<PAGE>
U. S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 1996
-------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
COMMISSION FILE NO. 0-22782
--------
FRONTIER NATURAL GAS CORPORATION
------------------------------------------------------
(Name of Small Business Issuer in its Charter)
Oklahoma 73-1421000
------------------ ------------------
(State or Other Jurisdiction of (I.R.S. Employer I.D. No.)
Incorporation or organization)
One Benham Place, 9400 North Broadway, Oklahoma City, OK 73114-7401
-------------------------------------------------------------------
(Address of Principal Executive Offices)
Issuer's Telephone Number: (405) 478-4455
--------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 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 the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date 5,208,406 shares of Class A
Common Stock were outstanding as of August 7, 1996.
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
FRONTIER NATURAL GAS CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
------
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 421,364 $ 63,908
Accounts receivable, net of allowance for doubtful
accounts of $11,833 and $12,710 at June 30, 1996
and December 31, 1995, respectively 545,918 612,876
Prepaid expenses and other 153,111 178,737
Receivables from affiliates 243,895 210,016
----------- -----------
Total current assets 1,364,288 1,065,537
Property and equipment:
Gas and oil properties, at cost -
successful efforts method of accounting 10,744,549 11,109,678
Other property and equipment 912,855 906,453
----------- -----------
11,657,404 12,016,131
Less accumulated depletion, depreciation
and amortization (3,417,555) (2,895,159)
----------- -----------
8,239,849 9,120,972
Other assets 720,448 252,966
----------- -----------
Total assets $10,324,585 $ 10,439,475
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
FRONTIER NATURAL GAS CORPORATION
CONSOLIDATED BALANCE SHEETS, CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------------ -------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 722,607 $ 2,065,341
Revenue distribution payable 411,111 493,072
Current portion of long-term debt 823,416 227,302
Deferred gas revenues --- 828,000
Accrued and other liabilities 172,274 222,778
----------- -----------
Total current liabilities 2,129,408 3,836,493
Deferred gas revenues --- 1,113,977
Long-term debt 3,527,706 150,271
Other long-term liabilities 313,245 275,298
----------- -----------
Total liabilities 5,970,359 5,376,039
Commitments and contingencies
Stockholders' equity:
Cumulative convertible preferred stock $.01 par value;
5,000,000 shares authorized; 85,961 shares issued
and outstanding at June 30, 1996 and December 31,
1995; ($859,610 aggregate liquidation preference
at June 30, 1996 and December 31, 1995) 860 860
Common stock:
Class A Common stock, $.01 par value; 20,000,000 shares
authorized; 5,208,406 shares issued and outstanding, at
June 30, 1996 and December 31, 1995 52,084 50,584
Unamortized value of warrants issued (68,244) ---
Common stock subscribed 45,000 45,000
Common stock subscription receivable (45,000) (45,000)
Additional paid-in capital 8,215,254 7,866,879
Deficit (3,845,728) (2,854,887)
----------- -----------
Total stockholders' equity 4,354,226 5,063,436
----------- -----------
Total liabilities and stockholders' equity $10,324,585 $10,439,475
=========== ===========
</TABLE>
The accompanying notes are an integral part of these finanaical statements.
2
<PAGE>
FRONTIER NATURAL GAS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -----------------------------
1996 1995 1996 1995
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues:
Gas and oil revenues $ 849,598 $ 766,576 $ 1,941,561 $ 1,474,611
Gain on sale of assets 257,286 251,291 270,571 489,474
Gain of sale of seismic data --- 601,100 --- 601,100
Operating fees 72,105 106,255 145,115 236,318
Other revenues 20,471 --- 92,419 121,353
---------- ----------- ----------- -----------
Total revenues 1,199,460 1,725,222 2,449,666 2,922,856
Costs and expenses:
Lease operating expense 154,834 224,738 321,401 445,278
Transportation and marketing 61,382 --- 190,255 ---
Production taxes 62,255 53,161 139,418 103,158
Gas purchases under deferred
contract --- 118,344 82,461 239,032
Depletion, depreciation and
amortization 378,847 228,533 810,845 513,407
Exploration Costs 113,129 396,011 218,671 732,048
Interest expense 100,957 --- 198,310 ---
Deferred gas contract settlement --- --- 368,960 ---
General and administrative costs 549,671 571,274 1,110,186 1,143,014
---------- ----------- ----------- -----------
Total costs and expenses 1,421,075 1,592,061 3,440,507 3,175,937
---------- ----------- ----------- -----------
Net income (loss) (221,615) 133,161 (990,841) (253,081)
Cumulative preferred stock dividend 25,788 136,835 51,576 343,805
Value of common stock issued for
cumulative preferred stock in excess
of original terms, net of relieved
preferred stock dividend --- 2,183,471 --- 2,183,471
---------- ----------- ----------- -----------
Net loss available to common
stockholder's shares $ (247,403) $(2,187,145) $(1,042,417) $(2,780,357)
========== =========== =========== ===========
Net loss per common and
equivalent share $(.05) $(.55) $(.20) $(.70)
========== =========== =========== ===========
Number of common and common
equivalent shares (in thousands) 5,146 3,965 5,146 3,965
========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
FRONTIER NATURAL GAS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (990,841) $ (253,081)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depletion, depreciation and amortization 810,845 513,407
Deferred gas contract settlement 368,960 ---
Gain on sale of assets (270,571) (489,474)
Deferred revenues under gas contract (74,400) (435,075)
Amortization of financing costs 128,132 ---
Non-cash compensation benefit attributable to SAR's --- (107,509)
Exploration Costs 218,671 732,048
Changes in assets and liabilities;
Accounts receivable 33,079 (393,820)
Prepaid expenses and other 25,626 (146,659)
Other assets (136,936) 12,311
Accounts payable (281,734) 537,626
Revenue distribution payable (81,961) (23,879)
Accrued and other liabilities (12,557) (16,715)
----------- -----------
Net cash provided by (used in) operating activities (263,687) (70,820)
----------- -----------
Cash flows used in investing activities:
Capital expenditures - gas and oil properties (2,169,586) (1,864,897)
Capital expenditures - other property and equipment (41,936) (114,170)
Proceeds from sale of assets 955,463 1,461,899
----------- -----------
Net cash used in investing activities (1,256,059) (517,168)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of debt 4,506,091 428,633
Repayments of long-term debt (264,013) (159,516)
Debt issue costs (183,387) ---
Payment for settlement of deferred gas contract (2,181,489) ---
Redemption of preferred stock of a subsidiary --- (99,540)
Preferred stock dividend --- (234,108)
Proceeds from issuance of common stock --- 202,500
----------- -----------
Net cash provided (used) by financing activities 1,877,202 137,969
----------- -----------
Net increase (decrease) in cash and cash equivalents 357,456 (450,019)
Cash and cash equivalents at beginning of period 63,908 615,256
----------- -----------
Cash and cash equivalents at end of period $ 421,364 $ 165,237
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 246,398 $ 13,944
=========== ===========
</TABLE>
4
<PAGE>
FRONTIER NATURAL GAS COPORATION
NOTES TO CONSOLICATED FINANCIAL STATEMENTS
(UNADUITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The unaudited consolidated financial statements and related notes have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to such rules and regulations.
The accompanying consolidated financial statements and related notes should be
read in conjunction with the audited financial statements of the Company, and
notes thereto, for the fiscal year ended December 31, 1995.
The information furnished reflects, in the opinion of management, all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the results of the interim periods presented. Operating results
of the interim period are not necessarily indicative of the amounts that will be
reported for the fiscal year ended December 31, 1996.
Reclassifications - Certain reclassifications have been made to the prior
year financial statements to conform them to classifications used in the periods
ended June 30, 1996.
2. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
---------- ------------
<S> <C> <C>
Note payable pursuant to a credit agreement with a bank of
$3,955,000, interest at LIBOR rate (reserve adjusted),
plus one and seven-eighths percent (1.875%) (7.25%
at June 30, 1996), principal payable in installments
of $45,000 per month for July 1996 through September 1996;
$70,000 per month for October 1996 through December 1996;
$76,000 per month for January 1997 through October 1997;
and $75,000 per month until December 2000, collateralized
by producing oil and gas properties; net of original
discount of $307,237: amortized on the interest method $3,686,471 $
Non-recourse loan, payable out of an 8% ORRI on the
Starboard Prospect, interest at 15% 470,428 ---
Note payable to bank, interest at a New York bank prime
plus 1% (9.75% at December 31, 1995), payable in
monthly installments of $6,944.44 until August 1,
1996 when remaining balance is due, collateralized
by producing oil and gas properties --- 180,554
Notes payable to bank, interest at 7.49% to 12.5%,
payable in monthly installments, due in various
amounts through 2001, collateralized by other
property and equipment 94,223 97,019
Note payable, interest at 12%, payable monthly,
principal due December 31, 1997 100,000 100,000
---------- ------------
4,351,122 377,573
Less current portion 823,416 227,302
---------- ------------
$3,527,706 $150,271
========== ============
</TABLE>
On January 3, 1996, the Company entered into a $15,000,000 credit agreement
with a bank. The agreement provided for the immediate funding of $4,000,000.
The loan is for a five year period with total payments of $390,000 in 1996,
$910,000 in 1997, and $900,000 in 1999 and 2000. The remaining funds will be
5
<PAGE>
FRONTIER NATURAL GAS COPORATION
NOTES TO CONSOLICATED FINANCIAL STATEMENTS
(UNADUITED)
available for specific future drilling activities of the Company subject to the
approval of the bank. The loan is secured by a mortgage on all of the Company's
significant producing properties. As part of the credit agreement, the Company
is subject to certain covenants and restrictions, among which are limitations on
additional borrowing, and sales of significant properties, working capital,
cash, and net worth maintenance requirements and a minimum debt to net worth
ratio. The required covenants escalate during 1996 as shown below:
<TABLE>
<CAPTION>
As of
Covenant, as defined Initial December 31, 1996
-------------------- ---------- -----------------
<S> <C> <C>
Tangible Net Worth $4,000,000 $5,000,000
Current Ratio 0.8 1.0
Debt to Capitalization 0.6 0.6
Cash Flow Ratio 2.0 3.0
Cash on Hand $ 200,000 $ 200,000
</TABLE>
The Company has entered into an interest rate swap with the bank to
guarantee a fixed interest rate of 8.28% for the life of the loan. In addition,
the Company will pay fees of one-eighth of 1% (0.125%) on the unused portion of
the commitment amount.
On March 12, 1996, the Company completed a financing package to evaluate and
develop a project in Terrebonne Parish, Louisiana. Under the terms of the
agreement, the Company conveyed a 48% working interest in all evaluation and
development of the project area for cash consideration of $495,455. In
addition, the acquirer agreed to provide a non-recourse loan to fund the
Company's share of the leasehold and seismic evaluation costs of the project.
The loan is secured by a mortgage on the Company's interest in the project.
Through June 1996, the Company received advances on the non-recourse loan of
$470,428. The non-recourse loan is to be paid solely by the assignment on an 8%
overriding royalty interest in the future revenues of the financed project
payable from the Company's interest in the project. Future funding will be
provided as costs are incurred.
3. GAS SALES AGREEMENT:
On January 5, 1996, the Company entered into an agreement with the end user
to terminate the Gas Sales Agreement as of January 31, 1996. The Company paid
the end user $2,181,489 which represents a return of its $.75 advance on
2,490,103 MMBTU's of gas, the balance remaining as of January 31, 1996, plus a
settlement payment of $313,912. In addition, approximately $55,048 in deferred
charges relating to the contract were expensed.
4. COMMITMENTS AND CONTINGENCIES:
As part of the financing obtained by the Company during the first quarter of
1996, the Company pursuant to an agreement with a financial advisor, agreed to
pay a combination of cash, stock and warrants for consideration in assisting
with obtaining the financing. As part of the agreement, the Company paid
$200,000 in cash as compensation for the financing of the project in Terrebonne
Parish, Louisiana and issued 150,000 shares of the Company's common stock to the
advisor on June 6, 1996, accompanied by rights to demand registration at any
time between July 1, 1996 and December 31, 1996 as compensation for the credit
agreement. These shares have been valued at $234,375, the fair market value at
the date granted. The Company agreed to guarantee a minimum of $200,000 in
proceeds, net of commission or selling costs, if these shares are sold (or
attempted to be sold and there is no market for such sale over a reasonable
period of time) prior to December 31, 1996. The Company has also issued a
warrant to purchase 250,000 shares of the Company's common stock at $2.00 per
share. The warrant has a five year term and provides for anti-dilution
protection, registration rights, and permits partial exercise at the election of
the holder by exchanging the warrants with appreciated value equal to each
exercise price in lieu of cash. If additional funds are not borrowed from the
bank, a portion of the warrants will be returned. The Company has recorded the
warrants which are not subject to return at their fair value of approximately
$33,000. The warrants subject to return will be recorded when additional funds
are borrowed.
The Company also issued to the bank providing financing during the quarter
ended March 31, 1996, a warrant to purchase up to 250,000 shares of common stock
for a period of five years at an exercise price of the highest average of the
daily closing bid prices for thirty (30) consecutive trading days between
January 1, 1996 and June 30, 1996. The Company will be required to register the
common shares underlying the warrants at the holder's request. The Company has
recorded the warrants at a value of
6
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
approximately $82,500 as unamortized value of warrants issued. The warrants are
being amortized using the interest method with an unamortized value of $68,244
at June 30, 1996.
Pursuant to the credit agreement with the bank, the Company has entered into
a natural gas swap agreement on 62,500 MMBTU of natural gas per month at $1.566
MMBTU for mid-continent gas for the period from April 1, 1996 through January
31, 1999. The Company has also entered into another natural gas swap agreement
on 45,000 MMBTU of natural gas per month at $2.03 per MMBTU for Mobile Bay gas
for the period from January 24, 1996 through December 24, 1996.
5. SUBSEQUENT EVENTS
On August 14, 1996, the Company closed the sale of a public offering of
1,350,000 Units of its securities. Each Unit consisted of three shares of
Common Stock and three Series B Redeemable Common Stock Purchase Warrants
("Series B Warrants").
The price for each Unit was $5.0625. The net proceeds after the
underwriter's commission and expense is estimated to be approximately
$5,701,000. Each Series B Warrant issued in the offering entitles the holder to
purchase one share of Common Stock for $2.025 commencing August 8, 1997 and
ending August 8, 2001. Each Series B Warrant is redeemable by the Company with
the prior consent of the underwriter at a price of $0.01 per Series B Warrant,
at any time after the Series B Warrants become exercisable, upon not less than
30 days notice, if the last sale price of the Common Stock has been at least
200% of the then exercise price of the Series B Warrants for the 20 consecutive
trading days ending on the third day prior to the date on which the notice of
redemption is given.
Immediately after the closing of the public offering, there were 9,258,406
shares of Common Stock and 4,050,000 Series B Warrants outstanding.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis reviews the Company's operations for
the three and six month period ended June 30, 1996 and should be read in
conjunction with the Company's Consolidated Financial Statements and related
notes thereto. Certain statements contained herein that set forth management's
intentions, hopes, plans, beliefs, expectations or predictions of the future are
forward-looking statements. It is important to note that actual results could
differ materially from those projected in such forward-looking statements. The
risks and uncertainties include but are not limited to potential unfavorable or
uncertain results of 3-D seismic surveys not yet completed, drilling cost and
operational uncertainties, risks associated with quantities of total reserves
and rates of production from existing gas and oil reserves and product pricing,
potential delays in the timing of planned operations, competition and other
risks associated with permitting seismic surveys and with leasing gas and oil
properties, potential cost overruns, the availability of capital to fund planned
expenditures and general industry and market conditions.
OVERVIEW
During the three and six months ended June 30, 1996, the Company's
activities continued to center around furthering its Gulf Coast Projects which
it initiated in 1995. The Company also continued locating and developing new
prospects in the region for 1996 and beyond during the quarter. The Mobile Bay
wells completed their first six months of production generating gross revenues
of approximately $1,306,000 for the period. The impact of this production was
further enhanced by relatively high gas prices which were partially offset by
two swap agreements entered into in January 1996. Natural gas prices averaged
$2.38 per Mcf and $2.17 per Mcf for these wells during the three and six
months ended June 30, 1996 before effect of the swap agreement. The Company has
continued to review its Garvin County, Oklahoma properties with its working
interest partners and participated in the drilling of three wells in the area
during the second quarter of 1996. One of these wells was completed as a
producer with initial production of approximately 100 barrels per day in the Oil
Creek which is part of the Simpson Sands. The Company owns a 7.75% interest in
the well. The other two wells were dry holes.
The Company also finalized two major financing transactions during the first
quarter which will provide for the costs of 3-D seismic and the development and
drilling of its Terrebonne Parish, Louisiana project and allowed the Company to
increase working capital and to retire an existing prepaid gas agreement which
should improve cash flow from operations in 1996 and future years.
In addition, on August 14, 1996, the Company closed the sale of a public
offering of 1,350,000 Units of its securities. Each unit consisted of three
shares of Common Stock and three Series B Redeemable Stock Purchase Warrants.
The net proceeds after the underwriter's commission and expense is estimated to
be approximately $5,701,000. The Company intends to use seventy percent (70%) of
the proceeds to fund the Company's exploration, developmental and acquisition
projects in Southern Louisiana, along the Gulf Coast of Alabama, Mississippi and
Texas and in Garvin County, Oklahoma. The remaining funds will be used for
working capital and general corporate purposes and to service approximately
$1,295,000 of the debt repayment requirement for the next twelve months under
the credit agreement.
RESULTS OF OPERATIONS
The following discussion of results of operations, including revenues, costs
and expenses, and net income, centers around a comparison of such results for
the three and six months ended June 30, 1996 and June 30, 1995. The historical
results do not necessarily reflect anticipated future performance.
THREE MONTHS ENDED JUNE 30, 1996 COMPARED WITH THREE MONTHS ENDED
JUNE 30, 1995
The Company incurred a net loss of $221,615 for the three months ended June
30, 1996 as compared to net income of $133,161 for the three months ended June
30, 1995. The Company's loss per share decreased from $0.55 per share for the
three months ended June 30, 1995 to a loss of $0.05 per share in the comparable
period in 1996. The decrease was due to the recognition in 1995 of the expense
related to the premium of
8
<PAGE>
two shares of common stock paid as an inducement to convert the Preferred Stock
to Common Stock during the quarter ended June 30, 1995 and by the increase in
the number of common shares outstanding at June 30, 1996 as a result of the
Preferred Stock conversion. There was no similar issue in 1996.
REVENUE. Revenue from gas and oil sales increased 11% for the three months
ended June 30, 1996 as compared to the three months ended June 30, 1995. The
increase was largely due to the Mobile Bay wells which contributed approximately
310,000 Mcf of net production during the quarter. These wells began production
in December 1995. The average price for all gas sold during the three months
ended June 30, 1996 was $1.98 per Mcf as compared to $1.56 per Mcf for the three
months ended June 30, 1995. The extent to which future gas and oil prices will
affect revenues cannot be determined. The increase in revenues from gas and oil
sales was partially offset by a decline in the gain on sale of seismic data
in the quarter ended June 30, 1996 as compared to the same period of 1995.
COSTS AND EXPENSES. Costs and expenses decreased $170,986 for the three
months ended June 30, 1996 as compared to June 30, 1995 largely due to a
$282,882 reduction in exploration costs and a $118,344 reduction in gas
purchases under the deferred contract due to the termination of the gas contract
in the first quarter of 1996. These reductions are offset by an increase in
interest costs which are a result of the Company's new financing arrangements
and a reduction in capitalized interest as a result of reduced drilling
activity, and an increase in transportation and marketing costs and depletion,
depreciation and amortization due to production from the Mobile Bay wells.
Exploration costs declined due to a reduction in costs related to the impairment
of gas and oil leases. The 1996 costs included approximately $54,750 in dry hole
costs.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1995
The Company's net loss increased from $253,081 for the six months ended June
30, 1996 to $990,841 for the six months ended 1995. The primary reason for the
increase in loss is due to a one-time charge relating to the settlement of a
long-term prepaid gas sales agreement totaling $368,960 in 1996, a gain on the
sale of seismic data in Garvin County, Oklahoma of $601,000 in 1996, as well as
a $218,000 decline in the gain on sale of assets in 1996 as compared to 1995.
The negative effects on net income were offset by a $513,377 decline in
exploration costs.
REVENUE. Revenue from gas and oil sales increased by 32% for the six months
ended June 30, 1996 as compared to the six months ended June 30, 1995. The
increase was largely due to production from the Mobile Bay wells which
contributed 602,000 Mcf of production during the six month period. The average
price for gas sold during the six months ended June 30, 1996 was $2.04 per Mcf
as compared to $1.55 per Mcf for the six months ended June 30, 1995. The
extent to which future gas and oil prices will offset revenues cannot be
determined. The increase in oil and gas sales was partially offset by a decline
in the gain on sale of assets and by lower operating fee revenue due to fewer
operated wells in the six months ended June 30, 1996 as compared to the same
period of 1995.
COSTS AND EXPENSES. Costs and expenses increased $264,570 for the six months
ended June 30, 1996 as compared to June 30, 1995 largely due to $368,960 in
expenses related to the settlement on the termination of the deferred gas
contract.
Transportation and marketing costs, production taxes and depletion,
depreciation and amortization increased due to production from the Mobile Bay
wells offset by a reduction in costs for wells sold in 1995. The transportation
and marketing costs represent costs for pipeline transportation on the Mobile
Bay wells. Exploration costs declined due to a reduction in seismic and
drilling activity in the first quarter of 1996 as compared with 1995.
Exploration costs in 1996 were largely due to the impairment of leases.
Interest costs increased due to the Company's new financing arrangements as well
as a reduction in capitalized interest as a result of the reduced drilling
activity.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company, largely through two major financing transactions, increased its
working capital by approximately $2,005,836 during the six months ended June 30,
1996. The financing proceeds were used largely to refinance existing short-term
liabilities, including approximately $1,061,000 in capital costs payable which
were related to the Company's interest in its Mobile Bay production platform and
the bulk of the additional proceeds were used to terminate a gas sales
agreement. The Company also used proceeds from the sale of assets, including
the Terrebonne Parish, Louisiana project assets which provided over $495,000 in
proceeds to fund additional capital costs of which $716,000 were associated with
the Terrebonne Parish, Louisiana project. The remaining capital costs were
largely associated with the Mobile Bay wells and, with the drilling of three
wells in Garvin County, Oklahoma.
During January 1996, the Company entered into a $15,000,000 credit agreement
with a bank to provide $4,000,000 in immediate cash to the Company. This
portion of the loan is collateralized by the most significant proved developed
gas and oil properties of the Company and is payable in monthly installments
over a five year period. The cash was used to (i) terminate the Gas Sales
Agreement by repaying the deferred gas revenues remaining under the Agreement of
$1,867,577 plus a settlement payment of $313,912, (ii) pay off a note to a bank
which was collateralized by gas and oil properties of $180,554, (iii) pay off
approximately $1,061,000 in infrastructure costs relating to the Company's
Mobile Bay properties, (iv) pay approximately $150,000 in bank and legal fees
relating to the loan with (v) the remainder used to pay current liabilities.
The credit facility provides for an additional $2,500,000, subject to bank
approval, to be used for the Company's share of developmental drilling costs in
the Starboard Project, a developmental and exploratory drilling project in
Tennebonne Parish, Louisiana, and an additional $8,500,000 will be available
contingent upon the company's reserve base meeting the bank's lending
parameters.
Under the terms of the loan, the Company is subject to certain restrictions
and covenants which escalate in 1996. The covenants include current ratio, cash
on hand and tangible net worth requirements among other requirements.
The second financing transaction occurred in March 1996 when the Company
entered into an agreement whereby it conveyed a 48% working interest in the
Company's working interest in the Starboard Project. The acquirer provided
funding through a non-recourse loan to the Company to cover all the costs in
obtaining the leasehold and seismic data on the Starboard Project. The loan is
anticipated to be approximately $1,728,000 at its conclusion and will be repaid
solely by the assignment of an 8% overriding interest in the Starboard Project
payable from the Company's interest in the project until such time as the lender
has received an amount equal to the loan plus closing costs and a 15% internal
rate of return. The loan is secured by a mortgage on the Starboard Prospect.
The Company received a reimbursement of costs of approximately $255,000 from the
third party and a $240,000 prospect fee as part of the agreement. Approximately
$470,000 was advanced on the non-recourse loan as of June 30, 1996. The
remaining funds are available to be advanced throughout 1996 to fund additional
leasehold acquisitions and seismic activities on the Starboard Prospect. The
Company may fund its share of 3-D costs on the Starboard Project through this
facility. It is also negotiating with an international oil company to fund 100%
of the Company's 3-D seismic costs and convey certain leases to the Company in
return for a pro rata interest in certain leasehold rights of the Company at
depths below the Company's proven undeveloped reserves in said project, and
generally below the Company's primary exploration targets in the project. Such a
transaction would provide alternative funding and would minimize the override
burden of the non-recourse loan on said project.
The Company's business philosophy has been to seek to minimize natural gas
price volatility by marketing reserves through the use of long-term end-user gas
contracts and utilizing the purchase of short-term commodity futures. During
January 1996, the Company terminated the long-term contracts as discussed. The
Company has replaced the contract with two swap agreements on natural gas
production to minimize price volatility. The first agreement is effective for
the period from April 1, 1996 through January 31, 1999 on 62,500 MMBTU per month
of mid-continent natural gas at a price of $1.566 per MMBTU. The second
agreement is effective from January 1996 through December 31, 1996 on 45,000
MMBTU per month of Mobile Bay natural gas at a price of $2.03 per MMBTU. During
the six months ended June 30, 1996, the price for natural gas exceeded
10
<PAGE>
the swap price and resulted in a charge against gas and oil revenues of
approximately $197,000. If both swaps had been in effect during the entire
period, an additional reduction in gas and oil revenues of approximately $55,000
would have been recorded during the period. Whether the swaps result in future
increases or reductions in revenues will depend upon whether future gas prices
are less than or greater than the swap prices. As of June 30, 1996, spot market
prices exceeded the swap price.
The Company is moving its headquarters from Oklahoma City, Oklahoma to
Houston, Texas, effective September 1, 1996. The Company has entered into a
five-year lease at an annual rate of approximately $106,000. The Company
estimates the total move costs, which should occur in the third quarter of 1996,
will be approximately $100,000.
In addition, on August 14, 1996, the Company closed the sale of a public
offering of 1,350,000 Units of its securities. Each unit consisted of three
shares of Common Stock and three Series B Redeemable Stock Purchase Warrants.
The net proceeds after the underwriter's commission and expense is estimated to
be approximately $5,701,000. The Company intends to use seventy percent (70%) of
the proceeds to fund the Company's exploration, developmental and acquisition
projects in Southern Louisiana, along the Gulf Coast of Alabama, Mississippi and
Texas and in Garvin County, Oklahoma. The remaining funds will be used for
working capital and general corporate purposes and to service approximately
$1,295,000 of the debt repayment requirement for the next twelve months under
the credit agreement.
It is management's belief that with the funds raised in the public offering,
along with the Company's other financing arrangements, the Company currently has
adequate cash available from its current assets, and from other likely third
party sources as set forth herein to adequately fund its planned exploration and
other activities for the next twelve months.
The Company does not believe it will need additional funds beyond its
capital and credit lines over the next twelve months. However, in the event it
develops currently unknown prospects and/or acquisition opportunities, it may
seek additional exploration and/or acquisition capital. As an ongoing policy,
the Company always considers offers to purchase certain of its producing
prospects under terms such that alternative uses for the proceeds are
anticipated to provide a greater return then retaining the solicited properties,
therefore, the Company is in negotiation to divest several producing and non-
producing gas and oil properties. Other options available to the Company to
raise any such additional funds for exploration and/or acquisitions include, but
are not limited to, (a) additional outside partners, (b) additional private
borrowing, and (c) the further sale of 3-D seismic data.
PART II
ITEM 1. Legal Proceedings.
------------------
The Company is party to a lawsuit filed on June 14, 1994 in the Circuit
Court of Mobile, Alabama. The lawsuit was brought by Frontier Exploration
and Production Corporation ("Frontier"), a subsidiary of the Company, as
plaintiff to quiet title to leases it owns in the Mobile Bay area in Mobile
County, Alabama. The original defendant, The Offshore Group, Inc. ("TOG"),
filed various counterclaims pursuant to which, inter alia, it (i) claimed an
ownership interest in the Mobile Bay area wells drilled by the Company and
(ii) sought recovery of substantial damages it claimed to have sustained due
to, among other stated reasons, delays in drilling allegedly caused by the
Company. The well for which TOG alleged it sustained damages was a dry hole.
The Company has been awarded summary judgment as to all counterclaims of TOG
with respect to the Mobile Bay area wells, other than TOG's claim for
damages related to the drilling of its well, and the Company has sued TOG
and certain of its principals for fraudulently asserting such claims. On
June 6, 1996, the summary judgment was appealed. The Company does not
believe TOG's appeal is likely to succeed or the remaining claim has any
merit.
In addition to the above, the Company is a defendant from time to time in
lawsuits incidental to its business. The Company believes that none of such
current proceedings, individually or in the aggregate, will have a
materially adverse effect on the Company.
11
<PAGE>
ITEM 2. Changes in Securities.
----------------------
None.
ITEM 3. Defaults Upon Senior Securities.
--------------------------------
The Company has undeclared and unpaid dividends in the amount of $120,345 in
its cumulative Preferred Stock for the period from May 1, 1995 to June 30,
1996. The Company is not required to declare and pay such dividends;
however, until such dividends are paid current, the Company is precluded
from paying dividends to its common shareholders.
ITEM 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
At the Annual Meeting of Shareholders held June 6, 1996, the following
matters were voted upon:
1. Election to the Board of Directors for the following terms:
<TABLE>
<CAPTION>
Vote
------
Director For Against Withheld Abstained
------- --------- ------- -------- ---------
<S> <C> <C> <C> <C>
David W. Berry,
term expiring in 1999 4,550,385 12,950 0 0
S. Gordon Reese, Jr.,
term expiring in 1999 4,548,785 14,550 0 0
David B. Christofferson,
term expiring in 1998 4,550,385 12,950 0 0
Jeffrey R. Orgill,
term expiring in 1997 4,550,385 12,950 0 0
</TABLE>
The following directors terms were not expiring and continue as members
of the of the Board of Directors:
Neal M. Elliott
Allen H. Sweeney
2. Approval of an amendment to Article VII of the Company's Certificate of
Incorporation to correct a typographical error which currently reads
"The number of Directors of this Corporation shall be no less than four
(4) and no less than eight (8)" to read "The number of Directors of
----
this Corporation shall be no less than four (4) and no more than eight
----
(8)."
The vote was as follows:
For 4,142,353 Against 3,664 Withheld 405,618
--------- ---------- ---------
Abstained 11,700
---------
3. Approval of the Stock Incentive Option Plan - 1996.
The vote was as follows:
For 2,749,572 Against 134,516 Withheld 1,652,097
--------- ---------- ---------
Abstained 27,150
---------
No other items were submitted for a vote.
12
<PAGE>
ITEM 5. Other Information.
------------------
None; not applicable.
ITEM 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits.
(11) Computation of Net Income Per Common and Common Equivalent
Share
(27) Financial Data Schedule
(b) None.
13
<PAGE>
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 of the
undersigned thereunto duly authorized.
FRONTIER NATURAL GAS CORPORATION
Date: August 14, 1996 By: /s/ DAVID W. BERRY
--------------------------------
David W. Berry,
President
Date: August 14, 1996 By: /s/ DAVID B. CHRISTOFFERSON
--------------------------------
David B. Christofferson,
Executive Vice President and Chief Financial
Officer
14
<PAGE>
EXHIBIT 11 TO FORM 10-QSB
FRONTIER NATURAL GAS CORPORATION
COMPUTATION OF NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
JUNE 30,
-------------------------------
1996 1995
-------------------------------
<S> <C> <C>
Common shares issued and outstanding beginning 5,058,406 2,418,050
Add:(1)
Shares purchased under common stock
subscription agreement --- 90,450
Cumulative preferred stock conversion --- 1,456,954
Stock issued for services 87,500 ---
----------- -----------
Total equivalent common shares 5,145,906 3,965,454
=========== ===========
Net loss (990,841) $ (253,081)
Less: Cumulative Preferred Stock dividend 51,576 343,805
Less: Value of common stock issued for cumulative
preferred stock in excess of original terms,
net of relieved preferred stock dividend --- 2,183,471
----------- -------------
Net loss available to common and common
equivalent shares $(1,042,417) $ (2,780,357)
=========== =============
Net loss per common and common equivalent share $(0.20) $(0.70)
=========== =============
</TABLE>
- ------------------------------------
/1/ Common stock equivalents were determined based on the "Treasury Stock
Method" as set forth in Accounting Principals Board Opinion No. 15.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S 2ND QUARTER FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 421,364
<SECURITIES> 0
<RECEIVABLES> 557,751
<ALLOWANCES> 11,833
<INVENTORY> 0
<CURRENT-ASSETS> 1,364,288
<PP&E> 11,657,404
<DEPRECIATION> 3,417,555
<TOTAL-ASSETS> 10,324,585
<CURRENT-LIABILITIES> 2,129,408
<BONDS> 4,351,122
0
860
<COMMON> 52,084
<OTHER-SE> 4,301,282
<TOTAL-LIABILITY-AND-EQUITY> 10,324,585
<SALES> 1,941,561
<TOTAL-REVENUES> 2,449,666
<CGS> 1,544,380
<TOTAL-COSTS> 1,544,380
<OTHER-EXPENSES> 1,697,817
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 198,310
<INCOME-PRETAX> (990,841)
<INCOME-TAX> 0
<INCOME-CONTINUING> (990,841)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (990,841)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
</TABLE>
