UNITED STATES 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 September 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ______ to ______
Commission file number: 0-22782
FRONTIER NATURAL GAS CORPORATION
----------------------------------------------------
(Exact name of small business issuer in its charter)
Oklahoma 73-1421000
- ------------------------ ---------------------------------------
(State of incorporation) (I.R.S. Employer Identification Number)
500 Dallas, Suite 2920, Houston, Texas 77002
------------------------------------------------------------------------
(Address of registrant's principal executive offices, including zip code)
(713) 739-7100
----------------------------------------------------
(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 [ ]
-------- ------
9,865,906 shares of the registrant's common stock were outstanding as of
November 12, 1997.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [ X ]
<PAGE>
FRONTIER NATURAL GAS CORPORATION
REPORT INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1997
and December 31, 1996 (Unaudited).............................. 3
Consolidated Statements of Operations for the three
and nine months ended September 30, 1997 and
1996 (Unaudited)............................................... 5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1997 and 1996 (Unaudited).................. 6
Notes to Consolidated Financial Statements (Unaudited)......... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 9
PART II. OTHER INFORMATION............................................... 15
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FRONTIER NATURAL GAS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------------ -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,232,719 $ 4,956,656
Accounts receivable, net of allowance for doubtful accounts
of $10,533 at September 30, 1997 and December 31, 1996 479,952 366,498
Prepaid expenses and other 263,765 282,317
Receivables from affiliates 133,847 152,419
------------------ -----------------
Total current assets 2,110,283 5,757,890
Property and equipment:
Gas and oil properties, at cost -
successful efforts method of accounting 3,272,908 5,280,115
Other property and equipment 1,169,127 1,074,727
------------------ -----------------
4,442,035 6,354,842
Less accumulated depletion, depreciation and (1,280,555) (2,918,918)
------------------ -----------------
amortization 3,161,480 3,435,924
Other assets 142,901 437,378
------------------ -----------------
Total assets $ 5,414,664 $ 9,631,192
================== =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
FRONTIER NATURAL GAS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------------ ------------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 832,574 $ 725,222
Revenue distribution payable 61,773 360,163
Current portion of long-term debt 471,164 304,540
Accrued and other liabilities 559,765 271,805
------------------ ------------------
Total current liabilities 1,925,276 1,661,730
Long-term debt 75,416 325,394
Non-recourse debt 864,000 681,618
Other long-term liabilities 62,954 223,624
------------------ ------------------
Total liabilities 2,927,646 2,892,366
Stockholders' equity:
Cumulative convertible preferred
stock $.01 par value; 5,000,000 shares
authorized; 85,961 shares issued and
outstanding at September 30, 1997
and December 31, 1996; ($859,610
aggregate liquidation preference at
September 30, 1997 and December 31, 1996) 860 860
Common stock:
Class A Common stock, $.01 par value;
20,000,000 shares authorized; 9,865,906
outstanding at September 30, 1997 and
December 31, 1996 98,659 98,659
Unamortized value of warrants issued (33,953) (54,325)
Common stock subscribed 45,000 45,000
Common stock subscription receivable (45,000) (45,000)
Additional paid-in capital 14,599,326 14,599,326
Deficit (12,177,874) (7,905,694)
------------------ ------------------
Total stockholders' equity 2,487,018 6,738,826
------------------ ------------------
Total liabilities and stockholders' equity $ 5,414,664 $ 9,631,192
================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
FRONTIER NATURAL GAS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
1997 1996 1997 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Gas and oil revenues $ 87,084 $ 632,074 $ 544,693 $ 2,573,635
Realized loss on commodity transactions (56,000) (212,000) (212,375) (212,000)
Gain on sale of assets 263,737 (24,067) 396,087 246,504
Operating fees 8,303 50,356 48,029 195,471
Other revenues 43,470 48,899 158,260 141,318
--------------
-------------- -------------- --------------
Total revenues 346,594 495,262 934,694 2,944,928
-------------- -------------- -------------- --------------
Costs and expenses:
Lease operating expense 177,742 157,203 400,597 478,604
Production taxes 4,018 46,509 18,273 185,927
Transportation and gathering costs 3,830 64,884 141,717 255,139
Gas purchases under deferred contract ----- ----- ----- 82,461
Unrealized loss on commodity transactions 95,199 ----- 251,814 -----
Depletion, depreciation and amortization 400,435 352,163 619,959 1,163,008
Exploration costs 656,651 111,477 1,918,245 330,148
Interest expense ----- 576,610 9,205 774,920
Deferred gas contract settlement ----- ----- ----- 368,960
General and administrative expense 516,907 484,046 1,638,601 1,594,232
Delay Rentals 14,766 ----- 131,098 -----
-------------- -------------- -------------- --------------
-------------- -------------- --------------
Total costs and expenses 1,869,548 1,792,892 5,129,509 5,233,399
-------------- -------------- -------------- --------------
Loss before provision for income taxes (1,522,954) (1,297,630) (4,194,815) (2,288,471)
Benefit (provision) for income taxes ----- ----- ----- -----
-------------- -------------- -------------- --------------
Net loss (1,522,954) (1,297,630) (4,194,815) (2,288,471)
Cumulative preferred stock dividend (25,788) (25,788) (77,365) (77,365)
-------------- -------------- -------------- --------------
Net loss applicable to common stockholders $(1,548,742) $(1,323,418) $(4,272,180) $(2,365,836)
============== ============== ============== ==============
Net loss per common and common equivalent share
$ (0.16) $ (0.19) $ (0.44) $ (0.33)
-------------- -------------- -------------- --------------
Weighted average number of common equivalent
shares (in thousands) 9,866 7,142 9,866 7,142
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
FRONTIER NATURAL GAS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------------
1997 1996
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,194,815) $ (2,288,471)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depletion, depreciation and amortization 619,959 1,163,008
Deferred gas contract settlement ----- 368,960
Gain on sale of assets (396,087) (246,504)
Deferred revenues under gas contract ----- (74,400)
Gain on settlement of deferred compensation agreement (25,794) -----
Amortization of warrants and financing costs 44,079 691,700
Writedown of oil & gas properties 489,661 -----
Unrealized loss on commodity transactions 251,814 -----
Exploration costs 1,918,245 330,148
Changes in operating assets and liabilities:
Trade and affiliate receivables (94,882) (121,830)
Prepaid expenses and other 113,981 (7,078)
Other assets 294,477 21,400
Accounts payable 107,352 (430,083)
Revenue distribution payable (298,390) (175,660)
Accrued and other (98,730) (8,745)
------------------ ------------------
Net cash provided by (used in) operating activities (1,269,130) (777,555)
------------------ ------------------
Cash flows used in investing activities:
Capital expenditures - gas and oil properties (3,055,258) (2,831,912)
Capital expenditures - other property and equipment (304,616) (71,877)
Proceeds from sale of assets 1,002,540 4,671,088
------------------ ------------------
Net cash provided by (used in) investing activities (2,357,334) 1,767,299
------------------ ------------------
Cash flows from financing activities:
Proceeds from issuance of debt 182,382 4,732,309
Repayments of long-term debt (202,490) (3,677,461)
Debt issuance costs ----- (183,387)
Payment for settlement of deferred gas contract ----- (2,181,489)
Preferred stock dividends paid (77,365) -----
Proceeds from issuance of common stock ----- 6,430,647
------------------ ------------------
Net cash provided by (used in ) financing activities (97,473) 5,120,619
------------------ ------------------
Net increase (decrease) in cash and cash equivalents (3,723,937) 6,110,363
Cash and cash equivalents at beginning of period 4,956,656 63,908
------------------ ------------------
Cash and cash equivalents at end of period $ 1,232,719 $ 6,174,271
================== ==================
Supplemental disclosure of cash flow information:
Cash paid for interest $ $
62,657 724,986
================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. INTERIM FINANCIAL PRESENTATION
The Condensed Consolidated Financial Statements herein have been prepared
by the Company without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). As applicable under such
regulations, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The Company believes that the
presentation and disclosures herein are adequate to make the information not
misleading, and the financial statements reflect all elimination entries and
adjustments, all of which are of a normal recurring nature, which are necessary
for a fair statement of the results for the nine months ended September 30, 1997
and 1996.
Operating results for interim periods are not necessarily indicative of the
results for full years. It is suggested that these condensed consolidated
financial statements be read in conjunction with the consolidated financial
statements for the year ended December 31, 1996 and the related notes thereto
included in the Company's Annual Report on Form 10-KSB filed with the SEC.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130") to be
effective for periods beginning after December 15, 1997. FAS 130 establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general purpose
financial statements. The Company does not believe that the application of the
new standard will have a material effect on its reporting of consolidated
results of operations, although certain additional disclosures relating to the
Company's hedging .
3. DISPOSITION OF OIL AND GAS PROPERTIES
For the first nine months of 1997 the Company divested its interest in
several wells located in Oklahoma, Texas and Arkansas and a portion of its
interest in a prospect located in South Louisiana and the Company's interest in
a production platform in Mobile Bay, Alabama for a total of $842,978 and
realized a gain of $429,880. This gain was partially offset by a realized loss
of $33,793 which was associated with the relocation of the Company headquarters
to Houston, Texas.
For the first nine months of 1996, the Company sold several properties in
Oklahoma including the sale of the N.E. Cedardale field located in Major County,
Oklahoma and a company vehicle for consideration totaling $3,986,802, and
realized a net gain of $258,878. This gain was partially offset by a realized
loss of $12,374, which was associated with the relocation of the Company
headquarters to Houston, Texas.
4. PREFERRED DIVIDENDS
The Board of Directors of the Company declared a quarterly dividend of $.30
per share on the Company's outstanding cumulative convertible preferred stock.
The dividend was paid July 31, 1997 to stockholders of record at the close of
business July 28, 1997.
5. COMMITMENTS AND CONTINGENCIES
The Company has entered into employment agreements with certain
employees. Two of these agreements expire December 31, 1999. The agreements had
previously provided for salaries for each person and in addition, each of said
two employees would have been entitled to receive deferred compensation.
Effective August 15, 1997, the Company settled the deferred compensation portion
7
<PAGE>
of the employment agreements with these employees, which settlements resulted in
a book gain to the Company of $25,794, and relieves the Company of any further
deferred compensation liabilities to said employees. The agreements previously
provided for automatic renewal for an additional one-year term. The Company,
pursuant to the agreements with the employees, has elected to not extend the
agreements; continued employment beyond December 31, 1999 of either of said
employees would be at will.
The Company also has employment agreements with two other employees. Both
agreements expire on December 31, 1997 . The agreements previously provided for
automatic renewal for an additional one-year term. The Company, pursuant to the
agreements with the employees, has elected to not extend the agreements;
continued employment of either of said employees would be at will. . The
agreements provide for salaries as well as certain incentive compensation. All
agreements contain provisions prohibiting the disclosure to third parties of
proprietary information relating to the Company.
The Company has entered into an agreement with a director to serve as a
consultant to the Company. The consulting agreement provides for the director to
furnish exploration and production oversight services on the Company's existing
properties and prospects in the Mid-Continent Area and prospect generation and
evaluation services on the Company's existing 3-D seismic data over acreage in
the Mid-Continent Area, for a period of 23 months for a monthly compensation of
$10,000 ending on March 1, 1998. This consulting agreement was entered into in
settlement of a previously existing employment agreement which would have been
more costly to the Company and for a longer period of time.
Pursuant to the credit agreement with the bank, the Company entered into a
natural gas swap agreement on 62,500 MMBTU of natural gas per month at $1.566
per MMBTU for Mid-Continent gas for the period from April 1, 1996 through
January 31, 1999. The swap was amended to 31,250 MMBTU on September 25, 1996,
due to the sale of the N.E. Cedardale field. The Company recorded a loss of
$212,000 in connection with this reduction in quantities covered by the swap
agreement. Currently the Company's monthly natural gas production is
substantially less than the natural gas swap that is in place. This caused the
Company to record an unrealized loss on the consolidated statements of
operations of $95,199 and $251,814 for the three and nine month periods ended
September 30, 1997, respectively. The total unrealized loss on the amended swap
agreement was $443,207 at September 30, 1997. The Company has a hedge in place,
which limits the potential cost per MMBTU it may have to settle at a price of
$3.13 per MMBTU, for 31,250 MMBTU per month in November and December 1997 and
January and February 1998.
The Company is presently in non-compliance with the terms of its loan from
Bank of America, but has secured a waiver of various covenants under the loan
through September 30, 1997. The Company anticipates that it will require
additional waivers of covenants under the Bank of America loan until such time
as the Company begins to receive revenues, if ever, from its current exploration
projects.
6. SUBSEQUENT EVENTS
On October 20, 1997 at a duly called Special Meeting of Shareholders, a quorum
was present and the proposal to increase authorized common shares from
20,000,000 to 40,000,000 was approved and, an amended Certificate of
Incorporation is in the process of being filed.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis reviews Frontier Natural Gas
Corporation's operations for the three and nine month periods ended September
30, 1997 and 1996 and should be read in conjunction with the consolidated
financial statements and notes related thereto. Certain statements contained
herein that set forth management's intentions, plans, beliefs, expectations or
predictions of the future are forward-looking statements. It is important to
note that Frontier's 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 pricing assumptions of said reserves, 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, regulatory uncertainties and the availability of capital to fund
planned expenditures as well as general industry and market conditions.
Overview
The Company's exploration activities for 1997 continued to center around
furthering its Gulf Coast Projects, and in particular, the transition zones of
South Louisiana which it initiated in 1995. The Company's main emphasis was in
furthering the Starboard Prospect. The Company moved its headquarters to
Houston, Texas, in September 1996, to allow the Company to more effectively
exploit opportunities in these primary areas of exploration.
During 1996, the Company raised funds through a bank financing agreement,
issued stock in a public offering, sold producing properties which no longer fit
the Company's business plan, and obtained partners for its exploration
activities.
The Starboard Project, located in Terrebonne Parish, Louisiana, has been
the primary focus of the Company's exploration work for over two years and
continues to be the most significant project in the Company's history. Partners
include Fina Oil and Chemical Company, two affiliates of public utilities and a
development drilling financing commitment from Bank of America, Illinois. The
Company owns working interests in its leases over said project ranging from 12%
to 48% depending upon the target formation depths. The 3-D seismic has been
shot, processed and interpreted. The project includes developmental and
exploratory locations. After seismic interpretation three initial wells have
been proposed by the partners, two of which are exploratory and one
developmental.
The Company implemented what it considers to be an aggressive drilling
program in 1997. In the first nine months of 1997, the Company participated in
five dry holes and one unsuccessful sidetrack operation on South Louisiana
prospects. It also participated in a dry hole in Mobile Bay, Alabama, on a high
risk, high potential Oligocene feature. The Company did however participate in
two successful completions in Garvin County, Oklahoma, resulting from 3D
seismic.
The 1997 drilling results to date have not been as hoped in that the
Company has participated in eight wells drilled in 1997 and one sidetrack
operation in an existing wellbore, which operations have resulted in two
successful completions, six dry holes and one unsuccessful sidetrack operation
due to mechanical difficulties. These results, coupled with limited capital
resources have caused the Company to primarily focus on its Starboard project.
The Company must also address its declining cash and/or capital resources
in order to continue to maximize its interest in its Starboard Project. The
result of the unsuccessful drilling and reductions in cash and capital assets
has caused the Company to focus on its existing prospects and adopt a moratorium
on seeking new projects. In addition the Company is reducing overhead and does
not intend unless additional capital resources are raised to invest its own
funds in any drilling, and projects other than Starboard will be drilled only
with third party funds through the sale of working or other participation
interests. In order to continue to maximize its ownership in Starboard, the
Company must supplement its cash and/or capital resources. In this regard, it is
looking at a potential asset acquisition with stock and the Company is reviewing
other potential opportunities including potential business consolidations in
9
<PAGE>
order to increase efficiencies and exploration capital. See also "Liquidity and
Capital Resources." In the event the Company does not raise or generate
additional capital resources within approximately three months it will not have
adequate liquidity to fund ongoing operations. In addition to possible
acquisitions based upon an exchange of stock or a business merger or
consolidation, such resources can be raised by a sale of working interests in
the Starboard Project. Management believes such resources will likely be
available within said time.
Three months ended September 30, 1997 compared with three months ended September
30, 1996
Revenue. Total revenues decreased 30.1% from $495,262 for the quarter ended
September 30, 1996, to $346,594 for the quarter ended September 30, 1997.
Total gas and oil revenues decreased 86.2% from $632,074 to $87,084. The
decrease in gas and oil revenues was primarily attributable to the ceased
production from the Mobile Bay wells which came on stream in December of 1995
and from the sale of the Company's Cedardale properties and other properties
located in Texas, Arkansas and Oklahoma as discussed below. Gas and oil revenues
associated with Mobile Bay declined from $247,434 for the quarter ended
September 30, 1996 and from the Cedardale properties declined from $91,637 for
the quarter both as compared to no revenue for the quarter ended September 30,
1997. A contributing factor to the decline in gas and oil revenues was the sale
of several of the Company's wells in Texas, Oklahoma and Arkansas.
The decrease in gas and oil revenues during the third quarter of 1997 was
partially offset by an increase in gain on sale of assets of $287,804 from a
loss of $24,067 reported in the third quarter of 1996 to $263,737 reported in
the third quarter of 1997. As a result of the sale of a substantial portion of
the Company's operated properties in 1996, operating fees to the Company
decreased from $50,356 in the third quarter of 1996 to $8,303 in the third
quarter of 1997. The Company realized losses from various commodity transactions
totaling $56,000 in the third quarter of 1997 as compared to a loss of $212,000
for the third quarter of 1996. These losses were attributable to various
transactions in which the Company hedged its future gas delivery obligations as
a requirement for its bank loan facility. Gains and losses are determined by
whether the spot gas prices are higher or lower than the hedge contracts for the
same time period. In addition to the foregoing, the Company had other revenues
of $43,470 in the third quarter of 1997 as compared to $48,899 in the third
quarter of 1996. Included in third quarter 1997 other revenues is the net gain
of $25,794 from the Company's officers deferred compensation settlement which
was executed on August 15, 1997.
Costs and Expenses. Total costs and expenses of the Company increased 4.3%
from $1,792,892 in the third quarter of 1996 to $1,869,548 in the third quarter
of 1997. The change in costs and expenses was primarily attributable to a
combination of decreases in transportation and marketing costs, production taxes
and interest expense. Offsetting the foregoing decreases in expenses were
increases in depletion and depreciation costs, lease operating expense,
exploration costs, general and administration expenses, and delay rental
expense.
Transportation and gathering costs decreased 94.1% from $64,884 for the
third quarter of 1996 compared to $3,830 for the third quarter of 1997. The
decrease in transportation and gathering costs is due to the ceased production
from the Mobile Bay wells.
Production taxes declined 91.4% from $46,509 for the third quarter of 1996
to $4,018 for the third quarter of 1997 due to reduced net production of the
Company.
Interest expense decreased to zero in the third quarter of 1997 from
$576,610 for the third quarter of 1996 due to the capitalization of interest for
the ongoing Starboard Project in South Louisiana. The Bank of America loan was
substantially repaid in September 1996 from the proceeds of the sale from the
N.E. Cedardale properties.
Depletion, Depreciation, and Amortization Expense ("DD&A") increased by
13.8% from $352,163 in the third quarter of 1996 to $400,435 for the third
quarter of 1997. The increase was primarily attributable to writeoffs of
$323,353 resulting from the plugging and abandonment of the wells located in
Mobile Bay, Alabama.
Lease operating expense increased 13.1% from $157,203 for the third quarter
of 1996 to $177,742 for the third quarter of 1997. The increase in lease
operating costs was attributable to ongoing workover activities on current
10
<PAGE>
operated properties and the onset of operational expenses of two successfully
completed non operated wells in Garvin County, Oklahoma. Of the total of
$177,742 incurred in the third quarter of 1997, $135,899 or 76.4% was
attributable to the Company's Mobile Bay operations which contributed no revenue
for the quarter and are presently being plugged and abandoned and the equipment
salvaged. All anticipated lease operating expenses relating to said Mobile Bay
wells have now been accrued. $1,675 of the total is attributable to other wells
that have been sold, $4,966 which are being plugged, $206 is attributed to
rework activity and $34,996 is attributable to ongoing operations.
Exploration costs increased 489.1% from $111,477 for the third quarter of
1996 to $656,651 for the third quarter of 1997. The exploration costs reflect
the impairment of oil and gas leases and expensed investments, of which $620,142
are attributable to dry hole costs. Also included in exploration costs is
$36,508 of abandoned leasehold costs.
General administrative expenses ("G&A") increased by 6.4% from $484,046 for
the third quarter of 1996 compared to $514,907 in the third quarter of 1997.
This was primarily attributable to increases in other professional services.
Unrealized loss on commodity transactions was $95,199 for the third quarter
of 1997. Currently the Company's production is less than the hedges that are in
place. This caused the Company to record the unrealized loss. There was no such
loss recorded for the same period in 1996.
Delay rentals transactions were $14,766 for the third quarter 1997. This
was attributed to rentals due on the Company's Starboard Prospect in Terrebonne
Parish, Louisiana.
Net Income (loss). The net loss increased from $1,297,630 to $1,522,954 for
the third quarter ended September 30, 1996 and September 30, 1997, respectively.
This increase was due to the factors discussed above.
The net loss per common share decreased from a net loss of $0.19 per share
in the third quarter of 1996 to a net loss of $0.16 per share in the third
quarter of 1997. This is attributed to the increased number of weighted average
common equivalent shares at September 30, 1997 that resulted from the secondary
offering which was finalized on August 14, 1996. As a result of the secondary
offering there were approximately 9,866,000 weighted average common equivalent
shares at September 30, 1997 as compared to approximately 7,142,000 weighted
average common equivalent shares at September 30, 1996.
Nine months ended September 30, 1997 compared with nine months ended September
30, 1996
Revenue. Total revenues decreased 68.3% from $2,944,928 for the nine months
ended September 30, 1996, to $934,694 for the nine months ended September 30,
1997.
Total gas and oil revenues decreased 78.9% from $2,573,635 to $544,693. The
decrease in gas and oil revenues was primarily attributable to ceased production
from the Mobile Bay wells which came on stream in December of 1995 and from the
sale of properties discussed below. Gas and oil revenues associated with Mobile
Bay declined from $641,609 for the nine months ended September 30, 1996 compared
to $60,808 for the nine months ended September 30, 1997. A contributing factor
to the decline in gas and oil revenues was the sale of the Company's N.E.
Cedardale field located in Major County, Oklahoma on September 27, 1996. The
Company recorded gas and oil revenues associated with the N.E. Cedardale field
of $530,213 for the nine months ended September 30, 1996 and no revenue in 1997.
As a result of the sale of a substantial portion of the Company's operated
properties in 1996, operating fees to the Company decreased from $195,471 for
the nine months ended September 30, 1996 to $48,029 for the nine months ended
September 30, 1997. The Company realized losses from various commodity
transactions totaling $212,375 for the nine months ended September 30, 1997 as
compared to a loss of $212,000 for the same period of 1996. These losses were
attributable to various transactions in which the Company hedged its future gas
delivery obligations as a requirement for its bank loan facility. The Company
also had other revenues of $158,260 in the nine months ended September 30, 1997
as compared to $141,318 in the nine months ended September 30, 1996. Included in
the nine months ended September 30, 1997 other revenues is the net gain of
$25,794 from the Company's officers deferred compensation settlement which was
executed on August 15, 1997.
11
<PAGE>
Costs and Expenses. Total costs and expenses of the Company decreased 2.0%
from $5,233,399 for the nine months ended September 30, 1996 compared to
$5,129,509 for the nine months ended September 30, 1997. The decrease in costs
and expenses was primarily attributable to a combination of decreases in
non-recurring deferred gas contract settlement costs and gas purchases under
deferred contracts, decreases in depletion, depreciation and amortization,
interest expense, and operating costs associated with oil and gas properties
such as lease operating expense, transportation, and production taxes. Partially
offsetting the foregoing decreases in expenses were increases in unrealized loss
on commodity transactions, exploration costs, general and administrative
expense, and delay rental expense.
Depletion, Depreciation, and Amortization Expense ("DD&A") decreased by
46.7% from $1,163,008 for the nine months ended September 30, 1996 to $619,959
for the nine months ended September 30, 1997. The decrease in DD&A was primarily
attributable to the sale of certain of the Company's properties including the
N.E. Cedardale field located in Major County, Oklahoma on September 27, 1996,
and was partially offset by the plugging of the Company's Mobile Bay wells
located in Alabama.
Interest expense decreased to $9,205 for the nine months ended September
30, 1997 from $774,920 for the nine months ended September 30, 1996. The Bank of
America loan was substantially repaid in September 1996 from the proceeds of the
sale from the N.E. Cedardale properties, and in 1997 the Company capitalized a
large portion of its interest in its ongoing Starboard Prospect.
Lease operating expense decreased 16.3% from $478,604 for the nine months
ended September 30, 1996 to $400,597 for the nine months ended September 30,
1997. The reduction in lease operating costs was attributable to the sale of
operated properties, including the N.E. Cedardale field. Of the nine month 1997
total $266,040 was attributable to the Company's Mobile Bay wells currently
being plugged.
Production taxes declined 90.2% from $185,927 for the nine months ended
September 30, 1996 to $18,273 for the nine months ended September 30, 1997 due
to reduced production .
Transportation and gathering costs decreased 44.5% from $255,139 for the
nine months ended September 30, 1996 compared to $141,717 for the nine months
ended September 30, 1997. The reduction in transportation and gathering costs is
due to the ceased production from the Mobile Bay wells.
Unrealized loss on commodity transactions was $251,814 for the nine months
ended September 30, 1997. Currently the Company's production is less than the
hedges that are in place. This caused the Company to record the unrealized loss.
There was no such loss recorded for the same period in 1996.
Exploration costs increased 481.1% from $330,148 for the nine months ended
September 30, 1996 to $1,918,245 for the nine months ended September 30, 1997.
The exploration costs reflect the impairment of oil and gas leases and expensed
investments, of which $1,748,498 are attributable to dry hole costs. Also
included in exploration costs is $169,747 of abandoned leasehold costs.
General administrative expenses ("G&A") increased by 2.8% from $1,594,232
for the nine months ended September 30, 1996 compared to $1,638,601 for the nine
months ended September 30, 1997. This was primarily attributable to increases in
other professional services.
Delay rental expense increased from zero to $131,098 for the period
September 30, 1997 as compared to the same period in 1996. This increase was
primarily attributed to the rental obligations of the Company 's Starboard
project in South Louisiana.
Net Income (loss). The net loss increased from $2,288,471 to $4,194,815 for
the nine months ended September 30, 1996 and September 30, 1997, respectively.
This increase was due to the factors discussed above.
The net loss per common share increased from a net loss of $0.33 per share
for the nine months ended September 30, 1996 to a net loss of $0.44 per share
for the nine months ended September 30, 1997. This is reflective of the increase
12
<PAGE>
in net loss of $1,906,344 from the nine months ended September 30, 1996 as
compared to the nine months ended September 30, 1997. The increased net loss was
partially offset by the increased number of weighted average common equivalent
shares at September 30, 1997 that resulted from the secondary offering which was
finalized on August 14, 1996. As a result of the secondary offering there were
approximately 9,866,000 weighted average common equivalent shares at September
30, 1997 as compared to approximately 7,142,000 weighted average common
equivalent shares at September 30, 1996.
Liquidity and Capital Resources
At September 30, 1997, the Company had a cash and cash equivalent balance
of $1,232,719 and working capital of $185,007 as compared to a cash and cash
equivalent balance of $4,956,656 and working capital of $4,096,160 at December
31, 1996. The decrease in cash and working capital was primarily attributable to
the operating loss incurred during the first nine months of 1997 and, in
particular, exploration costs associated with dry holes which were drilled
during the first nine months of 1997.
Cash flows used in operations totaled $1,269,130, excluding $1,918,245 of
exploration costs which are classified under cash flows used in investing
activities.
Cash flows used in investing activities totaled $2,357,334. Included in the
cash flows used in investing activities are $3,055,258 of capital expenditures
on gas and oil properties, including the exploration costs referred to above
which are included in the operating loss for the period but are excluded from
operating cash flows. Partially offsetting the capital expenditures during the
nine months ended September 30, 1997, the Company received $842,978 of proceeds
from the sale of various oil and gas properties during the nine months ended
September 30, 1997, which combined with other asset sales to total $1,002,540.
Cash flows from financing activities reflect a use of cash of 97,473 during
the first nine months of 1997. Cash flows from financing activities consisted of
proceeds from debt issuances of $182,382 offset by repayments of long-term debt
of $202,490 and preferred stock dividends paid of $77,365.
The Company's principal obligations at September 30, 1997, were
substantially the same as at December 31, 1996, and consisted principally of (i)
servicing loans from Bank of America ($335,181 at September 30, 1997) and other
loans, (ii) a non-recourse loan relating to the development of the Company's
Starboard Prospect ($864,000 at September 30, 1997), (iii) payment of preferred
stock dividends ($77,365 of dividends were paid during the first nine months of
1997), (iv) funding of the Company's exploration activities during the last half
of 1997, (v) funding of the day-to-day operating costs. Unrealized losses on
commodity transactions were $251,814 for the period ended September 30, 1997.
There were no such losses for the same period in 1996.
The lack of success in 1997 drilling has caused the Company to reduce its
exploration plans. It is not currently seeking additional projects and is
focused upon causing its Starboard project to be drilled and certain other
exploration projects in its inventory to be furthered. Absent additional new
capital resources it will fund these projects exclusively with third party
partners' funds via the sale of interest in the projects. In that the Company is
not currently seeking additional projects it is reducing overhead to the maximum
extent possible while still furthering its active projects. The effect of the
reductions will be reflected in the fourth quarter and more substantially in the
first quarter of 1998. Its objective is to continue to maximize its ownership in
the Starboard Project. In order to do so it is looking at several potential
alternatives to supplement its cash and/or capital resources, including an asset
acquisition for stock and/or potential business consolidations with other
entities. The Board of Directors has authorized management to discuss certain
merger or other business consolidations with third parties in order to ascertain
whether a strategic transaction beneficial to the shareholders may be available.
The Company has been pursuing said discussions with several entities and
management is devoting most of its' time to this issue.
In the interim, the Company has utilized, and expects to continue to
utilize, its cash balances to fund negative cash flows from operations. The
Company expects that it will have depleted its current cash reserves by early
1998. As such it is imperative that the Company increase its' capital by early
1998, or it will be unable to fund its projects and operations. This can
possibly be done either pursuant to a business consolidation or an asset
acquisition for stock. Management is aggressively pursuing such options and is
13
<PAGE>
in discussions with several entities in this regard. Absent success with such
sources, sale of working interests in Company projects, including Starboard,
could be sold for cash. The Company believes that such alternatives are viable
and achievable although no assurances can presently be made. The Company is
presently in non-compliance with the terms of its loan from Bank of America, but
has secured a waiver of various covenants under the loan through September 30,
1997. The Company anticipates that it will require additional waivers of
covenants under the Bank of America loan until such time as the Company begins
to receive revenues, if ever, from its current exploration projects. The Company
has no assurance said waiver will be granted.
14
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is party to a lawsuit filed in 1994 in the Circuit Court of
Mobile, Alabama. Said 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. TOG has dismissed its
claims in this regard with prejudice. The Company has been awarded summary
judgment as to all remaining counterclaims of TOG with respect to the Mobile Bay
area wells, 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. On October 24, 1997, the Alabama Supreme Court affirmed the summary
judgment decision in Frontier's favor. TOG has petitioned the Alabama Supreme
Court to rehear its appeal. Absent relief on that petition Frontier's claims
against the defendant may now proceed to trial and TOG has no further claims
pending against Frontier.
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 4. Submission of Matters to a Vote of Security Holders.
See the Company's Quarterly Report on Form 10-QSB for the quarter ended
June 30, 1997.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(10.1) Amendment to Employment Agreement with David W. Berry dated
August 15, 1997
(10.2) Amendment to Employment Agreement with David B. Christofferson
dated August 15, 1997
(11) Computation of Net Income Per Common and Common Equivalent
Share
(27) Financial Data Schedule
(b) Reports on Form 8-K
None
15
<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: November 14, 1997 By: /s/ DAVID W. BERRY
------------------- ------------------------------------
David W. Berry, Chief Executive
Officer (Principal Executive Officer)
and Director
Date: November 14, 1997 By: /s/ DAVID B. CHRISTOFFERSON
------------------- -------------------------------------
David B. Christofferson, Executive
Vice President, General Counsel,
Chief Financial Officer and Director
16
Amendment to Employment Agreement between
Frontier Natural Gas Corporation and David B. Christofferson
WHEREAS Frontier Natural Gas Corporation, an Oklahoma Corporation, ("Frontier")
and David B. Christofferson, an individual, ("Employee") have previously entered
into that certain employment agreement dated effective the first day of January,
1993 a copy of which is attached hereto as Exhibit A and incorporated by
reference (the "Employment Agreement") and
WHEREAS Frontier and Employee have agreed and settled all obligations of
Frontier to Employee in regards to deferred compensation as called for in
paragraph 5 of the Employment Agreement and
WHEREAS Employee and Frontier both desire to amend the Employment Agreement to
reflect the satisfaction of all obligations for payment of deferred compensation
pursuant to the Employment Agreement; now therefore
The Parties Hereby Agree as Follows:
1. Amendment. Employee and Frontier agree that the Employment Agreement shall be
deemed amended such that paragraph 5 titled "Deferred Compensation" of the
Employment Agreement, including sub-paragraphs 5.a., 5.b., 5.c., 5.d., 5.e.,
5.f., and 5.g.shall be deleted from the Employment Agreement and the Employment
Agreement shall be read as to all provisions as if said paragraph 5 had never
been a part thereof.
2. Contract Remains Effective. Other than as specifically amended and as changed
in this amendment, all provisions of the Employment Agreement shall remain in
full force and effect and binding upon the parties hereto.
In Witness Thereof, the parties have executed and delivered this amendment
effective as of the fifteenth day of August 1997.
/s/ illegible
- ------------------------------------
Frontier Natural Gas Corporation
/s/ David W. Berry
- ------------------------------------
Employee
Amendment to Employment Agreement between
Frontier Natural Gas Corporation and David W. Berry
WHEREAS Frontier Natural Gas Corporation, an Oklahoma Corporation, ("Frontier")
and David B. Christofferson, an individual, ("Employee") have previously entered
into that certain employment agreement dated effective the first day of January,
1993 a copy of which is attached hereto as Exhibit A and incorporated by
reference (the "Employment Agreement") and
WHEREAS Frontier and Employee have agreed and settled all obligations of
Frontier to Employee in regards to deferred compensation as called for in
paragraph 5 of the Employment Agreement and
WHEREAS Employee and Frontier both desire to amend the Employment Agreement to
reflect the satisfaction of all obligations for payment of deferred compensation
pursuant to the Employment Agreement; now therefore
The Parties Hereby Agree as Follows:
1. Amendment. Employee and Frontier agree that the Employment Agreement shall be
deemed amended such that paragraph 5 titled "Deferred Compensation" of the
Employment Agreement, including sub-paragraphs 5.a., 5.b., 5.c., 5.d., 5.e.,
5.f., and 5.g.shall be deleted from the Employment Agreement and the Employment
Agreement shall be read as to all provisions as if said paragraph 5 had never
been a part thereof.
2. Contract Remains Effective. Other than as specifically amended and as changed
in this amendment, all provisions of the Employment Agreement shall remain in
full force and effect and binding upon the parties hereto.
In Witness Thereof, the parties have executed and delivered this amendment
effective as of the fifteenth day of August 1997.
/s/ David W. Berry
- ------------------------------------
Frontier Natural Gas Corporation
/s/ illegible
- ------------------------------------
Employee
EXHIBIT 11 TO FORM 10-QSB
FRONTIER NATURAL GAS CORPORATION
Computation of Net Income Per Common and Common Equivalent Share
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
---------------------------------------
1997 1996
------------------ -----------------
<S> <C> <C>
Common shares issued and outstanding,
Beginning 9,865,906 5,058,406
Add: Common stock issued for service ---- 87,500
================== =================
Total equivalent common shares 9,865,906 7,142,056
================== =================
Net loss $ $
(4,194,815) (2,288,471)
Less: Cumulative preferred stock dividend 77,365 77,365
------------------ -----------------
Net loss available to common and common
equivalent shares $ $ (2,365,836)
(4,272,180)
================== =================
Net loss per common and common
equivalent share $ $
(0.44) (0.33)
================== =================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,232,719
<SECURITIES> 0
<RECEIVABLES> 490,485
<ALLOWANCES> (10,533)
<INVENTORY> 0
<CURRENT-ASSETS> 2,110,283
<PP&E> 4,442,035
<DEPRECIATION> (1,280,555)
<TOTAL-ASSETS> 5,414,664
<CURRENT-LIABILITIES> 1,925,276
<BONDS> 75,416
0
860
<COMMON> 98,659
<OTHER-SE> 2,387,499
<TOTAL-LIABILITY-AND-EQUITY> 5,414,664
<SALES> 544,693
<TOTAL-REVENUES> 934,694
<CGS> 0
<TOTAL-COSTS> 5,120,304
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,205
<INCOME-PRETAX> (4,194,815)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,194,815)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,194,815)
<EPS-PRIMARY> (.44)
<EPS-DILUTED> (.44)
</TABLE>
