<PAGE>
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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, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number: 1-12530
ESENJAY EXPLORATION, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 73-1421000
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
500 NORTH WATER STREET, SUITE 1100
CORPUS CHRISTI, TEXAS 78471
(Address of principal executive offices including zip code)
(512) 883-7464
(Issurer's telephone number including area code)
FRONTIER NATURAL GAS CORPORATION, 500 DALLAS STREET
SUITE 2920, HOUSTON, TEXAS 77002
(Former name, former address and formal fiscal year, if changed since last year)
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 [ ]
15,762,706 shares as the registrant's common stock were outstanding as of
August 18, 1998.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
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<PAGE>
ESENJAY EXPLORATION, INC.
FORM 10-QSB/A
FOR THE QUARTER ENDED JUNE 30, 1998
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements - General Information . . . . . . . . . . . .3
Condensed Consolidated Balance Sheets as of
June 30, 1998 and December 31, 1997 . . . . . . . . . . . .4
Condensed Consolidated Statements of Operations
for the three and six months ended June 30, 1998
and 1997. . . . . . . . . . . . . . . . . . . . . . . . . .5
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 1998 and 1997 . . . . . .6
Notes to Condensed Consolidated Financial Statements. . . . .7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . 10
PART II. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . 17
SIGNATURES
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENERAL
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 the
presentation and disclosures herein are adequate to make the information not
misleading, and the financial statements reflect all elimination entries and
normal adjustments which are necessary for a fair presentation of the results of
operations for the three and six months ended June 30, 1998 and 1997.
Operating results for the six month period ended June 30, 1998 are not
necessarily indicative of the results for full years. While the condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements for the year ended December 31, 1997 and the
related notes thereto included in Form 10-KSB and 10KSB/A as filed with the SEC
the reader should be aware of substantial changes which occurred in 1998
including those set forth in the Overview portion of Item 2 of this Form 10-QSB.
3
<PAGE>
ESENJAY EXPLORATION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . $172,984 $690,576
Accounts receivable, net of allowance for
doubtful accounts of $7,750 at
June 30, 1998 and $15,488 at
December 31, 1997. . . . . . . . . . . . . . . . . . . . 1,400,941 221,864
Prepaid expenses and other . . . . . . . . . . . . . . . . 405,243 249,328
Receivables from affiliates. . . . . . . . . . . . . . . . 97,740 105,171
----------------- -----------------
Total current assets . . . . . . . . . . . . . 2,076,908 1,266,939
Property and equipment:
Gas and oil properties, at cost-
successful efforts method of accounting. . . . . . . . . 66,615,878 3,235,848
Other property and equipment . . . . . . . . . . . . . . . 1,187,945 1,169,127
----------------- -----------------
67,803,823 4,404,975
Less accumulated depletion, depreciation and amortization. (1,380,121) (1,260,605)
----------------- -----------------
66,423,702 3,144,370
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 582,287 164,699
----------------- -----------------
Total assets . . . . . . . . . . . . . . . . . . . . . $69,082,897 $4,576,008
----------------- -----------------
----------------- -----------------
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------------- -----------------
<S> <C> <C>
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . $ 4,929,252 $ 911,396
Accounts payable to affiliates . . . . . . . . . . . . . . 8,603,082 ------
Revenue distribution payable . . . . . . . . . . . . . . . 64,632 68,131
Current portion of long-term debt. . . . . . . . . . . . . 3,108,328 401,085
Accrued and other liabilities. . . . . . . . . . . . . . . 757,094 299,704
----------------- -----------------
Total current liabilities. . . . . . . . . . . 17,462,388 1,680,316
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . 4,950,967 22,680
Non-recourse debt. . . . . . . . . . . . . . . . . . . . . . . 864,000 864,000
Accrued interest on non-recourse debt. . . . . . . . . . . . . 265,754 194,274
Other long-term liabilities. . . . . . . . . . . . . . . . . . ----- 9,918
----------------- -----------------
Total liabilities. . . . . . . . . . . . . . . $23,543,109 $2,771,188
Commitments and contingencies
Stockholders' equity:
Cumulative convertible preferred stock
$.01 par value; 5,000,000 shares
authorized; 0 and 85,961 shares issued
and outstanding at June 30, 1998 and
December 31, 1997 respectively
($0 and $859,610 aggregate liquidation
preference at June 30, 1998 and
December 31, 1997) . . . . . . . . . . . . . . . . . . . ----- 860
Common Stock:
Class A common stock, $.01 par value;
40,000,000 shares authorized; 11,762,706
and 1,655,984 shares issued and
outstanding at June 30, 1998 and
December, 1997, respectively . . . . . . . . . . . . . . 117,627 16,560
Unamortized value of warrants issued . . . . . . . . . . . . . (13,581) (27,163)
Additional paid-in capital . . . . . . . . . . . . . . . . . . 63,993,323 14,751,425
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . (18,557,581) (12,936,862)
----------------- -----------------
Total stockholders' equity . . . . . . . . . . . . . . . 45,539,788 1,804,820
----------------- -----------------
Total liabilities and stockholders' equity . . . . . . . $ 69,082,897 $ 4,576,008
----------------- -----------------
----------------- -----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
ESENJAY EXPLORATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
1998 1997 1998 1997
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Gas and oil revenues. . . . . . . . . . . . . . . . . . . . $106,361 $ 130,174 $ 54,864 $ 457,609
Realized gain (loss) on commodity
transactions. . . . . . . . . . . . . . . . . . . . . . . (50,687) (34,438) (98,562) (156,375)
Unrealized gain (loss) on commodity
transactions. . . . . . . . . . . . . . . . . . . . . . . 138,082 (156,615) 87,071 (156,615)
Gain on sale of assets. . . . . . . . . . . . . . . . . . . 553 315 3,428 132,350
Operating fees. . . . . . . . . . . . . . . . . . . . . . . 92,469 25,492 99,461 39,726
Other revenues. . . . . . . . . . . . . . . . . . . . . . . 78,931 60,910 102,861 114,790
-------------- ------------- ------------- -------------
Total revenues. . . . . . . . . . . . . . . . . . . . . $365,709 $25,838 $349,123 $431,485
-------------- ------------- ------------- -------------
Costs and expenses:
Lease operating expense . . . . . . . . . . . . . . . . . . (15,366) 126,157 54,407 222,855
Production taxes. . . . . . . . . . . . . . . . . . . . . . 6,042 5,471 4,952 14,255
Transportation and gathering costs. . . . . . . . . . . . . 687 47,493 1,326 137,887
Depletion, depreciation and amortization. . . . . . . . . . 84,798 86,750 138,366 219,524
Exploration costs-geological & geophysical. . . . . . . . . 2,788,100 58,819 2,788,100 133,238
Exploration costs-dry hole. . . . . . . . . . . . . . . . . 1,036,541 350,149 1,040,101 1,128,356
Delay rentals . . . . . . . . . . . . . . . . . . . . . . . 17,768 ------ 5,083 ------
Interest expense. . . . . . . . . . . . . . . . . . . . . . 198,676 5,072 217,899 9,205
General and administrative expense. . . . . . . . . . . . . 1,260,593 665,766 1,719,607 1,238,026
-------------- ------------- ------------- -------------
Total costs and expenses. . . . . . . . . . . . . . . . 5,377,839 1,345,677 5,969,841 3,103,346
-------------- ------------- ------------- -------------
Loss before provision for income taxes.. . . . . . . . . . . . (5,012,130) (1,319,839) (5,620,719) (2,671,861)
Benefit (provision) for income taxes.. . . . . . . . . . . . . ------ ------ ------ ------
-------------- ------------- ------------- -------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,012,130) (1,319,839) (5,620,719) (2,671,861)
Cumulative preferred stock dividend. . . . . . . . . . . . . . 22,350 25,788 48,138 51,576
-------------- ------------- ------------- -------------
Net loss applicable to common stockholders . . . . . . . . . . $ (5,034,480) $(1,345,627) $(5,668,857) $(2,723,437)
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
Net loss per common and common equivalent share. . . . . . . . $ (0.73) $ (0.82) $ (1.32) $ (1.63)
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
Weighted average number of common shares
outstanding ( in thousands). . . . . . . . . . . . . . . . . 6,876 1,644 4,280 1,644
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
ESENJAY EXPLORATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1998 1997
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(5,620,719) $(2,671,861)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depletion, depreciation and amortization . . . . . . . . . . . . . . 138,366 219,524
Gain on sale of assets . . . . . . . . . . . . . . . . . . . . . . . (3,428) (132,350)
Amortization of financing costs and warrants . . . . . . . . . . . . 48,505 28,268
Unrealized (gain) loss on commodity transactions . . . . . . . . . . (87,071) 156,615
Exploration costs. . . . . . . . . . . . . . . . . . . . . . . . . . 3,828,201 1,261,594
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ------ 27,046
Changes in operating assets and liabilities
Trade and affiliate receivables . . . . . . . . . . . . . . . . . (1,171,646) (65,270)
Prepaid expenses and other. . . . . . . . . . . . . . . . . . . . (155,915) (181,795)
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . (730,201) (1,184)
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . 4,017,856 75,399
Accounts payable to affiliates. . . . . . . . . . . . . . . . . . 456,464 ------
Revenue distribution payable. . . . . . . . . . . . . . . . . . . (3,499) (263,743)
Accrued and other . . . . . . . . . . . . . . . . . . . . . . . . 615,941 4,520
----------------- -----------------
Net cash provided by (used in) operating activities. . . . . . . . . 1,332,854 (1,179,647)
----------------- -----------------
Cash flows used in investing activities:
Capital expenditures - gas and oil properties. . . . . . . . . . . . ( 8,344,070) (2,194,648)
Capital expenditures - other property and equipment. . . . . . . . . (50,236) (102,808)
Proceeds from sale of assets . . . . . . . . . . . . . . . . . . . . 15,995 540,883
----------------- -----------------
Net cash provided by (used in) investing activities . . . . . . . (8,378,311) (1,756,573)
Cash flows from financing activities:
Proceeds from issuance of debt . . . . . . . . . . . . . . . . . . . 8,300,000 225,467
Repayments of long-term debt . . . . . . . . . . . . . . . . . . . . (683,871) (152,721)
Preferred stock redeemed . . . . . . . . . . . . . . . . . . . . . . (859,610) ------
Preferred stock dividends paid . . . . . . . . . . . . . . . . . . . (228,654) (51,576)
----------------- -----------------
Net cash provided by (used in) financing activities . . . . . . . 6,527,865 21,170
Net increase (decrease) in cash and cash equivalents. . . . . . . (517,592) (2,915,050)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . 690,576 4,956,656
----------------- -----------------
Cash and cash equivalents at end of period.. . . . . . . . . . . . . . . $ 172,984 $ 2,041,606
----------------- -----------------
----------------- -----------------
Supplemental disclosure of cash flow information:
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . $ 169,321 $ 123,797
----------------- -----------------
----------------- -----------------
Supplemental disclosure of non-cash investing and financing
activities:
Acquisition of gas and oil properties. . . . . . . . . . . . . . . . $ 58,864,160 ------
Proxy Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287,173 ------
Assumption of related liabilities. . . . . . . . . . . . . . . . . . 8,146,618 ------
Issuance of 10,106,722 shares of common stock. . . . . . . . . . . . 50,430,370 ------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accompanying unaudited condensed consolidated financial statements
of Esenjay Exploration, Inc. and its subsidiaries and its predecessor
Frontier Natural Gas Corporation (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim
financial information. Accordingly they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. Interim results for the six
month period ended June 30, 1998 are not necessarily indicative of results
expected for the full year.
A summary of the Companies' significant accounting policies is
presented on pages 30 and 31 of their 1997 Form 10KSB/A filed with the SEC.
Users of financial information are encouraged to refer to the footnotes
contained therein when reviewing interim financial results. There have
been no material changes in the accounting policies followed by the Company
during 1998.
The accompanying interim condensed consolidated financial statements
contain all the material adjustments, which are in the opinion of
management, consistent with the adjustments necessary to present fairly the
stated consolidated financial position, results of operations, cash flows
and shareholder's equity of Esenjay Exploration, Inc. for the interim
period. Certain prior period amounts have been reclassified to conform
with the current period presentation.
2. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Note payable pursuant to a credit agreement with a bank of
$143,888 at June 30, 1998 and $293,888 at December 31,
1997, interest at LIBOR rate (reserve adjusted), plus one and
seven-eights percent (1.875%) (7.25% at June 30, 1998 and
December 31, 1997), payable in various monthly installments
through December 1998, collateralized by producing oil and
gas properties; net of discount of $9,483 at June 30, 1998 and
$18,966 at December 31, 1997. . . . . . . . . . . . . . . . . . . $ 134,405 $ 4,922
Non-recourse loan, payable out of an 8% ORRI on the Starboard
Prospect, interest accrued at 15% . . . . . . . . . . . . . . . . 864,000 864,000
Notes payable to bank, interest at 7.49% to 12.5%, payable in
various monthly installments through 2001, collateralized by
other property and equipment. . . . . . . . . . . . . . . . . . . 24,889 48,843
Note payable, interest at 12%, payable monthly, principal due
December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . 100,000 100,000
Note payable pursuant to a credit agreement with an energy
lending institution, $7,800,000 at June 30, 1998, interest at
prime rate plus 4% payable in eleven monthly installments
commencing August 31, 1998. . . . . . . . . . . . . . . . . . . . 7,800,000 ------
------------ ------------
8,923,294 1,287,765
Less current portion. . . . . . . . . . . . . . . . . . . . . . . . . (3,108,328) (401,085)
------------ ------------
$ 5,814,966 $ 886,680
------------ ------------
------------ ------------
</TABLE>
7
<PAGE>
On January 3, 1996, the Company entered into a $15,000,000 credit agreement with
a bank. The remaining funds were intended to be available for specified future
drilling and acquisition activities of the Company subject to the approval of
the bank. The Company repaid a substantial portion of this borrowing with
proceeds from the sale of its N.E. Cederdale properties in September of 1996.
Due to this early repayment of borrowings, the Company reduced debt issuance
costs by $293,000 and discount on notes payable by $207,000 and recorded these
amounts as interest expense. The loan is secured by a mortgage on certain of
the Company's producing properties. As part of the credit agreement, the
Company is subject to certain covenants and restrictions, which included
limitations on additional borrowing, and sales of significant properties,
working capital, cash, and net worth maintenance requirements and a minimum debt
to net worth ratio. As additional consideration for the loan, the Company
assigned the bank an overriding royalty interest in the mortgaged properties.
The required covenants during 1998 are as follows:
<TABLE>
<CAPTION>
Covenant, as defined
------------------------------
<S> <C>
Tangible Net Worth........ $5,000,000
Current Ratio............. 1.1 : 1.0
Debt to Capitalization.... 0.6 : 1.0
Cash Flow Ratio........... 3.0 : 1.0
Cash on Hand.............. $ 200,000
Working Capital........... $ 400,000
</TABLE>
The Company has not been able and does not believe it will be able to
comply with certain of the covenants. The Company has obtained a waiver of the
covenants through September 30, 1998. Management believes the Company will
require an additional waiver or waivers during 1998. Accordingly, all amounts
outstanding pursuant to the credit agreement are classified as current
liabilities.
In addition, the Company entered into an interest rate swap guaranteeing a
fixed interest rate of 8.28% on the loan, and the Company will have paid fees of
one-eighth of 1% (.0125%) on the unused portion of the commitment amount. On
April 24, 1998, the Company settled this swap agreement resulting in a realized
loss of $28,500.
On March 12, 1996, the Company completed a financial package with a group
funded by a public utility to evaluate and develop a project in Terrebonne
Parish, Louisiana. This group may participate in 48% of all costs of evaluation
and development of the project area and provide a non-recourse loan to fund
$864,000 of the Company's 48% share of certain leasehold and seismic evaluation
costs of the project. The loan is secured by a mortgage on the Company's
interest in the project. As of June 30, 1998, the Company has received advances
aggregating $864,000 on the non-recourse loan. The non-recourse loan will be
paid solely by the assignment on an 8% overriding royalty interest in the future
revenues of the financed project. The loan is now fully funded.
In conjunction with the Acquisition Agreement and Plan of Exchange between
the Company, Aspect Resources LLC ("Aspect") and Esenjay Petroleum Corporation
("EPC") dated as of January 19, 1998 as amended (the "Acquisition Agreement"),
Aspect committed to lend the Company up to $1,800,000, and in January and
February advanced $500,000 on said credit facility. The facility was repaid by
the Company on February 23, 1998, when the Company entered into a $7,800,000
credit agreement with Duke Energy Financial Services, Inc. The new credit
facility provided for up to $4,800,000 prior to closing of the transactions set
forth in the Acquisition Agreement, $1,800,000 of which could be used directly
by the Company and $3,000,000 to be utilized solely to loan to EPC to pay
exploratory costs incurred on the assets acquired from EPC after the effective
date of the acquisitions and prior to closing thereof. An additional $3,000,000
became available to the Company after closing of the Acquisitions to pay
additional exploratory costs and to fund the costs of redemption of the
Company's convertible preferred stock. The credit facility bears interest at a
national prime rate plus 4%. In addition, the lender will be paid cash payments
equal to an overriding royalty of 0.6% of the Company's interest in wells
drilled by the Company while the credit facility is outstanding. The lender
also has a right to gather, process, transport and market, at competitive market
rates, natural gas produced from a majority of the projects the Company acquired
pursuant to the Acquisitions. The facility was secured by mortgages on most of
the Company's undeveloped exploration projects. The assets acquired pursuant to
the Acquisition Agreement are also subject to such mortgages. The facility was
repayable in eleven monthly payments equal to 1/30 of the principal plus
interest, plus a final monthly payment of all remaining principal plus interest
commencing August 31, 1998, or sooner in the event the Company sold interests in
the collateral or closed any underwritten public offering of securities. The
facility was repaid in full subsequent to the end of the period as set forth at
note 6 hereto.
8
<PAGE>
3. NOTES RECEIVABLE FROM EPC
The Duke Energy Financial Services, Inc. credit agreement provided for up
to $4,800,000 prior to the closing of the transactions provided for in the
Acquisition Agreement, of which $3,000,000 would be used by EPC to fund
exploratory costs incurred on the assets acquired by the Company and incurred
after the effective date of the Acquisition Agreement yet prior to closing. The
credit facility bore interest at a national prime rate plus 4%. The facility
was paid in full on July 21, 1998 from proceeds received in an underwritten
offering. At June 30, 1998 the fully funded loan to EPC of $3,000,000 was
applied to the account payable to affiliate due EPC of $4,993,992.
4. COMMITMENTS AND CONTINGENCIES
The Company previously entered into employment agreements with two officers
which covered periods through December 31, 1999. In 1997 the Company entered
into incentive agreements and contract settlement agreements with the two
officers. Pursuant to the incentive agreements and contact settlement
agreements, in the event the transactions provided for in the Acquisition
Agreement closed, or in the event there is another transaction which results in
a change of control of the Company, it will pay incentive payments totaling
$246,400, as well as contract settlement payments totaling $246,400 to said
officers. Each of the incentive payments and the contract payments may be paid
in the form of promissory notes due not later than September 30, 1998. Upon
closing of the transactions provided for in the Acquisition Agreement the
employment agreements were settled by execution of said promissory notes.
The Company is a party to various lawsuits arising in the normal course of
business. Management believes the ultimate outcome of these matters will not
have a material effect on the Company's consolidated financial position, results
of operations and net cash flows.
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 exceeding
that of the natural gas swap that is in place. The total unrealized gain on the
amended swap agreement was $41,865 at June 30, 1998.
5. ACQUISITIONS
On May 14, 1998, the Company acquired substantial interests in 28 projects
from EPC and Aspect in exchange for 10,106,722 shares of the Company's common
stock. The estimated fair value on the date of acquisition was approximately
$66.7 million, which consists of the fair market value, as determined by an
independent third party, plus project costs up to the closing of the Acquisition
Agreement. The acquired projects are primarily technology enhanced natural gas
exploration projects along the Texas and Louisiana Gulf Coast.
The Acquisitions have been recorded at their fair value and have been
included in the Company's consolidated financial statements from the date of
their acquisition. The following unaudited pro forma information presents a
summary of condensed consolidated results of operations as if the Acquisitions
had occurred on January 1, 1997:
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
--------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues.. . . . . . . . . . . . . $ 365,709 $ 25,838 $ 349,123 $ 431,485
Total costs and expenses.. . . . . 5,908,929 2,552,596 8,257,698 5,354,269
------------ ------------ ------------ ------------
Net loss . . . . . . . . . . . . . $(5,543,220) $(2,526,758) $(7,908,575) $(4,922,784)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
6. SUBSEQUENT EVENT
On July 21, 1998, the Company closed an underwritten offering of 4,000,000
shares of its common stock at a price of $4.00 per share. The net proceeds to
the Company in the underwritten offering were approximately $14,880,000, and as
a result the Company had 15,762,706 shares outstanding as of August 18, 1998.
The proceeds were utilized to fully repay the
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credit facility from Duke Energy Financial Services, Inc., to reduce accounts
payable, and for working capital and exploration costs.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis reviews Esenjay Exploration,
Inc.'s and/or its predecessor Frontier Natural Gas Corporation's operations for
the three and six month periods ended June 30, 1998 and 1997 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 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 costs 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
OVERVIEW OF HISTORICAL DEVELOPMENTS. In mid-1996, the Company refocused
its activities from acquiring gas reserves principally in the Mid-Continent
region of the United States to concentrate on exploration and related
development drilling projects in Southern Louisiana and along the Gulf Coast
region of Alabama, Mississippi and Texas. The Company's most significant
project (prior to the acquisitions described below) had been its Starboard
Project in Terrebonne Parish, Louisiana, which is 3-D seismic based and which
was a primary focus in 1996 and 1997, and which project has now reached the
drilling phase. During 1996 and 1997, the Company's drilling activities, which
were based primarily on 2-D seismic data, were largely unsuccessful. This fact,
along with an unexpected drop in production from the Company's Mobile Bay area
wells, reduced the Company's cash and capital resources at the time the drilling
phase of the Starboard Project was approaching.
To address the Company's capital needs, the Board of Directors, at its
meeting on August 12, 1997, directed management to look for potential assets to
acquire in exchange for the Company's Common Stock, to identify and review
potential business consolidation opportunities, identify potential partners to
help fund the Company's proposed drilling activities on the Starboard Project
and in other locations, and to consider any other avenues to strengthen the
Company's capital resources and diversify its exploration opportunities. The
Board also directed management to reduce overhead wherever prudently possible
and the Company retained an investment advisor to aid in achieving these
objectives. The Company explored a series of such transactions and the Board,
after receipt of the advice of management and its investment advisor, and
receipt of due diligence reports and other materials, unanimously agreed that a
transaction with Aspect and EPC was the best option for the Company's
shareholders. This process led to the Company entering the Acquisition
Agreement among the Company, EPC, and Aspect. This Acquisition Agreement, and
certain provisions of it, required approval of the shareholders of the Company.
At a special meeting of shareholders held on May 14, 1998 the shareholders
approved the Acquisition Agreement, a recapitalization of the Company pursuant
to which each outstanding share of common stock would convert into one-sixth
(1/6) of a share of new common stock (the "Reverse Split"), a plan and agreement
of merger pursuant to which the Company would reincorporate in the state of
Delaware and would change its name to Esenjay Exploration, Inc. (the
"Reincorporation"), and the election of seven directors.
On May 14, 1998 after the Special Meeting of Shareholders, the Company
closed the transactions provided for in the Acquisition Agreement, implemented
the Reverse Split, and completed the Reincorporation. In addition, as required
by the Acquisition Agreement, the Company called for redemption for all of its
issued and outstanding cumulative convertible preferred stock and did redeem
said preferred stock. The result of the foregoing is that the Company conveyed
a substantial majority of its Common Stock to acquire an array of significant
technology enhanced natural gas oriented exploration projects. The Company
believes the Acquisitions will facilitate expanded access to capital markets due
to the value and diversity of its exploration project portfolio. The Company
also believes the members of EPC's management that joined the Company after
consummation of the acquisitions significantly enhanced the Company's management
team.
On July 21, 1998 the Company closed an underwritten offering of 4,000,000
shares of its common stock at a price of $4.00 per share. The net proceeds to
the Company in the underwriter offering were approximately $14,880,000. After
the offering the Company has 15,762,706 shares outstanding.
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OVERVIEW OF CURRENT ACTIVITIES. As a result of the above described
acquisitions, restructuring, and the underwritten offering, the Company believes
it is positioned for a period of significant exploration activity on its
technology enhanced projects. Many of the projects have reached the drilling
stage. In many instances the requisite process of geological and/or engineering
analysis, followed by acreage acquisition of leasehold rights and seismic
permitting, and 3-D seismic field data acquisition, then processing of the data
and finally its interpretation, took several years of time and the investment of
significant capital. Management believes the acquisition of projects at this
advanced stage has not only reduced the drilling risk, but should allow the
Company to consistently drill on a broad array of exploration prospects over the
next twelve months. Included are several prospects planned to be drilled in the
third and fourth quarters of 1998 by the Company which have significant
potential to its net interest. As evidence of this activity the Company has
participated in the drilling of 19 prospects from March through the date hereof
with working interests which range from 8% to 79%. Out of the 19 wells drilled,
10 wells have been completed, 7 were dry holes, and 2 are being drilled.
Management expects its net oil and gas revenues in the fourth quarter of 1998 to
approximate $500,000 per month from this new drilling alone.
The Company will look to a variety of sources to fund its continuing
capital expenditures budget including new credit facilities and sales of
promoted project interests to industry partners as it seeks to maximize its
interests and manage its risks while aggressively pursuing its exploration
projects. This process will be limited more by capital availability than by
inventory of drillable prospects. (see "Liquidity and Capital Resources")
The Company utilizes the successful efforts method of accounting basis. It
booked the exploration projects acquired pursuant to the Acquisition Agreement
at their estimated fair market value based on a third party fairness opinion.
As a result of the tax rules applicable to the acquisitions, the Company will
likely not be able to fully use its existing net operating loss carry forward in
the future.
YEAR 2000
The Company has recognized the need to ensure its systems, equipment and
operations will not be adversely impacted by the change to the calendar year
2000. As such, the Company operates on software packages that are compliant
with the year 2000. The Company is attempting to identify other potential areas
of risk and has begun addressing these in its planning, purchasing and daily
operations. The total costs of connecting all internal systems, equipment and
operations to the year 2000 has not been fully quantified, but it is not
expected to be a material cost to the Company. However, although no estimates
can be made as to the potential adverse impact resulting from the failure of
third party service providers and vendors to prepare for the year 2000, the
Company intends to formulate a plan to deal with potential year 2000 issues.
THREE MONTHS ENDED JUNE 30, 1998 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1997
REVENUE. Total revenue increased 1315.39% from $25,838 for the quarter
ended June 30, 1997 to $365,709 for the quarter ended June 30, 1998. This is
primarily attributable to factors described below.
Total gas and oil revenues decreased 18.29% from $130,174 to $106,361. The
decline in gas and oil revenues was attributable to the loss of revenues
received from the sale of certain Company interests sold effective June 1, 1997.
The Company recorded revenues from these interests of $36,334 for the quarter
ended June 30, 1997. Partially offsetting the decrease in gas and oil revenues
was an increase in accrued revenues of $55,802 for the quarter ended June 30,
1998. The increase in accrued revenues was attributed to wells placed in
production during the quarter ended June 30, 1998. The Company did not receive
significant oil and gas revenues attributable to 1998 drilling in the quarter.
Operating fees to the Company increased from $25,492 for the second quarter
1997 to $92,469 in the second quarter 1998. This was attributed to the increase
in operated properties, resulting from drilling activity during the second
quarter 1998. The Company realized losses from various commodity transactions
totaling $50,687 in the second quarter 1998 as compared to $34,438 for the
second quarter 1997. These losses were attributed 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 the spot prices
being higher or lower than the hedge contracts for the same time period. In
addition to the realized losses the Company accrued $138,082 for unrealized
gains for the quarter ended June 30, 1998. This offset prior recognized losses
at a time when actual revenues were less then hedge quantities. This is no
longer the case. The Company had accrued a loss of $156,615 for the quarter
ended June 30, 1997. In addition to the foregoing, the Company had other
revenues of $78,931 in the second quarter of 1998 as compared to $60,910 in the
second quarter of 1997.
COSTS AND EXPENSES. Total costs and expenses of the Company increased
299.64% from $1,345,677 in the second quarter of 1997 to $5,377,839 in the
second quarter of 1998. This increase in costs and expenses was primarily
attributable to a combination of increases in expenditures of post asset
acquisition operations, specifically increases of $2,729,281 in
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exploration costs for geological and geophysical expenses, $686,392 in
exploration cost for dry holes both of which relate to increased activity as a
result of the acquisitions. General and administrative costs increased $594,827
which was primarily attributable to $492,800 in contract settlement obligations
and incentive costs requirements which were recognized as a result of the
acquisitions. Interest expense and delay rental expense increased a total of
$211,372. Offsetting the foregoing increases in expenses were decreases in
lease operating expense, transportation and gathering costs, and depletion,
depreciation and amortization expense.
EXPLORATION COSTS - GEOLOGICAL AND GEOPHYSICAL increased 4,640.13% from
$58,819 for the second quarter of 1997 to $2,788,100 for the second quarter of
1998. These exploration costs reflect the costs of topographical, geological
and geophysical studies and include the expenses of geologists, geophysical
crews and others conducting those studies. The Company's aggressive exploratory
drilling program has added to these costs for the second quarter of 1998.
EXPLORATION COSTS - DRY HOLE costs increased 196.03% from $350,149 during
the second quarter 1997 to $1,036,541 for the second quarter of 1998. This
increase was largely due to the search for gas and oil reserves through
exploratory drilling during the second quarter of 1998. Dry hole costs were
incurred on 7 wells.
GENERAL AND ADMINISTRATIVE COSTS ("G&A") increased by 89.34% from $665,766
for the second quarter of 1997 to $1,260,593 for the second quarter of 1998.
This was attributed to increases in operational expenses after the close of the
Acquisition Agreement on May 14, 1998 of approximately $817,967, which included
the $492,800 of above referenced settlement and incentive costs accrued and
$325,167 in increased ongoing G&A incurred as a result of the acquisitions.
INTEREST EXPENSE increased to $198,676 in the second quarter of 1998 from
$5,072 for the second quarter of 1997. The increase in interest expense was
primarily attributed to the credit facility dated February 23, 1998 between the
Company and Duke Energy Financial Services, Inc. The Company capitalized a
large portion of its interest in its ongoing Starboard Project, which
capitalized amounts totaled $82,117 for the second quarter of 1998 and $57,726
for the second quarter of 1997.
PRODUCTION TAXES increased 10.44% from $5,471 for the second quarter of
1997 to $6,042 for the second quarter of 1998 due to accrued revenues of wells
placed in production during the second quarter of 1998.
DELAY RENTAL EXPENSE increased to $17,768 for the second quarter of 1998,
and there were no delay rentals recorded for the second quarter 1997. The
increase was attributed to rental payments due on the Company's Starboard
Project and various other projects.
LEASE OPERATING EXPENSES decreased 112.18% from $126,157 for the second
quarter of 1997 to ($15,366) for the second quarter of 1998. The reduction in
lease operating costs was attributed to the sale of certain Company properties
effective July of 1997, a decline in rework activity and the reversal of over
accrued plugging and abandonment charges of $68,739 on the Company's Mobile Bay
wells.
TRANSPORTATION AND GATHERING COSTS decreased 98.55% from $47,493 for the
second quarter of 1997 to $687 for the second quarter of 1998. The decrease in
transportation and gathering costs was almost entirely attributable to the
ceased production of the Mobile Bay Wells.
DEPLETION, DEPRECIATION AND AMORTIZATION EXPENSE decreased 2.25% from
$86,750 for the second quarter 1997 to $84,798 for the second quarter 1998. The
decrease was largely due to the sale of certain Company interests in July of
1997 and was partially offset by increases due to the onset of production during
the second quarter of 1998.
NET INCOME (LOSS). The net loss increased from $1,319,839 to $5,012,130
for the second quarter ended June 30, 1997 and June 30, 1998, respectively.
This increase was due to the factors discussed above, most significantly
increased geological and geophysical and dry hole costs as its exploration
activity increased.
The net loss per common share decreased from a net loss of $0.82 per share
in the second quarter of 1997 to a net loss of $0.73 per share in the second
quarter of 1998. This is reflective of the increase in net loss of $3,688,853
from the second quarter of 1997 as compared to the second quarter of 1998 and
was mitigated as result of the increase in number of shares outstanding. As a
result of the common stock offering that was finalized August 14, 1996,
additional stock issued to an investment advisor during 1997, and the asset
acquisition which closed on May 14, 1998, approximately 6,875,939 weighted
average common equivalent shares were outstanding at June 30, 1998 as compared
to 1,644,317 at June 30, 1997.
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SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1997.
REVENUE. Total revenues decreased 19.09% from $431,485 for the six months
ended June 30, 1997 to $349,123 for the six months ended June 30, 1998.
Total gas and oil revenues decreased 66.16% from $457,609 to $154,864. The
decrease in gas and oil revenue was attributed to the combined effects of ceased
production from the Company's Mobile Bay Wells and the sale of properties
discussed below and was offset by accrued revenues on wells placed in production
during the second quarter of 1998. Gas and oil revenues associated with Mobile
Bay declined from $33,001 for the six months ended June 30, 1997 compared to no
revenues for the six months ended June 30, 1998. Effective July 1, 1997 the
Company sold its interest in various properties located in Texas, Oklahoma and
Arkansas, revenues attributed to these properties for the six months ended June
30, 1997 were $83,034 as compared to no revenue for the six months ended June
30, 1998. During the second quarter of 1998 the Company accrued revenue of
$55,802 for wells placed in production during that period.
In addition to the decrease in gas and oil revenues for the six months
ended June 30, 1998 there was a decrease in gain on sale of assets of $128,922
from $132,250 reported for the six months ended June 30, 1997 to $3,428 reported
for the six months ended June 30, 1998. As a result of the increased operations
stemming from both exploratory and developmental drilling, operating fees
increased 150.37% from $39,726 for the six months ended June 30, 1997 to $99,461
for the six months ended June 30, 1998. The Company realized losses from
various commodity transactions totaling $98,562 for the six months ended June
30, 1998 as compared to $156,375 for the same period of 1997. These losses were
attributed to various transactions in which the Company hedged its future gas
delivery obligations as a requirement for its bank loan facility. In addition
to the realized losses from commodity transactions, the Company accrued $87,071
unrealized gain for the six months ended June 30, 1998 as compared to an accrued
loss of $156,615 for the same period of 1997. In addition to the foregoing the
Company had other revenues of $102,861 for the six months ended June 30, 1998 as
compared to the $114,790 for the six months ended June 30, 1997.
COSTS AND EXPENSES. Total costs and expenses of the Company increased
92.37% from $3,103,346 for the six months ended June 30, 1997 compared to
$5,969,841 for the six months ended June 30, 1998. The increase was primarily
attributable to a combination of increases in exploration costs - geological and
geophysical, general and administrative costs, interest expense and delay
rentals. Partially offsetting the foregoing increases in expenses were
decreases in lease operating expense, transportation and gathering costs,
depletion, depreciation and amortization, exploration costs, dry hole costs and
production taxes.
EXPLORATION COSTS - GEOLOGICAL AND GEOPHYSICAL increased 1,992.57% from
$133,238 for the six months ended June 30, 1997 to $2,788,100 for the six months
ended June 30, 1998. These exploration costs reflect the costs of
topographical, geological and geophysical studies and include the expenses of
geologists, geophysical crews and others conducting these studies. The
Company's exploration portfolio and its aggressive drilling program has greatly
increased these costs for the six months ended June 30, 1998 as compared with
the same period of 1997.
GENERAL AND ADMINISTRATIVE EXPENSES ("G&A") increased 38.90% from
$1,238,026 for the six months ended June 30, 1997 as compared to $1,719,607 for
the six months ended June 30, 1998. This was primarily attributable to
increases in operational expenses incurred after May 14, 1998, the effective
date of the Acquisition Agreement with Aspect and EPC and costs associated with
said acquisitions.
INTEREST EXPENSE increased 2,267.18% from $9,205 for the six months ended
June 30, 1997 to $217,899 for the six months ended June 30, 1998. The increase
in interest expense was primarily attributed to the credit facility dated
February 23, 1998 between the Company and Duke Energy Financial Services, Inc.
The Company capitalized a large portion of its interest in its on-going
Starboard Prospect, which capitalized amounts totaled $161,219 for the six
months ended June 30, 1998 and $114,592 for the six months ended June 30, 1997.
DELAY RENTAL EXPENSE increased to $5,083 for the six months ended June 30,
1998. There were no delay rentals recorded for the six months ended June 30,
1997. The increase was attributed to rental payments due on the Company's
Starboard Prospect and various other prospects.
LEASE OPERATING EXPENSE decreased 75.59% from $222,855 for the six months
ended June 30, 1997 to $54,407 for the six months ended June 30, 1998. The
reduction in lease operating costs was attributable to the sale of certain
Company properties, effective July 1, 1997, and ceased operational costs for the
Company's Mobile Bay Wells. Lease operating costs associated with the Mobile
Bay Wells for the six months ended June 30, 1997 was $129,749. During the six
months ended June 30, 1998, the Company reversed over-accrued plugging and
abandonment costs on the Mobile Bay Wells at $68,739.
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Lease operating costs attributable to the Company wells sold effective July 1,
1997; for the six months ended June 30, 1997 totaled $41,231.
TRANSPORTATION AND GATHERING COSTS decreased 99.04% from $137,887 for the
six months ended June 30, 1997 to $1,326 for the six months ended June 30, 1998.
The decrease in transportation and gathering cost was almost entirely
attributable to the ceased production of the Mobile Bay Wells.
EXPLORATION COSTS - DRY HOLE COST decreased 7.82% from $1,128,356 for the
six months ended June 30, 1997 to $1,040,101 for the six months ended June 30,
1998.
DEPLETION, DEPRECIATION AND AMORTIZATION ("DD&A") decreased 36.97% from
$219,524 for the six months ended June 30, 1997 to $138,366 for the six months
ended June 30, 1998. The decrease to DD&A was primarily attributable to the
July 1, 1997 sale of certain Company properties located in Texas, Oklahoma, and
Arkansas and the ceased production from the Mobile Bay Wells.
PRODUCTION TAXES declined 65.26% from $14,255 for the six months ended June
30, 1997 to $4,952 for the six months ended June 30, 1998, due to reduced
production as a result of the sale of certain Company interests effective July
1, 1997 and a production tax refund from the State of Oklahoma for a production
enhancement project completed in 1994.
NET INCOME (LOSS) The net loss increased from $2,671,861 to $5,620,719 for
the six months ended June 30, 1997 and June 30, 1998 respectively. This
increase was due to the factors discussed above.
The net loss per common share decreased from a net loss of $1.63 per share
for the six months ended June 30, 1997 to a net loss of $1.32 for the six months
ended June 30, 1998. This is reflective of the increase in net loss of
$2,948,858 from the six months ended June 30, 1997 as compared to the six months
ended June 30, 1998. The increased net loss was offset by the increased number
of weighted average common equivalent shares at June 30, 1998 that resulted from
additional stock issued to an investment advisor during 1997, and the asset
acquisition which closed May 14, 1998. Approximately 4,280,381 weighted average
common equivalent shares were outstanding at June 30, 1998 as compared to
approximately 1,644,317 at June 30, 1997.
KNOWN AND ANTICIPATED TRENDS, CONTINGENCIES AND DEVELOPMENTS IMPACTING
FUTURE OPERATING RESULTS
The Company's future operating results will be substantially dependent upon
the success of the Company's efforts to develop the properties acquired in the
Acquisitions, as well as the Starboard Project and other prospects. Because the
Company divested substantially all of its oil and gas properties in the
Mid-Continent region by the end of 1996, revenues from the operation and sale of
such properties have been substantially reduced during 1997 and will be reduced
in future years. Further, following a sharp and unexpected drop in production
from the Company's Mobile Bay wells during the fourth quarter of 1996, the
Company's share of revenues from Mobile Bay was substantially reduced during
1997.
As a result of the loss of revenues from the Mid-Continent region and
Mobile Bay, the Company's revenues during 1997 were sharply reduced. While
management believes that the Acquisitions and the Starboard Project represent
the most promising prospects in the Company's history, and the wells drilled in
1998 are expected to substantially increase the Company's revenues, the capital
expenditures planned on the Acquisitions and the Starboard Project will require
substantial outlays of capital to explore, develop and produce.
LIQUIDITY AND CAPITAL RESOURCES
The Company has budgeted over $25.0 million to fund the drilling of over 30
wells on the Exploration Projects and other exploration costs over the next 12
months. The Company's sources of financing include borrowing capacity under the
Bank Credit Agreement and other credit facilities, the sale of promoted
interests in the Exploration Projects to industry partners and cash provided
from operations. The Company received over $14,000,000 in net proceeds from a
public offering of common stock effective July 16, 1998. Of such proceeds, $7.8
million was used to repay the Duke Credit Facility, and the remainder is being
used for exploration activities on the Exploration Projects, including the
payment of costs incurred by affiliates on the exploration projects acquired on
May 14, 1998 which costs were incurred after the effective date of November 1,
1997 and prior to closing, and for working capital and general corporate
purposes.
The Company will require additional sources of capital to fund its
exploration budget over the next 12 months. The Company currently is attempting
to renegotiate the terms of the Bank Credit Agreement to obtain additional
borrowing
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capacity. Management expects it will secure such commitments, however if the
Company is unable to obtain such additional borrowing capacity, or is unable to
access additional sources of outside financing, the Company will either have to
sell interests in its Exploration Projects to fund its exploration program or
curtail its exploration activities over the next 12 months. Such curtailing of
exploration activities could include reducing the number of wells drilled,
slowing exploratory activities on projects that the Company operates, selling
interests in the Company's project inventory or a combination of the foregoing.
The Company historically has addressed its long-term liquidity needs
through the issuance of debt and equity securities, through bank credit and
other credit facilities and with cash provided by operating activities. Its
major obligations at June 30, 1998, consisted principally of (i) servicing loans
under the Bank Credit Agreement and other loans, (ii) servicing the Duke Credit
Facility; (iii) funding of the Company's exploration activities, and (iv)
funding of the day-to-day general and administrative costs. The Duke Credit
Facility was repaid in July 1998.
The Company booked the assets acquired in the Acquisitions at $54.2
million, which was the estimated fair market value of such assets as
determined by an independent third party, plus costs incurred on the acquired
assets after the effective date of November 1, 1997 and prior to closing on
May 14, 1998. Items affected by the Acquisitions include (i) an increase in
the Company's current liabilities by the assumption of approximately $4.755
million of net post-effective date costs related to the assets acquired in
the Acquisitions, plus $1 million of additional current liabilities assumed
from EPC pursuant to the Acquisition Agreement, (ii) an increase in overhead
resulting from the hiring of additional technical staff and additional
management; and (iii) adopting a business plan that budgets over $25.0
million net to the Company's interest in exploratory costs over the next 12
months. Certain costs associated with these obligations may be offset by
future revenues from wells drilled since the effective date of the
Acquisitions and other revenue anticipated from wells scheduled to be drilled
in the third and fourth quarters of 1998. The Company cannot, however, assure
that such revenues will be forthcoming, nor can it project the revenues
anticipated from such sources over the next 12 months.
Many of the factors that may affect the Company's future operating
performance and long-term liquidity are beyond the Company's control, including,
but not limited to, oil and natural gas prices, governmental actions and taxes,
the availability and attractiveness of financing and its operational results.
The Company continues to examine alternative sources of long-term capital,
including bank borrowings, the issuance of debt instruments, the sale of common
stock or other equity securities, the issuance of net profits interests, sales
of promoted interests in its Exploration Projects, and various forms of joint
venture financing. In addition, the prices the Company receives for its future
oil and natural gas production and the level of the Company's production will
have a significant impact on future operating cash flows.
WORKING CAPITAL. At June 30, 1998, the Company had a cash balance of
$172,984 and a working capital deficit of $15,385,480 as compared to a cash
balance of $690,576 and a working capital deficit of $413,377 at December 31,
1997. The decrease in cash and working capital was primarily attributable to the
additions to oil and gas properties during the six months ended June 30, 1998.
The net proceeds to the underwritten common stock offering of over $14,000,000
retired $7,800,000 in long-term debt and the balance increased working capital.
The Company believes it is positioned for a period of significant
exploration activity on its technology enhanced projects. Many of the projects
have reached the drilling stage. In many instances the requisite process of
geological and/or engineering analysis, followed by acreage acquisition of
leasehold rights then seismic permitting, and 3-D seismic field data
acquisition, then processing of the data and finally its interpretation, took
several years of time and the investment of significant capital. Management
believes the acquisition of projects at this advanced stage has not only reduced
the drilling risk, but should allow the Company to consistently drill on a broad
array of exploration prospects over the next twelve months. Included will be
several prospects planned to be drilled in the third and fourth quarters of 1998
by the Company which have extremely high potential to its net interest. As
evidence of this activity the Company has participated in the drilling of 19
prospects from March through the date hereof with working interests which range
from 8% to 79%. Out of the 19 wells drilled, 10 wells have been completed, 7
were dry holes and 2 are being drilled. Management expects its net oil and gas
revenues in the fourth quarter of 1998 to approximate $500,000 per month from
this new drilling alone.
In that the Company will not fund most of its capital expenditure budget
from cash available or from cash flow, the Company will look to a variety of
sources to fund its continuing capital expenditures budget including new credit
facilities and sales of promoted project interests to industry partners, as it
seeks to maximize its interests and manage its risks while aggressively pursuing
its exploration projects. This process will be limited more by capital
availability than by its inventory of drillable prospects.
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Timing of funding its exploration budget will determine the pace of
drilling and, to the extent drilling is successful, the growth of future oil and
gas revenues. Management believes additional credit facilities will be
available to it in the third quarter and that strategic sales of prospect
interests will be effected which will allow it to continue its planned
exploration activities in the second half of 1998. Until such sources of
funding are committed however, it cannot actually commence certain drilling
operations anticipated to occur in the next several months.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS. In 1997, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings per Share"
and SFAS No. 129, "Disclosure Information about Capital Structure," which have
been reflected in the Company's year-end 1997 financial statements. In 1997,
FASB also issued SFAS No. 130, "Reporting Comprehensive Income", SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information", and SFAS
No. 133 "Accounting for Derivative Instruments and Hedging Activities" each of
which require expanded disclosures effective for 1998. The Company does not
expect the application of these statements to have a material effect on its
financial position, liquidity or results of operations.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Esenjay Petroleum Corporation ("EPC") was a defendant in a lawsuit
regarding injuries to an oilfield worker that resulted in a judgment against EPC
of approximately $17,700,000. The judgment was settled by EPC's insurers, who
agreed to make cash payments to the plaintiff, and by EPC who agreed to
implement a mutually agreeable work safety plan. The settlement was entered
into and approved by the court entering an agreed judgment on December 3, 1997.
On approximately April 16, 1998, the plaintiff filed an action against both EPC
and the Company alleging, in part, that EPC has failed and refused to implement
an appropriate safety plan and entered negotiations with the Company to convey
material assets to it which, if consummated, would negate plaintiffs benefits to
be obtained by EPC's safety plan, thereby fraudulently inducing plaintiff to
settle the judgment against EPC. The Company believes the claims are not
supported by the facts and are without merit. The Company and EPC intend to
vigorously defend the claims.
ITEM 2. CHANGES IN SECURITIES.
On May 14, 1998, a Special Meeting of Shareholders of the Company was held
pursuant to a solicitation of proxy mailed on or about April 24, 1998 to all of
the shareholders of record as of close of business on April 1, 1998. The
shareholders approved and ratified the following: (i) the approval of the
Acquisition Agreement, (ii) the approval of a 1:6 reverse split of the
presently outstanding Common Stock, (iii) the approval of the reincorporation of
the Company in the state of Delaware and a name change of the Company's name to
Esenjay Exploration, Inc., and (iv) the election of seven directors including:
Alex Cranberg, Michael E. Johnson, Jack P. Randall, Alex B. Campbell, Charles J.
Smith, William D. Dodge, III and Hobart A. Smith. As a result of the
Reincorporation the Company reincorporated in the state of Delaware and changed
its name to Esenjay Exploration, Inc. As a result of the Reverse Split, all of
the Company's common stock, warrants to purchase common stock and options to
issue common stock were effected with the result being that each share of common
stock, or warrant or option to purchase such share of common stock converted
into 1/6 of a share of common stock or rights to purchase 1/6 of a share of
common stock. This effected various outstanding warrants and options of the
Company including the Company's currently outstanding Class A warrants to
purchase common stock and its currently outstanding Class B warrants to purchase
common stock, both of which are registered securities and publicly traded. In
addition to the Reincorporation and the Reverse Split, the Company issued new
shares of its common stock plus various other consideration in return for
interests in exploration projects from Aspect and EPC, which have a historical
full cost basis on the books of the selling entities of $19,900,000 and a fair
market value of $54,200,000 (based upon an independent evaluation) on the
effective date of the acquisition on November 1, 1997. Securities were issued
in reliance upon exemptions set forth in Section 4 (2) of the Securities Act of
1933. All of the securities were sold effective May 14, 1998. Of the
securities sold 5,165,260 shares of common stock were issued to EPC and
4,941,440 shares of common stock were issued to Aspect and/or its assigns, of
which 4,203,106 shares were issued to Aspect, 23,334 shares were issued to R.
Michael Looney, 16,667 shares were issued to Steven L. Creger, 23,334 shares
were issued to James A. Rodgers, and 675,000 shares were issued to Joint Energy
Development's II Limited Partnership, an affiliate of Enron Corp.
In conjunction with, and as a requirement of, the Acquisition Agreement,
the Company called for redemption of all 85,961 shares of its previously issued
and outstanding shares of Convertible Preferred Stock. The redemption price was
$10.26 per share and included all accrued and unpaid dividends on the stock
through the redemption date of June 15, 1998. Record owners as of May 20, 1998
had the right to convert their Convertible Preferred Stock into Common stock at
any time until the close of business on June 12, 1998, or their shares would be
redeemed on June 15, 1998. The Company also declared a $2.40 per share dividend
on said Convertible Preferred Stock, which dividends acquitted all dividends
previously in arrears on said stock, and which totaled $206,304. The dividends
were paid on May 13, 1998 to the shareholders of record on May 11, 1998.
On July 21, 1998, the Company closed an underwritten offering of 4,000,000
shares of its common stock at a price of $4.00 per share. The net proceeds to
the Company in the underwritten offering were approximately $14,880,000, and as
a result the Company had 15,762,706 shares outstanding as of August 18, 1998.
The proceeds were utilized to fully repay the credit facility from Duke Energy
Financial Services, Inc., to reduce accounts payable, and for working capital
and exploration costs.
As a result of the above stockholder actions, the Acquisitions were closed,
the Company's preferred stock was called for redemption and the reverse split,
reincorporation and name change were effected. Accordingly, all numbers of
common shares and per share calculations have been restated to reflect the 1:6
reverse stock split.
17
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
On May 14, 1998 the Company called for the redemption of all 85,961
shares of its previously issued and outstanding shares of Convertible Preferred
Stock. The redemption price was $10.26 per share, plus all accrued and unpaid
dividends on the Preferred Stock through the redemption date of June 15, 1998.
Prior to the redemption there had been accrued and unpaid dividends.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 14, 1998, a special meeting of shareholders of Frontier
Natural Gas Corporation was held. At that meeting the shareholders voted as
follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
a) To approve the Acquisition Agreement
For 5,670,420 Against 133,487 Abstain 57,102
--------- ------- ------
b) To approve the Reverse Stock Split
For 8,989,738 Against 205,075 Abstain 312,224
--------- ------- -------
c) To approve the Reincorporation
For 5,315,168 Against 213,250 Abstain 340,848
--------- ------- -------
d) The following directors were elected (by the vote indicated) at such meeting:
Name of Nominee Number of Shares Number of shares
Voted For Voted Against
Alex M. Cranberg........ 9,342,453 164,572
Michael E. Johnson...... 9,339,743 167,292
Jack P. Randall......... 9,339,243 167,792
David W. Berry.......... 9,341,163 165,872
Alex B. Campbell........ 9,339,243 167,792
Charles J. Smith........ 9,339,743 167,292
William D. Dodge, III... 9,339,243 167,792
</TABLE>
ITEM 5. OTHER INFORMATION.
As a result of the completion of the acquisitions as set forth in the
Acquisition Agreement, the Company has been able to expand its business
strategy. The strategy being implemented is to expand its reserves, production
and cash flow through the implementation of an exploration program that focuses
on (i) obtaining dominant positions in core areas of exploration; (ii) enhancing
the value of its exploration projects and reducing exploration risks through the
use of 3-D seismic and CAEX technologies; (iii) maintaining an experienced
technical staff with the expertise necessary to take advantage of the Company's
proprietary 3-D seismic and CAEX seismic data; (iv) reducing exploration risks
by focusing on the identification of moderate depth gas reservoirs, which the
Company believes are conducive to direct hydrocarbon detection technologies; and
(v) retaining control over critical exploration decisions. The value scope and
advanced stage of technological evaluation of the focused core areas represented
in the properties acquired pursuant to the Acquisition Agreement have allowed
the Company to seek to implement this strategy.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
The following is filed as an exhibit to Part I of this Form 10-Q
Exhibit No. 11 Computation of Earnings Per Common Share
Exhibit No. 27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K for the quarter ended June
30, 1998.
18
<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.
ESENJAY EXPLORATION, INC.
Date: AUGUST _____, 1998 By: ___________________________________
Michael E. Johnson, President
(Principal Executive Officer for the
quarterly reporting period) and Director
Date: AUGUST ______, 1998 By: ___________________________________
David B. Christofferson, Senior Vice
President
General Counsel, Principal Financial
Officer
Date: AUGUST ______, 1998 By: ___________________________________
Howard E. Williams, Vice President
Principal Accounting Officer
19
<PAGE>
EXHIBIT 11 TO FORM 10QSB/A
ESENJAY EXPLORATION, INC.
Computation of Loss Per Common Share
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
--------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
Weighted average of common shares
outstanding.... . . . . . . . . . . . . . . . 6,875,939 1,644,317 4,280,381 1,644,317
------------ ------------ ------------ ------------
Basic loss per share. . . . . . . . . . . . . $ (0.73) $ (0.82) $ (1.32) $ (1.63)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
DILUTED EARNINGS PER SHARE
Weighted Average Common Shares
outstanding.. . . . . . . . . . . . . . . . . 6,875,939 1,644,317 4,280,381 1,644,317
Shares issuable from assumed conversion of
Common share options and warrants.. . . . . . 35,545 18,717 16,206 8,159
Convertible preferred stock.. . . . . . . . . ------ 28,654 ------ 28,654
------------ ------------ ------------ ------------
Weighted average common shares
outstanding, as adjusted. . . . . . . . . . . 6,911,484 1,691,688 4,296,587 1,681,130
------------ ------------ ------------ ------------
Diluted loss per share. . . . . . . . . . . . $ (0.73) $ (0.78) $ (1.32) $ (1.59)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
EARNINGS FOR BASIC AND DILUTED
COMPUTATION
Net loss . . . . . . . . . . . . . . . . . . . . $(5,012,130) $(1,319,839) $(5,620,719) $(2,671,861)
Preferred stock dividend... . . . . . . . . . . . (22,350) (25,788) (48,138) (51,576)
------------ ------------ ------------ ------------
Net income to common shareholders
(basic earnings per share computation). . . . (5,034,480) (1,345,627) (5,668,857) (2,723,437)
Preferred shares dividend . . . . . . . . . . . . ------ 25,788 ------ 51,576
------------ ------------ ------------ ------------
Net loss to common shareholders, as adjusted
(diluted earnings per share computation). . . $(5,034,480) $(1,319,839) $(5,668,857) $(2,671,861)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
This calculation is submitted in accordance with Regulation S-K; although it
is contrary to paragraphs 13 through 16 of the Financial Accounting Standards
Board's Statement of Financial Standard No. 128, because it produces an
antidilutive result.
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 172,984
<SECURITIES> 0
<RECEIVABLES> 1,408,691
<ALLOWANCES> (7,750)
<INVENTORY> 0
<CURRENT-ASSETS> 2,076,908
<PP&E> 67,803,823
<DEPRECIATION> (1,380,121)
<TOTAL-ASSETS> 69,082,897
<CURRENT-LIABILITIES> 17,462,388
<BONDS> 4,950,967
0
0
<COMMON> 117,627
<OTHER-SE> 45,422,161
<TOTAL-LIABILITY-AND-EQUITY> 69,082,897
<SALES> 154,864
<TOTAL-REVENUES> 349,123
<CGS> 0
<TOTAL-COSTS> 5,751,942
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 217,899
<INCOME-PRETAX> (5,620,719)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,620,719)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,620,719)
<EPS-PRIMARY> (1.32)
<EPS-DILUTED> (1.32)
</TABLE>
