<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
[ ] 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)
<TABLE>
<S> <C>
DELAWARE 58-1922764
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
</TABLE>
1400 ONE ENERGY SQUARE
4925 GREENVILLE AVENUE
DALLAS, TEXAS 75206
(Address of principal executive offices)
(214) 692-9211
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
40,527,482 shares of the registrant's Common Stock, $0.01 par value, were
outstanding on August 10, 2000.
--------------------------------------------------------------------------------
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<PAGE> 2
NATIONAL ENERGY GROUP, INC.
DEBTOR-IN-POSSESSION
INDEX
<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at December 31, 1999 and June
30, 2000 (Unaudited)...................................... 1
Consolidated Statements of Operations for the three and six
months ended June 30, 1999 and 2000 (Unaudited)........... 2
Consolidated Statements of Cash Flows for the six months
ended June 30, 1999 and 2000 (Unaudited).................. 3
Consolidated Statement of Stockholders' Equity (Deficit) for
the six months ended June 30, 2000 (Unaudited)............ 4
Notes to Consolidated Financial Statements (Unaudited)...... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 7
Item 3. Quantitative and Qualitative Disclosure about Market Risk... 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 12
Item 2. Changes in Securities and Use of Proceeds................... 12
Item 3. Defaults Upon Senior Securities............................. 12
Item 5. Other Information........................................... 12
Item 6. Exhibits and Reports on Form 8-K............................ 12
</TABLE>
i
<PAGE> 3
PART I
FINANCIAL STATEMENTS
NATIONAL ENERGY GROUP, INC.
DEBTOR-IN-POSSESSION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------- -------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 29,216,751 $ 43,510,037
Marketable securities..................................... 342,937 --
Accounts receivable -- oil and natural gas sales.......... 5,057,904 6,430,925
Accounts receivable -- joint interest and other........... 490,339 751,878
Other..................................................... 1,411,783 944,686
------------- -------------
Total current assets............................... 36,519,714 51,637,526
Oil and natural gas properties, at cost (full cost method):
Subject to ceiling limitation............................. 327,330,494 328,190,239
Accumulated depreciation, depletion, and amortization..... (266,282,860) (271,729,409)
------------- -------------
Net oil and natural gas properties........................ 61,047,634 56,460,830
Other property and equipment................................ 2,495,606 2,649,581
Accumulated depreciation.................................... (1,361,349) (1,603,770)
------------- -------------
Net other property and equipment................... 1,134,257 1,045,811
Other assets and deferred charges, net...................... 1,656,521 1,746,811
------------- -------------
Total assets....................................... $ 100,358,126 $ 110,890,978
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities not subject to compromise:
Accounts payable -- trade................................. $ 4,437,802 $ 4,703,330
Accounts payable -- revenue............................... 2,545,610 2,767,401
Credit facility........................................... 25,000,000 25,000,000
------------- -------------
Total liabilities not subject to compromise........ 31,983,412 32,470,731
Liabilities subject to compromise:
Accounts payable -- trade................................. 2,154,158 2,374,371
Accounts payable -- revenue............................... 2,879,469 2,660,371
Senior Notes.............................................. 165,000,000 165,000,000
Accrued interest on Senior Notes.......................... 10,537,601 10,537,601
Gas balancing and prepayments............................. 2,685,645 2,678,931
Other..................................................... 23,341 17,514
------------- -------------
Total liabilities subject to compromise............ 183,280,214 183,268,788
Commitments and contingencies
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................................. 405,275 405,275
Additional paid-in capital................................ 113,089,872 113,089,872
Unrealized loss on marketable securities, net............. (172,407) --
Accumulated deficit....................................... (228,399,427) (218,514,875)
------------- -------------
Total stockholders' deficit........................ (114,905,500) (104,848,541)
------------- -------------
Total liabilities and stockholders' equity
(deficit)........................................ $ 100,358,126 $ 110,890,978
============= =============
</TABLE>
See accompanying notes.
1
<PAGE> 4
NATIONAL ENERGY GROUP, INC.
DEBTOR-IN-POSSESSION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -------------------------
1999 2000 1999 2000
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Oil and natural gas sales............... $9,346,058 $12,326,447 $16,590,066 $23,047,698
Cost and expenses:
Lease operating......................... 1,424,317 1,343,008 2,896,576 2,756,446
Oil and natural gas production taxes.... 412,236 862,592 897,005 1,510,112
Depreciation, depletion, and
amortization......................... 4,325,667 2,869,778 8,754,622 5,779,769
General and administrative.............. 1,082,324 1,145,063 2,123,060 2,245,722
---------- ----------- ----------- -----------
Total costs and expenses........ 7,244,544 6,220,441 14,671,263 12,292,049
---------- ----------- ----------- -----------
Operating income.......................... 2,101,514 6,106,006 1,918,803 10,755,649
Other income (expense):
Interest expense........................ (467,152) (600,198) (923,080) (1,162,165)
---------- ----------- ----------- -----------
Income before reorganization items and
income taxes............................ 1,634,362 5,505,808 995,723 9,593,484
Reorganization items:
Professional fees and other............. (569,138) (440,031) (1,143,605) (575,345)
Interest earned on accumulating cash
resulting from Chapter 11
proceedings.......................... 201,016 446,579 258,050 866,413
---------- ----------- ----------- -----------
Income before income taxes................ 1,266,240 5,512,356 110,168 9,884,552
Provision for income taxes................ -- -- -- --
---------- ----------- ----------- -----------
Net income................................ 1,266,240 5,512,356 110,168 9,884,552
Preferred stock dividend requirements..... -- -- -- --
---------- ----------- ----------- -----------
Net income applicable to common
shareholders............................ $1,266,240 $ 5,512,356 $ 110,168 $ 9,884,552
========== =========== =========== ===========
Net income per common share, basic and
diluted................................. $ .03 $ .14 $ .00 $ .24
========== =========== =========== ===========
Weighted average number of common shares
outstanding............................. 40,527,482 40,527,482 40,527,482 40,527,482
========== =========== =========== ===========
</TABLE>
See accompanying notes.
2
<PAGE> 5
NATIONAL ENERGY GROUP, INC.
DEBTOR-IN-POSSESSION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1999 2000
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Income from operations...................................... $ 995,723 $ 9,593,485
Chapter 11 proceeding reorganization costs, net............. (885,555) 291,067
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, depletion, and amortization................. 8,754,622 5,779,769
Amortization of issuance premium.......................... (79,056) --
Amortization of deferred compensation..................... 22,490 24,370
Common stock, options, and warrants issued for services... 18,280 3,515
Other..................................................... (95,460) 72,658
Changes in operating assets and liabilities:
Accounts receivable.................................... 2,260,047 (1,634,560)
Other current assets................................... 671,272 442,726
Accounts payable and accrued liabilities............... 2,125,238 472,377
----------- -----------
Net cash provided by operating activities......... 13,787,601 15,045,407
----------- -----------
INVESTING ACTIVITIES
Oil and gas acquisition, exploration, and development
expenditures.............................................. (1,932,695) (1,479,647)
Proceeds from sales of oil and gas properties............... 339,089 619,904
Proceeds from sales of marketable securities................ -- 413,147
Purchases of other long-term assets......................... (445,066) (305,525)
Other....................................................... 3,810 --
----------- -----------
Net cash used in investing activities............. (2,034,862) (752,121)
----------- -----------
Increase in cash and cash equivalents....................... 11,752,739 14,293,286
Cash and cash equivalents and beginning of period........... 2,542,235 29,216,751
----------- -----------
Cash and cash equivalents at end of period.................. $14,294,974 $43,510,037
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid in cash....................................... $ -- $ 1,348,138
=========== ===========
</TABLE>
See accompanying notes.
3
<PAGE> 6
NATIONAL ENERGY GROUP, INC.
DEBTOR-IN-POSSESSION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
<TABLE>
<CAPTION>
CONVERTIBLE UNREALIZED
PREFERRED STOCK COMMON STOCK LOSS ON
------------------ --------------------- ADDITIONAL MARKETABLE ACCUMULATED
SHARES AMOUNT SHARES AMOUNT PAID-IN CAPITAL SECURITIES DEFICIT
------- -------- ---------- -------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1999....................... 171,187 $171,187 40,527,482 $405,275 $113,089,872 $(172,407) $(228,399,427)
Unrealized loss on
marketable securities.... -- -- -- -- -- 172,407 --
Net income................. -- -- -- -- -- -- 9,884,552
------- -------- ---------- -------- ------------ --------- -------------
Balance at June 30, 2000..... 171,187 $171,187 40,527,482 $405,275 $113,089,872 $ -- $(218,514,875)
======= ======== ========== ======== ============ ========= =============
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY (DEFICIT)
----------------
<S> <C>
Balance at December 31,
1999....................... $(114,905,500)
Unrealized loss on
marketable securities.... 172,407
Net income................. 9,884,552
-------------
Balance at June 30, 2000..... $(104,848,541)
=============
</TABLE>
See accompanying notes.
4
<PAGE> 7
NATIONAL ENERGY GROUP, INC.
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2000
1. CONFIRMATION OF JOINT PLAN OF REORGANIZATION
On February 11, 1999, the United States Bankruptcy Court for the Northern
District of Texas, Dallas Division ("Bankruptcy Court") entered an order placing
the Company under protection of the Bankruptcy Court pursuant to Title 11,
Chapter 11 of the United States Bankruptcy Code. On July 24, 2000 the Bankruptcy
Court entered a subsequent order confirming a Plan of Reorganization (the "Joint
Plan") jointly proposed by the Company and the official committee of unsecured
creditors (the "Committee"). The Joint Plan became effective on August 4, 2000
and the Company emerged from bankruptcy at that time. The confirmed Joint Plan
provides for (i) continuation of the Company's oil and gas operations, (ii)
satisfaction of all allowed secured claims, including the credit facility with
Arnos Corp., an affiliated subsidiary of the Company's Series D preferred
stockholder (See Note 3 of Consolidated Financial Statements), (iii) cash
payments to certain tort claimants who accepted the Joint Plan in an amount
equal to 2.0% of such allowed claims or, alternatively, if rejected, an amount
equal to 75% of the allowed claim as determined by the Bankruptcy Court, (iv)
payment to senior noteholders (excluding Arnos), utilizing cash deposited by
Arnos in the Bankruptcy Court's registry, in an amount equal to 56 1/2% of the
face value of each note, less a pro-rata share of $1.0 million to fund a
creditor's trust, plus a pro-rata share of any net recoveries from litigation
brought by the creditor's trust, (v) cash payment to trade creditors in an
amount equal to 75% of the allowed claim, plus a pro-rata share of any net
recoveries from litigation brought by the creditor's trust, (vi) conversion of
all existing preferred stock into common stock, (vii) retention of all existing
common stock subject to cancellation and reissuance at a ratio of one share in
the reorganized Company for every seven shares of existing common stock held,
(viii) cancellation of existing options, warrants or other equity interests in
the Company and (ix) amendment of the Senior Note Indenture.
The order confirming the Joint Plan also provides that (i) payment be made
within thirty days following the effective date to all creditors holding allowed
claims, (ii) confirmation of the Joint Plan shall be deemed an injunction
against all parties asserting claims against property of the Company, except as
provided for in the Joint Plan and (iii) administrative claims against the
Company, other than those provided for in the Joint Plan, must be filed within
the deadline set by the Bankruptcy Court. Also, in accordance with the Joint
Plan, the reorganized Company will contribute all or substantially all of its
operating properties to a limited liability company, not yet formed, in exchange
for a 50% interest in such limited liability company.
Due to the Chapter 11 filing and Bankruptcy Court restrictions, the Company
had suspended its exploratory and development drilling program and the Company
had 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. However, pursuant to a Bankruptcy
Court order dated May 2, 2000 authorizing the Company to operate its properties
in the ordinary course and confirmation of the Joint Plan, the Company has
resumed certain exploration, development and acquisition activities.
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. 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
5
<PAGE> 8
NATIONAL ENERGY GROUP, INC.
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
financial data should be read in conjunction with the consolidated financial
statements of the Company for the year ended December 31, 1999 (including the
notes thereto), set forth in the Company's Annual Report on Form 10-K.
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 had
raised 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 the Joint Plan which provides for continuation of
the Company's oil and gas operations, (ii) the current profitability of the
Company and (iii) the ability to generate sufficient cash from operations to
meet its obligations.
The accompanying financial statements as of and for the six months ended
June 30, 2000 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, 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.
Certain previously reported amounts have been reclassified to conform with
the current presentation. The results of operations for the six months ended
June 30, 2000, are not necessarily indicative of the results expected for the
full year.
The Company capitalizes internal general and administrative costs that can
be directly identified with acquisition, exploration, and development
activities. Such capitalized costs include salary 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. These costs totaled approximately $493,000 and $255,000,
respectively, for the six months ended June 30, 1999 and 2000. These costs
totaled approximately $212,000 and $125,000, respectively, for the three months
ended June 30, 1999 and 2000.
Overhead reimbursements received from joint interest partners which are
included as a reduction of general and administrative expense totaled
approximately $402,000 and $281,000, respectively, for the six months ended June
30, 1999 and 2000. These costs totaled $224,000 and $138,000, respectively, for
the three months ended June 30, 1999 and 2000.
3. CREDIT FACILITY
The Company has an outstanding secured credit facility with Arnos Corp., an
affiliated subsidiary of the Company's Series D preferred stock holder
("Arnos"), with a borrowing base of $25 million, currently maturing August 29,
2000. The Company had $25 million outstanding under the credit facility as of
December 31, 1999 and June 30, 2000. The Company is currently paying interest
under the credit facility at the base rate, as defined.
At December 31, 1999 and June 30, 2000, the Company was in violation of the
minimum interest coverage ratio and current ratio covenants under the Arnos
credit facility.
The credit facility currently has a maturity date of August 29, 2000.
However, the Joint Plan, as confirmed, provides for either cash payment of the
$25 million outstanding plus any accrued and unpaid interest or such other
treatment agreed between Arnos and the Company. The Company and Arnos have
agreed to negotiate continuation of the credit facility beyond the August 29,
2000 maturity date. Until such time, Arnos has agreed to keep the existing
credit facility in place.
6
<PAGE> 9
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 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.
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 had
raised 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 the Joint Plan which provides for continuation of
the Company's oil and gas operations, (ii) the current profitability of the
Company and (iii) the ability to generate sufficient cash from operations to
meet its obligations.
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.
CONFIRMATION OF JOINT PLAN OF REORGANIZATION
Pursuant to an order dated February 11, 1999 the Company was placed under
the protection of the Bankruptcy Court pursuant to Title 11 Chapter 11 of the
United States Bankruptcy Code and was precluded from making any interest
payments on the senior notes until the conclusion of the bankruptcy proceeding.
On July 24, 2000, the Bankruptcy Court entered an order confirming the Joint
Plan which became effective on August 4, 2000. See Note 1 to Consolidated
Financial Statements for further discussion of the bankruptcy proceedings.
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 expenses related to the Company's oil and natural gas
production for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
1999 2000 1999 2000
------- -------- ------- -------
<S> <C> <C> <C> <C>
Net production:
Oil (Mbbls)........................................... 291 218 585 437
Natural gas (Mmcf).................................... 2,403 1,829 4,897 3,711
Natural gas equivalent (Mmcfe)........................ 4,149 3,135 8,409 6,333
Oil and natural gas sales (in thousands):
Oil................................................... $4,697 $ 6,085 $ 7,893 $11,931
Natural gas........................................... 4,649 6,241 8,697 11,117
------ ------- ------- -------
Total................................................. $9,346 $12,326 $16,590 $23,048
====== ======= ======= =======
</TABLE>
7
<PAGE> 10
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
1999 2000 1999 2000
------- -------- ------- -------
<S> <C> <C> <C> <C>
Average sales price:
Oil (per Bbl)......................................... $16.14 $ 27.91 $ 13.48 $ 27.30
Natural gas (per Mcf)................................. 1.93 3.41 1.78 3.00
Unit economics (per Mcfe):
Average sales price................................... $ 2.25 $ 3.93 $ 1.97 $ 3.64
Lease operating expenses.............................. .34 .43 .34 .44
Oil and natural gas production taxes.................. .10 .28 .11 .24
Depletion rate........................................ .96 .86 .96 .86
General and administrative............................ .26 .37 .25 .35
</TABLE>
Three Months Ended June 30, 1999, Compared with Three Months Ended June 30,
2000
Revenues. Total revenues increased $3.0 million (32.3%) from $9.3 million
for the second quarter of 1999 to $12.3 million for the second quarter of 2000.
The increase in revenues was due to the significant increase in oil and natural
gas prices during the second quarter of 2000 offset, in part, by the decrease in
production from the same period in 1999. Average oil prices increased $11.77 per
barrel from $16.14 per barrel for 1999 to $27.91 per barrel for 2000 while
average natural gas prices increased $1.48 per Mcf from $1.93 per Mcf for 1999
to $3.41 per Mcf for 2000.
The Company produced 291 Mbbls of oil during the second quarter of 1999 and
218 Mbbls of oil in the second quarter of 2000, a decrease of 25.1%. The Company
produced 2,403 Mmcf of natural gas during the second quarter of 1999 and 1,829
Mmcf of natural gas during the second quarter of 2000, a decrease of 23.9%. The
decline in production is primarily due to natural production declines combined
with the loss of production from properties sold at an oil and gas auction in
December 1999. During the bankruptcy proceeding, the Company's ability to offset
natural production declines through drilling and exploration has been limited
due to the Bankruptcy Court restrictions. The Company expects production to
continue to decline unless replaced through drilling, workovers, recompletions
and/or acquisitions. Pursuant to the May 2, 2000 Bankruptcy Court order
authorizing the Company to operate its properties in the ordinary course and
confirmation of the Joint Plan, the Company has resumed certain exploration,
development and acquisition activities.
Costs and Expenses. Lease operating expenses remained relatively constant
at $1.4 million for the three months ended June 30, 1999 compared to $1.3
million for the same period in 2000. Lease operating expenses per Mcfe increased
$.09 from $.34 for 1999 to $.43 in 2000 due to the decline in overall
production.
Oil and natural gas production taxes increased $.5 million (125.0%) from
$.4 million for the three months ended June 30, 1999 to $.9 million for the same
period in 2000. This increase is the direct result of the increased oil and gas
revenue.
Depreciation, depletion and amortization ("DD&A") decreased $1.3 million
(30.2%) from $4.3 million for the three months ended June 30, 1999 to $3.0
million for the same period in 2000. This decrease was due to the decrease in
the average DD&A rate per Mcfe which was $.96 for 1999 compared to $.86 for
2000. The decrease in the DD&A rate is due primarily to upward revisions in the
Company's estimated oil reserves arising from the significant increase in oil
prices during 1999 that were used in computing the Company's DD&A rate for 2000.
General and administrative costs remained constant at $1.1 million for the
three months ended June 30, 1999 compared to $1.1 million for the same period in
2000. 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, exploration and development activities.
These capitalized general and administrative costs totaled $.2 million and $.1
million for the three months ended June 30, 1999 and 2000, respectively.
Other Income and Expenses. The $.1 million increase in interest expense
from $.5 million for the three months ended June 30, 1999 to $.6 million for the
same period in 2000 was due to the increase of the interest rate on the
Company's secured credit facility. Approximately $4.4 million additional
interest expense would
8
<PAGE> 11
have been recognized by the Company for the three months ended June 30, 1999 and
2000 if not for the discontinuation of the interest accrual on the Company's
senior notes due to the bankruptcy proceeding. The weighted average interest
rate for the three months ended June 30, 1999 was 8.0% compared to 9.6% for the
same period in 2000.
Reorganization Items. The Company incurred $.6 million and $.4 million for
professional fees and other expenses associated with the bankruptcy proceeding
for the three months ended June 30, 1999 and 2000, respectively. The Company
earned $.2 million and $.4 million in interest income on cash accumulating
during the bankruptcy proceeding for the three months ended June 30, 1999 and
2000, respectively.
Net Income (Loss). Net income of $1.3 million was recognized for the three
months ended June 30, 1999, compared with net income of $5.5 million for the
comparable 2000 period. Net income for the second quarters of 1999 and 2000 (i)
excludes $4.4 million in additional interest expense on the Company's senior
notes, (ii) includes expenses of $.6 million and $.4 million, respectively,
relating to the bankruptcy proceeding and (iii) includes $.2 million and $.4
million in interest income on cash accumulating during the bankruptcy
proceeding. Excluding the effects of these amounts, a net loss of $2.7 million
would have been recognized for the three months ended June 30, 1999 compared to
net income of $1.1 million for the same period in 2000.
Six Months Ended June 30, 1999, Compared with Six Months Ended June 30,
2000
Revenues. Total revenues increased by $6.4 million (38.6%) from $16.6
million for the six months ended June 30, 1999 to $23.0 million for the same
period of 2000. The increase in revenues was due to the significant increase in
oil and natural gas prices during the first six months of 2000 offset, in part,
by the decrease in production from the same period in 1999. Average oil prices
increased $13.82 per barrel from $13.48 per barrel for 1999 to $27.30 per barrel
for 2000 while average natural gas prices increased $1.22 per Mcf from $1.78 per
Mcf for 1999 to $3.00 per Mcf for 2000.
The Company produced 585 Mbbls of oil during the six months ended June 30,
1999 and 437 Mbbls of oil during the same period of 2000, a decrease of 25.3%.
The Company produced 4,897 Mmcf of natural gas during the six months ended June
30, 1999 and 3,711 Mmcf of natural gas during the same period of 2000, a
decrease of 24.2%. The decline in production is primarily due to natural
production declines combined with the loss of production from properties sold at
an oil and gas auction in December 1999. During the bankruptcy proceeding, the
Company's ability to offset natural production declines through drilling and
exploration has been limited due to the Bankruptcy Court restrictions. The
Company expects production to continue to decline unless replaced through
drilling, workovers, recompletions and/or acquisitions. Pursuant to the May 2,
2000 Bankruptcy Court order authorizing the Company to operate its properties in
the ordinary course and confirmation of the Joint Plan, the Company has resumed
certain exploration, development and acquisition activities.
Costs and Expenses. Lease operating expenses remained relatively constant
at $2.9 million for the six months ended June 30, 1999 compared to $2.8 million
for the same period in 2000. Lease operating expenses per Mcfe increased $.10
from $.34 for 1999 to $.44 in 2000 due to the decline in overall production.
Oil and natural gas production taxes increased $.6 million (66.7%) from $.9
million for the six months ended June 30, 1999 to $1.5 million for the same
period in 2000. This increase is the direct result of the increased oil and gas
revenue.
Depreciation, depletion and amortization ("DD&A") decreased $3.0 million
(34.1%) from $8.8 million for the six months ended June 30, 1999 to $5.8 million
for the same period in 2000. This decrease was due to the decrease in the
average DD&A rate per Mcfe which was $.96 for 1999 compared to $.86 for 2000.
The decrease in the DD&A rate is due primarily to upward revisions in the
Company's estimated oil reserves arising from the significant increase in oil
prices during 1999 that were used in computing the Company's DD&A rate for 2000.
General and administrative costs remained constant at $2.1 million for the
six months ended June 30, 1999 compared to $2.2 million for the same period in
2000. As discussed in Note 2 to the Consolidated Financial Statements, the
Company capitalizes internal general and administrative costs that can be
directly
9
<PAGE> 12
identified with acquisition, exploration and development activities. These
capitalized general and administrative costs totaled $.5 million and $.3
million, respectively, for the six months ended June 30, 1999 and 2000.
Other Income and Expenses. The $.3 million increase (33.3%) in interest
expense from $.9 million for the six months ended June 30, 1999 to $1.2 million
for the same period in 2000 was due to the increase of the interest rate on the
Company's secured credit facility. Approximately $8.9 million additional
interest expense would have been recognized by the Company for the six months
ended June 30, 1999 and 2000 if not for the discontinuation of the interest
accrual on the Company's senior notes due to the bankruptcy proceeding. The
weighted average interest rate for the six months ended June 30, 1999 was 8.0%
compared to 9.3% for the same period in 2000.
Reorganization Items. The Company incurred $1.1 million and $.6 million for
the six months ended June 30, 1999 and 2000, respectively, for professional fees
and other expenses associated with the bankruptcy proceeding. The Company earned
$.3 million and $.9 million in interest income on cash accumulating during the
bankruptcy proceeding for the six months ended June 30, 1999 and 2000,
respectively.
Net Income (Loss). Net income of $.1 million was recognized for the six
months ended June 30, 1999, compared with net income of $9.9 million for the
comparable 2000 period. Net income for the six months ended June 30, 1999 and
2000 (i) excludes $8.9 million in additional interest expense on the Company's
senior notes, (ii) includes expenses of $1.1 million and $.6 million,
respectively, relating to the bankruptcy proceeding and (iii) includes $.3
million and $.9 million in interest income on cash accumulating during the
bankruptcy proceeding. Excluding the effects of these amounts, a net loss of
$8.0 million would have been recognized for the six months ended June 30, 1999
compared to net income of $.7 million for the same period in 2000.
LIQUIDITY AND CAPITAL RESOURCES
Six Months Ended June 30, 1999, Compared with Six Months Ended June 30,
2000
Net cash provided by operating activities was $13.9 million for 1999,
compared to net cash provided by operating activities of $15.0 million for 2000.
The increase in cash flows from operating activities is primarily due to
increased income from operations before non-cash charges, resulting from
increased oil and gas revenues from higher commodity prices.
Net cash used in investing activities was $2.0 million for 1999 compared
with $.8 million for 2000. The cash used by investing activities for 1999
included $1.9 million of expenditures related primarily to workovers,
recompletions and other ordinary course production enhancement activities
compared with $1.5 million for 2000.
The Company's ability to undertake drilling and exploration activities was
previously limited due to the bankruptcy proceeding. However, pursuant to the
May 2, 2000 Bankruptcy Court order authorizing the Company to operate its
properties in the ordinary course and confirmation of the Joint Plan, the
Company has resumed certain exploration, development and acquisition activities.
There was no cash provided by financing activities during either 1999 or
2000.
FUTURE CAPITAL AND FINANCING REQUIREMENTS
The Company's existing credit facility has a maturity date of August 29,
2000. The Joint Plan provides for the Company to either make a cash payment of
the $25 million outstanding plus any accrued and unpaid interest or enter into
another arrangement mutually acceptable to the Company and Arnos. The Company
and Arnos have agreed to negotiate continuation of the credit facility beyond
the August 29, 2000 maturity date. Until such time, Arnos has agreed to keep the
existing credit facility in place.
If the Company's existing credit facility remains outstanding 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. If the Company's credit facility is paid in its entirety, the
Company could require
10
<PAGE> 13
additional capital to fund any large acquisitions or expenditures and access to
these markets could be limited due to potential inability to access additional
capital markets.
Prior to confirmation of the Joint Plan, Bankruptcy Court approval would
have been required for the Company to seek additional capital from traditional
reserve base borrowings, equity, and debt offerings or joint ventures to further
develop and explore its properties and to acquire additional properties. There
is no assurance that the Company would be able to access additional capital or
that, if available, it will be at prices or on terms acceptable to the Company.
Should the Company be unable to access the capital markets or should
sufficient capital not be available, the development and exploration of the
Company's properties could be delayed or reduced and, accordingly, oil and
natural gas revenues and operating results may be adversely affected.
CHANGES IN PRICES
Oil and gas prices are subject to numerous factors that are beyond the
Company's ability to control or predict, 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.
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 six months ended June 30, 1999 and 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
None.
11
<PAGE> 14
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other than the Bankruptcy Court proceeding, the Company is not a defendant
in any additional material pending legal proceedings. On August 4, 2000, the
Company's Joint Plan became effective and the Company emerged from bankruptcy.
See Note 1 to the Consolidated Financial Statements.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Pursuant to the Company's Joint Plan, which became effective August 4,
2000, the Company's existing common stock, preferred stock and senior notes,
were modified in accordance with the treatment provided for therein. See Note 1
to the Consolidated Financial Statements.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
At June 30, 2000, the Company was in violation of the minimum interest
coverage ratio and current ratio covenants under the Arnos credit facility.
Pursuant to an order dated February 11, 1999 the Company was placed under
the protection of the Bankruptcy Court pursuant to Title 11 Chapter 11 of the
United States Bankruptcy Code and was precluded from making any interest
payments on the senior notes until the conclusion of the bankruptcy proceeding.
On July 24, 2000, the Bankruptcy Court entered an order confirming the Joint
Plan which became effective on August 4, 2000. See Note 1 to Consolidated
Financial Statements for further discussion of the bankruptcy proceedings.
ITEM 5. OTHER INFORMATION
The Company's common stock currently trades on the OTC Bulletin Board under
the symbol "NEGXQ".
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The list of exhibits required by Item 601 of Regulation S-K and filed as
part of this report is set forth in the Index to Exhibits.
(b) Reports on Form 8-K
None.
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<PAGE> 15
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
<TABLE>
<S> <C> <C>
By: /s/ BOB G. ALEXANDER August 11, 2000
-------------------------------------------------
Bob G. Alexander
President and Chief Executive Officer
By: /s/ MELISSA H. RUTLEDGE August 11, 2000
-------------------------------------------------
Melissa H. Rutledge
Vice President, Controller and
Chief Accounting Officer
</TABLE>
13
<PAGE> 16
NATIONAL ENERGY GROUP, INC.
DEBTOR-IN-POSSESSION
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 -- Joint Plan of Reorganization Under Chapter 11 of the
Bankruptcy Code for National Energy Group, Inc. and
Boomer Marketing Corporation dated May 12, 2000(12)
2.5 -- Debtors' and Official Committee of Unsecured Creditors'
Joint Disclosure Statement under Section 1125 of the
Bankruptcy Code Regarding Debtors' and Official Committee
of Unsecured Creditors' Joint Plan of Reorganization
Under Chapter 11 of the Bankruptcy Code, Dated May 12,
2000(12)
3.1 -- Certificate of Incorporation of the Company, which
includes the Certificate of Incorporation of the Company
filed with the Secretary of State of Delaware on November
20, 1990(4), the Certificate of Elimination of the
Redeemable Convertible Preferred Stock, Series A of the
Company, filed with the office of the Secretary of State
of the State of Delaware on June 2, 1994(3), the
Certificate of Amendment of Certificate of Incorporation
of the Company, filed with the office of the Secretary of
State of the State of Delaware on August 29, 1996(3), the
Certificate of Designations of the Company of 10%
Cumulative Convertible Preferred Stock, Series B(5), the
Certificate of Designations of the Company of 10 1/2%
Cumulative Convertible Preferred Stock, Series(6), the
Certificate of Designations of the Company of Convertible
Preferred Stock, Series D(3), and the Certificate of
Designations of the Company of Convertible Preferred
Stock, Series E(3)
3.2 -- By-laws of the Company(4)
4.1 -- Certificate of Designations of the Company of 10%
Cumulative Convertible Preferred Stock, Series B(5)
4.2 -- Certificate of Designations of the Company of 10 1/2%
Cumulative Convertible Preferred Stock, Series C(6)
4.3 -- Certificate of Designations of the Company of Convertible
Preferred Stock, Series D(3)
4.4 -- Certificate of Designations of the Company of Convertible
Preferred Stock, Series E(3)
4.5 -- Indenture dated as of November 1, 1996, among the
Company, National Energy Group of Oklahoma, Inc.,
formerly NEG-OK, and BankOne, Columbus, N.A.(7)
4.6 -- Indenture dated August 21, 1997, among the Company and
Bank One, N.A.(8)
4.7 -- Instrument of Resignation, Appointment and Acceptance,
dated October 23, 1998, between the Company, Bank One,
Texas, N.A. and Norwest Bank Minnesota, N.A.(9)
27.1 -- Financial Data Schedule(13)
</TABLE>
<PAGE> 17
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
99.1 -- Order of Bankruptcy Court Granting Relief on Involuntary
Petition(10)
99.2 -- Order of Bankruptcy Court Implementing Auction Sale
Closing(11)
99.3 -- Order of Bankruptcy Court Confirming Joint Plan of
Reorganization and Fixing Deadlines for Filing
Administrative Claims, Fee Claims and Rejections
Claims(14)
</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 18, 1995.
(7) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996.
(8) Incorporated by reference to the Company's Form S-4 (No. 333-38075), filed
October 16, 1997.
(9) Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1998.
(10) Incorporated by reference to the Company's Current Report on Form 8-K,
dated February 8, 1999.
(11) Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1999.
(12) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2000.
(13) The Financial Data Schedule is filed herewith for EDGAR filings only.
(14) Filed herewith.
