<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 March 31, 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 5,058,406 shares of Class A
Common Stock were outstanding as of April 22, 1996.
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
FRONTIER NATURAL GAS CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
------
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 496,103 $ 63,908
Accounts receivable, net of allowance for doubtful
accounts of $12,175 and 12,710 at March 31, 1996
and December 31, 1995, respectively 630,394 612,876
Prepaid expenses and other 183,001 178,737
Receivables from affiliates 247,582 210,016
----------- -----------
Total current assets 1,557,080 1,065,537
Property and equipment:
Gas and oil properties, at cost -
successful efforts method of accounting 10,608,400 11,109,678
Other property and equipment 907,018 906,453
----------- -----------
11,515,418 12,016,131
Less accumulated depletion, depreciation
and amortization (3,274,641) (2,895,159)
----------- -----------
8,240,777 9,120,972
Other Assets 616,146 252,966
----------- -----------
Total assets $10,414,003 $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>
MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 755,585 $ 2,065,341
Revenue distribution payable 467,340 493,072
Current portion of long-term debt 656,108 227,302
Deferred gas revenues --- 828,000
Accrued and other liabilities 158,971 222,778
----------- -----------
Total current liabilities 2,038,004 3,836,493
Deferred gas revenues --- 1,113,977
Long-term debt 3,513,411 150,271
Other long-term liabilities 293,875 275,298
----------- -----------
Total liabilities 5,845,290 5,376,039
Commitments and contingencies
Stockholders' equity:
Cumulative convertible preferred stock $.01 par value;
5,000,000 shares authorized; 85,691 shares issued
and outstanding at March 31, 1996 and December 31,
1995; ($856,910 aggregate liquidation preference
at March 31, 1996 and December 31, 1995) 860 860
Common stock:
Class A Common stock, $.01 par value; 20,000,000 shares
authorized; 5,058,406 shares issued and outstanding, at
March 31, 1996 and December 31, 1995 50,584 50,584
Common stock to be issued 234,375 ---
Unamortized value of warrants issued (75,372) ---
Common stock subscribed 45,000 45,000
Common stock subscription receivable (45,000) (45,000)
Additional paid-in capital 7,982,379 7,866,879
Deficit (3,624,113) (2,854,887)
----------- -----------
Total stockholders' equity 4,568,713 5,063,436
----------- -----------
Total liabilities and stockholders' equity $10,414,003 $10,439,475
=========== ===========
</TABLE>
The accommpanying notes are an integral part of these financial statements.
2
<PAGE>
FRONTIER NATURAL GAS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
Revenues:
Gas and oil revenues $1,091,963 $ 708,036
Gain on sale of assets 13,285 238,184
Operating fees 73,010 128,063
Other revenues 71,948 121,353
---------- ----------
Total revenues 1,250,206 1,195,636
Costs and expenses:
Lease operating expense 166,567 220,540
Transportation and marketing 128,873 ---
Production taxes 77,163 49,997
Gas purchases under deferred contract 82,461 120,687
Depletion, depreciation and amortization 431,998 284,874
Exploration costs 105,542 336,037
Interest expense 97,353 ---
General and administrative costs 560,515 571,742
Deferred gas contract settlement 368,960 ---
---------- ----------
Total costs and expenses 2,019,432 1,583,877
---------- ----------
Net loss (769,226) (388,241)
Cumulative preferred stock dividend 25,788 206,970
---------- ----------
Net loss available to common stockholder's shares $ (795,014) $ (595,211)
========== ==========
Net loss per common and common equivalent share $(0.16) $(0.24)
========== ==========
Weighted average number of common and common
equivalent shares (in thousands) 5,058 2,531
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial sttements.
3
<PAGE>
FRONTIER NATURAL GAS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (769,226) $ (388,241)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depletion, depreciation and amortization 431,998 284,874
Amortization of financing costs 44,712 ---
Gain on sale of assets (13,285) (238,184)
Deferred revenues under gas contract (74,400) (216,675)
Deferred gas contract settlement 368,960 ---
Non-cash compensation expense attributable to SAR's --- (40,971)
Exploration costs 105,542 336,037
Changes in assets and liabilities;
Accounts receivable (55,084) 193,207
Prepaid expenses and other (4,264) (99,866)
Other assets (13,279) 5,424
Accounts payable (248,756) 906,323
Revenue distribution payable (25,732) 32,817
Accrued and other liabilities (45,230) (31,595)
----------- -----------
Net cash provided by (used in) operating activities (298,044) 743,150
Cash flows used in investing activities:
Capital expenditures - gas and oil properties (1,617,501) (1,323,442)
Capital expenditures - other property and equipment (565) (113,389)
Proceeds from sale of assets 595,769 640,560
----------- -----------
Net cash used in investing activities (1,022,297) (796,271)
Cash flows from financing activities:
Proceeds from issuance of debt 4,278,455 103,633
Repayments of long-term debt (179,272) (49,530)
Debt issue costs (165,158) ---
Payment for settlement of deferred gas contract (2,181,489) ---
Redemption of preferred stock of a subsidiary --- (99,540)
Preferred stock dividend --- (208,320)
Proceeds from issuance of common stock --- 202,500
----------- -----------
Net cash provided (used) by financing activities 1,752,536 (51,257)
----------- -----------
Net increase (decrease) in cash and cash equivalents 432,195 (104,378)
Cash and cash equivalents at beginning of period 63,908 615,256
----------- -----------
Cash and cash equivalents at end of period $ 496,103 $ 510,878
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 134,568 $ 5,840
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 indicitive of the amounts that will be
reported for the fiscal year ended December 31, 1996.
2. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
---------- --------
<S> <C> <C>
Note payable pursuant to a credit agreement with a bank of
$4,000,000, interest at LIBO rate (reserve adjusted),
plus one and seven-eighths percent (1.875%) (7.25%
at March 31, 1996), principal payable in installments
of $45,000 per month for June 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 $3,711,197 $
Non-recourse loan, payable out of an 8% ORRI on the
Starboard Prospect, interest at 15% 278,455 ---
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 2000, collateralized by other
property and equipment 79,867 97,019
Note payable, interest at 12%, payable monthly,
principal due December 31, 1997 100,000 100,000
---------- --------
4,169,519 377,573
Less current portion 656,108 227,302
---------- --------
$3,513,411 $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 payments of $390,000 in 1996, $910,000
in 1997, and $900,000 in 1999 and 2000. The remaining funds will be 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
5
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
minimum debt to net worth ratio. Management believes that the Company will need
to raise additional capital prior to September 30, 1996 in order to satisfy the
covenant requirements. 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 $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. During March 1996, the Company received
an advance on the non-recourse loan of $278,455. The non-recourse loan will 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 will issue 150,000 shares of the Company's common stock to
the advisor 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 will also issue 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.
6
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 approximately $82,500 as unamortized value
of warrants issued. The warrants are being amortized using the interest method
with an unamortized value of $75,372 at March 31, 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.
In September 1995, the Company signed a Letter of Intent with an
underwriter to serve as an underwriter or as representative of several
underwriters to a public offering of the Company's common stock between
$6,000,000 and $8,000,000. The Company is currently anticipating filing a
registration statement with the Securities and Exchange Commission in the second
quarter of 1996 relating to this offering.
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 month period ended March 31, 1996 and should be read in conjunction
with the Company's Consolidated Financial Statements and related notes thereto.
OVERVIEW
During the three months ended March 31, 1996, the Company's activities
continued to center around the development of the Gulf Coast Projects which it
initiated in 1995. The Company also began developing new prospects in the
region for 1996 and beyond during the quarter. The Mobile Bay wells completed
their first full quarter of production generating gross revenues of
approximately $592,000 for the quarter. The impact of this production was
further enhanced by relatively high gas prices. National gas prices averaged
$2.50 per Mcf for these wells during the quarter. The Company has continued to
review its Garvin County, Oklahoma properties with its working interest partners
and anticipates participating in the drilling of at least two to three wells in
the area during the second and third quarters of 1996.
The Company also finalized two major financing transactions during the
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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 COMPARED WITH THREE MONTHS ENDED
MARCH 31, 1995
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 months ended March 31, 1996 and March 31, 1995. The historical
results do not necessarily reflect anticipated future performance.
The Company's net loss increased from $388,241 for the three months ended
March 31, 1995 to $769,226 for the three months ended March 31, 1996 for the
reasons discussed below including a one-time charge relating to settlement of a
long-term prepaid gas sales agreement totaling $368,960. The Company's loss per
share decreased from $0.24 per share for the three month ended March 31, 1995 to
a loss of $0.16 per share in the comparable period in 1996. The decrease was
due to an increase in the number of common shares outstanding at March 31, 1996
as a result of the preferred stock conversion completed in 1995.
REVENUE. Revenue from gas and oil sales increased 54% for the three months
ended March 31, 1996 as compared to the three months ended March 31, 1995. The
increase was largely due to production from the Mobile Bay wells which
contributed approximately 237,000 Mcf of production during the quarter. These
wells began production in December 1995. The average price for all gas sold
during the three months ended March 31, 1996 was $2.05 per Mcf as compared to
$1.54 per Mcf for the three months ended March 31, 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 assets and by lower operating fee revenue due to fewer
operated wells in the quarter ended March 31, 1996 as compared to the same
period of 1995.
COSTS AND EXPENSES. Costs and expenses increased $435,555 for the three
months ended March 31, 1996 as compared to March 31, 1995 largely due to
approximately $369,000 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 largely 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
8
<PAGE>
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.
LIQUIDITY AND CAPITAL
The Company, largely through two major financing transactions, increased
its working capital by $2,290,000 during the quarter. The financing proceeds
were used largely to refinance existing short-term liabilities and 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 $437,000 were
associated with the Terrebonne Parish, Louisiana project. The remaining capital
costs were largely associated with the Mobile Bay wells.
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 all significant 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 loan 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 covenants
which escalate in 1996 and certain restrictions. The covenants include current
ratio, cash on hand and tangible net worth requirements among other
requirements. Management believes that the Company will need to raise
additional capital in order to satisfy all the covenant requirements by
September 30, 1996, particularly the tangible net worth requirement which
increases from $4,000,000 at March 31, 1996 to $5,000,000 at December 31, 1996.
If the Company is not able to satisfy the covenants, the loan to the bank could
become current.
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
$278,000 was advanced on the non-recourse loan as of March 31, 1996. The
Company anticipates the remaining funds will be advanced throughout 1996 to fund
additional leasehold acquisitions and seismic activities on the Starboard
Prospect. The Company anticipates it will obtain most of its financing needs
for exploration activities in the second quarter from this arrangement.
The Company's business philosophy has been to seek to minimize natural gas
price volitility by marketing reserves through the use of long-term end-user gas
contracts 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 volitility. 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 quarter ended March 31, 1996, the price for natural
9
<PAGE>
gas exceeded the swap price and resulted in a charge against gas and oil
revenues of approximately $78,000. If both swaps had been in effect during the
quarter, an additional reduction in gas and oil revenues of approximately
$55,000 would have been recorded during the quarter. 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 March 31, 1996,
spot market prices exceeded the swap price.
The Company may seek additional exploration capital for its Garvin County
and Gulf Coast activities. To satisfy said objectives, the Company is in
negotiation to divest several non-mortgaged producing and non-producing gas and
oil properties. Other options available to the Company to raise the additional
drilling funds for exploration include, but are not limited to, (a) additional
outside partners, (b) additional private borrowing, and (c) the further sale of
3-D seismic data. The Company is actively evaluating its options in this
regard.
The Company intends to raise the required capital for additional
exploration funds beyond the second quarter of 1996 for its Gulf Coast and other
activities and to meet the bank covenant requirement through a public common
stock equity offering. The Company has signed a Letter of Intent with an
underwriter to raise approximately $6 to $8 million. The Company anticipates
completion of the public offering in the second or third quarter of 1996.
It is management's belief that the Company currently has adequate cash
available from its current assets and from other likely third party sources as
set forth herein to support its activities in 1996, however, the inability to
raise the required financing to complete certain of these activities could
result in cash shortfalls, a reduction of future operations, an impairment of
certain assets, and a possibility that certain loan covenants will not be
satisfied. Management believes that the Company will need to raise additional
capital, which it anticipates achieving through the above discussed public
equity offering or from other sources it believes to be available, prior to
September 30, 1996, in order to satisfy certain of the previous discussed
covenant requirements. The level of current or additional activity to be
achieved will be dependent upon the Company's ability to generate capital from
outside sources.
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. Said lawsuit was brought by Frontier
Exploration and Production Corporation ("Frontier") as Plaintiff to
quiet title to leases it owns in the Mobile Bay area in Mobile County,
Alabama. The original Defendant in said suit, The Offshore Group, Inc.
("TOG"), claimed an ownership interest in certain of said leases in
which Frontier is the record title owner. The Company has been awarded
summary judgment as to all claims of TOG against the Company's
developed wells, and the Company has sued TOG and certain of its
principals for fraudulently asserting such claims. Said order may be
appealed. TOG also has claims against the Company for alleged damages
TOG claims to have sustained by delays in drilling its dry hole due to
actions by the Company. Frontier does not believe such claims by TOG
have ever had 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.
ITEM 2. Changes in Securities.
----------------------
None.
ITEM 3. Defaults Upon Senior Securities.
--------------------------------
The Company has undeclared and unpaid dividends in the amount of
$94,557 in its cumulative Preferred Stock for the period from May 1,
1995 to March 31, 1996. The Company is not required
10
<PAGE>
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.
----------------------------------------------------
The following have been submitted to be voted on at the Annual Meeting
of Shareholders to be held June 6, 1996.
1. Election to the Board of Directors for the following terms:
David W. Berry, term expiring in 1999
S. Gordon Reese, Jr., term expiring in 1999
David B. Christofferson, term expiring in 1998
Jeffrey R. Orgill, term expiring in 1997
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)."
----
3. Approval of Stock Incentive Option Plan - 1996.
No other items have been submitted for a vote.
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) Reports on Form 8-K. The Company filed a Form 8-K dated January 9,
1996. The report consisted of a description of two major financing
arrangements completed in the first quarter.
11
<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: May 13, 1996 By: \s\ David W. Berry
-----------------------------------------
David W. Berry,
President
Date: May 13, 1996 By: \s\ David B. Christofferson
-----------------------------------------
David B. Christofferson,
Executive Vice President and Chief Financial
Officer
12
<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
MARCH 31,
--------------------------
1996 1995
---------- ----------
<S> <C> <C>
Common shares issued and outstanding beginning 5,058,406 2,418,050
Add: Stock subscriptions/1/ --- 14,959
Subscribed stock issued --- 90,450
Cumulative preferred stock conversion --- 7,500
---------- ----------
Total equivalent common shares 5,058,406 2,530,959
========== ==========
Net loss $(769,226) $ (388,241)
Less: Cumulative Preferred Stock dividend 25,788 206,970
---------- ----------
Net income (loss) available to common and common
equivalent shares $ (795,014) $ (595,211)
========== ==========
Net income (loss) per common and common
equivalent share $ (0.16) $(0.24)
========== ==========
</TABLE>
- - -------------------------
/1/ Common stock equivalents were determined based on the "Treasury Stock
Method" as set forth in Accounting Principals Board Opinion No. 15.
The accompanying notes are an integral part of these financial statements.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MARCH 31,
1996 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 496,103
<SECURITIES> 0
<RECEIVABLES> 630,394
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,557,080
<PP&E> 11,515,418
<DEPRECIATION> 3,274,641
<TOTAL-ASSETS> 10,414,003
<CURRENT-LIABILITIES> 2,038,004
<BONDS> 4,169,519
0
860
<COMMON> 50,584
<OTHER-SE> 4,517,269
<TOTAL-LIABILITY-AND-EQUITY> 10,414,003
<SALES> 1,164,973
<TOTAL-REVENUES> 1,250,206
<CGS> 0
<TOTAL-COSTS> 992,604
<OTHER-EXPENSES> 929,475
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 97,353
<INCOME-PRETAX> (769,226)
<INCOME-TAX> 0
<INCOME-CONTINUING> (769,226)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (769,226)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
