<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 211662
FRONTIER OIL & GAS COMPANY
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 76-0392937
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
1717 ST. JAMES PLACE
SUITE 380
HOUSTON, TEXAS 77056
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (713) 622 2798
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF CLASS
COMMON STOCK, PAR VALUE $0.02 PER SHARE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 12 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 AT LEAST THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-B IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED,
TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-KSB OR ANY
AMENDMENT TO THIS FORM 10-KSB.
REGISTRANT'S REVENUES FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997 .... $ 163,889
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Page 1 of 46 total pages
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS
AND REPORTS REQUIRED TO BE FILED BY SECTION 12, 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN
CONFIRMED BY A COURT. YES [X] NO [ ]
AS OF SEPTEMBER 15, 1998, THERE WERE 3,309,233 SHARES OF REGISTRANT'S
STOCK OUTSTANDING. THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY
NON-AFFILIATES OF THE REGISTRANT CANNOT BE DETERMINED AT THIS TIME. THE LAST
QUOTED HIGH BID AND LOW ASKED PRICES IN THE OVER-THE-COUNTER MARKET WERE $.03
AND $.01, RESPECTIVELY, ON SEPTEMBER 20, 1985.
NOTE: THE EXHIBIT INDEX (PART IV, ITEM 1) APPEARS ON PAGES 25-26.
Page 2 of 46 total pages
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<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
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ITEM NUMBER AND CAPTION: PAGE
PART I
<S> <C> <C>
1. Business 4
2. Properties and Production 13
3. Legal Proceedings 17
4. Submission of Matters to a Vote of Security Holders 17
PART II
5. Market for Registrant's Common Stock and Related Security Holder Matters 18
6. Management's Discussion and Analysis or Plan of Operations 19
7. Financial Statements and Supplementary Data 20
8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 20
PART III
9. Directors and Executive Officers of the Registrant 21
10. Executive Compensation 22
11. Security Ownership of Certain Beneficial Owners and Management 23
12. Certain Relationships and Related Transactions 24
PART IV
13. Exhibits, Financial Statements, Schedules and Reports on Form 8-K 25
</TABLE>
Page 3 of 46 total pages
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PART I
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ITEM 1. BUSINESS
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Frontier Oil & Gas Company, is a Delaware corporation, ("Frontier" or the
"Company") with its principal business offices at 1717 St. James Place, Suite
380, Houston, Texas 77056. The Company's primary business is acting as general
partner for a Partnership, described below, which holds an interest in certain
coal seam gas properties in Rio Arriba County, New Mexico. Through its
relationship with Delta, described below, the Company seeks to acquire and
develop oil and gas properties. Previously, the Company, through its
predecessors, acquired non-producing oil and gas leases, which it assigned to
third parties for cash and a residual interest. Those properties are currently
developed and held by production. Through its predecessors, the Company also
previously engaged in the production and sale of oil and gas. The Company also
brokers the sale of coal seam gas properties which generate tax credits under
the internal revenue code.
FRONTIER LIMITED PARTNERSHIP. Pursuant to an agreement effective as of July 1,
1993, the Company sold all of its Fruitland Coal Seam gas properties in the
Carracas Canyon Federal Unit in Rio Arriba County, New Mexico, to Frontier
Limited Partnership (the "Partnership"), a Texas Limited Partnership, of which
the Company is the general partner and FAR Gas Acquisitions Corporation is the
limited partner. The Company, as general partner, manages the properties and,
after expenses, is entitled to 1.0% of the revenues of the Partnership, and is
obligated for 1.0% of the expenses. The limited partner is entitled to 99.0% of
the revenues and is obligated for 99.0% of the expenses.
The purchase price paid by the Partnership to the Company was $1,812,652, of
which $25,152 was paid in cash, with the balance to be paid in deferred payments
which bear interest at 7.25% per annum. The sum of $240,000 was paid to the
Company in quarterly installments of principal and interest, commencing October
1, 1993. The balance of $1,547,500 is payable pursuant to a reserved production
payment, when, as and if gas is produced and sold. In addition, the Partnership
is obligated to make quarterly incentive payments to the Company, initially
equal to $0.33369 per MMbtu of all natural gas produced and sold from the
property through December 31, 2002. During the period ended October 31, 1997,
the Company earned $ 30,325 in incentive payments and was paid $ 110,319 in
respect of the reserved production payment. For the years through 2002, the
amount of the incentive payment is to be increased or decreased annually by an
amount equal to the percentage change in the GNP implicit price deflator. This
amount was adjusted to $0.34773 per MMbtu effective January 1, 1996. After the
Partnership has produced and sold 1,170,000 Mcf of gas, the Company, as general
partner, will be entitled to 70.0% of the Partnership revenues and be obligated
for 70.0% of the expenses, and the limited partner's interest will be reduced to
30.0%.
Page 4 of 46 total pages
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AGREEMENTS WITH DELTA PARTNERS, INC. AND DELTA ASSOCIATES, INC. In December
1991, through a predecessor, the Company entered into a joint venture agreement
with Delta Partners, Inc., a Nevada corporation to provide for: (i) management
services; (ii) additional working capital; and, (iii) an ongoing business
relationship. The joint venture included (a) a management agreement; (b) a
subscription agreement; (c) a stock option agreement; and (d) an oil and gas
prospects agreement. Effective January 1, 1994, certain principal shareholders
of Delta Partners, Inc. dissolved that corporation and formed Delta Associates,
Inc., a Texas corporation. Since the expiration of the initial term of the
agreement between the Company and Delta Associates, Inc., the companies have
continued to work together by mutual consent. Delta Partners, Inc. and Delta
Associates, Inc. are herein collectively referred to as "Delta" unless the
context requires otherwise.
Under the 1991 agreements, Delta purchased 428,571 shares of the Company for a
purchase price of $180,000. The subscription payment to the Company was in the
form of quarterly advances which were, in turn, paid back to Delta as management
fees.
The Company has agreed to pay Delta an operation incentive fee equal to fifteen
percent (15%) of the operating cash flow of the Company in excess of $12,500 per
month. As further consideration for the Management Agreement, the Company
granted to Delta an option to purchase 1,190,476 shares of its common stock at
$0.42 per share.
Under the 1991 agreements, Frontier had an option under which it might acquire
an interest in oil and gas prospects developed by Delta. Under the Oil and Gas
Prospect Option Agreement described below, Frontier is entitled to exercise the
option with respect to up to one-half (1/2) of Delta's interest in a particular
prospect upon payment of an amount equal to one-half (1/2) of the amounts Delta
paid out as its cost for prospect generation and acquisition. Through October
1997, Delta had developed no producing properties under which the Company could
have purchased an interest.
The initial eighteen (18) month term of the Management Agreement expired in June
1993. In June of 1993, the parties agreed to continue the Management Agreement
for an additional eighteen (18) months. Management fees are payable only from
funds derived from the exercise of options. To the extent funds are not
available to pay management fees from the exercise of options, Frontier has
elected to advance management fees to be later repaid as options are exercised.
Including the initial subscription in October 1992, Delta has purchased 975,178
shares of the Company's common stock at $0.42 per share through October 31,
1997.
The stock option issued to Delta has a term of five (5) years from January 1,
1994 and may be exercised at any time in whole or in part. The option contains
anti-dilution provisions in the event of stock split, stock dividend, any other
change in the character or amount of the Company's stock or in the event of a
business combination of the Company with another entity. The option agreement
provides for restrictions on transfer of the stock including restrictions on
transfer in the event of a future underwriting of the Company's stock. At
October 31, 1997, there were options outstanding to purchase 643,869 shares.
Page 5 of 46 total pages
<PAGE> 6
Under the Oil and Gas Prospects Option Agreement, Delta granted to the Company
an option to purchase a fifty percent (50%) interest in any oil and gas prospect
developed by Delta for a period of five (5) years, commencing as of January 1,
1994. The option relates to the net interest retained by Delta (after all
overrides, working interests and concessions to third parties) with respect to
any oil and gas prospect developed by Delta throughout the option term. The
purchase price of the option interest shall be: (a) the Company's pro rata
portion (up to one-half) of all of Delta's actual out-of-pocket expenses
incurred in the generation, development and sale of such prospect (not including
any provision for Delta's overhead); plus (b) a bonus of ten percent (10%) of
the purchase price if Delta has retained an interest in a prospect which shall
then be productive. The purchase price shall be payable in cash at the time of
each exercise. The Company may elect to pay the bonus in either cash or in
Frontier's common stock at a price equal to the market price of Frontier's
common stock at the time of exercise of this option.
Section 29 Tax Credits
In April 1995, the Company entered into an agreement ("Agreement") with Meridian
Investments, Inc., ("Meridian") of Quincy, Massachusetts, under which Meridian
has engaged the Company to assist it in the identification and acquisition of
companies producing qualified Section 29 tax credit interests to be passed on to
Meridian's institutional clients.
Under the Agreement, the Company acts as a non-exclusive agent to secure, and
pass on to Meridian, the names of each company which the Company has identified
as a company willing to consider the sale or monetization of its Section 29 tax
credits. In each such case, the Company has agreed to represent only Meridian
unless otherwise approved by Meridian.
As compensation for its services, Meridian has agreed to pay the Company a fee
equal to 3.5% of the gross equity raised from each transaction in which the
Company acts as finder. Compensation is payable within 15 days of Meridian
receiving payment from all associated acquisition fees in a particular
transaction should the compensation arrangement between Meridian and its client
call for fees to be received in installments, the Company would, likewise,
receive its fees in installments.
Initially, the Company identified 5 companies or entities as having the
potential to produce fees from the monetization of tax credits from a sale by
those entities. In addition to the initial prospects, the Company identified,
through October 31, 1997, 26 entities from which Meridian might structure a tax
credit acquisition. The relationship with Meridian has resulted in several
offers being made to entities so identified by the Company. In some cases, the
offers were less than those made by competitors and, in other instances, the
companies which solicited offers later elected not to sell their tax credits.
Meridian, in a transaction arranged by the Company, assisted one of its
institutional clients in acquiring all of the outstanding stock of FAR Gas
Acquisitions Corporation of Denver, Colorado. The transaction was concluded in
December 1996 and resulted in a fee being paid to the Company of $253,000;
$92,000 of which was paid in cash at closing and the balance of which is to be
paid in installments over 5 years.
Page 6 of 46 total pages
<PAGE> 7
The term of the initial Agreement between the Company and Meridian expired on
April 13, 1996; however, the two companies have continued to have an ongoing
relationship by mutual consent and are continuing to work on several potential
tax credit acquisitions for Meridian's customers. Negotiations through fiscal
1997 did not result in additional fees to the Company.
In some instances, the compensation originally agreed to may be adjusted to
reflect the higher cost to Meridian's customers as the Section 29 tax credit
business is intensely competitive and the price being paid for Section 29 tax
credits has increased substantially since execution and delivery of the initial
agreement.
The original Agreement contains a right of first refusal for two years beyond
the initial term, i.e. until April of 1998, under which Meridian shall have a 30
day right of first refusal on Section 29 interests identified by the Company
from and after April 13, 1996. During that period, Meridian would be obligated
to pay the Company a finder's fee and associated reimbursable expenses as if the
original Agreement were in full force and effect should Meridian elect to
conclude, with its customers, the sale of credits so identified by the Company.
GENERAL. Since it commenced business, the Company or its predecessors,
associates, or joint venture partners, participated in the drilling of 41
exploration and 13 development wells. Of the 40 exploration wells drilled, 14
were completed as oil or gas discoveries and 27 were abandoned as dry holes.
Subsequently, two of the completed exploration wells were abandoned, and 10 were
sold. Eleven of the 13 development wells were completed, but all have been sold
or abandoned.
At this date, the Company holds a 17.5% working interest in a well in Sweetwater
County, Wyoming which is presently shut in, see "Properties and Production." The
Company's only materially important assets are its interest as general partner
of the Partnership, the reserved production payment owed to the Company by the
Partnership and its rights under the Oil and Gas Prospects Option Agreement with
Delta.
OTHER OPERATIONS:
NET OIL AND GAS PRODUCTION. The following presents the net quantities of oil and
gas produced from the Partnership's oil and gas interests for the year ended
October 31, 1997:
<TABLE>
<CAPTION>
Year Ended
October 31, 1997
----------------
<S> <C>
Oil (bbls.) 0
Gas (mcf.) 86,773
</TABLE>
All such gas was produced from the Rio Arriba Properties described below.
Page 7 of 46 total pages
<PAGE> 8
OIL AND GAS CONTRACTS AND PRICES. The gas produced from the Rio Arriba
Properties is dedicated to Northwest Pipeline Corporation with the price being
based on the spot prices in the San Juan basin, reduced by Northwest's
system-wide costs for transportation, gathering, processing, etc. Prices were as
high as $3.76 per Mcf in January 1997, but have been as low as $1.18 per Mcf in
May 1997.
The average sales price per Mcf of gas sold by the Partnership for the period
indicated and the average production (lifting) expense per Mcf of gas for that
period were as follows:
<TABLE>
<CAPTION>
Year Ended
October 31, 1997
----------------
<S> <C>
Average Sales Price per Mcf (Gas) $ 2.06
Average Production Expense per Mcf (Gas) $ 0.194
</TABLE>
Gas production from the Rio Arriba Properties is under contract with Northwest
Pipeline Corporation. The Company considers this contract material to its and
the Partnership's existing business.
TOTAL GROSS AND PRODUCTIVE WELLS AND UNDEVELOPED ACREAGE. At October 31, 1997,
the Partnership had an interest in 16 gross productive gas wells located on
4,763 gross productive acres.
The Partnership's working interest in four wells is .0996875 located on 127.6
net acres and .0746474 in one well located on 23.88 net acres. The Partnership
has an additional overriding royalty interest of .00398437 in a total of sixteen
wells located on 20.399744 net acres.
The following table sets forth the Partnership's total gross and net productive
wells and developed acreage as of October 31, 1997:
<TABLE>
<CAPTION>
Developed Acreage* Gross Productive Wells Net Productive Wells
Gross Net Oil Gas Oil Gas
<S> <C> <C> <C> <C> <C>
1,240.00 127.60 0 4 0 .3988
320.00 23.88 0 1 0 .0746
3,202.93 20.40 0 11 0 .0478
</TABLE>
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* The Partnership's interest is in a total of approximately 4,763 acres.
The Partnership has a working interest in the first five wells and an
overriding royalty interest in the remaining wells. The Partnership
derives its interest in the Carracas Canyon Federal Unit through its
Overriding Royalty interest under the 4,763 acres, convertible to a
working interest in certain areas deemed to have reached payout. Four
(4) producing wells have converted to a working interest covering 1,240
acres in the participating area and another productive well covering
320 acres. The Partnership has an unconverted Overriding Royalty under
eleven (11) other wells in the participating area.
Page 8 of 46 total pages
<PAGE> 9
EMPLOYEES. At October 31, 1997, the Company had two (2) employees. The Company
expects to continue to employ a total of two (2) persons full-time. In addition
to this staff, Frontier periodically will utilize the services of part-time
consultants.
OPERATING HAZARDS AND UNINSURED RISKS. The Company's operations are subject to
all the risks inherent in the exploration for and production of oil and gas,
including blowouts, cratering and fires, all of which can result in damage to or
destruction of oil and gas wells or formations, producing facilities or
property, personal injury or loss of life, or pollution damages. The Company
generally will carry insurance against various of these risks but because
insurance with respect to certain of such risks is either not available or is
limited in its coverage, the Company may elect not to insure due to prohibitive
premium costs. The occurrence of an event not fully insured against could result
in the Company incurring substantial costs. Notwithstanding the foregoing, the
Company does not expect to be the operator of any wells in which it has an
interest. In general, the terms of any operating agreements will provide for the
operator to insure against most of these risks.
TITLE TO PROPERTIES. The Company will follow practices customary in the industry
with respect to title matters. Under customary industry practices, a preliminary
title examination is conducted at the time oil and gas properties are acquired.
Prior to the commencement of any drilling operations on any of its properties, a
thorough title examination will be conducted to attempt to remedy any defects in
title. In the event that material defects or disputes exist with respect to the
title to any properties, the Company could suffer title failures or incur
substantial costs in attempting to remedy such title defects or resolve such
disputes.
The properties owned and to be owned by the Company or the Partnership will be
subject to royalty, overriding royalties and other outstanding interests
customary in the industry.
COMPETITION AND MARKETS. The Company and the Partnership compete and will
compete with numerous other companies and individuals in their oil and gas
activities. Their competitors include foreign producing countries, the major oil
companies and other independent oil companies, most of which have financial
resources, staffs and facilities substantially greater than the Company's or the
Partnership's.
Evaluation of geological and engineering data, identification and acquisition of
suitable prospects, and other aspects of the business of the Company requires
skilled and experienced personnel. The ability to attract and retain such people
and build such relationships is a critical aspect of its success.
Competition is encountered from other independent oil companies and from major
oil companies in acquiring properties. Many competitors have financial resources
and staffs larger than those available to the Company and its future success
will depend in large part upon its ability to discover reserves by selecting and
acquiring suitable prospects.
Page 9 of 46 total pages
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For oil and gas produced from leases in which the Company or the Partnership own
or will own an economic interest, the availability of a ready market for
production and the prices obtained for production will depend upon a number of
factors beyond its control, the effects of which cannot be accurately predicted.
Such factors include: the extent of domestic production and imports of oil; the
competitive position of oil and gas as a source of energy vis-a-vis coal, atomic
energy, hydroelectric power, and other energy forms; the availability and
capacity of pipelines and other means of transportation; and the effect of
federal and state regulations on production, transportation and sale of oil and
gas.
In addition, the Company will face competition in connection with the formation
of oil and gas investment programs. The sale of limited partnership and other
investment programs in all forms is highly competitive, particularly with
respect to programs which have been registered under securities laws for sale to
the public. Oil and gas programs are generally offered for sale to persons with
substantial financial resources and persons who are interested in obtaining
certain tax advantages from these investments. These persons are limited in
number. The competition for oil and gas investment money is intense, and the
Company will compete with other companies which can demonstrate successful
operations of prior programs to prospective investors, as well as with companies
which have substantially greater resources and more extensive operating
histories.
REGULATION. The production and sale of oil and natural gas in the United States
are subject to extensive regulations by both federal and state authorities,
particularly with respect to pricing, allowable rates of production, marketing
and environmental matters.
NATURAL GAS REGULATION. The Natural Gas Policy Act of 1978 ("NGPA") provided for
federal regulation of wellhead sales of natural gas and scheduled future
deregulation of wellhead sales of some categories of natural gas. Certain
"high-cost natural gas" was deregulated effective November 1, 1979. "New"
natural gas and some "intrastate" gas became deregulated effective January 1,
1985. The gas being produced from the Partnership's Rio Arriba Properties and
any gas which might be produced from the Company's Sweetwater County, Wyoming
wells, is "high cost gas" under the NGPA and the price is hence deregulated.
However, in general, the price of natural gas has fallen so substantially over
the last several years that it is not relevant whether particular gas production
is deregulated. Under current market conditions, deregulated gas prices under
new contracts tend to be substantially lower than most regulated price ceilings
prescribed by the NGPA. On July 26, 1989, the Natural Gas Wellhead Decontrol Act
of 1989 (the "Decontrol Act") was enacted. The Decontrol Act amends the NGPA to
remove, as of certain dates ranging from July 27, 1989 to January 1, 1993, all
remaining federal price controls from natural gas.
FEDERAL CRUDE OIL REGULATION. In 1989, President Reagan eliminated all federal
price and allocation controls on United States oil production and marketing. The
order allows all crude oil and refined products to be sold at free market
prices. This action may be modified by future presidential or congressional
action. Controls may be reinstated by Congress, which may also adopt new
legislation extending price and allocation controls or imposing new ones.
Page 10 of 46 total pages
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PROPOSED LEGISLATION. There are currently many additional federal proposals
relating to the regulation of the oil and gas industry being considered by
Congress which, if enacted, could have a material effect on the business of the
Company. Such proposals include a broad based energy tax based on Btu content,
restrictions on the use of natural gas and crude oil, the introduction of the
federal government directly into the energy business through the purchase and
allocation of imported crude oil and petroleum products, the creation of a
federally owned oil company to compete directly with privately owned companies,
and the freezing or otherwise controlling of the price of oil and gas.
ENVIRONMENTAL REGULATIONS. The Company is subject to various federal, state and
local provisions regarding environmental matters, the existence of which is not
expected materially to hinder or adversely affect the Company's business.
Although the Company does not believe its expected business operations will
impair environmental quality, compliance with federal, state and local
regulations which have been enacted or may be adopted relating to the discharge
of materials into the environment could have a material adverse effect on its
capital expenditures, earnings and competitive position. Since inception,
neither FEC nor Frontier has made any material capital expenditures for
environmental control and neither would expect to make any such expenditures.
STATE REGULATIONS. The operations of the Company will be subject to regulation
by state conservation commissions which have authority to issue permits prior to
the commencement of drilling activities, establish allowable rates of
production, control spacing of wells, protect against waste, and aid in the
conservation of natural gas and oil. Typical of state regulatory requirements
are regulations promulgated by government agencies which require, among other
things, a permit to drill and to produce oil or gas, requirements for protecting
fresh water horizons and to insure that wells will be properly plugged and
abandoned.
FEDERAL INCOME TAXATION. The operation of the Company, as is generally the case
in the oil and gas industry, is significantly affected by the impact of federal
income tax laws. Over the years, Congress has substantially reduced the
availability of deductions with respect to oil and gas production.
In addition to the foregoing, the federal tax laws require that the actual cost
of equipment on producing properties such as pipe, casing, tubing, storage
tanks, pumps and other items considered to have a salvage value, be capitalized
and be charged to expense through acceptable depreciation methods. Lease
acquisition costs on producing properties must be capitalized and may be
recovered through the allowance for depletion, if the lease produces, or as a
loss if the lease does not produce and is determined to be worthless or is
abandoned, or as an offset against sales proceeds in determining the gain on
sale from the sale or disposition of the lease. Geological and geophysical costs
must be capitalized and recovered in the same manner as lease acquisition costs.
Operating costs after a well is drilled and equipped are deductible as ordinary
business expenses.
Page 11 of 46 total pages
<PAGE> 12
In addition to the foregoing, federal tax laws have many provisions applicable
to corporations in general which have an impact on the potential tax liability
of the Company. Any adverse change in the existing provisions of the Internal
Revenue Code, including the reduction or elimination of percentage depletion or
the enactment of an incremental federal tax on oil and gas production, could
have a materially adverse impact on the Company's operations. The natural gas
produced by the Company and the Partnership from the Rio Arriba Properties (see
"Properties and Production" below) qualifies for certain Federal income tax
credits under Section 29 of the Internal Revenue Code. Section 29 was designed
to encourage the development of alternative, qualified fuels such as methane
associated with coal beds, and provides a credit for the production and sale of
such fuels until December 31, 2002. Under Section 29, the initial credit
commenced at $3.00 for the Btu equivalent of one barrel of oil. For the purposes
of the Act, one barrel of oil is assumed to have 5.8 times the Btu value of one
Mcf of gas (one Mcf of gas is the rough equivalent of one MMbtu of oil). In
1987, the $3.00 credit adjusted annually for inflation, was $4.49 per barrel;
the usable tax credit per Mcf of gas is obtained by dividing the credit amount
by 5.8, which worked out to be approximately 77 cents per Mcf in 1987. The
credit is adjusted annually for inflation.
Since the tax credit is calculated on the amount of qualified fuel produced, and
is not related to the income from the fuel produced, the credit will offset not
only tax liability on the income from the qualified fuel, but may also offset
the tax on other income, to the extent such tax exceeds the alternate minimum
tax payable by a taxpayer. The incentive payment payable to the Company pursuant
to the sale of its Fruitland Coal Seam gas production to the Partnership is
based on approximately 35% of the Section 29 credits earned by the Partnership.
(See "Frontier Limited Partnership" above).
Page 12 of 46 total pages
<PAGE> 13
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ITEM 2. PROPERTIES AND PRODUCTION
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The Partnership has producing and non-producing oil and gas interests in New
Mexico and the Company has non-producing interests in Wyoming as summarized in
the following table:
<TABLE>
<CAPTION>
Overriding and
Production
Approximate Working Royalty Net Rev.
Location Acreage Interest Interest Interest
- ----------------- ----------- -------- -------- --------
<S> <C> <C> <C> <C>
Rio Arriba County, 1,240* 12.5% -0- 9.96875%
New Mexico 320* 10.0% -0- 7.46474%
3,203* -0- 2% 0.398437%
Sweetwater County,
Wyoming 640 17.5% -0- 13.9125%
</TABLE>
- -----------------
* The Partnership's interest in the Carracas Canyon Federal Unit is
limited to a total of 4,763 acres. It owns the working interest shown
in the 1,240 and 320 acre tracts and an overriding royalty interest in
the remaining 3,203 acres. The Partnership derives its interest in the
Carracas Canyon Federal Unit through its Overriding Royalty interest
under the 4,763 acres, convertible to a working interest in certain
areas deemed to have reached pay out. Four (4) producing wells have
converted to a working interest covering 1,240 acres in the
participating area and another productive well covering 320 acres. The
Partnership has an unconverted Overriding Royalty under eleven (11)
other wells in the participating area.
RIO ARRIBA COUNTY, NEW MEXICO: In June of 1985 FEC agreed to sell to Amoco
Production Company ("Amoco") all of its 50% working interest in leases acquired
from Kenai Oil & Gas, Inc. under 5,082.93 acres, and to acquire from Exeter
Exploration Company, and to sell to Amoco, the remaining 50% working interest.
The leases had expiration dates between August, 1985 to April, 1987. On July 15,
1985, FEC completed the sale of its 100% working interest under those leases,
retaining an overriding royalty of 2% and agreeing with Amoco that the overrides
would be convertible to 15% of the working interest after payout.
To prevent the expiration of the leases, Amoco farmed out to Jerome P. McHugh &
Associates ("McHugh") and McHugh included those leases in the formation of the
Carracas Canyon, a Federal Exploratory Unit ("Unit").
McHugh assembled and included in its application for the Unit a total of
30,720.31 acres. The Unit was applied for in October of 1986 and FEC, as a
royalty owner, ratified and joined in its formation. In 1989, McHugh and
partners commenced development drilling on the Carracas Canyon Unit.
Page 13 of 46 total pages
<PAGE> 14
The leases contain a total of 4,762.93 acres. One of the leases (NM-28812) was
split by the Amoco-Kindermac farmout agreement such that wells located in two of
the sections (1,240 acres) cannot be converted to a working interest, but under
which the Partnership continues to retain its 2% overriding royalty for the life
of the wells. Wells on the remaining areas of that lease can be converted to a
12.5% working interest at payout. Payout is to be calculated on a lease by lease
basis. Even though there are areas within the NM-28812 lease that cannot be
converted, all wells on the lease still contribute toward payout. The other two
leases both carry a 2% overriding royalty that is convertible to a full 15%
working interest payout. The terms of all of the leases are the same.
In developing the Unit, McHugh drilled and completed 62 wells through October
31, 1993. Under 5 wells, the Company elected to convert its overriding royalty
interest to a 12.5% working interest in June of 1992. Such interests are now
owned by the Partnership.
The operator, Nassau Resources, Inc. ("Nassau"), has elected to shut in several
of the wells under which the Partnership is entitled to receive royalties and
management has no input or control over the operation of any completed well
where it has only an overriding royalty. No information in respect of wells
completed during development of the Unit has been furnished to the Partnership;
the Unit operator is under no obligation to furnish such information, nor does
management anticipate that it will be contacted in the future in respect of the
intention of the operator to flow or shut in any well. However, on wells where
the Partnership now owns an operating working interest, the operator is required
to provide operating information and any plan in respect of future drilling and
development.
One of the 62 wells on the Unit is a water disposal well. All of the wells were
drilled through the Fruitland coal seams to depths of 3,500 to 4,000 feet;
however, some wells have not been completed and some have not been completely
tested. Of the 62 wells drilled, there have been 22 wells drilled on acreage
where the Company has an interest. The drilling to date represents full
development for those leases.
The operator's election not to put all wells on production is due to relatively
high operating costs and low gas prices. The Company has been advised that the
operator has elected to produce only the most prolific wells. As economics
improve, management believes that the operator will elect to put additional
wells on production. As Of October 31, 1997, there were 16 wells producing and,
of those wells, the Partnership has a 12.5% working interest under 4 of those
wells and a 10.0% working interest under one well.
Revenue is being distributed according to the participant's respective revenue
interests in the "participating areas." The participating area is comprised of
320 acre units that are assigned to the wells that are producing within the
participating area. The interest in the gas produced is then calculated from the
interest in the participating area. The Partnership's revenue interest in the
wells now producing is .003984. As wells are placed on production, the operator
circulates new division orders for the gas produced.
Page 14 of 46 total pages
<PAGE> 15
Gas is being sold on the spot market and it is taken into the Northwest pipeline
system; it is also gathered via the Northwest gathering system. Northwest
charges a flat $.30 per Mcf for gathering. Historically, the operator has
provided the compression and dehydration, but in November 1991, Northwest
assumed those duties and thereby cut the operating cost to the Unit owners.
There is some additional development possible within the Unit on the approved
320 acre spacing; however, all of the Partnership's acreage is considered fully
developed under the present spacing rules for the Unit. There is ultimately the
possibility of infill drilling on the Unit, should future regulations allow 160
acre spacing; management believes reduced spacing is probably many years away
and no study of potential infill reserves has been made.
The 63 wells drilled through October 31, 1997 are completed in the Fruitland
coal seams. A typical well shows about 18 feet of coal seams located at a depth
of 3,880 ft. to 3,960 ft., with the bulk of the coal concentrated in a single
seam. The wells on the east side of the unit average about 17 feet of coal,
while the total area averages 20 feet. The thickest coals are located on the
north side of the Unit with individual seam thickness of up to 22 feet.
The production payment payable to the Company from the production from the Rio
Arriba County properties owned by the Partnership is the principal asset of the
Company. See "Item 1. Business - Frontier Limited Partnership" above. The firm
of Fairchild, Ancell and Wells, independent petroleum engineers, evaluated all
of the Partnership's interests in Rio Arriba County. The report estimates the
present value of such properties at October 31, 1997 to be $739,029, exclusive
of the value of Section 29 tax credits referred to below after discounting total
projected cash flow under existing wells by 10% per annum. Estimated future net
cash flow (undiscounted) at such date is $1,430,492. The value of the Section 29
credits is dependent upon the total taxable income of the owner from year to
year. The Company will realize some additional value available to it because of
the incentive payments from the Partnership pursuant to the Frontier Limited
Partnership Agreement. For the year ended October 31, 1997 the Company was
entitled to $30,325 in incentive payments from the Partnership.
The estimated reserves indicated above are estimates only and should not be
construed as being exact quantities. Such estimated reserves, therefore, may or
may not be recovered and if recovered in amounts which are more or less than the
estimated amounts, the revenues therefrom will correspondingly increase or
decrease.
The present value of estimated future net cash flow is computed by discounting
the aggregate estimated future net cash flow by ten percent (10%). The 10%
discount rate does not purport to represent the time-value of money nor the rate
of return a third party might deem necessary in properly evaluating the
producing properties for purchase. The present values so determined do not
necessarily represent the fair market value of the properties.
No estimates of Company's total proven net oil or gas reserves has been filed
with or included in any report to any federal authority or agency.
Page 15 of 46 total pages
<PAGE> 16
SWEETWATER COUNTY, WYOMING: The other asset of Frontier is a seventeen and
one-half percent (17.5%) working interest in the Hay Reservoir-Great Divide in
Sweetwater County, Wyoming in which one gas well was drilled in 1982. All
revenue produced from 1990 to date has been applied to operating costs
attributed to the Company's interest. The 640 acres being held by production
carries royalties and overriding royalties totaling twenty and one-half percent
(20.5%), with the remaining seventy-nine and one-half percent (79.5%) net
revenue interest allocated to the working interest owners. The Company's net
revenue interest is 13.9125%. A substantial amount of gas was produced prior to
1990 and sold without accounting to FEC or Frontier for its interest and a
dispute exists between the present operator and all prior operators. The gas
previously sold from the drilled well qualified as Section 107 priced gas under
the Natural Gas Policy Act of 1978 ("NGPA") and accordingly was deregulated. The
well is presently shut in, and management believes the well to be noncommercial
at this time. No value is ascribed to this asset in the Company's ongoing
business, nor is it recorded in the financial statements.
DELTA OPTION PROPERTIES: Under its agreement with Delta, Frontier will have the
option to participate with Delta by purchasing up to 50% of any interest owned
or earned by Delta in either producing or nonproducing leases. Frontier's
agreement with Delta is described in more detail above. See Item 1. "Business -
Agreements with Delta."
The prospects, which Delta has generated, are described as follows:
NAVARRO CROSSING: This prospect is located in Houston County, Texas. Delta
assembled a lease block consisting of approximately 1,000 acres. In assembling
the prospect, Delta provided funds for leases and associated landman fees. The
initiating geologist was not successful in promoting a well on the Delta acreage
during the primary term of its leases and all of the leases have now expired.
NORTH REPEAT: This prospect is located in Carter County, Montana and the lease
block originally assembled by Delta contains approximately 2,000 acres. In
assembling the prospect, Delta provided funds for leases and associated landman
fees. The initiating geologist was not successful in promoting a well on the
Delta acreage during the primary term of its leases and all of the leases have
now expired.
LAWTELL PROSPECT: This prospect, located in St. Landry Parish, Louisiana,
consists of a 500 acre lease block. The prospect was assembled by Delta at a
cost of approximately $126,000 and sold to Santos USA Corporation and Mid Con
Exploration Corporation. The prospect was drilled in December 1995 to a depth of
11,000 ft. to test the Savoy, Bergeron, Mayer, Higgenbotham and Cockfield sands.
The prospect well was completed but after testing in the fourth quarter of 1996
was plugged and abandoned.
DONAHOE CREEK PROSPECT: This prospect is located in Newton County, Texas, and
consists of a 758 acre lease block. Delta committed to funding 50% of the
prospect at an estimated cost of approximately $60,000 and in September 1995, a
well was drilled to a depth of 7,550 ft. in order to test the Yegua formation.
The test was unsuccessful but the operator, Southwestern Energy Production
Company continues to keep the leases in force.
Page 16 of 46 total pages
<PAGE> 17
- --------------------------------------------------------------------------------
ITEM 3. LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
The Company is not a party to any legal proceedings.
- --------------------------------------------------------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------------------------
The Company's principal shareholders, holding sufficient shares to conduct
business in lieu of an annual meeting, elected to do so on September 15, 1997.
The only matter voted was in respect of the election of three (3) directors for
the ensuing year until the next annual meeting.
There were an aggregate of 3,509,233 shares outstanding and entitled to vote at
such date of which 2,945,350 shares were represented in person or by proxy. The
following persons were elected as directors:
<TABLE>
<CAPTION>
Votes for
---------
<S> <C>
Robert M. Davant 2,945,350
Dennis A. Jones 2,945,350
Lani Kirsch 2,945,350
</TABLE>
Page 17 of 46 total pages
<PAGE> 18
PART II.
- --------------------------------------------------------------------------------
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS
- --------------------------------------------------------------------------------
The outstanding registered common stock of FEC was last quoted Over-The-Counter
by the National Association of Securities Dealers Automated Quotation System
("NASDAQ") under the symbol "FROG" in 1985. The reported high and low bid prices
are shown below for the indicated periods:
<TABLE>
<CAPTION>
High Bid Low Bid
-------- -------
<S> <C> <C>
For Fiscal Year Ended June 30, 1985:
First Quarter $.625 $.50
Second Quarter $.3125 $.25
</TABLE>
The above represent high and low bid prices of FEC's Common Stock through
January 31, 1985 were as reported by NASDAQ. After January 31, 1985, there were
not sufficient stock transactions to establish a meaningful high or low bid
price. These and other prices reflected below do not reflect current values of
the Company's common stock.
On September 20, 1985, the high bid and low asked prices in the over-the-counter
market for FEC's Common Stock were $.03 and $.01 respectively. On September 20,
1985 there were 6,392,121 shares issued and outstanding, which were held by 969
shareholders.
The prices presented are bid and asked prices which represent prices between
broker-dealers and do not include retail markdowns or any commissions to the
broker-dealer. The prices do not reflect prices in actual transactions.
The Company has not paid any cash dividends of shares on its common stock. The
Company anticipates that for the foreseeable future, its earnings, if any, will
be retained for use in its business and no cash dividends will be paid on its
common stock.
Page 18 of 46 total pages
<PAGE> 19
- --------------------------------------------------------------------------------
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATIONS
- --------------------------------------------------------------------------------
PLAN OF OPERATION
As described in Item 1. "Business - Frontier Limited Partnership" above, the
Company sold, pursuant to an agreement effective as of July 1, 1993, all of
Frontier's Fruitland Coal Seam gas properties in the Carracas Canyon Federal
Unit located in New Mexico. The properties were sold to Frontier Limited
Partnership, a Texas limited partnership, of which the Company is the general
partner and an affiliate of an investment fund is the limited partner. The
purchase price paid was $1,812,652, of which $25,152 was paid in cash and the
balance is to be paid in deferred payments which bear interest at 7.25% per
annum. The sum of $240,000 is to be paid over three years in quarterly
installments of principal. The balance of $1,547,500 is payable pursuant to a
reserved production payment. As part of the transaction, the Company will also
receive incentive cash payments based on volumes of production equal to 35% of
the Section 29 tax credits generated by the production, such payments to be
adjusted annually by the percentage change in the GNP implicit price deflator.
Such incentive payments are expected to amount to approximately $115,000 over
the next five years.
The $1,547,500 production payment is payable solely from the sale of production
when, as and if produced. If the gas prices in effect at October 31, 1997 were
to remain constant, the Company would be unable to collect the principal and
interest amounts due under the contractual terms of the production payment.
Management has measured the possible impairment of the collectibility of the
production payment, based on current reserve studies, by using the present value
of future cash flows discounted at the contractual 7.25% interest rate. At
October 31, 1997 a valuation allowance to adjust the receivable to the amount
currently expected to be collected, amounted to $405,193. This reserve may be
changed in the future depending upon gas prices actually realized by the
Partnership.
At October 31, 1993, the date of the confirmation of the Plan of Reorganization
and acquisition of the assets of old Frontier by the Registrant, the Carracas
Canyon properties were valued at $1,591,809, exclusive of tax credits and
discounted at 10%, based on the October 1992 price of natural gas of $2.04 per
Mcf. In July 1993, the properties' book value, allowing for production from
October 1992 through June 1993, was $1,429,566. The contractual purchase price
was $1,812,652, resulting in the deferred gain of $383,084 at the time of sale
to Frontier Limited Partnership discussed above. The purchase price consisted of
$25,152 cash, $240,000 payable over three years and the production payment of
$1,547,500 plus interest at 7.25%. At October 31, 1997, the date of the
engineering evaluation of the reserves supporting the production payment, the
price of natural gas was $2.52 per MMbtu, resulting in the significantly lower
valuation of $808,580 of such reserves as of that date. The collectibility of
the interest and the principal amount of the production payment depends on the
price of natural gas over the period the contractual volume is delivered. It
cannot be predicted at this time whether or not the Registrant will ultimately
collect all or a substantial portion of the production payment, together with
the contractual interest. If natural gas prices average approximately $2.06 per
Mcf over the
Page 19 of 46 total pages
<PAGE> 20
period of time required to produce the 1,170,000 Mcf, but prior to December 31,
2002, the full amount of the production payment will be recovered by the
Registrant.
The incentive payment is dependent only on volume of gas produced and is not
related to gas prices, but is to be an amount equal to 35% of the federal tax
credits under Section 29 of the Internal Revenue Code allocable to production
from the properties. The MMbtu amount is adjusted annually, depending upon the
GNP implicit price deflator for the preceding calendar year, and has increased
between 3% and 5% per year since the enactment of Section 29 of the Internal
Revenue Code of 1979. The credit for calendar 1997 is approximately $0.35479 per
MMbtu produced effective January 1, 1997. The market price of natural gas will
have no effect on the amount of the incentive payments.
- --------------------------------------------------------------------------------
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
The financial statements and supplementary schedules are filed with this report
and appear after Part IV.
- --------------------------------------------------------------------------------
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
- --------------------------------------------------------------------------------
Item 4. Change in Registrant's Certifying Accountant
On March 21, 1996, Pannell Kerr Forster of Texas, P.C. ("PKF") was
dismissed by the Company as the Company's independent auditor and Harper &
Pearson Company, certified public accountants, was appointed to replace PKF. The
change in accountants was not due to any disagreements with PKF on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope and procedure. The dismissal was effected by the Company's chairman and
chief executive officer after consultation with members of the Company's Board
of Directors. PKF's report on the financial statements of the Company for the
two years ended October 1993 and October 31, 1994, did not contain an adverse
opinion or disclaimer of opinion nor any modification as to uncertainty, audit
scope, or accounting principles.
Page 20 of 46 total pages
<PAGE> 21
PART III.
- --------------------------------------------------------------------------------
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- --------------------------------------------------------------------------------
The directors and executive officers of the Company for the fiscal year ended
October 31, 1997 and until the next annual meeting of shareholders are:
<TABLE>
<CAPTION>
Name First Elected Position
- ---------------- ------------- -----------------------------
<S> <C> <C>
Robert M. Davant October 1992 Chairman of the Board
of Directors, Chief Executive
Officer and Treasurer
Dennis A. Jones October 1992 Director, President and
Chief Operating Officer
Lani Kirsch April 1993 Director
Pauline A. Wilbraham June 1995 Secretary
</TABLE>
Robert M. Davant, age 66. Mr. Davant served as a director of FEC from 1982. He
has been in private law practice for more than five years and was a partner of
the law firm of Davant & Morris, Houston, Texas, since 1990. The partnership
ended in June 1995 with the death of Mr. Davant's partner, Thomas A. Morris. Mr.
Davant graduated from the University of Texas in 1960 and received his L.L.B.
from the University of Houston in 1963. Mr. Davant is also a director of
Seacoast Services, Inc., a Texas corporation engaged in the development of oil
field equipment.
Dennis A. Jones, age 47. During the five year period ended February, 1991, Mr.
Jones was Executive Vice President of Brehm Oil and Brehm Investment Group. He
also served during such period as chief operating officer of Brehm-Basin
Exploration, a joint venture between Brehm and Basin Exploration in Lafayette,
Louisiana. Mr. Jones was one of the founders of Delta in February, 1991, and has
served as its Chief Executive Officer and a director since that date to present.
Mr. Jones graduated from the University of Mississippi in 1973, and received his
juris doctor from Mississippi College of Law in 1976.
Lani Kirsch, age 65. Ms. Kirsch's principal occupation for at least the last
five years has been as Chairman of the Board of Kirsch Builders Supply, Inc., a
building supply and lumber company located in Frankfort, Illinois.
Ms. Kirsch is a founder, director and major shareholder of Delta.
Pauline A. Wilbraham, age 53. Ms. Wilbraham managed the international sales
office in London, England, for CRC-Crose International, Inc., a pipeline
equipment manufacturer and subsidiary of Crutcher Resources Corporation,
Houston, Texas. She was transferred to CRC in Houston in 1978 and in 1983 joined
Frontier Energy Corporation as office administrator.
Page 21 of 46 total pages
<PAGE> 22
- --------------------------------------------------------------------------------
ITEM 10. EXECUTIVE COMPENSATION
- --------------------------------------------------------------------------------
During the year ended October 31, 1997, the Company paid direct compensation as
follows:
<TABLE>
<CAPTION>
Name of Individual Annual
or Identity of Group Capacity Compensation
-------------------- -------- ------------
<S> <C> <C>
Robert M. Davant CEO $60,000
Dennis A. Jones President *
Pauline A. Wilbraham Secretary $34,800
All officers and
directors as a group
(4 persons)
</TABLE>
* Mr. Jones compensation is derived through the Management Agreement with Delta.
The Company expects to pay the following compensation during the coming year:
<TABLE>
<CAPTION>
Name of Individual
or Identity of Group Capacity Compensation
-------------------- -------- ------------
<S> <C> <C>
Robert M. Davant CEO $60,000
Dennis A. Jones President *
Pauline A. Wilbraham Secretary $34,800
All officers and directors
as a group (4 persons)
</TABLE>
* Mr. Jones' compensation is derived from the Management Agreement with Delta.
Mr. Jones is not expected to devote all of his time to the business of the
Company.
None of the officers of the Company are employed under an employment agreement
and the Company has no bonus, pension or profit sharing plans. The Company has a
stock option plan under which options to purchase 40,000 shares of its common
stock (adjusted to reflect current capitalization) may be granted to key persons
in the form of incentive stock options (at 100% of fair market value) or
non-statutory stock options (at discounts from fair market value). No options
are presently issued under the Plan.
Page 22 of 46 total pages
<PAGE> 23
- --------------------------------------------------------------------------------
ITEM 11. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
- --------------------------------------------------------------------------------
As of October 31, 1997, the number of shares of Frontier Common Stock (assuming
full dilution) owned by each person who is known by Frontier to own beneficially
more than 5% of its outstanding Stock, by each person who is a director of
Frontier, and by all executive officers and directors as a group is:
<TABLE>
<CAPTION>
Amount and Nature of
Name and Address Beneficial Ownership(1) Percentage
- -------------------------- ----------------------- ----------
<S> <C> <C>
Robert M. Davant(4) 1,439,078 41.48 %
Lani Kirsch 1,302,857(2) 32.12 %
Dennis A. Jones 201,905(2) 5.64 %
Robert L. Anderson(3)(4) 202,023 5.82 %
Est. of Thomas A. Morris(5) 160,000 4.61 %
Pauline A. Wilbraham 45,424 1.31 %
Frances O'Brien Riley(3)(4) 207,654 5.99 %
Officers and Directors
as a Group (4 persons) 2,989,264 71.72 %
</TABLE>
- ----------------------------
1 The persons named in the table have sole voting and investment power
with respect to all shares of Common Stock shown as beneficially owned
by each of them subject to community property laws, where applicable,
and except as indicated below.
2 Delta Associates, Inc. owns 975,178 shares and options to purchase an
additional 643,870 shares at $0.42 per share.
3 Mr. Anderson is a partner in the law firm of Berg, Ziegler, Anderson &
Parker, which has provided legal counsel to Frontier in the past and is
expected to provide legal service in the future. Mr. Anderson and Ms.
Riley were married on October 15, 1993. Each disclaims beneficial
ownership of the shares of the other.
Page 23 of 46 total pages
<PAGE> 24
4 Messrs. Davant, Morris and Anderson, and Ms. Riley acquired their
respective shares pursuant to the Plan in exchange for creditor claims
against FEC, except that Mr. Anderson holds 4,138 shares of
Registrant's outstanding stock in respect of shares of FEC previously
owned by him.
5 Mr. Thomas A. Morris, who was deceased on June 20, 1995, was formerly
the Secretary of the Company and also the owner of 341,767 shares.
During 1996 and 1995, respectively, Mr. Morris and his estate sold to
Robert M. Davant 41,767 and 100,000 shares of his stock. The balance of
the shares as shown above are the subject of an escrow agreement
between the Estate of Thomas A. Morris and the Company. The Company is
acquiring the shares to be placed in the treasury and has issued a
non-recourse promissory note in the amount of $60,000, payable over 60
months in payment of those shares. The escrow provides for the delivery
of 40,000 shares after the payment of $12,000 in each one year payment
period.
- --------------------------------------------------------------------------------
ITEM 12. CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS
- --------------------------------------------------------------------------------
Dennis A. Jones, the President of Frontier is also a founder and substantial
stockholder of Delta. Delta is party to a joint venture with Frontier under
which Delta derives (a) management and other income from a management contract
and (b) options to purchase stock of Frontier at $0.42 per share (see Item 1.
Business - Agreement with Delta Partners, Inc. and Delta Associates, Inc.). Lani
Kirsch, who owns 32.12% of the common stock of the Company and is a Director, is
also a founder and substantial stockholder of Delta.
Page 24 of 46 total pages
<PAGE> 25
PART IV
- --------------------------------------------------------------------------------
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES
AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1. Exhibits
--------
<S> <C>
2.1 Disclosure Statement and Plan of Reorganization dated May 29, 1992.*
2.2 Order of Confirmation dated October 5, 1992.**
3.1 Articles of Incorporation of the Company.**
3.2 Bylaws of the Company as currently in effect.**
3.3 Specimen copy of the Company's common share certificate.**
4.1 Form of Warrant to Purchase Common Stock of the Company.**
10.1 1984 Stock Option Plan.***
10.2 Purchase Agreement between the Company and its predecessor,
Frontier Energy Corporation, effective October 31, 1992.**
10.3 [Left Blank Intentionally]
10.4 Farmout Agreement with Amoco Production dated September 22, 1987.*
10.5 Joint Venture Agreement dated December 18, 1991 with Delta Partners, Inc.*
10.6 Management Agreement dated December 18, 1991 with Delta Partners, Inc.*
10.7 Subscription and Contribution Agreement dated December 18, 1991
with Delta Partners, Inc., as amended. *
10.8 Stock Option Agreement dated December 18, 1991, with Delta
Partners, Inc. as amended. *
10.9 Oil and Gas Prospects Option Agreement dated December 18, 1991,
as amended.*
10.10 Agreement of Limited Partnership of Frontier Production Limited Partnership
dated July 1, 1993.****
</TABLE>
Page 25 of 46 total pages
<PAGE> 26
<TABLE>
<CAPTION>
<S> <C>
10.11 Purchase and Sale Agreement dated July 1, 1993.****
10.12 Assignment, Bill of Sale and Conveyance with Reservation of
Production Payment dated July 1, 1993.****
10.13 Joint Venture Agreement with Delta Associates, Inc.*****
27 Financial Data Schedule.
</TABLE>
2. FINANCIAL STATEMENTS:
Audited Balance Sheets as of October 31, 1997 and 1996 and Statements
of Operations, Shareholders' Equity, and Cash Flows for the years ended
October 31, 1997 and 1996.
3. REPORTS ON FORM 8-K:
Form 8-K, May 24, 1993 - Items reported:
Item 2 - Acquisition or Disposition of Assets
Item 5 - Other Events
Form 8-K, July 29, 1993 - Items reported:
Item 2 - Acquisition or Disposition of Assets
Form 8-K, March 21, 1996 - Items reported:
Item 4 - Change in Registrant's Certifying Accountant
- -------------------------
* Incorporated by reference to the exhibits bearing the same reference
and contained in Form 10-KSB of the Company's predecessor for the
fiscal year ended June 30, 1992.
** Incorporated by reference to the exhibits bearing the same reference
and contained in Form 10-KSB of the Company for the fiscal year ended
October 31, 1992.
*** Incorporated by reference to the exhibit bearing the same reference and
contained in Form 10-K of the Company's predecessor (FEC) for the
fiscal year ended June 30, 1984.
**** Incorporated by reference to the exhibits bearing the same reference
and contained in Form 8-K filed by the Company July 29, 1993.
***** Incorporated by reference under Exhibit 10.5 as an extension of the
Agreement dated December 18, 1991 with Delta Partners, Inc.
Page 26 of 46 total pages
<PAGE> 27
FRONTIER OIL & GAS COMPANY
FINANCIAL STATEMENTS
OCTOBER 31, 1997 and 1996
Page 27 of 46 total pages
<PAGE> 28
FRONTIER OIL & GAS COMPANY
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditor's Report 29
Financial Statements:
Balance Sheets 30
Statements of Operations 31
Statements of Changes in Shareholders' Equity 32
Statements of Cash Flows 33
Notes to Financial Statements 34-42
Unaudited Supplementary Oil and Gas Information 43-45
</TABLE>
Page 28 of 46 total pages
<PAGE> 29
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Frontier Oil & Gas Company
We have audited the accompanying balance sheets of Frontier Oil & Gas Company as
of October 31, 1997 and 1996, and the related statements of operations, changes
in shareholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Frontier Oil & Gas Company at
October 31, 1997 and 1996, and the results of its operations and its cash flows
for the periods then ended in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary oil and gas information
on pages 44 through 46 is not a required part of the basic financial statements,
but is supplementary information required by the Financial Accounting Standards
Board and Securities and Exchange Commission. We have applied certain limited
procedures, which consisted principally of inquiries of management regarding the
methods of measurement and presentation of the supplementary information.
However, we did not audit the information and express no opinion on it.
/s/ HARPER & PEARSON COMPANY
Houston, Texas
July 3, 1997
Page 29 of 46 total pages
<PAGE> 30
FRONTIER OIL & GAS COMPANY
Balance Sheets
ASSETS
<TABLE>
<CAPTION>
October 31,
-----------------------------------
1997 1996
-------------- -----------
<S> <C> <C>
Current Assets
Cash $ 471 $ 6,078
Accounts receivable, related parties 51,311 12,466
Commission income receivable 30,550 --
Related party production payment receivable, net of allowance 114,426 66,435
Prepaid expenses 1,241 4,445
----------- -----------
Total current assets 197,999 89,424
Commission income receivable 115,429 --
Related party production payment receivable, less
current portion, net of allowance 694,154 344,938
Furniture and equipment, net of accumulated depreciation
of $11,206 in 1997 and $8,206 in 1996 6,968 9,968
Investment in partnership 4,573 4,257
Investment in oil and gas properties 5,434 --
----------- -----------
Total assets $ 1,024,557 $ 448,587
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 119,136 $ 64,811
Line of credit 26,172 21,775
Current portion of treasury stock note payable 12,561 12,177
----------- -----------
Total current liabilities 157,869 98,763
----------- -----------
Treasury stock note payable 34,000 46,000
----------- -----------
Commitments
Shareholders' equity:
Preferred stock 100,000 shares authorized; $1.00 par value,
no shares outstanding -- --
Common stock, 25,000,000 shares authorized; $.02 par value,
3,509,233 shares issued at October 31, 1997 and 1996 70,184 70,184
Capital in excess of par 1,873,564 1,873,564
Treasury stock, 200,000 shares, at cost (60,000) (60,000)
Retained deficit (1,051,060) (1,579,924)
----------- -----------
Total shareholders' equity 832,688 303,824
----------- -----------
Total liabilities and shareholders' equity $ 1,024,557 $ 448,587
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
Page 30 of 46 total pages
<PAGE> 31
FRONTIER OIL & GAS COMPANY
Statements of Operations
<TABLE>
<CAPTION>
Years ended October 31,
-----------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Interest income $ 25,402 $ 20,672
Incentive income 30,325 36,281
Commission income 252,145 --
Other income 1,996 --
----------- -----------
309,868 56,953
----------- -----------
Other Income (Expenses):
General and administration expenses (281,999) (280,063)
Interest Expense (6,531) (2,959)
Gain on production payment receivable 507,526 207,714
----------- -----------
218,996 (75,308)
----------- -----------
Net gain (loss) $ 528,864 $ (18,355)
=========== ===========
Net gain (loss) per common share $ .16 $ (.01)
=========== ===========
Weighted average shares outstanding 3,309,233 3,469,051
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
Page 31 of 46 total pages
<PAGE> 32
FRONTIER OIL & GAS COMPANY
Statements of Changes in Shareholders' Equity
Years ended October 31, 1997 and 1996
<TABLE>
<CAPTION>
Common Stock Capital in Treasury Retained
---------------------------
Shares Amount Excess of Par Stock Deficit Total
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at
October 31, 1995 3,454,472 $ 69,089 $ 1,851,659 $- $(1,561,569) $ 359,179
Stock issued 54,761 1,095 21,905 -- -- 23,000
Purchase of Treasury
Stock (200,000) -- -- (60,000) -- (60,000)
Net loss -- -- -- -- (18,355) (18,355)
----------- ----------- ----------- ----------- ----------- -----------
Balance at
October 31, 1996 3,309,233 70,184 1,873,564 (60,000) (1,579,924) 303,824
Net income -- -- -- -- 528,864 528,864
----------- ----------- ----------- ----------- ----------- -----------
Balance at
October 31, 1997 3,309,233 $ 70,184 $ 1,873,564 $(60,000 ) $(1,051,060) $ 832,688
=========== =========== =========== =========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
Page 32 of 46 total pages
<PAGE> 33
FRONTIER OIL & GAS COMPANY
Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended October 31,
-------------------------------
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net gain (loss) $ 528,864 $ (18,355)
Adjustments:
Depreciation 3,000 2,976
(Gain) Loss on adjustment of related party production
payment receivable (507,526) (207,714)
Changes in current assets and liabilities:
Accounts receivable, related parties (38,845) 21,014
Commission income receivable (145,979) --
Prepaid expenses 3,204 (653)
Accounts payable 54,325 19,670
--------- ---------
Net cash used by operating activities (102,957) (183,062)
--------- ---------
Cash flows from investing activities:
Collections on related party notes receivable -- 60,000
Collections on related party production payment receivable 110,319 83,562
Purchase of furniture and equipment -- (208)
Investment in partnership (316) (429)
Investment in oil and gas properties (5,434) --
--------- ---------
Net cash provided by investing activities 104,569 142,925
--------- ---------
Cash flows from financing activities:
Proceeds from sale of stock -- 23,000
Borrowings on line of credit 28,900 29,995
Repayments on line of credit (24,503) (8,180)
Repayment of treasury stock note payable (11,616) (1,823)
--------- ---------
Net cash (used) provided by financing activities (7,219) 42,952
--------- ---------
Net (decrease) increase in cash (5,607) 2,815
Cash at beginning of year 6,078 3,263
--------- ---------
Cash at end of year $ 471 $ 6,078
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 6,531 $ 2,959
========= =========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
Page 33 of 46 total pages
<PAGE> 34
FRONTIER OIL & GAS COMPANY
Notes to Financial Statements
October 31, 1997 and 1996
NOTE 1 - REORGANIZATION AND SUCCESSION OF FRONTIER ENERGY CORPORATION
Frontier Oil & Gas Company ("Frontier" or "the Company"), is a Delaware
corporation formed in 1992 for the purpose of acquiring all of the
assets and contractual rights of Frontier Energy Corporation ("FEC") in
exchange for common stock of the Company. FEC was a Utah corporation
organized in 1973, primarily involved in acquisition, exploration and
development of oil and gas properties, particularly natural gas coal
seams.
The Company's primary business purposes are (i) to act as general
partner for Frontier Limited Partnership (the "Partnership") (see Note
3) and, (ii) to acquire and develop additional properties with Delta
Associates, Inc. (formerly Delta Partners, Inc.) ("Delta").
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Financial instruments and credit risk
Financial instruments which potentially subject the Company to credit
risk include cash, accounts receivable, note receivable, and the
production payment receivable. The Company maintains its cash with
major domestic banks and investment companies. The terms of these
deposits are on demand to minimize risk. The Company has not incurred
losses related to these deposits. Accounts receivables consist
primarily of accrued interest on the note receivable. The production
payment receivable is collectible solely from oil, gas and other
hydrocarbons produced and sold from the oil and gas properties sold to
the Partnership (see Notes 4 and 5). Reserves of oil, gas and other
hydrocarbons are estimated and may or may not be recovered. If
recovered in amounts which are more or less than the estimated amounts,
the revenues therefrom will correspondingly increase or decrease. The
market prices for the production also will impact revenues from the
sales of production.
Fair Value of Financial Instruments
At October 31, 1997 and 1996, the Company estimates that the fair
values of financial instruments approximate their recorded costs.
Page 34 of 46 total pages
<PAGE> 35
FRONTIER OIL & GAS COMPANY
Notes to Financial Statements
October 31, 1997 and 1996
NOTE - 2 SUMMARY OF SIGNIFICANT ACCOUNTING PROCEDURES (CONTINUED)
Furniture and Equipment
Furniture and equipment are stated at cost less accumulated
depreciation. Depreciation for financial reporting purposes is computed
using the straight-line method over an estimated useful life of five
years.
When properties are retired or otherwise disposed of, the cost thereof
and the applicable accumulated depreciation and amortization are
removed from the respective accounts and the resulting gain or loss is
reflected in earnings.
Oil and gas properties
Frontier utilizes the full cost method of accounting for oil and gas
exploration, development and production activities. Accordingly, all
costs associated with acquisition, exploration and development of oil
and gas reserves are capitalized in each cost center and amortized
ratably as reserves within the cost center are produced. Should
amortizable costs within a cost center exceed the present value of the
estimated future net cash flows from proven reserves, the excess is
charged to expense during the year in which the excess occurs.
The provision for depreciation, depletion and amortization of
capitalized costs is computed on a composite unit-of-production method,
based on estimated proven reserves. All capitalized costs associated
with proven reserves currently are included in the computation of such
provision.
Costs of acquiring unusually significant unproven properties for future
development and associated development costs are excluded from costs
amortized until the amount of proven reserves attributable to the
properties has been determined. Until such a determination is made, the
properties and development projects are assessed individually to
ascertain whether impairment has occurred. If impairment is indicated,
the amount of the impairment is expensed.
Gains and losses are recognized only upon sales or dispositions of
significant amounts of oil and gas reserves. The proceeds of all other
sales or dispositions are accounted for as reductions in the cost of
oil and gas properties.
Revenue recognition
Revenues from the sale of oil and gas are recognized when the oil and
gas is delivered to the first purchaser.
Page 35 of 46 total pages
<PAGE> 36
FRONTIER OIL & GAS COMPANY
Notes to Financial Statements
October 31, 1997 and 1996
NOTE 3 - INVESTMENT IN PARTNERSHIP
On July 1, 1993, Frontier entered into a partnership agreement with Far
Gas Acquisitions Corporation ("Far Gas") to form Frontier Limited
Partnership (the "Partnership"), under which Frontier is the 1% general
partner and Far Gas the 99% limited partner. In December of 1996, KLT
Gas, Inc., of Kansas City, Missouri, purchased all of the stock of Far
Gas. The Partnership was formed to acquire all of Frontier's interests
in the oil and gas properties described in Note 4. Income or losses of
the Partnership are allocated in accordance with provisions of the
partnership agreement; generally based on the above percentages.
The results of the Partnership's operations are as follows at December
31:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Sales $161,329 $128,806
======== ========
Net Loss $126,388 $153,994
======== ========
</TABLE>
NOTE 4 - OIL AND GAS PROPERTIES
On July 29, 1993, the Company sold to the Partnership all of its
interests in the Fruitland Coal Seam gas properties in the Carracas
Canyon Federal Unit located in New Mexico pursuant to a Purchase and
Sales Agreement (the "Agreement"). The effective date of the Agreement
was July 1, 1993. The interests sold included, among other things, all
of the Company's right in the leases, land and wells and production
therefrom, rights in and to all agreements, product purchase and sale
contracts and Section 29 federal tax credits ("Section 29 Credits") to
which the Company was entitled by virtue of production from its working
interests in nonconventional fuel sources and coal seam gas wells.
The purchase price paid by the Partnership was $1,812,652, of which (i)
$25,152 was paid in cash, (ii) $240,000 to be paid over three years in
quarterly installments of principal plus interest at 7.25% per annum,
and (iii) $1,547,500 payable pursuant to a reserved production payment,
plus interest at 7.25% per annum. The properties sold to the
Partnership represented substantially all the producing assets of the
Company. The net book value of the properties sold was approximately
$1,429,568, resulting in a deferred gain of $383,084 at the date of
sale. Subsequently, this deferred gain was eliminated in connection
with the recording of a valuation allowance primarily established
during the year ended October 31, 1993 (see Note 5).
Page 36 of 46 total pages
<PAGE> 37
FRONTIER OIL & GAS COMPANY
Notes to Financial Statements
October 31, 1997 and 1996
NOTE 4 - OIL AND GAS PROPERTIES (CONTINUED)
The Agreement provides for the Company to receive a quarterly incentive
payment per MMbtu of natural gas produced and sold from the properties
through December 31, 2002. Such payments are to be adjusted annually by
an amount equal to annual percentage changes in the GNP implicit price
deflator. Initially, this amount totaled $0.33369 per MMbtu; it was
adjusted to $0.34773, effective January 1, 1996.
For the period ended October 31, 1997 and October 31, 1996, there were
86,773 mcf and 101,168 mcf, respectively, produced from the properties
sold to the Partnership.
NOTE 5 - RELATED PARTY PRODUCTION PAYMENT RECEIVABLE
Related party production payment receivable consists of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
Principal
<S> <C> <C>
Beginning of year $ 1,324,092 $ 1,407,654
Collections (110,319) (83,562)
----------- -----------
End of year 1,213,773 1,324,092
----------- -----------
Valuation Allowance
Beginning of year 912,719 1,120,433
Adjustment (507,526) (207,714)
----------- -----------
End of year 405,193 912,719
----------- -----------
Net 808,580 411,373
Less current portion (114,426) (66,435)
----------- -----------
Long-term $ 694,154 $ 344,938
=========== ===========
</TABLE>
The production payment receivable is dependent on the production and
sales of the assigned production from the oil and gas properties sold
to the Partnership. Based on prices in effect at October 31, 1997, it
is probable that the Company will be unable to collect the aggregate
principal and interest amounts scheduled in the Agreement. The Company
has estimated the present value of future cash flows from production
from these properties, based on an October 31, 1997 reserve study
prepared by independent petroleum engineers, discounted at the
contractually stated 7.25% interest rate.
Page 37 of 46 total pages
<PAGE> 38
FRONTIER OIL & GAS COMPANY
Notes to Financial Statements
October 31, 1997 and 1996
NOTE 5 - PRODUCTION PAYMENT RECEIVABLES (CONTINUED)
Actual future cash flows could vary significantly from the amounts
estimated in the reserve study due to changes in the production, gas
prices or expenses realized by the Partnership which could cause the
valuation allowance to change materially in the near term. During
fiscal years 1997 and 1996, the Company recognized gains amounting to
$507,526 and $207,714 relating solely to changes in the valuation
allowance. The Company recognized interest income amounting to $25,402
and $17,490 on this production payment receivable during fiscal years
1997 and 1996.
As of October 31, 1997, discounted annual maturities of the production
payment receivable, net of the current valuation allowance of $405,193,
are estimated as follows:
<TABLE>
<CAPTION>
Year Ending October 31,
<S> <C>
1998 $ 114,426
1999 75,267
2000 64,378
2001 55,678
Thereafter 498,831
---------
$ 808,580
==========
</TABLE>
NOTE 6 - FURNITURE AND EQUIPMENT
Cost and accumulated depreciation of furniture and equipment is as
follows at October 31:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Cost $ 18,174 $ 18,174
Accumulated depreciation (11,206) (8,206)
-------- --------
$ 6,968 $ 9,968
======== ========
</TABLE>
NOTE 7 - COMMISSION INCOME RECEIVABLE
The commission income receivable is the result of negotiating the sale
of Section 29 tax credits between two unrelated parties. The receivable
is payable based on tax credit dollars awarded the purchaser and is
payable through March 2003. Actual collections could vary from the
amount accrued.
Page 38 of 46 total pages
<PAGE> 39
FRONTIER OIL & GAS COMPANY
Notes to Financial Statements
October 31, 1997 and 1996
NOTE 8 - INCOME TAXES
On October 31, 1997, the Company had tax basis net operating loss and
investment tax credit carryforwards, subject to limitations described
below, totaling approximately $4,353,000 and $991 respectively. These
carryforwards expire as follows:
<TABLE>
<CAPTION>
Year Ending Net Operating Investment
October 31, Losses Tax Credits
----------- ------------- -----------
<S> <C> <C>
1998 $ 1,006,000 $ 351
1999 672,000 640
2004 948,000 -
2005 272,000 -
2006 262,000 -
2007 12,000 -
2008 319,000 -
2009 181,000 -
2010 344,000 -
2011 184,000 -
----------- -----------
$ 4,200,000 $ 991
=========== ==========
</TABLE>
No tax benefit has been reported in the accompanying financial
statements because the Company believes there is at least a 50% chance
that the net operating loss and investment tax credit carryforwards
will expire unused (approximately $663,000 and $1,019,000 expired
during the years ended October 31, 1997 and 1996, respectively).
Accordingly, the $1,480,020 tax benefit of these carryforwards has been
offset by a valuation allowance of the same amount.
Deferred income taxes result from timing differences in reporting
income and expenses for financial statement and income tax purposes.
The primary sources of deferred income taxes result from: (i) net
operating loss carryforwards, (ii) the use of different methods of
depreciation for income tax and financial statement purposes; and,
(iii) the installment sales method for income tax purposes to recognize
the gain on the sale of oil and gas properties.
Page 39 of 46 total pages
<PAGE> 40
FRONTIER OIL & GAS COMPANY
Notes to Financial Statements
October 31, 1997 and 1996
NOTE 8 - INCOME TAXES (CONTINUED)
The Company's deferred tax assets and liabilities at June 30 are as
follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Current deferred tax assets:
Loss carryforwards $ 1,428,000 $ 1,665,944
----------- -----------
Deferred income taxes, long-term:
Depreciation (1,001) (2,033)
Production payment receivable valuation allowance 137,766 310,324
----------- -----------
Total deferred income taxes, long term 136,765 308,291
----------- -----------
Total deferred assets 1,564,765 1,974,235
Valuation allowance (1,564,765) (1,974,235)
----------- -----------
Total net deferred income taxes $ -0- $ -0-
=========== ===========
</TABLE>
The deferred tax asset value allowance decreased by $357,508 and by
$332,231 for the years ended October 31, 1997 and 1996, respectively,
due mainly to an expiration of certain net operating loss carryforwards
and changes in the production payment valuation allowance.
For federal income tax purposes, options granted to Delta Partners,
Inc. in December 1991 (see Note 13) resulted in an ownership change as
defined in Section 382 of the Internal Revenue Code of 1954, as amended
(the "Code"). The Code imposes substantial limitations on the use of
tax carryforwards which have originated prior to such changes in
ownership.
The differences between the effective rate of income tax expense
(benefits) at October 31, 1997 and 1996 and the amounts which would be
determined by applying the statutory U.S. income tax rate of 34% to
income (loss) before income tax expense are explained below according
to the tax implications of various items of income or expense.
<TABLE>
<CAPTION>
1997 1996
----------- --------
<S> <C> <C>
Provision for income tax expense (benefit)
at U.S. statutory rates $ 179,814 $ (6,240)
Increase (decrease) in tax provision
resulting from:
Non-deductible entertainment expense 2,593 1,868
Net operating loss carryforward (182,407) 4,732
---------- ---------
Income tax expense $ -0- $ -0-
========== =========
</TABLE>
Page 40 of 46 total pages
<PAGE> 41
FRONTIER OIL & GAS COMPANY
Notes to Financial Statements
October 31, 1997 and 1996
NOTE 9 - LINE OF CREDIT
The Company has a line of credit with a bank, which provides for
maximum borrowings of $40,000 plus interest at the rate of prime plus
6.75%.
NOTE 10 - TREASURY STOCK NOTE PAYABLE TO RELATED PARTY
In July 1996, the Company entered into an escrow agreement with a
stockholder to acquire from the Thomas A. Morris Estate, 200,000 shares
of the Company's stock for $60,000. The note is payable in monthly
installments of $1,000 plus interest at 6%.
NOTE 11 - COMMITMENTS
The Company leases office space for $2,719 per month under an operating
lease agreement expiring April 1998.
Total rent expense under operating leases for the periods ending
October 31, 1997 and 1996 was $28,185 and $26,427, respectively.
NOTE 12 - NON-CASH INVESTING AND FINANCING ACTIVITIES
During 1996, the Company acquired 200,000 shares of treasury stock in
exchange for a note payable of $60,000 to a related party.
NOTE 13 - RELATED PARTY TRANSACTIONS
The Chairman of the Company's Board of Directors is an attorney who, in
addition to providing legal services for the Company, conducts a
limited amount of law business out of the Company's offices.
Frontier, as general partner for the Partnership, incurs expenses on
behalf of the Partnership. All such expenses are absorbed by the
Company.
The Company is party to an agreement with Delta Associates, Inc. The
agreement includes: (a) a management agreement; (b) a stock option
agreement; and, (c) an oil and gas prospects agreement.
Page 41 of 46 total pages
<PAGE> 42
FRONTIER OIL & GAS COMPANY
Notes to Financial Statements
October 31, 1997 and 1996
NOTE 13 - RELATED PARTY TRANSACTIONS (CONTINUED)
Frontier granted to Delta an option to purchase 1,190,476 shares of
Frontier's common stock at $0.42 per share. Management fees are paid
from funds received through Delta's exercise of these options. Delta
has exercised options to purchase 546,607 of Frontier common stock at
$0.42 per share through October 31, 1997.
The stock option issued to Delta may be exercised at any time in whole
or in part through January 1, 1999. The option contains anti-dilution
provisions in the event of stock split, stock dividend, other changes
in the character or amount of Frontier's stock, or in the event of a
business combination of Frontier with another entity. The option
agreement provides for restrictions on transfer of the stock including
restrictions on transfer in the event of a future underwriting of
Frontier's stock.
Frontier has an option under which it may acquire an interest in oil
and gas prospects developed by Delta. Under the oil and gas prospects
option agreement described below, Frontier is entitled to exercise the
option with respect to a particular prospect upon payment of an amount
equal to one half (1/2) of the amounts Delta paid out as its cost for
prospect generation and acquisition.
Under the oil and gas prospects option agreement, Delta granted
Frontier an option to purchase a 50% interest in any oil and gas
prospects developed by Delta through January 1, 1999. The option
relates to the net interest retained by Delta (after all overrides,
working interests and concessions to third parties) with respect to any
oil and gas prospect developed by Delta throughout the option term. The
purchase price of the option interest shall be the sum of: (a) the
Company's pro rata portion (up to one-half) of all Delta's actual
out-of-pocket expenses incurred in the generation, development and sale
of such prospect (not including any provision for Delta's overhead);
plus (b) a bonus of 10% of the purchase price if Delta has retained an
interest in a prospect which shall then be productive. The purchase
price shall be payable in cash at the time of each exercise. Frontier
may elect to pay the bonus in either cash or in Frontier's common stock
at a price equal to the market price of Frontier's common stock at the
time of exercise of this option.
NOTE 14 - BUSINESS SEGMENT AND MAJOR CUSTOMER INFORMATION
Prior to the sale of oil and gas properties noted in Note 4, the
Company was engaged in the exploration and development of oil and gas
properties in only one cost center, the United States.
All gas produced by the Partnership, during the periods ended October
31, 1997 and 1996 was sold to Northwest Pipeline Corporation.
Page 42 of 46 total pages
<PAGE> 43
FRONTIER OIL & GAS COMPANY
Unaudited Supplementary Oil and Gas Information
October 31, 1997 and 1996
Pursuant to the sale of oil and gas properties, described in Note 4, information
provided for the periods ended October 31, 1997 and 1996 relate to Frontier
Limited Partnership.
Capitalized costs
Total capitalized costs relating to oil and gas exploration and development were
as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Oil and gas properties being amortized $1,873,897 $1,814,086
Less: accumulated depletion and amortization (727,574) (609,245)
----------- -----------
Net capitalized costs $1,146,323 $1,204,841
=========== ===========
</TABLE>
Costs Incurred
No costs relating to oil and gas property acquisition, exploration or
development activities were incurred during the periods October 31, 1997 and
1996.
Results from oil and gas operations
The following summarizes the results of operations for oil and gas producing
activities:
1997 1996
--------- ---------
Gas Sales $161,329 $128,806
--------- ---------
Production expenses 31,675 24,460
Depletion 118,051 125,848
--------- ---------
149,726 150,308
--------- ---------
Results of operations from
producing activities (excluding
corporate overhead) $11,603 $(21,502)
========= =========
See independent auditor's report at page 29.
Page 43 of 46 total pages
<PAGE> 44
FRONTIER OIL & GAS COMPANY
Unaudited Supplementary Oil and Gas Information
October 31, 1997 and 1996
Oil and gas reserve data
The following presents the Partnership's estimates of its proven natural gas
reserves. Proven developed reserves are the estimated quantities of natural gas
which geological and engineering data demonstrated with reasonable certainty to
be recoverable by primary producing mechanisms in future years from known
producing reservoirs under existing economic and operating conditions. In
general, the estimated proven producing reserves are supported by actual
production. The Partnership emphasizes that these estimates are inherently
imprecise and may change as further information becomes available.
Gas reserves are stated in thousands of cubic feet (Mcf). All reserves are
located within the United States. There were no proven undeveloped reserves as
at October 31, 1997 or 1996.
<TABLE>
<CAPTION>
Gas (Mcf)
-----------
<S> <C>
At October 31, 1995 1,089,530
Production (101,168)
Revision of previous estimate (149,362)
----------
At October 31, 1996 839,000
----------
Production (86,773)
Revision of previous estimate 78,773
----------
At October 31, 1997 831,000
==========
</TABLE>
The standardized measure of discounted future net cash flows
The standardized measure of discounted future net cash flows represents the
value of such net cash flows discounted at 10%. The standardized measure does
not purport to be an estimate of the fair market value of the Partnership's
proven reserves. An estimate of fair value would also take into account, among
other things, the expected recovery of reserves in excess of proven reserves,
anticipated changes in future prices and costs, and a discount factor more
representative of the time value of money and the risks inherent in producing
oil and gas.
Estimates of cash inflows and production expenses are based on those currently
being experienced by the Partnership. A gas price of $2.52 per MMbtu was used
for October 31, 1997 in the estimation of future cash inflows. No provision for
federal income taxes has been made, as it is estimated that the Partnership's
net operating loss carryforwards, Section 29 Credits, and overhead expenses are
allocated to the individual partners.
See independent auditor's report at page 29.
Page 44 of 46 total pages
<PAGE> 45
FRONTIER OIL & GAS COMPANY
Unaudited Supplementary Oil and Gas Information
October 1997 and 1996
The standardized measure of discounted future net cash flows (continued)
The following presents the Partnership's estimates of the standardized measure
of discounted future net cash flows from future production of proven oil and gas
reserves.
<TABLE>
<CAPTION>
October 31,
1997
------------
<S> <C>
Future cash inflows $2,095,180
Future production expenses (664,688)
------------
Future net cash flow 1,430,492
Discount for estimated timing of cash flows at 10% (691,463)
-----------
Standardized measure of discounted future net
cash flows $739,029
===========
</TABLE>
The following summarizes changes in the standardized measure of discounted
future net cash flows:
<TABLE>
<CAPTION>
<S> <C>
At October 31, 1995 $ 265,371
Sales, net of production expenses (104,346)
Net changes in prices and revision of quantity estimate 218,059
---------
At October 31, 1996 379,084
Sales, net of production expenses (129,654)
Net changes in prices and revision of quantity estimate 489,599
---------
At October 31, 1997 $ 739,029
=========
</TABLE>
In management's opinion, the accretion of discount is insignificant and
therefore has not been presented.
See independent auditor's report at page 29.
Page 45 of 46 total pages
<PAGE> 46
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FRONTIER OIL & GAS COMPANY
(Registrant)
By /s/ Robert M. Davant
----------------------
Robert M. Davant
Chairman and Chief Executive
Officer
Date September 18, 1998
----------------------
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
Date September 18, 1998 /s/ Robert M. Davant
----------------------- ------------------------
Robert M. Davant
Chairman of the Board, Chief
Executive Officer and Treasurer
(Chief Financial Officer and
Principal Accounting Officer)
Date September 18, 1998 /s/ Dennis A. Jones
----------------------- ------------------------
Dennis A. Jones
President and Director
Date September 18, 1998 /s/ Lani Kirsch
----------------------- ------------------------
Lani Kirsch
Director
Date September 18, 1998 /s/ Pauline A. Wilbraham
----------------------- ------------------------
Pauline A. Wilbraham
Secretary
Page 46 of 46 total pages
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<S> <C>
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<PERIOD-START> NOV-01-1996
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0
0
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