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 June 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 as the registrant's common stock were outstanding as of
August 5, 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 June 30, 1997 and
December 31, 1996 (Unaudited)..................................... 3
Consolidated Statements of Operations for the three
and six months ended June 30, 1997 and 1996 (Unaudited)........... 5
Consolidated Statements of Cash Flows for the six months
ended June 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..................................................14
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FRONTIER NATURAL GAS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------------ -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,041,606 $ 4,956,656
Accounts receivable, net of allowance for doubtful accounts
of $10,533 at June 30, 1997 and December 31, 1996 393,833 366,498
Prepaid expenses and other 128,808 282,317
Receivables from affiliates 190,354 152,419
------------------ -----------------
Total current assets 2,754,601 5,757,890
Property and equipment:
Gas and oil properties, at cost -
successful efforts method of accounting 5,871,257 5,280,115
Other property and equipment 1,174,308 1,074,727
------------------ -----------------
7,045,565 6,354,842
Less accumulated depletion, depreciation and (3,007,464) (2,918,918)
------------------ -----------------
amortization 4,038,101 3,435,924
Other assets 214,423 437,378
------------------ -----------------
Total assets $ 7,007,125 $ 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>
June 30, December 31, 1996
1997
------------------ ------------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 800,621 $ 725,222
Revenue distribution payable 96,420 360,163
Current portion of long-term debt 411,266 304,540
Accrued and other liabilities 343,591 271,805
------------------ ------------------
Total current liabilities 1,651,898 1,661,730
Long-term debt 149,284 325,394
Non-recourse debt 864,000 681,618
Other long-term liabilities 312,973 223,624
------------------ ------------------
Total liabilities 2,978,155 2,892,366
Stockholders' equity:
Cumulative convertible preferred stock $.01 par value; 5,000,000
shares authorized; 85,961 shares issued and outstanding at
June 30, 1997 and December 31, 1996; ($859,610 aggregate liquidation
preference at June 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 June 30, 1997 and
December 31, 1996 98,659 98,659
Unamortized value of warrants issued (40,744) (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 (10,629,131) (7,905,694)
------------------ ------------------
Total stockholders' equity 4,028,970 6,738,826
------------------ ------------------
Total liabilities and stockholders' equity $ 7,007,125 $ 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 Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
1997 1996 1997 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Gas and oil revenues $ 130,174 $ 650,597 $ 457,609 $ 1,742,560
Realized gain/(loss) on commodity (34,438) 199,001 (156,375) 199,001
transactions
Gain on sale of assets 315 257,286 132,350 270,571
Operating fees 25,492 72,105 39,726 145,115
Other revenues 60,910 20,471 114,790 92,419
-------------- -------------- -------------- --------------
Total revenues 182,453 1,199,460 588,100 2,449,666
-------------- -------------- -------------- --------------
Costs and expenses:
Lease operating expense 126,157 154,834 222,855 321,401
Production taxes 5,471 62,255 14,255 139,418
Transportation and gathering costs 47,493 61,382 137,887 190,255
Gas purchases under deferred contract ----- ----- ----- 82,461
Unrealized loss on commodity transactions 156,615 ----- 156,615 -----
Depletion, depreciation and amortization 86,750 378,847 219,524 810,845
Exploration costs 408,968 113,129 1,261,594 218,671
Interest expense 5,072 100,957 9,205 198,310
Deferred gas contract settlement ----- ----- ----- 368,960
General and administrative expense 665,766 549,671 1,238,026 1,110,186
-------------- -------------- -------------- --------------
Total costs and expenses 1,502,292 1,421,075 3,259,961 3,440,507
-------------- -------------- -------------- --------------
Loss before provision for income taxes (1,319,839) (221,615) (2,671,861) (990,841)
Benefit (provision) for income taxes ----- ----- ----- -----
-------------- -------------- -------------- --------------
Net loss (1,319,839) (221,615) (2,671,861) (990,841)
Cumulative preferred stock dividend 25,788 25,788 51,576 51,576
-------------- -------------- -------------- --------------
Net loss applicable to common stockholders $(1,345,627) $(247,403) $(2,723,437) $(1,042,417)
============== ============== ============== ==============
Net loss per common and common equivalent share
$ (0.14) $ (0.05) $ (0.28) $ (0.20)
-------------- -------------- -------------- --------------
Weighted average number of common equivalent
shares (in thousands) 9,866 5,146 9,866 5,146
============== ============== ============== ==============
</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>
Six Months Ended June 30,
------------------------------------------
1997 1996
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,671,861) $ (990,841)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depletion, depreciation and amortization 219,524 810,845
Deferred gas contract settlement ----- 368,960
Gain on sale of assets (132,350) (270,571)
Deferred revenues under gas contract ----- (74,400)
Amortization of financing costs 28,268 128,132
Unrealized loss on commodity transactions 156,615 -----
Exploration costs 1,261,594 218,671
Other 27,046 -----
Changes in operating assets and liabilities:
Accounts receivable (65,270) 33,079
Prepaid expenses and other 181,795 25,626
Other assets (1,184) (136,936)
Accounts payable 75,399 (281,734)
Revenue distribution payable (263,743) (81,961)
Accrued and other 4,520 (12,557)
------------------ ------------------
Net cash provided by (used in) in operating activities (1,179,647) (263,687)
------------------ ------------------
Cash flows used in investing activities:
Capital expenditures - gas and oil properties (2,194,648) (2,169,586)
Capital expenditures - other property and equipment (102,808) (41,936)
Proceeds from sale of assets 540,883 955,463
------------------ ------------------
Net cash provided by (used in) investing activities (1,756,573) (1,256,059)
------------------ ------------------
Cash flows from financing activities:
Proceeds from issuance of debt 225,467 4,506,091
Repayments of long-term debt (152,721) (264,013)
Debt issuance costs ----- (183,387)
Payment for settlement of deferred gas contract ----- (2,181,489)
Preferred stock dividends paid (51,576) -----
------------------ ------------------
Net cash provided by (used in ) financing activities 21,170 1,877,202
------------------ ------------------
Net increase (decrease) in cash and cash equivalents (2,915,050) 357,456
Cash and cash equivalents at beginning of period 4,956,656 63,908
------------------ ------------------
Cash and cash equivalents at end of period $ 2,041,606 $ 421,364
================== ==================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 123,797 $ 246,398
================== ==================
</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 six months ended June 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.
3. DISPOSITION OF OIL AND GAS PROPERTIES
For the first six months of 1997 the Company divested its interest in a
well located in Oklahoma and a portion of its interest in a prospect located in
South Louisiana for a total of $381,321 and realized a gain of $166,143. 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 six months of 1996 the Company sold several properties in
Oklahoma and a company vehicle for consideration totaling $436,802, and realized
a net gain of $270,571.
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 April 25, 1997 to stockholders of record at the close of
business April 21, 1997.
5. COMMITMENTS AND CONTINGENCIES
The Company has entered into employment agreements with certain employees.
Two of these agreements expire December 31, 1999 (and automatically renew for
additional one-year terms each December 31 unless specifically terminated by
either the Company or employee). The agreements provide for salaries for each
person and in addition, each of said two employees shall be entitled to receive
deferred compensation, provided the employee remains employed with the Company
until expiration of the initial term of his agreement and that he has not been
terminated for cause thereunder. Such deferred compensation shall be an annual
payment equal to the product of $9,000 multiplied by the number of years the
employee is employed by the Company commencing July 1, 1993 (up to a maximum of
ten years, and payments commence the year the Employee reaches age 65 or retires
from the Company, whichever is later). Deferred payments shall be paid for a
maximum of 15 years thereafter. The liability for these payments is being
accrued over a ten year period commencing July 1, 1993.
7
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company also has employment agreements with two other employees. Both
agreements expire on December 31, 1997 and automatically renew for successive
one-year terms unless terminated by either the Company or the employee. 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 commencing on May 1, 1996 for
a monthly compensation of $10,000. 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 $156,615. The total unrealized loss on the amended swap agreement
was $275,258 at June 30, 1997.
6. SUBSEQUENT EVENTS
The Company sold various oil and gas properties at auction on July 16,
1997. Net proceeds after related sale expenses were $228,057.
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 six month periods ended June 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 acquisition and financing of 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 half of 1997, the Company participated in four dry
holes and one unsuccessful sidetrack operation on South Louisiana prospects,
none of which was confirmed by 3-D seismic. It also participated in a dry hole
in Mobile Bay on a high risk, high potential Oligocene feature. As of August
1997 the Company's Schooner Prospect in Plaquemines Parish, Louisiana, has also
completed drilling and has proved to be a dry hole. The Schooner Prospect was
operated by Hunt Petroleum Corporation which participated with Frontier in the
project. Dry hole costs for the Company's interest are approximately $250,000.
The 1997 drilling results to date have not been successful in that the
Company has participated in six wells drilled in 1997 and one sidetrack
operation in an existing wellbore, which operations have resulted in 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 to invest its own capital 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 order to increase efficiencies and
exploration capital. See also "Liquidity and Capital Resources."
9
<PAGE>
Three months ended June 30, 1997 compared with three months ended June 30, 1996
Revenue. Total revenues decreased 84.8% from $1,199,460 for the quarter
ended June 30, 1996, to $182,453 for the quarter ended June 30, 1997.
Total gas and oil revenues decreased 80.0% from $650,597 to $130,174. The
decrease in gas and oil revenues was primarily attributable to decreased
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 $407,936 for the quarter ended June 30, 1996
compared to $675 for the quarter ended June 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
$246,655 for the quarter ended June 30, 1996.
In addition to the decrease in gas and oil revenues during the second
quarter of 1997 there was a decrease in gain on sale of assets of $256,971 from
$257,286 reported in the second quarter of 1996 to $315 reported in the second
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 $72,105 in the second quarter of 1996 to $25,492 in the second quarter of
1997. The Company realized losses from various commodity transactions totaling
$34,438 in the second quarter of 1997 as compared to a gain of $199,001 for the
second quarter of 1996. These gains and 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 $60,910 in the second quarter of 1997 as compared to $20,471 in the second
quarter of 1996.
Costs and Expenses. Total costs and expenses of the Company increased 5.7%
from $1,421,075 in the second quarter of 1996 to $1,502,292 in the second
quarter of 1997. The increase in costs and expenses was primarily attributable
to a combination of increases in unrealized loss on commodity transactions,
exploration costs and general and administrative expense. Offsetting the
foregoing increases in expenses were decreases in interest expense, decreases in
depletion, depreciation and amortization and operating costs associated with oil
and gas properties such as lease operating expense, transportation, and
production taxes.
Unrealized loss on commodity transactions was $156,615 for the second
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.
Exploration costs increased 261.5% from $113,129 for the second quarter of
1996 to $408,968 for the second quarter of 1997. The exploration costs reflect
the impairment of oil and gas leases and expensed investments, of which $350,149
are attributable to dry hole costs. Also included in exploration costs is
$58,819 of leasehold and acquisition costs.
General administrative expenses ("G&A") increased by 21.1% from $549,671
for the second quarter of 1996 compared to $665,766 in the second quarter of
1997. This was primarily attributable to increases in delay rentals and other
professional services.
Interest expense decreased to $5,072 in the second quarter of 1997 from
$100,957 for the second quarter of 1996. 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") decreased by
77.1% from $378,847 in the second quarter of 1996 to $86,750 for the second
quarter of 1997. The decrease in DD&A was primarily attributable to the sale of
the Company's N.E. Cedardale field located in Major County, Oklahoma on
September 27, 1996.
Lease operating expense decreased 18.5% from $154,834 for the second
quarter of 1996 to $126,157 for the second quarter of 1997. The reduction in
lease operating costs was attributable to the sale of operated properties,
including the N.E. Cedardale field. Of the total of $126,157 incurred in the
second quarter of 1997, $75,502 or 59.8% was attributable to the Company's
10
<PAGE>
Mobile Bay operations which contributed only $675 in revenue for the quarter and
are presently being plugged and abandoned and the equipment salvaged. $12,950 of
the total is attributable to other wells which have been sold or are being
plugged and $37,705 is attributable to ongoing operations.
Production taxes declined 91.2% from $62,255 for the second quarter of 1996
to $5,471 for the second quarter of 1997 due to the sale of the N.E. Cedardale
properties and the significant decline in production from Mobile Bay.
Transportation and gathering costs decreased 22.6% from $61,382 for the
second quarter of 1996 compared to $47,493 for the second quarter of 1997. The
decrease in transportation and gathering costs is due to the substantial drop in
production from the Mobile Bay wells.
Net Income (loss). The net loss increased from $221,615 to $1,319,839 for
the second quarter ended June 30, 1996 and June 30, 1997, respectively. This
increase was due to the factors discussed above.
The net loss per common share increased from a net loss of $0.05 per share
in the second quarter of 1996 to a net loss of $0.14 per share in the second
quarter of 1997. This is reflective of the increase in net loss of $1,098,224
from the second quarter of 1996 as compared to the second quarter of 1997. The
increased net loss was partially offset by the increased number of weighted
average common equivalent shares at June 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 June 30, 1997 as compared to approximately 5,146,000
weighted average common equivalent shares at June 30, 1996.
Six months ended June 30, 1997 compared with six months ended June 30, 1996
Revenue. Total revenues decreased 76.0% from $2,449,666 for the six months
ended June 30, 1996, to $588,100 for the six months ended June 30, 1997.
Total gas and oil revenues decreased 73.7% from $1,742,560 to $457,609. The
decrease in gas and oil revenues was primarily attributable to decreased
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 $962,449 for the six months ended June 30, 1996
compared to $33,001 for the six months ended June 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 $453,107 for the six months ended June 30, 1996.
In addition to the decrease in gas and oil revenues for the six months
ended June 30, of 1997 there was a decrease in gain on sale of assets of
$138,221 from $270,571 reported for the six months ended June 30, 1996 to
$132,350 reported for the six months ended June 30, 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 $145,115 for the six months ended
June 30, 1996 to $39,726 for the six months ended June 30, 1997. The Company
realized losses from various commodity transactions totaling $156,375 for the
six months ended June 30, 1997 as compared to a gain of $199,001 for the same
period of 1996. These gains and 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 $114,790 in
the six months ended June 30, 1997 as compared to $92,419 in the six months
ended June 30, 1996.
Costs and Expenses. Total costs and expenses of the Company decreased 5.2%
from $3,440,507 for the six months ended June 30, 1996 compared to $3,259,961
for the six months ended June 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 and general and administrative expense.
Depletion, Depreciation, and Amortization Expense ("DD&A") decreased by
72.9% from $810,845 for the six months ended June 30, 1996 to $219,524 for the
11
<PAGE>
six months ended June 30, 1997. The decrease in DD&A was primarily attributable
to the sale of the Company's N.E. Cedardale field located in Major County,
Oklahoma on September 27, 1996.
Interest expense decreased to $9,205 for the six months ended June 30, 1997
from $198,310 for the six months ended June 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.
Lease operating expense decreased 30.7% from $321,401 for the six months
ended June 30, 1996 to $222,855 for the six months ended June 30, 1997. The
reduction in lease operating costs was attributable to the sale of operated
properties, including the N.E. Cedardale field. Partially offsetting the
foregoing decreases were increases in disposal fees for the Mobile Bay wells. Of
the six month 1997 total $129,749 was attributable to the Company's Mobile Bay
wells currently being plugged.
Production taxes declined 89.8% from $139,418 for the six months ended June
30, 1996 to $14,255 for the six months ended June 30, 1997 due to the sale of
the N.E. Cedardale properties and the significant decline in production from
Mobile Bay.
Transportation and gathering costs decreased 27.5% from $190,255 for the
six months ended June 30, 1996 compared to $137,887 for the six months ended
June 30, 1997. The reduction in transportation and gathering costs is due to the
substantial drop in production from the Mobile Bay wells.
Unrealized loss on commodity transactions was $156,615 for the second
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.
Exploration costs increased 476.9% from $218,671 for the six months ended
June 30, 1996 to $1,261,594 for the six months ended June 30, 1997. The
exploration costs reflect the impairment of oil and gas leases and expensed
investments, of which $1,128,356 are attributable to dry hole costs. Also
included in exploration costs is $133,238 of leasehold and acquisition costs.
General administrative expenses ("G&A") increased by 11.5% from $1,110,186
for the six months ended June 30, 1996 compared to $1,238,026 for the six months
ended June 30, 1997. This was primarily attributable to increases in delay
rentals and other professional services.
Net Income (loss). The net loss increased from $990,841 to $2,671,861 for
the six months ended June 30, 1996 and June 30, 1997, respectively. This
increase was due to the factors discussed above.
The net loss per common share increased from a net loss of $0.20 per share
for the six months ended June 30, 1996 to a net loss of $0.28 per share for the
six months ended June 30, 1997. This is reflective of the increase in net loss
of $1,681,020 from the six months ended June 30, 1996 as compared to the six
months ended June 30, 1997. The increased net loss was partially offset by the
increased number of weighted average common equivalent shares at June 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 June 30, 1997 as compared to
approximately 5,146,000 weighted average common equivalent shares at June 30,
1996.
Liquidity and Capital Resources
At June 30, 1997, the Company had a cash balance of $2,041,606 and working
capital of $1,102,703 as compared to a cash 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 six months of 1997 and, in particular, exploration costs associated with
dry holes which were drilled during the first half of 1997.
Cash flows used in operations totaled $1,179,647, excluding $1,261,594 of
exploration costs which are classified under cash flows used in investing
activities.
Cash flows used in investing activities totaled $1,756,573. Included in the
cash flows used in investing activities are $2,194,648 of capital expenditures
12
<PAGE>
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
six months ended June 30, 1997, the Company received $540,883 of proceeds from
the sale of various oil and gas properties during the six months ended June 30,
1997.
Cash flows from financing activities totaled $21,170 during the first six
months of 1997. Cash flows from financing activities consisted of proceeds from
debt issuances of $225,467 offset by repayments of long-term debt of $152,721
and preferred stock dividends paid of $51,576.
The Company's principal obligations at June 30, 1997, were substantially
the same as at December 31, 1996, and consisted principally of (i) servicing
loans from Bank of America ($375,440 at June 30, 1997) and other loans, (ii) a
non-recourse loan relating to the development of the Company's Starboard
Prospect ($864,000 at June 30, 1997), (iii) payment of preferred stock dividends
($51,576 of dividends were paid during the first half of 1997 and $25,788 of
dividends were declared and paid in July of 1997, subsequent to quarter end),
(iv) funding of the Company's exploration activities during the second half of
1997, and (v) funding of the day-to-day operating costs.
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. It will fund these
projects, other than Starboard, 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 should be partially reflected in the third quarter and more fully in
the fourth quarter of 1997. 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.
In the interim the Company has utilized, and expects to continue to
utilize, its cash balances to fund negative cash flows from operations. Prior to
the reductions currently being implemented the Company projected it would
substantially deplete its cash reserves by year end. It believes the reductions
will reduce but not eliminate the cash deficits in the remainder of the year.
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
June 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.
Pending successful exploration results and/or third party investment in
certain of the company's projects, the Company will need additional funds beyond
its capital and credit lines over the next twelve months for operating or
capital needs. Potential options available to the Company to raise any
additional funds include, but are not limited to, (a) additional outside
partners, (b) additional private borrowing, (c) the further sale of 3-D seismic
data, (d) a sale of interests in its exploration projects (e) a business
consolidation with another company or (f) the exchange of equity stock in return
for cash and/or producing properties.
13
<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. The Alabama Supreme Court has now 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.
(a) On June 5, 1997, an annual meeting of shareholders of Frontier Natural
Gas Corporation was held.
(b) The following directors were elected (by the vote indicated) at such
meeting:
For Against Abstain
Jeffrey R. Orgill 7,311,649 48,890 3,890
Allen H. Sweeney 7,312,669 47,870 2,870
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
None
14
<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, 1997 By: /s/ DAVID W. BERRY
----------------- ---------------------------------
David W. Berry, Chief Executive
Officer (Principal Executive
Officer) and Director
Date: August 14, 1997 By: /s/ DAVID B. CHRISTOFFERSON
----------------- ---------------------------------
David B. Christofferson,
Executive Vice President,
General Counsel, Chief
Financial Officer and Director
Date: August 14, 1997 By: /s/ STEPHEN R. STABILE
----------------- ---------------------------------
Stephen R. Stabile,
Chief Accounting Officer
15
EXHIBIT 11 TO FORM 10-QSB
FRONTIER NATURAL GAS CORPORATION
Computation of Net Income Per Common and Common Equivalent Share
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 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 5,145,906
================== =================
Net loss $ (2,671,861) $ (990,841)
Less: Cumulative preferred stock dividend 51,576 51,576
------------------ -----------------
Net loss available to common and common
equivalent shares $ (2,723,437) $ (1,042,417)
================== =================
Net loss per common and common
equivalent share $ (0.28) $ (0.20)
================== =================
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,041,606
<SECURITIES> 0
<RECEIVABLES> 404,366
<ALLOWANCES> (10,533)
<INVENTORY> 0
<CURRENT-ASSETS> 2,754,601
<PP&E> 7,045,565
<DEPRECIATION> (3,007,464)
<TOTAL-ASSETS> 7,007,125
<CURRENT-LIABILITIES> 1,651,898
<BONDS> 149,284
0
860
<COMMON> 98,659
<OTHER-SE> 3,929,451
<TOTAL-LIABILITY-AND-EQUITY> 7,007,125
<SALES> 457,609
<TOTAL-REVENUES> 588,100
<CGS> 0
<TOTAL-COSTS> 3,259,961
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,205
<INCOME-PRETAX> (2,671,861)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,671,861)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,671,861)
<EPS-PRIMARY> (.28)
<EPS-DILUTED> (.28)
</TABLE>
