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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-19136 (COMMON STOCK)
NATIONAL ENERGY GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 58-1922764
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1400 ONE ENERGY SQUARE
4925 GREENVILLE AVENUE
DALLAS, TEXAS 75206
(Address of principal executive offices)
(214) 692-9211
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]
11,190,650 shares of the registrant's Common Stock, $0.01 par value, were
outstanding on November 10, 2003.
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NATIONAL ENERGY GROUP, INC.
INDEX
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements........................................
Balance Sheets at December 31, 2002 and September 30, 2003
(Unaudited)................................................. 2
Statements of Operations for the three months and nine
months ended September 30, 2002 and 2003 (Unaudited)........ 3
Statements of Cash Flows for the nine months ended September
30, 2002 and 2003 (Unaudited)............................... 4
Statement of Stockholders' Equity (Deficit) for the nine
months ended September 30, 2003 (Unaudited)................. 5
Notes to Financial Statements (Unaudited)................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 13
Item 3. Quantitative and Qualitative Disclosure About Market Risk... 17
Item 4. Controls and Procedures..................................... 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 18
Item 4. Submission of Matters to a Vote of Security Holders......... 19
Item 5. Other Information........................................... 19
Item 6. Exhibits and Reports on Form 8-K............................ 19
1
NATIONAL ENERGY GROUP, INC.
BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
2002 2003
------------ -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,477,250 $ 4,070,959
Accounts receivable -- other.............................. 18,876 333,402
Accounts receivable -- affiliates......................... 588,122 333,430
Other..................................................... 319,409 110,248
------------ -------------
Total current assets.............................. 4,403,657 4,848,039
Investment in NEG Holding LLC............................... 108,879,929 69,867,615
Deferred tax asset.......................................... 25,521,738 21,466,250
------------ -------------
Total assets...................................... $138,805,324 $ 96,181,904
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 45,254 $ 60,726
Accrued interest on senior notes -- affiliates............ 44,359,805 6,657,699
------------ -------------
Total current liabilities......................... 44,405,059 6,718,425
Long term liabilities:
Credit facility -- affiliates............................. 10,939,750 --
Senior notes -- affiliates................................ 148,637,000 148,637,000
Deferred gain on senior note redemption................... 7,812,699 6,284,128
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, $.01 par value:
Authorized shares -- 15,000,000 at December 31, 2002
and September 30, 2003; Issued and outstanding
shares -- 11,190,650 at December 31, 2002 and
September 30, 2003................................... 111,907 111,907
Additional paid-in capital.................................. 123,020,121 123,020,121
Accumulated deficit......................................... (196,121,212) (188,589,677)
------------ -------------
Total stockholders' equity (deficit).............. (72,989,184) (65,457,649)
------------ -------------
Total liabilities and stockholders' equity
(deficit)....................................... $138,805,324 $ 96,181,904
============ =============
See accompanying notes to financial statements.
2
NATIONAL ENERGY GROUP, INC.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ---------------------------
2002 2003 2002 2003
----------- ----------- ------------ ------------
(UNAUDITED)
Revenues:
Accretion of investment in NEG
Holding LLC....................... $ 8,445,128 $ 7,221,828 $ 24,311,182 $ 22,673,052
Management fee....................... 1,782,564 1,817,170 5,817,116 5,696,852
----------- ----------- ------------ ------------
Total revenue................... 10,227,692 9,038,998 30,128,298 28,369,904
Cost and expenses:
General and administrative........... 1,631,417 1,590,634 5,315,447 5,178,623
----------- ----------- ------------ ------------
Total costs and expenses........ 1,631,417 1,590,634 5,315,447 5,178,623
----------- ----------- ------------ ------------
Operating income....................... 8,596,275 7,448,364 24,812,851 23,191,281
Other income (expense):
Interest expense..................... (4,741,559) (3,485,096) (14,241,385) (11,629,833)
Interest income and other, net....... 4,507 8,888 16,812 25,575
----------- ----------- ------------ ------------
Income before income taxes............. 3,859,223 3,972,156 10,588,278 11,587,023
Income tax expense..................... (1,350,729) (1,390,255) (3,704,517) (4,055,488)
----------- ----------- ------------ ------------
Net income............................. $ 2,508,494 $ 2,581,901 $ 6,883,761 $ 7,531,535
=========== =========== ============ ============
Earnings per common share:
Net income per common share.......... $ .22 $ .23 $ .62 $ .67
=========== =========== ============ ============
Weighted average number of common
shares outstanding................... 11,190,650 11,190,650 11,190,650 11,190,650
=========== =========== ============ ============
See accompanying notes to financial statements.
3
NATIONAL ENERGY GROUP, INC.
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2002 2003
------------ ------------
(UNAUDITED)
Operating Activities:
Net income................................................ $ 6,883,761 $ 7,531,535
Adjustments to reconcile net income to net cash provided
by operating activities:
Accretion of investment in NEG Holding LLC............. (24,311,182) (22,673,052)
Deferred gain amortization............................. (1,528,569) (1,528,571)
Deferred income tax expense............................ 3,704,517 4,055,488
Changes in operating assets and liabilities:
Accounts receivable.................................. 605,394 (59,834)
Other current assets................................. 38,383 209,160
Accounts payable and accrued liabilities............. 4,414,656 5,069,744
------------ ------------
Net cash used in operating activities............. (10,193,040) (7,395,530)
------------ ------------
Investing Activities:
Priority distribution from NEG Holding LLC................ -- 40,506,071
Guaranteed payment from NEG Holding LLC................... 10,842,212 10,239,545
------------ ------------
Net cash provided by investing activities......... 10,842,212 50,745,616
------------ ------------
Financing Activities:
Repayment of Reinstated Interest............................ -- (42,756,377)
------------ ------------
Net cash used in financing activities..................... -- (42,756,377)
------------ ------------
Increase in cash and cash equivalents....................... 649,172 593,709
Cash and cash equivalents at beginning of period............ 3,090,361 3,477,250
------------ ------------
Cash and cash equivalents at end of period.................. $ 3,739,533 4,070,959
============ ============
Supplemental cash flow information
Interest paid in cash....................................... $ 11,304,948 $ 50,860,483
============ ============
Non-cash financing and investing activities Distribution of
note from NEG Holding LLC................................. $ -- $ 10,939,750
============ ============
See accompanying notes to financial statements.
4
NATIONAL ENERGY GROUP, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
COMMON STOCK TOTAL
--------------------- ADDITIONAL ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT PAID-IN CAPITAL DEFICIT EQUITY (DEFICIT)
---------- -------- --------------- ------------- ----------------
Balance at December 31,
2002....................... 11,190,650 $111,907 $123,020,121 $(196,121,212) $(72,989,184)
Net income................. -- -- -- 7,531,535 7,531,535
---------- -------- ------------ ------------- ------------
Balance at September 30,
2003....................... 11,190,650 $111,907 $123,020,121 $(188,589,677) $(65,457,649)
========== ======== ============ ============= ============
See accompanying notes to financial statements.
5
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2003
1. SETTLEMENT OF BANKRUPTCY CASE AND FORMATION OF LIMITED LIABILITY COMPANY
National Energy Group, Inc. (the "Company") was incorporated under the laws
of the State of Delaware on November 20, 1990. Effective June 11, 1991, Big
Piney Oil and Gas Company 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.
On February 11, 1999, the United States Bankruptcy Court for the Northern
District of Texas, Dallas Division ("Bankruptcy Court") entered an involuntary
petition placing the Company under protection of the Bankruptcy Court pursuant
to Title 11, Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy
Proceeding"). On July 24, 2000, the Bankruptcy Court entered a subsequent order
confirming a Plan of Reorganization (the "Plan of Reorganization") jointly
proposed by the Company and the official committee of unsecured creditors, which
Plan of Reorganization became effective on August 4, 2000. The Bankruptcy Court
issued a final decree closing the case effective December 13, 2001. Accordingly,
the Company has effectively settled all matters relating to the Bankruptcy
Proceeding.
As mandated by the Plan of Reorganization and the Bankruptcy Court, NEG
Holding LLC ("Holding LLC"), a Delaware limited liability company, was formed in
August 2000. In exchange for an initial 50% membership interest in Holding LLC,
on September 12, 2001, but effective as of May 1, 2001, the Company contributed
to Holding LLC all of its operating assets and oil and natural gas properties
excluding cash of $4.3 million (the "LLC Contribution"). In exchange for its
initial 50% membership interest in Holding LLC, Gascon Partners, ("Gascon"), an
entity owned or controlled by Carl C. Icahn, contributed (i) its sole membership
interest in Shana National LLC, an oil and natural gas producing company, (ii)
cash of $75.2 million, and (iii) a $10.9 million revolving note, evidencing the
borrowings under the Company's revolving credit facility issued to Arnos Corp.
("Arnos"). In connection with the foregoing, Holding LLC initially owns 100% of
the membership interest in NEG Operating LLC ("Operating LLC"), a Delaware
limited liability company. Holding LLC is governed by an operating agreement,
effective as of May 1, 2001, which provides for the management and control of
Holding LLC by Gascon (the "Holding LLC Operating Agreement"). All of the oil
and natural gas assets contributed by the Company and all of the oil and natural
gas assets associated with Gascon's contribution to Holding LLC were transferred
from Holding LLC to Operating LLC on September 12, 2001, effective as of May 1,
2001. Carl C. Icahn, through his majority ownership of American Real Estate
Holding, L.P. ("AREH") beneficially owns in excess of 50% of the issued and
outstanding common stock of the Company.
The assets contributed by the Company to Holding LLC were current assets of
$11.5 million, net oil and natural gas assets of $85.0 million and other assets
of $4.8 million. The liabilities assumed by Holding LLC were current liabilities
of $4.2 million, intercompany payable to Gascon of $4.8 million and long-term
liabilities of $1.0 million.
The Holding LLC Operating Agreement contains a provision that allows
Gascon, or its successor, at any time, in its sole discretion, to redeem the
Company's membership interest in Holding LLC at a price equal to the fair market
value of such interest determined as if Holding LLC had sold all of its assets
for fair market value and liquidated. A determination of the fair market value
of such assets shall be made by an independent third party jointly engaged by
Gascon and the Company. Since all of the Company's operating assets and oil and
natural gas properties would have been contributed to Holding LLC, following
such a redemption, the Company's principal assets would consist solely of its
cash balances. In the event that such redemption right is exercised by Gascon,
the Company may be obligated to use the proceeds that it would receive for its
redeemed membership interest to pay outstanding indebtedness and operating
expenses before the distribution of any portion of such proceeds to the
Company's stockholders. Following the payment of the Company's
6
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
indebtedness (currently held by entities owned or controlled by Carl C. Icahn)
and its operating expenses, there is a substantial risk that there will be no
proceeds remaining for distribution to the Company's stockholders. It is the
present intention of Holding LLC to continue to conduct oil and natural gas
drilling and development activities in the ordinary course of business and to
seek additional reserves.
As a result of the foregoing transactions and as mandated by the Plan of
Reorganization effective September 12, 2001, the Company's principal assets were
its remaining cash balances, accounts receivable from affiliates, deferred tax
asset, and its initial 50% membership interest in Holding LLC, and its principal
liabilities were the $10.9 million outstanding under its existing $100 million
revolving credit facility with Arnos and its 10 3/4% Senior Notes ("Senior
Notes") and long-term interest payable on Senior Notes. None of the Company's
employees were transferred to Holding LLC or Operating LLC.
On March 26 2003, NEG Holding LLC distributed the $10.9 million note
outstanding under the Company's revolving credit facility, as a priority
distribution to the Company thereby canceling the note. Also, on March 26, 2003
the Company, Arnos and Operating LLC entered into an agreement to assign the
credit facility to Operating LLC. (See Note 4)
The Company remains highly leveraged following confirmation of the Plan of
Reorganization and entry of the final decree closing the Bankruptcy Proceeding.
Further, as a result of the terms and conditions of the various agreements
related to the repayment of the Company's indebtedness to Arnos and repayment of
the priority distribution amounts and the guaranteed payments (plus accrued
interest thereon) to Gascon, there is a substantial risk that there will be no
proceeds remaining for distribution to the Company's shareholders.
2. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information, and with the instructions to Form
10-Q and Article 10 of Regulation S-X and are fairly presented. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, these financial statements contain all adjustments, consisting of
normal recurring accruals, necessary to present fairly the financial position,
results of operations and cash flows for the periods indicated. The preparation
of financial statements in accordance with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual
results may differ from these estimates. The Company's quarterly financial data
should be read in conjunction with the financial statements of the Company for
the year ended December 31, 2002 (including the notes thereto), set forth in the
Company's Annual Report on Form 10-K.
The results of operations for the nine months ended September 30, 2003, are
not necessarily indicative of the results expected for the full year. Certain
prior year amounts have been reclassified to correspond with the current
presentation.
3. MANAGEMENT AGREEMENTS
The management and operation of Operating LLC is being undertaken by the
Company pursuant to a Management Agreement (the "Management Agreement") which
the Company has entered into with Operating LLC. However, neither the Company's
officers nor directors will control the strategic direction of Operating LLC's
oil and natural gas business including oil and natural gas drilling and capital
investments, which shall be controlled by the managing member of Holding LLC
(currently Gascon). The Management Agreement provides that the Company will
manage Operating LLC's oil and natural gas assets and business until the earlier
of November 1, 2006, or such time as Operating LLC no longer owns any of the
managed oil and natural gas properties. The Company's employees will conduct the
day-to-day operations of Operating
7
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
LLC's oil and natural gas properties, and all costs and expenses incurred in the
operation of the oil and natural gas properties shall be borne by Operating LLC.
The Management Agreement provides that the salary of the Company's Chief
Executive Officer shall be 70% attributable to the managed oil and natural gas
properties, and the salaries of each of the General Counsel and Chief Financial
Officer shall be 20% attributable to the managed oil and natural gas properties.
In exchange for the Company's management services, Operating LLC shall pay the
Company a management fee equal to 115% of the actual direct and indirect
administrative and reasonable overhead costs incurred by the Company in
operating the oil and natural gas properties, which either the Company or
Operating LLC may seek to change within the range of 110%-115% as such change is
warranted; however, the parties have agreed to consult with each other to ensure
that such administrative and reasonable overhead costs attributable to the
managed properties are properly reflected in the management fee paid to the
Company. In addition, Operating LLC has agreed to indemnify the Company to the
extent it incurs any liabilities in connection with its operation of the assets
and properties of Operating LLC, except to the extent of its gross negligence,
or misconduct. The Company recorded $1.8 million and $5.7 million as a
management fee for the three and nine month periods ended September 30, 2003.
On August 28, 2003, the Company entered into an agreement (the "TTG
Management Agreement") to manage TransTexas Gas Corporation ("TTG"). The TTG
Management Agreement was entered into in connection with a plan of
reorganization for TTG proposed by Thornwood Associates LP, an entity affiliated
with Carl C. Icahn, the Company's largest stockholder. The United States
Bankruptcy Court, Southern District of Texas issued an order confirming the TTG
Plan of Reorganization, effective August 29, 2003 (the "TTG Plan"). TTG is
engaged in the exploration, production and transmission of natural gas and oil
primarily in South Texas, including the Eagle Bay field in Galveston Bay, Texas
and the Southwest Bonus field located in Wharton County, Texas. Bob G. Alexander
and Philip D. Devlin, President and CEO, and Vice President, Secretary and
General Counsel of the Company, respectively, have been appointed to the TTG
Board of Directors and shall act as the two principal officers of TTG and its
subsidiaries, Galveston Bay Pipeline Corporation and Galveston Bay Processing
Corporation.
The TTG Management Agreement provides that the Company shall be responsible
for and have authority with respect to all of the day-to-day management of TTG's
business but shall not function as a Disbursing Agent as such term is defined in
the TTG Plan. As consideration for the Company's services in managing the TTG
business, the Company shall receive a monthly fee of $312,500. The TTG
Management Agreement is terminable (i) upon 30 days prior written notice by TTG,
(ii) upon 90 days prior written notice by the Company, (iii) upon 30 days
following any day where High River Limited Partnership (also affiliated with
Carl C. Icahn) designees no longer constitute the TTG Board of Directors, unless
otherwise waived by the newly-constituted Board of Directors of TTG, or (iv) as
otherwise determined by the Bankruptcy Court.
4. CREDIT FACILITIES
At December 31, 2002, the Company had $10.9 million outstanding under its
existing $100 million credit facility with Arnos. Arnos continued to be the
holder of the credit facility; however, the $10.9 million note outstanding under
the credit facility was contributed to Holding LLC as part of Gascon's
contribution to Holding LLC on September 12, 2001. In December 2001, the
maturity date of the credit facility was extended to December 31, 2003 and the
Company was given a waiver of compliance with respect to any and all covenant
violations. The Company was not in compliance with the minimum interest coverage
ratio at September 30, 2002 and December 31, 2002 and the current ratio at
December 31, 2002, however, in December 2001 the Company was given a waiver of
compliance with respect to any and all covenant violations through December 31,
2003.
On March 26, 2003, NEG Holding LLC distributed the $10.9 million note
outstanding under the Company's revolving credit facility as a priority
distribution to the Company, thereby canceling the note. Also, on March 26, 2003
the Company, Arnos and Operating LLC entered into an agreement to assign the
credit
8
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
facility to Operating LLC. Effective with this assignment, Arnos amended the
credit facility to increase the revolving commitment to $150 million, increase
the borrowing base to $75 million and extend the revolving due date until June
30, 2004. Concurrently, Arnos extended a $42.8 million loan to Operating LLC
under the amended credit facility. Operating LLC then distributed $42.8 million
to Holding LLC who, thereafter, made a $40.5 million priority distribution and a
$2.3 million guaranteed payment to the Company.
5. SENIOR NOTES DUE 2006
Upon confirmation of the Joint Plan, the Senior Notes are held in their
entirety by Arnos and its affiliates. 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.
The Indenture contains certain covenants limiting the Company with respect
to the following: (i) asset sales; (ii) restricted payments; (iii) the
incurrence of additional indebtedness and the issuance of certain redeemable
preferred stock; (iv) liens; (v) sale and leaseback transactions; (vi) lines of
business; (vii) dividend and other payment restrictions affecting subsidiaries;
(viii) mergers and consolidations; and (ix) transactions with affiliates. The
Company was in compliance with these covenants at September 30, 2003.
6. INVESTMENT IN NEG HOLDING LLC
As explained below, the Company's investment in NEG Holding LLC is recorded
as a preferred investment. The initial investment was recorded at historical
carrying value of the net assets contributed with no gain or loss recognized on
the transfer.
Under the Holding LLC Operating Agreement, the Company is to receive
guaranteed payments in addition to a priority distribution amount of $202.2
million before Gascon receives any monies. The priority distribution is to be
made on or before November 1, 2006. Guaranteed payments are to be paid, on a
semi annual basis, based on an annual interest rate of 10.75% of the outstanding
priority distribution amount. After the payments to the Company, Gascon is to
receive distributions equivalent to the priority distribution amount and
guaranteed payments plus other amounts as defined. Following the above
distributions to the Company and Gascon, additional distributions, if any, are
to be made in accordance with their respective capital accounts. The order of
distributions is listed below. Because of the substantial uncertainty that the
Company will receive any distributions above the priority and guaranteed payment
amounts, the Company accounts for its investment in Holding LLC as a preferred
investment.
At inception (September 12, 2001), the Company recorded the investment in
Holding LLC at the historical cost of the oil and gas properties contributed
into the partnership (in exchange for Holding LLC's obligation to pay the
Company the priority distribution and guaranteed payments). Subsequently, the
Company accretes its investment in Holding LLC from the initial investment
recorded up to the priority distribution amount, including the guaranteed
payments, at the implicit rate of interest, recognizing the accretion income in
earnings. Accretion income is periodically adjusted for changes in the timing of
cash flows, if necessary due to unscheduled cash distributions. Receipt of
guaranteed payments and the priority distribution are recorded as reductions in
the preferred investment. The preferred investment is evaluated quarterly for
other than temporary impairment.
Because of the substantial uncertainty that the Company will receive any
distributions in excess of the priority distribution and the guaranteed payments
("residual interest"), the residual interest attributable to the investment in
Holding LLC is valued at zero. Upon payment of the priority distribution in
2006, the
9
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company's investment in Holding LLC will be zero. Cash receipts, if any, after
the priority distribution and the guaranteed payments will be reported in income
as earned.
The following is a summary balance sheet of Holding LLC as of December 31,
2002 and September 30, 2003.
DECEMBER 31, SEPTEMBER 30,
2002 2003
------------ -------------
Current assets........................................... $ 42,126,407 $ 41,927,341
Net oil and natural gas properties (full-cost method).... 168,334,114 181,115,173
Net other property and equipment......................... 1,322,745 1,183,795
Other long-term assets................................... 10,954,103 12,803
------------ ------------
Total assets............................................. $222,737,369 $224,239,112
============ ============
Current liabilities...................................... $ 20,927,227 $ 14,667,774
Long-term liabilities.................................... 1,968,248 47,613,295
Members' equity.......................................... 199,841,894 161,958,043
------------ ------------
Total liabilities and members' equity.................... $222,737,369 $224,239,112
============ ============
The following is a summary income statement for Holding LLC for the nine
months ended September 30, 2002 and 2003.
2002 2003
------------ ------------
Total revenues........................................... $ 26,507,103 $ 60,431,427
Total cost and expenses.................................. (22,824,976) (35,660,867)
------------ ------------
Operating income......................................... 3,682,127 24,770,560
Interest income and other................................ 9,217,636 (2,880,751)
------------ ------------
Income before cumulative effect of change in accounting
principle.............................................. 12,899,763 21,889,809
Cumulative effect of change in accounting principle...... -- 1,911,705
------------ ------------
Net income............................................... $ 12,899,763 $ 23,801,514
============ ============
For the nine month period ended September 30, 2003, Holding LLC generated
cash flows of $37.6 million from operating activities, used $76.2 million in
investing activities and generated cash flows from financing activities of $42.8
million. Audited financials will be prepared and included in the Company's Form
10-K at December 31, 2003.
The following is a rollforward of the Investment in Holding LLC as of
September 30, 2003:
Investment in Holding LLC at December 31, 2002.............. $108,879,929
Priority distribution from Holding LLC...................... (51,445,821)
Guaranteed payment from Holding LLC......................... (10,239,545)
Accretion of investment in Holding LLC...................... 22,673,052
------------
Investment in Holding LLC at September 30, 2003............. $ 69,867,615
============
10
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Holding LLC Operating Agreement requires that distributions shall be
made to both the Company and Gascon as follows:
1. Guaranteed payments are to be paid to the Company, calculated on an
annual interest rate of 10.75% on the outstanding priority distribution
amount. The priority distribution amount includes all outstanding debt owed
to entities owned or controlled by Carl C. Icahn, including the amount of
the Company's 10.75% Senior Notes. As of September 30, 2003, the priority
distribution amount was $148.6 million. The guaranteed payments will be
made on a semi-annual basis.
2. The priority distribution amount is to be paid to the Company. Such
payment is to occur by November 6, 2006.
3. An amount equal to the priority distribution amount and all
guaranteed payments paid to the Company, plus any additional capital
contributions made by Gascon, less any distribution previously made by
Holding LLC to Gascon, is to be paid to Gascon.
4. An amount equal to the aggregate annual interest (calculated at
prime plus 1/2% on the sum of the guaranteed payments), plus any unpaid
interest for prior years (calculated at prime plus 1/2% on the sum of the
guaranteed payments), less any distributions previously made by Holding LLC
to Gascon, is to be paid to Gascon.
5. After the above distributions have been made, any additional
distributions will be made in accordance with the ratio of the Company's
and Gascon's respective capital accounts.
On March 26, 2003, Holding LLC distributed the $10.9 million note
outstanding under the Company's revolving credit facility as a priority
distribution to the Company, thereby canceling the note. Also, on March 26, 2003
the Company, Arnos and Operating LLC entered into an agreement to assign the
credit facility to Operating LLC. Effective with this assignment, Arnos amended
the credit facility to increase the revolving commitment to $150 million,
increase the borrowing base to $75 million and extend the revolving due date
until June 30, 2004. Concurrently, Arnos extended a $42.8 million loan to
Operating LLC under the amended credit facility. Operating LLC then distributed
$42.8 million to Holding LLC who, thereafter, made a $40.5 million priority
distribution and a $2.3 million guaranteed payment to the Company.
Operating LLC is currently in compliance with all covenants of the credit
facility. (See Note 4)
7. INCOME TAXES
At December 31, 2002, the Company had net operating loss carryforwards
available for federal income tax purposes of approximately $101.3 million which
begin expiring in 2003. Utilization of approximately $27.6 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 its predecessors. Additional net operating loss
limitations may be imposed as a result of subsequent changes in stock ownership
of the Company. Prior to the formation of Holding LLC, the income tax benefit
associated with the loss carryforwards had not been recognized since, in the
opinion of management, there was not sufficient positive evidence of future
taxable income to justify recognition of a benefit. Upon the formation of
Holding LLC, management again evaluated all evidence, both positive and
negative, in determining whether a valuation allowance to reduce the carrying
value of deferred tax assets was still needed and concluded, based on the
projected allocations of taxable income by Holding LLC, the Company more likely
than not will realize a partial benefit from the loss carryforwards. The Company
recorded a deferred tax asset of $25.5 million and $21.4 million as of December
31, 2002 and September 30, 2003, respectively. Ultimate realization of the
deferred tax asset is dependent upon, among other factors, the Company's ability
to generate sufficient taxable income within the carryforward periods and is
subject to change depending on the tax laws in effect in the
11
NATIONAL ENERGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
years in which the carryforwards are used. As a result of the recognition of
expected future income tax benefits, subsequent periods will reflect a full
effective tax rate provision.
8. CONTINGENCIES
On July 7, 2003, the Company filed a request with the American Arbitration
Association for dispute resolution of a claim in the amount of $21,000 against
Osprey Petroleum Company, Inc. ("Osprey") arising out of Osprey's failure to
post bond for certain plugging and abandonment liabilities associated with oil
and gas properties sold by the Company to Osprey in September 2000. Osprey has
counterclaimed against the Company and its affiliates (NEG Holding LLC and NEG
Operating LLC) in an amount up to $15 million, alleging fraud and breach of
contract related to the sale of such oil and gas properties. The Purchase and
Sale Agreement transferring the properties from the Company to Osprey provides
for dispute resolution through binding arbitration utilizing arbitrator(s)
experienced in oil and gas transactions. The exclusive venue for any such
arbitration is in Dallas, Texas, and the binding, nonappealable judgment by the
arbitrator(s) may be entered in any court having competent jurisdiction.
The Company will vigorously defend against the Osprey counterclaim, which
the Company believes to be without merit. It is the Company's belief that the
ultimate resolution of the arbitration will not have a material adverse effect
on the Company's financial condition or results of operations.
9. SUBSEQUENT EVENTS
On September 9, 2003, in conjunction with approval of the Charter Amendment
by the shareholders of the Company and as permitted under the Company's Amended
and Restated Certificate of Incorporation, the Board of Directors approved a
request to transfer 49.9% of the outstanding common stock of the Company
currently held by certain affiliates of Carl C. Icahn to American Real Estate
Holdings L.P. ("AREH"), which is controlled by Mr. Icahn. On October 2, 2003,
the effective date of such transfer, AREH acquired 5,584,044 shares of common
stock of the Company and $148,637,000 in aggregate principal amount of
outstanding Senior Notes due 2006 of the Company, from entities affiliated with
Carl C. Icahn. As a result of the foregoing transaction and following the
acquisition by AREH of additional shares of common stock of the Company prior to
closing of such transaction, AREH beneficially owns in excess of 50% of the
issued and outstanding common stock of the Company.
12
ITEM 2. 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 February 11, 1999, the United States Bankruptcy Court for the Northern
District of Texas, Dallas Division ("Bankruptcy Court") entered an involuntary
petition placing the Company under protection of the Bankruptcy Court pursuant
to Title 11, Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy
Proceeding"). On July 24, 2000 the Bankruptcy Court entered a subsequent order
confirming a Plan of Reorganization (the "Plan of Reorganization") jointly
proposed by the Company and the official committee of unsecured creditors, which
Plan of Reorganization became effective on August 4, 2000. The Bankruptcy Court
issued a Final Decree closing the case effective December 13, 2001. Accordingly,
the Company has effectively settled all matters relating to the Bankruptcy
Proceeding.
As mandated by the Plan of Reorganization and the Bankruptcy Court, NEG
Holding LLC ("Holding LLC"), a Delaware limited liability company, was formed in
August 2000. In exchange for an initial 50% membership interest in Holding LLC,
on September 12, 2001, but effective as of May 1, 2001, the Company contributed
to Holding LLC all of its operating assets and oil and natural gas properties
excluding cash of $4.3 million (the "LLC Contribution"). In exchange for its
initial 50% membership interest in Holding LLC, Gascon Partners, ("Gascon"), an
entity owned or controlled by Carl C. Ichan, contributed (i) its sole membership
interest in Shana National LLC, an oil and natural gas producing company, (ii)
cash of $75.2 million, and (iii) a $10.9 million revolving note, evidencing the
borrowings under the Company's revolving credit facility issued to Arnos Corp.
("Arnos"). In connection with the foregoing, Holding LLC initially owns 100% of
the membership interest in NEG Operating LLC ("Operating LLC"), a Delaware
limited liability company. Holding LLC is governed by an operating agreement,
effective as of May 1, 2001, which provides for the management and control of
Holding LLC by Gascon (the "Holding LLC Operating Agreement"). All of the oil
and natural gas assets contributed by the Company and all of the oil and natural
gas assets associated with Gascon's contribution to Holding LLC were transferred
from Holding LLC to Operating LLC on September 12, 2001, effective as of May 1,
2001. Carl C. Icahn, through his majority ownership of American Real Estate
Holding, L.P. ("AREH") beneficially owns in excess of 50% of the issued and
outstanding common stock of the Company.
Pursuant to the Holding LLC Operating Agreement, the Company is to receive
guaranteed payments, in addition to a priority distribution amount of $202.2
million before Gascon receives any monies. It is anticipated that the priority
distribution amount of $202.2 million will be used by the Company to pay off the
Company's indebtedness (currently held by entities owned or controlled by Carl
C. Icahn). The priority distribution is to be made on or before November 1,
2006. Guaranteed payments are to be paid on a semi annual basis, based on 10.75%
of the outstanding priority distribution amount. The guaranteed payments are
expected to be sufficient to make the interest payments on the Senior Notes
until their due date of 2006. After the payments to the Company, Gascon is to
receive distributions equivalent to the priority distribution amount and
guaranteed payments plus other amounts as defined in the NEG Holding LLC
Operating Agreement referred herein. Following the above distributions to the
Company and Gascon, additional distributions, if any, are to be made in
accordance with their respective capital accounts. Because of the substantial
uncertainty that the Company will receive any distributions above the priority
and guaranteed payment amounts, the Company accounts for its investment in
Holding LLC as a preferred investment whereby guaranteed payment amounts
received and receipts of the priority distribution amount are recorded as
reductions in the investment and income is recognized from accretion of the
investment up to the priority distribution amount, including the guaranteed
payments (based on the interest method), and the Company's remaining investment
in Holding LLC will be valued at zero. Cash receipts, if any, after the priority
distribution and guaranteed payments will be reported in income as earned. In
March 2003, Holding LLC made a priority distribution of $51.4 million to the
Company, consisting of $40.5 million in cash and the $10.9 million note
outstanding under
13
the credit facility. The Company utilized these funds to repay the long-term
interest payable on the Senior Notes.
The Holding LLC Operating Agreement contains a provision that allows
Gascon, or its successor, at any time, in its sole discretion, to redeem the
Company's membership interest in Holding LLC at a price equal to the fair market
value of such interest determined as if Holding LLC had sold all of its assets
for fair market value and liquidated. A determination of the fair market value
of such assets shall be made by an independent third party jointly engaged by
Gascon and the Company. Since all of the Company's operating assets and oil and
natural gas properties would have been contributed to Holding LLC, following
such a redemption, the Company's principal assets would consist solely of its
cash balances. In the event that such redemption right is exercised by Gascon,
the Company may be obligated to use the proceeds that it would receive for its
redeemed membership interest to pay outstanding indebtedness and operating
expenses before the distribution of any portion of such proceeds to the
Company's stockholders. Following the payment of the Company's indebtedness
(currently held by entities owned or controlled by Carl C. Icahn) and its
operating expenses, there is a substantial risk that there will be no proceeds
remaining for distribution to the Company's stockholders. It is the present
intention of Holding LLC to continue to conduct oil and natural gas drilling and
development activities in the ordinary course of business and to seek additional
reserves.
The management and operation of Operating LLC is being undertaken by the
Company pursuant to a Management Agreement (the "Management Agreement") which
the Company has entered into with Operating LLC. However, neither the Company's
officers nor directors will control the strategic direction of Operating LLC's
oil and natural gas business, including oil and natural gas drilling and capital
investments, which shall be controlled by the managing member of Holding LLC
(currently Gascon). The Management Agreement provides that the Company will
manage Operating LLC's oil and natural gas assets and business until the earlier
of November 1, 2006, or such time as Operating LLC no longer owns any of the
managed oil and natural gas properties. The Company's employees will conduct the
day-to-day operations of Operating LLC's oil and natural gas properties, and all
costs and expenses incurred in the operation of the oil and natural gas
properties shall be borne by Operating LLC. The Management Agreement provides
that the salary of the Company's Chief Executive Officer shall be 70%
attributable to the managed oil and natural gas properties, and the salaries of
each of the General Counsel and Chief Financial Officer shall be 20%
attributable to the managed oil and natural gas properties. In exchange for the
Company's management services, Operating LLC shall pay the Company a management
fee equal to 115% of the actual direct and indirect administrative and
reasonable overhead costs incurred by the Company in operating the oil and
natural gas properties, which either the Company or Operating LLC may seek to
change within the range of 110%-115% as such change is warranted; however, the
parties have agreed to consult with each other to ensure that such
administrative and reasonable overhead costs attributable to the managed
properties are properly reflected in the management fee paid to the Company. In
addition, Operating LLC has agreed to indemnify the Company to the extent it
incurs any liabilities in connection with its operation of the assets and
properties of Operating LLC, except to the extent of its gross negligence, or
misconduct. The Company recorded $1.8 million and $5.7 as a management fee for
the three and nine month periods ended September 30, 2003.
On August 28, 2003, the Company entered into an agreement (the "TTG
Management Agreement") to manage TransTexas Gas Corporation ("TTG"). The TTG
Management Agreement was entered into in connection with a plan of
reorganization for TTG proposed by Thornwood Associates LP, an entity affiliated
with Carl C. Icahn, the Company's largest stockholder. The United States
Bankruptcy Court, Southern District of Texas issued an order confirming the TTG
Plan of Reorganization, effective August 29, 2003 (the "TTG Plan"). TTG is
engaged in the exploration, production and transmission of natural gas and oil
primarily in South Texas, including the Eagle Bay field in Galveston Bay, Texas
and the Southwest Bonus field located in Wharton County, Texas. Bob G. Alexander
and Philip D. Devlin, President and CEO, and Vice President, Secretary and
General Counsel of the Company, respectively, have been appointed to the TTG
Board of Directors and shall act as the two principal officers of TTG and its
subsidiaries, Galveston Bay Pipeline Corporation and Galveston Bay Processing
Corporation.
The TTG Management Agreement provides that the Company shall be responsible
for and have authority with respect to all of the day-to-day management of TTG's
business but shall not function as a
14
Disbursing Agent as such term is defined in the TTG Plan. As consideration for
the Company's services in managing the TTG business, the Company shall receive a
monthly fee of $312,500. The TTG Management Agreement is terminable (i) upon 30
days prior written notice by TTG, (ii) upon 90 days prior written notice by the
Company, (iii) upon 30 days following any day where High River Limited
Partnership (also affiliated with Carl C. Icahn) designees no longer constitute
the TTG Board of Directors, unless otherwise waived by the newly-constituted
Board of Directors of TTG, or (iv) as otherwise determined by the Bankruptcy
Court.
As a result of the foregoing transactions and as mandated by the Plan of
Reorganization effective September 12, 2001, the Company's principal assets were
its remaining cash balances, accounts receivable from affiliates, deferred tax
asset and its initial 50% membership interest in Holding LLC, and its principal
liabilities were the $10.9 million outstanding under its existing $100 million
revolving credit facility with Arnos and its 10 3/4% Senior Notes and long-term
interest payable on Senior Notes. None of the Company's employees were
transferred to Holding LLC or Operating LLC.
On March 26, 2003, Holding LLC distributed the $10.9 million note
outstanding under the Company's revolving credit facility, as a priority
distribution to the Company thereby canceling the note. Also, on March 26, 2003
the Company, Arnos and Operating LLC entered into an agreement to assign the
credit facility to Operating LLC. (See Note 4).
As a result of the terms and conditions of the various agreements related
to the repayment of the Company's indebtedness and repayment of the priority
distribution amounts and the guaranteed payments (plus accrued interest thereon)
to Gascon, there is a substantial risk that there will be no amounts remaining
for distribution to the Company's stockholders.
Although the Company is highly leveraged following confirmation of the Plan
of Reorganization, the Company expects that cash flows from guaranteed payments,
priority distributions and management fees will be sufficient to fund its
operations and debt service. However, no assurances can be given that Holding
LLC will generate sufficient cash flows to make these payments and in that
event, the Company would not be able to meet its obligations.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002, COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 2003
Revenues. Total revenues decreased $1.2 million (11.8%) from $10.2 million
for the three months ended September 30, 2002 to $9.0 million for the same
period in 2003. Total revenues decreased due to the decrease in accretion of
investment in Holding LLC as a result of the priority distributions received
from Holding LLC in March 2003.
General and administrative costs remained constant at $1.6 million for both
the third quarter of 2002 and 2003.
Other Income and Expenses. Interest expense decreased $1.2 million from
$4.7 million for the three months ended September 30, 2002 to $3.5 million for
the same period in 2003. This decrease was due primarily to the repayment of the
long-term interest payable on March 27, 2003 and the canceling of the note
outstanding under the Company's revolving credit facility. The weighted average
interest rate for the three months ended September 30, 2002 was 9.44% compared
to 10.6% for the same period in 2003.
Income Taxes. As of December 31, 2002, the Company estimates it has net
operating loss carryforwards available for federal income tax purposes of
approximately $101.3 million which begin expiring in 2003. The Company recorded
a deferred tax asset of $25.5 million and $21.4 million as of December 31, 2002
and September 30, 2003, respectively, based upon the projected allocations of
taxable income by Holding LLC. Ultimate realization of the deferred tax asset is
dependent upon, among other factors, the Company's ability to generate
sufficient taxable income within the carryforward periods and is subject to
change depending on the tax laws in effect in the years in which the
carryforwards are used. As a result of the recognition of expected future income
tax benefits, subsequent periods will reflect a full effective tax rate
15
provision. The Company recorded deferred income tax expense of $1.4 million for
the three months ended September 30, 2003.
NINE MONTHS ENDED SEPTEMBER 30, 2002, COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 2003
Revenues. Total revenues decreased $1.7 million (5.6%) from $30.1 million
for the nine months ended September 30, 2002 to $28.4 million for the same
period in 2003. Total revenues decreased due to the decrease in accretion of
investment in Holding LLC.
General and administrative costs decreased $.1 million (1.9%) from $5.3
million for the nine months ended September 30, 2002 to $5.2 million for the
same period in 2003.
Other Income and Expenses. The $2.6 million decrease in interest expense
from $14.2 million for the nine months ended September 30, 2002 to $11.6 million
for the same period in 2003 was due primarily to the repayment of the long-term
interest payable on March 27, 2003 and the canceling of the note outstanding
under the Company's revolving credit facility. The weighted average interest
rate for the nine months ended September 30, 2002 was 9.45% compared to 10.6%
for the same period in 2003.
Income Taxes. As of December 31, 2002, the Company estimates it has net
operating loss carryforwards available for federal income tax purposes of
approximately $101.3 million which begin expiring in 2003. The Company recorded
a deferred tax asset of $25.5 million and $21.4 million as of December 31, 2002
and September 30, 2003, respectively, based upon the projected allocations of
taxable income by Holding LLC. Ultimate realization of the deferred tax asset is
dependent upon, among other factors, the Company's ability to generate
sufficient taxable income within the carryforward periods and is subject to
change depending on the tax laws in effect in the years in which the
carryforwards are used. As a result of the recognition of expected future income
tax benefits, subsequent periods will reflect a full effective tax rate
provision. The Company recorded deferred income tax expense of $4.0 million for
the nine months ended September 30, 2003.
LIQUIDITY AND CAPITAL RESOURCES
NINE MONTHS ENDED SEPTEMBER 30, 2002, COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 2003
Net cash used in operating activities was $10.2 million for 2002, compared
to $7.4 million for 2003. The decrease in cash flows used in operating
activities is primarily due to the reduced interest expense as a result of the
repayment of the long-term interest payable. The guaranteed payments are
expected to be sufficient to make the interest payments on the Senior Notes
until their due date of 2006.
Net cash provided by investing activities was $50.7 million for 2003 and
consisted of the $40.5 million priority distribution and the $10.2 million
guaranteed payment received from Holding LLC. Net cash provided by investing
activities in 2002 consisted of the $10.8 million guaranteed payment received
from Holding LLC.
Net cash used in financing activities was $42.8 million in 2003 and
consisted of repayment of a portion of the interest payable on the Senior Notes.
There were no financing activities in 2002.
FUTURE CAPITAL AND FINANCING REQUIREMENTS
Although the Company is highly leveraged following confirmation of the Plan
of Reorganization, the Company expects that cash flows from guaranteed payments,
priority distributions and management fees will be sufficient to fund its
operations and debt service. However, no assurances can be given that Holding
LLC will generate sufficient cash flows to make these payments and in that
event, the Company would not be able to meet its obligations.
Upon confirmation of the Plan of Reorganization, the Senior Notes are held
in their entirety by Arnos and its affiliates. 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
16
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.
The Indenture contains certain covenants limiting the Company with respect
to the following: (i) asset sales; (ii) restricted payments; (iii) the
incurrence of additional indebtedness and the issuance of certain redeemable
preferred stock; (iv) liens; (v) sale and leaseback transactions; (vi) lines of
business; (vii) dividend and other payment restrictions affecting subsidiaries;
(viii) mergers and consolidations; and (ix) transactions with affiliates.
The following table is a summary of contractual obligations as of September
30, 2003.
4TH QUARTER
2003 2004 2005 2006
----------- ----------- ----------- ------------
Senior Notes..................... $ -- $ -- $ -- $148,637,000
Interest payments................ 7,989,238 15,978,478 15,978,478 14,646,938
Rent............................. 149,032 596,128 596,128 596,128
---------- ----------- ----------- ------------
Total.......................... $8,138,270 $16,574,606 $16,574,606 $163,880,066
========== =========== =========== ============
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51". This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. The implementation date of this Interpretation
was recently delayed until December 31, 2003 for variable interest entities
existing prior to January 31, 2003. The Interpretation requires certain
disclosures in financial statements issued after January 31, 2003 if it is
reasonably possible that the Company will consolidate or disclose information
about variable interest entities when the Interpretation becomes effective. The
Company is currently evaluating the impact of the adoption of Interpretation No.
46, with respect to Holding LLC.
INFLATION
Although certain of the Company's costs and expenses are affected by the
level of inflation, inflation did not have a significant effect on the Company's
results of operations during the nine months ended September 30, 2002 and 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In the past, the Company utilized various derivative instruments,
principally to control risk related to future oil and natural gas prices. While
the use of derivative contracts can limit the downside risk of adverse price
movements, it may also limit future gains from favorable movements. The Company
addressed market risk by selecting instruments whose value fluctuations
correlated strongly with the underlying commodity. Credit risk related to
derivative activities was managed by requiring minimum credit standards for
counterparties, periodic settlements, and market to market valuations.
ITEM 4. CONTROLS AND PROCEDURES
In accordance with Exchange Act Rules 13a-15 and 15d-15, the Company
carried out an evaluation under the supervision and with the participation of
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of our disclosure controls and procedures as of the end of
the period covered by this report. Based on that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of the end of the period covered by this report to
provide reasonable assurance that information required to be disclosed in our
reports
17
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms.
There has been no change in the Company's internal controls over financial
reporting that occurred during the three months ended September 30, 2003 that
has materially affected, or is reasonably likely to materially affect, our
internal controls over financial reporting.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 7, 2003, the Company filed a request with the American Arbitration
Association for dispute resolution of a claim in the amount of $21,000 against
Osprey Petroleum Company, Inc. ("Osprey") arising out of Osprey's failure to
post bond for certain plugging and abandonment liabilities associated with oil
and gas properties sold by the Company to Osprey in September 2000. Osprey has
counterclaimed against the Company and its affiliates (NEG Holding LLC and NEG
Operating LLC) in an amount up to $15 million, alleging fraud and breach of
contract related to the sale of such oil and gas properties. The Purchase and
Sale Agreement transferring the properties from the Company to Osprey provides
for dispute resolution through binding arbitration utilizing arbitrator(s)
experienced in oil and gas transactions. The exclusive venue for any such
arbitration is in Dallas, Texas, and the binding, nonappealable judgment by the
arbitrator(s) may be entered in any court having competent jurisdiction.
The Company will vigorously defend against the Osprey counterclaim, which
the Company believes to be without merit. It is the Company's belief that the
ultimate resolution of the arbitration will not have a material adverse effect
on the Company's financial condition or results of operations.
With respect to certain claims of the Company against Enron North America
Corp. relating to the oil and natural gas properties contributed to Holding LLC,
a representative of the Company has been appointed to the official committee of
unsecured creditors in the Enron bankruptcy proceeding, and the Company has
filed a claim for damages in that bankruptcy proceeding. This claim represents a
hedge against future oil and natural gas prices and does not reflect a cash gain
or loss. Any recoveries from Enron North America Corp. will become the property
of Operating LLC as a result of the LLC Contribution.
Other than routine litigation incidental to its business operations which
are not deemed by the Company to be material, there are no additional legal
proceedings in which the Company nor Operating LLC, is a defendant.
The Company's Plan of Reorganization became effective August 4, 2000 and
the Bankruptcy Court issued a final decree effective December 13, 2001 closing
the case.
18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 9, 2003, an annual meeting of the shareholders of the Company
was held.
At the meeting three proposals were voted upon and the following sets forth
the number of votes that were cast for and against the proposals and the number
of abstentions and broker no votes on the proposals:
(i) Proposal to elect five nominees as directors of the Company to
serve until the next annual meeting of shareholders:
BOB G. ROBERT H. MARTIN L. ROBERT J. JACK G.
ALEXANDER KITE HIRSCH MITCHELL WASSERMAN
--------- --------- --------- --------- ---------
For........................... 5,858,751 5,858,384 5,858,652 5,858,697 5,858,690
Against....................... -- -- -- -- --
Abstain....................... 1,501 1,868 1,600 1,555 1,562
--------- --------- --------- --------- ---------
5,860,252 5,860,252 5,860,252 5,860,252 5,860,252
========= ========= ========= ========= =========
(ii) Proposal to amend the Company's certificate of incorporation
enabling the Company's board of directors to approve the transfer of
certain equity interests which may be otherwise restricted.
For......................................................... 5,849,061
Against..................................................... 2,842
Abstain..................................................... 8,349
Broker no votes............................................. --
---------
5,860,252
=========
(iii) Proposal to ratify the selection of KPMG LLP as the Company's
independent auditors for the current fiscal year ended December 31, 2003.
For......................................................... 5,856,015
Against..................................................... 311
Abstain..................................................... 3,926
Broker no votes --
---------
5,860,252
=========
ITEM 5. OTHER INFORMATION
On September 9, 2003, in conjunction with approval of the Charter Amendment
by the shareholders of the Company and as permitted under the Company's Amended
and Restated Certificate of Incorporation, the Board of Directors approved a
request to transfer 49.9% of the outstanding common stock of the Company
currently held by certain affiliates of Carl C. Icahn to American Real Estate
Holdings L.P. ("AREH"), which is controlled by Mr. Icahn. On October 2, 2003,
the effective date of such transfer, AREH acquired 5,584,044 shares of common
stock of the Company and $148,637,000 in aggregate principal amount of
outstanding Senior Notes due 2006 of the Company, from entities affiliated with
Carl C. Icahn. As a result of the foregoing transaction and following the
acquisition by AREH of additional shares of common stock of the Company prior to
closing of such transaction, AREH beneficially owns in excess of 50% of the
issued and outstanding common stock of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The list of exhibits required by Item 601 of Regulation S-K and filed
as part of this report is set forth in the Index to Exhibits.
19
(b) Reports on Form 8-K
The Company filed an 8-K on September 10, 2003 to disclose execution of an
agreement to manage TransTexas Gas Corporation effective August 28, 2003.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NATIONAL ENERGY GROUP, INC
By: /s/ BOB G. ALEXANDER
--------------------------------------
Bob G. Alexander
President and Chief Executive Officer
November 14, 2003
By: /s/ RANDALL D. COOLEY
--------------------------------------
Randall D. Cooley
Vice President and Chief Financial
Officer
November 14, 2003
21
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 -- Joint Plan of Reorganization Under Chapter 11 of the
Bankruptcy Code for National Energy Group, Inc. and Boomer
Marketing Corporation dated May 12, 2000(1)
2.3 -- Order of Bankruptcy Court Confirming Joint Plan of
Reorganization and Fixing Deadlines for Filing
Administrative Claims, Fee Claims and Rejections Claims(2)
3.1 -- Restated Certificate of Incorporation filed with the
Secretary of State of Delaware on October 16, 2000(3)
3.2 -- By-laws of the Company(4)
3.3 -- Amendment to Restated Certificate of Incorporation filed
with the Secretary of State of Delaware on November 10,
2003(17)
4.1 -- Indenture dated as of November 1, 1996, among the Company,
National Energy Group of Oklahoma, Inc., formerly NEG-OK,
and Bank One, Columbus, N.A.(5)
4.2 -- Indenture dated August 21, 1997, among the Company and Bank
One, N.A.(6)
4.3 -- Instrument of Resignation, Appointment and Acceptance, dated
October 23, 1998, between the Company, Bank One, Texas, N.A.
and Norwest Bank Minnesota, N.A.(7)
10.5 -- 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")(8)
10.6 -- $50,000,000 Revolving Note dated August 29, 1996 payable to
Bank One(8)
10.7 -- $50,000,000 Revolving Note dated August 29, 1996 payable to
Credit Lyonnais(8)
10.8 -- Assignment of $50,000,000 Revolving Note to Arnos Corp. from
Bank One, Texas, N.A.(9)
10.9 -- Assignment of $50,000,000 Revolving Note to Arnos Corp. from
Credit Lyonnais New York Branch(9)
10.10 -- Unlimited Guaranty of NEG-OK dated August 29, 1996 for the
benefit of Bank One(8)
10.11 -- Unlimited Guaranty of NEG-OK, dated August 29, 1996 for the
benefit of Credit Lyonnais(8)
10.12 -- Unlimited Guaranty of Boomer dated August 29, 1996 for the
benefit of Bank One(8)
10.13 -- Unlimited Guaranty of Boomer dated August 29, 1996 for the
benefit of Credit Lyonnais(8)
10.14 -- First Amendment to Restated Loan Agreement dated October 31,
1996 among Bank One and Credit Lyonnais and the Company,
Guarantor and Boomer(10)
10.15 -- Second Amendment to Restated Loan Agreement dated October
31, 1996, among Bank One and Credit Lyonnais and the
Company, Guarantor and Boomer(11)
10.16 -- Third Amendment to Restated Loan Agreement dated October 31,
1996, among Bank One and Credit Lyonnais and the Company,
Guarantor and Boomer(11)
10.17 -- Fourth Amendment to Restated Loan Agreement dated October
31, 1996, among Bank One and Credit Lyonnais and the
Company, Guarantor and Boomer(11)
10.18 -- Multi-State Assignment Agreement dated December 22, 1998
between Bank One, Texas, N.A., Credit Lyonnais New York
Branch and Arnos Corp.(12)
10.19 -- 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.(9)
10.20 -- 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.(9)
10.21 -- Oklahoma Assignment Agreement, dated December 22, 1998,
between Bank One, Texas, N.A., Credit Lyonnais New York
Branch and Arnos Corp.(9)
10.29 -- Fifth Amendment to Restated Loan Agreement dated August 1,
2001, among the Company and Arnos Corp.(13)
10.30 -- Debt Purchase Agreement dated August 1, 2001 between the
Company and High River Limited Partnership.(13)
22
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.31 -- Debt Purchase Agreement dated August 1, 2001 between the
Company and High Coast Limited Partnership.(13)
10.32 -- NEG Holding LLC Operating Agreement dated May 1, 2001
between the Company and Gascon Partners.(14)
10.33 -- NEG Operating LLC Operating Agreement dated May 1, 2001
executed by NEG Holding LLC.(14)
10.34 -- Shana National LLC Amended and Restated Operating Agreement
dated September 12, 2001 executed by NEG Operating LLC.(14)
10.35 -- Management Agreement dated September 12, 2001 between the
Company and NEG Operating LLC.(14)
10.36 -- Master Conveyance dated September 12, 2001 executed by the
Company in favor of NEG Holding LLC.(14)
10.37 -- Master Conveyance dated September 12, 2001 executed by
Gascon Partners in favor of NEG Holding LLC.(14)
10.38 -- Master Conveyance dated September 12, 2001 executed by NEG
Holding LLC in favor of NEG Operating LLC.(14)
10.39 -- Master Conveyance dated September 12, 2001 executed by Shana
Petroleum Company in favor of Gascon Partners.(14)
10.40 -- Master Conveyance dated September 12, 2001 executed by Shana
Petroleum Company in favor of Shana National LLC.(14)
10.41 -- Final Decree of Bankruptcy Court(15)
10.42 -- Sixth Amendment to Restated Loan Agreement dated December
15, 2001, among the Company and Arnos Corp.(16)
10.43 -- Assignment of Restated Loan Agreement dated March 26, 2003,
among Arnos Corp., the Company and NEG Operating LLC.(16)
10.44 -- Seventh Amendment to Restated Loan Agreement dated March 26,
2003, among Arnos Corp. and NEG Operating LLC.(16)
10.45 -- Management Agreement with TransTexas Gas Corporation dated
August 28, 2003(17)
31.1 -- Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.(17)
31.2 -- Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.(17)
32.1 -- Certification of Chief Executive Officer pursuant to Section
906 of Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
1350(17). Pursuant to SEC Release 34-47551 this Exhibit is
furnished to the SEC and shall not be deemed to be "filed".
32.2 -- Certification of Chief Financial Officer pursuant to Section
906 of Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
1350(17). Pursuant to SEC Release 34-47551 this Exhibit is
furnished to the SEC and shall not be deemed to be "filed".
- ---------------
(1) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2000.
(2) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2000.
(3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2000.
(4) Incorporated by reference to the Company's Registration Statement on Form
S-4 (No. 33-38331), dated April 23, 1991.
23
(5) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996.
(6) Incorporated by reference to the Company's Form S-4 (No. 333-38075), filed
October 16, 1997.
(7) Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1998.
(8) Incorporated by reference to the Company's Current Report on Form 8-K,
dated August 29, 1996.
(9) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
(10) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1995.
(11) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997.
(12) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
(13) Incorporated by reference to the Company's Report on Form 10-Q for the
quarter ended June 30, 2001.
(14) Incorporated by reference to the Company's Report on Form 10-Q for the
quarter ended September 30, 2001.
(15) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 2001.
(16) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 2002.
(17) Filed herewith.
24