assignment to Buyer of all Related Contracts, (except those Related Contracts
that Buyer designates herein that Buyer does not wish to have assumed and
assigned) ("Assigned Contracts"), (ii) a specific finding regarding Seller's
cure of any defaults under such Assigned Contracts at the time of Closing; and
(iii) the rejection by Seller of Related Contracts designated by Buyer and
agreed to by Seller (and the Creditors' Committee) as Related Contracts to be
rejected (or such executory contracts as may be rejected by Seller). Such 365
Motion, proposed findings of fact and conclusions of law, if any, and proposed
order shall be in form and substance reasonably satisfactory to the Buyer and
Buyer's counsel and such proposed findings of fact and conclusions of law, if
any, and form of order shall include the provisions and relief described below
as the 365 Order. Seller shall obtain a hearing on the 365 Motion as soon as
practicable. If additional Related Contracts are identified by Buyer or Seller
after the execution and delivery of this Agreement that are not described in
this Agreement and in the 365 Motion, then Seller will seek to obtain Bankruptcy
Court approval, at Buyer's election, of (a) the rejection by Seller (if agreed
to by Seller and the Creditors' Committee) of the applicable additional Related
Contracts designated by Buyer to be rejected, or, (b) the assumption by Seller
and assignment to Buyer of the applicable additional Related Contracts
designated by Buyer and agreed to by Seller (and the Creditors' Committee) to be
assumed and assigned to Buyer.
17.4 Subject to the provisions of subsections 17.2 and 17.3 above, whether
the 363 Motion and 365 Motion are filed with the Bankruptcy Court and served as
one (1) motion or multiple motions is entirely within the discretion of the
Seller and the Creditors' Committee; provided, however, the 363 Motion and 365
Motion shall be served on all known creditors.
17.5 "363 ORDER@ means an order, not susceptible to alteration or amendment
under Fed.R.Bankr.P.9023, of the Bankruptcy Court that (i) approves the 363
Motion, (ii) is in form and substance reasonably satisfactory to Buyer and
Buyer's counsel, (ill) approves the sale of the Oil and Gas Properties and other
Assets, to Buyer pursuant to the terms of this Agreement, the provisions of the
Bankruptcy Code and any other provisions ordered by the Bankruptcy Court. The
363 Order shall provide that the transfer of the Oil and Gas Properties from
Seller to Buyer shall be (i) free and clear of any interest in the Oil and Gas
Properties of an entity other than the estate, (ii) a legal, valid and effective
transfer of the Oil and Gas Properties, (iii) a transfer in exchange for
reasonably equivalent value and fair consideration under the Bankruptcy Code and
the laws of the United States, any State, territory, possession or the District
of Columbia and (iv) finds that the sale of the Assets to Buyer will maximize
the value of the Seller's estate and is in contemplation of the implementation
of a plan of reorganization and necessary to the confirmation and consummation
of any plan of reorganization. Accordingly, the sale of the Assets shall be
deemed a sale "under a plan confirmed"
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within the meaning of Bankruptcy Code Section 1146(c) and shall be exempt from
any and all stamp taxes, recording taxes and similar taxes; provided, however,
that such exemption is contingent upon the Seller confirming a plan of
reorganization under Section 1129 of the Bankruptcy Code. Further, the 363 Order
shall provide that the transaction contemplated under this Agreement (i) was and
is undertaken by the Seller and Buyer in good faith, as the term is used in
section 363(m) of the Bankruptcy Code, and, (ii) does not and will not subject
Buyer to any pre-conveyance liability by reason of such Oil and Gas Properties
or Assets transfer under the Bankruptcy Code or the laws of the United States,
any State, territory, possession or the District of Columbia based, in whole or
in part, directly or indirectly, on any theory of law, including, without
limitation, any theory of successor or transferee liability unless provided in
or contemplated under the terms of this Agreement.
17.6 "365 ORDER@ means an order of the Bankruptcy Court that (i) approves
the 365 Motion, (ii) is in form and substance reasonably satisfactory to Buyer
and Buyer's counsel, (iii) approves the assumption by Seller and assignment to
Buyer of the Oil and Gas Properties and the Related Contracts, (iv) contains a
specific finding regarding Seller's cure of any defaults under such Related
Contracts at the time of Closing, (v) approves the rejection by Seller of the
applicable Related Contracts. The 365 Order shall further provide that, if
additional Related Contracts arc identified by Buyer or Seller after the
execution and delivery of this Agreement that are not described in this
Agreement and in the 365 Motion, then if Seller agrees, then Buyer shall seek to
obtain Bankruptcy Court approval, at Buyer's election, of (a) the rejection by
Seller of the applicable additional Related Contracts designated by Buyer to be
rejected, or (b) the assumption by Seller and assignment to Buyer of the
applicable additional Related Contracts designated by Buyer to be assumed and
assigned.
17.7 Whether the 363 Order and the 365 Order are submitted to the Court in
the form of one (1) order or two (2) orders is entirely within the discretion of
Seller and Creditors' Committee.
17.8 On or before November 8, 1999, Seller shall deliver to the Buyer a
schedule ("Schedule of Assumed Contract Deficiencies"), which shall indicate as
to each Related Contract the amounts, if any, in Seller's understanding,
necessary or required under Section 365(b) of the Bankruptcy Code to remedy and
cure all monetary arrears under each of the Related Contracts ("Assumed Contract
Deficiencies") in order to effectuate the assumption and assignment of such
Related Contracts. Buyer shall have the right to obtain appropriate assurances
from the Seller or the Court that the Seller has paid, or made arrangements
reasonably acceptable to the Buyer to satisfy, all such Assumed Contract
Deficiencies. If the Seller disputes the amount necessary to cure a Related
Contract, the Seller will either establish an escrow fund and deposit the full
cure amount estimated by Seller or asserted by the non-debtor party to such
Related Contract into an escrow fund or if the Committee and Seller determine
the cure amount asserted by a party to a Related Contract is excessive, they may
decide to reject such contract under Section 365 of the Bankruptcy Code. Any
disputes in this regard will be resolved by the Bankruptcy Court. Buyer shall
pot be liable for any cure amounts under any of the Related Contracts. The
validity of the assumption, assignment and sale to Buyer of any Related Contract
shall not be affected by any dispute between the Seller and
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<PAGE> 27
another party to such Related Contract regarding the payment of the "cure"
amount under such Related Contract. Notwithstanding anything contained herein to
the contrary, the Seller shall be deemed to have assumed and assigned each
Related Contract as of the date of and only upon the Closing, and absent such
Closing, such Related Contract shall neither be deemed assumed nor assigned and
shall in all respects be subject to further administration under the Bankruptcy
Code.
18. CASUALTY LOSS. In the event of damage by fire or other casualty to the
Assets prior to the Closing, then this Agreement shall remain in full force and
effect, and (unless Buyer and Seller shall otherwise agree) in such event
(a) as to each such Asset so damaged which is an Oil and Gas Property,
then, (i) if there is no policy of insurance in force with respect to such
Asset, such Asset shall be treated as if it had a Title Defect associated
with it and the procedure provided for in Section 6 shall be applicable
thereto, or (ii) if Seller should be entitled to make any claim under any
insurance policy with respect to such damage, Seller shall and/or pay over
to Buyer, if assignable, or, if allowed under the applicable policy, such
claims, and
(b) as to each such Asset which is other than an Oil and Gas
Properties, Seller shall assign to Buyer, if assignable, any and all
insurance claims relating to such loss, and Buyer shall take title to the
Asset affected by such loss without reduction of the Purchase Price.
(c) At Buyer's election, Seller shall use its reasonable commercial
efforts to assign its rights to and under its casualty and other insurance
policies to Buyer to be effective as of the Closing Date (or thereafter at
Buyer's election). In the event that a refund is due and payable by the
insurance carrier as a result of the assignment by Seller to Buyer, Seller
shall be entitled to receive such refund amount.
19. NOTICES. All notices and other communications required under this
Agreement shall (unless otherwise specifically provided herein) be in writing
and be delivered personally, by recognized commercial courier or delivery
service (which provides a receipt), by telex or telecopier (with receipt
acknowledged), during normal business hours or by registered or certified mail
(postage prepaid), at the following addresses:
If to Seller: CIBC World Markets/CIBC Oppenheimer
1600 Smith St., Suite 3100
Houston, TX 77002
Attn: Billy Bauch
Fax: (713)650-7670
Phone: (713) 650-2550
with a copy to: Van Oliver
Andrews & Kurth L.L.P.
1717 Main St., Suite 3700
Dallas, Texas 75201
Fax: (214) 659-4401
Phone: (214) 659-4600
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and Patrick J. Neigan, Jr.
Neligan & Averch, L.L.P.
Suite 4050, 1717 Main St.
Dallas, Texas 75201
Fax: (214) 745-2533
Phone: (214) 653-4393
Buyer: Arnos Corporation
767 Fifth Avenue
47th Floor
New York, NY
Attention: Robert Mitchell
Fax: (212) 750-5807
with a copy to: Berlack, Israels & Liberman LLP
120 West 45th Street
New York, NY 10036
Attention: Edward S. Weisfelner
Fax: (212) 704-0196
and shall be considered delivered on the date of receipt. Either Buyer or Seller
may specify as its proper address any other post office address within the
continental limits of the United States by giving notice to the other party, in
the manner provided in this Section, at least ten (10) days prior to the
effective date of such change of address.
20. SURVIVAL OF PROVISIONS. Except as expressly set forth in this Section
20, all of the representations, warranties, and covenants made by the Parties
shall terminate on the Closing Date. Notwithstanding the foregoing, the
representations, warranties, and covenants made by the Parties under Sections
2.1, 6 and 7 (to the extent the same are, by mutual agreement, not performed at
Closing), and Sections 8, 13, 14, 15, 16, 17, 18, 19 and 22 shall survive the
Closing and the delivery of the Conveyance.
21. OPERATIONS. Subject to the terms and provisions of any existing
agreements covering the Assets, Seller agrees to turn over to Buyer, at Closing,
the operations of those Assets for which it is currently serving as operator.
Seller shall take all reasonable actions necessary to cause Buyer to become
operator as contemplated herein.
22. MISCELLANEOUS MATTERS.
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(a) After the Closing, Seller and Buyer shall execute and deliver, and
shall otherwise cause to be executed and delivered, from time to time,
such further instruments, notices, division orders, transfer orders and
other documents, and do such other and further acts as reasonably may be
necessary to more fully and effectively grant, convey and assign the Assets
to Buyer.
(b) Except as provided in the following sentence, neither party shall
have the right to assign its rights under this Agreement and any such
assignment in violation of this provision shall be void.
(c) No waiver of any provision of this Agreement shall be deemed or
shall constitute a waiver of any provision of this Agreement (whether or
not similar), nor shall such waiver constitute a continuing waiver unless
otherwise expressly provided.
(d) To the extent applicable to the transaction contemplated hereby, or
any portion thereof, Buyer waives the provisions of the Texas Deceptive
Trade Practices Act, Chapter 17, Subchapter E, Sections 17.41 through
17.63, inclusive (other than Section 17.555 which is not waived), Texas
Business and Commerce Code. In connection with such waiver, Buyer hereby
represents and warrants to Seller that Buyer (a) is in the business of
seeking or acquiring, by purchase or lease, goods, or services, for
commercial or business use, (b) has assets of Five Million and No/l00
Dollars ($5,000,000.00) or more according to its most recent financial
statement, (c) has knowledge and experience in financial and business
matters that enable it to evaluate the merits and risks of the transaction
contemplated hereby and (d) is not in a significantly disparate bargaining
position.
(e) In connection with Buyer's evaluation of the Assets, Seller shall
disclose to Buyer certain confidential information, which is proprietary,
and includes, but is not necessarily limited to, geological and geophysical
data; maps, models, and interpretations; and commercial, contractual, and
financial information. All such data disclosed by Seller to Buyer shall
hereinafter be referred to as the "CONFIDENTIAL INFORMATION." Buyer has
entered into with Seller that certain Confidentiality Agreement(s) dated
October 20, 1999 regarding this Confidential Information. If, for any
reason the Closing does not occur, Buyer agrees that the prior existing
Confidentiality Agreement(s) will remain in effect as provided therein.
(i) Buyer may disclose the Confidential Information without
Seller's prior written consent only to the extent such information:
(a) is already known to Buyer as of the date of disclosure
hereunder;
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(b) is already in possession of the public or becomes
available to the public other than through the act or omission of
Buyer;
(c) is required to be disclosed under applicable law or by a
governmental order, decree, regulation, or rule (provided that
Buyer shall give written notice to Seller prior to such
disclosure); or
(d) is acquired independently from a third party that has the
right to disseminate such information at the time it is acquired by
Buyer.
(ii) Buyer may disclose the Confidential Information without
Seller's prior written consent to an Affiliated Company (as hereinafter
defined), provided that Buyer guarantees the adherence of such
Affiliated Company to the terms of this Agreement. "AFFILIATED COMPANY"
shall mean any company or legal entity that (a) controls either
directly or indirectly a party, or (b) that is controlled directly or
indirectly by such party, or (c) is directly or indirectly controlled
by a company or entity that directly or indirectly controls such party.
"CONTROL" means the right to exercise fifty percent (50%) or more of
the voting rights in the appointment of the directors of such company.
(iii) Buyer shall be entitled to disclose the Confidential
Information without Seller's prior written consent to such of the
following persons who have a clear need to know in order to evaluate
Seller's petroleum exploration and production rights:
(a) employees, officers, and directors of Buyer;
(b) employees, officers, and directors of an Affiliated
Company;
(c) any professional consultant or agent retained by Buyer
for the purpose of evaluating the Confidential Information.
(iv) Prior to making any such disclosures to persons under
subparagraph 21.e.(iii)(c) above, however, Buyer shall obtain an
undertaking of confidentiality, in the same form and content as this
Agreement, from each such person.
(v) Buyer and its Affiliated Companies, if any, shall use, or
permit the use of the Confidential Information disclosed under Section
22.(e)(ii) or 22.(e)(iii) above, only to evaluate petroleum exploration
and production rights held by Seller.
(vi) Buyer shall be responsible for ensuring that all persons to
whom the Confidential Information is disclosed under this Agreement
shall keep such information confidential and shall not disclose or
divulge the same to any
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unauthorized person. Neither party shall be liable in an action
initiated by one against the other for special, indirect, or
consequential damages resulting from or arising out of this Agreement,
including, without limitation, loss of profit or business
interruptions, however same may be caused.
(vii) The Confidential Information shall remain the property of
Seller, and Seller may demand the return thereof at any time upon
giving written notice to Buyer. Within ten (10) days of receipt of such
notice, Buyer shall return all of the original Confidential Information
and shall destroy all copies and reproductions (both written and
electronic) in its possession and in the possession of persons to whom
it was disclosed pursuant to Sections 22.(e)(ii) and 22.(e)(iii)
hereof.
(viii) The term of this Section 22.(e) and the rights and
obligations created hereunder shall commence upon the date hereof and
shall continue for a period of two (2) years thereafter.
(ix) Seller makes no representations or warranties, express or
implied, as to the quality, accuracy, and completeness of the
Confidential Information disclosed hereunder. Seller and its Affiliated
Companies, and their officers, directors, employees, shall have no
liability whatsoever with respect to the use of or reliance upon the
Confidential Information by Buyer.
(f) This Agreement and that certain Confidentiality Agreement dated
October 20, 1999 between Seller and Buyer contain the entire understanding
of the parties hereto with respect to the subject matter hereof and
supersede all prior agreements, understandings, negotiations, and
discussions among the parties with respect to such subject matter between
Seller and Buyer. The headings contained in this Agreement are for
convenience only and shall not control or affect the meaning or
construction of any provision of this Agreement. Within this Agreement,
words of any gender shall be held and construed to cover any other gender,
and words in the singular shall be held and construed to cover the plural,
unless the context otherwise requires. Time is of the essence in this
Agreement.
(g) This Agreement may be amended, modified, supplemented, restated, or
discharged (and provisions hereof may be waived) only by an instrument
in writing signed by the party against whom enforcement of the amendment,
modification, supplement, restatement, or discharge (or waiver) is sought,
or by order of the Court where the party against whom enforcement of any
provision has been given notice and the opportunity to file objection.
(h) Each party shall bear and pay all expenses it incurred in
connection with the transaction contemplated by this Agreement.
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(i) This Agreement shall be binding on the parties hereto and their
respective successors and assigns.
(j) This Agreement shall not confer any rights or remedies upon any
person other than Seller and Buyer and their respective successors and
permitted assigns.
(k) This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which shall constitute one
and the same instrument. It shall not be necessary for both parties to sign
the same counterpart.
(l) Buyer shall properly execute, acknowledge and file the Conveyance
for record immediately upon receipt thereof and will furnish to Seller a
copy of the recorded document promptly after Buyer's receipt of such
recorded instrument from the clerk in the county or parish in which the
Conveyance is recorded. In addition, where applicable, Buyer and Seller
shall execute any forms required to effect a change of operator for all
wells conveyed herein.
(m) Prior to Closing, Buyer shall not issue any publicity or press
release concerning this Agreement or the transaction contemplated hereby
without the prior written consent of Seller, unless, in the written opinion
of legal counsel acceptable to Seller, such disclosure is required by
applicable law or other applicable rules or regulations of any governmental
authority or stock exchange and such publicity or press release contains no
more than the minimum information necessary to comply therewith. This
provision shall not replace or restrict any provision in any prior
agreement between the parties affecting confidentiality or the disclosure
of information about the Assets.
IN WITNESS WHEREOF, this Agreement is executed by the parties hereto on
the date set forth above.
SELLER: BUYER:
NATIONAL ENERGY GROUP, INC. ARNOS CORPORATION
By: /s/ BOB G. ALEXANDER By: /s/ GEORGE W. HEBARD III
------------------------------- --------------------------------
Name: BOB G. ALEXANDER Name: George W. Hebard III
----------------------------- ------------------------------
Title: PRESIDENT & CEO Title: Vice President
---------------------------- -----------------------------
WITNESSES: WITNESSES:
/s/ GRACE BRICKER /s/ JENNIFER ALBRIGHT
- ----------------------------------- ------------------------------------
/s/ TAMARA SIMS /s/ RUSSELL GLASS
- ----------------------------------- ------------------------------------
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ACKNOWLEDGMENTS
STATE OF TEXAS )
)
COUNTY OF DALLAS )
This instrument was acknowledged before me, Notary Public, this 11TH day of
November, 1999, by BOB G. ALEXANDER, PRESIDENT & CEO of NATIONAL ENERGY, GROUP,
INC., a Delaware corporation, on behalf of the corporation.
IN WITNESS, WHEREOF, I set my hand and official seal.
[SEAL] /s/ MARILYN J. GRAHAM
Notary Public
My commission expires:
8/31/02
- ----------------------
STATE NEW YORK )
)
COUNTY OF NEW YORK )
This instrument was acknowledged before me, Notary Public, as of this 1st
day of November, 1999, by GEORGE HEBARD, Vice President of ARNOS CORPORATION, a
Nevada corporation, on behalf of the corporation.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
[SEAL] /s/ VICKI A. GOLDSTEIN
Notary Public
My commission expires:
32
<PAGE> 34
EXHIBITS
Exhibit A - Oil, Gas & Mineral Leases
Land Operating Contracts
Well Master List
Exhibit A-l - Order (I) Scheduling the Auction of the Aggregate Properties
and Subgroup Properties, and (II) Approving (A) the Bid
Procedures and Auction Guidelines and (B) the Notice
Procedure
Exhibit B - Gas Marketing Contracts
Production Department Contracts
Gas Balancing Balances -- 9/30/99
Preferential Right to Purchase
Contracts Subject to a Call on Production
Exhibit C - Conveyance
Exhibit D-l - Seller's Officers Certificate
Exhibit D-2 - Buyer's Officers Certificate
<PAGE> 1
EXHIBIT 12.1
NATIONAL ENERGY GROUP, INC.
COMPUTATION OF HISTORICAL RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS, EXCEPT FOR RATIOS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1995 1996 1997 1998 1999
------ -------- -------- --------- ------
<S> <C> <C> <C> <C> <C>
Earnings
Income (loss) before income taxes and
extraordinary items...................... $ 206 $(40,061) $(41,624) $(164,514) $2,024
Interest expense............................ 995 3,621 11,256 15,719 1,909
Amortization of debt issuance cost.......... 37 151 640 936 863
Interest portion of rental expense.......... 34 37 83 100 129
------ -------- -------- --------- ------
Earnings (loss).......................... $1,272 $(36,252) $(29,645) $(147,759) $4,925
====== ======== ======== ========= ======
Fixed charges:
Interest, including capitalized portion..... $ 995 $ 3,621 $ 13,801 $ 19,090 $1,909
Amortization of debt issuance cost.......... 37 151 640 936 863
Interest portion of rental expense.......... 34 37 83 100 129
------ -------- -------- --------- ------
Fixed charges............................ $1,066 $ 3,809 $ 14,524 $ 20,126 $2,901
====== ======== ======== ========= ======
Ratio of earnings to fixed charges............ 1.2X -- -- -- 2.0X(a)
====== ======== ======== ========= ======
Deficiency of earnings to fixed charges....... -- $(40,061) $(44,169) $(167,885) --
====== ======== ======== ========= ======
</TABLE>
- ---------------
(a) This ratio excludes approximately $17.7 million of interest on the Senior
Notes since the Company discontinued the accrual of interest due to the
Chapter 11 proceeding
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
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 Arrangement, respectively, of our report dated
March 23, 2000, with respect to the consolidated financial statements of
National Energy Group, Inc. included in this Annual Report (Form 10-K) for the
year ended December 31, 1999.
ERNST & YOUNG LLP
Dallas, Texas
March 28, 2000
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS
We hereby consent to the reference to our firm and to our report dated
March 8, 2000, presenting estimated reserves and future revenue for the oil and
gas properties of National Energy Group, Inc., in National Energy Group Inc.'s
Annual Report on Form 10-K for the year ended December 31, 1999.
NETHERLAND, SEWELL & ASSOCIATES, INC.
By: /s/ FREDERIC D. SEWELL
---------------------------------------
Frederic D. Sewell
President
Dallas, Texas
March 27, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 29,217
<SECURITIES> 343
<RECEIVABLES> 5,548
<ALLOWANCES> 149
<INVENTORY> 148
<CURRENT-ASSETS> 36,520
<PP&E> 329,826
<DEPRECIATION> 267,644
<TOTAL-ASSETS> 100,358
<CURRENT-LIABILITIES> 31,983
<BONDS> 165,000
0
171
<COMMON> 405
<OTHER-SE> (115,481)
<TOTAL-LIABILITY-AND-EQUITY> 100,358
<SALES> 39,300
<TOTAL-REVENUES> 39,300
<CGS> 8,196
<TOTAL-COSTS> 8,196
<OTHER-EXPENSES> 27,933
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,909)
<INCOME-PRETAX> 2,024
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,024
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,024
<EPS-BASIC> 0.05
<EPS-DILUTED> 0.05
</TABLE>
<PAGE> 1
EXHIBIT 99.2
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
IN RE: )
)
NATIONAL ENERGY GROUP, INC. ) CASE NO. 98-80258-HCA-11
AND BOOMER MARKETING, ) (JOINTLY ADMINISTERED)
CORPORATION )
)
DEBTORS. )
ORDER IMPLEMENTING AUCTION SALE CLOSING
Having considered the (i) unfiled request of Arnos Corporation to close
into escrow the Purchase and Sale Agreement entered into between National Energy
Group, Inc. ("NEG") as Seller and Arnos Corporation ("Arnos") as Buyer, as of
December 1, 1999 ("PSA") pending an attempt at a consensual plan of
reorganization, (ii) the Creditors Committee's unscheduled "Motion to Forfeit
$9.625 Million Escrow Deposit of Arnos Corporation; to Terminate Escrow
Agreement; and to Direct Bank One, N.A. to Distribute Escrow Deposit in Favor of
Unsecured Creditors Committee," (iii) the various proposals and arguments by
Arnos and the Creditors Committee, and the Court having summarized the latter
for consideration by Arnos and the Creditors Committee, which have been accepted
by them; it is hereby
ORDERED that Arnos shall pay into escrow by 3:00 p.m. (E.S.T.) on Monday,
December 13, 1999, the purchase price of the NEG assets (the "Purchased Assets")
under the PSA by wire transferring into the registry of the Court the sum of
$61,250,000.00 that equals the approved purchase price of $96,250,000, less the
escrow deposit on hand with Bank One, N.A. of
ORDER IMPLEMENTING AUCTION SALE CLOSING - PAGE -1-
<PAGE> 2
$9,625,000, and less a credit for the outstanding balance of principal due to
Arnos Corp. purchased from Bank One and Credit Lyonnais (the "Bank One Note")
under Section 363(k) of the Bankruptcy Code in the principal amount of
$25,000,000 ("Credit Bid") (such funds collectively referred to as the "Escrow
Proceeds"); and it is further
ORDERED that as a result of its above-mentioned Credit Bid of $25,000,000,
upon implementation of the sale of the Assets, the principal amount of Arnos'
secured claim pursuant to the Bank One Note is satisfied in full and the only
remaining portion of Arnos' secured claim is the accrued interest due thereon,
from December 1, 1999 to December 13, 1999; and it is further
ORDERED that any plan of reorganization filed or sponsored by Arnos or NEG
shall provide for a Creditor Trust into which shall be transferred and assigned
all claims, causes of action and rights of NEG under Sections 541-553 of the
Bankruptcy Code, as well as any and all rights of the estate of the Debtor to
investigate and prosecute, claims against the officers and directors of NEG and
its former accountants, Ernst & Young, and, in the interim no lawsuits may be
filed by the Committee until a plan is filed and there is further Court Order;
and it is further
ORDERED that if the Closing takes place, all proceeds, benefits, income and
revenues from the Assets attributable to the period from and after November 1,
1999 will be allocated to Arnos but that NEG on behalf of Arnos shall pay all
costs and expenses incurred in NEG's business pertaining to the ownership,
operation and maintenance of the Assets, including appropriate allocation of
general and administrative expenses, attributable to the period from and after
November 1, 1999 through the earlier of the effective date of a plan of
reorganization for NEG or the Closing, and NEG shall provide Arnos and the
Committee with a summary statement of such proceeds, benefits,
ORDER IMPLEMENTING AUCTION SALE CLOSING - PAGE -2-
<PAGE> 3
income, revenues, costs and expenses and a proposed allocation as between Arnos
and NEG of general and administrative expenses each month; and it is further
ORDERED that if the Closing takes place, the proceeds, benefits, income,
revenues, costs and expenses relating to the Assets from and after November 1,
1999 shall be accounted for at the time of and in connection with the Closing of
the sale of the Assets pursuant to the PSA or the implementation of a plan of
reorganization, as the case may be, such that Arnos will ultimately receive the
benefit of such proceeds, benefits, income and revenues and Arnos will
ultimately bear the burden of such allocation of expenses attributable to the
Assets after November 1, 1999 and the Committee may contest any allocation at
any time and reserves the right to argue that such allocation should include a
profit for the Debtors;
ORDERED that Arnos will pay separately the reasonable fees and expenses of
Neligan & Averch L.L.P., or its successor in name, as counsel for NEG from
December 13, 1999 forward incurred in connection with any plan of reorganization
that Arnos may sponsor, but such payment shall be predicated on Court order
approving the fees and expenses of Neligan & Averch, L.L.P. or its successor;
and it is further
ORDERED that the Court shall determine the sufficiency of any additional
consideration to be funded by Arnos for the unsecured creditors in connection
with any plan of reorganization sponsored by Arnos or the Debtor, with Arnos and
the Creditors' Committee agreeing to waive any rights of appeal therefrom; and
it is further
ORDERED that any Arnos sponsored plan and disclosure statement shall be
filed at the earliest practical date, and that in the event the Creditors'
Committee is not satisfied with progress on the filing of an Arnos sponsored
plan, it may seek a hearing to request that the Escrowed Proceeds be released
and the transactions contemplated by the PSA be consummated, and it is further
ORDER IMPLEMENTING AUCTION SALE CLOSING - PAGE -3-
<PAGE> 4
ORDERED that, from and after December 13, 1999, the implementation of the
sale contemplated by the PSA will be deemed to be held in abeyance in
accordance with the PSA, unless earlier concluded by order of this Court or by
written declaration from Arnos that it is no longer seeking to confirm a plan
and will proceed to close under the PSA, or a plan of reorganization proposed by
the Committee is confirmed that incorporates the assignment of the Assigned
Interests and the sale of the Assets to Arnos pursuant to this Order and the PSA
SIGNED this 13th day of January, 2000.
[SEAL]
-------------------------------
THE HONORABLE HAROLD ABRAMSON
UNITED STATES BANKRUPTCY JUDGE
ORDER IMPLEMENTING AUCTION SALE CLOSING - PAGE -4-
