AS FILED: JUNE 10, 1996 SEC FILE NO. 33-
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
REGISTRATION STATEMENT ON
FORM S-1
UNDER THE SECURITIES ACT OF 1933
FRONTIER OIL EXPLORATION COMPANY
(Name of registrant as specified in its Charter)
NEVADA 1070 87-0504461
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization
3006 HIGHLAND DRIVE, SUITE 206, SALT LAKE CITY, UTAH 84106 (801) 486-5555
(Address, including zip code and telephone number, including area code, of
registered principal executive offices)
DAVID N. PIERCE, PRESIDENT, 3006 HIGHLAND DRIVE, SUITE 206, SALT LAKE CITY, UTAH
84106 (801) 486-5555
(Address, including zip code and telephone number, including area code, of agent
for service)
Copies to:
JAMES R. KRUSE THOMAS R. DENISON
KRUSE, LANDA & MAYCOCK, L.L.C. GIBSON, DUNN & CRUTCHER LLP
50 WEST BROADWAY, EIGHTH FLOOR 1801 CALIFORNIA STREET, SUITE 4100
SALT LAKE CITY, UTAH 84101-2034 DENVER, COLORADO 80202-2694
TELEPHONE: (801) 531-7090 TELEPHONE: (303) 298-5700
TELECOPY: (801) 359-3954 TELECOPY: (303) 296-5310
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this registration statement.
If any of the securities being registered are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ].....
If this Form is a post-effective amendment filed pursuant to Rule 262(c)
under the Securities act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
[ ].....
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
CALCULATION OF REGISTRATION FEE
================================================================================
Proposed Proposed
Title of Each Class of Amount to Maximum Maximum Amount of
Securities to be Registered be Offering Aggregate Registration
Registered Price Per Offering Price fee
Unit(1)
- --------------------------------------------------------------------------------
Common Stock,
par value $0.001 3,600,000 $ 9.125 $ 32,850,000 $ 11,327
- --------------------------------------------------------------------------------
(1)Bona fide estimate of maximum offering price solely for the purpose of
calculating the registration fee. The offering price for the Common Stock
being sold is based on the average of the closing sales price for the
Registrant's Common Stock of $9.125 as of June 7, 1996 (rule 457(c)). The
offering price of the Underwriters' Warrants and Warrant Shares is the
estimate of the exercise price of such securities (rule 457(i)).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
<PAGE>
FRONTIER OIL EXPLORATION COMPANY
Cross Reference Sheet
Cross reference between items of Part I of Form S-1 and the Prospectus
filed by Frontier Oil Exploration Company as part of the Registration Statement.
REGISTRATION STATEMENT ITEM NUMBER AND HEADING PROSPECTUS CAPTION
1. Forepart of Registration Statement and Front Cover and
Outside Front Cover Page of Prospectus Forepart
2. Inside Front and Outside Back Cover Pages Inside Front Cover
of Prospectus and Outside Back
Cover
3. Summary Information and Risk Factors PROSPECTUS SUMMARY
and RISK FACTORS
4. Use of Proceeds USE OF PROCEEDS
5. Determination of Offering Price Not Applicable
6. Dilution DILUTION
7. Selling Security Holders Not Applicable
8. Plan of Distribution UNDERWRITING
9. Description of Securities to be Registered DESCRIPTION OF
SECURITIES
10. Interests of Named Experts and Counsel EXPERTS and LEGAL
MATTERS
11. Information with Respect to the Registrant PROSPECTUS SUMMARY,
COMPANY HISTORY and
BUSINESS AND
PROPERTIES
12. Disclosure of Commission Position on Not applicable
Indemnification for Securities Act
Liabilities
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 10, 1996
3,000,000 SHARES
FX ENERGY
(FRONTIER OIL EXPLORATION COMPANY)
COMMON STOCK
--------------
All of the shares of Common Stock offered hereby are being sold by FX Energy
(the "Company"). The Company's Common Stock is quoted on the Nasdaq SmallCap
Market ("Nasdaq SmallCap") under the symbol "FXEN." The Company has applied to
list the Common Stock on the Nasdaq National Market under the symbol "FXEN." On
June 7, 1996, the last reported price for the Common Stock was $9.125 per share.
See "Price Range of Common Stock and Dividend Policy."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" ON PAGE 7.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
Price to Underwriting Proceeds to
Public Discount(1) Company(2)
Per Share.......... $ $ $
Total(3)........... $ $ $
================================================================================
(1)See "Underwriting" for information concerning the compensation and
indemnification of the Underwriters and other information.
(2)Before deducting expenses of the Offering payable by the Company estimated at
$550,000.
(3)The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to 450,000 additional shares of
Common Stock for the purpose of covering over-allotments, if any. If the
Underwriters exercise such option in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
The shares of Common Stock are offered severally by the Underwriters when, as
and if delivered to and accepted by them, subject to their right to withdraw,
cancel or reject orders in whole or in part and subject to certain other
conditions. It is expected that delivery of the certificates representing the
shares will be made against payment on or about , 1996, at the offices of
Oppenheimer & Co., Inc., Oppenheimer Tower, World Financial Center, New York,
New York 10281.
OPPENHEIMER & CO., INC. HANIFEN, IMHOFF INC.
The date of this Prospectus is , 1996.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL NOR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
[Fold out inside front cover.]
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"SEC") a Registration Statement on Form S-1 (of which this Prospectus is a part)
under the Securities Act of 1933, as amended, with respect to the securities
offered hereby. This Prospectus does not contain all the information set forth
in the Registration Statement or the exhibits thereto, to which reference is
made concerning the contents of such exhibits. Reference to each such exhibit
qualifies all information related thereto.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and accordingly files reports, proxy
statements and other information ("Reports") with the SEC. The Registration
Statement, the exhibits thereto and the Reports can be inspected and copied at
prescribed rates at the public reference facilities maintained by the SEC at 450
5th Street, N.W., Room 1024, Washington, D.C. 20549 and at the regional offices
of the SEC: Seven World Trade Center, 13th Floor, New York, New York 10048 and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661.
OIL AND GAS TERMS
The following terms have the indicated meaning when used in this
Prospectus.
"API" means American Petroleum Institute.
"BPD" means barrels of oil per day.
"BBL" means barrel of oil.
"BCF" means billion cubic feet of natural gas.
"DEVELOPMENT WELL" means a well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive.
"EXPLORATORY WELL" means a well drilled to find and produce oil or gas in an
unproved area, to find a new reservoir in a field previously found to be
productive of oil or gas in another reservoir or to extend a known reservoir.
"MBBL" means thousand barrels of oil.
"MMBBL" means million barrels of oil.
"MMBOE" means million barrels of oil equivalent.
"PROVED RESERVES" means the estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions, i.e., prices and costs as of
the date the estimate is made. "Proved reserves" may be developed or
undeveloped.
"PV-10 VALUE" means the estimated future net revenue to be generated from the
production of proved reserves discounted to present value using an annual
discount rate of 10%. These amounts are calculated net of estimated production
costs and future development costs, using prices and costs in effect as of a
certain date, without escalation and without giving effect to non-property
related expenses such as general and administrative expense, debt service,
future income tax expense or depreciation, depletion and amortization. See
"Risk Factors--Factors Relating to the Oil and Gas Industry: Uncertainty of
Reserve Estimates and Future Net Revenues."
"RESERVOIR" means a porous and permeable underground formation containing a
natural accumulation of producible oil and/or gas that is confined by
impermeable rock or water barriers and is individual and separate from other
reservoirs.
"STRATIGRAPHIC TEST" means a drilling effort, geologically directed, to obtain
information pertaining to a specific geological condition. Such wells
customarily are drilled without the intention of being completed for hydrocarbon
production.
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ SMALLCAP MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THE OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE
10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
<PAGE>
[Fold out inside front cover--left page]
UNITED STATES AREAS OF ACTIVITY
[This page consists of a map outlining the states of Montana, Wyoming,
Utah and Nevada, marked to show the location of the producing
properties in the Cut Bank field and the Bears Den field in Montana
and the Trap Spring and Bacon Flat fields in Railroad Valley, Nevada;
the location of the Company's Cobb Creek, Utah-Nevada, Lake Valley,
Nevada and Hamlin Valley, Utah prospects; the location of the
Company's Salt Lake City, Utah headquarters; and the location of the
Company's Oilmont, Montana field office. The legend shows the map
scale and identifies the symbols for producing oilfields and
exploration prospects with the following text:]
The Company's property in Cut Bank field [color]
10,600 gross acres
Working interest--99.5%-100%
78% of daily production
Development program underway
30. to 35. API gravity, low sulfur
<PAGE>
[Fold out inside front cover--right page]
POLAND AREAS OF ACTIVITY
[This page consists of a map of Poland, identifying the principal
cities and adjacent countries and showing the area of the Company's
Baltic Concession and the area in the Carpathian region covered by the
Company's joint study agreement with the Polish Oil and Gas Company
("POGC"); the areas of the country reserved for exclusive exploration
by POGC; and the areas subject to agreements or pending negotiations
for oil and gas exploration rights with government authorities.]
<PAGE>
PROSPECTUS SUMMARY
This summary is qualified in its entirety by the detailed information and
financial data appearing elsewhere in this Prospectus. Defined terms used
herein to describe quantities of oil and other matters are explained under
"Defined Terms." Unless otherwise indicated, the information contained in this
Prospectus assumes that the Underwriters' over-allotment option will not be
exercised. Investors should carefully consider the information set forth under
"Risk Factors."
THE COMPANY
FX Energy (Frontier Oil Exploration Company) is engaged in the exploration,
development and production of oil and gas properties in the western United
States and Poland. The Company currently produces oil from fields in Montana
and Nevada and explores for oil and gas primarily in Poland. In August 1995,
the Company was one of the first independent energy companies to secure oil and
gas exploration rights in Poland (the "Baltic Concession"). The Baltic
Concession covers approximately 2.4 million acres in northern Poland and is part
of a geological region (the "Baltic Platform") which reportedly has produced in
excess of 150 MMBbl from four fields located approximately 50 miles to the
northeast in the Kaliningrad district of Russia. The Company has also entered
into a joint study agreement with the Polish Oil and Gas Company ("POGC") to
reprocess and reinterpret geological and geophysical data collected from a 6.25
million acre area in the Carpathian region of southeastern Poland. The Company
believes that its principal strengths are its existing prospects in Poland, its
access to previously collected geological and geophysical data, its established
network of strategic alliances and its inventory of domestic properties.
The Company has identified several potential drilling prospects in the
Baltic Concession through the reprocessing and reevaluation of previously
collected seismic and drilling data. The Company intends to explore and develop
these prospects with RWE-DEA AG ("RWE-DEA"), a subsidiary of RWE AG, Germany's
fifth largest industrial company. The Company and RWE-DEA recently initiated a
300 kilometer seismic survey on selected portions of the Baltic Concession. The
results of this survey will assist in the selection of the site of an
exploratory well scheduled to be drilled in late 1996. In the Carpathian
region, the Company and POGC are conducting a technical evaluation of a target
area and, if warranted, will apply for an exploration concession. The Company
has budgeted approximately $10.8 million for its contributions to exploration
and development projects in Poland through 1997.
At December 31, 1995, the Company had estimated proved reserves of 5.3
MMBbl with a PV-10 Value of approximately $23.8 million. Approximately 78% of
the Company's production and 96% of its reserve base are concentrated in
northern Montana's Cut Bank field. The Company intends to continue an infill
drilling program initiated in conjunction with an existing waterflood to enhance
production in this field. The Company is also evaluating several exploration
prospects in the western United States and has identified a prospect in Nevada
on which it intends to drill an exploratory well in late 1996 in partnership
with several independent energy companies.
Business Strategy
The Company explores and develops oil and gas prospects potentially
containing recoverable reserves in excess of 25 MMBOE for international
properties and 10 MMBOE for domestic properties. The key elements of this
strategy include the following:
Focus on Poland. The Company believes that the Baltic Concession and the
Carpathian joint study agreement provide it with a foundation upon which to
build a significant exploration and development operation in Poland. The
Company believes this foundation will allow it to capitalize on Poland's
attractive combination of significant reserve potential, underexplored
acreage and favorable operating environment. In 1989, Poland initiated
market-based reforms which have resulted in the country's economy becoming
one of the fastest growing in eastern Europe. Important elements of this
transition have included the introduction of both a broad-based privatization
program and an internationally competitive tax and royalty structure.
Partially as a result of these initiatives, Poland attracted approximately
$4.5 billion in direct foreign investment through June 1995. With regard to
the oil and gas industry, several international oil companies, including
Texaco, Inc., Tenneco Co., Exxon Corp., Shell Oil Co. and British Gas PLC,
have either secured, or obtained the exclusive right to negotiate for,
exploration rights.
Access to geological and geophysical data. The Company focuses on areas
where it can reevaluate previously collected geological and geophysical data.
Between 1950 and 1993, state-sponsored agencies in Poland gathered hundreds
of line miles of seismic data and drilled 15 test wells in the Baltic
Concession to the same formation that is productive in established fields in
the Baltic Platform. While 12 of these wells indicated the presence of
hydrocarbons in that formation, none was completed for production due, in
management's opinion, to the use of outdated drilling and testing techniques.
The Company, with the assistance of consultants that included Halliburton
Energy Services, Ryder Scott Company and Western Atlas, reevaluated existing
seismic and well data from the Baltic Concession. As a result of this
effort, the Company believes that it has identified potential oil reservoirs
in two previously drilled structures and has identified more than a dozen
undrilled structures.
Capitalize on strategic alliances. The Company seeks to form strategic
alliances to reduce its financial exposure and to gain additional technical
and operational expertise. This strategy is exemplified by the Company's
alliances with RWE-DEA covering the Baltic Concession and with POGC in the
Carpathian region. RWE-DEA, formerly Deutsche Texaco AG, is an established
producer, refiner and marketer of oil and gas in Europe and currently
produces oil in the Baltic Sea off Germany's northern coast. Pursuant to an
agreement with the Company, RWE-DEA will earn a 50% interest in the Baltic
Concession by paying the Company $250,000 and by providing up to $1.0 million
for the seismic survey currently underway, up to $1.0 million for the
drilling of an exploratory well and 50% of the costs of drilling a second
well. The Company will serve as the operator in the Baltic Concession. With
respect to the Carpathian region, the Company is evaluating existing
geological and geophysical data contributed by POGC in order to determine the
hydrocarbon potential of a target area. On completion of this study, the
Company and POGC may apply for exploration rights to such target area.
Exploit domestic reserve base and prospects. The Company believes that its
existing domestic properties have significant development and exploration
potential. The Company recently completed an infill drilling program on a
1,000 acre tract of the Cut Bank field which, based on preliminary results,
the Company believes will increase production during the next two to three
years. The Company plans to invest $6.1 million to expand this program on
approximately 4,000 additional acres in the Cut Bank field beginning in late
1996. The Company also has an ongoing program of prospect generation and
exploration in the western United States.
THE OFFERING
Common Stock Offered
by the Company .............. 3,000,000 shares
Common Stock Outstanding
after the Offering(1)........ 11,704,596 shares
Use of Proceeds(2)........... Net proceeds of the Offering will be used to repay
bank debt; to fund the Company's capital
expenditure program, which includes exploration
and development activities in the Baltic
Concession and Carpathian region of Poland and the
western United States; and for general corporate
purposes.
Nasdaq Symbol.................FXEN
(1)Calculated as of March 31, 1996, and adjusted to give effect to the
subsequent issuance of 244,111 shares of Common Stock. Does not include an
aggregate of 3,077,028 shares issuable upon (i) the conversion of outstanding
preferred stock, (ii) the exercise of outstanding options and warrants and
(iii) the issuance of shares contingent upon attaining certain production
levels in Montana and Nevada. See "Management--Executive Compensation,"
"Principal Stockholders," "Certain Transactions" and "Description of
Securities."
(2)See "Use of Proceeds."
SUMMARY FINANCIAL DATA
The following tables, parts of which have been derived from the Company's
audited financial statements, set forth summary historical financial
information for the Company and should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere herein. The financial data for the three month periods ended March
31, 1995 and 1996 were derived from the unaudited financial statements of the
Company and, in management's opinion, include all adjustments (consisting of
only normal recurring adjustments) necessary to present fairly the results for
such periods. The operating results for such periods are not necessarily
indicative of the operating results to be expected for a full fiscal year, and
none of the data presented below is necessarily indicative of future results.
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------- ---------------------
1993(1) 1994(1) 1995 1995 1996
-------- --------- --------- ------- --------
(In thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Revenues.................................$ 276 $ 1,916 $ 2,167 $ 581 $ 505
Operating costs and expenses:
Production and operating costs(2)....... 7 680 1,272 338 325
Depreciation, depletion and
amortization.......................... 3 422 503 106 138
General and administrative.............. 353 816 1,466 276 366
Other(3)................................ 654 829 1,003 105 213
-------- --------- --------- ------- --------
Operating loss........................... (741) (831) (2,077) (244) (537)
Interest and other income................ 39 53 98 10 36
Interest expense......................... (2) (214) (448) (111) (82)
Minority interest:
Non-cash dividends(4)................. -- -- (93) (55) --
-------- --------- --------- ------- --------
Loss before income taxes................. (704) (992) (2,520) (400) (583)
Benefit from income taxes................ 9 -- -- -- --
-------- --------- --------- ------- --------
Net loss................................. $ (695) $ (992) $(2,520) $ (400) $ (583)
======== ========= ========= ======= ========
Net loss per share....................... $ (0.40) $ (0.44) $ (0.47) $(0.14) $ (0.07)
Weighted average shares outstanding...... 1,750 2,229 5,389 2,811 8,086
OTHER FINANCIAL DATA:
EBITDA(5)................................ $ (699) $ (356) $(1,476) $ (128) $ (363)
Capital expenditures.............. 22 4,432 1,507 127 147
</TABLE>
As of As of March 31, 1996
As of --------------------------
December 31, Pro Forma as
1995 Actual Adjusted(6)
----------- --------- ------------
BALANCE SHEET DATA................. (In thousands)
Working capital (deficit)..........$ (278) $ 399 $26,266
Net property and equipment......... 8,612 8,560 8,560
Total assets....................... 10,039 10,148 36,015
Long-term debt..................... 3,359 3,439 --
Stockholders' equity............... 5,224 5,750 31,631
(1)Certain balances have been reclassified to conform with current year
presentation. These changes had no effect on previously reported net losses,
total assets, liabilities or stockholders' equity.
(2)Includes production taxes.
(3)Other expenses include exploration costs, drilling costs and leasehold
abandonments.
(4)Non-cash dividend on FX Producing convertible preferred stock.
(5)EBITDA represents net loss before interest, taxes, depreciation, depletion
and amortization and minority interest: non-cash dividends.
(6)As adjusted to give effect to (i) the sale of 3.0 million shares of Common
Stock offered hereby at an assumed price of $9.125 per share and the
application of the net proceeds therefrom, (ii) the sale subsequent to March
31, 1996, of 156,111 shares of Common Stock for net proceeds of $680,000,
(iii) the exercise of 80,000 options to purchase Common Stock for proceeds of
$120,000, (iv) the receipt of a $90,000 stock subscription receivable and (v)
the issuance of 8,000 shares of Common Stock for services.
SUMMARY OIL RESERVE AND OPERATING DATA
The following table sets forth certain summary information as of December
31, 1995, from the reserve report of Larry D. Krause, independent petroleum
engineer, regarding the Company's proved oil reserves, the future net revenues
therefrom, and the PV-10 Value thereof. Estimates are based upon a weighted
average price of $16.48 per barrel of oil at December 31, 1995, holding prices
constant throughout the life of the properties in accordance with regulations
promulgated by the SEC, with the Company's ownership position adjusted to
reflect the Company's net interest after royalties and taxes. This information
is based upon numerous assumptions and is subject to various uncertainties due
to numerous factors. See "Business and Properties--Oil Reserves" and "Risk
Factors--Factors Relating to the Oil and Gas Industry: Uncertainty of Reserve
Estimates and Future Net Revenues." This information should be read in
conjunction with the Summary Reserve Report of Larry D. Krause included as
Appendix A to this Prospectus and is qualified in its entirety by such report.
DECEMBER 31, 1995
-------------------------------------------
PROVED PROVED TOTAL
DEVELOPED UNDEVELOPED PROVED
------------ ------------ ----------
(IN THOUSANDS)
ESTIMATED NET PROVED RESERVES
Oil and condensate (Bbl) 2,683 2,574 5,257
Future net revenues $ 19,528 $ 25,652 $ 45,180
PV-10 Value........ $ 7,735 $ 16,046 $ 23,781
The following table sets forth certain operating data of the Company for
the two years ended December 31, 1994 and 1995, and for the three months periods
ended March 31, 1995 and 1996 (unaudited), as derived from the Company's
Consolidated Financial Statements and Notes thereto for such periods.
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------- ---------------------
1994 1995 1995 1996
---------- --------- -------- --------
PRODUCTION DATA:
Oil production (MBbl).. 117 135 34 32
Average sales price
(per Bbl)............. $14.07 $14.67 $ 14.92 $15.98
SELECTED DATA ($ PER BBL):
Production costs and
taxes(1)............. $ 5.81 $ 9.42 $ 9.87 $10.29
Depreciation, depletion
and amortization...... 3.61 3.73 3.10 4.38
Exploration costs...... 5.58 5.54 2.74 5.98
General and
administrative........ 6.99 10.86 8.06 11.58
WELLS DRILLED (GROSS):
Development............ 5 5 -- --
Exploration............ 2 2 -- --
(1)Production costs increased during 1995 because the Company increased the
level of maintenance to support long-term improvements in production
expected to result from the implementation of its infill drilling program
and due to the abnormally wet spring weather in the Company's principal
production area. Production costs per Bbl also increased during 1995 due to
a substantial decline in production from a well in Nevada with extremely low
production costs. See "Business and Properties--Production and Marketing."
RISK FACTORS
The purchase of Common Stock involves a high degree of risk. Prospective
investors should consider, in addition to the negative implications of all other
information and financial data set forth herein, the following factors before
making an investment in the Common Stock. Certain portions of this Prospectus
contain forward-looking information concerning the Company, its plans and other
future events. These statements should be read in conjunction with the risks
and uncertainties set forth below, which could cause actual results to differ
materially from such forward-looking statements.
FACTORS RELATING TO THE COMPANY
Dependence on Activities in Poland
The Company's success will depend to a high degree on its activities in
Poland. This dependence is likely to be reflected in both the short-term
performance of the Common Stock and the Company's long-term prospects. The
Company currently intends to drill one exploratory well in Poland in late 1996
and to continue exploratory drilling in 1997. The market price of the Common
Stock may experience significant fluctuations based on the outcome of individual
wells and the Company's other exploration efforts in Poland. These fluctuations
may be exacerbated by the fact that the Common Stock, in management's opinion,
currently trades to a significant degree on the potential of the Company's
current and planned activities in Poland. See "Development Risks" and
"Exploration Risks." The success of the Company's efforts in Poland will depend
on, in addition to the risks normally associated with the exploration for oil,
its ability to maintain its relationships with its exploration partners and the
Polish government and a number of other risks associated with conducting
operations in a foreign country. See "Risk Factors--Factors Relating to
Activities in Poland." If the Company's activities in Poland are unsuccessful,
the price of the Common Stock would likely suffer a material decline and
investors would face the possible loss of a substantial portion of their
investment. Because of the preliminary stage of the Company's activities in
Poland, no assurance can be given that such activities will be successful. See
"Business and Properties--Exploration and Development Activities in Poland."
Volatility of Common Stock
The market price for the Common Stock has been volatile in the past and
could fluctuate significantly in response to the results of specific exploration
drilling tests, variations in quarterly operating results and changes in
recommendations by securities analysts. Further, the trading volume of the
Common Stock is relatively small and the market for the Common Stock may not be
able to efficiently accommodate significant trades on any given day.
Consequently, sizable sales or purchases of the Common Stock have in the past,
and may in the future, cause volatility in the market price of the Common Stock
to a greater extent than in other more actively traded stocks. Until more
trading volume develops, larger transactions may not be able to be closed at the
then current market price for the Common Stock. In addition, the securities
markets regularly experience significant price and volume fluctuations that are
often unrelated or disproportionate to the results of operations of particular
companies. These broad fluctuations may adversely affect the market price of
the Common Stock. See "Price Range of Common Stock and Dividend Policy."
Possible Termination of RWE-DEA Strategic Alliance
The Company has budgeted $8.0 million for exploration and potential
development of the Baltic Concession through 1997 based, to a significant
degree, on the participation of RWE-DEA. If RWE-DEA elects not to participate
in the Baltic Concession for any reason, the Company could, at the discretion of
management, either seek a replacement partner or proceed as planned with a
substantially increased budget funded largely with the proceeds of the Offering.
Although the Company believes it would be able to locate an alternative
strategic partner, there can be no assurance that the Company would be
successful in obtaining the participation of another partner, that the terms of
any such arrangement would be favorable to the Company or that such efforts will
not delay the Company's exploration and development of the Baltic Concession.
Dependence on Polish Government Consent to RWE-DEA Assignment
Under the terms of its agreement with RWE-DEA, the Company is required to
assign to RWE-DEA 50% of its beneficial interest in its exploration and
exploitation agreement covering the Baltic Concession. RWE-DEA and the Company
are applying for approval of such assignment from the appropriate government
authorities. Although the Company believes that such consent will be granted,
based on informal discussions among representatives of the Company, RWE-DEA and
the Polish government, there is no assurance that such consent will actually be
obtained. If the government does not consent to such assignment and if the
Company is not able to negotiate some other arrangement with RWE-DEA, the
Company will be required to reimburse RWE-DEA for all of its Baltic Concession
expenditures.
Dependence on Government Approval
Should the Company's exploration efforts discover hydrocarbons in the
Baltic Concession, the Company will be required to engage in negotiations with
national and local government officials of Poland regarding the terms and
conditions of the required exploitation licenses. These negotiations would
include the determination of a development/exploitation fee within the range of
0.001% to 0.05% of the market value of the economically recoverable reserves
estimated to be in place, payable in five equal annual installments. In
addition, the granting of an exploitation license requires the consent of the
local governments having jurisdiction over the production area. Although the
Company has the exclusive right to receive an exploitation license in the Baltic
Concession and the local governments will receive 60% of royalties paid, the
Company could be subject to significant delays in obtaining the consents of
local authorities or satisfying other governmental requirements prior to
obtaining an exploitation license. Finally, the granting of an exploitation
license would require the Company to comply with certain environmental
regulations and may require the compilation of an environmental impact
statement.
Exploration Risks
The Company's oil and gas exploration activities involve significant risks.
There can be no assurance that the use of technical expertise as applied to
geophysical or geological data will ensure that any well will encounter
hydrocarbons. Further, there is no way to know in advance of drilling and
testing whether any prospect encountering hydrocarbons will yield oil or gas in
sufficient quantities to be economically viable. Several test wells are
typically required to explore each prospect or exploration area. The Company
may continue to incur exploration costs in specific areas, including the Baltic
Concession and the Carpathian region in Poland, even if initial test wells are
plugged and abandoned or, if completed for production, do not result in
production in commercial quantities. To date, the Company has participated in
six exploratory test wells in the western United States, none of which has
resulted in the establishment of commercial production or reserves. The Company
has yet to drill a well in Poland; however, wells drilled previously by third
parties in the Baltic Concession were all plugged and abandoned. Through 1997,
the Company has allocated up to $10.8 million of its capital budget for its
activities in Poland, and there can be no assurance that the Company's efforts
will be successful. Many of the Company's exploration decisions are based on
scientific data gathered by third parties, some of which was gathered in the
1960s and 1970s. Although the Company has reprocessed such data, there can be
no assurance that such data is as reliable as data gathered either using modern
technology or under the Company's supervision. See "Business and Properties."
Possible Changes in Royalty Rate
The Company's activities in Poland are subject to the risk of changes in
the royalty rate to be paid on production. Poland's Council of Ministers sets a
base royalty rate for the extraction of each mineral. The base royalty rate for
oil is currently 6%, but could be increased unilaterally up to 10% (the current
maximum base royalty rate) by the Council of Ministers. In addition, the Polish
government can set the royalty rate for any particular oil and gas field in a
range between 50% and 150% of the base royalty rate, depending on the economic
viability of such field. See "Business and Properties--Exploration and
Development Activities in Poland."
No Assurance of Commercial Production from the Baltic Concession
Various agencies of the Polish government have drilled seven exploratory
wells and eight stratigraphic wells in the Baltic Concession to the same
formation that is productive in established fields in the Baltic Platform, but
none has been completed for production. Notwithstanding the substantial data
available regarding the Baltic Concession, the Company believes that several
exploration tests may be required to appraise the potential of any structure.
There can be no assurance that such tests will be successful. Although the
Company has identified certain structures within the Baltic Concession that it
believes contain oil reservoirs, there can be no assurance that oil is present
in commercial quantities or that the first exploratory well, the location of
which will be determined by RWE-DEA, will be drilled on one of these identified
structures. Further, there can be no assurance that the porosity, permeability
or other characteristics of any reservoir formation will support the production
of oil in commercial quantities. Similarly, although the Company believes that
it has identified a number of structures which have the potential to contain
hydrocarbons, there can be no assurance that such structures actually contain
hydrocarbons. See "Business and Properties--Exploration and Development
Activities in Poland."
Dependence on Officers and Key Employees
The Company is dependent upon Mr. David N. Pierce, President, Mr. Andrew W.
Pierce, Operations Vice President, and other key personnel for its various
activities, and the loss of the services of any of these individuals may
materially and adversely affect the Company. In addition, with respect to its
activities in Poland, the Company is dependent on an executive officer and an
employee, both Polish nationals, who have been instrumental in assisting the
Company in establishing its operations in Poland, and the loss of the services
of either one may materially and adversely affect the Company's activities in
Poland. The Company has entered into employment agreements with Mr. David N.
Pierce and Mr. Andrew W. Pierce and intends to enter into employment agreements
with the two individuals who are instrumental to the Company's activities in
Poland. The Company does not maintain key man insurance on any of its
employees, nor does it currently have directors' and officers' liability
insurance. See "Management--Executive Officers and Directors."
Risks Associated with Growth
The Company has had limited operations and, if its activities in Poland are
successful, may experience rapid growth following the Offering. The Company's
ability to manage this growth will depend, in part, upon its ability to attract
and retain quality management and technical personnel. No assurance can be
given that the Company will be able to attract or retain such employees or
otherwise manage any potential expansion of its business. The likelihood of the
success of the Company must be considered in light of the expenses,
difficulties, complications and delays frequently encountered in connection with
the early stages of an oil and gas company. In particular, the Company's
operations in Poland to date have focused primarily on evaluation of prospects,
and the Company has little or no experience in Poland regarding exploration,
development production and marketing and has not yet drilled a well in Poland.
Although the Company does have experience in these areas in the United States,
there can be no assurance that such experience will translate to its activities
in Poland.
Possible Future Need for Additional Capital
If exploration of either the Baltic Concession or the Carpathian region is
successful in proving substantial oil reserves, the Company may require
significant amounts of additional capital for a development program, oil storage
and handling facilities, oil transportation assets, or other assets required to
support large-scale production. In addition, the Company might require
additional capital to accelerate the infill drilling program in the balance of
its Cut Bank field property. The Company has no arrangement for any such
additional financing, but might seek funds from project financing, strategic
alliances or other sources, all of which may dilute the interest of the Company
in the specific project financed. In addition, the Company might seek funds
through the sale of debt or equity securities which could significantly dilute
the ownership of the Company's existing shareholders. There can be no assurance
that additional funds could be obtained or, if obtained, would be obtained on
terms favorable to the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
History of Operating Losses
From its inception in January 1989 through March 31, 1996, the Company
incurred cumulative losses of $4.8 million and, because of its continued
exploration activities, expects that it will continue to incur losses and that
its accumulated deficit will increase. The Company reported losses of $992,000
and $2.5 million for the years ended December 31, 1994 and 1995, respectively,
and a loss of $583,000 for the quarter ended March 31, 1996. The Company
anticipates that it will incur losses through 1996 and possibly beyond,
depending on whether exploration of the Baltic Concession results in the
commencement of production in quantities sufficient to cover related operating
expenses and whether the infill drilling program in the Cut Bank field results
in increased production. See "Selected Consolidated Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Risk of Impairment of Recorded Value of Unproved Properties
The Company capitalizes costs related to unproved oil and gas properties
and recognizes expenses for costs to drill exploratory wells that do not result
in proved reserves at the time the well is plugged or abandoned. In addition,
the Company reviews its unproved properties periodically to assess whether an
impairment allowance should be recorded. At March 31, 1996, the Company had
capitalized costs related to the acquisition of unproved oil and gas properties
in the amount of $1.7 million, of which $1.3 million related to the Company's
Lake Valley exploration prospect. Should future events such as the drilling of
dry holes evidence that an impairment of recorded value has taken place, the
adverse impact on the Company's results of operations for the relevant period
could be significant. As a result of the foregoing, the results of operations
of the Company for any particular period may not be indicative of the results
that could be expected over longer periods. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Risks of Adverse Weather
A significant portion of the Company's exploration and development
activities are subject to periodic interruptions due to weather conditions which
may be quite severe in the areas where such activities are conducted. Heavy
precipitation may make travel to exploration sites or drilling locations
difficult or impossible. Extremely cold temperatures may delay or interrupt
drilling, well servicing and production. The foregoing may reduce production
volumes or increase production costs.
Shares Eligible for Future Sale
Substantially all of the approximately 8.7 million shares of Common Stock
currently issued and outstanding either are registered (i.e., sold in a
registered offering) have been held for in excess of two years and are eligible
for resale under rule 144 or will be registered for resale in registration
statements declared effective March 30, 1995, or to be filed at the earliest
practicable date. Although the resale of 1.6 million of such shares is subject
to contractual restrictions, the possible resale of the remaining 7.1 million
shares may have a depressive effect on the public trading market for the Common
Stock. See "Price Range of Common Stock and Dividend Policy" and "Description
of Securities--Covenant to Register Common Stock."
Substantial and Immediate Dilution
Persons purchasing Common Stock will suffer a substantial and immediate
dilution below the purchase price to the net tangible book value of their
shares. See "Dilution."
Control of the Company by Management
The current executive officers and directors of the Company hold sole or
shared voting and dispositive power over approximately 1.1 million issued and
outstanding shares of Common Stock, which constitutes approximately 9.6% of the
approximately 11.7 million shares of Common Stock that will be outstanding after
the Offering (without giving effect to the exercise of any options or warrants).
Giving effect only to the exercise of all options held by officers and
directors, including options not yet completely vested, current executive
officers and directors would own a total of approximately 3.2 million shares, or
approximately 23.1% of the approximately 13.8 million shares that would be
issued and outstanding after the Offering. As a result of such ownership, such
persons will be able to substantially influence the election of all of the
directors of the Company and the outcome of other matters submitted to the
stockholders for consideration. See "Principal Stockholders" and "Description of
Securities."
Substantial Warrants and Options Outstanding
The Company has issued and outstanding warrants and options to purchase up
to 2,859,528 shares of Common Stock at exercise prices ranging from $1.10 to
$3.00 with a weighted average exercise price of $2.52 per share. The existence
of such warrants and options may hinder future financings by the Company and the
exercise of such options may further dilute the interests of all other
stockholders. The possible future resale of Common Stock issuable on the
exercise of such options could adversely affect the prevailing market price of
the Common Stock. Further, the holders of warrants and options may exercise
them at a time when the Company would otherwise be able to obtain additional
equity capital on terms more favorable to the Company. See "Description of
Securities" and "Principal Stockholders."
Caution Respecting Forward-Looking Information
This Prospectus contains certain forward-looking information, including
discussions of the uncertainties of certain terms to be determined in the future
relating to the Baltic Concession; uncertainties regarding future political,
economic, regulatory, fiscal, taxation and other policies in Poland; the future
results of various exploration and development activities; future events that
may result in the need for additional capital, future drilling and other
exploration schedules and sequences for various wells and other activities; the
future ability of the Company to attract drilling participants to share the
costs of exploration and development; and similar matters. Such information is
based on present circumstances and on the Company's predictions respecting
events that have not occurred, which may not occur or which may occur with
different consequences from those now assumed or anticipated. No assurance can
be given that actual events may not be different than the assumptions on which
such forward-looking information is based. See "Business and Properties--Title
to Properties."
FACTORS RELATING TO THE OIL AND GAS INDUSTRY
Uncertainty of Reserve Estimates and Future Net Revenues
There are numerous uncertainties inherent in estimating quantities of
proved oil reserves. The estimates in this Prospectus are based on various
assumptions relating to rates of future production, timing and amount of
development expenditures, oil prices and the results of planned development
work. Actual future production rates and volume, revenues, taxes, operating
expenses, development expenditures and quantities of recoverable oil reserves
may vary substantially from those assumed in the estimates. Any significant
change in these assumptions, including changes which result from variances
between projected and actual results, could materially and adversely affect
future reserve estimates. In addition, such reserves may be subject to downward
or upward revision based upon production history, results of future development,
prevailing oil prices and other factors. See "Business and Properties--Oil
Reserves" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
Development Risks
The Company's infill drilling program in the Cut Bank field in Montana is
based on the engineering model used in a similar program conducted on a portion
of the Company's property by a previous owner. There can be no assurance that
the results of the Company's development program will achieve the results of the
engineering model on which it is based, significantly increase production or
reserves, or result in a financial return to the Company. Whether or not the
development program is successful, no assurance can be given that the Company
will be able to discover, develop or purchase properties to replace its current
reserve base. See "Business and Properties--Exploration and Development
Activities in the United States."
Volatility of Commodity Prices and Markets
Oil and gas prices have been and are likely to continue to be volatile and
subject to wide fluctuations in response to any of the following factors:
relatively minor changes in the supply of and demand for oil and gas; market
uncertainty; political conditions in international oil producing regions; the
extent of domestic production and importation of oil in certain relevant
markets; the level of consumer demand; weather conditions; the competitive
position of oil or gas as a source of energy as compared with other energy
sources; the refining capacity of oil purchasers; and the effect of federal and
state regulation on the production, transportation and sale of oil. Adverse
changes in the oil market or the regulatory environment would likely have an
adverse effect on the Company's ability to obtain capital from lending
institutions, industry participants, private or public investors or other
sources.
Operating Hazards and Uninsured Hazards
Oil and gas drilling involves hazards such as fire, explosions, blow-outs,
pipe failures, casing collapses, unusual or unexpected formations and pressures
and environmental hazards such as oil spills, gas leaks, ruptures and discharges
of toxic gases, any one of which may result in environmental damage, personal
injury and other harm that could result in substantial liabilities to third
parties and losses to the Company. The Company maintains insurance against
certain risks which it believes are customarily insured against in the oil and
gas industry by companies of comparable size and scope of operations. The
insurance that the Company maintains does not cover all of the risks involved in
oil exploration, drilling and production and if coverage does exist, may not be
sufficient to pay the full amount of such liabilities. For example, the Company
does not maintain insurance against risks related to violations of environmental
laws. The Company may not be insured against all losses or liabilities which
may arise from all hazards because such insurance is unavailable at economic
rates, because of limitations in the insurance policy or because of other
factors. Any uninsured loss could have a material and adverse effect on the
Company. See "Business and Properties--Operational Hazards and Insurance."
Intense Competition in Oil and Gas Industry
The oil and gas industry is highly competitive. Most of the Company's
current and potential competitors have greater financial resources and a greater
number of experienced and trained managerial and technical personnel than the
Company. There can be no assurance that the Company will be able to compete
effectively with such firms.
United States Governmental Regulation, Taxation and Price Control
Oil and gas production and exploration are subject to comprehensive
federal, state and local laws and regulations controlling the exploration for
and production and sale of oil and gas and the possible effects of such
activities on the environment. Present, as well as future, legislation and
regulations could cause additional expenditures, restrictions and delays in the
Company's business, the extent of which cannot be predicted and which may
require the Company to limit substantially, delay or cease operations in some
circumstances. From time to time, regulatory agencies have imposed price
controls and limitations on production by restricting the rate of flow of oil
and gas wells below actual production capacity in order to conserve supplies of
oil and gas. Because energy and taxation policies are unclear and are subject
to constant revisions, no prediction can be made as to the ultimate effect of
such governmental policies and controls. See "Business and Properties--
Government Regulation: United States."
FACTORS RELATING TO ACTIVITIES IN POLAND
Political Uncertainties
The exploration, development and production of oil and gas in Poland will
be subject to ongoing uncertainties and risks, including risks of political
instability and changes in government, expropriation or nationalization of
private enterprises, export and transportation tariffs, local and national tax
requirements and other risks arising out of foreign government sovereignty over
the exploration area. The terms of the agreements with governmental agencies are
subject to administration by government officials and are, therefore, subject to
changes in government personnel, the development of new administrative policies
and practices and political changes in Poland. There can be no assurance that
the laws, regulations and policies applicable to the Company will not change,
that the laws and regulations will be applicable in any particular circumstance
or that the Company will be able to enforce its rights in Poland. The Company
anticipates that it will be required to demonstrate, to the satisfaction of the
Polish authorities, the Company's compliance with the concession terms
respecting exploration expenditures, results of exploration, environmental
protection matters and other factors. Although the exploration and exploitation
rights of the Company may be canceled by the Company at any time, the Company
would likely not be able to recover previous payments made under the rights or
any other costs incurred respecting the rights upon such cancellation. There can
be no assurance that the Company will be able to take measures to provide
adequate protection against any of the political uncertainties discussed above.
See "Business and Properties--Exploration and Development Activities in Poland."
Currency Risks
The Company will be subject to a variety of currency risks, including the
risks that currencies will not be convertible at satisfactory rates, that the
official conversion rates between United States and Polish currencies may not
accurately reflect the relative value of goods and services available or
required in Poland and that inflation will lead to the devaluation of the Polish
zloty.
Repatriation of Earnings
The Company may be restricted as to the amount, manner or timing of the
repatriation to the United States of earnings from activities in Poland. The
Company has formed a wholly owned Polish subsidiary through which it will
conduct its activities in Poland. Currently, assuming the Polish subsidiary is
adequately capitalized, there are no restrictions on the ability of a Polish
entity to repay debt to a foreign parent corporation or to pay fair market
compensation to a foreign parent corporation for legitimate services. However,
Polish entities are limited in their ability to pay dividends. Dividends can be
paid only once annually and are limited in amount to the extent of profit, as
determined in compliance with Polish accounting and regulatory requirements and
as verified by an audit satisfying Polish professional standards. In addition,
the payment of dividends by the Polish subsidiary is subject to a 5% withholding
tax. Although the Company is entitled to a credit against its United States tax
obligations equal to the Polish withholding tax, the Company may not be able to
use this credit unless the Company owes taxes in the United States. See
"Business and Properties--Exploration and Development Activities in Poland."
Lack of Exploration and Development Infrastructure
There can be no assurance that the Company will be able to conduct an
effective and efficient exploration program in Poland. Further, the Company is
subject to certain risks which could substantially increase the cost of
exploration, development and production activities and reduce potential
financial return, including the limited availability of certain modern
exploration, drilling and production equipment, supplies and services and the
lack of availability or limited capacity of oil and gas gathering, storage,
transportation and processing facilities.
Lack of Transportation and Marketing Arrangements
The Company has no transportation, refining or marketing arrangements
relating to future oil production in Poland. Instead, the Company is relying
primarily on continuing increases in demand for oil products and the fact that
Poland reportedly imports over 95% of its oil as the basis for a potential
market for any oil that may be discovered. The Company is not precluded from
exporting oil, but the Company presently has no such arrangements. There can be
no assurance that the Company will be able to establish transportation, refining
or marketing arrangements to sell any oil discovered and produced in Poland on
terms favorable to the Company or that the Company will be able to make
arrangements for the exportation of oil in the event such exportation is
desirable to the Company. See "Business and Properties--Exploration and
Development Activities in Poland."
Poland's Governmental Regulation
The Company's activities in Poland are subject to certain laws and
regulations relating to the exploration for, and development, production,
marketing, transportation and storage of, oil, including measures relating to
the protection of the environment. The regulatory regime governing these
activities was recently promulgated and is relatively untested. Therefore,
there is no enforcement history or established practice that can aid the Company
in evaluating how the regulatory regime will affect the Company's operations.
Although management believes that the regulatory infrastructure in place and now
being further developed in Poland is generally consistent with the government's
stated purpose of encouraging foreign investment and the development of Poland's
natural resources, there can be no assurance that such governmental policy will
not change or that new laws and regulations, administrative practices or
policies or interpretations of existing laws and regulations will not materially
and adversely affect the Company's activities in Poland.
Poland's Environmental Regulations
The Company's operations are subject to environmental laws and regulations
in Poland. Poland's environmental laws and regulations may provide for
restrictions and prohibitions on spills, releases or emissions of various
substances produced in association with oil exploration and development.
Additionally, if significant quantities of gas are produced in conjunction with
the Company's production of oil, regulations prohibiting the flaring of gas and
the absence of a gas gathering and delivering system may restrict production or
may require significant expenditures by the Company to develop such a system
prior to the production of oil. Certain aspects of the Company's proposed
operations may require the submission and approval of environmental impact
assessments to governmental authorities in Poland prior to commencing
production.
The Company has only recently initiated field activities in connection with
its seismic program and has not incurred material environmental remediation
costs to date. Management believes that the Company is currently in material
compliance with all applicable laws and regulations. However, there can be no
assurance of such compliance or that applicable regulations or administrative
policies or practices will not be changed by the Polish government. The cost of
compliance with current regulations or any changes in environmental regulations
could require significant expenditures, and breaches of such regulations may
result in the imposition of fines and penalties, any of which may be material.
There can be no assurance that these environmental costs will not have a
material adverse effect on the Company's financial condition or results of
operations in the future.
COMPANY HISTORY
In January 1989, the Company began its oil exploration activities with the
formation of its predecessor, Frontier Exploration Company ("Exploration").
Exploration and the Company combined in 1992. Effective April 1, 1994, the
Company purchased producing oil properties and related assets in Montana and
Nevada (the "Montana Acquisition"). In 1995, the Company launched a multi-year
infill drilling operation on specific portions of the acquired Montana oil
fields to develop additional proved producing reserves and increase the rate of
current production. In August 1995, the Company acquired rights to the Baltic
Concession.
The Company's executive offices are located at 3006 Highland Drive, Suite
206, Salt Lake City, Utah 84106. Its telephone number is (801) 486-5555 and its
facsimile number is (801) 486-5575.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3.0 million shares of
Common Stock offered hereby will be approximately $ million ($ million,
assuming exercise of the Underwriters' over-allotment option) after deducting
estimated underwriting discounts and expenses of the Offering payable by the
Company.
The net proceeds from the Offering, together with cash available from the
Company's existing credit facility and, to the extent available, operations,
will be used to repay the Company's outstanding bank credit line of $3.6
million, to fund the Company's $18.4 million 1996 and 1997 capital expenditure
budget and for general corporate purposes. The Company's planned capital
expenditures through December 31, 1997, are as follows: (i) approximately $8.0
million for exploration and potential development activities related to the
Baltic Concession, (ii) approximately $2.8 million for the review and evaluation
of available geological and geophysical data and the potential initiation of
exploratory activities in the Carpathian region, (iii) approximately $6.1
million for infill development drilling in the Cut Bank field in Montana and
(iv) approximately $1.5 million for exploration activities in the western United
States. The allocation of the Company's capital among the categories of
anticipated expenditures is discretionary and will depend upon future events
that cannot be predicted. Such events include the actual results and costs of
future exploration and development drilling activities. Consistent with previous
practice, the Company may obtain partial funding for its exploration and
potential development activities through strategic arrangements with industry or
financial partners.
The Company's outstanding bank loan was made pursuant to a bank credit
facility established to provide a portion of the funds required to complete the
Montana Acquisition and is secured by the properties acquired in such
acquisition. The bank indebtedness bears interest at the lending bank's base
rate plus 1.25%, adjusted monthly. The current maturity of the bank
indebtedness is October 1, 1997.
Until the net proceeds of the Offering are utilized for the purposes
described above, they will be invested in interest-bearing bank accounts, U.S.
government securities, other investment grade debt securities and other short-
term investments.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Effective June 7, 1996, the Common Stock began to be quoted on the Nasdaq
SmallCap Market under the symbol "FXEN." The Company has applied to have its
Common Stock approved for quotation on the Nasdaq National Market ("NNM") on the
effective date of the Offering under the symbol "FXEN."
Management believes that the trading market for Common Stock , which
included extended periods during which no trades occurred, was extremely limited
prior to the completion of the Company's sale of 2 million shares of Common
Stock in September 1995. As a result, the potential existed for relatively
minor trading to result in significant changes in the trading price of the
Common Stock, with potentially limited regard to the business activities of the
Company. During this period, information on specific transactions involving the
Common Stock was not readily available. Therefore, the Company does not believe
that quotations before late 1995 should be considered reliable indicators of the
existence of a viable trading market for the Common Stock.
The following table sets forth the closing bid quotation for the Common
Stock, based on interdealer bid quotations, without markup, markdown,
commissions or adjustments, for the periods indicated as quoted on the OTC
Electronic Bulletin Board of the National Association of Securities Dealers,
Inc. (the "EBB") under the symbol "FOEX."
LOW HIGH
------ ------
1996
Second Quarter
(through June 6, 1996).............. $2.63 $9.63
First Quarter........................ 2.00 3.91
1995
Fourth Quarter....................... $1.75 $2.75
Third Quarter........................ 1.25 2.13
Second Quarter....................... 2.00 3.00
First Quarter........................ 2.75 3.38
1994
Fourth Quarter....................... $2.75 $3.38
Third Quarter........................ 2.75 3.38
Second Quarter....................... 1.00 3.25
First Quarter........................ 1.00 3.25
On June 7, 1996, the closing sales price for the Common Stock on the Nasdaq
SmallCap Market was $9.125 per share.
The Company has never paid cash dividends on the Common Stock or its
preferred stock and does not anticipate that it will pay dividends in the
foreseeable future. The Company currently intends to continue a policy of using
retained earnings for expansion of its business. The Company's outstanding
preferred stock does not have a preference on dividends, but holders of
preferred stock would participate with holders of the Common Stock if, contrary
to management's expectations, dividends were declared and paid on the Common
Stock.
DILUTION
As of March 31, 1996, as adjusted to give pro forma effect to the
subsequent issuance of 244,111 shares of Common Stock and the receipt of
proceeds therefrom, the Company had a pro forma net tangible book value of $6.6
million, with 8.7 million shares of Common Stock issued and outstanding, or
approximately $0.76 per share, after deducting a liquidation preference of
$17,500 respecting the 17,500 shares of the Company's outstanding preferred
stock. The following table illustrates per share dilution to new investors to
the net tangible book value of the shares of Common Stock to be sold in the
Offering.
Assumed public offering price per share... $ 9.13
Pro forma net tangible book value per share
at March 31, 1996(1) .................. $ 0.76
Increase attributable to new investors .. 1.94
-------
Pro forma net tangible book value per share
after the Offering ...................... 2.70
-------
Dilution per share to purchasers in the
Offering ................................ $ 6.43
=======
(1)Subsequent to March 31, 1996, the Company issued 156,111 shares of Common
Stock for net proceeds of $680,000, issued 80,000 shares of Common Stock on
the exercise of options for $120,000, received $90,000 on a stock
subscription receivable and issued 8,000 shares for services. Does not
include an aggregate of 3,077,028 shares issuable upon (i) the conversion of
outstanding preferred stock, (ii) the exercise of outstanding options and
warrants and (iii) the issuance of shares contingent upon attaining certain
production levels in Montana and Nevada. See "Management--Executive
Compensation," "Principal Stockholders," "Certain Transactions" and
"Description of Securities."
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of March 31, 1996, and as adjusted to give pro forma effect to the subsequent
issuance of 244,111 shares of Common Stock and the receipt of proceeds therefrom
and to give effect to the sale by the Company of the 3.0 million shares of
Common Stock offered hereby at an assumed Offering price of $9.13 per share and
the application of the net proceeds therefrom, but without giving any effect to
any other changes to the Company after March 31, 1996. This information should
be read in conjunction with the Company's Consolidated Financial Statements and
the Notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" presented elsewhere in this Prospectus.
AS OF MARCH 31, 1996
-------------------------
PRO FORMA
AS
ACTUAL ADJUSTED(1)
---------- -----------
(IN THOUSANDS)
Current portion of long-term debt......... $ 180 $ --
========== ===========
Long-term debt, net of current portion.... $ 3,439 $ --
---------- -----------
Stockholders' equity:
Preferred stock, $0.001 par value;
5,000,000 shares authorized; 17,500
issued and outstanding............... -- --
Common Stock, $0.001 par value;
20,000,000 shares authorized;
8,460,485 issued and outstanding;
11,704,596 shares issued and
outstanding (pro forma as adjusted).. 8 12
Additional paid-in capital ............. 10,665 36,471
Stock subscription receivable .......... (90) --
Accumulated deficit .................... (4,833) (4,852)
---------- -----------
Total stockholders' equity ............. 5,750 31,631
---------- -----------
Total capitalization $ 9,189 $ 31,631
========== ===========
(1)Does not include an aggregate of 3,077,028 shares issuable upon (i) the
conversion of outstanding preferred stock, (ii) the exercise of outstanding
options and warrants and (iii) the issuance of shares contingent upon
attaining certain production levels in Montana and Nevada. See "Management--
Executive Compensation," "Principal Stockholders," "Certain Transactions" and
"Description of Securities."
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company for each
of the four years in the period ended December 31, 1995, are derived from the
audited financial statements and notes thereto of the Company, certain of which
are included elsewhere in this Prospectus. The selected consolidated financial
data for the three month periods ended March 31, 1995 and 1996, and for the year
ended December 31, 1991, are unaudited and, in management's opinion, include all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the results for such periods. Results for the interim
periods are not necessarily indicative of results to be expected for the entire
year. The selected consolidated financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements and the Notes
thereto included elsewhere herein.
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1991 1992 1993 1994 1995
------ ------ ------ ------ -------
(In thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA:
Revenues:
Oil sales .......... -- -- -- $1,692 $ 1,981
Drilling revenue ... -- -- -- 224 111
Other (1) .......... $ 174 $ 342 $ 276 -- 75
------ ------ ------ ------ -------
Total revenues .... 174 342 276 1,916 $ 2,167
------ ------ ------ ------ -------
Operating costs and expenses:
Production and operating 13 45 7 680 1,272
costs(2) ..........
Exploration costs .. -- -- 654 651 747
Depreciation, depletion and 10 7 3 422 503
amortization ......
General and administrative 178 259 353 816 1,466
Other(3) ........... -- -- -- 178 256
------ ------ ------ ------ -------
Total operating costs and 201 311 1,017 2,747 4,244
expenses ..........
------ ------ ------ ------ -------
Operating income (loss) (27) 31 (741) (831) (2,077)
Interest and other income 20 36 39 53 98
Interest expense.... (1) (4) (2) (214) (448)
Minority interest: Non-cash -- -- -- -- (93)
dividends(4) ......
Net income (loss) before income (8) 63 (704) (992) (2,520)
taxes .............
Benefit from (provision for) 3 (16) 9 -- --
income taxes ......
------ ------ ------ ------ -------
Net income (loss)... $ (5) $ 47 $ (695) $ (992) $(2,520)
========= ======= ======= ======== ========
Net income (loss) per common $ (0.00) $ 0.03 $(0.40) $ (0.44) $ (0.47)
share .............
Weighted average shares 1,400 1,412 1,750 2,229 5,389
outstanding .......
CASH FLOW STATEMENT DATA:
Net cash provided by(used in)
operating activities $ (35) $ 96 $(569) $ (322) $ (1,030)
Net cash used in investing
activities ........ (15) (265) (22) (4,432) (1,489)
Net cash provided by(used in)
financing activities (136) 171 1,046 4,587 2,974
AS OF DECEMBER 31,
---------------------------------------------------
1991 1992 1993 1994 1995
-------- ------ -------- ------- -------
BALANCE SHEET DATA: (In thousands)
Working capital (deficit) $ 63 $ (154) $ 283 $ (272) $ (278)
Total assets ....... 143 374 1,317 8,436 10,039
Long-term debt ..... -- -- -- 4,091 3,359
Redeemable FX Producing -- -- -- 550 --
preferred stock ...
Stockholders' equity 106 173 910 1,280 5,224
THREE MONTHS
STATEMENT OF OPERATIONS DATA: ENDED MARCH 31,
-------------------
1995 1996
------ ------
Revenues:
Oil sales .......... $ 516 $ 505
Drilling revenue ... 5 --
Other (1) .......... 60 --
------ ------
Total revenues .... $ 581 505
------ ------
Operating costs and expenses:
Production and operating 338 325
costs(2) ..........
Exploration costs .. 94 189
Depreciation, depletion and 106 138
amortization ......
General and administrative 276 366
Other(3) ........... 11 24
------ ------
Total operating costs and 825 1,042
expenses ..........
------ ------
Operating income (loss) (244) (537)
Interest and other income 10 36
Interest expense.... (111) (82)
Minority interest: Non-cash (55) --
dividends(4) ......
------ ------
Net income (loss) before income (400) (583)
taxes .............
Benefit from (provision for) -- --
income taxes ......
Net income (loss)... $ (400) $ (583)
======= ========
Net income (loss) per common $(0.14) $ (0.07)
share .............
Weighted average shares 2,811 8,086
outstanding .......
CASH FLOW STATEMENT DATA:
Net cash provided by(used in)
operating activities $ (64) $ (747)
Net cash used in investing (127) (47)
activities ........
Net cash provided by(used in)
financing activities 427 909
AS OF MARCH 31,
1995 1996
BALANCE SHEET DATA:
Working capital (deficit) $ (170) $ 399
Total assets ....... 9,379 10,148
Long-term debt ..... 4,009 3,439
Redeemable FX Producing -- --
preferred stock ...
Stockholders' equity 3,140 5,750
(1) Other revenues include prospect sales and project management fees.
(2) Includes production taxes.
(3) Other expenses include drilling costs and leasehold abandonments.
(4) Non-cash dividend on FX Producing convertible preferred stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's Consolidated Financial Statements and related Notes thereto and
the Selected Consolidated Financial Data included elsewhere in this Prospectus.
GENERAL
The Company is engaged in the exploration, development and production of
oil and gas in the western United States and Poland. The Company plans to focus
on the oil potential of Poland and to explore specific prospects utilizing
modern evaluation techniques to reinterpret existing well and seismic data. The
Company forms strategic alliances with industry partners to reduce its financial
exposure and to obtain the benefits of additional technical and operating
expertise. The Company's principal exploration efforts in the Baltic Concession
are being funded partially through an arrangement with RWE-DEA. The Company has
also entered into a joint study arrangement with POGC to evaluate technical
information previously collected from the Carpathian region and is undertaking
a long-term development project on its producing Montana properties to increase
cash flows and reserves.
From its organization in January 1989 through the first quarter of 1994,
the Company generated revenue principally from the sale of oil and gas prospects
and from fees generated by the management of joint exploration groups formed by
the Company. During such period, the Company reported substantial operating
losses. Effective April 1, 1994, with the Montana Acquisition, the Company's
activities were expanded substantially and the Company began generating revenue
from oil production, well drilling and related activities. Thereafter, the
Company began to have increased operating revenue but continued to report
operating losses and negative cash flows from operations. In August 1995, the
Company acquired exploration rights to the Baltic Concession and began to focus
its exploration efforts in Poland. The Company's activities were expanded in
May 1996 when the Company and POGC initiated their joint evaluation regarding
the Carpathian region.
The Company currently intends to continue its exploration activities,
principally in the Baltic Concession and Carpathian region, to develop its
Montana producing properties and to explore selected prospects in the western
United States.
RESULTS OF OPERATIONS
Comparison of Three Months Ended March 31, 1995 and 1996
Revenues
Oil sales decreased 2% to $505,000 in the first quarter of 1996 from
$516,000 in the same quarter of 1995. The decrease was due to a 7.7% decrease
in oil production, to 31,598 Bbl for the first quarter 1996 from 34,226 Bbl for
the same quarter in 1995. The decrease in production was primarily attributable
to formation damage that occurred in 1994 to a well in Bacon Flat, Nevada, and
normal production declines on the Company's other fields. The decrease in
production was partially offset by a 7.1% increase in the average price per Bbl
sold to $15.98 during the first quarter 1996 compared to $14.92 in the first
quarter of 1995. In the first quarter of 1995, the Company sold an interest in
undeveloped acreage and recognized revenues of $60,000 related to such sale.
Costs and Expenses
Production and operating costs increased 10.8% to $293,000 ($9.28 per Bbl)
in the first quarter of 1996 from $265,000 ($7.74 per Bbl) in the first quarter
of 1995. The increase was due primarily to record cold weather conditions in
the Company's primary operating regions in the first quarter of 1996 and the
continuation of an expanded maintenance and production enhancement program in
the Cut Bank field.
Production taxes decreased 56.2% to $32,000 ($1.01 per Bbl) in the first
quarter of 1996 from $73,000 ($2.13 per Bbl) in the same quarter of 1995. The
decrease was due primarily to an exemption, effective July 1, 1995, for certain
stripper well production affecting most of the Company's Montana production.
Effective January 1, 1996, another production tax of approximately 5.5% was
eliminated on most of the Montana production. These production taxes are not
expected to be reinstated in the future.
Exploration costs increased 101.1% to $189,000 in the first quarter of 1996
from $94,000 in the first quarter of 1995. The increase was due primarily to
increased consulting, payroll and legal costs related to expanded exploration
efforts in Poland.
Depreciation, depletion and amortization increased 30.3% to $138,000 ($4.38
per Bbl) in the first quarter of 1996 from $106,000 ($3.10 per Bbl) in the first
quarter of 1995. The increase was due primarily to an increase in the cost of
capitalized oil and gas properties of approximately $1.3 million in the first
quarter of 1996 and a reduction of total proved reserves used to calculate
depreciation, depletion and amortization for the quarter ended March 31, 1996,
compared to the quarter ended March 31, 1995.
General and administrative expenses increased 32.6% to $366,000 in the
first quarter of 1996 from $276,000 in the first quarter of 1995. The increase
was due primarily to additional administrative requirements related to the
Company's expanded exploration and development activities.
Interest and Other Income (Expense)
Interest and other income increased to $36,000 in the first quarter of 1996
as compared to $10,000 for the first quarter of 1995. The increase was due
primarily to increased interest income resulting from an increase in the
Company's average cash balance during 1996 and the Company's receipt of a
liquidating distribution of $15,000 from a partnership in which the Company
owned an interest. Interest expense decreased to $82,000 for the first quarter
of 1996 as compared to $111,000 for the first quarter of 1995, primarily due to
a decrease in the average outstanding balance of the Company's long-term debt.
During the first quarter of 1995, the Company paid non-cash dividends in
preferred stock of $55,000 on convertible preferred stock of its oil-producing
subsidiary. All such dividends paid in preferred shares of the subsidiary had
been converted into Common Stock of the Company as of December 31, 1995;
accordingly, there was no preferred stock dividend payment in the first quarter
of 1996.
Income Taxes
The Company did not recognize any tax benefit from its losses in the three
months ended March 31, 1996, and March 31, 1995.
Net Loss
Net loss increased 45.8% to $583,000 in the first quarter of 1996 from
$400,000 in the first quarter of 1995. The increase was due primarily to a
decrease in total revenues and increases in exploration and general and
administrative costs as discussed above.
Comparison of Years Ended December 31, 1994 and 1995
The Company's results of operations for the fiscal year ended December 31,
1995, includes one full year of revenues from oil production, well servicing and
related activities and interest expense related to bank debt, whereas the year
ended December 31, 1994, includes only revenues and expenses from the date of
the Montana Acquisition. The results of operations for the fiscal years ended
December 31, 1994 and 1995 are, in management's opinion, therefore not
comparable.
Revenues
During 1995, oil sales increased 17.1% to $2.0 million from $1.7 million in
1994 primarily due to inclusion of one full year of oil sales in 1995 as
compared to a partial year in 1994. Oil sales also increased due to a 4.3%
increase in the average price per Bbl sold to $14.67 in 1995 from $14.07 in
1994. These increases were partially offset by a 15.4% decrease in oil
production in 1995. The decrease in production in 1995 was primarily due to the
loss of 51 Bpd in average net production from a well in the Bacon Flat field
that sustained formation damage in 1994 and 17 Bpd in production from the Cut
Bank field. This decline in the Cut Bank field represents a normal production
decline, which the Company's infill drilling and waterflood project is designed
to overcome.
Drilling revenue decreased 50.5% in 1995 to $111,000 from $224,000 in
1994. One well was drilled in 1995 with the Company's drilling rig in 1995 as
compared to two wells in 1994. Prospect sales revenue increased in 1995 due to a
conveyance of an interest in the Cobb Creek prospect for $75,000. There were no
such sales in 1994.
Costs and Expenses
Production and operating costs increased 131.0% to $1.0 million ($7.42 per
Bbl) in 1995 from $434,000 ($3.71 per Bbl) in 1994. The increase was due
primarily to the inclusion of one full year of oil production in 1995 as
compared to a partial year in 1994. The increase on a per Bbl basis was due
primarily to increased labor costs resulting from abnormally wet weather
conditions in the second quarter of 1995 and increased maintenance expenditures
on the Cut Bank field in conjunction with the Company's plan to enhance
production.
Production taxes increased 10.2% to $271,000 ($2.00 per Bbl) in 1995 from
$246,000 ($2.10 per Bbl) in 1994. The increase was due primarily to the
inclusion of one full year of oil production in 1995 as compared to a partial
year in 1994. The decrease on a per Bbl basis was due primarily to an exemption
for certain stripper well production affecting most of the Company's Montana
production, which was effective July 1, 1995.
Exploration costs increased 14.7% to $747,000 in 1995 from $651,000 in
1994. The increase was due primarily to an expansion of exploration activities
in Poland in 1995. The Company participated in two dry holes in the United
States in both 1995 and 1994.
Depreciation, depletion and amortization increased 19.2% to $503,000 ($3.73
per Bbl) in 1995 from $422,000 ($3.61 per Bbl) in 1994. The increase was due
primarily to the inclusion of one full year of production in 1995 compared a
partial year in 1994.
Drilling costs decreased 20.8% to $141,000 in 1995 from $178,000 in 1994.
The decrease was primarily due to the Company drilling rig drilling one well in
1995 as compared to two wells in 1994.
The Company reported leasehold abandonment expense of $115,000 in 1995 as
compared to no such expense in 1994. Leasehold abandonments will vary from year
to year based, in part, upon management's periodic assessment to determine
whether unproved properties have been impaired.
General and administrative expenses increased 83.8% to $1.5 million in 1995
from $816,000 in 1994. The increase was due primarily to non-cash expenses of
$425,000 relating to the issuance of stock options to employees and the issuance
of 200,000 shares of Common Stock to a shareholder as compensation for financial
consulting. The increase was also a product of additional administrative
requirements due to a general expansion of the Company's activities.
Interest and Other Income (Expense)
Interest and other income increased 84.9% to $98,000 in 1995 from $53,000
in 1994. This increase was due primarily to a $20,000 increase in interest
income due to a greater average cash balance during 1995 and the sale of
equipment in 1995 which resulted in a gain of $16,000. Interest expense
increased 109.0% to $448,000 in 1995 from $214,000 in 1994. A full year of
interest expense related to the Company's credit facility is included in 1995
compared to the inclusion of only a partial year of interest expense in 1994.
Preferred stock of the Company's oil-producing subsidiary required payment
of cumulative dividends. Dividends of $93,000 were paid in preferred stock of
such subsidiary in 1995. All of the outstanding preferred stock of such
subsidiary had been converted into Common Stock of the Company as of December
31, 1995. No such dividend payments were made in 1994.
Income Taxes
The Company incurred net operating losses in 1993, 1994 and 1995 which can
be carried forward to offset future taxable income. Statement of Financial
Accounting Standards (SFAS) No. 109 requires that a valuation allowance be
provided if it is more likely than not that some portion or all of a deferred
tax asset will not be realized. The Company's ability to realize the benefit of
its deferred tax asset will depend on the generation of future taxable income
through profitable operations and the expansion of the Company's oil and gas
producing activities. The market and capital risks associated with achieving
the above requirement are considerable, resulting in the Company's conclusion
that a full valuation allowance be provided. Accordingly, the Company did not
recognize any tax benefit in its consolidated statement of operations for the
years ended December 31, 1993, 1994 and 1995.
Net Loss
Net loss increased 150.0% to $2.5 million in 1995 from $1.0 million in
1994. The increase was due primarily to increases in production and operating
costs, interest expense and general and administrative costs as discussed above.
Comparison of Years Ended December 31, 1994 and 1993
Prior to the Company's Montana Acquisition, effective April 1, 1994, the
Company had no revenue from oil production, well drilling and related
activities. Accordingly, the Company's results of operations for the fiscal
year ended December 31, 1994 includes revenues and expenses from the date of the
Montana Acquisition, whereas the year ended December 31, 1993 includes no
revenues from oil production, well drilling and related activities and no
interest expense related to bank debt. The results of operations for the fiscal
years ended December 31, 1993 and 1994 are, in management's opinion, therefore
not comparable.
Revenues for the year ended December 31, 1994, increased to $1.9 million
from $276,000 in 1993. This increase was primarily due to the $1.7 million in
oil and gas revenue and $224,000 in drilling revenue earned after the Montana
Acquisition. Operating costs and expenses for the year ended December 31, 1994,
increased 170.0% to $2.7 million from $1.0 million in 1993, reflecting the
purchase of the Montana and Nevada producing properties and related assets.
Expenses for 1994 included $1.1 million in costs directly related to the
acquired oil production, including production and operating costs, production
taxes and depreciation, depletion and amortization. General and administrative
expenses increased 131.1% to $816,000 in 1994 from $353,000 in 1993 primarily as
a result of the Company's expanded operations resulting from the Montana
Acquisition.
CAPITALIZED COSTS FOR UNPROVED OIL AND GAS PROPERTIES
The Company follows the successful efforts method of accounting for its oil
and gas properties. Under this method of accounting, all property acquisition
costs and costs of exploratory and development wells are capitalized when
incurred, pending determination of whether the well has found proved reserves.
If an exploratory well has not found proved reserves, the costs of drilling the
well are expensed. The costs of development wells are capitalized whether
productive or nonproductive. Geological and geophysical costs on exploratory
prospects and the costs of carrying and retaining unproved properties are
expensed as incurred. An impairment allowance is provided to the extent that
capitalized costs of unproved properties, on a property-by-property basis, are
considered to be not realizable. At December 31, 1995 and March 31, 1996, the
Company had capitalized costs related to unproved oil and gas properties in the
amount of $1.8 and $1.7 million, respectively, of which $1.4 million and $1.3
million, respectively, related to the Company's Lake Valley exploration
prospect. Should future events, such as the drilling of dry holes, evidence that
an impairment of recorded value has taken place, the impact on the relevant
period of results of operations could be significant. As a result of the
foregoing, the results of operations of the Company for any particular period
may not be indicative of the results that could be expected over longer periods.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has relied primarily on proceeds from the sale of
equity securities to fund its operations. To complete the Montana Acquisition,
the Company utilized bank financing, supplemented by proceeds from the sale of
securities of a subsidiary. The Company also benefits from funds provided by
other participants in drilling groups formed by it to undertake specific
exploration. In 1995, the Company sold 2.1 million shares of Common Stock at
$2.00 per share for net proceeds of $4.0 million. In the first quarter of 1996,
the Company sold 372,000 shares of Common Stock for net proceeds of $1.1
million, of which $90,000 was received in April 1996. Subsequent to March 31,
1996, the Company sold 157,000 shares of Common Stock at $4.50 per share for net
proceeds of $680,000 and received $120,000 from the exercise of stock options.
Operating Activities
The Company used cash of $747,000 in operating activities during the three
months ended March 31, 1996, compared to cash used of $64,000 during the
corresponding period in the prior year. The increase in the cash used in 1996
was primarily due to a larger net loss and a substantial reduction in accounts
payable and accrued liabilities during 1996 as compared to 1995. During 1995,
accounts payable and accrued liabilities increased substantially. During 1993,
1994 and 1995, operations required net cash of $569,000, $322,000 and $1.0
million, respectively. The 1994 decrease as compared to the previous year was
primarily due to the Montana Acquisition and the corresponding increase in
depreciation, depletion and amortization in 1994 as compared to 1993. The
increase in 1995 was due principally to a substantially larger operating loss in
that year as the Company significantly expanded its operations.
Financing Activities
Financing activities provided net cash of $909,000 during the quarter ended
March 31, 1996, as compared to $427,000 for the same period of the preceding
year, in each case attributable principally to the sale of securities. In 1993
and 1995, financing activities provided net cash of $1.0 million and $3.0
million, respectively, again principally from net proceeds from the sale of
securities. Net cash of $4.6 million provided by financing activities in 1994
was provided principally from a long-term loan under the Company's credit
facility described below.
The improvement in the Company's working capital to $399,000 as of March
31, 1996, as compared to a deficit of $170,000 on the same date a year earlier,
was primarily due to net proceeds received from the sale of Common Stock in the
first quarter of 1996. Subsequent to March 31, 1996, the Company received
additional net proceeds of $680,000 from the sale of Common Stock, $120,000 from
stock options exercised and $90,000 from the collection of a stock subscription
receivable, which further increased its working capital. As of December 31,
1993, 1994 and 1995, the Company had working capital (deficit) of $283,000,
($272,000) and ($278,000), respectively. Working capital shortages in the past
were primarily due to the Company's losses from operations.
Credit Facility
In June 1994, the Company established a bank credit facility with Bank One,
Texas, NA, to provide a portion of the funds for the Montana Acquisition. This
facility provides for a total loan amount of $5.0 million, with a borrowing base
determined at least semi-annually by the lending bank based on its analysis of
the Company's producing reserves and cash flow. The borrowing base as of March
31, 1996, was $3.6 million. During the term of the loan, the Company is
required to make monthly payments of interest on the unpaid principal balance at
a rate equal to the lending bank's base rate plus 1.25% and to reduce the
outstanding principal by $25,000 per month. As of December 31, 1995, the Company
was in violation of the loan agreement's cash flow-to-debt service requirements
applicable to FX Producing. Non-compliance with any such ratios and covenants
could result in termination of the loan agreement, however the bank waived the
cash flow-to-debt service requirement for the quarters ending December 31, 1995
and March 31, 1996 and has amended this provision for the quarters ending June
30, and September 30, 1996 and thereafter. The amendment waived the monthly
principal reductions of $25,000 for the period from March 1 through September
30, 1996 and required the Company to purchase a $300,000 certificate of deposit
maturing November 1, 1996, which certificate of deposit is pledged as collateral
to the bank note. The Company expects that it will be in compliance with the
amended cash flow-to-debt service requirement as of June 30, 1996 and throughout
the remainder of 1996. In May 1996, the due date of the loan was extended to
October 1, 1997. The Company anticipates repaying the current principal balance
of $3.6 million due under this credit facility with net proceeds from the
Offering. See "Use of Proceeds."
Investing Activities
During each of the three month periods ended March 31, 1995 and 1996 and
the years ended December 31, 1993, 1994 and 1995, the Company required cash to
fund its investing activities, consisting principally of the acquisitions of, or
improvements to, oil and gas properties and other property and equipment. The
largest single investment was the $4.2 million Montana Acquisition in 1994. The
$1.5 million used in investing activities during 1995 consisted principally of
capitalized additions to oil and gas properties related to the infill drilling
program in the Cut Bank field.
Capital Requirements
As of March 31, 1996, as adjusted to give effect to the subsequent receipt
of $890,000 (including $90,000 received from a stock subscription receivable)
from the sale of securities and the exercise of options, the Company had working
capital of approximately $1.3 million. This working capital, together with the
$250,000 received from RWE-DEA related to its participation in the exploration
and potential development of the Baltic Concession, is expected to satisfy the
Company's operating requirements during 1996.
As of March 31, 1996, the Company had utilized approximately $600,000 of
its own funds for expenditures associated with obtaining the Baltic Concession,
obtaining and analyzing data provided by Polish sources and advancing the
related exploration effort to its current stage. The Company is obligated under
the Baltic Concession agreement to pay annual fees of approximately $58,000,
one-time geological and geophysical expenditures of $250,000 and to begin
drilling one well (at an estimated dry hole cost of approximately $1.0 million)
during 1996.
RWE-DEA, under a joint exploration arrangement, will provide up to $1.0
million for a seismic study now underway and up to $1.0 million in drilling and
testing costs for the initial test well in the Baltic Concession. The Company
has budgeted $18.4 million in capital expenditures through 1997, including (i)
approximately $8.0 million for exploration and potential development activities
related to the Baltic Concession, (ii) approximately $2.8 million for the review
and evaluation of available geological and geophysical data and the potential
initiation of exploratory activities in the Carpathian region, (iii)
approximately $6.1 million for infill development drilling in the Cut Bank field
in Montana and (iv) approximately $1.5 million for exploration activities in the
western United States. The actual expenditures for the foregoing items will be
dependent upon the actual results and costs of future exploration and
development activities. The Company estimates that the capital available from
the net proceeds from the Offering, the Company's existing credit facility and,
to the extent available, from operations, will meet the Company's capital
requirements through at least December 31, 1997.
Prior to the end of 1997, however, the Company may need additional capital
to accelerate planned exploration and development programs in both Poland and
the United States. If exploration of the Baltic Platform or Carpathian region
is successful in proving substantial oil reserves, the Company may require
additional capital to fund a multi-well development program, install oil storage
and handling facilities or purchase other assets or related investments required
to support large-scale production. The Company has no arrangement for any such
additional financing, but may seek required funds from the sale of additional
securities, project financing, strategic alliances with other energy or
financial partners or other arrangements, all of which may dilute the interest
of existing shareholders in the Company or in the specific project financed.
There can be no assurance that additional funds could be obtained or, if
obtained, would be on terms favorable to the Company.
BUSINESS AND PROPERTIES
GENERAL
The Company is engaged in the exploration, development and production of
oil and gas properties in the western United States and Poland. The Company
currently produces oil from fields in Montana and Nevada and explores for oil
and gas primarily in Poland. In August 1995, the Company was one of the first
independent energy companies to secure oil and gas exploration rights in Poland
(the "Baltic Concession"). The Baltic Concession covers approximately 2.4
million acres in northern Poland and is part of a geological region (the "Baltic
Platform") which reportedly has produced in excess of 150 MMBbl from four fields
located approximately 50 miles to the northeast in the Kaliningrad district of
Russia. The Company has also entered into a joint study agreement with the
Polish Oil and Gas Company ("POGC") to reprocess and reinterpret geological and
geophysical data collected from a 6.25 million acre area in the Carpathian
region of southeastern Poland. The Company believes that its principal
strengths are its existing prospects in Poland, its access to previously
collected geological and geophysical data, its established network of strategic
alliances and its inventory of domestic properties.
The Company has identified several potential drilling prospects in the
Baltic Concession through the reprocessing and reevaluation of previously
collected seismic and drilling data. The Company intends to explore and develop
these prospects with RWE-DEA AG ("RWE-DEA"), a subsidiary of RWE AG, Germany's
fifth largest industrial company. The Company and RWE-DEA recently initiated a
300 kilometer seismic survey on selected portions of the Baltic Concession. The
results of this survey will assist in the selection of the site of an
exploratory well scheduled to be drilled in late 1996. In the Carpathian
region, the Company and POGC are conducting a technical evaluation of a target
area and, if warranted, will apply for an exploration concession. The Company
has budgeted approximately $10.8 million for its contributions to exploration
and development projects in Poland through 1997.
At December 31, 1995, the Company had estimated proved reserves of 5.3
MMBbl with a PV-10 Value of approximately $23.8 million. Approximately 78% of
the Company's production and 96% of its reserve base is concentrated in northern
Montana's Cut Bank field. The Company intends to continue an infill drilling
program initiated in conjunction with an existing waterflood to enhance
production in this field. The Company is also evaluating several exploration
prospects in the western United States and has identified a prospect on which it
intends to drill an exploratory well in late 1996 in partnership with several
independent energy companies.
Business Strategy
The Company intends to explore and develop oil and gas prospects with
potential recoverable reserves in excess of 25 MMBOE for international
properties and 10 MMBOE for domestic properties. The key elements of this
strategy include the following:
Focus on Poland. The Company believes that the Baltic Concession and the
Carpathian region provide it with a foundation upon which to build a
significant exploration and development operation in Poland and to capitalize
on Poland's attractive combination of significant reserve potential,
underexplored acreage and favorable operating environment. In 1989, Poland
initiated market-based reforms which have resulted in the country's economy
becoming one of the fastest growing in eastern Europe. Important elements of
this transition have included the introduction of both a broad-based
privatization program and an internationally competitive tax and royalty
structure. Partially as a result of these initiatives, Poland reportedly had
attracted approximately $4.5 billion in direct foreign investment through
June 1995. With regard to the oil and gas industry, several international
oil companies, including Texaco, Inc., Tenneco Co., Exxon Corp., Shell Oil
Co. and British Gas PLC, have either secured, or obtained the exclusive right
to negotiate for, exploration rights.
Access to geological and geophysical data. The Company focuses on areas
where it can reevaluate previously collected geological and geophysical data.
Between 1950 and 1993, state-sponsored agencies in Poland gathered hundreds
of line miles of seismic data and drilled 15 test wells in the Baltic
Concession to the same formation that is productive in established fields in
the Baltic Platform. While 12 of these wells indicated the presence of
hydrocarbons in that formation, none was completed for production due, in
management's opinion, to the use of outdated drilling and testing techniques.
The Company, with the assistance of consultants that included Halliburton
Energy Services, Ryder Scott Company and Western Atlas, reevaluated existing
seismic and well data. As a result of this effort, the Company believes that
it has identified potential oil reservoirs in two previously drilled
structures and has identified more than a dozen undrilled structures.
Capitalize on strategic alliances. The Company seeks to form strategic
alliances to reduce its financial exposure and to gain additional technical
and operational expertise. This strategy is exemplified by the Company's
alliances with RWE-DEA covering the Baltic Concession and with POGC in the
Carpathian region. RWE-DEA, formerly Deutsche Texaco AG, is an established
producer, refiner and marketer of oil and gas in Europe and currently
produces oil in the Baltic Sea off Germany's northern coast. Pursuant to an
agreement with the Company, RWE-DEA will earn a 50% interest in the Baltic
Concession by providing up to $1.0 million for the seismic survey currently
underway, up to $1.0 million for the drilling of an exploratory well and 50%
of the costs of drilling a second well. The Company will serve as the
operator in the Baltic Concession. With respect to the Carpathian region,
the Company is evaluating existing geological and geophysical data
contributed by POGC in order to define the hydrocarbon potential of a target
area. On completion of this study, the Company and POGC may apply for
exploration rights to such target area.
Exploit domestic reserve base and prospects. The Company believes that its
existing domestic properties have significant development and exploration
potential. The Company recently completed an infill drilling program on a
1,000 acre tract of the Cut Bank field which, based on preliminary results,
the Company believes will increase production during the next two to three
years. The Company plans to invest $6.1 million to expand this infill
drilling and development program on approximately 4,000 additional acres in
the Cut Bank field beginning in late 1996. The Company also has an ongoing
program of prospect generation and exploration in the western United States.
EXPLORATION AND DEVELOPMENT ACTIVITIES IN POLAND
The Company believes that Poland offers an attractive environment in which
to explore for and develop oil and gas prospects that meet its established
criteria of potentially containing recoverable reserves in excess of 25 MMBOE
for international prospects. By applying modern interpretive techniques to
previously collected seismic, geological and well data, the Company believes
that it will be able to capitalize on the combination of Poland's hydrocarbon
potential and relatively new programs to encourage the development of the
country's domestic energy resources. In August 1995, the Company was granted
an exclusive right to explore and potentially develop the Baltic Concession, an
onshore 2.4 million acre undeveloped area extending approximately 50 miles
southward from the Baltic Sea in northern Poland. In addition, the Company
recently completed a geological review of selected oil and gas prospect areas in
Poland and, as a result of this review, in May 1996 entered into an agreement
with POGC to reevaluate and reprocess existing geophysical and geological data
regarding the Carpathian region of southeastern Poland. If warranted, the
Company and POGC may apply for a formal concession in a limited target area of
the Carpathian region in the first half of 1997. The Company and POGC may also
elect to evaluate other areas of Poland in the future.
The Republic of Poland
The Republic of Poland is bordered on the north by the Baltic Sea, on the
west by Germany, on the south by the Czech Republic and Slovakia and on the east
by Lithuania, Belorussia, Ukraine and the Kaliningrad district of Russia.
Poland is comprised of approximately 121,000 square miles and contains a
population of almost 40 million people. Between 1945 and 1989, Poland's
political and economic systems were directly influenced by the former Soviet
Union. In 1989, Poland peacefully asserted its independence, adopted a new
constitution which established a parliamentary democracy and began the
transition to a market-based economy.
Poland has one of the fastest growing economies in eastern Europe.
According to one published report, Poland's gross domestic product grew by an
estimated 5.0% in 1994, compared to 2.5% for the Czech Republic, 2.5% for
Hungary and negative 15.0% for Russia. One of the most important elements of
Poland's economic growth has been the country's development of an
entrepreneurial private sector. In 1993, private enterprises employed 58.9% of
Poland's workforce as compared to 33.3% in 1989. Poland's international trade
has also undergone significant change since Poland gained its independence. For
example, in 1986, the former Soviet Union accounted for 33% of Poland's imports
and 28% of its exports. By 1993, these figures had decreased to 4.6% and 5.5%,
respectively, while the countries of the European Union purchased 71.3% of
Poland's exports and provided 63.9% of its imports.
Between 1854, when oil was first commercially produced in the Carpathian
region of southeastern Poland, and 1945, Poland produced approximately 61.4
MMBbl and 303 Bcf. War damage and overproduction following the 1939 invasions
of Poland by Germany and the Soviet Union caused output to drop dramatically by
1945. Over the last several decades, the exploration for, and development of,
Poland's oil and gas assets have been hindered by a combination of limited
financial resources, political difficulties and a lack of modern exploration
technology. Poland currently imports over 95% of its oil, primarily from the
countries of the former Soviet Union and the Middle East.
The Baltic Concession
The Baltic Concession is part of the Baltic Platform geological region that
covers the southeastern portion of the Baltic Sea and portions of the bordering
onshore areas of Germany, Poland, the Kaliningrad district of Russia, Lithuania,
and Latvia. Oil produced in this region is generally high quality with an
average API gravity of approximately 40o and contains insignificant amounts of
sulfur, of heavy metals or of similar contaminants. The B-3 oilfield, located
off Poland's Baltic coast and first placed into production in 1992, has
reportedly produced over 1.2 MMBbl through 1994. Onshore, approximately 34
fields have been discovered in the Baltic Platform in a region that covers an
area that extends from approximately 50 miles northeast of the Baltic Concession
in the Kaliningrad district of Russia that extends northward 50 miles into
Lithuania. Four of the largest fields in this region reportedly have produced
an aggregate of over 150 MMBbl through 1994.
Between 1950 and 1993, agencies of the Polish government gathered hundreds
of line miles of seismic data and drilled seven oil exploratory wells and eight
stratigraphic survey wells in the Baltic Concession to the same formation that
is productive in established fields in the Baltic Platform. Although none of
these wells was completed for production, test data from 12 of the 15 wells
indicated the presence of hydrocarbons. The Company, in conjunction with
consultants, that include Halliburton Engineering, Western Atlas and Ryder Scott
Company, was able to apply modern reprocessing techniques to reevaluate a
significant portion of the seismic and well log data obtained from these wells.
This information has enabled the Company to identify two drilled structures (as
indicated by the Gladysze-1 and Gladysze-2 wells) and more than a dozen
undrilled structures in the Baltic Concession that, in management's opinion, are
similar in structural type and contain the same formations as wells that produce
oil in the Kaliningrad district of Russia, offshore Poland and in other areas of
the Baltic Platform.
At the Company's request, Halliburton Engineering completed a detailed log
analysis of the 15 wells described above, including the Gladysze-1 and Gladysze-
2 wells. Halliburton reported that both Gladysze wells appear to have
encountered movable hydrocarbons, with 8% or more effective porosity and
calculated water saturations of less than 30%. While there is no guarantee that
Halliburton's interpretation of these relatively old Russian-style well logs
accurately reflects actual downhole conditions, the Company believes
Halliburton's interpretation is consistent with other geological and geophysical
data reviewed by the Company, including contemporaneous drilling reports and
core sample descriptions. Based on the foregoing, the Company has concluded that
both Gladysze wells encountered reservoirs of movable oil.
The Company has analyzed the previous exploration efforts in the Baltic
Concession. Based on its review of associated seismic data, the Company
believes that only the Gladysze-1 and Gladysze-2 wells were drilled on
geological structures. Neither of the Gladysze wells was completed for
production because, the Company believes, of poor drilling and testing
techniques. The wells were drilled with very heavy drilling mud, as was common
in eastern Europe at the time, which caused formation damage by sealing off the
porous reservoir rocks. The relatively short testing periods that followed were
probably insufficient to overcome the formation damage which resulted from
drilling with heavy mud.
There can be no assurance that wells drilled on any structure, including a
Gladysze structure, will encounter oil reservoirs or that the porosity,
permeability or other characteristics of any reservoir formations encountered
will support production of oil in commercial quantities. Notwithstanding the
substantial data available respecting the Baltic Concession, the Company
believes that several exploration tests may be required to appraise the
potential of the identified structures. There can be no assurance that any of
such tests will be successful.
Exploration, Development and Production Plans
The Company has developed a comprehensive exploration and development
program for the Baltic Concession. In May 1996, the Company, in partnership
with RWE-DEA, initiated a 300 kilometer seismic program which will build upon
previously collected data and assist in the determination of a drillsite for an
exploratory well from among three identified structures. The Company's ultimate
intention is to drill exploratory wells on all three structures with a target
depth of approximately 9,500 feet. If one or more of these three wells is found
to have commercial production, the Company will prepare a long-term field
development plan in conjunction with RWE-DEA. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources." The Company has budgeted $8.0 million for its share of exploration
and development expenditures on the Baltic Concession through 1997.
The Company anticipates that any oil produced from discoveries in the
Baltic Concession would be sold in the spot market for domestic consumption.
The crude oil produced from existing fields on the Baltic Platform is generally
of high quality with an average API gravity of approximately 40. and contains no
significant amounts of sulfur, of heavy metal or of similar contaminants.
Poland has several refineries which the Company believes could process crude oil
produced in the Baltic Concession. RWE-DEA also has an ownership interest in a
refinery in Schwedt, Germany, on the Polish border, which might purchase crude
produced from the Baltic Concession, as the Company is not legally prohibited
from exporting oil. Poland currently imports over 95% of its crude oil
requirement, principally from the countries of the former Soviet Union and the
Middle East.
The Company currently has no agreement or arrangement for the sale,
delivery or refining of any oil that may be produced. However, the Baltic
Concession contains a well-developed infrastructure of hard surface roads and
railways over which the Company believes oil produced from discoveries within
the Baltic Concession could be delivered for sale. The Company may incur
expenditures for constructing and operating crude oil transportation and
handling facilities if substantial oil production is established.
Strategic Alliance with RWE-DEA
In May 1996, the Company entered into a strategic alliance with RWE-DEA for
joint operations on the Baltic Concession. RWE-DEA currently produces oil in the
Baltic Sea off Germany's northern coast and is a member of a consortium of
German and Russian oil companies that has been established to develop an
offshore oilfield in the Kaliningrad district of Russia, north of the Company's
Baltic Concession. RWE-DEA, formerly Deutsche Texaco AG, is a subsidiary of RWE
AG, the fifth largest industrial enterprise in Germany. RWE-DEA is a fully
integrated major industrial company with 1995 fiscal year revenue of U.S. $15.9
billion from worldwide energy and chemical businesses. The Company selected RWE-
DEA as its partner in the Baltic Concession because of its established oil
producing, refining and distribution business throughout Europe, including
limited gasoline marketing within Poland, and its international exploration and
production experience. In addition, RWE-DEA's parent has business activities in
Poland outside of the oil and gas business, including construction and power
generation. The relationship with RWE-DEA should provide the Company with
additional technical and operational expertise.
Under its agreement with the Company, RWE-DEA will earn a 50% interest in
the Baltic Concession by paying the Company $250,000 and providing up to $1.0
million for the seismic survey described above, up to $1.0 million of the
drilling cost of the first exploratory well, and 50% of the costs of a second
exploratory well. All costs in excess of the amounts indicated above, in
addition to the cost of any subsequent exploration and development activity,
will be borne equally by the Company and RWE-DEA. If RWE-DEA does not
participate in the costs of the second well, RWE-DEA's interest in the Baltic
Concession will terminate. The Company will be the operator for all joint
operations. The assignment of a 50% interest in the Baltic Concession is
subject to approval by the Polish government. The Company expects that such
approval will be obtained based on discussions among representatives of the
Company, RWE-DEA and the Polish government. If such approval is not obtained,
the Company will reimburse RWE-DEA for its direct expenditures related to the
Baltic Concession. The Company has agreed to pay an unaffiliated party a fee of
approximately $125,000 for assisting in its search for an international joint
venture partner which resulted in the Company forming a strategic alliance with
RWE-DEA.
Strategic Alliance with POGC
The Polish government has granted to POGC exclusive rights to explore for
and develop hydrocarbons in areas covering a substantial portion of Poland. In
January 1996, the Company and POGC initiated a limited review of Poland's
hydrocarbon potential. The purpose of this review was to select a region on
which to undertake a detailed study program.
Carpathian Region
On May 21, 1996, the Company entered into a joint study agreement with POGC
in order to identify drillable hydrocarbon prospects in a selected area in the
Carpathian region of southeastern Poland. Oil was first discovered in the
Carpathian Mountains in 1854 and has been produced continuously from several
fields, including discoveries in the 1960s.
The initial goal of the joint study agreement is to identify the most
promising target area in the Carpathian geological region (the "Carpathian
Target Area"), primarily through the review of existing geological and
geophysical data. Thereafter, the Company and POGC will conduct a more detailed
analysis of existing seismic and other data contributed by POGC, supplemented by
limited reprocessing, to assess the Carpathian Target Area's hydrocarbon
potential and to generate drillable oil and gas prospects. The Company and POGC
will each contribute technical personnel to participate in the study. The
Company will fund approximately $100,000 of the initial technical research and
analysis costs, including seismic data reprocessing, third-party data purchases
and laboratory analysis.
In the first half of 1997, the Company, if warranted, plans to submit with
POGC an application to the appropriate Polish authorities for exploration rights
over designated portions of the Carpathian Target Area. The Company and POGC
will share equally in new exploration rights that are obtained through this
arrangement, except that if one party elects not to proceed with an application
for an exploration license over a specific area, the other party may do so
independently. Upon obtaining an exploration license or concession, the Company
will gather additional seismic or other geophysical data to further define
exploration targets and to develop a specific exploration drilling program in
conjunction with POGC. The exploration drilling program may be undertaken by
the Company and POGC on an equal basis or the Company could elect to decrease
its interest in a project by sharing its ownership with a third party. The
latter approach would also enable the Company to gain technical and operating
expertise. The Company has budgeted $2.8 million through 1997 for exploration
activities in the Carpathian region under its arrangement with POGC. See "Use
of Proceeds."
EXPLORATION AND DEVELOPMENT ACTIVITIES IN THE UNITED STATES
Cut Bank Field Development
The Company owns and operates producing oil wells, purchased effective
April 1, 1994, in the Cut Bank and Bears Den fields in Montana and the Bacon
Flat and Trap Spring fields in Nevada. The Company's 10,600 acres in the Cut
Bank field account for approximately 96% of its proved reserves and 78% of its
current oil production. In January 1996, the Company completed an infill
drilling program on 1,000 acres in the Cut Bank field, which included drilling
eight new production wells and five water injection wells, and converting two
production wells to water injection wells. The Company's infill drilling
program is based on a similar program that resulted in significant production
increases in a separate part of the Company's Cut Bank field properties
conducted by a previous owner.
Through the end of 1997, the Company intends to spend approximately $6.1
million on an expanded infill drilling development program on strategically
selected areas in the remainder of the Company's Cut Bank property. The Company
has engaged Ryder Scott Company to conduct an in-depth engineering analysis of
the Company's Cut Bank field properties, to review the recent infill drilling
program and to assist in designing the expanded program. Although management
believes the expanded development program will increase oil revenues and proved
oil reserves, there can be no assurance that the Company will actually realize
substantial increases in production or that any increases that are realized will
be sufficient to recover development costs incurred or result in a financial
return to the Company. See "Use of Proceeds."
Domestic Exploration Prospects
The Company has a number of exploratory prospects in the western United
States in various stages of evaluation, prospect identification and drillsite
selection. Domestically, the Company seeks exploration prospects with potential
reserves of at least 10 MMBOE that can be acquired or controlled with a limited
financial commitment and have a sufficient risk/reward profile to attract
drilling partners. The Company's traditional policy is not to drill an
exploratory well until it can reduce its own financial commitment by forming a
drilling group with other energy companies. As part of the Montana
Acquisition, the Company acquired a drilling rig which it seeks to use in
exploration tests in Nevada in order to offset some portion of the cost of
participating in specific exploration prospects. The Company has an ongoing
program of prospect generation and exploration and has budgeted approximately
$1.5 million for its share of western United States exploration costs through
1997. See "Use of Proceeds."
Cobb Creek. The Cobb Creek prospect is located in Hamlin Valley, Nevada,
near the Utah border approximately 225 miles southwest of Salt Lake City. The
Company has identified a large undrilled anticline covering approximately nine
square miles. The Company identified this prospect through the reprocessing of
geological and geophysical data previously collected by other parties. The
Company, as operator, intends to drill an exploratory well in the Cobb Creek
prospect in late 1996 with a group of industry partners.
Lake Valley. The Lake Valley region of Nevada is similar to Railroad
Valley, Nevada's most prolific producing region that lies approximately 60 miles
west of Lake Valley, Utah. The Company, with a group of industry partners,
identified and drilled one structural feature in Lake Valley in 1993. This well
was eventually plugged. In 1994, the Company and a group of industry partners
purchased and reprocessed approximately 70 line miles of seismic data and
acquired additional geophysical and geochemical data over approximately 70,000
acres. The initial operator discontinued its western United States exploration
activities and its rights reverted to the Company. The Company became the
operator and, based on the reprocessed and reinterpreted seismic data,
identified six potential exploratory drillsites. The Company has since
concluded that additional test wells are warranted and it is currently seeking
additional industry partners to join in this program. The Company now holds
approximately 13,863 gross (12,819 net) acres in the Lake Valley prospect.
Hamlin Valley. Hamlin Valley is located about 50 miles east of Lake Valley,
Utah, near the Nevada state border. The Company was attracted to Hamlin Valley
because of the presence of an oil seep and the availability of geological,
geochemical and geophysical data. Further exploration of this prospect is
planned for 1997, subject to the Company's ability to form an industry drilling
group. The Company's current plan consists of acquiring drillsite seismic and
other geophysical data to further define and help provide information for
potential drillable structures.
PROPERTIES
All of the Company's producing properties were acquired as part of the
Montana Acquisition. The Company is the operator of all its producing
properties, except for the Bacon Flat well.
Cut Bank Field
Production in the Cut Bank field commenced with the discovery of oil in the
1940s at an average depth of approximately 2,900 feet. The Southwest Cut Bank
Sand Unit, which is the core of the Company's interest in the field, was
originally formed by the Phillips Petroleum Company in 1963, which initiated a
pilot waterflood in 1964 and eventually converted the entire unit to a
waterflood with producing wells on 40 and 80 acre spacings. The Company owns
interests in 135 producing oil wells, 36 water injection wells and three water
supply wells in the Cut Bank field. Working interests owned by the Company in
the field range from 99.5% to 100%. Oil production from this field in 1995
averaged 342 Bpd (285 Bpd net). As of December 31, 1995, the Company's interest
in the Cut Bank field represented 95.8% of the Company's total PV-10 Value.
Bears Den Field
The Bears Den field in Montana was discovered in 1929 and has been under
waterflood since 1990. Oil is produced at an average depth of approximately
2,430 feet. The Company owns interests in five producing oil wells, four water
injection wells and one water supply well in the Bears Den field. The Company's
working interest in this property is 48.0%.
Trap Spring Field
Discovered in 1976, the Trap Spring field produces from fractured volcanics
at an average depth of 3,700 feet. The Company owns interests in six producing
oil wells in the Trap Spring field. Working interests owned by the Company in
this field range from 21.6% to 50.5%.
Bacon Flat Field
The first well in the Bacon Flat field was drilled in 1981 and produced
over 300,000 Bbls during its seven-year productive life from a depth of
approximately 6,000 feet. The Company owns a 16.9% working interest in a
different Bacon Flat well which was drilled in 1993.
PRODUCTION AND MARKETING
The following table sets forth the Company's average net daily oil
production, average sales price and average production costs associated with
such production during the periods indicated. The Company had no production
prior to 1994 and no gas production for any of the periods for which information
is presented.
YEAR ENDED DECEMBER THREE MONTHS ENDED MARCH
31, 31,
------------------- ------------------------
1994 1995 1995 1996
--------- -------- ---------- -----------
Average daily oil production
(Bbl) ................ 436 369 380 347
Average sales price (per
Bbl) ................. $ 14.07 $ 14.67 $ 14.92 $ 15.98
Average production costs
(per Bbl)(1) ......... $ 5.81 $ 9.42 $ 9.87 $ 10.29
(1)Production costs for 1994 reflect the fact that after the Company acquired
the properties in the Montana Acquisition in April 1994, it continued
routine maintenance consistent with the practice of the previous owners. In
late 1994, the Company initiated an infill drilling and enhanced waterflood
operation on portions of the Cut Bank property and, therefore, increased the
level of maintenance to support long-term increases in production expected
to result from such development. In addition, abnormally wet weather
conditions in the late spring of 1995 resulted in increased labor costs.
Production cost per Bbl also increased due to the substantial decline in
production from the Bacon Flat well, which had extremely low production
costs, due to formation damage. Because of the fixed costs that are included
in average production costs, any production increases resulting from the
development work described above should result in a moderate decrease in the
average production cost per Bbl.
The Company sells oil at posted field prices to one of several purchasers
in each of the areas in which it has productive oil wells. For the years ended
December 31, 1994 and 1995, 89% and 85%, respectively, of the Company's total
oil sales were to CENEX, a regional refiner and marketer. Posted prices are
published and are generally competitive among the various purchasers. The crude
oil sales contracts are terminable by either party on 30 days' notice. The
Company has benefited in recent months from increases in the prices at which it
is able to sell oil produced in Montana and Nevada, but will be adversely
affected by any decline in prevailing oil prices. The Company has no gas
production.
OIL RESERVES
The Company's oil properties containing proved oil reserves are located in
Montana and Nevada. All information set forth in this Prospectus regarding
proved reserves, related future net revenues and PV-10 Value, is taken from the
report of Larry D. Krause, independent petroleum engineer, Billings, Montana.
Mr. Krause's estimates were based upon the review of production history and
other geological, economic, ownership and engineering data provided by the
Company. In accordance with SEC guidelines, the Company's estimates of future
net revenues from the Company's proved reserves and the present value thereof
("PV-10 Value") are made using a sales price of $16.48, the weighted average oil
sales price in effect as of December 31, 1995, the date of such estimate, and
are held constant throughout the life of the properties. The information
contained herein is qualified in its entirety by the Summary Reserve Report of
Larry D. Krause included as Appendix A to this Prospectus. See "Risk Factors--
Caution Respecting Forward-Looking Information," "Factors Relating to Oil and
Gas Industry: Uncertainty of Reserve Estimates and Future Net Reserves" and
"Factors Relating to the Oil and Gas Industry: Volatility of Commodity Prices
and Markets."
DECEMBER 31, 1995
ESTIMATED --------------------------------
PROVED RESERVES OIL(BBL) PV-10 VALUE(1)
------------------------- --------------------------------
DEVELOPED PRODUCING
Cut Bank ................. 2,239,528 $5,433,246
Other .................... 188,320 988,413
------------ ------------
Total .................. 2,427,848 6,421,659
DEVELOPED NONPRODUCING
Cut Bank ................. 254,825 1,314,330
Other .................... -- --
------------ ------------
Total .................. 254,825 1,314,330
UNDEVELOPED
Cut Bank ................. 2,574,500 16,045,459
Other .................... -- --
------------ ------------
Total .................. 2,574,500 16,045,459
TOTAL PROVED RESERVES....... 5,257,173 $23,781,448
============ ============
(1)The operating costs, based on information provided by the Company, represent
actual recurring expenses for each of the properties, held constant for the
purposes of the evaluation, except that a 6% reduction in production taxes
for the Cut Bank field was recognized to reflect the effect of an agreement
signed on December 31, 1995, between Montana and the Blackfoot Tribe which
will eliminate double taxation on wells on the Blackfoot Reservation. See
the Summary Reserve Report of Larry D. Krause included as Appendix A to this
Prospectus and Company's Consolidated Financial Statements and Notes 14 and
15 thereto.
DRILLING ACTIVITIES
The following table sets forth the wells drilled and completed by the
Company during the periods indicated. Wells drilled during 1994 and 1995 include
drilling activities on the Company's Montana and Nevada properties acquired
effective April 1, 1994. The Company has not participated in the drilling of
any wells since December 31, 1995.
YEARS ENDED DECEMBER 31,
------------------------------------------
1993 1994 1995
------------ ------------ -------------
GROSS NET GROSS NET GROSS NET
----- ----- ----- ----- ----- ------
DEVELOPMENT WELLS:
Producing ................. -- -- 5.0 3.8 5.0 5.0
Non-producing ............. -- -- -- -- -- --
----- ----- ----- ----- ----- ------
Total ............... -- -- 5.0 3.8 5.0 5.0
===== ===== ===== ===== ===== ======
EXPLORATORY WELLS:
Producing ................... -- -- -- -- -- --
Non-producing ............... 2.0 0.8 2.0 1.1 2.0 1.1
----- ------ ----- ----- ----- ------
TOTAL ................. 2.0 0.8 2.0 1.1 2.0 1.1
===== ====== ===== ===== ===== ======
The above does not include five water injector wells drilled in each of
1994 and 1995 as part of the Cut Bank field infill development program. No gas
wells were drilled by the Company during the indicated period.
WELLS AND ACREAGE
As of December 31, 1995, the Company had 155 gross and 147 net producing
oil wells, all of which are in Montana and Nevada. The following table sets
forth the Company's gross and net acres of developed and undeveloped oil and gas
leases as of March 31, 1996.
DEVELOPED UNDEVELOPED
ACREAGE ACREAGE
------------- ---------------
GROSS NET GROSS NET(1)
------ ----- ------ ------
DOMESTIC (IN THOUSANDS)
Montana........... 11 10 1 1
Other............. -- -- 42 41
------ ----- ------ ------
Total 11 10 43 42
POLAND.............. -- -- 2,375 1,187
------ ----- ------ ------
TOTAL............... 11 10 2,418 1,229
====== ===== ====== ======
(1) Gives effect to the assignment of a beneficial 50% interest in the Baltic
Concession to RWE-DEA under the Company's joint exploration arrangement
discussed above.
TITLE TO PROPERTIES
Nearly all of the Company's domestic working interests are held under
leases from third parties. The Company usually seeks to obtain a title opinion
concerning such properties prior to the commencement of drilling operations.
The Company has obtained such title opinions or other third party review on
nearly all of its producing properties and is of the opinion that it has
satisfactory title to all such properties sufficient to meet standards generally
accepted in the oil and gas industry. The Company's properties are subject to
common burdens, including customary royalty interests and liens for current
taxes, but the Company has concluded that such burdens do not materially
interfere with the use of such properties. Further, the Company believes that
the economic effects of such burdens have been appropriately reflected in the
Company's acquisition costs of such properties. All of the Company's producing
properties are mortgaged to secure repayment of the outstanding bank
indebtedness, which will be repaid with net proceeds from the Offering. See
"Use of Proceeds." Title investigation before the acquisition of undeveloped
properties is less thorough than that conducted prior to drilling, as is
standard practice in the industry. A title opinion is typically obtained prior
to the commencement of drilling exploratory wells.
With respect to the Baltic Concession, the Company relies on sovereign
ownership of such mineral rights by the Polish government and has not conducted
and does not plan to conduct any independent title examination. The Company has
obtained final documentation with the advice of Polish legal counsel to comply
with Polish laws.
BALTIC CONCESSION TERMS
In 1994, Poland adopted the Geological and Mining Law which outlined the
process for energy companies to obtain domestic exploration and exploitation
rights. In August 1995, the Ministry of Environmental Protection, Natural
Resources and Forestry of the State Treasury granted exploration rights covering
the Baltic Concession to the Company's wholly-owned Polish subsidiary. The
Company subsequently acquired the licenses required for surface access.
The Company's exploration rights are divided into two successive three-year
phases expiring in December 1998 and December 2001, respectively. To retain its
rights in the Baltic Concession, the Company is required to commence one
exploratory well by December 1996, and a second exploratory well by December
1999. The Company must select the most promising 50% of the acreage of the
Baltic Concession and relinquish the remaining 50% at the end of the first
three-year phase. The Company is required to pay an annual fee of $33,333 and
to spend at least $25,000 annually in the training of Polish citizens. To
date, the Company believes that it has satisfied all material terms of the
Baltic Concession agreement.
If a commercially viable discovery of oil were made, the Company would be
required to apply for an exploitation license with a term of 30 years and
thereafter during the productive life of the property. At this point, the
Company will be obligated to pay a fee to be negotiated within the range of
0.001% to 0.05% of the market value of the estimated recoverable reserves in
place, payable in five equal annual installments. The Company's activities in
Poland are subject to the risk of changes in the royalty rate to be paid on
production. Poland's Council of Ministers sets a base royalty rate for the
extraction of each mineral. The base royalty rate for oil is currently 6%, but
could be increased unilaterally to 10% by the Council of Ministers. In
addition, the Polish government entity which grants concessions can set the
royalty rate for any particular oil and gas field in a range between 50% and
150% of the base royalty rate, depending on the economic viability of such
field.
OPERATIONAL HAZARDS AND INSURANCE
The Company is engaged in the drilling and production of oil, and as such,
its operations are subject to the usual hazards incident to the industry. These
hazards include, but are not limited to, blowouts, cratering, explosions,
uncontrollable flows of oil, natural gas or well fluids, fires, pollution,
releases of toxic gas, and other environmental hazards and risks. These hazards
can cause personal injury and loss of life, severe damage to and destruction of
property and equipment, pollution or environmental damage and suspension of
operations.
In order to lessen the effects of these hazards, the Company maintains
insurance of various types to cover its domestic operations. The Company has
$5.0 million of general liability insurance. This insurance, however, does not
cover all of the risks involved in oil exploration, drilling and production of
oil and, if coverage does exist, may not be sufficient to pay the full amount of
such liabilities. The Company may not be insured against all losses or
liabilities which may arise from all hazards because such insurance is
unavailable at economic rates, because of limitation on the insurance policy or
because of other factors. For example, the Company does not maintain insurance
against risks related to violations of environmental laws. The occurrence of a
significant adverse event that is not fully covered by insurance could have a
materially adverse effect on the Company. Further, the Company cannot assure
that it will be able to maintain adequate insurance in the future at rates it
considers reasonable.
The Company has investigated preliminarily risk management practices and
the availability of casualty and liability insurance in Poland. In accordance
with the agreement with RWE-DEA, at such time as the Company's Polish subsidiary
initiates drilling activities or acquires tangible assets, the Company would be
required to obtain such insurance coverage. There can be no assurance that the
Company will be able to obtain insurance coverage for proposed activities in
Poland or that any insurance obtained will provide coverage customary in the
industry in the United States or comparable to the insurance now maintained by
the Company. The failure or inability to obtain adequate insurance would expose
the Company to additional risks and constitute an event of default under the
agreement with RWE-DEA.
GOVERNMENT REGULATION--UNITED STATES
State and Local Regulation of Drilling and Production
State regulatory authorities have established rules and regulations
requiring permits for drilling, drilling bonds and reports concerning drilling
and producing activities. Such regulations also cover the location of wells,
the method of drilling and casing wells, the surface use and restoration of well
locations, the plugging and abandoning of wells, the density of wells (well
spacing) within a given area and other matters.
Environmental Regulations
The Company's activities are subject to numerous federal and state laws and
regulations concerning the storage, use and discharge of materials into the
environment, the remediation of environmental impacts and other matters relating
to environmental protection, all of which may adversely affect the Company's
operations and the costs of doing business. There can be no assurance that
future legislation or administrative regulations or interpretations will not
impose stricter requirements that could have an adverse impact on the operating
costs of the Company and the oil and gas industry in general. The Company does
not currently believe that it will be required in the near future to expend
material amounts due to environmental laws and regulations. A bond is posted
with the Environmental Protection Agency as security for the Company's
compliance with the environmental requirements administered by that agency
respecting the water injection wells in the Company's Montana producing
properties.
Federal and Bureau of Indian Affairs Leases
A substantial part of the Company's Montana producing properties are
operated under oil and gas leases issued by the Bureau of Land Management or by
certain Indian nations under the supervision of the Bureau of Indian Affairs.
These activities must comply with rules and orders that regulate aspects of the
oil and gas industry, including drilling and operations on these leases and the
calculation and payment of royalties to the federal government or the governing
Indian nation. Operations on Indian lands must also comply with applicable
requirements of the governing body of the tribe involved including, in some
instances, the employment of tribal members.
Safety and Health Regulations
The Company must also conduct its operations in accordance with various
laws and regulations concerning occupational safety and health. Currently, the
Company does not foresee expending material amounts to comply with these
occupational safety and health laws and regulations. However, since such laws
and regulations are frequently changed, the Company is unable to predict the
future effect of these laws and regulations.
GOVERNMENT REGULATIONS--POLAND
The Company's activities in Poland are subject to political, economic and
other uncertainties, including the adoption of new laws, regulations or
administrative policies that may adversely affect the Company or the terms of
its exploration or production rights; political instability and changes in
government or public or administrative policies; export and transportation
tariffs and local and national taxes; foreign exchange and currency restrictions
and fluctuations; repatriation limitations; inflation; environmental regulations
and other matters. See "Risk Factors--Factors Relating to Activities in
Poland."
EMPLOYEES AND CONSULTANTS
As of June 1, 1996, the Company had 28 employees, consisting of six in Salt
Lake City, Utah; 20 in the Company's Oilmont, Montana, field office; and two in
Houston, Texas. None of the Company's employees is represented by a collective
bargaining organization, and the Company considers its relationship with its
employees to be satisfactory. In addition to its employees, the Company
regularly engages technical consultants to provide specific geological,
geophysical and other professional services.
OFFICES AND FACILITIES
The Company's executive offices, located in approximately 1,650 square feet
of office space at 3006 Highland Drive, Salt Lake City, Utah, are rented at
$1,413 per month under a month to month agreement. The Company owns a 16,160
square foot office building located at the corner of Central and Main in
Oilmont, Montana. The Company utilizes 4,800 square feet for its field office
and rents the remaining space to unrelated third parties for $880 per month. The
registered address of the Company's Polish subsidiary is Wal Miedzesynski 646,
03-994 Warszawa, Poland, where an office is provided to this subsidiary at
nominal cost by an unrelated person.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings, and no
material legal proceedings have been threatened by the Company or, to the best
of its knowledge, against it.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
NAME TITLE
David N. Pierce....... Chairman of the Board, President and
Chief Executive Officer
Andrew W. Pierce...... Vice-President, Secretary and Director
Scott J. Duncan....... Vice-President, Treasurer and Director
Thomas B. Lovejoy..... Vice Chairman and Director
Peter L. Raven........ Director
Jerzy B. Maciolek .... Vice-President, International Exploration
David N. Pierce, age 50, has been President and a Director of the Company
since March 1992. For over three years previously, he was Vice-President and
director of the Company's predecessor, which he co-founded with his brother,
Andrew W. Pierce, in January 1989. He became president and director of the
Company on its acquisition of Exploration in March 1992. Mr. Pierce has been
engaged in an executive capacity with privately held oil and gas companies since
1979 and has served exclusively in such a capacity with Exploration since its
formation and with the Company since its acquisition of Exploration. He is an
attorney with over 20 years' experience in natural resources, securities and
international business law. He is a graduate of Princeton University and
Stanford Law School.
Andrew W. Pierce, age 48, has been Vice-President and a Director of the
Company since March 1992. For over three years previously, he was the President
and a Director of the Company's predecessor, which he co-founded with his
brother, David N. Pierce, in January 1989. He has over 20 years' oil and gas
exploration, drilling, production and leasing experience. Mr. Pierce has held
primary management and line responsibility for drilling and completion
operations on more than 60 oil and gas wells in Montana, Wyoming, Utah and
Nevada over the last 20 years and supervises all field operations of the
Company.
Scott J. Duncan, age 47, has been Vice-President, Treasurer and a Director
of the Company since May 1993. He was a financial consultant to the Company
from its inception in 1992 through April 1993, when he became a full-time
employee. From December 1988 through February 1992, Mr. Duncan served as a
director and principal shareholder of MusicNet Holding Company, Salt Lake City,
Utah. In March 1989, he became secretary/treasurer of MusicNet and in December
1989 was elected its president. He continued in those positions until February
1992. Mr. Duncan served as president, director and principal shareholder of
Hastings Corp., Salt Lake City, Utah, from May 1990 until January 1992, when it
acquired Anodyne Corporation, a Whitmore Lake, Michigan, manufacturer of a
patented lift device. Mr. Duncan is a graduate of the University of Utah School
of Business.
Thomas B. Lovejoy, age 60, joined the Company as Vice-Chairman of the Board
of Directors and a Director in October 1995 and has been engaged in financial
advisory and investment banking activities since 1961. In November 1992, Mr.
Lovejoy formed Lovejoy Associates, Inc., Greenwich, Connecticut, to provide
financial strategic advice respecting private placements, mergers and
acquisitions and other financial alternatives. For three years prior to forming
Lovejoy Associates, Inc., Mr. Lovejoy was managing director and head of natural
resource, utility and mining groups for Prudential Securities, Inc., New York,
New York. From 1980 to 1988, he was managing director and head of the energy
and natural resources group of Paine Webber, Inc. Since 1993, Mr. Lovejoy has
been a director of Scaltech, Inc., Houston, Texas, which processes petroleum
refinery oily waste. Mr. Lovejoy received an MBA from Harvard Business School
and a B.S. from the Massachusetts Institute of Technology.
Peter L. Raven, age 57, joined the Company as a director in March 1996.
For over 25 years, Mr. Raven was employed by Ultramar, PLC, London, England, a
British holding company for a world-wide group of operating companies engaged in
the exploration for, and production of, crude oil and natural gas and the
shipping, refining and marketing of crude oil and petroleum products. From 1957
through 1985, Mr. Raven held various positions with Ultramar and its U.K. and
American subsidiaries. From 1985 through 1988, Mr. Raven was executive vice
president, and from 1988 through 1992, was president of American Ultramar.
During this time, he also served as the chief financial officer of Ultramar PLC.
Mr. Raven received his education from the Downside School in England, obtained
his associate's degree from the Institute of Chartered Accountants in 1962, and
graduated from the Harvard Business School Advanced Management Programme in
1987.
Jerzy B. Maciolek, age 46, who was instrumental in the Company's efforts to
secure its rights to its Baltic Concession, became employed by the Company in
September 1995 and was elected Vice-President of International Operations in
April 1996. Mr. Maciolek also serves as a member of POGC's advisory board.
Prior to becoming a Company employee, Mr. Maciolek was a private consultant for
in excess of five years, including consulting on the hydrocarbon potential of
Poland and Kazakhstan, translating and interpreting geological and geophysical
information for several integrated hydrocarbon potential reports on Poland and
Kazakhstan, and developing applied integrated geophysical interpretations over
gold mines in Nevada, California and Mexico. Since 1992, Mr. Maciolek has also
provided consulting services regarding its exploration projects in the western
United States and Poland. Mr. Maciolek received a master's degree in
exploration geophysics from the Mining and Metallurgy Academy in Krakow,
Poland.
KEY EMPLOYEES
Eva K. Sokolowska, age 31, who was instrumental in securing the Company's
exploration license for the Baltic Concession, joined the Company in June 1995
as Manager of International Relations and Governmental Liaison. Between 1989
and 1994, Ms. Sokolowska has been involved in various projects, including
consulting on the hydrocarbon potential of Poland and Kazakhstan and translating
geological information for several integrated hydrocarbon potential reports on
Poland and Kazakhstan. Ms. Sokolowska received a degree in business
administration from Warsaw College of business and Management in 1984.
James A. Giauque III, age 42, joined the Company in November 1995 as its
controller. Mr. Giauque began his 19 years in public accounting with Coopers &
Lybrand L.L.P. in 1977 working in its audit department until 1990. His clients
included public companies in the mineral extractive industry. In 1990, he
established his own accounting practice specializing in financial reporting
requirements and investigative auditing, continuing in such practice until
joining the Company. Mr. Giauque received his MBA and B.A. in accounting from
the University of Utah.
EXECUTIVE COMPENSATION
Summary Compensation
The following table sets forth, for the last three fiscal years of the
Company, the annual and long term compensation earned by, awarded to or paid to
the person who was chief executive officer of the Company as of the end of the
last fiscal year. None of the Company's other executive officers as of the end
of the last fiscal year received total annual salary and bonuses in excess of
$100,000 for all services rendered in all capacities to the Company and its
subsidiaries.
LONG TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
(A) (B) (C) (D) (E) (F) (G) (H) (I)
OTHER SECURITIES
ANNUAL RESTRICTE UNDERLYING ALL
YEAR COMPEN- D STOCK OPTIONS/ LTIP OTHER
NAME AND ENDED SALARY BONUS SATION AWARD(S) SARS PAYOUTS COMPEN-
PRINCIPAL DEC. ($)(1) ($) ($) ($) (NO.) ($) SATION
POSITION 31, ($)
David N. Pierce1995 $120,000-- -- -- 100,000 -- --
President 1994 $99,569-- -- -- 500,000 -- --
(CEO)
1993 $90,000-- -- -- 150,000 -- --
(1)Figures shown for 1993 and 1994 represent the compensation component of
amounts paid to Pierce-Arrow Management, Inc., owned by David N. Pierce and
Andrew W. Pierce.
Option/SAR Grants in Last Fiscal Year
The following table sets forth information respecting all individual grants
of options and stock appreciation rights ("SARs") made during the last completed
fiscal year to the chief executive officer of the Company.
(A) (B) (C) (D) (E)
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO
OPTIONS/SARS EMPLOYEES EXERCISE OR
NAME GRANTED DURING FISCAL BASE PRICE EXPIRATION
(NO.) YEAR ($/SHARE) DATE
David N. Pierce October 6,
President (CEO) 100,000 8.5% $3.00 2000
On October 6, 1995, the Company granted options to purchase 100,000 shares
of Common Stock, subject to adjustment for certain events of dilution, to Mr.
David Pierce. See below for a discussion of the terms of such options.
Aggregate Option/SAR Exercises in Last Fiscal Year and Year End Option/SAR
Values
The following table sets forth information respecting the exercise of
options and SARs during the last completed fiscal year by the chief executive
officer of the Company and the fiscal year end values of unexercised options and
SARs.
(A) (B) (C) (D) (E)
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS/SARS AT
OPTIONS/SARS AT FY END ($)
FY END (NO.)
SHARES
NAME ACQUIRED ON VALUE REALIZED EXERCISABLE/ EXERCISABLE/
EXERCISE (NO.) ($) UNEXERCISABLE UNEXERCISABLE
David N.
Pierce
President 350,000/400,000
(CEO) -- -- (1) $56,250/-- (2)
(1)Includes options to purchase 100,000 shares of Common Stock at any time
through October 6, 2000, at an exercise price of $3.00 per share; 150,000
shares of Common Stock at any time through May 7, 1998, at an exercise price
of $1.50 per share; and 500,000 shares of Common Stock exercisable in
installments of 100,000 shares per year commencing in June 1995, at an
exercise price of $3.00 per share.
(2)Based on the bid price for the Common Stock of $1.875 on December 31, 1995.
Executive Compensation and Benefits
On June 10, 1994, the Company entered into three-year employment
agreements, effective January 1, 1995, with David N. Pierce and Andrew W.
Pierce, each of whom is an officer and director, providing for annual salaries
during 1995 of $120,000 and $90,000, respectively, with annual increases of at
least 7.5%, as determined by the Board of Directors or a compensation committee.
Each employment agreement, as amended, provides that on the initiation of the
first test well in the Baltic Concession, the executive employee is entitled to
receive a bonus in the form of a $100,000 credit that may be applied against the
exercise of options to purchase Common Stock. The term of such employment
agreements are automatically extended for an additional year on the anniversary
date of each such agreement. In the event of termination of employment
resulting from a change in control of the Company not approved by the Board of
Directors, each of the above employees would be entitled to a termination
payment equal to 150% of his annual salary at the time of termination and the
value of previously granted employee benefits, including the repurchase of
outstanding options.
OPTIONS AND WARRANTS TO OFFICERS, DIRECTORS AND EMPLOYEES
The Company currently has outstanding options to purchase an aggregate of
2,300,000 shares that have been granted to officers, directors and employees of
the Company. Of such options, 825,000 contain vesting limitations contingent on
continuing association with the Company. Options held by officers, directors
and employees are exercisable at prices of between $1.50 and $3.00 per share.
Options issued to executive officers and directors contain terms providing that
in the event of a change in control of the Company and at the election of the
optionee, in consideration of the cancellation of unexercised options, the
Company will pay to the optionee an amount equal to the number of unexercised
options multiplied by the amount by which the fair market value of the Common
Stock as of the date preceding the date of the change of control exceeds the
option exercise price. The grants of options to officers and directors were not
the result of arm's length negotiations.
STOCK OPTION AND AWARD PLAN
On August 31, 1995, the Company adopted the 1995 Stock Option and Award
Plan (the "Plan"). The Plan is administered by a committee (the "Committee")
consisting of the Board of Directors or a committee of the board. Under the
Plan, the Committee may grant stock options, which may be incentive stock
options ("ISOs") as defined in the Internal Revenue Code, stock awards or
options which do not qualify as ISOs to employees and officers. All employees
of the Company are eligible to participate in the Plan. A maximum of 500,000
shares, subject to adjustment for certain events of dilution, are available for
grant under the Plan. During 1995, the Company granted to employees, none of
whom was an executive officer or director, options to purchase an aggregate of
50,000 shares of Common Stock at $1.50 per share, the approximate fair market
value of the Common Stock as of the date of grant, exercisable through August
30, 2000. The Company intends to submit the Plan for approval by the Company's
shareholders at the 1996 annual shareholder meeting.
BOARD COMMITTEES
In June 1996, the Board of Directors appointed Messrs. Lovejoy and Raven to
the audit and compensation committees. Such committees have not yet met.
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of the date of this Prospectus, the
name, address and shareholdings of each person who owns of record, or was known
by the Company to own beneficially, 5% or more of the Common Stock currently
issued and outstanding; the name and shareholdings of each director; and the
shareholdings of all executive officers and directors as a group. Unless
otherwise indicated, all shares consist of Common Stock and all such shares are
owned beneficially and of record by the named person or group.
PERCENTAGE OF
OWNERSHIP(2)
--------------------
BEFORE AFTER
NAME OF PERSON OR GROUP NUMBER(1) OFFERING OFFERING
- ----------------------- --------- --------- ---------
DIRECTORS
David N. Pierce 977,993 (3)(7) 10.3% 7.9%
Andrew W. Pierce 910,000 (4)(7) 9.7% 7.3%
Scott J. Duncan 292,000 (5)(7) 3.3% 2.5%
Thomas B. Lovejoy 769,000 (6)(7) 8.5% 6.4%
Peter L. Raven 32,500 0.4% 0.3%
ALL EXECUTIVE OFFICERS AND
DIRECTORS AS A GROUP (6 3,181,493 29.6% 23.1%
PERSONS)
PRINCIPAL STOCKHOLDERS
MML Management, Ltd. 595,222 (9) 7.0% 4.9%
19 Willis Street
Armadale 3143
Melbourne, Australia
The Wood River Trust 500,000 (8) 5.9% 4.3%
370 Lexington Avenue, No.
400
New York, New York 10017
National Australia Trustees 447,864 (10) 5.3% 3.8%
271 Collins Street
Melbourne 3000
Australia
(1)Except as otherwise noted, shares are owned beneficially and of record and
such record shareholder has sole voting, investment and dispositive power.
(2)Calculations of percentages of ownership outstanding for each individual
assumes the exercise of options held by that individual to which the
percentage relates, including options not yet fully vested. Percentages
calculated for totals of all executive officers and directors as a group
assume the exercise of all options held by the indicated group.
(3)Includes 127,493 shares held by Mr. Pierce jointly with his wife, Mary
Phillips; 20,000 shares held by Mary Phillips; 40,000 shares held by Mr.
Pierce as custodian for minor children; 20,000 shares held by Alysa Thirsk,
an adult child living in Mr. Pierce's household; and 20,000 shares held by
Mary Phillips as custodian for a minor child. Also includes 750,000 shares
that are acquirable on exercise of options held by Mr. Pierce. Options to
purchase 300,000 shares are subject to equal annual vesting over the next
three years but are reflected in the table as being fully vested and
exercisable. Mr. Pierce is deemed to hold or share voting and dispositive
power over all of such shares. Mr. Pierce's address is in care of the
Company.
(4)Includes 10,000 shares held by a minor child. Also includes 700,000 shares
that are acquirable on exercise of options held by Mr. Pierce. Options to
purchase 300,000 shares are subject to equal annual vesting over the next
three years but are reflected in the table as being fully vested and
exercisable. Mr. Pierce is deemed to hold or share voting and/or
dispositive power over all of such shares. Mr. Pierce's address is in care
of the Company.
(5)Includes 10,000 shares held solely by Mr. Duncan; 172,000 shares held by Mr.
Duncan jointly with his wife, Cathy H. Duncan; 20,000 shares held solely by
Cathy H. Duncan; and 40,000 shares held by Cathy Duncan as custodian for
minor children. Includes 50,000 shares that are acquirable on exercise of
options held by Mr. Duncan. Mr. Duncan is deemed to hold or share voting
and/or dispositive power over all of such shares.
(6)Includes 12,000 shares held in trust for the benefit of Mr. Lovejoy's
children, 49,500 shares held in Mr. Lovejoy's IRA account and 208,000 shares
held by Lovejoy Associates, Inc., (of which Mr. Lovejoy is sole owner).
Includes 350,000 shares acquirable on exercise of options held by Mr.
Lovejoy. Such options include options to purchase 200,000 shares that are
subject to vesting requirements. Mr. Lovejoy is deemed to hold or share
voting and/or dispositive power over all of such shares. Mr. Lovejoy's
address is 48 Burying Hill Road, Greenwich, Connecticut 06831.
(7)Includes options give the holders the right to acquire shares of Common Stock
at prices ranging from $1.50 to $3.00 per share with various expiration dates
ranging from May 1998 to June 2004. Certain of the options are subject to
vesting requirements but are reflected in the table as being fully vested and
exercisable. See "Management--Executive Compensation."
(8)Includes 25,000 shares of Common Stock held by the Rumsey Royalty Trust. The
Wood River Trust and Rumsey Royalty Trust are both affiliates of Sunshine
Pacific Corporation.
(9)Includes warrants to acquire 43,194 shares of Common Stock issuable on
exercise of warrants held by MML Management, Ltd.
(10)Includes 36,500 shares of Common Stock issuable on exercise of warrants held
by National Australian Trustees.
CERTAIN TRANSACTIONS
Unless otherwise indicated, the terms of the following transactions between
related parties were not determined as a result of arm's length negotiations.
AMOUNTS DUE TO AND FROM AFFILIATES
During 1994, David N. Pierce and Andrew W. Pierce provided their
management services to the Company through Pierce-Arrow Management, Inc.
("Pierce-Arrow"), a company which they own. This arrangement was terminated
December 31, 1994, and David N. Pierce and Andrew W. Pierce became employees of
the Company. As of December 31, 1995, the Company owed Pierce-Arrow a total of
$95,005, including interest at 9% per annum which totals $17,997, for such
services previously provided. In the first quarter of 1996 the Company paid
Pierce-Arrow $60,000, reducing the outstanding balance due Pierce-Arrow to
$35,551 (including interest) as of March 31, 1996.
INTERIM LOAN COMMITMENT; CONSULTING AGREEMENT
Effective August 3, 1995, the Company entered into a loan agreement with an
existing shareholder, Thomas B. Lovejoy, which provided for borrowing, with
interest at the shareholder's borrowing rate plus 2%, through March 31, 1996, up
to $430,000, reduced by the amount of any equity investment in the Company by
such shareholder after August 1, 1995. As a result of Mr. Lovejoy's subsequent
equity investment of $370,000, the available borrowing under this line of credit
was reduced to $60,000. No amounts were borrowed by the Company under this
credit facility prior to its expiration on March 31, 1996.
On August 3, 1995, the Company also agreed to engage Mr. Lovejoy's company,
Lovejoy Associates, Inc., as financial consultant. The parties subsequently
entered into a formal consulting agreement, effective August 3, 1995, with
Lovejoy Associates, Inc., under which it advises the Company respecting future
financing alternatives, identifying possible sources of debt and equity
financing, with particular emphasis on funding for the Baltic Concession and
the Company's relationship with the investment community at a fee of $10,000 per
month commencing October 15, 1995, and continuing through December 31, 1997.
The Company agreed to reimburse the consultant for out-of-pocket expenses.
In consideration of the consulting agreement and a loan agreement now
expired, the Company issued to Lovejoy Associates, Inc., 200,000 shares of
restricted Common Stock and granted to Mr. Lovejoy options to purchase 350,000
shares of Common Stock at an exercise price of $3.00 per share. The options
became immediately exercisable to purchase 150,000 shares of Common Stock and
subsequently become exercisable respecting an additional 100,000 shares on
December 31, 1996, and an additional 100,000 shares on December 31, 1997, unless
the consulting agreement with Lovejoy Associates, Inc., has previously been
terminated by the Company for cause. The options may be exercised at any time
within five years after they become exercisable. The Company recognized
$400,000 as compensation expense in connection with the issuance of such 200,000
shares. The Company has agreed to register the resale of shares of Common Stock
issuable on the exercise of the option. At the optionee's election, any tax
withholding obligation may be satisfied by the optionee tendering shares of
Common Stock to the Company or by the Company withholding shares otherwise
issuable on exercise of the options. The foregoing was the result of arm's
length negotiations.
DESCRIPTION OF SECURITIES
The Company is authorized to issue 20,000,000 shares of Common Stock,
$0.001 par value; and 5,000,000 shares of preferred stock, $0.001 par value.
PREFERRED STOCK
Under the Company's Articles of Incorporation, the Company's Board of
Directors is authorized, without shareholder action, to issue preferred stock in
one or more series and to fix the number of shares and rights, preferences and
limitations of each series. Among the specific matters that may be determined
by the Board of Directors are the dividend rate, the redemption price, if any,
conversion rights, if any, the amount payable in the event of any voluntary
liquidation or dissolution of the Company and voting right, if any. The Company
has 17,500 shares of preferred stock, with an aggregate liquidation preference
of $17,500, issued and outstanding as of March 31, 1996.
COMMON STOCK
As of the date of this Prospectus, the Company had 8,704,569 shares of
Common Stock issued and outstanding. The holders of Common Stock are entitled
to one vote per share on each matter submitted to a vote at any meeting of
stockholders. Holders of Common Stock do not have cumulative voting rights, and
therefore, a majority of the outstanding shares voting at a meeting of
stockholders are able to elect the entire Board of Directors, and if they do so,
minority stockholders would not be able to elect any members to the Board of
Directors. The Company's bylaws provide that a majority of the issued and
outstanding shares of the Company constitutes a quorum for stockholders'
meetings, except with respect to certain matters for which a greater percentage
quorum is required by statute.
Stockholders of the Company have no preemptive rights to acquire additional
shares of Common Stock or other securities. The Common Stock is not subject to
redemption and carries no subscription or conversion rights. In the event of
liquidation of the Company, the shares of Common Stock are entitled to share
equally in corporate assets after satisfaction of all liabilities and the
payment of any liquidation preferences.
Holders of Common Stock are entitled to receive such dividends as the Board
of Directors may from time to time declare out of funds legally available for
the payment of dividends. The Company seeks growth and expansion of its
business through the reinvestment of profits, if any, and does not anticipate
that it will pay dividends on the Common Stock in the foreseeable future.
The Company has reserved for issuance an aggregate of 3,077,028 shares of
Common Stock consisting of 17,500 shares issuable on the conversion of the same
number of shares of preferred stock, 2,034,528 shares on the exercise of
outstanding options and warrants at exercise prices ranging from $1.10 to $3.00
with a weighted average exercise price of $2.33 per share, 825,000 shares on the
exercise of options previously granted but not yet exercisable at $3.00 per
share and 200,000 shares issuable on the satisfaction of certain contractual
conditions relating to oil production levels from the Company's producing
properties in Montana and Nevada.
CERTAIN ARTICLE AND BYLAW PROVISIONS
The Company's Articles of Incorporation divide the members of the Board of
Directors into three classes of directors, with each class to be as nearly equal
in number of directors as possible, serving staggered, three-year terms. See
"Management." The Company's Articles of Incorporation also provide that
directors may be removed, with or without cause, by a two-thirds majority of the
shareholders at a meeting called for that purpose and that any resulting
vacancies can be filled by only a vote of a majority of the directors remaining
in office.
The Company's bylaws permit stockholders to nominate a person for election
as a director or bring other matters before a stockholder meeting only if
written notice of such intent is provided to the Company at least 30 days prior
to the meeting. Such notice of intent to nominate a person for election as a
director is required to set forth the same kind of information respecting such
nominee as would be required under the proxy rules of the SEC, including the
written consent of the nominee to serve as a director, if elected, and the name
and address of the stockholder making the nomination as well as the number of
shares of stock owned by such stockholder. In the case of other proposed
business, the notice must set forth a brief description of each matter proposed,
the name and address of the stockholder proposing the matter, the number of
shares of stock owned by such stockholder and any material interest of such
stockholder in such matter.
Nevada law provides that a merger or consolidation, sale or similar
transaction involving all or substantially all of the Company's assets, the
issuance of securities having an aggregate value equal to 5% or more of the
aggregate market of all outstanding shares of the corporation or the
reclassification, recapitalization or similar transaction involving an
"interested stockholder" (as defined), within three years after the stockholder
became interested, cannot be completed unless such transaction is approved by
the Board of Directors of the Company. After the expiration of three years
after a person becomes an interested stockholder, a transaction cannot be
completed with the interested stockholder unless it is approved by the Board of
Directors or a majority of the outstanding voting power not beneficially owned
by the interested stockholder, unless certain "fair price" provisions are met.
Such fair price provisions generally require that the amount of cash and the
market value of the consideration of the cash to be received per share by all
holders of the outstanding Common Stock of the Company not beneficially owned by
the interested stockholder be at least equal to the higher of the price per
share paid by the interested stockholder or the market value on the date of
announcement of the proposed combination. For purposes of these provisions, an
interested stockholder is one who beneficially owns, directly or indirectly, 10%
or more of the voting power of the outstanding stock of the corporation.
The foregoing provisions may tend to deter any potential unfriendly offers
or other efforts to obtain control of the Company that are not approved by the
Board of Directors and thereby deprive the stockholders of opportunities to sell
shares of Common Stock at prices higher than the prevailing market price. On
the other hand, these provisions may tend to assure continuity of management and
corporate policies and to induce any person seeking control of the Company or a
business combination with the Company to negotiate on terms acceptable to the
then elected Board of Directors.
COVENANTS TO REGISTER COMMON STOCK
Pursuant to the terms under which certain securities were previously issued
by the Company, it has agreed to register for resale under the Securities Act an
aggregate of approximately 5.5 million shares of outstanding Common Stock. Of
such shares, approximately 4.6 million shares were included in a registration
statement declared effective March 30, 1995, and have been eligible for resale
since that date. The Company believes that approximately 2.7 million shares may
remain to be sold under such registration statement. Approximately 941,000
shares are to be included in a registration statement to be filed at the
earliest practicable date. Stockholders owning an aggregate of 516,000 of the
shares to be included in the registration statement to be filed have agreed that
(a) during the 120 days after the date of this Prospectus they may not sell such
Common Stock in any public trading market for the Common Stock, and (b) during
the 12 weeks thereafter, they will not sell during any four week period in
excess of 1% of the number of shares of Common Stock then issued and
outstanding.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
among the Company and the Underwriters named below, for whom Oppenheimer & Co.,
Inc. and Hanifen, Imhoff Inc. are acting as representatives (the
"Representatives"), the Underwriters have severally agreed to purchase from the
Company, and the Company has agreed to sell to the Underwriters, the number of
shares of Common Stock set forth opposite their respective names:
UNDERWRITERS NUMBER OF
SHARES
Oppenheimer & Co., Inc................
Hanifen, Imhoff Inc...................
Total............................
The Underwriting Agreement provides that the obligations of the
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other conditions. The nature of the Underwriters'
obligations is such that they are committed to purchase all of the above shares
of Common Stock if any are purchased.
The Underwriters propose to offer the shares of Common Stock directly to
the public at the offering price set forth on the cover page of this Prospectus
and at such price less a concession not in excess of $ per share of Common
Stock to certain securities dealers who are members of the National Association
of Securities Dealers, Inc. The Underwriters may allow and such dealers may
reallow concessions not in excess of $ per share to certain other
securities dealers. After the Offering, the offering price and other selling
terms may be changed by the Representatives.
The Underwriters have been granted a 30-day over-allotment option to
purchase from the Company up to an aggregate of [450,000] additional shares of
Common Stock at the public offering price less the underwriting discount. If
the Underwriters exercise such over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof as the number of shares of Common Stock to be purchased
by it as shown in the above table bears to the number of shares of Common Stock
offered hereby. The Underwriters may exercise such option only to cover over-
allotments made in connection with the sale of Common Stock offered hereby.
Upon the closing of the Offering, the Company has agreed to issue and
deliver to the Representatives warrants to purchase 150,000 shares of Common
Stock. The warrants will have a term of five years, will be exercisable after
one year at an exercise price equal to 120% of the public offering price and
will be transferable to either of the Representative's officers and partners.
The Representatives have advised the Company that they do not intend to
confirm sales to any accounts over which they exercise discretionary authority.
The Company has agreed to indemnify the Underwriters against certain
liabilities, losses and expenses, including liabilities under the Securities Act
or to contribute to payments that the Underwriters may be required to make in
respect thereof.
The Company and its officers and directors holding 1,131,493 outstanding
shares and 2,050,000 options in the aggregate have agreed that for a period of
180 days after the date of this Prospectus they will not sell, contract to sell
or otherwise dispose of, directly or indirectly, shares without the prior
written consent of the Representatives.
LEGAL MATTERS
The validity of the Common Stock under Nevada corporation laws will be
passed upon for the Company by Kruse, Landa & Maycock, L.L.C. and certain
matters related to the laws of Poland will be passed on for the Company by White
& Case, Warsaw, Poland. Certain legal matters will be passed upon for the
Underwriters by Gibson, Dunn & Crutcher LLP.
EXPERTS
The Consolidated Financial Statements and the Notes thereto of the Company
and its subsidiaries included in this registration statement have been audited
by Coopers & Lybrand L.L.P., independent accountants, for the period indicated
in their report thereon appearing elsewhere in this registration statement. The
financial statements audited by Coopers & Lybrand L.L.P. have been included in
reliance upon such report and upon the authority of said firm as experts in
accounting and auditing.
The financial statements of the Company for the year ended December 31,
1993 and 1994, included in this Prospectus, have been audited by Barker &
Folsom, certified public accountants, as stated in their report appearing
herein, and have been included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The statement of operations of B&B Production Company for the year ended
December 31, 1993, included in this Prospectus has been audited by Hamilton
Misfeldt & Company, P.C., certified public accountants, as stated in their
report appearing herein, and has been included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
The statement of operations of J.R. Bacon Drilling, Inc., for the year
ended December 31, 1993, included in this Prospectus, has been audited by
Barker & Folsom, certified public accountants, as stated in their report
upon the authority of such firm as experts in accounting and auditing.
The estimates of oil and gas reserves of the Company respecting its
properties are included herein under the caption "Business and Properties--Oil
Reserves" in reliance upon the authority of Larry D. Krause, independent
petroleum engineer, Billings, Montana, as an expert in petroleum engineering.
For additional information relating to the Company's reserves, see the Summary
Reserve Report of Larry D. Krause included as Appendix A to this Prospectus.
The opinion based on the detailed log analysis of the Gladysze-1 and
Gladysze-2 wells is included herein under the caption "Business and Properties--
Exploration and Development Activities in Poland: the Baltic Concession" in
reliance upon the authority of Halliburton Energy Services as an expert in oil
well log interpretation.
INCORPORATION OF CERTAIN INFORMATION
BY REFERENCE
The Company's annual report on form 10-KSB for the fiscal year ended
December 31, 1995, its current report on Form 8-K dated May 3, 1996, its
quarterly report on Form 10-QSB for the quarter ended March 31, 1996 and its
current report on Form 8-K dated May 21, 1996, are hereby incorporated by
reference into this Prospectus. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will provide, without charge, to each person to whom a copy of
this Prospectus is delivered, on the written or oral request of such person, a
copy of any or all of the documents referred to above which have been or may be
incorporated by reference into this Prospectus, other than certain exhibits to
such documents. Requests for such copies should be directed to Stockholder
Relations, FX Energy, at 3006 Highland Drive, Suite 206, Salt Lake City, Utah
84106, telephone number (801) 486-5555.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
CONSOLIDATED FINANCIAL STATEMENTS OF FRONTIER OIL
EXPLORATION COMPANY AND SUBSIDIARIES
Report of Coopers & Lybrand L.L.P., certified
public accountants............................ F-2
Report of Barker & Folsom, certified public
accountants................................... F-3
Consolidated Balance Sheet at December 31, 1994,
1995 and March 31, 1996 (unaudited)........... F-4
Consolidated Statement of Operations for the years
ended December 31, 1993, 1994 and 1995 and the
three months ended March 31, 1995 and 1996
(unaudited)................................... F-6
Consolidated Statement of Cash Flows for the years
ended December 31, 1993, 1994 and 1995 and the
three months ended March 31, 1995 and 1996
(unaudited)................................... F-7
Consolidated Statement of Stockholders' Equity for
the years ended December 31, 1993, 1994 and
1995 and the three months ended March 31, 1996
(unaudited)................................... F-9
Notes to Consolidated Financial Statements....... F-11
STATEMENT OF OPERATIONS OF B & B PRODUCTION COMPANY
(A GENERAL PARTNERSHIP)
Report of Hamilton Misfeldt & Company P.C.,
certified public accountants.................. F-27
Statement of Operations for the year ended
December 31, 1993............................. F-28
Notes to Financial Statements.................... F-30
STATEMENT OF OPERATIONS OF J.R. BACON DRILLING, INC.
Report of Barker & Folsom, certified public
accountants................................... F-36
Statement of Operations for the year ended
December 31, 1993............................. F-37
Notes to Financial Statements.................... F-38
<PAGE>
Report of Independent Accountants
---------------------------------
To the Board of Directors and Stockholders of
Frontier Oil Exploration Company and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Frontier Oil
Exploration Company and Subsidiaries as of December 31, 1995 and the related
statements of operations, stockholders' equity, and cash flows for the year 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Frontier Oil
Exploration Company and Subsidiaries as of December 31, 1995, and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
/S/
COOPERS & LYBRAND L.L.P.
Salt Lake City, Utah
March 29, 1996
<PAGE>
Report of Independent Accountants
---------------------------------
To the Board of Directors and Stockholders of
Frontier Oil Exploration Company and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Frontier Oil
Exploration Company and Subsidiaries as of December 31, 1994, and the related
statements of operations, stockholders' equity, and cash flows for the years
ended December 31, 1993 and 1994. 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 consolidated financial position of Frontier Oil
Exploration Company and Subsidiaries as of December 31, 1994, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1993 and 1994 in conformity with generally accepted
accounting principles.
/S/
BARKER & FOLSOM
Ogden, Utah
February 24, 1995
<PAGE>
FRONTIER OIL EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands, except share amounts)
ASSETS
December 31, March 31,
------------------- ------------
1994 1995 1996
-------- -------- ------------
Current assets: (Unaudited)
Cash and cash equivalents $ 289 $ 744 $ 559
Cash---estricted -- -- 300
Receivables:
Accrued oil sales 258 254 284
Due from joint interest 98 132 125
owners
Inventory 17 16 15
Other current assets 5 32 75
-------- -------- ------------
Total current assets 667 1,178 1,358
-------- -------- ------------
Property and equipment, at cost:
Oil and gas property
(successful efforts method):
Proved 4,850 6,063 6,139
Unproved 1,525 1,797 1,715
Other property and equipment 1,600 1,625 1,699
-------- -------- ------------
7,975 9,485 9,553
Less accumulated depreciation,
depletion and amortization (447) (873) (993)
-------- -------- ------------
Net property and equipment 7,528 8,612 8,560
-------- -------- ------------
Other assets:
Certificates of deposit 154 217 217
Loan origination costs, net of
accumulated amortization of
$33 in 1994, $96 in 1995 and
$111 in 1996 87 32 13
-------- -------- ------------
Total other assets 241 249 230
-------- -------- ------------
Total assets $8,436 $10,039 $ 10,148
-------- -------- ------------
-------- -------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, March 31,
------------------- ------------
1994 1995 1996
-------- -------- ------------
Current liabilities: (Unaudited)
Accounts payable $ 220 $ 354 $ 362
Accounts payable - related 86 95 35
parties
Accrued liabilities 302 682 382
Current portion of long-term
debt 331 325 180
-------- -------- ------------
Total current liabilities 939 1,456 959
Long-term debt 4,091 3,359 3,439
-------- -------- ------------
Total liabilities 5,030 4,815 4,398
Minority interest in FX
Producing convertible
preferred stock, par value
$0.001 per share, 3,300,000
shares authorized; 1,442,147
shares outstanding in 1994,
liquidation preference of
$2,165,501 in 1994 1,576 -- --
-------- -------- ------------
Redeemable FX Producing
preferred stock 550 -- --
-------- -------- ------------
Commitments and contingencies
(Notes 3 and 12)
Stockholders' equity:
Preferred stock, $0.001 par
value, 5,000,000 shares
authorized, issued and
outstanding 1,500,000 shares
in 1994, 137,500 in 1995 and
17,500 in 1996; liquidation
preference of $1,500,000 in
1994; $137,500 in 1995 and
$17,500 in 1996. 1 -- --
Common stock, $0.001 par
value, 20,000,000 shares
authorized, issued and
outstanding 2,595,602 in
1994, 7,898,995 in 1995 and
8,460,485 in 1996 3 8 8
Additional paid-in capital 3,006 9,466 10,665
Stock subscription receivable -- -- (90)
Accumulated deficit (1,730) (4,250) (4,833)
Total stockholders' equity 1,280 5,224 5,750
-------- -------- ------------
Total liabilities and
stockholders' equity $8,436 $10,039 $ 10,148
-------- -------- ------------
-------- -------- ------------
The accompanying notes are an integral part of these financial statements
<PAGE>
FRONTIER OIL EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
Years Ended December 31, March 31,
---------------------------------- ----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
Revenues: (Unaudited)
<S> <C> <C> <C> <C> <C>
Oil sales -- $1,692 $1,981 $516 $505
Drilling revenue -- 224 111 5 --
Prospect sales $247 -- 75 60 --
Project management fees 29 -- -- -- --
---------- ---------- ---------- ---------- ----------
Total revenues 276 1,916 2,167 581 505
---------- ---------- ---------- ---------- ----------
Operating costs and expenses:
Production and operating costs 7 434 1,001 265 293
Production taxes -- 246 271 73 32
Exploration costs 654 651 747 94 189
Drilling costs -- 178 141 11 24
Depreciation, depletion and amortization 3 422 503 106 138
Leasehold abandonments -- -- 115 -- --
General and administrative 353 816 1,466 276 366
---------- ---------- ---------- ---------- ----------
Total operating costs and expenses 1,017 2,747 4,244 825 1,042
---------- ---------- ---------- ---------- ----------
Operating loss (741) (831) (2,077) (244) (537)
Other income (expense):
Interest and other income 39 53 98 10 36
Interest expense (2) (214) (448) (111) (82)
Minority interest: Non-cash dividends on
FX Producing convertible preferred stock -- -- (93) (55) --
---------- ---------- ---------- ---------- ----------
Total other income (expense) 37 (161) (443) (156) (46)
---------- ---------- ---------- ---------- ----------
Net loss before benefit from income taxes (704) (992) (2,520) (400) (583)
Benefit from income taxes 9 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net loss ($695) ($992) ($2,520) ($400) ($583)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net loss per common share ($0.40) ($0.44) ($0.47) ($0.14) ($0.07)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Weighted average number of shares
outstanding 1,750 2,229 5,389 2,811 8,086
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
FRONTIER OIL EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
Years Ended December 31, March 31,
--------------------------------- ------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- -------- --------
(Unaudited)
Cash flows from operating
activities:
<S> <C> <C> <C> <C> <C>
Net loss $(695) $(992) $(2,520) $(400) $(583)
Adjustment to reconcile net loss
to net cash used in operating
activities:
Depreciation, depletion and
amortization 3 422 503 120 138
Net current assets acquired from
Petrolex 18 -- -- -- --
Leasehold abandonments -- -- 115 -- --
Gain on sale of equipment -- -- (16) -- --
Minority interest: Non-cash
dividends on FX Producing
convertible preferred stock -- -- 93 55 --
Loss on disposition of
partnerships -- 23 -- -- --
Common stock and options issued
for services 100 168 443 14 114
Increase (decrease) from changes
in :
Cash-restricted (143) 143 -- -- --
Receivables (86) (266) (30) (204) (23)
Inventory -- (17) 1 1 1
Other current assets 1 (4) (27) (16) (43)
Accounts payable and accrued
liabilities 219 201 408 366 (351)
Income taxes payable 14 -- -- -- --
---------- ---------- ---------- -------- --------
Net cash used in operating
activities (569) (322) (1,030) (64) (747)
---------- ---------- ---------- -------- --------
Cash flows from investing
activities:
Additions to oil and gas
properties (22) (2,725) (1,404) (57) (89)
Additions to other property and
equipment -- (1,553) (25) (3) (58)
Additions to other assets -- (154) (78) (67) --
Proceeds from sale of interest in
unproved property -- -- -- -- 100
Proceeds from sale of equipment -- -- 18 -- --
---------- ---------- ---------- -------- --------
Net cash used in investing
activities (22) (4,432) (1,489) (127) (47)
---------- ---------- ---------- -------- --------
Cash flows from financing
activities:
Proceeds from long-term debt -- $ 4,364 -- -- --
Repayment of long-term debt -- (63) $ (737) $ (79) $ (84)
Proceeds from issuance of FX
Producing convertible preferred
stock -- 1,695 111 111 --
Proceeds from issuance of
redeemable FX Producing
preferred stock -- 550 -- -- --
Redemption of FX Producing
convertible preferred stock -- (2,151) -- -- --
Redemption of redeemable FX
Producing preferred stock -- -- (465) -- --
Proceeds from issuance of
preferred stock $1,028 192 -- -- --
Proceeds from issuance of common
stock and exercise of warrants,
net of offering costs 18 -- 4,065 395 993
---------- ---------- ---------- -------- --------
Net cash provided by financing
activities 1,046 4,587 2,974 427 909
---------- ---------- ---------- -------- --------
Increase (decrease) in cash and
cash equivalents 455 (167) 455 236 115
Cash and cash equivalents at
beginning of period 1 456 289 289 744
---------- ---------- ---------- -------- --------
Cash and cash equivalents at end
of period (including restricted
cash of $300 at March 31, 1996) $ 456 $ 289 $ 744 $ 525 $ 859
---------- ---------- ---------- -------- --------
---------- ---------- ---------- -------- --------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 2 $ 178 $ 422 $ 111 $ 89
Income taxes 9 -- -- -- --
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
FRONTIER OIL EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Stock
------------------------- ------------------------ Paid--in Subscription Accumulated
Shares Amount Shares Amount Capital Receivable Deficit
------------ ----------- ------------ ---------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992 -- -- 1,051,200 $ 1 $ 85 $ (43)
Common stock issued for cash -- -- 10,000 -- 10 -- --
Common stock issued for
unproved oil and gas
properties -- -- 321,255 -- 291 -- --
Common stock issued for
services -- -- 100,000 -- 100 -- --
Common stock issued in
connection with Petrolex
acquisition -- -- 400,000 1 133 -- --
Preferred stock issued for
cash, net of offering costs 1,279,500 $ 1 -- -- 1,106 -- --
of $172
Net loss -- -- -- -- -- -- (695)
------------ ----------- ------------ ---------- ---------- ------------ -----------
Balance, December 31, 1993 1,279,500 1 1,882,455 2 1,725 -- (738)
Preferred stock issued for
cash, net of offering costs
of $29 220,500 -- -- -- 192 -- --
Common stock issued for
unproved oil and gas
properties -- -- 500,000 1 883 -- --
Common stock issued for
services -- -- 112,000 -- 168 -- --
Common stock issued for
cancellation of note payable -- -- 25,453 -- 38 -- --
Common stock issued as
commission for placement of
FX Producing preferred stock -- -- 75,694 -- -- -- --
Net loss (992)
------------ ----------- ------------ ---------- ---------- ------------ -----------
Balance, December 31, 1994 1,500,000 1 2,595,602 3 3,006 -- (1,730)
Common stock issued for cash,
net of offering costs of
$182 -- -- 2,087,500 2 3,991 -- --
Common stock issued for
services and line of credit -- -- 207,000 -- 418 -- --
Conversion of FX Producing
preferred stock into common
stock -- -- 1,504,458 $ 2 $ 1,779 -- --
Conversion of redeemable FX
Producing preferred stock into
common stock -- -- 64,935 -- 85 -- --
Conversion of preferred stock
into common stock (1,362,500) $ (1) 1,362,500 1 -- --
Exercise of warrants -- -- 65,000 -- 72 -- --
Common stock issued for
unproved oil and gas
properties -- -- 12,000 -- 27 -- --
Compensation related to
granting of stock options at
below-market value -- -- -- -- 25 -- --
Additions to oil and gas
properties resulting from
granting of stock options at
below-market value 63 --
Net loss -- -- -- -- -- -- $(2,520)
------------ ----------- ------------ ---------- ---------- ------------ -----------
Balance, December 31, 1995 137,500 -- 7,898,995 8 9,466 -- (4,250)
Common stock issued for cash,
net of offering costs of $48
(unaudited) -- -- 372,393 -- 1,056 (90) --
Exercise of warrants -- -- 22,004 -- 27 -- --
(unaudited)
Conversion of preferred stock
into common stock (unaudited) (120,000) -- 120,000 -- -- -- --
Common stock issued for
services (unaudited) -- -- 46,000 -- 114 -- --
Common stock issued for proved
oil properties (unaudited) -- -- 1,093 -- 2 -- --
Net loss (unaudited) (583)
------------ ----------- ------------ ---------- ---------- ------------ -----------
Balance at March 31, 1996
(unaudited)
------------ ----------- ------------ ---------- ---------- ------------ -----------
17,500 $ -- 8,460,485 $8 $10,665 $ (90) $(4,833)
------------ ----------- ------------ ---------- ---------- ------------ -----------
------------ ----------- ------------ ---------- ---------- ------------ -----------
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
FRONTIER OIL EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Information as of March 31, 1996, and for the three month periods ended
March 31, 1995 and 1996, is unaudited.
Organization
Frontier Oil Exploration Company (formerly Direct West, Inc.), a Nevada
corporation ("Frontier"), and its subsidiaries (collectively hereinafter
referred to as the "Company") operate in the oil and gas industry in the
United States and Poland (see Note 12). The Company is engaged in
acquiring, exploring and developing oil and gas properties. In addition,
the Company owns and operates a drilling and well servicing company.
Acquisitions of certain subsidiaries and assets are discussed in Note 4---
Acquisitions.
The Company believes that its working capital as of December 31, 1995, plus
additional amounts received after year-end (see Note 13) will satisfy the
Company's operating requirements during 1996. However, the Company will
require substantial amounts of additional capital to continue its planned
geological and geophysical studies, well drilling, and other exploration
and development activities. The Company will be dependent on its ability
to raise such funds through exploration groups formed with others, the sale
of securities, bank loans, or the sale of interests in one or more of the
projects.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation. At December 31,
1995, the Company owned 100% of the voting common stock of its
subsidiaries, including FX Producing Company, Inc. ("FX Producing"). At
December 31, 1994 FX Producing had 1,442,147 shares of nonvoting
convertible preferred stock outstanding which were not owned by the
Company. All of these shares were converted into common stock of the
Company during 1995. The dividends on the convertible preferred stock are
reflected in the consolidated statement of operations as a minority
interest.
Inventory
Inventory consists primarily of tubular supplies and other well equipment
and is valued at the lower of average cost or market.
Oil and Gas Properties
The Company follows the successful efforts method of accounting for its oil
and gas properties. Under this method of accounting, all property
acquisition costs and costs of exploratory and development wells are
capitalized when incurred, pending determination of whether the well has
found proved reserves. If an exploratory well has not found proved
reserves, the costs of drilling the well are expensed. The costs of
development wells are capitalized whether productive or nonproductive.
Geological and geophysical costs on exploratory prospects and the costs of
carrying and retaining unproved properties are expensed as incurred. An
impairment allowance is provided to the extent that capitalized costs of
unproved properties, on a property-by-property basis, are considered to be
not realizable. Depletion, depreciation and amortization ("DD&A") of
capitalized costs of proved oil and gas properties is provided on a
property-by-property basis using the units of production method. The
computation of DD&A takes into consideration restoration, dismantlement and
abandonment costs and the anticipated proceeds from equipment
salvage. The estimated restoration, dismantlement and abandonment costs
are expected to be offset by the estimated residual value of lease and well
equipment.
An impairment loss will be recorded if the net capitalized costs of proved
oil and gas properties exceed the aggregate undiscounted future net
revenues determined on a property-by-property basis. The impairment loss
recognized will equal the excess of net capitalized costs over the expected
discounted future net revenues from the related property.
Gains and losses are recognized on sales of entire interests in proved and
unproved properties. Sales of partial interests are generally treated as a
recovery of costs.
Other Property and Equipment
Other property and equipment, including drilling and well servicing
equipment, are stated at cost. Depreciation of other property and
equipment is calculated using the straight-line method over the estimated
useful lives (ranging from 3 to 40 years) of the respective assets. The
cost of normal maintenance and repairs is charged to operating costs and
expenses as incurred. Material expenditures which increase the life of an
asset are capitalized and depreciated over the estimated remaining useful
life of the asset. The cost of other property and equipment sold, or
otherwise disposed of, and the related accumulated
depreciation are removed from the accounts, and any gain or loss is
reflected in current operations.
Other Assets
Other assets include loan origination costs which are being amortized over
2 years on a straight-line basis, which approximates the interest method.
Concentration of Credit Risk
Substantially all of the Company's receivables are within the oil and gas
industry, primarily from the purchasers of its oil (see Note 14) and joint
interest owners. Collectibility of the Company's receivables is dependent
upon the general economic conditions of the industry. The receivables are
generally not collateralized and, to date, the Company has experienced
minimal bad debts.
The majority of the Company's cash and cash equivalents is held by three
financial institutions located in Salt Lake City, Utah, Shelby, Montana
and Houston, Texas.
Net Income (Loss) Per Share
Net income (loss) per share of common stock is computed based on the
weighted average number of common and common equivalent shares outstanding
during the period. Options, warrants and convertible preferred stock are
excluded from the calculation, when their effect would be antidilutive.
Cash Equivalents and Statement of Cash Flows
The Company considers all highly-liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Non-cash transactions not reflected in the consolidated statement of cash
flows include the following:
Three Months
Years Ended December 31, Ended
-------------------------------- -----------------
1993 1994 1995 March 31, 1996
---------- ---------- -------- -----------------
(Unaudited)
(In Thousands)
Common Stock issued for:
-Unproved oil and gas
properties $ 291 $ 884 $ 27 $ --
-Cancellation of note
payable to related
party -- 38 -- --
Conversion of FX
Producing convertible
preferred stock into
the Company's common
stock -- -- 1,781 --
Conversion of redeemable
FX Producing preferred
stock into the
Company's common stock -- -- 85 --
Conversion of the
Company's preferred
stock into common stock -- - 1,363 120
FX Producing convertible
preferred stock issued
for oil and gas
properties -- 2,111 -- --
Additions to oil and gas
properties resulting
from granting of stock
options at below market
value -- -- 63 --
Additions to oil and gas
properties financed
with trade accounts
payable -- -- 115 --
Additions to other
property and equipment
financed with long-term
leases -- -- -- 18
Income Taxes
Deferred income taxes are provided on the difference between the tax basis
of an asset or liability and its reported amount in the financial
statements that will result in taxable or deductible amounts in future
years when the reported amount of the asset or liability is recovered or
settled, respectively.
Use of 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.
Reclassifications
Certain balances in the December 31, 1993 and 1994 financial statements
have been reclassified to conform with the current year presentation.
These changes had no effect on previously reported net loss, total assets,
liabilities or stockholders' equity.
Unaudited Financial Information
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting only of normal
recurring items) necessary to present fairly the consolidated financial
position of the Company as of March 31, 1996 and the consolidated results
of operations and cash flows for the three months ended March 31, 1995 and
1996. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the SEC's
rules and regulations. The results of operations for the periods presented
are not necessarily indicative of the results to be expected for the full
year.
Accounting Pronouncements
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation. The Company has elected to continue to apply the current
stock based compensation methods pursuant to APB 25 and to furnish the
additional disclosures required by SFAS No. 123. The Company also adopted,
as of January 1, 1996, SFAS No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of. The adoption of
SFAS No. 121 had no impact on the Company's financial statements.
2. Cash--Restricted:
In accordance with an amendment to the Company's bank loan agreement in the
first quarter of 1996, the Company is required to purchase a certificate of
deposit in the amount of $300,000 in lieu of making its normal principal
reduction payments of $25,000 per month for the period from March 1 to
September 30, 1996. The certificate of deposit was purchased in April 1996
and matures on November 1, 1996. The certificate of deposit is pledged as
collateral for the bank note through its maturity date of November 1, 1996.
3. Performance Bond Deposits:
The Company maintains certificates of deposit of $217,400 at December 31,
1995, which are held at financial institutions in lieu of performance bonds
for various federal and state agencies.
As of December 31, 1995, the Company had provided a replacement bond to a
federal agency in the amount of $463,000, collateralized by a $67,400
certificate of deposit included in the amount above and $164,100 provided
by B & B Production Co. (a related party). The Company is required to
reimburse B & B Production Co. upon demand and is paying B&B Production Co.
interest at 9% on the $164,100.
4. Acquisitions:
In June 1993, the Company acquired Petrolex Corporation ("Petrolex"), a
privately-held oil and gas lease brokerage, arbitrage and investment
company. The Company acquired all of the issued and outstanding shares of
Petrolex's common stock in exchange for 400,000 shares of the Company's
common stock. Because common control existed between the Company and
Petrolex, the transaction was accounted for at historical cost.
Effective April 1994, the Company, through its subsidiaries, FX Producing
and FX Drilling Company, Inc., acquired certain producing oil properties
from B&B Production Company (B&B) and well servicing equipment and related
assets from J.R. Bacon Drilling, Inc. for a total purchase price of
$5,650,000. The acquisition was funded with bank borrowings and the
issuance of FX Producing preferred stock. The acquisition was accounted
for by the purchase method with the purchase price allocated between the
proved oil properties, well servicing equipment and related assets based on
their relative fair values.
The unaudited pro forma condensed consolidated statements of operations for
the years ended December 31, 1993 and 1994 have been prepared to give
effect as if the transactions had occurred on January 1, 1993 and 1994,
respectively. The pro forma adjustments included are based on assumptions
and estimates and are not necessarily indicative of the results of
operations of the Company as they might have been or as they may be in the
future.
Pro Forma for the Years
Ended
December 31,
-----------------------
1993 1994
---------- ----------
(In Thousands)
(Unaudited)
Revenues $ 3,801 $ 2,984
Operating costs and expenses 4,140 4,065
---------- ----------
Operating loss (339) (1,081)
Other income (expense) (295) (247)
---------- ----------
Net loss $ (634) (1,328)
---------- ----------
---------- ----------
Net loss per common share $ (0.36) $ (0.60)
---------- ----------
---------- ----------
5. Long-term Debt:
The following is a summary of long-term debt:
December 31, March 31,
1994 1995 1996
---------- ---------- -----------
(Unaudited)
(In Thousands)
Note payable to a bank by FX Producing,
bearing interest at prime plus 1.25%, (9.5%
at March 31, 1996) with monthly payments of
$25,000 of principal plus interest,
collateralized by the common stock and
producing oil properties of FX Producing. $ 4,350 $ 3,640 $3,565
Notes payable, bearing interest at rates
from 6% to 8.9%, with monthly payments of
principal and interest totaling $2,644,
collateralized by well service vehicles and
equipment. 72 44 54
---------- ---------- -----------
4,422 3,684 3,619
---------- ---------- -----------
Less current portion (331) (325) (180)
---------- ---------- -----------
Total $4,091 $3,359 $3,439
---------- ---------- -----------
---------- ---------- -----------
Future maturities of long-term debt are as follows at December 31:
1996 $ 325
1997 3,359
-------
$3,684
-------
-------
The note payable to a bank, which is guaranteed by the Company, is subject
to extension at the option of the lender for successive one-year periods
following semi-annual reviews of FX Producing's oil reserve data and
recalculation of the borrowing base. Should the outstanding balance of the
loan exceed the borrowing base, the Company may be required to fund the
deficiency.
Provisions of the loan agreement related to the note payable to a bank
require compliance with certain covenants, including tangible net worth
requirements of FX Producing and the Company and other financial ratios.
In addition, the loan imposes restrictions on other indebtedness,
guarantees, loans to other parties, and sales or pledges of collateralized
assets. The Company is also prohibited from declaring or paying cash
dividends on any class of FX Producing's or the Company's capital stock,
and is prohibited from making distributions on, and purchasing or redeeming
any shares of, any class of FX Producing's or the Company's capital stock.
As of December 31, 1995, the Company was in violation of the loan
agreement's cash flow-to-debt service requirements applicable to FX
Producing. Non-compliance with any such ratios and covenants could result
in termination of the loan agreement, however the bank waived the cash
flow-to-debt service requirement for the quarters ending December 31,
1995 and March 31, 1996 and has amended this provision for the quarters
ending June 30, and September 30, 1996 and thereafter. The amendment
waived the monthly principal reductions of $25,000 for the period from
March 1 through September 30, 1996 and required the Company to
purchase a $300,000 certificate of deposit maturing November 1, 1996,
which certificate of deposit is pledged as collateral to the bank note.
The Company expects that it will be in compliance with the
amended cash flow-to-debt service requirement as of June 30, 1996 and
throughout the remainder of 1996.
On May 13, 1996, the bank amended the loan agreement to extend the maturity
date of the note from January 1, 1997 to October 1, 1997 (unaudited).
6. Income Taxes:
The Company recognized no income tax benefit from the losses generated
during the years ended December 31, 1993, 1994 and 1995.
The components of the net deferred tax asset as of December 31, 1994 and
1995 are as follows.
December 31,
---------------------
1994 1995
---------- ----------
(In Thousands)
Deferred tax liability:
Property and equipment basis differences $ (24) $ (519)
Deferred tax asset:
Net operating loss carryforwards 669 2,045
Valuation allowance (645) (1,526)
---------- ----------
Net deferred tax asset $ -- $ --
---------- ----------
---------- ----------
The change in the valuation allowance during the years ended December 31,
1993, 1994 and 1995, is as follows:
1993 1994 1995
---------- ---------- ----------
(In Thousands)
Balance, beginning of year $ -- $ -- $ (645)
Decrease due to property and equipment
basis differences -- 24 495
Increase due to net operating loss -- (669) (1,376)
---------- ---------- ----------
Balance, end of year $ -- $ (645) $(1,526)
---------- ---------- ----------
---------- ---------- ----------
6. Income Taxes (Continued):
Statement of Financial Accounting Standards (SFAS) No. 109 requires that a
valuation allowance be provided if it is more likely than not that some
portion or all of a deferred tax asset will not be realized. The Company's
ability to realize the benefit of its deferred tax asset will depend on the
generation of future taxable income through profitable operations and
expansion of the Company's oil and gas producing activities. The market
and capital risks associated with that growth requirement are considerable,
resulting in the Company's conclusion that a full valuation allowance be
provided.
At December 31, 1995, the Company has net operating loss carryforwards of
approximately $5,480,000 available to offset future taxable income, which
expire from 2008 through 2010. The utilization of these carryforwards
against future taxable income may become subject to an annual limitation
due to a change in ownership.
7. Related Party Transactions:
Officers of the Company have an interest in a company which prior to 1995
provided management services and office facilities to the Company.
At December 31, 1995, the Company owed this company a total of
$95,005, including interest at 9% of $17,997. During the year ended
December 31, 1993, this company also billed the Company $28,000 for rent
and $13,254 for labor provided. During the years ended December 31, 1993
and 1994, this company billed the Company $150,000 and $195,067,
respectively, for management services.
In August 1995, the Company issued to a director's consulting company, in
consideration of a loan agreement and consulting agreement, 200,000 shares
of restricted common stock and granted to the director options to purchase
350,000 shares of common stock at an exercise price of $3.00 per share.
The Company recognized $400,000 as compensation expense in connection with
the issuance of such 200,000 shares.
8. Redeemable FX Producing Preferred Stock:
During the year ended December 31, 1994, the Company issued 366,666 shares
of redeemable FX Producing preferred stock with a liquidation preference
totaling $550,000. During the year ended December 31, 1995, 301,731 of
these shares were redeemed for cash payments of $464,666 and 64,935 of
these shares were converted into common shares valued at $85,334.
9. Minority Interest in FX Producing Convertible Preferred Stock:
FX Producing has been authorized to issue up to 3,300,000 shares of
convertible preferred stock, which bears a dividend of 8%, payable
in cash or kind. Holders of FX Producing convertible preferred stock have
preference on liquidation proceeds from FX Producing. One share of FX
Producing preferred stock is convertible at the election of the holder
to one share of Company common stock, subject to adjustment, at any time
during 1995. Dividends on FX Producing preferred stock will be paid at
the rate of 8% of the original issuance price of $1.50 per share,
payable in cash or in additional shares of FX Producing preferred stock
at the Company's discretion, and subject to bank loan covenants,
cumulative from the date of issuance. Dividends are payable each June
30 and December 31, beginning December 31, 1994.
During the year ended December 31, 1994, the Company issued 1,791,667
shares of FX Producing convertible preferred stock valued at $2,111,070 for
producing oil properties and well servicing equipment, and issued 1,267,480
shares for cash proceeds of $1,694,527. During 1994 the Company also
redeemed 1,617,000 shares of FX Producing convertible preferred stock for
$2,150,400. In addition, stock subscriptions receivable of $111,000 were
due FX Producing as of January 1, 1995. During the year ended December 31,
1995, FX Producing received the $111,000 in proceeds from the stock
subscriptions receivable, accrued for issuance 62,311 convertible
preferred shares at a value of $93,466 as dividends, and converted
1,504,458 shares into the Company's common stock at a value of
$1,780,462, resulting in no shares of FX Producing convertible preferred
stock outstanding as of December 31, 1995.
10. Common Stock Issuable, Stock Options and Warrants:
Common Stock Issuable
In connection with the purchase of the Company's' producing oil properties
and well servicing equipment in 1994, the Company agreed to issue to the
former owners up to 400,000 shares of Company common stock in semi-annual
increments of 50,000 shares each beginning October 1, 1994 on the
attainment of certain levels of oil production from the properties
acquired. Production levels as of October 1, 1995 had not attained
required levels and thus 150,000 shares which might have been issued
through October 1, 1995 had not been issued. Accordingly, the number of
shares which may be issued in the future has been reduced to 250,000 shares
as of December 31, 1995, and further reduced to 200,000 shares as of March
31, 1996 (unaudited).
Stock Options
On August 31, 1995, the Company adopted the 1995 Stock Option and Award
Plan (the "Plan"). This Plan replaced the 1994 Employee Incentive Plan
under which no options have been issued. The Plan is administered by a
committee (the "Committee) consisting of the board of directors, or a
committee thereof. At its discretion, the Committee may grant stock
options to any employee, including officers, in the form of incentive stock
options ("ISOs") as defined in the Internal Revenue Code, stock awards or
options which do not qualify as ISOs. A maximum of 500,000 shares, subject
to adjustment for certain events of dilution, is available for grant.
During the year ended December 31, 1995, the Company issued 50,000
incentive stock options under the Plan. The Company also issued non-
qualified options during the years ended December 31, 1993, 1994 and 1995.
Changes in outstanding stock options during 1993, 1994 and 1995 were as
follows:
Shares Price Range
----------- ---------------
Outstanding at December 31, 1992: -- --
Options granted to two officers and
directors; immediately exercisable;
expiring May 7, 1998 300,000 $1.50
Options granted to an individual for
consulting services; immediately
exercisable; expiring May 7, 1998 120,000 1.50
----------- ---------------
Outstanding at December 31, 1993: 420,000 1.50
Options granted to two officers and
directors; exercisable 20% per year
beginning June 9, 1995; expiring
June 9, 2004 1,000,000 3.00
----------- ---------------
Outstanding at December 31, 1994: 1,420,000 1.50-3.00
Options granted to two individuals directly
involved in obtaining Poland exploration
rights. 125,000 shares immediately
exercisable; 100,000 shares exercisable as
specific performance benchmarks are
achieved; expiring August 31, 2000 225,000 1.50
Options granted to a shareholder's company
for financial consulting and providing a
line of credit of $60,000 through March 31,
1996; 150,000 immediately exercisable;
100,000 vest on December 31, 1996 and 1997;
expiring August 3, 2000 to 2002 350,000 3.00
Options granted to officers and directors,
including 150,000 options immediately
exercisable at $2.00 per share which
replaced a contingent obligation to issue
100,000 shares of common stock pursuant to
an employment agreement; expiring September
29 to October 6, 2000 400,000 2.00-3.00
Options granted to employees; 75,000
currently exercisable and 75,000 vesting in
1996; expiring October 9 to November 9, 2000
150,000 3.00
Incentive stock options granted to employees
under the 1995 Stock Option and Award Plan;
expiring August 31, 2000 50,000 1.50
----------- ---------------
Outstanding at December 31, 1995 2,595,000 $1.50-3.00
----------- ---------------
----------- ---------------
Exercisable at December 31, 1995 1,420,000 $1.50-3.00
----------- ---------------
----------- ---------------
Warrants
Changes in outstanding warrants during 1993, 1994 and 1995 were as follows:
Shares Price Range
----------- ---------------
Outstanding at December 31, 1992: -- --
Warrants granted as commission to broker;
expiring May 31, 1998 150,000 $1.10
----------- ---------------
Outstanding at December 31, 1993: 150,000 1.10
Warrants granted as commission to
brokers; expiring September 30, 1999 82,198 1.65
----------- ---------------
Outstanding at December 31, 1994: 232,198 1.10 - 1.65
Warrants granted as commission to
brokers; expiring September 30, 1999 4,000 1.65
Warrants granted in consideration of
consulting agreement; expiring September
30, 1998 60,000 2.20
Warrants granted in consideration of
consulting agreement; expiring November
9, 2000 100,000 3.00
Warrants exercised (65,000) 1.10
----------- ---------------
Outstanding and exercisable at December 31,
1995 331,198 $1.10-$3.00
----------- ---------------
----------- ---------------
FRONTIER OIL EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. Common Stock Issuable, Stock Options and Warrants (Continued):
During the three months ended March 31, 1996, no warrants were granted and
22,004 were exercised at an average price of $1.20 per warrant. No options
were granted or exercised during the same period (unaudited).
11. Issuance of Preferred Stock:
The Company has been authorized to issue up to 5,000,000 shares of
preferred stock. The issued and outstanding Company preferred stock does
not have a preference on dividends but participates with the common stock
outstanding on a share-for-share basis. Holders of the Company's preferred
stock have preference on liquidation proceeds, equal to $1.00 per share.
In 1993 and 1994, the Company issued a total of 1,500,000 shares of
preferred stock in a private placement at $1.00 per share. One share of
preferred stock is convertible into one share of common stock. During the
year ended December 31, 1995, 1,362,500 preferred shares were
converted into the same number of common shares resulting in 137,500
preferred shares of stock outstanding at December 31, 1995. Liquidating
preferences total $137,500 for this class of preferred stock at December
31, 1995.
During the three months ended March 31, 1996, 120,000 preferred shares were
converted into the same number of common shares resulting in 17,500
preferred shares of stock (with liquidating preferences totaling $17,500)
outstanding at March 31, 1996 (unaudited).
12. Commitments:
Poland Exploration Agreement:
On August 22, 1995, the Company entered into an exploration agreement (the
"Agreement") with the Government of Poland covering a 2.25 million acre
block in the onshore Baltic Platform area of north central Poland. The
Agreement provides for a six-year exploration term with a 30-year
exploitation right as to any commercial discoveries. The Agreement
requires the Company to spud one well in 1996, annual fees of approximately
$58,000, and geological and geophysical expenditures of $250,000 during the
first 18 months.
In order to fund the required expenditures under the Agreement, the Company
must either enter into a joint venture arrangement with a partner (see Note
13) with adequate financial resources or raise additional debt or equity
(in addition to that raised in the private placement discussed in Note 13).
If the Company is unable to fund the required expenditures under the
Agreement, it would attempt to sell or farm-out its entire interest in
the agreement or it would forfeit its interest in the project, which
had a capitalized cost of $370,000 at December 31, 1995 ($390,000 at March
31, 1996, unaudited).
Employment Agreements:
Effective January 1, 1995, the Company entered into three-year employment
agreements with two officers. The agreements provide for aggregate annual
compensation of $210,000 with annual increases of at least 7.5%, as
determined by the Board of Directors or a compensation committee. Each
employment agreement, as amended, provides that on the initiation of the
first test well in the Baltic Concession, the executive employee is
entitled to receive a bonus in the form of a $100,000 credit that may be
applied against the exercise of options to purchase Common Stock. The
terms of such employment agreements are automatically
extended for an aditional year on the anniversary date of each such
agareement. In the event of termination of employment resulting from a
change in control of the Company not approved by the Board of Directors,
each of the two officers would be entitled to a termination payment equal
to 150% of his annual salary at the time of termination and the value of
previously granted employee benefits, including stock options and stock
awards.
Consulting Agreement:
The Company entered into a consulting agreement, effective August 3, 1995,
with a director's consulting company under which it advises the Company
respecting future financing alternatives, identifying possible sources of
debt and equity financing, with particular emphasis on funding for the
Baltic Concession and the Company's relationship with the investment
community at a fee of $10,000 per month commencing October 15, 1995, and
continuing through December 31, 1997.
13. Events Subsequent to March 31, 1996 (Unaudited):
During April and May 1996, the Company sold 156,111 shares of common stock
at an offering price of $4.50, resulting in net proceeds of approximately
$680,000. During the same period, 80,000 options to purchase common stock
were exercised at $1.50 per share, resulting in proceeds to the Company of
$120,000.
On May 3, 1996, the Company entered into an agreement with RWE-DEA,
Aktiengesellschaft fur Mineraloel und Chemie, Hamburg, Germany ("RWE-DEA"),
which provides for joint operations on the Company's approximately 2.4
million acre on-shore Baltic Platform concession area in northern Poland.
This agreement grants to RWE-DEA the right to earn a 50% interest in the
concession area by paying the Company $250,000 in cash as reimbursement of
costs incurred to date, paying up to $1,000,000 (plus 10% contingency) for
a seismic study now being initiated on the Gladysze and two other
structures within the concession area, and bearing up to $1,000,000 of the
cost of an exploratory well scheduled for the last half of 1996 at a
location to be designated by RWE-DEA. Should the costs of the planned
seismic or drilling of the first exploratory well in 1996 exceed the
amounts RWE-DEA is obligated to pay, the Company will be required to pay
50% of the excess. In order to obtain necessary funds, the Company may
have to seek amounts of additional equity or funding through an industry-
formed drilling group. The Company is designated at the operator of all
joint operations. The Company has agreed to pay an unaffiliated party a
fee of aproximately $125,000 for assisting the Company in its search for
an international joint venture partner.
The agreement with RWE-DEA is subject to approval by the Polish
authorities. Based on informal discussions between the Company, RWE-DEA,
and the Polish authorities, the Company expects that such approval will be
obtained. If such required approval is not obtained, the Company is
required to return the initial $250,000 cash payment and reimburse all of
RWE-DEA's direct expenditures.
In June 1996, the Company entered into a letter of intent with investment
bankers to provide services concerning a proposed public offering of the
Company's securities.
14. Disclosures About Oil and Gas Properties and Producing Activities:
The Company's significant oil and gas properties are located in Montana,
Nevada, Utah and Poland. The Company had no working interest in any
producing wells until April 1, 1994, when FX Producing acquired certain oil
properties.
For the years ended December 31, 1994 and 1995, the Company sold oil to one
purchaser comprising 89% and 85%, respectively, of the Company's total oil
sales, all of which occurred in the United States.
Capitalized costs relating to oil and gas producing activities as of
December 31, 1994 and 1995 are summarized as follows:
United
States Poland Total
---------- ---------- ---------
(In Thousands)
December 31, 1994:
Proved properties $4,850 $ -- $4,850
Unproved properties 1,525 -- 1,525
---------- ---------- ---------
6,375 -- 6,375
Less accumulated depreciation,
depletion and amortization (229) -- (229)
---------- ---------- ---------
Total $6,146 $ -- $6,146
---------- ---------- ---------
---------- ---------- ---------
December 31, 1995:
Proved properties $6,063 $ -- $6,063
Unproved properties 1,426 370 1,796
---------- ---------- ---------
7,489 370 7,859
Less accumulated depreciation,
depletion and amortization (406) -- (406)
---------- ---------- ---------
Total $7,083 $ 370 $7,453
---------- ---------- ---------
---------- ---------- ---------
Costs incurred in oil property acquisition, exploration and development
activities during the years ended December 31, 1993, 1994 and 1995, whether
capitalized or expensed, are summarized as follows:
United
States Poland Total
---------- ---------- ---------
December 31, 1993: (In Thousands)
Acquisition of properties
Proved properties $ -- $ -- $ --
Unproved properties 332 -- 332
Exploration costs 654 -- 654
---------- ---------- ---------
Total costs incurred $ 986 $ -- $ 986
---------- ---------- ---------
---------- ---------- ---------
United
States Poland Total
---------- ---------- ---------
(In Thousands)
December 31, 1994:
Acquisition of properties
Proved properties $4,265 -- $4,265
Unproved properties 910 -- 910
Exploration costs 651 -- 651
585 -- 585
---------- ---------- ---------
Total costs incurred $6,411 $ -- $6,411
---------- ---------- ---------
---------- ---------- ---------
December 31, 1995:
Acquisition of Properties
Proved properties $ 48 $ -- $ 48
Unproved properties 16 370 386
Exploration costs 533 214 747
Development costs 1,175 -- 1,175
---------- ---------- ---------
Total costs incurred $1,772 $ 584 $2,356
---------- ---------- ---------
---------- ---------- ---------
15. Summary Oil and Gas Reserve Data (Unaudited):
The following quantity and value information is based on prices as of the
end of each respective reporting period. No price escalations were
assumed except for sales made under terms of contracts which include
fixed and determinable escalations. Operating costs and production taxes
were deducted in determining the quantity and value information. Such
costs were estimated based on current costs and were not adjusted to
anticipate increases due to inflation or other factors. No amounts were
deducted for general overhead, depreciation, depletion and amortization and
interest expense.
The determination of oil and gas reserves is based on estimates and is
highly complex and interpretive. The estimates are subject to continuing
change as additional information becomes available and an accurate
determination of the reserves may not be possible for several years after
discovery.
Estimated Quantities of Proved Oil Reserves
Following is a reconciliation of the Company's interest in net quantities
of proved oil reserves. All proved oil reserves are located in the United
States. Proved reserves are the estimated quantities of crude oil which
geological and engineering data demonstrate with reasonable certainty
to be recoverable in future years
from known reserves under existing economic and operating conditions.
Changes in estimated oil reserves of the Company for the years ended
December 31, 1994 and 1995, are as follows:
For the Years Ended
December 31,
1994 1995
-------- --------
(MBbl)
Total proved reserves:
Beginning of year -- 5,734
Purchase of minerals-in-place 4,863 146
Extensions and discoveries 1,255 --
Revisions of previous
estimates (267) (488)
Production (117) (135)
-------- --------
End of year 5,734 5,257
-------- --------
Proved developed reserves:
Beginning of year -- 2,655
-------- --------
-------- --------
End of year 2,655 2,683
-------- --------
-------- --------
Standardized Measure of Discounted Future Net Cash Flows and Changes
Therein Relating to Proved Oil Reserves
Estimated discounted future net cash flows and changes therein were
determined in accordance with Statement of Financial Accounting Standards
No. 69. Certain information concerning the assumptions used in computing
the valuation of proved reserves and their inherent limitations are
discussed below. The Company believes such information is essential for a
proper understanding and assessment of the data presented.
Future cash flows are computed by applying period-end prices of oil
relating to the Company's proved reserves to the period-end quantities of
those reserves.
The assumptions used to compute the proved reserve valuation do not
necessarily reflect the Company's expectations of actual revenues to be
derived from those reserves nor their present worth. Assigning monetary
values to the reserve quantity estimation process does not reduce the
subjective and ever-changing nature of such reserve estimates.
Additional subjectivity occurs when determining present values because the
rate of producing the reserves must be estimated. In addition to errors
inherent in predicting the future, variations from the expected production
rate also could result directly or indirectly from factors outside the
Company's control, such as unintentional delays in development,
environmental concerns and changes in prices or regulatory controls.
The reserve valuation assumes that all reserves will be disposed of by
production. However, if reserves are sold in place, additional economic
considerations also could affect the amount of cash eventually realized.
Future development and production costs are computed by estimating
expenditures to be incurred in developing and producing the proved oil
reserves at the end of the period, based on period-end costs and assuming
continuation of existing economic conditions.
A discount rate of 10% per year was used to reflect the timing of the
future net cash flows.
As of December 31,
1994 1995
---------- ----------
(In Thousands)
Future cash flows $ 72,914 $ 86,643
Future production and
development costs (33,728) (41,463)
---------- ----------
Future net cash flows 39,186 45,180
Future income tax expense (8,064) (11,628)
---------- ----------
Future net cash flows 31,122 33,552
10% annual discount for
estimated timing of cash flows (14,369) (15,891)
---------- ----------
Standardized measure of
discounted future net cash
flows $ 16,753 $ 17,661
---------- ----------
---------- ----------
Standardized Measure of Discounted Future Net Cash Flows and Changes
Therein Relating to Proved Oil Reserves:
The following are principal sources of changes in the standardized measure
of discounted future net cash flows:
1994 1995
------------ ------------
(In Thousands)
Balance, beginning of year $ -- $ 16,753
Sales of oil produced, net of
production costs (1,035) (709)
Net changes in prices and production
costs (1,377) 4,663
Purchases of minerals in-place 20,125 681
Extensions and discoveries, net of
future costs 5,236 --
Changes in estimated future
development costs (630) 349
Development costs incurred during the
year 134 1,298
Revisions in previous quantity
estimates (1,015) (2,467)
Accretion of discount 1,509 1,675
Net change in income taxes (2,404) (2,178)
Changes in rates of production and
other (3,790) (2,404)
------------ ------------
Balance, end of year $ 16,753 $ 17,661
------------ ------------
------------ ------------
<PAGE>
HAMILTON MISFELDT & COMPANY P.C.
Certified Public Accountants
INDEPENDENT AUDITORS' REPORT
TO THE GENERAL PARTNERS
B&B PRODUCTION COMPANY
SHELBY, MONTANA
We have audited the accompanying statement of operations of B & B Production
Company (a general partnership) for the year ended December 31, 1993. This
financial statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We conducted our audit 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 statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the results of operations of B & B Production Company (a
general partnership) for the year ended December 31, 1993 in conformity with
generally accepted accounting principles.
/S/
HAMILTON MISFELDT & COMPANY, P.C.
February 14, 1994
118 East Main Cut Bank, Montana 59427 (406) 873-5564 Fax (406) 873-4410
<PAGE>
B & B PRODUCTION COMPANY
(A GENERAL PARTNERSHIP)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
Sales
Oil sales $2,457,348
Contract services 509,281
Consulting fees 30,627
-------------
2,997,256
-------------
Operating expenses
Royalty 384,262
Production taxes 282,100
Operating expense 1,883,282
Travel & other expense 1,361
Telephone 7,341
Office supplies 2,068
Legal 1,527
Accounting 56,690
Bank charges 711
Bad debt 36,705
Recording fees 1,672
Postage 2,288
Contract services 26,010
Clerical services 57,250
Leases and equipment rental 172
Utilities 3,053
Office maintenance 3,720
Property taxes 1,091
Dry hole costs 157,593
Insurance 538
Reclamation costs 201,145
Depreciation 113,903
Depletion 58,781
Dues and subscriptions 409
Donations 228
-------------
TOTAL OPERATING EXPENSES 3,283,900
-------------
LOSS FROM OPERATIONS (286,644)
-------------
OTHER INCOME (EXPENSES)
Interest expense (19,289)
Interest and dividend income 38,868
Gain on sale of equipment 3,240
Loss on sale of leasehold (4,210)
Other income 12,914
Royalty income 2,681
-------------
34,204
-------------
NET LOSS $(252,440)
-------------
-------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
B & B PRODUCTION COMPANY
(A GENERAL PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993
Note 1: Summary of significant accounting policies
B & B Production Company is a general partnership formed in the State of
Montana on August 14, 1986. The general partners are J.R. Bacon Drilling,
Inc., a Utah corporation, and RLB Oil Company, a Montana corporation.
The Company was created to explore, develop, and produce hydrocarbons
from oil and gas properties.
Depletion and depreciation - The costs of producing properties are
capitalized as leaseholds for accounting purposes. Depletion is provided
for under the cost depletion method for financial statement purposes.
For income tax purposes, depletion is provided for under the cost
depletion method for properties purchased in 1990 and prior, and the
percentage depletion method for properties purchased in 1991 and
thereafter. Depletion for the year ended December 31, 1993, was $58,781.
All of the depreciable assets are carried at cost. Depreciation is
calculated using straight-line and accelerated methods over useful lives
of 5, 7, and 10 years for both financial statement and income tax
purposes. Depreciation for the year ended December 31, 1993, was
$113,903.
Income taxes - Federal and state income taxes are the personal
obligations of the partners. Therefore, no provision for income taxes
has been provided in the financial statements.
Oil and gas properties - The Company uses the successful efforts method
of accounting for oil and gas producing activities. Costs to acquire
mineral interests in oil and gas properties, to drill and equip
exploratory wells that find proved reserves, and to drill and equip
development wells are capitalized. Costs to drill exploratory wells that
do not find proved reserves, geological and geophysical costs, and costs
of carrying and retaining unproved properties are expensed.
Unproved oil and gas properties that are individually significant are
periodically assessed for impairment by providing an impairment
allowance. Other unproved properties are amortized based on the
Company's experience of successful drilling and average holding period.
Capitalized costs of producing oil and gas properties, after considering
estimated dismantlement and abandonment costs and estimated salvage
values, are depreciated and depleted by the unit of production method.
Support equipment and other property and equipment are depreciated over
their estimated useful lives.
On sale or retirement of a complete unit of a proved property, the cost
and related accumulated depreciation, depletion, and amortization are
eliminated from the property accounts, and the resulting gain or loss is
recognized. On retirement or sale of a partial unit of proved property,
the cost is charged to accumulated depreciation, depletion, and
amortization with a resulting gain or loss recognized in income.
On sale of an entire interest in an unproved property for cash or cash
equivalent, gain or loss on the sale is recognized, taking into
consideration the amount of any recorded impairment if the property had
been assessed individually. If a partial interest in an unproved
property is sold, the amount received is treated as a reduction of the
costs of the interest retained.
Note 2: Related party transactions
B & B Production Company (B & B) does a significant amount of business
with the J.R. Bacon Drilling, Inc. (JRB) which is a general partner in B
& B. JRB is the operator of the Southwest Cut Bank Sand Unit (SWCBSU).
J.R. Bacon Drilling, Inc. is the major supplier of oil field services for
the Company. The amount paid for these services for the year ended
December 31, 1993, was $952,072.
Total clerical services paid to JRB for accounting services for the year
ended December 31, 1993, was $57,250.
B & B receives consulting fees from JRB for well drilling consulting
work. In 1993, fees collected by B & B were $30,627.
Contract services includes $19,728 in 1993, paid to RLB Oil Company, a
general partner in B & B for accounting services.
Note 3: Accrued reclamation costs
The Company has estimated its future costs of plugging its oil wells and
reclaiming the land as required by federal and state regulations. Costs
have been estimated using current dollars on a per barrel of production
basis. Accrued reclamation costs charged to expense for the year ended
December 31, 1993, was $201,145.
Note 4: Significant customers
The Company's oil sales were made to only four customers, one of which is
located in Montana and three of which are located in Utah.
Note 5: Oil producing properties and activities
All oil operations of the Company are conducted in the United States.
Costs both capitalized and expensed, incurred in oil producing activities
during the year ended December 31, 1993, are as follows:
Acquisition costs $ 62,359
-----------
-----------
Exploration costs $157,593
-----------
-----------
Development costs $ 68,871
-----------
-----------
Results of operations for oil producing activities for the year ended
December 31, 1993, is as follows:
Oil sales $ 2,457,348
Loss on sale of leasehold (4,210)
Royalty (384,262)
Production costs (2,165,382)
Exploration expenses (157,593)
Depreciation, depletion, and
amortization (172,684)
-----------
Results of operations for oil
producing activities
(excluding overhead and
financing costs) $ (426,783)
-----------
-----------
Note 6: Supplemental information on oil reserves (unaudited)
Estimated quantities of proved oil reserves - Reserve calculations
involve the estimation of future net recoverable reserves of oil and the
timing and amount of future net revenues to be received therefrom. These
estimates are based on numerous factors, many of which are variable and
uncertain. Accordingly, it is common for the actual production and
revenues to vary from earlier estimates. Estimates made in the first few
years of production from a property are not likely to be as reliable as
later estimates based on longer production history. Hence, reserve
estimates and estimates of future net revenues from production may be
subject to substantial revision from year to year. Reserve information
presented herein is based on reports prepared by an independent petroleum
engineer.
Proved oil reserves are the estimated quantities of crude oil, which
geological and engineering data demonstrate with reasonable certainty to
be recoverable in future years from known reservoirs under existing
economic and operating conditions, existing equipment and operating
methods. However, reserve information should not be construed as the
current market value of the Company's oil reserves or the costs that
would be incurred to obtain equivalent reserves.
Set forth below is the unaudited summary of the changes in the net
quantities of the Company's proved crude oil reserves.
Barrels
Proved reserves, December 31, 1992 2,241,005
Production (240,680)
Revisions in previous estimates 2,230,932
-----------
Proved reserves December 31, 1993 4,231,257
-----------
-----------
Proved developed reserves:
December 31, 1993 2,731,418
-----------
-----------
The Company's proved reserves (in barrels) are located in the following
states at December 31, 1993:
Proved
Proved Reserves Developed Reserves
Montana 3,802,545 2,482,514
Nevada 428,712 248,904
---------- ----------
Total 4,231,257 2,731,418
---------- ----------
---------- ----------
The following is the unaudited standardized measure of discounted future
net cash flows and changes therein relating to proved oil reserves.
Future net cash flows were computed using year-end prices and costs
(adjusted for permanent differences, that relate to existing proved oil
reserves in which the Company has an interest). No provision for income
taxes has been provided, as taxes are the personal obligations of the
partners. However, a pro forma column has been presented for December
31, 1993, to show the effect of a provision for future income tax expense
on discounted future net cash flows, as if the Company was a taxable
entity.
Pro forma
December 31, December 31,
1993 1993
------------ -------------
Future cash inflows $48,090,318 $48,090,318
Future development and
production costs (26,629,086) (26,629,086)
Net capital investment (2,535,575) (2,535,575)
------------ -------------
Future net cash flows 18,925,657 18,925,657
Future income tax expense (3,895,000) -
------------ -------------
15,030,657 18,925,657
10% annual discount for estimated
timing of cash flows (7,172,349) (9,030,970)
------------ -------------
Standardized measure of
discounted future net cash flows $7,858,308 $9,894,687
------------ -------------
------------ -------------
The following is a summary by state of the standardized measure of
discounted future net cash flows at December 31, 1993:
Montana $ 7,448,281
Nevada 2,446,406
------------
Total $ 9,894,687
------------
------------
The following are the unaudited principal sources of changes in the
standardized measure of discounted future net cash flows for the year
ended December 31:
Pro forma
1993 1993
------------- ------------
Standardized measure
beginning of year $7,150,093 $9,002,702
Sales of oil, net of
production costs (291,966) (291,966)
Acquisition of minerals in
place 62,359 62,359
Net change due to revisions in
quantity estimates 3,156,203 3,156,203
Net change due to changes in
price (2,034,611) (2,034,611)
Net change in income taxes (183,770) -
------------ -------------
Standardized measure, end of
year $7,858,308 $9,894,687
------------ -------------
------------ -------------
<PAGE>
BARKER & FOLSOM
CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of J.R. Bacon Drilling, Inc.
Shelby, Montana
We have audited the accompanying statement of operations of J.R. Bacon
Drilling, Inc., a Utah corporation, for the year ended December 31, 1993. This
financial statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We conducted our audit 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 statement. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the results of operations of J.R. Bacon Drilling, Inc.
for the year ended December 31, 1993 in conformity with generally accepted
accounting principles.
/S/
BARKER & FOLSOM
Ogden, Utah
February 28, 1994
2655 Kiesel Avenue/Ogden, Utah 84401
(801) 621-0390/FAX (801) 392-7729
<PAGE>
J.R. BACON DRILLING, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
REVENUES
Well service income $1,427,241
Drilling income 476,309
-----------
Total revenues 1,903,550
-----------
EXPENSES
Officers' salaries 157,429
Other salaries and wages 343,431
Payroll taxes and benefits 145,358
Operating expenses 345,031
Administrative expense 238,103
Interest expense 6,473
Depreciation 205,509
-----------
Total expenses 1,441,334
-----------
Income from operations 462,216
-----------
Other income (loss)
Loss from partnership (126,220)
Show horse loss (47,533)
Loss on sale of horses
and equipment (95,457)
Interest and dividend
income 74,312
Loss on marketable
securities (3,672)
-----------
Total other loss (198,570)
-----------
Income before income taxes 263,646
Income taxes
Current 49,103
Deferred 20,861
-----------
Total income taxes 69,964
-----------
NET INCOME $193,682
-----------
-----------
The accompanying notes are an integral
part of the financial statements
J.R. BACON DRILLING, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of accounting policies of J.R. Bacon Drilling, Inc., is
presented to assist in understanding the Company's financial statements. The
accounting policies conform to generally accepted accounting principles and have
been consistently applied in the preparation of the financial statements.
Organization
J.R. Bacon Drilling, Inc. (the "Company"), was organized as a Utah
corporation on April 28, 1975. The Company's offices are located in Oilmont,
Montana, and it is engaged primarily in the oil and gas field service business.
The Company also provides well drilling and well workover services, as well as
operating services.
The Company has a fiscal year-end of March 31. However, the Company's
financial statements have been restated and are presented here using a calendar
year format in order to be comparable to the fiscal year of other entities who
have a calendar year end and are presented for the twelve-month calendar year
ended December 31, 1993.
Property and Equipment and Depreciation
Property and equipment is recorded at cost. The cost of property and
equipment is depreciated over the estimated useful lives of the related assets.
The Company depreciates its equipment using straight-line and accelerated
methods over estimated useful lives ranging from three to ten years.
Expenditures for maintenance and repairs are expensed.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" which
requires the use of the "liability method" of accounting for income taxes.
Accordingly, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities, using enacted tax rates in effect for the year in which the
differences are expected to reverse. Current income taxes are based on the
year's income taxable for federal and state income tax reporting purposes.
The Company files its corporate income tax return using the modified
accrued method of accounting which results in timing differences in recognizing
income and expenses for tax purposes.
NOTE 2 - PARTNERSHIP INCOME (LOSS)
The Company owns 50% of the general partnership of B & B Production
Company, formed in August of 1986. The Company accounts for its investment in B
& B Production Company using the equity method. B & B Production Company
acquires, operates, explores for, develops, reworks, and produces hydrocarbons
from oil and gas properties located in Montana and Nevada.
The gross sales, net income and partners' withdrawals for the year ended
December 31, 1993, is as follows:
Gross sales $2,997,256
Net income (loss) (252,440)
Partners' withdrawals 302,000
The Company reported 50% of the partnership net loss on their statements of
operations of ($126,220) for the year ended December 31, 1993.
NOTE 3 - RELATED PARTY TRANSACTIONS
The Company performs pumping, management and well workover services for B &
B Production Company, as well as the South West Cut Bank Sand Unit (SWCBSU) Kye
Trout oil field which is owned by B & B Production Company (see Note 2). Gross
revenue for services provided to these related parties for the year ended
December 31, 1993, were as follows:
South West Cut Bank Sand Unit $1,002,405
B & B Production Company 313,121
-----------
Total $1,315,526
-----------
-----------
The Company also leases a compressor on a month-to-month basis at a monthly
rate of $3,000 from Mr. Bacon.
NOTE 4 - INCOME TAXES
Income taxes computed by applying the statutory rate to income before
income taxes are reconciled to the provision for income taxes set forth in the
financial statement for the year ended December 31, 1993, as follows:
Federal income tax $89,640
State income tax, net of federal tax benefit 11,733
Tax benefit of statutory depletion deduction (31,409)
-----------
Total income tax expense $69,964
-----------
-----------
The provision for income taxes included the following:
Current tax $49,103
Deferred tax 20,861
-----------
$69,964
-----------
-----------
Deferred income tax expense results from temporary differences in the
recognition of revenue and expenses and basis of assets and liabilities for tax
and financial statement purposes. The source of these differences results from
the enterprise using the modified accrual basis of accounting for tax purposes
and the accrual basis of accounting for financial statement purposes. In
particular, net accounts receivable are not recognized as income for income tax
purposes until the cash is received. Timing of receipts of cash from
receivables and payment of accounts payable accounts for all of the deferred tax
liability and changes therein.
<PAGE>
APPENDIX A
LARRY D. KRAUSE
PETROLEUM ENGINEERING CONSULTANT 2812 1st Avenue North, Suite 205
Billings, Montana 59101
(406) 252-2975
January 30, 1996
Mr. David Pierce
Frontier Oil Exploration Company
3006 Highland Drive, Suite 206
Salt Lake City, Utah 84106
Re: Appraisal of Frontier Oil Exploration Company's
Interest in Various Oil Producing Properties
as of December 31, 1995
Dear Mr. Pierce:
As per your request, I have prepared an independent appraisal of Frontier
Oil Exploration Company's interest in various oil producing properties using
Securities and Exchange Commission guidelines. The result, net to appraised
interest, is as follows:
Future Net Income
----------------------------
Reserve Category Oil, Bbls Undiscounted Discounted
at 10.0%
- -------------------- ------------ -------------- ------------
Proved Developed 2,427,848 $17,416,164 $6,421,659
Producing
Proved Nonproducing 254,825 2,111,711 1,314,330
Proved Undeveloped 2,574,500 25,652,415 16,045,459
----------- ------------- -----------
Totals 5,257,173 $45,180,290 $23,781,448
The weighted average oil price of $16.48 per barrel used in the evaluation
was based on prices paid for December 31, 1995, sales. This price, provided by
Frontier Oil Exploration Company, was adjusted for any applicable gravity
corrections and bonuses paid by the purchasers. This price was held constant
for the purpose of this evaluation.
The lease operating expenses used in the evaluation were provided by
Frontier Oil Exploration Company. The expenses represent actual recurring
expenses for each of the properties that were evaluated. The expenses were held
constant. Operating expenses for the Southwest Cut Bank Sand Unit were adjusted
to take into account wells being shut-in and/or abandoned as they became
uneconomical to produce. Operating expenses do not include such items as
depreciation and state and federal income taxes. Ad valorem and production
severance taxes were deducted separately. These taxes were deducted at the
published rate for each state. They were input as a decimal and applied as a
percentage of undiscounted net revenue. The taxes were combined with operating
expenses in the operating expense column.
On December 21, 1995, the State of Montana and Blackfeet Tribe signed an
agreement which will eliminate double taxation on the Blackfeet Reservation.
This resulted in a 7.0% reduction in production taxes for the Southwest Cut Bank
Sand Unit. Plugging and abandonment costs were assumed to be approximately
equal to salvage values for the equipment. Therefore, neither were included in
the evaluation.
The discounted figures have been reduced by estimated development costs of
$6,115,089. This reflects the estimated cost of infill drilling and waterflood
operations on four specific areas within the Cut Bank field designed to increase
production rates, flood efficiency, and ultimate oil recovery. These efforts
include returning eight shut-in wells to producing status, converting 12 shut-in
water injection wells to producing oil wells, converting seven areas in the
field to inverted five-spot waterflood patterns, and drilling six producing
wells at various locations to further develop the field. For purposes of the
reserve evaluation, it was assumed that the subject work will be performed
during 1996 and 1997. The amount and timing of future development and operating
costs may differ from those used in the estimate.
The reserves considered in this evaluation are proved developed producing,
proved developed nonproducing, and proved undeveloped. The definition of oil
and gas reserves, as defined by the Society of Petroleum Engineers of AIME, are
included at the end of this report.
The oil reserves assigned to the properties in this evaluation were
determined by analyzing current test data, extrapolation of historical
production data, and comparison to production history of similar wells in the
area. The current volatility of oil prices provides an element of uncertainty.
If prices should vary significantly from those projected in the appraisal, the
resulting values could change substantially. The reserve estimates contained in
this evaluation are based on accepted engineering and evaluation principles and
are believed to be reasonable. The information contained in this report is for
the benefit of Frontier Oil Exploration Company and does not necessarily
represent an estimate of a fair market value for the evaluated properties.
Very truly yours,
/s/ Larry D. Krause
Petroleum Engineer
DEFINITIONS FOR OIL AND GAS RESERVES
RESERVES
Reserves are estimated volumes of crude oil, condensate, natural gas,
natural gas liquids and associated substances anticipated to be commercially
recoverable from known accumulations from a given date forward, under existing
economic conditions, by established operating practice and under current
government regulations. Reserves estimates are based on interpretation of
geologic and/or engineering data available at the time of the estimate.
Reserves estimates generally will be revised as reservoirs are produced, as
additional geologic and/or engineering data become available or as economic
conditions change.
Reserves do not include volumes of crude oil, condensate, natural gas or
natural gas liquids being held in inventory. If required for financial
reporting or other special purposes, reserves may be reduced for on-site usage
and/or processing losses.
The ownership status of reserves may change due to the expiration of a
production license or contract; when relevant to reserves assignment such
changes should be identified for each reserves classification.
Reserves may be attributed to either natural reservoir energy or improved
recovery methods. Improved recovery includes all methods for supplementing
natural reservoir energy to increase ultimate recovery from a reservoir. Such
methods include (1) pressure maintenance, (2) cycling, (3) waterflooding, (4)
thermal methods, (5) chemical flooding and (6) use of miscible and immiscible
displacement fluids.
All reserves estimates involve some degree of uncertainty, depending
chiefly on the amount and reliability of geologic and engineering data available
at the time of the estimate and the interpretation of these data. The relative
degree of uncertainty may be conveyed by placing reserves in one of two
classifications, either proved or unproved. Unproved reserves are less certain
to be recovered than proved reserves and may be subclassified as probable or
possible to denote progressively increasing uncertainty.
PROVED RESERVES
Proved reserves can be estimated with reasonable certainty to be
recoverable under current economic conditions. Current economic conditions
include prices and costs prevailing at the time of the estimate. Proved
reserves may be developed or undeveloped.
In general, reserves are considered proved if commercial producibility of
the reservoir is supported by actual production or formation tests. The term
proved refers to the estimated volume of reserves and not just to the
productivity of the well or reservoir. In certain instances, proved reserves
may be assigned on the basis of electrical and other type logs and/or core
analyses that indicate the subject reservoir is hydrocarbon bearing and is
analogous to reservoirs in the same area that are producing or have demonstrated
the ability to produce on a formation test.
The area of a reservoir considered proved includes (1) the area delineated
by drilling and defined by fluid contacts, if any and (2) the undrilled areas
that can be reasonably judged as commercially productive on the basis of
available geologic and engineering data. In the absence of data on fluid
contacts, the lowest known structural occurrence of hydrocarbons controls the
proved limit unless otherwise indicated by definitive engineering or performance
data.
Proved reserves must have facilities to process and transport those
reserves to market that are operational at the time of the estimate or there is
a commitment or reasonable expectation to install such facilities in the future.
In general, proved undeveloped reserves are assigned to undrilled locations that
satisfy the following conditions: (1) the locations are direct offsets to wells
that have indicated commercial production in the objective formation, (2) it is
reasonably certain that the locations are within the known proved productive
limits of the objective formation, (3) the locations conform to existing well
spacing regulations, if any, and (4) it is reasonably certain that the locations
will be developed. Reserves for other undrilled locations are classified as
proved undeveloped only in those cases where interpretations of data from wells
indicate that the objective formation is laterally continuous and contains
commercially recoverable hydrocarbons at locations beyond direct offsets.
Reserves that can be produced through the application of established
improved recovery methods are included in the proved classification when (1) the
successful testing by a pilot project or favorable production or pressure
response of an installed program in that reservoir, or one in the immediate area
with similar rock and fluid properties, provides support for the engineering
analysis on which the project or program is based and (2) it is reasonably
certain the project will proceed.
Reserves to be recovered by improved recovery methods that have yet to be
established through repeated commercially successful applications are included
in the proved classification only (1) after a favorable production response from
subject reservoir from either (a) a representative pilot or (b) an installed
program, where the response provides support for the engineering analysis on
which the project is based and (2) it is reasonably certain the project will
proceed.
UNPROVED RESERVES
Unproved reserves are based on geologic and/or engineering data similar to
that used in estimates of proved reserves; but technical, contractual, economic
or regulatory uncertainties preclude such reserves being classified as proved.
They may be estimated assuming future economic conditions different from those
prevailing at the time of the estimate.
Estimates or unproved reserves may be made for internal planning or special
evaluations, but are not routinely compiled.
Unproved reserves are not to be added to proved reserves because of
different levels of uncertainty.
Unproved reserves may be divided into two subclassifications: probable and
possible.
Probable Reserves
Probable reserves are less certain than proved reserves and can be
estimated with a degree of certainty sufficient to indicate they are more likely
to be recovered than not.
In general, probable reserves may include (1) reserves anticipated to be
proved by normal stepout drilling where subsurface control is inadequate to
classify these reserves as proved, (3) reserves in formations that appear to be
productive based on log characteristics but that lack core data or definitive
tests and which are not analogous to producing or proved reservoirs in the area,
(3) incremental reserves attributable to infill drilling that otherwise could be
classified as proved but closer statutory spacing had not been approved at the
time of the estimate, (4) reserves attributable to an improved recovery method
that has been established by repeated commercially successful applications when
a project or pilot is planned but not in operation and rock, fluid and reservoir
characteristics appear favorable for commercial application, (5) reserves in an
area of a formation that has been proved productive in other area of the field
but the subject area is structurally higher than the proved area, (6) reserves
attributable to a successful workover, treatment, retreatment, change of
equipment or other mechanical procedure where such procedure has not been proved
successful in wells exhibiting similar behavior in analogous reservoirs and (7)
incremental reserves in a proved producing reservoir where an alternate
interpretation of performance or volumetric data indicates significantly more
reserves than can be classified as proved.
Possible Reserves
Possible reserves are less than probable reserves and can be estimated with
a low degree of certainty, insufficient to indicate where they are more likely
to be recovered than not.
In general, possible reserves may include (1) reserves suggested by
structural and/or stratigraphic extrapolation beyond areas classified as
probable, based on geologic and/or geophysical interpretation, (2) reserves in
formations that appear to be hydrocarbon bearing based on logs or cores but that
may not be productive at commercial rates, (3) incremental reserves attributable
to infill drilling that are subject to technical uncertainty, (4) reserves
attributable to an improved recovery method when a project or pilot is planned
but not in operation and rock, fluid and reservoir characteristics are such that
a reasonable doubt exists that the project will be commercial and (5) reserves
in an area of a formation that has been proved productive in other areas of the
field but subject area appears to separated from the proved area by faulting and
geologic interpretation indicates subject area is structurally lower than the
proved area.
RESERVE STATUS CATEGORIES
Reserve status categories define the development and producing status of
wells and/or reservoirs.
Developed
Developed reserves are expected to be recovered from existing wells
(including reserves behind pipe). Improved recovery reserves are considered
developed only after the necessary equipment has been installed or when the
costs to do so are relatively minor. Developed reserves may be subcategorized
as producing or nonproducing.
Producing
Producing reserves are expected to be recovered from completion intervals
open at the time of the estimate and producing. Improved recovery reserves are
considered to be producing only after an improved recovery project is in
operation.
Nonproducing
Nonproducing reserves include shut-in and behind-pipe reserves. Shut-in
reserves are expected to be recovered from completion intervals open at the time
of the estimate, but which had not started producing or were shut-in for market
conditions or pipeline connection or were not capable of production for
mechanical reasons and the time when sales will start is uncertain.
Behind-pipe reserves are expected to be recovered from zones behind casing
in existing wells, which will require additional completion work or a future
completion prior to the start of production.
Undeveloped
Undeveloped reserves are expected to be recovered: (1) from new wells on
undrilled acreage, (2) from deepening existing wells to a different reservoir or
(3) where a relatively large expenditure is required to (a) recomplete an
existing well or (b) install production or transportation facilities for primary
or improved recovery projects.
<PAGE>
NO DEALER, SALESMAN OR OTHER
PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY
REPRESENTATION IN CONNECTION WITH THE
OFFERING OTHER THAN THOSE CONTAINED 3,000,000 Shares
IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED FX ENERGY
UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN (Frontier Oil Exploration Company)
OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER IN SUCH JURISDICTION. Common Stock
NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN PROSPECTUS
IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF OR THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE SUCH DATE.
TABLE OF CONTENTS
Page
Available Information.... inside
cover
Oil and Gas Terms........ inside
cover
Prospectus Summary....... 3
Risk Factors............. 12 Oppenheimer & Co., Inc.
Company History.......... 14
Use of Proceeds.......... 15
Price Range of Common Stock and Hanifen, Imhoff Inc.
Dividend Policy ........ 16
Dilution................. 17
Capitalization........... 18
Selected Consolidated Financial 19 , 1996
Data ...................
Management's Discussion and
Analysis of Financial
Condition and Results of 20
Operations .............
Business and Properties.. 26
Management............... 38
Principal Stockholders... 43
Certain Transactions..... 45
Description of Securities 46
Underwriting............. 48
Legal Matters............ 49
Experts.................. 50
Consolidated Financial F-1
Statements .............
Incorporation of Certain
Information by Reference 50
Summary Reserve Report A-1
, 1996
<PAGE>
PART II
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following are the estimated expenses in connection with the
distribution of the securities being registered:
Securities and Exchange Commission $ 11,327
registration fee
Attorney's fees and expenses 175,000
State "blue sky" fees and expenses,
including attorney's fees 15,000
Accounting fees and expenses 30,000
Nasdaq fees 45,000
Printing expenses 100,000
Reproduction, courier, and other
miscellaneous expenses 23,673
--------
Total $550,000
========
All expenses, except the SEC fees, are estimates.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 78.037 and 78.751 of the Nevada Revised Statutes and Article VI of
the Registrant's Articles of Incorporation provide for indemnification of the
Registrant's directors in a variety of circumstances, which include liabilities
under the Securities Act of 1933, as amended.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
SECURITIES TRANSACTIONS
During the three years last preceding the filing of this registration
statement, the Registrant issued the following securities without registration
under the Securities Act of 1933:
(a) Issuance of Common Stock for Services and Cash--106,000 Shares of
Common Stock
Between May and October 1993, the Registrant issued for services 50,000
shares of Common Stock to Robert I. Coward, then an officer of the Registrant
(accredited investor); 25,000 shares to Karin Warner, one of the Registrant's
current administrative employees who had been employed by the Registrant since
inception as well as by David N. Pierce and Andrew W. Pierce in their various
oil and gas and other business enterprises for approximately ten years, for
extraordinary services and loyalty, at some times when the Registrant's long-
term financial stability was uncertain; 25,000 shares to Philip Lundquist,
Atlanta, Georgia, a financial advisor to the Registrant respecting possible
sources of project financing, the capital structure of the corporation, and
industry contacts; and 6,000 shares of Common Stock for $1.00 per share to Mr.
Lundquist's business associate, B&S Partners.
(b) Acquisition of Petrolex--400,000 Shares of Common Stock
In June 1993, the Registrant issued 400,000 shares of restricted Common
Stock in exchange for all of the issued and outstanding shares of Petrolex
Corporation ("Petrolex"). Such shares were issued to the stockholders of
Petrolex, pro rata in proportion to their then existing ownership interest in
Petrolex, except for David N. Pierce, who voluntarily reduced his interest.
David N. Pierce and David Dallof, officers and/or directors of the Registrant,
owned 48.7% of the issued and outstanding stock of Petrolex, and relatives of
Mr. Dallof owned an additional approximately 6.8% of such issued and outstanding
stock. The acquisition was effected through the merger of Petrolex with and
into a wholly owned subsidiary of the Registrant organized for that purpose.
The stockholders of Petrolex approved the merger at a special stockholders'
meeting held on June 24, 1994, after receiving written notice of the meeting and
a proxy statement containing information about the merger, the business of the
Registrant, historical financial information on the parties to the transaction,
and pro forma combined financial information. Of the 21 persons receiving shares
in this exchange, 13 were accredited investors. No offers were made to persons
not stockholders of Petrolex.
(c) Sale of Preferred Stock--1,500,000 Shares of Preferred Stock and
150,000 Purchase Warrants
Between June 1993 and February 1994, the Registrant issued an aggregate of
1,500,000 shares of its 1993 Series Convertible Preferred Stock sold at $1.00
per share, receiving a net amount of approximately $1.3 million, after deducting
offering costs and commissions of approximately $200,000. George E. Dullnig &
Co., 115 East Travis, Milam Building, Suite 11, San Antonio, Texas 78205, acted
as placement agent for the offering, for which it received cash commissions of
10%, or a total of $150,000, an accountable expense allowance of up to 2%, and
five year warrants to purchase 150,000 shares of Common Stock at $1.10 per
share. The offering was made through a private placement memorandum that
contained detailed information respecting the business and properties of the
Registrant and audited financial statements. Securities in this offering were
sold to four persons who were not citizens or residents of the United States and
to 38 United States persons, including 32 accredited investors.
A notice on Form D respecting this offering was timely filed with the
Commission.
(d) Options to Purchase Common Stock/1,000,000 Options
On June 10, 1994, the Registrant issued to David N. Pierce and Andrew W.
Pierce, officers, directors, and principal stockholders of the Registrant, 10
year options to purchase at $3.00 per share a total of 500,000 shares of Common
Stock each, exercisable in installments of 100,000 shares each annually
commencing in June 1995.
(e) Acquisition of Oil and Gas Properties--500,000 Shares of Common Stock
In June 1994, the Registrant issued 500,000 shares of restricted Common
Stock to two designees of Sunshine Pacific Corporation, a principal shareholder,
in exchange for certain working interests in oil and gas properties and $100,000
in cash. This transaction was the result of specific negotiations to acquire
specific oil and gas lease interests; no offers were made to other persons.
(f) Common Stock and Warrants--79,694 Shares of Common Stock and 86,198
Warrants
Between July and December 1994, the Registrant's subsidiary, FX Producing
Company, Inc. ("FX Producing"), issued an aggregate of 1,267,480 shares of FX
Producing preferred stock at $1.50 per share, for a total of $1,901,215. The
Registrant issued to an unaffiliated Australian firm and Alpine Securities
Corporation, an unaffiliated Utah firm, that assisted in the placement of these
shares, warrants to purchase 86,198 shares of Registrant Common Stock at $1.65
per share between January 1, 1995, and December 31, 1999. In addition, the
Registrant issued 79,694 shares of Common Stock in lieu of cash compensation to
persons who assisted in the placement of the FX Producing preferred stock.
(g) Issuance of Common Stock for Payment of Note--25,453 Shares of Common
Stock
On October 5, 1994, the Registrant issued 25,453 shares of Common Stock to
J.R. Bacon Drilling, Inc., in consideration of the cancellation of a promissory
note of the Registrant for the acquisition of certain assets valued at
$38,179.29 that were not originally included in assets purchased by the
Registrant in April 1994.
(h) Issuance of Common Stock for Services and Fee--115,000 Shares of
Common Stock
Between October 1994 and January 1995, the Registrant issued 50,000 shares
of Common Stock to Robert I. Coward pursuant to an employment agreement with the
Registrant; 25,000 shares to Karin Warner as additional compensation for
continuing services and loyalty; 32,000 shares to Marc W. Eller for services
rendered as a director of the Registrant; an aggregate of 5,000 shares to three
individuals for services previously rendered to the Registrant; and 3,000 shares
to Westergaard Publishing Registrant, New York, New York, in lieu of a $9,000
registration fee for the Registrant's participation in an oil and gas
conference.
(i) Issuance of Common Stock on Conversion of FX Producing Preferred
Stock--1,871,125 Shares of Common Stock
During 1995, holders of an aggregate of 1,871,125 shares of preferred stock
of FX Producing, a wholly owned subsidiary of the Registrant, converted such
shares of preferred stock into an equal number of shares of Common Stock.
(j) Issuance of Common Stock on Conversion of Registrant Preferred Stock--
1,482,500 Shares of Common Stock
During 1995, holders of 1,362,500 shares of Registrant preferred stock
converted such shares into an equal number of shares of Common Stock. An
additional 120,000 shares of Registrant preferred stock were converted into
Common Stock during the first fiscal quarter of 1996.
(k) Issuance of Common Stock and Options for Consulting and Line of
Credit--200,000 shares; 350,000 options
On August 3, 1995, the Registrant granted to Thomas B. Lovejoy, now a
director, executive officer, and principal shareholder, for financial consulting
services to be provided by Lovejoy Associates, Inc., and for personally
providing a line of credit of $600,000 through March 31, 1996, options to
purchase 350,000 shares of Common Stock at $3.00 per share. In connection with
the foregoing, the Registrant also issued Lovejoy Associates, Inc., 200,000
shares of Common Stock.
(l) Issuance of Common Stock on Exercise of Warrants and Options--87,004
Shares of Common Stock
Between October 1995 and March 1996, individuals exercised warrants to
purchase an aggregate of 83,000 shares of Common Stock at an exercise price of
$1.10 per share. These warrants had been issued in connection with the private
placement of the Registrant's preferred stock in 1993 and 1994. In
February, 1996, an individual exercised warrants to purchase 4,004 shares of
Common Stock at an exercise price of $1.65 per share. All of the foregoing
warrants had been issued to the holders in connection with the private placement
of the FX Producing preferred stock in 1994 and 1995.
(m) Options to Purchase Common Stock Granted to Directors, Employees, and
Consultants of the Registrant--835,334 Options
Between August and November, 1995, the Registrant granted options to
purchase 225,000 shares of Common Stock at $1.50 per share to two employees
directly involved in the Registrant's obtaining the Baltic Concession;
incentive stock options to purchase 50,000 shares of Common Stock at $1.50 per
share to employees that are not executive officers or directors; options to
purchase 375,000 shares of Common Stock at $3.00 per share to officers,
directors, and employees.
In September 1995, the Registrant granted to Robert I. Coward options to
purchase 150,000 shares of Common Stock at an exercise price of $2.00 per share
through September 29, 2000. These options were granted to replace the
Registrant's obligation to issue up to 100,000 shares in connection with Mr.
Coward's employment.
Between April and May 1996, the Registrant granted options to purchase
25,000 shares of Common Stock at $3.00 per share to an employee involved in the
Registrant's activities in Poland and options to purchase 10,334 shares of
Common Stock at an exercise price of $3.00 per share to L.G. Zangani, Inc. for
services related to public relations of the Company.
(n) Issuance of Common Stock on Exercise of Options--80,000 Shares of
Common Stock
In April and May, 1996, individuals exercised options to purchase 80,000
shares of Common Stock at an exercise price of $1.50 per share. These options
were originally granted to the president of an independent oil exploration firm
that provided financial advisory services and were transferred by such
individual pursuant to a privately negotiated transaction.
(o) Issuance of Warrants to Purchase Common Stock to Consultants--160,000
Warrants
On September 30, 1995, the Registrant issued to Fechtor, Detwiler, in
consideration of consulting services, warrants to purchase 60,000 shares of
Common Stock at $2.20 per share exercisable through September 30, 1998. On
November 10, 1995, the Registrant issued to Laurence B. Flood, in consideration
of consulting services, warrants to purchase 100,000 shares of Common Stock at
$3.00 per share exercisable through November 9, 2000. Each consultant has had
ongoing relationships with the Registrant and has provided services with regard
to the financing activities of the Registrant.
(p) Cash Sales of Common Stock--616,004 shares
In October 1995 the Registrant sold 50,000 shares of Common Stock to an
executive officer and director and in January 1996 the Registrant sold 50,000
shares of Common Stock to a business associate of the executive officer and
director for aggregate proceeds of $200,000. A notice on Form D was timely
filed with the Commission respecting the issuance of the latter 50,000 shares.
During the first quarter of 1996, the Registrant sold an aggregate of
359,893 shares of Common Stock at $3.00 per share for net proceeds of
approximately $940,000. During April and May 1996, the Registrant sold an
aggregate of 156,111 shares of common stock at $4.50 per share for net proceeds
of approximately $680,000. Securities in these offerings were sold to an
aggregate 26 accredited investors and 10 nonaccredited investors. A notice on
Form D was filed with the Commission respecting these offerings.
(q) Acquisition of Oil and Gas Properties--500,000 Shares of Common Stock
On October 6, 1995, the Registrant issued 12,000 shares of restricted stock
to Walter E. Uhlman, a shareholder of the Registrant, in consideration of the
shareholder's interest in an oil and gas prospect. In January 1996, the
Registrant issued 1,093 shares of Common Stock in connection with the
acquisition of an interest in the Cut Bank field to increase the Registrant's
holdings in the field. These transactions were the result of specific
negotiations to acquire specific oil and gas lease interests; no offers were
made to other persons.
(r) Issuance of Common Stock for Services--71,857 shares
Between January and April 1996, the Registrant issued for services 40,000
shares of Common stock to three individuals, all of whom are citizens and
residents of Poland, for services provided.
Between March and May 1996, the Registrant issued 6,000 shares to an
individual on his appointment as a director of the Registrant; 5,500 shares of
Common Stock to a brother of two executive officers and directors of the
Registrant for services in connection with the installation and maintenance of
the Registrant's computer network; and 2,500 shares of Common Stock to
Petresearch International, Inc., a corporation that provided services in
relation to assisting the Registrant in its search for a partner in its
activities in Poland.
EXEMPTIONS RELIED ON
The securities issued in the transactions described above were issued in
reliance on the exemption from the registration and prospectus delivery
requirements of the Securities Act provided in Section 4(2) thereof.
Each purchaser was provided with business and financial information
respecting the Registrant and was provided with the opportunity to obtain
additional information in order to verify the information provided or to further
inform themselves respecting the Registrant.
Each of the persons acquiring such securities acknowledged in writing that
he, she, or it was obtaining "restricted securities" as defined in rule 144
under the Securities Act; that such shares could not be transferred without
registration or an available exemption therefrom; that he, she, or it must bear
the economic risk of the investment for an indefinite period; and that the
Registrant would restrict the transfer of the securities in accordance with such
representations. Such persons also agreed that any certificates representing
such shares would be stamped with a restrictive legend covering the transfer of
such shares. The certificates representing the foregoing shares bear an
appropriate restrictive legend conspicuously on their face, and stop transfer
instructions are noted on the Registrant's stock transfer records.
With respect to the transactions described in paragraph (i), the holders of
the FX Producing preferred stock were provided with business and financial
information respecting both the Registrant and FX Producing, including separate
financial statements and business and property information for both
corporations. All certificates for shares of Common Stock issued on conversion
bear a restrictive legend. In connection with their original purchase of FX
Producing preferred stock, investors were advised that the Common Stock issued
on conversion of such preferred stock would constitute "restricted securities"
in the absence of registration under the Securities Act.
In addition to the foregoing, the provisions of Regulation D were relied on
in connection with the sale of preferred stock discussed in subparagraph (c) and
the sale of certain shares of common stock discussed in subparagraph (p).
Regulation S was also relied on respecting sales of 257,500 shares of
Registrant preferred stock as well as the conversion of 796,943 shares of
preferred stock of FX Producing into the same number of shares of Common Stock
and the issuance of 40,000 shares of Common Stock referred to in subparagraphs
(c), (i), and (r). respectively, to persons who were not "U.S. Persons," as that
term is defined therein. The offer of such securities was made to persons in
Australia, not in the United States, and at the time the purchases were made,
the buyers were outside the United States. The Registrant did not engage in
directed selling efforts, as defined in Regulation S, in connection with such
transactions. In connection with the purchase of such securities, (a) each
buyer agreed in writing that all offers and sales of the securities prior to the
expiration of the applicable one-year restricted period could only be made
pursuant to registration of the securities under the Securities Act or pursuant
to an available exemption, and (b) all written materials used in connection with
the offering contained the statements as required by Rule 902(h)(2). Each
offshore purchaser made the written representations required by Rule
903(c)(3)(iii)(B) (1) and (2). Certificates representing the shares sold in
reliance on Regulation S bear a legend on their face as required by Rule
903(c)(3)(iii)(B)(3). The agreement between the Registrant and each offshore
purchaser requires the Registrant to refuse to register any transfer of
securities not made in accordance with Regulation S as provided in Rule
903(c)(3)(iii)(B)(4). All sales were made without the participation of a
distributor.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBITS
The following exhibits are included as part of this report:
SEC
EXHIBIT REFERENCE
NUMBER NUMBER TITLE OF DOCUMENT LOCATION
- ------ ------ --------------------------------- ----------
Item 1. Underwriting Agreement
---------------------------------
1.01 1 Form of Underwriting Agreement This Filing
between the Frontier Oil Exploration
Company, Oppenheimer & Co., Inc., and
Hanifen, Imhoff Inc.
1.02 1 Form of Underwriters' Warrant This Filing
1.03 1 Form of Lockup Agreement and Related This Filing
Schedule
Item 3. Articles of Incorporation and Bylaws
3.01 3 Restated and Amended Articles of Incorporated
Incorporation by
Reference(1)
3.02 3 Bylaws Incorporated
by
Reference(1)
Item 4. Instruments Defining the Rights of
Security Holders
4.01 4 Specimen Stock Certificate Incorporated
by
Reference(1)
4.02 4 Designation of Rights, Privileges, Incorporated
and Preferences of 1993 Series by
preferred stock of Frontier Oil Reference(1)
Exploration Company
Item 5. Opinion Regarding Legality
5.01 5 & 23 Opinion of Kruse, Landa & Maycock, This Filing
L.L.C.
Item 10. Material Contracts
10.01 10 Purchase and Sale Agreement between Incorporated
B&B Production Company and FX by
Producing Company, Inc., dated April Reference(1)
1, 1994, regarding purchase of
B&B/JRB Assets
10.02 10 Purchase and Sale Agreement between Incorporated
J.R. Bacon Drilling, Inc., and The by
Supply Store Company and FX Drilling Reference(1)
Company, Inc., regarding purchase of
B&B/JRB Assets
10.03 10 Real Property Exchange Agreement Incorporated
between Frontier Oil Exploration by
Company, FX Drilling Company, Inc., Reference(1)
FX Producing Company, Inc., and B&B
Production and J.R. Bacon Drilling,
Inc., dated June 8, 1994, regarding
purchase of B&B/JRB Assets
10.04 10 Exchange Escrow Agreement between FX Incorporated
Producing Company, Inc., and B&B by
Production, Inc., and First State Reference(1)
Bank of Shelby, dated June 8, 1994,
regarding escrow of cash and FX
Producing preferred stock in relation
to the purchase of B&B/JRB Assets
10.05 10 Addendum dated July 21, 1994, to the Incorporated
Exchange Escrow Agreement dated June by
8, 1994 Reference(1)
10.06 10 Loan Agreement dated June 7, 1994, by Incorporated
and between Bank One, Texas, N.A., by
and FX Producing Company, Inc. Reference(1)
10.07 10 Promissory Note dated June 7, 1994, Incorporated
in the original principal amount of by
$5,000,000 payable by FX Producing Reference(1)
Company, Inc., to Bank One, Texas,
N.A.
10.08 10 Guaranty dated June 7, 1994, by Incorporated
Frontier Oil Exploration Company for by
the benefit of Bank One, Texas, N.A., Reference(1)
relating to the Bank Loan
10.09 10 Stock Pledge Agreement dated June 7, Incorporated
1994, between Frontier Oil by
Exploration Company and Bank One, Reference(1)
Texas, N.A., relating to pledge of
common stock of FX Producing Company,
Inc.
10.10 10 Deed of Trust, Security Agreement, Incorporated
Financing Statement and Fixture by
Filing dated June 7, 1994, between FX Reference(1)
Producing Company, Inc., as grantor,
Arthur R. Gralla, as trustee, and
Bank One, Texas, N.A., as grantee,
relating to Nevada properties
10.11 10 Deed of Trust, Mortgage, Security Incorporated
Agreement, Financing Statement, and by
Assignment of Production dated June Reference(1)
7, 1994, between FX Producing
Company, Inc., as mortgagor and
debtor, Arthur R. Gralla, as trustee,
and Bank One, Texas, N.A., as
mortgagee and secured party, relating
to Montana properties
10.12 10 Transfer Order Letter executed June Incorporated
7, 1994, between FX Producing by
Company, Inc., and Bank One, Texas, Reference(1)
N.A., relating to production from
producing properties of FX Producing
Company, Inc.
10.13 10 Promissory Note dated June 7, 1994, Incorporated
in the original principal amount of by
$1,385,000 payable by Frontier Oil Reference(1)
Exploration Company to FX Producing
Company, Inc.
10.14 10 Collateral Transfer of Note dated Incorporated
June 7, 1994, by FX Producing by
Company, Inc., and Bank One, Texas, Reference(1)
N.A., relating to transfer of
promissory note of Frontier Oil
Exploration Company
10.15 10 Form of Employment Agreement between Incorporated
R.L. Brown, J.R. Bacon, and L. Bacon by
and Frontier Oil Exploration Company Reference(1)
10.16 10 Exchange Agreement between Charles C. Incorporated
Rumsey, Sunshine Pacific Corporation, by
A&C Associates, the Rumsey Royalty Reference(1)
Trust, and the Wood River Trust dated
June 7, 1994, regarding issuance of
500,000 shares of Common Stock in
exchange for interests in the Basin &
Range Project
10.17 10 Assignment and Assumption dated June Incorporated
7, 1994, between Charles C. Rumsey, by
Jr., Sunshine Pacific Corp., A&C Reference(1)
Associates, The Rumsey Royalty Trust,
The Wood River Trust and Frontier Oil
Exploration Company
10.18 10 Investor's Rights Agreement dated Incorporated
June 7, 1994, between Frontier Oil by
Exploration Company , Charles C. Reference(1)
Rumsey, Jr., Sunshine Pacific Corp.,
A&C Associates, The Rumsey Royalty
Trust, and The Wood River Trust
10.19 10 Warrant to purchase 150,000 shares of Incorporated
Common Stock at $1.10 issued to by
George E. Dullnig & Co. Reference(1)
10.20 10 Form of Warrant to Purchase Shares of Incorporated
Common Stock at $1.65 with related by
schedule of optionees Reference(1)
10.21 10 Employment Agreements between Incorporated
Frontier Oil Exploration Company and by
each of David Pierce and Andrew Reference(1)
Pierce, effective January 1, 1995 *
10.22 10 Form of Stock Option with related Incorporated
schedule (D. Pierce, A. Pierce, and by
Others) * Reference(1)
10.23 10 1994 Employee Incentive Plan * Incorporated
by
Reference(1)
10.24 10 Form of Stock Option granted to D. Incorporated
Pierce and A. Pierce* by
Reference(1)
10.25 10 Crude Oil Purchase Contract dated Incorporated
March 16, 1994 between Petro Source by
Partners, Ltd., and B&B Production Reference(1)
Company
10.26 10 Amended Crude Oil Purchase Contract Incorporated
dated August 15, 1994, between FX by
Drilling Company, Inc., and Petro Reference(1)
Source Partners, Ltd.
10.27 10 Agreement effective May 1, 1994 Incorporated
between J.R. Bacon Drilling, Inc. and by
Crysen Refining, Inc. Reference(1)
10.28 10 Amended Agreement Letter dated June Incorporated
30,1994, between FX Drilling Company, by
Inc. and Crysen Refining, Inc. Reference(1)
10.29 10 Agreement dated July 8, 1994 between Incorporated
FX Drilling Company, Inc. and CENEX, by
Inc., regarding Crude Oil Purchase Reference(1)
Contract.
10.30 10 Agreements between FX Producing and Incorporated
each of Jerry R. Bacon and Roy Brown by
dated December 2, 1994 Reference(1)
10.31 10 Preliminary Agreement between Incorporated
Frontier Oil Exploration Company and by
the Ministry of Environmental Reference(1)
Protection, Natural Resources and
Forestry dated February 10, 1995,
with translation thereof
10.32 10 Agreement between Frontier Oil Incorporated
Exploration Company and Roy L. Brown, by
Jerold R. Bacon, and Laura A. Bacon Reference(1)
dated February 7, 1995
10.33 10 Supplemental Agreement between FX Incorporated
Producing, Frontier Oil Exploration by
Company, Roy L. Brown, and Jerold R. Reference(1)
Bacon dated February 27, 1995
10.34 10 Mining Usufruct Agreement between the Incorporated
State Treasury of the Republic of by
Poland and Frontier Poland Reference(3)
Exploration and Producing Company,
Sp.z o.o. dated August 22, 1995
10.35 10 Amendment No. 1 to Mining Usufruct Incorporated
Agreement by
Reference(4)
10.36 10 Frontier Oil Exploration Company 1995 Incorporated
Stock Option and Award Plan* by
Reference(4)
10.37 10 Form of Non-Qualified Stock Option Incorporated
with related schedule* by
Reference(4)
10.38 10 Non-Qualified Stock Option granted to Incorporated
Robert I. Coward* by
Reference(4)
10.39 10 Letter Agreement dated effective Incorporated
August 3 , 1995, between Lovejoy by
Associates, Inc., and Frontier Oil Reference(4)
Exploration Company re: Financial
Consulting Engagement*
10.40 10 Loan Agreement between Thomas B. Incorporated
Lovejoy and Frontier Oil Exploration by
Company Reference(4)
10.41 10 Letter Agreement dated effective Incorporated
August 3, 1995, between Lovejoy by
Associates, Inc., and Frontier Oil Reference(4)
Exploration Company re:
Indemnification
10.42 10 Non-Qualified Stock Option granted to Incorporated
Thomas B. Lovejoy* by
Reference(4)
10.43 10 Form of Amendment No. 1 to Loan Incorporated
Agreement dated June 7, 1994, by and by
between FX Producing Company, Inc., Reference(5)
and Bank One, Texas, N.A.
10.44 10 Amendment No. 2 to Loan Agreement Incorporated
dated June 7, 1994, by and between FX by
Producing Company, Inc., and BankOne, Reference(5)
Texas, N.A.
10.45 10 Form of Concession dated December 20, Incorporated
1995, relating to concessions granted by
pursuant to the Mining Usufruct Reference(5)
Agreement, with related schedule
10.46 10 Agreement dated April 16, 1996, Incorporated
between Frontier Poland Exploration by
and Producing Company Sp. Z o o. and Reference(6)
RWE-DEA Aktiengesellschaft fur
Mineraloel und Chemie, including
exhibits, relating to Poland
Concession
10.47 10 Joint Study Agreement dated May 21, Incorporated
1996, between FX Energy (Frontier Oil by
Exploration Company) and the Polish Reference(7)
Oil and Gas Company, including
appendix, relating to joint study of
area of interest.
10.48 10 Amendments to Employment Agreements This Filing
between Frontier Oil Exploration
Company and each of David Pierce and
Andrew Pierce, effective May 30, 1996
*
10.49 10 Employment Agreement between Frontier To Be Filed
Oil Exploration Company and Jerzey M. by Amendment
Maciolek
Item 16. Letter on Change in Certifying
Accountant
16.01 16 Letter from Barker & Folsom, previous Incorporated
Registrant auditors by
Reference(2)
Item 21. Subsidiaries of the Registrant
21.01 21 Schedule of Subsidiaries This Filing
Item 23 Consents of Experts and Counsel
23.01 23 Consent of Coopers & Lybrand L.L.P., This Filing
Registrant auditors
23.02 23 Consent of Barker & Folsom, previous This Filing
Registrant auditors
23.03 23 Consent of Barker & Folsom J.R. This Filing
Bacon Drilling, Inc., auditors
23.04 23 Consent of Hamilton Misfeldt, B&B This Filing
Production Company auditors
23.05 23 Consent of Kruse, Landa & Maycock, This Filing
L.L.C., counsel to the Registrant (See Item 5)
23.06 23 Consent of Larry D. Krause, Petroleum This Filing
Engineer
23.07 23 Consent of Halliburton Energy This Filing
Services, experts in well log
interpretation
Item 24. Power of Attorney
24.01 24 Power of Attorney This Filing
(See
Signature
Page)
* IDENTIFIES EACH MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT
REQUIRED TO BE FILED AS AN EXHIBIT.
(1) Incorporated by reference from the registration statement on form SB-2, SEC
File No. 33-88354-D.
(2) Incorporated by reference from the report on Form 8-K dated August 16, 1995.
(3) Incorporated by reference from the report on Form 8-K dated August 22, 1995.
(4) Incorporated by reference from the quarterly report on Form 10-Q for the
quarter ended September 30, 1995.
(5) Incorporated by reference from the annual report on Form 10-KSB for the year
ended December 31, 1995.
(6) Incorporated by reference from the current report on Form 8-K dated May 3,
1996.
(7) Incorporated by reference from the current report on Form 8-K dated May 21,
1996.
ITEM 17. UNDERTAKINGS
RULE 415 OFFERINGS: POST-EFFECTIVE AMENDMENTS (Regulation S-K, Item 512(a))
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or
sales are being made, a post-effective amendment to this registration
statement:
(a) To include any prospectus required by section 10(a)(3) of the
Securities Act;
(b) To reflect in the Prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement; and
(c) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
material change to such information in the registration statement.
(2) For the purpose of determining liability under the Securities
Act, treat each such post-effective amendment as a new registration
statement of the securities offered, and the offering of such securities at
that time to be the initial bona fide offering thereof.
(3) File a post-effective amendment to remove from registration any
of the securities that remain unsold at the termination of the offering.
REQUEST FOR ACCELERATION OF EFFECTIVE DATE OR FILING OF REGISTRATION STATEMENT
ON FORM S-8. (REGULATION S-K, ITEM 512(H))
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the Registrant
in the successful defense of any action, suit, or proceeding) is asserted by
such director, officer, or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
RULE 430A (REGULATION S-K, ITEM 512(I)
The undersigned Registrant hereby undertakes that:
1. For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance on rule 430A and contained in the form of
prospectus filed by the Registrant pursuant to rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
2. For the purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Salt Lake City, state of
Utah, on the 7th day of June, 1996.
FRONTIER OIL EXPLORATION COMPANY
(Registrant)
By /s/ David N. Pierce, President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints David N. Pierce, with power of substitution, as
his attorney-in-fact for him, in all capacities, to sign any amendments to this
registration statement and to file the same with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that said attorney-in-fact or his
substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities
stated on the 7th day of June, 1996.
/s/ David N. Pierce
Director and President
(Principal Executive and
Financial Officer)
/s/ Andrew W. Pierce
Director, Vice-President and
Secretary (Principal Operating
Officer)
/s/ Scott J. Duncan
Director
/s/ Thomas B. Lovejoy
Director
/s/ Peter L. Raven
Director
/s/ James A. Giauque, III
Controller
[ SHARES]
FX ENERGY CORPORATION
COMMON STOCK, $.001 PAR VALUE PER SHARE
UNDERWRITING AGREEMENT
, 1996
<PAGE>
[ SHARES]
FX ENERGY CORPORATION
COMMON STOCK
UNDERWRITING AGREEMENT
, 1996
Oppenheimer & Co., Inc.
Hanifen, Imhoff Inc.
c/o Oppenheimer & Co., Inc.
Oppenheimer Tower
World Financial Center
New York, New York 10281
On behalf of the several
Underwriters named on
Schedule I attached hereto
Ladies and Gentlemen:
FX Energy Corporation, a Nevada corporation (the "Company"), proposes
to sell to you (the "Representatives") and the other underwriters
named on Schedule I to this Agreement (the "Underwriters"), for whom
you are acting as representatives, an aggregate of [ shares]
(the "Firm Shares") of the Company's Common Stock, $0.001 par value
(the "Common Stock"). In addition, the Company proposes to grant to
the Underwriters an option to purchase up to an additional [Firm
Shares* 15%] shares (the "Option Shares") of Common Stock from it for
the purpose of covering over-allotments in connection with the sale of
the Firm Shares. The Firm Shares and the Option Shares are together
called the "Shares."
1. SALE AND PURCHASE OF THE SHARES. On the basis of the
representations, warranties and agreements contained in, and subject
to the terms and conditions of, this Agreement:
(a) The Company agrees to sell to each of the Underwriters, and
each of the Underwriters agrees, severally and not jointly, to
purchase from the Company, at $ per share (the "Initial Price"),
the number of Firm Shares set forth opposite the name of such
Underwriter on Schedule I to this Agreement.
(b) The Company grants to the several Underwriters an option to
purchase, severally and not jointly, all or any part of the Option
Shares at the Initial Price. The number of Option Shares to be
purchased by each Underwriter shall be the same percentage (adjusted
by the Representatives to eliminate fractions) of the total number of
Option Shares to be purchased by the Underwriters as such Underwriter
is purchasing of the Firm Shares. Such option may be exercised only
to cover over-allotments in the sales of the Firm Shares by the
Underwriters and may be exercised in whole or in part at any time on
or before 12:00 noon, New York City time, on the second business day
before the Firm Shares Closing Date (as defined below), and only once
thereafter within 30 days after the date of this Agreement, in each
case upon written or telegraphic notice, or verbal or telephonic
notice confirmed by written or telegraphic notice, by the
Representatives to the Company no later than 12:00 noon, New York City
time, on the second business day before the Firm Shares Closing Date
or at least three business days before the Option Shares Closing Date
(as defined below), as the case may be, setting forth the number of
Option Shares to be purchased and the time and date (if other than the
Firm Shares Closing Date) of such purchase.
2. DELIVERY AND PAYMENT. Delivery by the Company of the Firm Shares
to the Representatives for the respective accounts of the
Underwriters, and payment of the purchase price by certified or
official bank check or checks payable in New York Clearing House (next
day) funds to the Company shall take place at the offices of
Oppenheimer & Co., Inc., at Oppenheimer Tower, World Financial Center,
New York, New York 10281, at 10:00 a.m., New York City time, on the
third business day following the date of this Agreement (or the fourth
business day if permitted by Rule 15c6-1(c) promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")), or
at such time on such other date, not later than 10 business days after
the date of this Agreement, as shall be agreed upon by the Company and
the Representatives (such time and date of delivery and payment are
called the "Firm Shares Closing Date").
In the event the option with respect to the Option Shares is
exercised, delivery by the Company of the Option Shares to the
Representatives for the respective accounts of the Underwriters and
payment of the purchase price by certified or official bank check or
checks payable in New York Clearing House (next day) funds to the
Company shall take place at the offices of Oppenheimer & Co., Inc.
specified above at the time and on the date (which may be the same
date as, but in no event shall be earlier than, the Firm Shares
Closing Date) specified in the notice referred to in Section 1(b)
(such time and date of delivery and payment are called the "Option
Shares Closing Date"). The Firm Shares Closing Date and the Option
Shares Closing Date are called, individually, a "Closing Date" and,
together, the "Closing Dates."
Certificates evidencing the Shares shall be registered in such names
and shall be in such denominations as the Representatives shall
request at least two full business days before the Firm Shares Closing
Date or, in the case of the Option Shares, on the day of notice of
exercise of the option as described in Section 1(b) and shall be made
available to the Representatives for checking and packaging, at such
place as is designated by the Representatives, on the full business
day before the Firm Shares Closing Date (or the Option Shares Closing
Date in the case of the Option Shares).
3. REGISTRATION STATEMENT AND PROSPECTUS; PUBLIC OFFERING. The
Company has prepared in conformity with the requirements of the
Securities Act of 1933, as amended (the "Securities Act"), and the
published rules and regulations thereunder (the "Rules") adopted by
the Securities and Exchange Commission (the "Commission") a
registration statement on Form S-1 (No. 33- ), including a
preliminary prospectus relating to the Shares, and has filed with the
Commission the Registration Statement (as hereinafter defined) and
such amendments thereof as may have been required to the date of this
Agreement. Copies of such Registration Statement (including all
amendments thereof) and of the related preliminary prospectuses have
heretofore been delivered by the Company to you. The term
"preliminary prospectus" as used herein means any preliminary
prospectus (as described in Rule 430 of the Rules) relating to the
Shares included at any time as a part of the Registration Statement.
The Registration Statement, as amended at the time and on the date it
becomes effective (the "Effective Date"), including all exhibits and
information, if any, deemed to be part of the Registration Statement
pursuant the Rules, including Rule 424(b), Rule 430A and Rule 434, is
called the "Registration Statement." The term "Prospectus" means the
prospectus relating to the Shares in the form first used to confirm
sales of the Shares (whether such prospectus was included in the
Registration Statement at the time of effectiveness or was
subsequently filed with the Commission pursuant to Rule 424(b) of the
Rules).
The Company understands that the Underwriters propose to make a public
offering of the Shares, as set forth in and pursuant to the
Prospectus, as soon after the Effective Date and the date of this
Agreement as the Representatives deem advisable. The Company hereby
confirms that the Underwriters and dealers have been authorized to
distribute or cause to be distributed each preliminary prospectus and
are authorized to distribute the Prospectus (as from time to time
amended or supplemented if the Company furnishes amendments or
supplements thereto to the Underwriters).
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to each Underwriter as follows:
(a) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Nevada. The Company is duly qualified and in good standing as a
foreign corporation in each jurisdiction in which the character or
location of its assets or properties (owned, leased or licensed) or
the nature of its business makes such qualification necessary, except
for such jurisdictions where the failure to so qualify would not have
a material adverse effect on the assets or properties, business,
results of operations, prospects or financial condition of the
Company. Except as disclosed in the Registration Statement, the
Company does not own, lease or license any asset or property or
conduct any business outside the United States of America. Each of
Frontier Oil Exploration Company, a Nevada Corporation, FX Drilling
Company, Inc., a Nevada corporation, FX Producing Company, Inc., a
Nevada corporation, Frontier Exploration Company, a Utah corporation,
Petrolex Corporation, a Utah corporation, and Frontier Poland
Exploration and Producing Company SP. ZO. O, a Polish limited
liability company (collectively, the "Subsidiaries"), has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of its state of incorporation. Frontier Poland
Exploration and Producing Company SP. ZO. O has been duly incorporated
and is validly existing as a corporation under the laws of the
Republic of Poland. Each Subsidiary is duly qualified and in good
standing as a foreign corporation in each jurisdiction in which the
character or location of its assets or properties (owned, leased or
licensed) or the nature of its business makes such qualification
necessary, except for such jurisdictions where the failure to qualify
would not have a material adverse affect on the assets or properties,
business, results of operations or financial condition of the Company.
The Company does not control, directly or indirectly, more than 10% of
any corporation, partnership, joint venture, association or other
business organization other than the Subsidiaries.
(b) The Company and each of the Subsidiaries has all requisite
corporate power and authority, and all necessary authorizations,
approvals, consents, orders, licenses, certificates and permits of and
from all governmental or regulatory bodies or any other person or
entity, including any and all leases, permits and approvals required
under applicable law to own, lease and license its assets and
properties and to conduct its businesses as now being conducted and as
proposed to be conducted as described in the Registration Statement
and the Prospectus. The Company and each of the Subsidiaries has
fulfilled and performed in all material respects all of its
obligations with respect to such authorizations, approvals, consents,
orders, licenses, certificates and permits, and neither the Company
nor any Subsidiary is in violation of any term or provision of any
such authorizations, approvals, consents, orders, licenses,
certificates or permits, nor has any event occurred which allows, or
after notice or lapse of time would allow, revocation or termination
thereof or which could result in any material impairment of the rights
of the holder thereof. No such authorization, approval, consent,
order, license, certificate or permit contains a materially burdensome
restriction other than as disclosed in the Registration Statement and
the Prospectus. Neither the Company nor any of the Subsidiaries has
any reason to believe that any governmental or regulatory body is
considering modifying, limiting, conditioning, suspending, revoking or
not renewing any such authorizations, approvals, consents, orders,
licenses, certificates or permits of the Company or any of the
Subsidiaries or that such governmental or regulatory bodies are
investigating the Company or any of the Subsidiaries or related
parties.
(c) The Company and/or its Subsidiaries own, or have enforceable
rights to use, all trademarks, trademark applications, trade names,
service marks, copyrights, copyright applications, licenses, know-how
and other similar rights, technology and proprietary knowledge
(collectively, "Intangibles") necessary for the conduct of the
business of the Company as described in the Registration Statement and
the Prospectus. Neither the Company nor any of the Subsidiaries has
received any notice of, and they are not aware of, any infringement
of, or conflict with asserted rights of others with respect to, any
Intangibles which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would have a material adverse
effect upon the assets or properties, business, results of operations,
prospects or financial condition of the Company. The Intangibles are
free and clear of all liens and encumbrances of every nature and kind.
Except as disclosed in the Registration Statement and the Prospectus,
neither the Company nor any of the Subsidiaries has violated or
infringed any patent, trademark, tradename, trade secret or copyright
held by others or any license, authorization or permit held by them,
in any manner which may materially adversely affect the Intangibles or
the business of the Company. Except in connection with transactions
entered into in the ordinary course of business, neither the Company
nor any of the Subsidiaries has granted any licenses or other rights
or has any obligations to grant licenses or any other rights to any
Intangibles. Neither the Company nor any of the Subsidiaries has made
any material claim of violation or infringement by others of rights
to, or in connection with, the Intangibles, and the Company knows of
no basis for making any such claim. There are no interferences or
other contested proceedings, either pending or, to the knowledge of
the Company, threatened, in the United States Copyright Office, the
United States Patent and Trademark Office or any federal, state or
local court or before any other governmental agency or tribunal,
relating to any pending application with respect to the Intangibles.
(d) The Company and each of the Subsidiaries has (i) good and
valid title to each of the items of personal property and good,
marketable and insurable fee title to all real property reflected in
its financial statements referred to in Section 4(u) or referred to in
the Registration Statement and the Prospectus as being owned by it,
(ii) valid and enforceable leasehold interests in each of the items of
real and personal property which are referred to in the Registration
Statement and the Prospectus as being leased by it, and (iii) good and
marketable title to each oil and gas property referred to in the
Registration Statement and the Prospectus as a property in which the
Company has an interest or which is included in the Engineering Report
(as defined below) in each case free and clear of all liens,
encumbrances, claims, security interests, defects or rights of way.
Except as disclosed in the Registration Statement, no financing
statement under the Uniform Commercial Code with respect to any assets
of the Company or the Subsidiaries has been filed in any jurisdiction,
and neither the Company nor any of the Subsidiaries has signed any
such financing statement or any security agreement authorizing any
secured party thereunder to file any such financing statement. All
real property of the Company and the Subsidiaries reflected in the
financial statements referred in Section 4(u) or referred to in the
Registration Statement and the Prospectus as being owned by or
licensed to the Company or the Subsidiaries is in good condition and
conforms in all material respects with all applicable building,
zoning, land use and other laws, ordinances, codes, orders and
regulations (other than environmental laws, which are addressed in
Section 4(h)) and the use of such real property conforms in all
material respects with such laws, ordinances, codes, orders and
regulations, and all necessary occupancy, certificates and permits for
the lawful use and occupancy thereof and the equipment thereof have
been issued. All notices of violations of law, ordinances, codes,
orders or regulations issued by any governmental authority having
jurisdiction over or affecting any such real property have been
complied with by the Company or the Subsidiaries, as applicable.
(e) Except as described in the Registration Statement and the
Prospectus, there is no pending or, to the knowledge of the Company,
threatened, lawsuit or claim with respect to the Company or any of the
Subsidiaries which (i) involves a claim by or against the Company or
any of the Subsidiaries, as applicable, of more than $50,000,
(ii) seeks injunctive relief that could have an adverse effect on the
Company, or (iii) could affect the performance by the Company or any
of the Subsidiaries of their obligations pursuant to this Agreement or
the transactions contemplated hereby. Neither the Company nor any of
the Subsidiaries is in default under any judgment, order or decree of
any court, administrative agency or commission or other governmental
authority or instrumentality, domestic or foreign, applicable to it or
any of its respective properties, assets, operations or businesses.
There is no legal or governmental or other proceeding or investigation
before any court or before or by any public body or board pending or,
to the Company's best knowledge, threatened (and the Company does not
know of any basis therefor) against or involving the assets,
properties or business of the Company or the assets, properties or
business of any of the Subsidiaries, that would materially adversely
affect the value or the operation of any such assets or properties in
the hands of the Company or the Subsidiaries or the business, results
of operations, prospects or financial condition of the Company.
(f) Neither the Company nor any of the Subsidiaries has at any
time engaged in the handling, manufacture, treatment, storage, use or
generation of any Hazardous Materials (as defined below) upon any real
property owned or leased by it, except for such quantities handled,
stored and used in the ordinary course of the business of the Company
or the Subsidiaries, as applicable. Neither the Company nor any of
the Subsidiaries has been a party to any litigation in which it is
alleged, nor have any of them at any time received written notice of
any allegation or investigation of the possibility, that any of them
or any of their assets is or was subject to any liability, clean-up or
other obligation arising out of or relating to any discharge, or the
storage, handling or disposal, of any Hazardous Material. There has
been no discharge at any time by the Company or any of the
Subsidiaries of any Hazardous Material that the Company or any of the
Subsidiaries has reported or is or was obligated to report to any
governmental agency the occurrence of which may have a material
adverse effect on the Company. For the purposes of this Agreement,
"Hazardous Material" means any substance: (i) the presence of which
requires investigation or remediation under any federal, state,
provincial, or local statute, regulation, ordinance, order, action,
policy or common law; (ii) that is or becomes defined as a "hazardous
waste," "hazardous substance," pollutant or contaminant under any
federal, state or local statute, regulation, rule or ordinance or
amendments thereto including, without limitation the Comprehensive
Environmental Response Compensation and Liability Act (42 U.S.C. 9601
et seq.) and/or the Resource Conservation and Recovery Act (42 U.S.C.
section 6901 et seq.) or similar Polish laws; (iii) that is toxic,
explosive, corrosive, flammable, infectious, radioactive,
carcinogenic, mutagenic, or otherwise hazardous and is or becomes
regulated by any governmental authority, agency, department,
commission, board, agency or instrumentality of the United States or
of any state or any political subdivision thereof or any similar
Polish political entity; or (iv) which contains polychlorinated
biphenyls (PCBs), asbestos, urea formaldehyde foam insulation or radon
gas.
(g) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus and each
preliminary prospectus, and except as described therein, (i) there has
not been any material adverse change in the assets or properties,
business, results of operations, prospects or financial condition of
the Company or the Subsidiaries, whether or not arising from
transactions in the ordinary course of business; (ii) neither the
Company nor any of the Subsidiaries has sustained any loss or
interference with its assets, businesses or properties (whether owned
or leased) from fire, explosion, earthquake, flood or other calamity,
whether or not covered by insurance, or from any labor dispute or any
court or legislative or other governmental action, order or decree
that would have a material adverse effect on the Company; and
(iii) and since the date of the latest balance sheets included in the
Registration Statement and the Prospectus, except as reflected
therein, neither the Company nor any of the Subsidiaries has
(A) issued any securities or incurred any liability or obligation,
direct or contingent, for borrowed money, except such liabilities or
obligations incurred in the ordinary course of business, (B) entered
into any transaction not in the ordinary course of business or
(C) declared or paid any dividend or made any distribution on any
shares of its stock or redeemed, purchased or otherwise acquired or
agreed to redeem, purchase or otherwise acquire any shares of its
stock.
(h) There is no document or contract of a character required to
be described in the Registration Statement or the Prospectus or to be
filed as an exhibit to the Registration Statement which is not
described or filed as required. Each agreement described in or listed
in the exhibits to the Registration Statement is in full force and
effect and is valid and enforceable by and against the Company or the
Subsidiaries, as applicable, in accordance with its terms, assuming
the due authorization, execution and delivery thereof by each of the
other parties thereto, except for agreements that have expired by
their terms or have been fully performed. Neither the Company, nor,
to the Company's knowledge, any other party is in default, nor is any
Subsidiary which is a party thereto in default, in the observance or
performance of any term or obligation to be performed by it under any
such agreement, and no event has occurred which with notice or lapse
of time or both would constitute such a default, in any such case in
which a default or event would have a material adverse effect on the
assets or properties, business, results of operations, prospects or
financial condition of the Company. No default exists, and no event
has occurred which with notice or lapse of time or both would
constitute a default, in the due performance and observance of any
term, covenant or condition by the Company or any of the Subsidiaries
of any other agreement or instrument to which the Company or any of
the Subsidiaries is now a party or by which it or its properties or
business may be bound or affected which default or event would have a
material adverse effect on the assets or properties, business, results
of operations, prospects or financial condition of the Company.
(i) Neither the Company nor any of the Subsidiaries is in
violation of any term or provision of its charter or by-laws or of any
judgment, decree, order, statute, rule or regulation where the
consequences of such violation would have a material adverse effect on
the assets or properties, business, results of operations, prospects
or financial condition of the Company.
(j) There is no labor strike, dispute or work stoppage or
lockout pending, or, to the knowledge of the Company, threatened,
against or affecting the Company or any of the Subsidiaries, and no
such labor strike, dispute, work stoppage or lockout has occurred with
respect to any employees of the Company, or any of the Subsidiaries
during the two years prior to the date of this Agreement. No union
organization campaign is in progress with respect to the employees of
the Company or the Subsidiaries, and no question concerning
representation exists with respect to such employees. No unfair labor
practice charge or complaint against the Company or the Subsidiaries
is pending or, to the knowledge of the Company, threatened, before the
National Labor Relations Board or similar foreign authorities, and no
such charge or complaint against the Company or any of the
Subsidiaries has been filed during the past two years. There is no
pending, or, to the knowledge of the Company, threatened, grievance
that, if adversely decided, would have a material adverse effect on
the business, results of operations, prospects or financial condition
of the Company. No charges with respect to or relating to the Company
or the Subsidiaries are pending before the Equal Employment
Opportunity Commission or any similar state, local or foreign agency
responsible for the prevention of unlawful employment practices, and
no such charges have been filed with respect to the Company or any of
the Subsidiaries.
(k) Each of the Company and the Subsidiaries has correctly and
timely filed all necessary federal, state, local and foreign income,
property and franchise tax returns and paid all taxes required to be
shown as due thereon and all assessments received by it to the extent
that the same are material and have become due. Neither the Company
nor any of its officers has any knowledge of any tax deficiency of the
Company or any of the Subsidiaries or any tax proceeding or action
pending or threatened against the Company or any of the Subsidiaries
that would materially adversely affect the business, financial
position, stockholders' equity or results of operations, present or
prospective, of the Company. There are no liens for taxes on the
assets of the Company or the Subsidiaries, except for taxes not yet
due. There are no audits pending of the Company's or any of the
Subsidiaries' tax returns (federal, state, local or foreign), and
there are no claims which have been or, to the best of the Company's
knowledge, may be asserted relating to any such tax returns which, if
determined adversely, would result in the assertion by any
governmental agency of any deficiency material to the Company. There
have been no waivers of any statute of limitations by the Company or
any of the Subsidiaries relating to tax returns (federal, state, local
and foreign). The Internal Revenue Service has not asserted or
threatened to assert any assessment, claim or liability for taxes due
or to become due in connection with any review or examination of the
tax returns of the Company or any of the Subsidiaries for any year.
(l) None of the Company, any Subsidiary or any officer or
director purporting to act on behalf of the Company or any Subsidiary
has during the past five years (i) made any contributions to any
candidate for political office, or failed to disclose fully any such
contributions, in violation of law; or (ii) made any payment to any
Federal, state, local or foreign governmental officer or official, or
other person charged with similar public or quasi-public duties, other
than payments required or allowed by applicable law; or (iii) made any
payment outside the ordinary course of business to any purchasing or
selling agent or person charged with similar duties of any entity to
which the Company or such Subsidiary as applicable, sells (or has in
the past sold) or from which the Company or such Subsidiary, as
applicable, buys (or has in the past bought) products for the purpose
of influencing such agent or person to buy products from or sell
products to the Company or such Subsidiary, as applicable; or
(iv) engaged in any transaction, maintained any bank account or used
any corporate funds except for transactions, bank accounts and funds
which have been and are reflected in the normally maintained books and
records of the Company or such Subsidiary, as applicable.
(m) Each of the Company and the Subsidiaries has adequate
liability and other insurance policies insuring it against the risks
of loss arising out of or related to its businesses, as described in
the Registration Statement and Prospectus, issued by insurers of
recognized financial responsibility.
(n) The Company and each of the Subsidiaries maintain a system
of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with
management's general or specific authorizations; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to
maintain asset accountability; (iii) access to assets is permitted
only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and
appropriate action is (or was) taken with respect to any differences.
(o) On the Effective Date, the Registration Statement complied,
and on the date of the Prospectus, on the date any post-effective
amendment to the Registration Statement shall become effective, on the
date any supplement or amendment to the Prospectus is filed with the
Commission and on each Closing Date, the Registration Statement and
the Prospectus (and any amendment thereof or supplement thereto) will
comply, in all material respects, with the applicable provisions of
the Securities Act and the Rules and the Exchange Act and the rules
and regulations of the Commission thereunder; the Registration
Statement did not, as of the Effective Date, contain any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the
statements therein not misleading; and on the other dates referred to
above neither the Registration Statement nor the Prospectus, nor any
amendment thereof or supplement thereto, will contain any untrue
statement of a material fact or will omit to state any material fact
required to be stated therein or necessary in order to make the
statements therein (in light of the circumstances in which they were
made) not misleading. When any related preliminary prospectus was
first filed with the Commission (whether filed as part of the
Registration Statement or any amendment thereto or pursuant to
Rule 424(a) of the Rules) and when any amendment thereof or supplement
thereto was first filed with the Commission, such preliminary
prospectus as amended or supplemented complied in all material
respects with the applicable provisions of the Securities Act and the
Rules and did not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or
necessary in order to make the statements therein (in light of the
circumstances in which they were made) not misleading.
Notwithstanding the foregoing, the Company makes no representation or
warranty as to the paragraphs with respect to stabilization or passive
market-making on the inside front cover page of the Prospectus and the
statements contained under the caption "Underwriting" in the
Prospectus. The Company acknowledges that the statements referred to
in the previous sentence constitute the only information furnished in
writing by the Representatives on behalf of the several Underwriters
specifically for inclusion in the Registration Statement, any
preliminary prospectus or the Prospectus.
(p) The Company has all requisite corporate power and authority
to enter into, deliver and perform this Agreement and to issue and
sell the Shares and the Representatives Warrants. All necessary
corporate action has been duly and validly taken by the Company and
the Subsidiaries to authorize the execution, delivery and performance
of this Agreement and the issuance and sale of the Shares by the
Company. This Agreement has been duly and validly authorized,
executed and delivered by the Company and constitutes the legal, valid
and binding obligation of the Company enforceable against the Company
in accordance with its terms, except (A) as the enforceability thereof
may be limited by bankruptcy, insolvency, reorganization, moratorium
or other similar laws affecting the enforcement of creditors' rights
generally and by general equitable principles and (B) to the extent
that rights to indemnity or contribution under this Agreement may be
limited by Federal and state securities laws or the public policy
underlying such laws.
(q) Neither the execution, delivery and performance of this
Agreement nor the consummation of any of the transactions contemplated
hereby (including, without limitation, the issuance and sale by the
Company of the Shares and the Representatives Warrants) will (A) give
rise to a right to terminate or accelerate the due date of any payment
due under, conflict with or result in the breach of any term or
provision of, constitute a default (or an event which with notice or
lapse of time or both would constitute a default) under, require any
consent or waiver under, or result in the execution or imposition of
any lien, charge or encumbrance upon any properties or assets of the
Company or any Subsidiary pursuant to the terms of any indenture,
mortgage, deed of trust or other agreement or instrument filed as an
exhibit to the Registration Statement to which the Company or any
Subsidiary is a party or by which it or any of its properties or
businesses is bound, or (B) violate any franchise, license, permit,
judgment, decree, order, statute, rule or regulation applicable to the
Company or any Subsidiary or (C) violate any provision of the charter
or by-laws of the Company or any Subsidiary, except for such consents
or waivers which have already been obtained and are in full force and
effect, copies of which have been delivered to the Representatives.
(r) No authorization, approval, consent, order, license,
certificate or permit is required of or from any governmental or
regulatory body under any federal, foreign, provincial, state or local
law for the execution, delivery and performance of this Agreement or
for the consummation of the transactions contemplated hereby, except
such as have been obtained. This Agreement has been presented to any
and all governmental agencies or authorities to the extent required
and this Agreement and the transactions contemplated hereby were
approved by or on behalf of such governmental agencies or authorities
to the extent required, and such approvals have not been revoked,
modified or rescinded.
(s) The financial statements of the Company (including all notes
and schedules thereto) included in the Registration Statement and
Prospectus present fairly the financial position, the results of
operations and cash flows and the stockholders' equity and the other
information purported to be shown therein of the Company at the
respective dates and for the respective periods to which they apply;
and such financial statements and pro forma financial statements have
been prepared in conformity with generally accepted accounting
principles, consistently applied throughout the periods involved, and
all adjustments necessary for a fair presentation of the results for
such periods have been made.
(t) Coopers and Lybrand LLP, Barker & Folsom, and Hamilton
Misfeldt & Company, P.C., whose reports are filed with the Commission
as a part of the Registration Statement and Prospectus, are and,
during the periods covered by their reports were, independent public
accountants as required by the Securities Act and the Rules.
(u) The Company has authorized and outstanding capital stock as
set forth under the caption "Capitalization" in the Prospectus. All
of the outstanding shares of Common Stock have been duly and validly
issued and are fully paid and nonassessable and none of them was
issued in violation of any preemptive or other similar right or the
Securities Act. The Shares and the Representatives Warrants when
issued and sold pursuant to this Agreement, and the Common Stock
issuable upon the exercise of the Representatives Warrants, when
issued pursuant to the terms of the Representatives Warrants, will be
duly and validly issued, fully paid and nonassessable and none of them
will be issued in violation of any preemptive or other similar rights.
Except as disclosed in the Registration Statement and the Prospectus,
there is no outstanding option, warrant or other right calling for the
issuance of, and there is no commitment, plan or arrangement to issue,
any share of stock of the Company or any security convertible into, or
exercisable or exchangeable for, such stock. The Common Stock and the
Shares conform in all material respects to all statements in relation
thereto contained in the Registration Statement and the Prospectus.
(v) All of the outstanding shares of capital stock of the
Subsidiaries have been duly and validly issued. All of the
outstanding shares of capital stock of the Subsidiaries beneficially
and of record are owned by the Company, directly or indirectly, free
and clear of any liens, charges or encumbrances. Such shares of
capital stock are fully paid and nonassessable, and none of them was
issued in violation of any preemptive or other similar right. Except
as disclosed in the Registration Statement and the Prospectus, there
is no outstanding option, warrant or other right calling for the
issuance of, and there is no commitment, plan or arrangement to issue,
any share of capital stock of any Subsidiary or any security
convertible into, or exercisable or exchangeable for, such stock.
(w) Except as described in the Registration Statement and
Prospectus, there are no persons with registration or other similar
rights to have any securities registered pursuant to the Registration
Statement or otherwise registered by the Company or any Subsidiary
under the Securities Act. Each director and executive officer of the
Company has delivered to the Representatives his enforceable written
agreement that he will not, for a period of 180 days after the date of
this Agreement, offer for sale, sell, distribute, grant any option for
the sale of, or otherwise dispose of, directly or indirectly, or
exercise any registration rights with respect to, any shares of Common
Stock (or any securities convertible into, exercisable for, or
exchangeable for any shares of Common Stock) owned by him, without the
prior written consent of the Representatives.
(x) No transaction has occurred between or among the Company or
any Subsidiary and any of their officers or directors or any affiliate
or affiliates of any such officer or director that is required to be
described in and is not described in the Registration Statement and
the Prospectus.
(y) The Shares have been duly approved for quotation on the
Nasdaq National Market.
(z) The Company is not an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in
the Investment Company Act of 1940, as amended.
(aa) None of the Company or any of its directors, officers or
controlling persons has taken or will take, directly or indirectly,
any action resulting in a violation of Rule 10b-6 under the Exchange
Act, or designed to cause or result under the Securities Act or
otherwise in, or which has constituted or which reasonably might be
expected to constitute, the stabilization or manipulation of the price
of any securities of the Company or facilitation of the sale or resale
of the Shares.
(bb) Neither the Company nor any of the Subsidiaries has incurred
any liability for finder's or broker's fees or agent's commissions in
connection with the execution and delivery of this Agreement, the
offer and sale of the Shares or the transactions contemplated hereby
or entered into any agreement with respect to the sale of Common
Stock, including agreements granting any person the right to
participate in any way in a sale of securities of the Company.
(cc) The Company is not required to register as a "broker" or
"dealer" in accordance with the provisions of the Exchange Act or the
rules and regulations promulgated thereunder.
(dd) The Company has complied with all of the requirements and
filed the required forms, if any, as specified in Florida Statutes
Section 517.075.
(ee) All information supplied by the Company to Larry Krause for
use in preparing his reserve report which is included in the
Registration Statement (the "Reserve Report") was accurate and
complete in all respects.
(ff) Each of the Company and the Subsidiaries has adequate
liability and other insurance policies insuring it against the risks
of loss arising out of or related to its businesses, as described in
the Registration Statement and Prospectus, issued by insurers of
recognized financial responsibility. The Company has no reason to
believe that it, and each Subsidiary, will not be able to renew its
existing insurance coverage as and when such coverage expires or to
obtain similar coverage or expanded coverage standard in the industry
for the location of the operations of the Company from similar
insurers as may be necessary to continue its business, at a cost that
would not have a material adverse effect on the assets or properties,
business, results of operations, prospects or condition (financial or
otherwise) of the Company.
(gg) No order preventing or suspending the use of any preliminary
prospectus has been issued and no proceedings for that purpose are
pending or, to the best knowledge of the Company, threatened by the
Commission; no order suspending the offering of the Shares in any
jurisdiction designated by you has been issued and no proceedings for
that purpose have been instituted or, to the best knowledge of the
Company, threatened, and any request of the Commission for additional
information (to be included in the Registration Statement or the
Prospectus or otherwise) has been complied with.
5. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations of
the Underwriters under this Agreement are several and not joint. The
respective obligations of the Underwriters to purchase the Shares are
subject to each of the following terms and conditions:
(a) The Prospectus shall have been timely filed with the
Commission in accordance with Section 6(A)(a) of this Agreement and
the Registration Statement shall have become effective not later than
5:30 P.M., New York time, on the date of this Agreement, or at such
later time and date as shall have been consented to in writing by you;
if the Company shall have elected to rely upon Rule 430A of the Rules,
the Prospectus shall have been filed with the Commission in a timely
fashion.
(b) No order preventing or suspending the use of any preliminary
prospectus or the Prospectus shall have been or shall be in effect and
no order suspending the effectiveness of the Registration Statement
shall be in effect and no proceedings for such purpose shall be
pending before or threatened by the Commission, and any requests for
additional information on the part of the Commission (to be included
in the Registration Statement or the Prospectus or otherwise) shall
have been complied with to the satisfaction of the Representatives.
(c) The representations and warranties of the Company contained
in this Agreement and in the certificates delivered pursuant to
Section 5(d) shall be true and correct when made and on and as of each
Closing Date as if made on such date and the Company shall have
performed all covenants and agreements and satisfied all the
conditions contained in this Agreement required to be performed or
satisfied by it at or before such Closing Date.
(d) The Representatives shall have received on each Closing Date
a certificate, addressed to the Representatives and dated such Closing
Date, of the chief executive or chief operating officer and the chief
financial officer or chief accounting officer of the Company to the
effect that the signers of such certificate have carefully examined
the Registration Statement, the Prospectus and this Agreement and that
the representations and warranties of the Company in this Agreement
are true and correct on and as of such Closing Date with the same
effect as if made on such Closing Date and the Company has performed
all covenants and agreements and satisfied all conditions contained in
this Agreement required to be performed or satisfied by it at or prior
to such Closing Date.
(e) The Representatives shall have received on the Effective
Date, at the time this Agreement is executed and on each Closing Date,
a signed letters from Coopers & Lybrand addressed to the
Representatives and dated, respectively, the Effective Date, the date
of this Agreement and each such Closing Date, in form and substance
reasonably satisfactory to the Representatives, confirming that they
are independent accountants within the meaning of the Securities Act
and the Rules, that the response to Item 10 of the Registration
Statement is correct insofar as it relates to them and stating in
effect that:
(i) in their opinion the audited financial statements
and financial statement schedules included in the Registration
Statement and the Prospectus and reported on by them comply as to
form in all material respects with the applicable accounting
requirements of the Securities Act and the Rules;
(ii) on the basis of a reading of the amounts included
in the Registration Statement and the Prospectus under the
headings "Summary Financial Data" and "Selected Consolidated
Financial Data," carrying out certain procedures (but not an
examination in accordance with generally accepted auditing
standards) which would not necessarily reveal matters of
significance with respect to the comments set forth in such
letter, a reading of the minutes of the meetings of the
stockholders and directors of the Company, and inquiries of
certain officials of the Company who have responsibility for
financial and accounting matters of the Company as to
transactions and events subsequent to the date of the latest
audited financial statements, except as disclosed in the
Registration Statement and the Prospectus, nothing came to their
attention which caused them to believe that:
(A) the unaudited financial statements and supporting
schedules of the Company included in the Registration
Statement do not comply as to form in all material respects
with the applicable accounting requirements of the
Securities Act and the Rules or are not presented in
conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the
audited financial statements included in the Registration
Statement;
(B) the amounts in "Summary Financial Data," and
"Selected Consolidated Financial Data" included in the
Registration Statement and the Prospectus do not agree with
the corresponding amounts in the audited and unaudited
financial statements from which such amounts were derived;
or
(C) with respect to the Company, there were, at a
specified date not more than five business days prior to the
date of the letter, any increases in long-term liabilities
of the Company or any decreases in net income or the
stockholders' equity in the Company, as compared with the
amounts shown on the Company's audited balance sheet dated
December 31, 1995 and the unaudited balance sheet dated
March 31, 1996 included in the Registration Statement; and
(iii) they have performed certain other procedures as a
result of which they determined that certain information of an
accounting, financial or statistical nature (which is limited to
accounting, financial or statistical information derived from the
general accounting records of the Company) set forth in the
Registration Statement and the Prospectus and reasonably
specified by the Representatives agrees with the accounting
records of the Company.
References to the Registration Statement and the Prospectus in
this paragraph (e) are to such documents as amended and supplemented
at the date of the letter.
(f) The Representatives shall have received on the Effective
Date, at the time this Agreement is executed and on each Closing Date,
a signed letters from Barker & Folsom addressed to the Representatives
and dated, respectively, the Effective Date, the date of this
Agreement and each such Closing Date, in form and substance reasonably
satisfactory to the Representatives, confirming that they are
independent accountants within the meaning of the Securities Act and
the Rules, that the response to Item 10 of the Registration Statement
is correct insofar as it relates to them and stating in effect that:
(i) in their opinion the audited financial statements
and financial statement schedules included in the Registration
Statement and the Prospectus and reported on by them comply as to
form in all material respects with the applicable accounting
requirements of the Securities Act and the Rules;
(ii) on the basis of a reading of the amounts included
in the Registration Statement and the Prospectus under the
headings "Summary Financial Data" and "Selected Consolidated
Financial Data," carrying out certain procedures (but not an
examination in accordance with generally accepted auditing
standards) which would not necessarily reveal matters of
significance with respect to the comments set forth in such
letter, a reading of the minutes of the meetings of the
stockholders and directors of the Company, and inquiries of
certain officials of the Company who have responsibility for
financial and accounting matters of the Company as to
transactions and events subsequent to the date of the latest
audited financial statements, except as disclosed in the
Registration Statement and the Prospectus, nothing came to their
attention which caused them to believe that:
(A) the unaudited financial statements and supporting
schedules of the Company included in the Registration
Statement do not comply as to form in all material respects
with the applicable accounting requirements of the
Securities Act and the Rules or are not presented in
conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the
audited financial statements included in the Registration
Statement; or
(B) the amounts in "Summary Financial Data," and
"Selected Consolidated Financial Data" included in the
Registration Statement and the Prospectus do not agree with
the corresponding amounts in the audited and unaudited
financial statements from which such amounts were derived.
(iii) they have performed certain other procedures as a
result of which they determined that certain information of an
accounting, financial or statistical nature (which is limited to
accounting, financial or statistical information derived from the
general accounting records of the Company) set forth in the
Registration Statement and the Prospectus and reasonably
specified by the Representatives agrees with the accounting
records of the Company.
References to the Registration Statement and the Prospectus in
this paragraph (f) are to such documents as amended and supplemented
at the date of the letter.
(g) The Representatives shall have received on the Effective
Date, at the time this Agreement is executed and on each Closing Date,
a signed letters from Hamilton Misfeldt & Company, P.C. addressed to
the Representatives and dated, respectively, the Effective Date, the
date of this Agreement and each such Closing Date, in form and
substance reasonably satisfactory to the Representatives, confirming
that they are independent accountants within the meaning of the
Securities Act and the Rules, that the response to Item 10 of the
Registration Statement is correct insofar as it relates to them and
stating in effect that:
(i) in their opinion the audited financial statements
included in the Registration Statement and the Prospectus and
reported on by them comply as to form in all material respects
with the applicable accounting requirements of the Securities Act
and the Rules;
(ii) on the basis of a reading of the amounts included
in the Registration Statement and the Prospectus under the
headings "Summary Financial Data" and "Selected Consolidated
Financial Data," carrying out certain procedures (but not an
examination in accordance with generally accepted auditing
standards) which would not necessarily reveal matters of
significance with respect to the comments set forth in such
letter, a reading of the minutes of the meetings of the
stockholders and directors of the Company, and inquiries of
certain officials of the Company who have responsibility for
financial and accounting matters of the Company as to
transactions and events subsequent to the date of the latest
audited financial statements, except as disclosed in the
Registration Statement and the Prospectus, nothing came to their
attention which caused them to believe that:
(A) the unaudited financial statements and supporting
schedules of the Company included in the Registration
Statement do not comply as to form in all material respects
with the applicable accounting requirements of the
Securities Act and the Rules or are not presented in
conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the
audited financial statements included in the Registration
Statement; or
(B) the amounts in "Summary Financial Data," and
"Selected Consolidated Financial Data" included in the
Registration Statement and the Prospectus do not agree with
the corresponding amounts in the audited and unaudited
financial statements from which such amounts were derived.
References to the Registration Statement and the Prospectus in
this paragraph (g) are to such documents as amended and supplemented
at the date of the letter.
(h) The Representatives shall have received on each Closing Date
from Kruse Landa & Maycock, L.L.C., counsel for the Company, an
opinion, addressed to the Representatives and dated such Closing Date,
and stating in effect that:
(i) Each of the Company and the Subsidiaries has been
duly incorporated and is validly existing as a corporation in
good standing under the laws of its jurisdiction of
incorporation. The Company and the Subsidiaries are in good
standing as foreign corporations in all jurisdictions in which
the nature of their businesses requires them to be qualified to
do business as a foreign corporation, except for such
jurisdictions where the failure to so qualify would not have a
material adverse effect on the assets or properties, business,
results of operations, prospects or financial condition of the
Company.
(ii) The Company and each of the Subsidiaries has all
requisite corporate power and authority and all necessary
authorizations, approvals, consents, orders, licenses,
certificates and permits required under Federal law to own, lease
and license its assets and properties and to conduct its business
as now being conducted and as described in the Registration
Statement and the Prospectus. The Company and each of the
Subsidiaries has all requisite corporate power and authority and
all necessary authorizations, approvals, consents, orders,
licenses, certificates and permits to enter into, deliver and
perform this Agreement, and, in the case of the Company, to issue
and sell the Shares, other than those authorizations, approvals,
consents, orders licenses, certificates and permits required
under state and foreign securities laws. To such counsel's
knowledge, the Company does not control, directly or indirectly,
any corporation, partnership, joint venture, association or other
business organization other than the Subsidiaries.
(iii) The Company has authorized and issued capital
stock as set forth in the Registration Statement and the
Prospectus; the certificates evidencing the Shares are in due and
proper legal form and have been duly authorized for issuance by
the Company; all of the outstanding shares of Common Stock of the
Company have been duly and validly authorized and have been duly
and validly issued and are fully paid and nonassessable and none
of them was issued in violation of any preemptive or other
similar right. The Shares and the Representatives Warrants, when
issued and sold pursuant to this Agreement, and the shares of
Common Stock to be issued pursuant to the Representatives
Warrants, when issued will be duly and validly issued,
outstanding, fully paid and nonassessable and none of them will
have been issued in violation of any preemptive or other similar
right. Except as disclosed in the Registration Statement and the
Prospectus, there is no outstanding subscription, option, warrant
or other right calling for the issuance of any share of stock of
the Company or any Subsidiary or any security convertible into,
exercisable for, or exchangeable for stock of the Company or any
Subsidiary. The Common Stock and the Shares conform in all
material respects to the descriptions thereof contained in the
Registration Statement and the Prospectus. All of the issued and
outstanding capital stock of each Subsidiary has been duly
authorized and validly issued and is fully paid and
nonassessable, was not issued in violation of preemptive rights,
and is owned directly or indirectly by the Company, free and
clear of any lien, encumbrance, or adverse claim.
(iv) All necessary corporate action has been duly and
validly taken by the Company and the Subsidiaries to authorize
the execution, delivery and performance of this Agreement and the
issuance and sale of the Shares. This Agreement has been duly
and validly authorized, executed and delivered by the Company,
and constitutes the valid and binding obligation of the Company,
enforceable against the Company, in accordance with its terms,
except (A) as such enforceability may be limited by applicable
bankruptcy, insolvency, fraudulent transfer or conveyance,
reorganization, receivership, moratorium or other similar laws
then or thereafter in effect relating to or affecting the rights
of creditors generally and by general equitable principles
regardless of whether enforcement is considered in proceedings at
law or in equity (including the possible unavailability of
specific performance or injunctive relief and the general
discretion of the court or tribunal considering the matter) and
(B) to the extent that rights to indemnity or contribution under
this Agreement may be unenforceable under certain circumstances
under law or court decisions with respect to a liability where
indemnification or contribution is contrary to law or public
policy.
(v) Neither the execution, delivery and performance
of this Agreement by the Company nor the consummation of any of
the transactions contemplated hereby (including, without
limitation, the issuance and sale by the Company of the Shares)
will (A) give rise to a right to terminate or accelerate the due
date of any payment due under, or conflict with or result in the
breach of any term or provision of, constitute a default (or any
event which with notice or lapse of time, or both, would
constitute a default) under, require a consent or waiver under,
or result in the execution or imposition of any lien, charge or
encumbrance upon any properties or assets of the Company or any
Subsidiary, pursuant to the express terms of any indenture,
mortgage, deed of trust, note or other agreement or instrument
filed as an exhibit to the Registration Statement and to which
the Company or any Subsidiary is a party or by which it or any of
its properties or businesses is bound, or (B) violate any
franchise, license, permit, judgment, decree, order, statute,
rule or regulation binding upon or applicable to the Company or
any Subsidiary or (C) violate any provision of the charter or by-
laws of the Company or any Subsidiary.
(vi) Except as described in the Registration Statement
and the Prospectus, to such counsel's knowledge, no default
exists, and no event has occurred which with notice or lapse of
time, or both, would constitute a default in the due performance
and observance of any express term, covenant or condition by the
Company or any Subsidiary of any indenture, mortgage, deed of
trust, note or any other agreement filed as an exhibit to the
Registration Statement, where the consequences of such default
would have a material and adverse effect on the assets,
properties or business of the Company.
(vii) To such counsel's knowledge, neither the Company
nor any of the Subsidiaries is in violation of any term or
provision of any franchise, license, permit, judgment, decree,
order, statute, rule or regulation under Federal law, where the
consequences of such violation would have a material adverse
effect on the assets, properties or businesses of the Company.
(viii) No authorization, approval, consent, order,
license, certificate or permit or order of any court or
governmental agency or body is required under Federal law for the
execution, delivery or performance of this Agreement or the
consummation of the transactions contemplated hereby or any other
transaction described in the Registration Statement to be entered
into prior to or contemporaneously with the sale of the Shares,
except (a) as disclosed in the Registration Statement, (b) such
as have been obtained and (c) such as are required under state
and foreign securities laws.
(ix) To such counsel's knowledge, there is no
litigation or governmental or other proceeding or investigation
before any court or before or by any public body or board pending
or threatened against the Company or any of the Subsidiaries
which is required to be disclosed in the Prospectus and which is
not so disclosed.
(x) Each of the documents which is described in the
Registration Statement and the Prospectus conforms in all
material respects to the descriptions thereof contained in the
Registration Statement and the Prospectus. The statements in the
Prospectus insofar as such statements constitute a summary of
documents referred to therein or matters of law, are fair
summaries in all material respects and accurately present the
information called for by the Securities Act and the Rules with
respect to such documents and matters. To such counsel's
knowledge, all contracts and other documents required to be filed
as exhibits to, or described in, the Registration Statement have
been so filed with the Commission or are fairly described in the
Registration Statement, as the case may be.
(xi) The Registration Statement, all preliminary
prospectuses and the Prospectus and each amendment or supplement
thereto (except for the financial statements and schedules and
other financial and statistical data included therein, as to
which such counsel expresses no opinion) comply as to form in all
material respects with the requirements of the Securities Act and
the Rules.
(xii) The Registration Statement has become effective
under the Securities Act, and, to such counsel's knowledge,
(a) no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for
that purpose have been instituted or are threatened, pending or
contemplated and (b) the Prospectus has been filed with the
Commission in the manner and within the time period required by
Rule 424(b) of the Rules.
(xiii) The Company is not an "investment company" or an
entity "controlled" by an "investment company," as such terms are
defined in the Investment Company Act of 1940, as amended.
(xiv) The Shares have been duly approved for quotation
on the Nasdaq National Market.
(xv) To such counsel's knowledge, there are no persons
with registration or other similar rights to have any securities
registered pursuant to the Registration Statement or otherwise
registered by the Company under the Securities Act, except as
disclosed in the Registration Statement and the Prospectus.
(xvi) To such counsel's knowledge, the Company is in
compliance with the Foreign Corrupt Trade Practices Act.
To the extent deemed advisable by such counsel, they may rely as
to matters of fact on certificates of officers of the Company and
public officials and on the opinions of other counsel satisfactory to
the Representatives as to matters which are governed by laws other
than the Federal laws of the United States; provided that such counsel
shall state that in their opinion that they believe the Underwriters
and they are justified in relying on such other opinions. Copies of
such certificates and other opinions shall be furnished upon request
to the Representatives and counsel for the Underwriters.
In addition, such opinion shall include a statement to the effect
that, although such counsel has not verified, and is not passing upon
and does not assume any responsibility for, the accuracy, completeness
or fairness of the statements contained in the Registration Statement
and the Prospectus (except as specified in the foregoing opinion), no
facts have come to the attention of such counsel which lead such
counsel to believe that, under the Securities Act and the Rules, the
Registration Statement at the time it became effective contained any
untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, or that, as of the date of the Prospectus, as amended or
supplemented, the Prospectus as so amended or supplemented contained
any untrue statement of a material fact or omitted to state a material
fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading (in
each case except with respect to the financial statements and notes
and schedules thereto and other financial and statistical data, as to
which such counsel need make no statement).
(i) The Representatives shall have received on each Closing Date
from White & Case, Polish counsel for the Company, an opinion,
addressed to the Representatives and dated such Closing Date, and
stating in effect that:
(i) Frontier Poland Exploration and Producing Company
Sp.zo.o ("Frontier Poland") has been duly incorporated and is
validly existing as a limited liability company in good standing
under the laws of the Republic of Poland. All of the authorized
and issued capital stock (or other equity securities or ownership
interests) of Frontier Poland is owned of record and beneficially
by the Company. All of the outstanding shares of common stock of
Frontier Poland have been duly and validly authorized and have
been duly and validly issued and are fully paid and nonassessable
and none of them was issued in violation of any preemptive or
other similar right. Except as disclosed in the Registration
Statement and the Prospectus, there is no outstanding
subscription, option, warrant or other right calling for the
issuance of any share of stock, or other equity securities or
ownership interests, of Frontier Poland or any security
convertible into, exercisable for, or exchangeable for stock, or
other equity securities, of Frontier Poland.
(ii) Each of the documents listed on the exhibit to
such opinion and which is described in the Registration Statement
and the Prospectus with respect to the Company's or Frontier
Poland's activities in Poland conforms in all material respects
to the descriptions thereof contained in the Registration
Statement and the Prospectus. The statements in the Prospectus
insofar as such statements constitute a summary of such documents
or matters of Polish law, are fair summaries in all material
respects and accurately present the information called for by the
Securities Act and the Rules with respect to such documents and
matters. To such counsel's knowledge, every contract not made in
the ordinary course of business which is material to Frontier
Poland and is to be performed in whole or in part at or after the
filing of the registration statement or report or was entered
into not more than two years before such filing.
(iii) The Company's and Frontier Poland's activities in
Poland are in compliance with all applicable Polish laws and
regulations (including Restrictions Imposed on the Conduct of
Business by Persons Performing Public functions), except those
which the failure to comply with would not have a material
adverse effect upon the Company.
In addition, such opinion shall include a statement to the effect
that, although such counsel has not verified, and is not passing upon
and does not assume any responsibility for, the accuracy, completeness
or fairness of the statements contained in the Registration Statement
and the Prospectus (except as specified in the foregoing opinion), no
facts have come to the attention of such counsel which lead such
counsel to believe that, under the Securities Act and the Rules, the
Registration Statement at the time it became effective contained any
untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, or that, as of the date of the Prospectus, as amended or
supplemented, the Prospectus as so amended or supplemented contained
any untrue statement of a material fact or omitted to state a material
fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading (in
each case except with respect to the financial statements and notes
and schedules thereto and other financial and statistical data, as to
which such counsel need make no statement).
(j) All proceedings taken in connection with the sale of the
Firm Shares and the Option Shares as herein contemplated shall be
reasonably satisfactory in form and substance to the Representatives
and their counsel and the Underwriters shall have received from
Gibson, Dunn & Crutcher a favorable opinion, addressed to the
Representatives and dated such Closing Date, with respect to the
Shares, the Registration Statement and the Prospectus, and such other
related matters, as the Representatives may reasonably request, and
the Company shall have furnished to Gibson, Dunn & Crutcher such
documents as they may reasonably request for the purpose of enabling
them to pass upon such matters.
(k) The Company shall have furnished or caused to be furnished
to the Representatives such further certificates and documents as the
Representatives shall have reasonably requested.
(l) The Representatives Warrants shall have been validly issued
and delivered to Oppenheimer.
6. COVENANTS OF THE COMPANY. (A) The Company covenants and agrees
as follows:
(a) The Company shall prepare the Prospectus in a form approved
by the Representatives and file such Prospectus pursuant to
Rule 424(b) under the Securities Act not later than the Commission's
close of business on the second business day following the execution
and delivery of this Agreement, or, if applicable, such earlier time
as may be required by Rule 430A(a)(3) under the Securities Act, and
shall promptly advise the Representatives (i) when any amendment to
the Registration Statement shall have become effective, (ii) of any
request by the Commission for any amendment of the Registration
Statement or the Prospectus or for any additional information,
(iii) of the prevention or suspension of the use of any preliminary
prospectus or the Prospectus or of the issuance by the Commission of
any stop order suspending the effectiveness of the Registration
Statement or the institution or threatening of any proceeding for that
purpose and (iv) of the receipt by the Company of any notification
with respect to the suspension of the qualification of the Shares for
sale in any jurisdiction or the initiation or threatening of any
proceeding for such purpose. The Company shall not file or prepare
any amendment of the Registration Statement or supplement to the
Prospectus unless the Company has furnished the Representatives a copy
for their review within a reasonable amount of time prior to filing or
use and shall not file or use any such proposed amendment or
supplement to which the Representatives reasonably object. The
Company shall use its best efforts to prevent the issuance of any such
stop order and, if issued, to obtain as soon as possible the
withdrawal thereof.
(b) If, at any time when a prospectus relating to the Shares is
required to be delivered under the Securities Act and the Rules, any
event occurs as a result of which the Prospectus as then amended or
supplemented would include any untrue statement of a material fact or
omit to state any material fact necessary to make the statements
therein in the light of the circumstances under which they were made
not misleading, or if it shall be necessary to amend or supplement the
Prospectus to comply with the Securities Act or the Rules, the Company
promptly shall prepare and file with the Commission, subject to the
second sentence of paragraph (a) of this Section 6(A), an amendment or
supplement which shall correct such statement or omission or an
amendment which shall effect such compliance.
(c) The Company shall make generally available to its security
holders and to the Representatives as soon as practicable, but not
later than 45 days after the end of the 12-month period beginning at
the end of the fiscal quarter of the Company during which the
"effective date" (as defined in Rule 158 of the Rules) occurs (or 90
days if such 12-month period coincides with the Company's fiscal
year), an earnings statement (which need not be audited) of the
Company, covering such 12-month period, which shall satisfy the
provisions of Section 11(a) of the Securities Act. The Company may
satisfy this requirement by complying with Rule 158 of the Rules.
(d) The Company shall furnish to the Representatives and counsel
for the Underwriters, without charge, three signed copies of the
Registration Statement (including all exhibits thereto and amendments
thereof) and to each other Underwriter a copy of the Registration
Statement (without exhibits thereto) and all amendments thereof and,
so long as delivery of a prospectus by an Underwriter or dealer may be
required by the Securities Act or the Rules, as many copies of any
preliminary prospectus and the Prospectus and any amendments thereof
and supplements thereto as the Representatives may reasonably request.
(e) The Company shall cooperate with the Representatives and
their counsel in endeavoring to qualify the Shares for offer and sale
under the laws of such jurisdictions as the Representatives may
designate and shall maintain such qualifications in effect so long as
required for the distribution of the Shares; provided, however, that
the Company shall not be required in connection therewith, as a
condition thereof, to qualify as a foreign corporation or to execute a
general consent to service of process in any jurisdiction or subject
itself to taxation as doing business in any jurisdiction. In each
jurisdiction in which the Shares have been so qualified, the Company
will file such statements and reports as may be required by the laws
of such jurisdiction to continue such qualification in effect for a
period of not less than one year from the Effective Date.
(f) For a period of five years after the date of this Agreement,
the Company shall supply to the Representatives, and to each other
Underwriter who may so request in writing, copies of such financial
statements and other periodic and special reports as the Company may
from time to time distribute generally to the holders of any class of
its capital stock and to furnish to the Representatives a copy of each
annual or other report it shall be required to file with the
Commission.
(g) Except as disclosed in the Registration Statement, without
the prior written consent of the Representatives, for a period of 180
days after the date of this Agreement, the Company shall not issue,
sell or register with the Commission (other than on Form S-8 or on any
successor form), or otherwise dispose of, directly or indirectly, any
equity securities of the Company (or any securities convertible into
or exercisable or exchangeable for equity securities of the Company),
except for the issuance of the Shares pursuant to the Registration
Statement and the issuance of shares pursuant to the Company's
existing stock option plan. In the event that, during this period,
(i) any shares are issued pursuant to the Company's existing stock
option plan or (ii) any registration is effected on Form S-8 or on any
successor form, the Company shall obtain the written agreement of each
grantee or purchaser or holder of such registered securities who
obtains 50,000 or more shares or rights to purchase shares that vest
within such 180 day period that, for a period of 180 days after the
date of this Agreement, such person will not, without the prior
written consent of Oppenheimer & Co., Inc., offer for sale, sell,
distribute, grant any option for the sale of, or otherwise dispose of,
directly or indirectly, or exercise any registration rights with
respect to, any shares of Common Stock (or any securities convertible
into, exercisable for, or exchangeable for any shares of Common Stock)
owned by such person.
(h) On or before completion of this offering, the Company shall
make all filings required under applicable securities laws and by the
Nasdaq National Market (including any required registration under the
Exchange Act).
(i) Prior to a Closing Date, the Company will not issue,
directly or indirectly, without the Representatives' prior written
consent which shall not be unreasonably withheld, any press release or
other communication or hold any press conference with respect to the
Company or its activities or this offering, other than press releases
issued in the ordinary course of the Company's business with respect
to the Company's operations.
(j) The Company will comply with all of the provisions of any
undertakings contained in the Prospectus or the Registration
Statement.
(k) The Company will apply the net proceeds from the sale of the
Shares substantially in accordance with the description set forth in
the Prospectus.
(l) Except as stated in this Agreement and in the Prospectus,
the Company will not take, directly or indirectly (except for any
action taken by the Underwriters), any action designed to or that
might reasonably be expected to cause or result in stabilization or
manipulation of the price of the Common Stock to facilitate the sale
or resale of the Shares.
(m) The Company will not make any payments or distributions to
its shareholders for the purpose of funding, directly or indirectly,
any tax liabilities of its shareholders.
(n) The Company shall cause the Shares to be approved for
quotation on the Nasdaq National Market.
(B) The Company agrees to pay, or reimburse if paid by the
Representatives, whether or not the transactions contemplated hereby
are consummated or this Agreement is terminated, all costs and
expenses incident to the public offering of the Shares and the
performance of the obligations of the Company under this Agreement
including those relating to: (i) the preparation, printing, filing
and distribution of the Registration Statement including all exhibits
thereto, each preliminary prospectus, the Prospectus, all amendments
and supplements to the Registration Statement and the Prospectus, and
the printing, filing and distribution of this Agreement; (ii) the
preparation and delivery of certificates for the Shares to the
Underwriters to the Representatives; (iii) the registration or
qualification of the Shares for offer and sale under the securities or
Blue Sky laws of the various jurisdictions referred to in
Section 6(A)(e), including the reasonable fees and disbursements of
counsel for the Underwriters in connection with such registration and
qualification and the preparation, printing, distribution and shipment
of preliminary and supplementary Blue Sky memoranda; (iv) the
furnishing (including costs of shipping and mailing) to the
Representatives and to the Underwriters of copies of each preliminary
prospectus, the Prospectus and all amendments or supplements to the
Prospectus, and of the several documents required by this Section to
be so furnished, as may be reasonably requested for use in connection
with the offering and sale of the Shares by the Underwriters or by
dealers to whom Shares may be sold; (v) the filing fees of the
National Association of Securities Dealers, Inc. in connection with
its review of the terms of the public offering; (vi) the furnishing
(including costs of shipping and mailing) to the Representatives and
to the Underwriters of copies of all reports and information required
by Section 6(A)(f); (vii) inclusion of the Shares for quotation on the
Nasdaq National Market; and (viii) all transfer taxes, if any, with
respect to the sale and delivery of the Shares by the Company to the
Underwriters. Subject to the provisions of Section 9, the
Underwriters agree to pay, whether or not the transactions
contemplated hereby are consummated or this Agreement is terminated,
all costs and expenses incident to the performance of the obligations
of the Underwriters under this Agreement not payable by the Company
pursuant to the preceding sentence.
7. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter, each of their respective officers, directors, partners,
employees, agents and counsel, and each person, if any, who controls
any Underwriter within the meaning of Section 15 of the Securities Act
or Section 20 of the Exchange Act against any and all losses, claims,
damages and liabilities, joint or several (including any reasonable
investigation, legal and other expenses incurred in connection with,
and any amount paid in settlement of, any action, suit or proceeding
or any claim asserted), to which they, or any of them, may become
subject under the Securities Act, the Exchange Act or other federal or
state law or regulation, at common law or otherwise, including such
losses, claims, damages or liabilities which arise out of or are based
upon any untrue statement or alleged untrue statement of a material
fact contained in any preliminary prospectus, the Registration
Statement or the Prospectus or any amendment thereof or supplement
thereto, or arise out of or are based upon any omission or alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading;
provided, however, that such indemnity shall not inure to the benefit
of any Underwriter (or any officers, directors, parties, employees,
agents, counsel or any person controlling such Underwriter) on account
of any losses, claims, damages or liabilities arising from the sale of
the Shares to any person by such Underwriter if such untrue statement
or omission or alleged untrue statement or omission was made in such
preliminary prospectus, the Registration Statement or the Prospectus,
or such amendment or supplement, in reliance upon and in conformity
with the information furnished in writing to the Company by the
Representatives on behalf of any Underwriter specifically for use
therein as described in Section 4(o). This indemnity agreement will
be in addition to any liability which the Company may otherwise have
by reason of the Engagement Letter between the Company and
Oppenheimer & Co., Inc. dated , 1996 or otherwise.
(b) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, each person, if any, who
controls the Company within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act, each director of the
Company, and each officer of the Company who signs the Registration
Statement, to the same extent as the foregoing indemnity from the
Company to each Underwriter, but only insofar as such losses, claims,
damages or liabilities arise out of or are based upon any untrue
statement or omission or alleged untrue statement or omission which
was made in any preliminary prospectus, the Registration Statement or
the Prospectus, or any amendment thereof or supplement thereto, in
reliance upon and in conformity with information furnished in writing
to the Company by the Representatives on behalf of such Underwriter
specifically for use therein; provided, however, that the obligation
of each Underwriter to indemnify the Company (including any
controlling person, director or officer thereof) shall be limited to
the net proceeds received by the Company from such Underwriter.
(c) Any party that proposes to assert the right to be
indemnified under this Section will, promptly after receipt of notice
of commencement of any action, suit or proceeding against such party
in respect of which a claim is to be made against an indemnifying
party or parties under this Section, notify each such indemnifying
party of the commencement of such action, suit or proceeding,
enclosing a copy of all papers served. No indemnification provided
for in Section 7(a) or 7(b) shall be available to any party who shall
fail to give notice as provided in this Section 7(c) if the party to
whom notice was not given was unaware of the proceeding to which such
notice would have related and was materially prejudiced by the failure
to give such notice but the omission so to notify such indemnifying
party of any such action, suit or proceeding shall not relieve it from
any liability that it may have to any indemnified party for
contribution or otherwise than under this Section. In case any such
action, suit or proceeding shall be brought against any indemnified
party and it shall notify the indemnifying party of the commencement
thereof, the indemnifying party shall be entitled to participate in,
and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof,
with counsel reasonably satisfactory to such indemnified party, and
after notice from the indemnifying party to such indemnified party of
its election so to assume the defense thereof and the approval by the
indemnified party of such counsel, the indemnifying party shall not be
liable to such indemnified party for any legal or other expenses,
except as provided below and except for the reasonable costs of
investigation subsequently incurred by such indemnified party in
connection with the defense thereof. The indemnified party shall have
the right to employ its counsel in any such action, but the fees and
expenses of such counsel shall be at the expense of such indemnified
party unless (i) the employment of counsel by such indemnified party
has been authorized in writing by the indemnifying parties, (ii) the
indemnified party shall have reasonably concluded that there may be a
conflict of interest between the indemnifying parties and the
indemnified party in the conduct of the defense of such action (in
which case the indemnifying parties shall not have the right to direct
the defense of such action on behalf of the indemnified party) or
(iii) the indemnifying parties shall not have employed counsel to
assume the defense of such action within a reasonable time after
notice of the commencement thereof, in each of which cases the fees
and expenses of counsel shall be at the expense of the indemnifying
parties. An indemnifying party shall not be liable for any settlement
of any action, suit, proceeding or claim effected without its written
consent; provided, however, that such consent has not been
unreasonably withheld.
8. CONTRIBUTION. In order to provide for just and equitable
contribution in circumstances in which the indemnification provided
for in Section 7(a) is due in accordance with its terms but for any
reason is held to be unavailable from the Company, the Company and the
Underwriters shall contribute to the aggregate losses, claims, damages
and liabilities (including any investigation, legal and other expenses
reasonably incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claims asserted,
but after deducting any contribution received by the Company from
persons other than the Underwriters, such as persons who control the
Company within the meaning of the Securities Act, officers of the
Company who signed the Registration Statement and directors of the
Company, who may also be liable for contribution) to which the Company
and one or more of the Underwriters may be subject in such proportion
as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Underwriters on the other from the
offering of the Shares or, if such allocation is not permitted by
applicable law or indemnification is not available as a result of the
indemnifying party not having received notice as provided in Section 7
hereof, in such proportion as is appropriate to reflect not only the
relative benefits referred to above but also the relative fault of the
Company on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative benefits received by
the Company and the Underwriters shall be deemed to be in the same
proportion as (x) the total proceeds from the offering (net of
underwriting discounts but before deducting expenses) received by the
Company, as set forth in the table on the cover page of the
Prospectus, bear to (y) the underwriting discounts received by the
Underwriters, as set forth in the table on the cover page of the
Prospectus. The relative fault of the Company or the Underwriters
shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact related to
information supplied by the Company or the Underwriters and the
parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The
Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 8 were determined
by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which
does not take account of the equitable considerations referred to
above. Notwithstanding the provisions of this Section 8, (i) in no
case shall any Underwriter (except as may be provided in the Agreement
Among Underwriters) be liable or responsible for any amount in excess
of the underwriting discount applicable to the Shares purchased by
such Underwriter hereunder, and (ii) the Company shall be liable and
responsible for any amount in excess of such underwriting discount;
provided, however, that no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation. For purposes of
this Section 8, each person, if any, who controls an Underwriter
within the meaning of Section 15 of the Securities Act or
Section 20(a) of the Exchange Act shall have the same rights to
contribution as such Underwriter, and each person, if any, who
controls the Company within the meaning of Section 15 of the
Securities Act or Section 20(a) of the Exchange Act, each officer of
the Company who shall have signed the Registration Statement and each
director of the Company shall have the same rights to contribution as
the Company, subject in each case to clauses (i) and (ii) in the
immediately preceding sentence of this Section 8. Any party entitled
to contribution will, promptly after receipt of notice of commencement
of any action, suit or proceeding against such party in respect of
which a claim for contribution may be made against another party or
parties under this Section, notify such party or parties from whom
contribution may be sought, but the omission so to notify such party
or parties from whom contribution may be sought shall not relieve the
party or parties from whom contribution may be sought from any
obligation it or they may have hereunder or otherwise than under this
Section, except to the extent of any material prejudice resulting from
such failure to notify. No party shall be liable for contribution
with respect to any action, suit, proceeding or claim settled without
its written consent; provided, however, that such written consent has
not been unreasonably withheld. The Underwriters' obligations to
contribute pursuant to this Section 8 are several in proportion to
their respective underwriting commitments and not joint.
9. TERMINATION. This Agreement may be terminated without liability
on the part of the Representatives to the Company with respect to the
Shares to be purchased on a Closing Date by the Representatives by
notifying the Company at any time
(a) in the sole and absolute discretion and judgment of the
Representatives at or before any Closing Date: (i) if the Company
shall have sustained a material or substantial loss by fire, flood,
accident, hurricane, earthquake, theft, sabotage or other calamity or
malicious act which, whether or not said loss shall have been insured,
will make it inadvisable to proceed with the offering; (ii) if there
has been, since the respective dates as of which information is given
in the Registration Statement and the Prospectus, any material adverse
change in the business, operations, earnings, prospects, properties or
financial condition of the Company, whether or not arising in the
ordinary course of business; (iii) if on or prior to such date, any
domestic or international event or act or occurrence has materially
disrupted, or in the opinion of the Representatives will in the future
materially disrupt, the securities markets; (iv) if there has occurred
any new outbreak or material escalation of hostilities or other
calamity or crisis the effect of which on the financial markets of the
United States is such as to make it, in the judgment of the
Representatives, inadvisable to proceed with the offering; (v) if
there shall be such a material adverse change in general financial,
political or economic conditions or the effect of international
conditions on the financial markets in the United States is such as to
make it, in the judgment of the Representatives, inadvisable or
impracticable to market the Shares; (vi) if trading in the Shares has
been suspended by the Commission or trading generally on the New York
Stock Exchange, Inc. or on the American Stock Exchange, Inc. has been
suspended or limited, or minimum or maximum ranges for prices for
securities shall have been fixed, or maximum ranges for prices for
securities have been required, by said exchanges or by order of the
Commission, the National Association of Securities Dealers, Inc., or
any other governmental or regulatory authority; or (vii) if a banking
moratorium has been declared by any state or federal authority, or
(b) at or before any Closing Date, that any of the conditions
specified in Section 5 shall not have been fulfilled when and as
required by this Agreement.
If this Agreement is terminated pursuant to any of its provisions, the
Company shall not be under any liability to any Underwriter, and no
Underwriter shall be under any liability to the Company, except that
(y) if this Agreement is terminated by the Representatives or the
Underwriters because of any failure, refusal or inability on the part
of the Company to comply with the terms or to fulfill any of the
conditions of this Agreement, the Company will reimburse the
Underwriters for all out-of-pocket expenses (including the reasonable
fees and disbursements of their counsel) incurred by them in
connection with the proposed purchase and sale of the Shares or in
contemplation of performing their obligations hereunder and (z) no
Underwriter who shall have failed or refused to purchase the Shares
agreed to be purchased by it under this Agreement, without some reason
sufficient hereunder to justify cancellation or termination of its
obligations under this Agreement, shall be relieved of liability to
the Company or to the other Underwriters for damages occasioned by its
failure or refusal.
10. SUBSTITUTION OF UNDERWRITERS. If one or more of the Underwriters
shall fail (other than for a reason sufficient to justify the
cancellation or termination of this Agreement under Section 9) to
purchase on any Closing Date the Shares agreed to be purchased on such
Closing Date by such Underwriter or Underwriters, the Representatives
may find one or more substitute underwriters to purchase such Shares
or make such other arrangements as the Representatives may deem
advisable or one or more of the remaining Underwriters may agree to
purchase such Shares in such proportions as may be approved by the
Representatives, in each case upon the terms set forth in this
Agreement. If no such arrangements have been made by the close of
business on the business day following such Closing Date,
(a) if the number of Shares to be purchased by the defaulting
Underwriters on such Closing Date shall not exceed 10% of the Shares
that all the Underwriters are obligated to purchase on such Closing
Date, then each of the nondefaulting Underwriters shall be obligated
to purchase such Shares on the terms herein set forth in proportion to
their respective obligations hereunder; provided, that in no event
shall the maximum number of Shares that any Underwriter has agreed to
purchase pursuant to Section 1 be increased pursuant to this
Section 10 by more than one-ninth of such number of Shares without the
written consent of such Underwriter, or
(b) if the number of Shares to be purchased by the defaulting
Underwriters on such Closing Date shall exceed 10% of the Shares that
all the Underwriters are obligated to purchase on such Closing Date,
then the Company shall be entitled to an additional business day
within which it may, but is not obligated to, find one or more
substitute underwriters reasonably satisfactory to the Representatives
to purchase such Shares upon the terms set forth in this Agreement.
In any such case, either the Representatives or the Company shall have
the right to postpone the applicable Closing Date for a period of not
more than five business days in order that necessary changes and
arrangements (including any necessary amendments or supplements to the
Registration Statement or Prospectus) may be effected by the
Representatives and the Company. If the number of Shares to be
purchased on such Closing Date by such defaulting Underwriter or
Underwriters shall exceed 10% of the Shares that all the Underwriters
are obligated to purchase on such Closing Date, and none of the
nondefaulting Underwriters or the Company shall make arrangements
pursuant to this Section within the period stated for the purchase of
the Shares that the defaulting Underwriters agreed to purchase, this
Agreement shall terminate with respect to the Shares to be purchased
on such Closing Date without liability on the part of any
nondefaulting Underwriter to the Company and without liability on the
part of the Company, except in both cases as provided in Sections
6(B), 7, 8 and 9. The provisions of this Section shall not in any way
affect the liability of any defaulting Underwriter to the Company or
the nondefaulting Underwriters arising out of such default. A
substitute underwriter hereunder shall become an Underwriter for all
purposes of this Agreement.
11. REPRESENTATIVES WARRANTS. Oppenheimer & Co., Inc.
("Oppenheimer") and Hanifen, Imhoff Inc. ("Hanifen") shall each have
the option, but not the obligation, to purchase from the Company
warrants for an aggregate of [Firm Shares* 5%] shares of the Common
Shares (to be allocated between Oppenheimer and Hanifen as such
parties shall agree) with an exercise price per Common Share equal to
one hundred and twenty percent of the average closing price of the
Common Stock over the twenty trading days prior to the date of this
Agreement, such warrant being exercisable during a four (4) year
period beginning one (1) year after the Firm Shares Closing Date and
expiring five (5) years after the Closing Date (the "Representatives
Warrants"). The Representatives Warrants shall be purchased on the
Closing Date by Oppenheimer and Hanifen at an aggregate price of
$100.00. The Representative Warrants shall be transferable to the
partners and officers of the Representatives.
12. MISCELLANEOUS. The respective agreements, representations,
warranties, indemnities and other statements of the Company or its
officers and of the Underwriters set forth in or made pursuant to this
Agreement shall remain in full force and effect, regardless of any
indemnification made by or on behalf of any Underwriter or the Company
or any of the officers, directors or controlling persons referred to
in Sections 7 and 8 hereof, and shall survive delivery of and payment
for the Shares. The provisions of Sections 6(B), 7, 8 and 9 shall
survive the termination or cancellation of this Agreement.
This Agreement has been and is made for the benefit of the
Underwriters and the Company and their respective successors and
assigns, and, to the extent expressed herein, for the benefit of
persons controlling any of the Underwriters or the Company, and
directors and officers of the Company, and their respective successors
and assigns, and no other person shall acquire or have any right under
or by virtue of this Agreement. The term "successors and assigns"
shall not include any purchaser of Shares from any Underwriter merely
because of such purchase.
All notices and communications hereunder shall be in writing and
mailed or delivered or by telephone or telegraph if subsequently
confirmed in writing, (a) if to the Representatives, c/o Oppenheimer &
Co., Inc., Oppenheimer Tower, World Financial Center, New York,
New York 10281, Attention: Ronald D. Ormand, Managing Director, and
Hanifen, Imhoff Inc., 1125 17th Street, Suite 600, Denver, CO 80202,
Attention: Kathyrn E. Evers, Managing Director, and (b) if to the
Company, to its agent for service as such agent's address appears on
the cover page of the Registration Statement.
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York without regard to principles of
conflict of laws.
This Agreement may be signed in any number of counterparts, each of
which shall be an original, with the same effect as if the signatures
thereto and hereto were upon the same instrument.
Please confirm that the foregoing correctly sets forth the agreement
among us.
Very truly yours,
FX ENERGY CORPORATION
By:
Name:
Title:
Confirmed:
OPPENHEIMER & CO., INC.
HANIFEN, IMHOFF INC.
Acting severally on behalf of themselves
and as representative of the several
Underwriters named in Schedule I
annexed hereto.
OPPENHEIMER & CO., INC.
By:
Ronald D. Ormand
Managing Director
HANIFEN, IMHOFF INC.
By:
Kathryn E. Evers
Managing Director
SCHEDULE I
Name Number of
Firm Shares to
Be Purchased
Oppenheimer & Co., Inc.
Hanifen, Imhoff Inc.
TOTAL [Firm Shares]
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED FOR SALE, SOLD
OR OTHERWISE DISPOSED OF IN THE UNITED STATES OR TO UNITED STATES PERSONS EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT FILED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SUCH
ACT.
VOID AFTER 5:00 P.M., NEW YORK TIME, ON [ , 2001] OR IF NOT A BUSINESS
DAY, AS DEFINED HEREIN, AT 5:00 P.M., NEW YORK TIME, ON THE NEXT BUSINESS DAY.
WARRANT TO PURCHASE
[ ] COMMON SHARES
WARRANT TO PURCHASE
COMMON SHARES OF
FX ENERGY CORPORATION
TRANSFER RESTRICTED -- SEE SECTION 5.02
This certifies that, for $100.00 and other good and valuable consideration,
[OPPENHEIMER & CO., INC. or HANIFEN, IMHOFF INC.] and its registered, permitted
assigns (collectively, the "Warrantholder"), is entitled to purchase from FX
ENERGY CORPORATION, a corporation incorporated under the laws of the state of
Nevada (the "Company"), subject to the terms and conditions hereof, at any time
after 9:00 A.M., New York time, on [ , 1997], and before 5:00 P.M.,
New York time, on [ , 2001] (or, if such day is not a Business Day, at
or before 5:00 P.M., New York time, on the next following Business Day), the
number of fully paid and non-assessable Common Shares stated above at the
Exercise Price. The Exercise Price and the number of shares purchasable
hereunder are subject to adjustment from time to time as provided in Article III
hereof.
ARTICLE I
Section 1.01: Definition of Terms. As used in this Warrant, the following
capitalized terms shall have the following respective meanings:
(a) 50% Holders: At any time as to which a Demand Registration is
requested, the holders of any Warrants and the holders of Warrant Shares
who have the right to acquire or hold, as the case may be, not less than
50% of the combined total of Warrant Shares issuable and Warrant Shares
outstanding at the time such Demand Registration is requested.
(b) Business Day: A day other than a Saturday, Sunday or other day
on which banks in the State of New York are authorized by law to remain
closed.
(c) Common Stock: Common Shares, with par value of $.001 per share,
of the Company.
(d) Common Stock Equivalents: Securities that are convertible into
or exercisable for shares of Common Stock.
(e) Demand Registration: See Section 6.02.
(f) Exchange Act: The Securities Exchange Act of 1934, as amended.
(g) Exercise Price: [$ ] per Warrant Share, as such price may
be adjusted from time to time pursuant to Article III hereof.
(h) Expiration Date: 5:00 P.M., New York time, on , 2001
or if such day is not a Business Day, the next succeeding day which is a
Business Day.
(i) Holder: A Holder of Registrable Securities.
(j) NASD: National Association of Securities Dealers, Inc., and
NASDAQ: NASD Automatic Quotation System.
(k) Person: An individual, partnership, joint venture, corporation,
trust, unincorporated organization or government or any department or
agency thereof.
(l) Piggyback Registration: See Section 6.01.
(m) Prospectus: Any prospectus included in any Registration
Statement, as amended or supplemented by any prospectus supplement, with
respect to the terms of the offering of any portion of the Registrable
Securities covered by such Registration Statement and all other amendments
and supplements to the prospectus, including post-effective amendments and
all material incorporated by reference in such prospectus.
(n) Public Offering: A public offering of any of the Company's
equity securities pursuant to a registration statement under the Securities
Act.
(o) Registrable Securities: Any Warrant Shares issued to
[OPPENHEIMER & CO., INC. or HANIFEN, IMHOFF INC.] and/or its designees or
transferees as permitted under Section 5.02 and/or other securities that
may be or are issued by the Company upon exercise of this Warrant,
including those which may thereafter be issued by the Company in respect of
any such securities by means of any stock splits, stock dividends,
recapitalizations, reclassifications or the like, and as adjusted pursuant
to Article III hereof.
(p) Registration Expenses: Any and all expenses incurred in
connection with any registration or action incident to performance of or
compliance by the Company with Article VI, including, without limitation,
(i) all SEC, national securities exchange and NASD registration and filing
fees; all listing fees and all transfer agent fees; (ii) all fees and
expenses of complying with state securities or blue sky laws (including the
fees and disbursements of counsel for the underwriters in connection with
blue sky qualifications of the Registrable Securities); (iii) all printing,
mailing, messenger and delivery expenses and (iv) all fees and
disbursements of counsel for the Company and of its accountants, including
the expenses of any special audits and/or "cold comfort" letters required
by or incident to such performance and compliance, but excluding
underwriting discounts and commissions, brokerage fees and transfer taxes,
if any, and fees of counsel or accountants retained by the holders of
Registrable Securities to advise them in their capacity as Holders of
Registrable Securities.
(q) Registration Statement: Any registration statement of the
Company filed or to be filed with the SEC which covers any of the
Registrable Securities pursuant to the provisions of this Agreement,
including all amendments (including post-effective amendments) and
supplements thereto, all exhibits thereto and all material incorporated
therein by reference.
(r) SEC: The Securities and Exchange Commission or any other federal
agency at the time administering the Securities Act or the Exchange Act.
(s) Securities Act: The Securities Act of 1933 as amended.
(t) Transfers: See Section 5.02.
(u) Warrants: This Warrant, and all other similar warrants issued on
the date hereof, and all other warrants that may be issued in its place
(together evidencing the right to purchase an aggregate of [ ]
shares of Common Stock), originally issued as set forth in the definition
of Registrable Securities.
(v) Warrantholder: The person(s) or entity(ies) to whom this Warrant
is originally issued, or any successor in interest thereto, or any assignee
or transferee thereof, in whose name this Warrant is registered upon the
books to be maintained by the Company for that purpose.
(w) Warrant Shares: Common Stock, Common Stock Equivalents and other
securities purchased or purchasable upon exercise of the Warrants.
(x) $ or Dollars: United States dollars.
ARTICLE II
DURATION AND EXERCISE OF WARRANT
Section 2.01: Duration of Warrant. The Warrantholder may exercise this Warrant
at any time and from time to time after 9:00 A.M., New York time on ,
1997 and before 5:00 P.M., New York time, on the Expiration Date. If this
Warrant is not exercised on the Expiration Date, it shall become void, and all
rights hereunder shall thereupon cease.
Section 2.02: Exercise of Warrant.
(a) The Warrantholder may exercise this Warrant, in whole or in part,
as follows:
(i) by presentation and surrender of this warrant to the Company
at its corporate office at 3006 Highland Drive, Suite 206, Salt Lake
City, Utah 84106 or at the office of its stock transfer agent, if any,
with the Subscription Form annexed hereto duly executed and
accompanied by payment of the full Exercise Price for each Warrant
Share to be purchased by means of a cashiers or certified check; or
(ii) By presentation and surrender of this Warrant to the Company
at its principal executive offices with a Cashless Exercise Form
annexed hereto duly executed (a "Cashless Exercise"). In the event of
a Cashless Exercise, the Warrantholder shall exchange its Warrant for
that number of shares of Common Stock determined by multiplying the
number of Warrant Shares by a fraction, the numerator of which shall
be the amount by which the then current market price per share of
Common Stock exceeds the Exercise Price, and the denominator of which
shall be the then current market price per share of Common Stock. For
purposes of any computation under this Section 2.02(a)(ii), the then
current market price per share of Common Stock at any date shall be
deemed to be the last sale price of the Common Stock on the business
day prior to the date of the Cashless Exercise or, in case no such
reported sales take place on such day, the average of the last
reported bid and asked prices of the Common Stock on such day, in
either case on the principal national securities exchange on which the
Common Stock is admitted to trading or listed, or if not listed or
admitted to trading on any such exchange, the representative closing
bid price of the Common Stock as reported by NASDAQ, or other similar
organization if NASDAQ is no longer reporting such information, or if
not so available, the fair market price of the Common Stock as
determined by the Board of Directors in good faith.
(b) Upon receipt of this Warrant with the Subscription Form fully
executed and accompanied by payment of the aggregate Exercise Price for the
Warrant Shares for which this Warrant is then being exercised, or, in the
case of Section 2.02(a)(ii), with the Cashless Exercise Form duly executed,
the Company shall cause to be issued certificates for the total number of
whole shares of Common Stock for which this Warrant is being exercised
(adjusted to reflect the effect of the anti-dilution provisions contained
in Article III hereof, if any, and as provided in Section 2.04 hereof) in
such denominations as are requested for delivery to the Warrantholder, and
the Company shall thereupon deliver such certificates to the Warrantholder.
The Warrantholder shall be deemed to be the holder of record of the shares
of Common Stock issuable upon such exercise, notwithstanding that the stock
transfer books of the Company shall then be closed or that certificates
representing such shares of Common Stock may not then be actually delivered
to the Warrantholder. If at the time this Warrant is exercised, a
Registration Statement is not in effect to register under the Securities
Act the Warrant Shares issuable upon exercise of this Warrant, the Company
may require the Warrantholder to make such representations, and may place
such legends on certificates representing the Warrant Shares, as may be
reasonably required in the opinion of counsel to the Company to permit the
Warrant Shares to be issued without such registration.
(c) In case the Warrantholder shall exercise this Warrant with
respect to less than all of the Warrant Shares that may be purchased under
this Warrant, the Company shall execute a new warrant in the form of this
Warrant for the balance of such Warrant Shares and deliver such new warrant
to the Warrantholder.
(d) The Company shall pay any and all stock transfer and similar
taxes which may be payable in respect of the issue of this Warrant or in
respect of the issue of any Warrant Shares.
Section 2.03: Reservation of Shares. The Company hereby agrees that at all
times there shall be reserved for issuance and delivery upon exercise of this
Warrant such number of shares of Common Stock or other shares of capital stock
of the Company from time to time issuable upon exercise of this Warrant. All
such shares shall be duly authorized, and when issued upon such exercise, shall
be validly issued, fully paid and non-assessable, free and clear of all liens,
security interests, charges and other encumbrances or restrictions on sale and
free and clear of all preemptive rights.
Section 2.04: Fractional Shares. The Company shall not be required to issue
any fraction of a share of its capital stock in connection with the exercise of
this Warrant, and in any case where the Warrantholder would, except for the
provisions of this Section 2.04, be entitled under the terms of this Warrant to
receive a fraction of a share upon the exercise of this Warrant, the Company
shall, upon the exercise of this Warrant and receipt of the Exercise Price,
issue the greatest number of whole shares purchasable upon exercise of this
Warrant for which payment in full of the Exercise Price has been received. The
Company shall not be required to make any cash or other adjustment in respect of
such fraction of a share to which the Warrantholder would otherwise be entitled.
Section 2.05: Listing. Prior to the issuance of any shares of Common Stock
upon exercise of this Warrant, the Company shall secure the listing of such
shares of Common Stock upon each national securities exchange or automated
quotation systems, if any, upon which shares of Common Stock are then listed
(subject to official notice of issuance upon exercise of this Warrant) and shall
maintain, so long as any other shares of Common Stock shall be so listed, such
listing of all shares of Common Stock from time to time issuable upon the
exercise of this Warrant; and the Company shall so list on each national
securities exchange or automated quotation System, and shall maintain such
listing of, any other shares of capital stock of the Company issuable upon the
exercise of this Warrant if and so long as any shares of the same class shall be
listed on such national securities exchange or automated quotation system.
ARTICLE III
ADJUSTMENT OF SHARES OF COMMON STOCK
PURCHASABLE AND OF EXERCISE PRICE
The Exercise Price and the number and kind of Warrant Shares shall be subject to
adjustment from time to time upon the happening of certain events as provided in
this Article III.
Section 3.01: Mechanical Adjustments
(a) If at any time prior to the exercise of this Warrant in full, the
Company shall (i) declare a dividend or make a distribution on the Common
Stock payable in shares of its Common Stock; (ii) subdivide, reclassify or
recapitalize the outstanding Common Stock into a greater number of shares
of Common Stock; (iii) combine, reclassify or recapitalize its outstanding
shares of Common Stock into a smaller number of shares of Common Stock, or
(iv) issue any shares of its capital stock by reclassification of its
Common Stock (including any such reclassification in connection with a
consolidation or a merger in which the Company is the continuing
corporation), the Exercise Price in effect at the time of the record date
of such dividend, distribution, subdivision, combination, reclassification
or recapitalization shall be adjusted so that the Warrantholder shall be
entitled to receive the aggregate number and kind of shares which, if this
Warrant had been exercised in full immediately prior to such event, he
would have owned upon such exercise and been entitled to receive by virtue
of such dividend, distribution, subdivision, combination, reclassification
or recapitalization. Any adjustment required by this paragraph 3.01(a)
shall be made successively and become effective immediately after the
record date, in the case of a dividend or distribution, or the effective
date, in the case of a subdivision, combination, reclassification or
recapitalization, to allow the purchase of such aggregate number and kind
of shares.
(b) If at any time prior to the exercise of this Warrant in full, the
Company shall (i) issue or sell any Common Stock or Common Stock
Equivalents without consideration or for consideration per share of Common
Stock less than the current market price per share of Common Stock on the
date of such issuance or sale as defined in Section 3.01(f) (other than
pursuant to employee benefit or compensation arrangements and other than
pursuant to subscription rights, options or warrants which had a
subscription, exercise, purchase or conversion price equal to or greater
than the current market price per share on the effective date of issuance
or grant of such rights, options or warrants) or (ii) fix a record date for
the issuance of subscription rights, options or warrants to all holders of
Common Stock entitling them to subscribe for or purchase shares of Common
Stock (or Common Stock Equivalents) at a price (or having an exercise or
conversion price per share) less than the current market price of the
Common Stock (as determined pursuant to Section 3.01(e)) on the record date
described below, the Exercise Price shall be adjusted so that the Exercise
Price shall equal the price determined by multiplying the Exercise Price in
effect immediately prior to the date of such sale or issuance (which date
in the event of distribution to shareholders shall be deemed to be the
record date set by the Company to determine shareholders entitled to
participate in such distribution) by a fraction, the numerator of which
shall be (i) the number of shares of Common Stock outstanding on the date
of such sale or issuance, plus (ii) the number of additional shares of
Common Stock which the aggregate consideration received by the Company upon
such issuance or sale (plus the aggregate of any additional amount to be
received by the Company upon the exercise of such subscription rights,
options or Warrants) would purchase at such current market price per share
of the Common Stock immediately prior to the date of such issuance or sale;
and the denominator of which shall be (i) the number of shares of Common
Stock outstanding on the date of such issuance or sale, plus (ii) the
number of additional shares of Common Stock offered for subscription or
purchase (or into which the Common Stock equivalents so offered are
exercisable or convertible). Any adjustments required by this paragraph
3.01(b) shall be made immediately after such issuance or sale or record
date, as the case may be unless the offering period of such Common Stock or
Common Stock Equivalents, or the period in which such rights, options or
warrants may be exercised or converted, shall expire in 90 days or less, in
which case such event shall be given effect immediately after the
expiration of such period based upon the number of shares of Common Stock
(or Common Stock Equivalents) actually delivered; provided that should any
Warrant be exercised during such period, the number of shares of Common
Stock issuable upon such exercise shall be recalculated giving effect to
any adjustment made at the end of such period in respect of such event and
an appropriate number of additional shares of Common Stock shall be issued
in respect of such exercise. Such adjustments shall be made successively
whenever such event shall occur. In the event that such period shall be
greater than 90 days, then to the extent that shares of Common Stock (or
Common Stock Equivalents) are not delivered after the expiration of such
subscription rights, options or warrants, the Exercise Price shall be
readjusted to the Exercise Price which would then be in effect had the
adjustments made upon the issuance of such rights, options or warrants been
made upon the basis of delivery of only the number of shares of Common
Stock (or Common Stock Equivalents) actually delivered.
(c) If at any time prior to the exercise of this Warrant in full, the
Company shall fix a record date for the issuance or making a distribution
to all holders of the Common Shock (including any such distribution to be
made in connection with a consolidation or merger in which the Company is
to be the continuing corporation) of evidences of its indebtedness, any
other securities of the Company or any cash, property or other assets or
securities, including without limitation shares of a subsidiary's capital
stock (excluding a common stock dividend, combination, reclassification,
recapitalization or issuance referred to in Section 3.01(a)), regular cash
dividends or cash distributions in the ordinary course of business or
subscription rights, options or warrants for Common Stock or Common Stock
Equivalents (excluding those referred to in Section 3.01(b)) (any such
nonexcluded event being herein called a "Special Dividend"), the Exercise
Price shall be decreased immediately after the record date for such Special
Dividend to a price determined by multiplying the Exercise Price then in
effect by a fraction, the numerator of which shall be the then current
market price of the Common Stock (as defined in Section 3.01(e)) on such
record date less the fair market value (as determined by the Company's
Board of Directors) of the evidences of indebtedness, securities or
property, or other assets issued or distributed in such Special Dividend
applicable to one share of Common Stock or of such subscription rights or
warrants applicable to one share of Common Stock, and the denominator of
which shall be such then current market price per share of Common Stock (as
so determined). Any adjustment required by this paragraph 3.01(c) shall be
made successively effective on the record date for the Special Dividend and
in the event that such distribution is not so made, the Exercise Price
shall again be adjusted to be the Exercise Price that was in effect
immediately prior to such record date.
(d) If at any time prior to the exercise of this Warrant in full, the
Company shall make a distribution to all holders of the Common Stock of
stock of a subsidiary or securities convertible into or exercisable for
such stock, then in lieu of an adjustment in the Exercise Price or the
number of Warrant Shares purchasable upon the exercise of this warrant,
each Warrantholder, upon the exercise hereof at any time after such
distribution, shall be entitled to receive from the Company, such
subsidiary or both, as the Company shall determine, the stock or other
securities to which such Warrantholder would have been entitled if such
Warrantholder had exercised this Warrant immediately prior thereto, all
subject to further adjustment as provided in this Article III, and the
Company shall reserve, for the life of the Warrant, such securities of such
subsidiary or other corporation; provided, however, that no adjustment in
respect of dividends or interest of such stock or other securities shall be
made during the term of this Warrant or upon its exercise.
(e) Whenever the Exercise Price payable upon exercise of each Warrant
is adjusted pursuant to one or more of paragraphs (a), (b) and (c) of this
Section 3.01, the Warrant Shares shall simultaneously be adjusted by
multiplying the number of Warrant Shares initially issuable upon exercise
of each Warrant by the Exercise Price in effect on the date thereof and
dividing the product so obtained by the Exercise Price, as adjusted.
(f) For the purpose of any computation under this Section 3.01, the
current market price per share of Common Stock at any date shall be deemed
to be the average of the daily closing prices for 20 consecutive trading
days commencing 30 trading days before such date. The closing price for
each day shall be the last sale price regular way or, in case no such
reported sales take place on such day, the average of the last reported bid
and asked prices regular way, in either case on the principal national
securities exchange on which the Common Stock is admitted to trading or
listed, or if not listed or admitted to trading on such exchange, the
representative closing bid price as reported by NASDAQ, or other similar
organization if NASDAQ is no longer reporting such information, or if not
so available, the fair market price as determined in good faith by the
Board of Directors of the Company.
(g) No adjustment in the Exercise Price shall be required unless such
adjustment would require an increase or decrease of at least five cents
($.05) in such price; provided, however, that any adjustments which by
reason of this paragraph (f) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All
calculations under this Section 3.01 shall be made to the nearest cent or
to the nearest one-hundredth of a share, as the case may be.
Notwithstanding anything in this Section 3.01 to the contrary, the Exercise
Price shall not be reduced to less than the then existing par value, if
any, of the Common Stock as a result of any adjustment made hereunder.
(h) In the event that at any time, as a result of any adjustment made
pursuant to Section 3.01(a), the Warrantholder thereafter shall become
entitled to receive any shares of the Company other than Common Stock,
thereafter the number of such other shares so receivable upon exercise of
any Warrant shall be subject to adjustment from time to time in a manner
and on terms as nearly equivalent as practicable to the provisions with
respect to the Common Stock contained in Section 3.01(a).
(i) In the case of an issue of additional Common Stock or Common
Stock Equivalents for cash, the consideration received by the Company
therefor, without deducting therefrom any discount or commission or other
expenses paid by the Company for any underwriting of, or otherwise in
connection with, the issuance thereof, shall be deemed to be the amount
received by the Company therefor. To the extent that such issuance shall
be for a consideration other than cash, then, except as herein otherwise
expressly provided, the amounts of such consideration shall be deemed to be
the fair value of such consideration at the time of such issuance as
reasonably determined in good faith by the Board of Directors of the
Company (but without deduction of any compensation, discounts or expenses
paid or incurred by the Company for, and in the underwriting of, or
otherwise in connection with, the issuance thereof). The term issue shall
include the sale or other disposition of shares held by or on account of
the Company or in the treasury of the Company but until so sold or
otherwise disposed of such shares shall not be deemed outstanding.
Section 3.02: Notices of Adjustment. Whenever the number of Warrant Shares or
the Exercise Price is adjusted as herein provided, the Company shall prepare and
deliver forthwith to the Warrantholder a certificate signed by its President,
and by any Vice President, Treasurer or Secretary, setting forth the adjusted
number of shares purchasable upon the exercise of this Warrant and the Exercise
Price of such shares after such adjustment, setting forth a brief statement of
the facts requiring such adjustment and setting forth the computation by which
adjustment was made. The certificate of any independent firm of public
accountants of recognized standing selected by the Board of Directors of the
Company shall be conclusive evidence of the arithmetic correctness of any
computation made under this Section 3.
Section 3.03: No Adjustment for Dividends. Except as provided in Section 3.01
of this Agreement, no adjustment in respect of any cash dividends shall be made
during the term of this Warrant or upon the exercise of this Warrant.
Section 3.04: Preservation of Purchase Rights in Certain Transactions. In case
of any consolidation or merger of the Company with or into another corporation
(other than a merger with a subsidiary in which the Company is the continuing
corporation and that does not result in any reclassification, capital
reorganization or other change of outstanding shares of Common Stock) or in case
of any sale, lease, transfer or conveyance to another corporation of the
property and assets of the Company as an entirety or substantially as an
entirety, the Company shall, as a condition to such transaction cause such
successor or purchasing corporation, as the case may be, to execute with the
Warrantholder an agreement granting the Warrantholder the right thereafter, upon
payment of the Exercise Price in effect immediately prior to such transaction,
to receive upon exercise of this Warrant the kind and amount of shares and other
securities and property which he would have owned or have been entitled to
receive as a result of such transaction had this Warrant been exercised
immediately prior to such action. Such agreement shall provide for adjustments
in respect of such shares of stock and other securities and property, which
shall be as nearly equivalent as may be practicable to the adjustments provided
for in this Article III and shall provide that such rights may be exercised at
any time prior to the Expiration Date. In the event that in connection with any
such transaction, additional shares of Common Stock shall be issued in exchange,
conversion, substitution or payment, in whole or in part, for, or of, a security
of the Company other than Common Stock, any such issue shall be treated as an
issue of Common Stock covered by the provisions of Article III. The provisions
of this Section 3.04 shall similarly apply to successive reclassifications,
capital reorganizations, consolidations, mergers, sales or conveyance.
Section 3.05: Form of Warrant After Adjustments. The form of this Warrant need
not be changed because of any adjustments in the Exercise Price or the number or
kind of the Warrant Shares, and Warrants theretofore or thereafter issued may
continue to express the same price and number and kind of shares as are stated
in the Warrant, as initially issued.
Section 3.06: Treatment of Warrantholder. Prior to due presentment for
registration of transfer of this Warrant, the Company may deem and treat the
Warrantholder as the absolute owner of this Warrant (notwithstanding any
notation of ownership or other writing hereon) for all purposes and shall not be
affected by any notice to the contrary.
ARTICLE IV
OTHER PROVISIONS RELATING TO
RIGHTS OF WARRANTHOLDER
Section 4.01: No Rights as Shareholders: Notice to Warrantholders. Nothing
contained in this Warrant shall be construed as conferring upon the
Warrantholder or his or its transferees the right to vote or to receive
dividends or to consent or to receive notice as a shareholder in respect of any
meeting of shareholders for the election of directors of the Company or of any
other matter, or any rights whatsoever as shareholders of the Company. The
Company shall give notice to the Warrantholder by registered mail if at any time
prior to the expiration or exercise in full of the Warrants, any of the
following events shall occur:
(a) the Company shall authorize the payment of any dividend to all
holders of Common Stock;
(b) the Company shall authorize the issuance to all holders of Common
Stock of any additional shares of Common Stock or Common Stock equivalents
or of rights, options or warrants to subscribe for or purchase Common Stock
or Common Stock Equivalents or of any other subscription rights, options or
warrant;
(c) a dissolution, liquidation or winding up of the Company; or
(d) a capital reorganization or reclassification of the Common Stock
(other than a subdivision or combination of the outstanding Common Stock)
or any consolidation or merger of the Company with or into another
corporation (other than a consolidation or merger in which the Company is
the continuing corporation and that does not result in any reclassification
or change of Common Stock outstanding) or in the case of any sale or
conveyance to another corporation of the property of the Company as an
entirety or substantially as an entirety.
Such giving of notice shall be completed at least 15 Business Days prior to the
date fixed as a record date or effective date or the date of closing of the
Company's stock transfer books for the determination of the shareholders
entitled to such dividend, distribution, or subscription rights, or for the
determination of the shareholders entitled to vote on such proposed merger,
consolidation, sale, conveyance dissolution, liquidation or winding up. Such
notice shall specify such record date or the date of closing the stock transfer
books, as the case may be. Failure to provide such notice shall not affect the
validity of any action taken in connection with such dividend, distribution or
subscription rights, or proposed merger, consolidation, sale, conveyance,
dissolution, liquidation or winding up.
Section 4.02: Lost, Stolen, Mutilated or Destroyed Warrants. If this Warrant
is lost, stolen, mutilated or destroyed, the Company may, upon receipt by the
Company of evidence of ownership reasonably satisfactory to it and on such terms
as to indemnity or otherwise as it may in its discretion impose (which shall, in
the case of a mutilated Warrant, include the surrender thereof), issue a new
Warrant of like denomination and tenor as, and in substitution for, this
Warrant.
ARTICLE V
SPLIT-UP, COMBINATION, EXCHANGE
AND TRANSFER OF WARRANTS
Section 5.01: Split-Up, Combination, Exchange and Transfer of Warrants.
Subject to the provisions of Section 5.02 hereof, this Warrant may be split up,
combined or exchanged for another Warrant or Warrants containing the same terms
to purchase a like aggregate number of Warrant Shares. If the Warrantholder
desires to split up, combine or exchange this Warrant, he or it shall make such
request in writing delivered to the Company and shall surrender to the Company
this Warrant and any other Warrants to be so split-up, combined or exchanged.
Upon any such surrender for a split-up, combination or exchange, the Company
shall execute and deliver to the person entitled thereto a Warrant or Warrants,
as the case may be, as so requested. The Company shall not be required to
effect any split-up, combination or exchange which will result in the issuance
of a Warrant entitling the Warrantholder to purchase upon exercise a fraction of
a share of Common Stock or a fractional Warrant.
Section 5.02: Restrictions on Transfer. Neither this Warrant nor the Warrant
Shares may be disposed of or encumbered (any such action, a "Transfer"), except
(i) to [OPPENHEIMER & CO., INC. or HANIFEN, IMHOFF INC.] any successor to the
business of such company, or any officer or partner of such company, or (ii) to
any underwriter in connection with a registered Public Offering of the Warrant
Shares, provided (as to (ii)) that this Warrant is exercised upon such Transfer
and the Warrant Shares issued upon such exercise are sold by such underwriter as
part of such registered Public Offering and, as to both (i) and (ii), only in
accordance with and subject to the provisions of the Securities Act and the
rules and regulations promulgated hereunder. If at the time of a Transfer, a
Registration Statement is not in effect to register this Warrant or the Warrant
Shares, the Company may require the Warrantholder to make such representations,
and may place such legends on certificates representing this Warrant, as may be
reasonably required in the opinion of counsel to the Company to permit a
Transfer without such registration.
ARTICLE VI
REGISTRATION UNDER THE SECURITIES ACT OF 1933
Section 6.01: Piggyback Registration.
(a) Right to Include Registrable Securities. If at any time or from
time to time after , 1997, and prior to the Expiration Date, the
Company proposes to register any Common Stock (or any other securities for
which this Warrant may then be exercised) under the Securities Act on any
form for the registration of securities under such Act, whether or not for
its own account (other than by a registration statement on forms S-4, S-8
(or any successor forms) or other form which does not include substantially
the same information as would be required in a form for the general
registration of securities or would not be available for the Registrable
Securities) (a "Piggyback Registration"), it shall give written notice to
all Holders of its intention to do so and of such Holders' rights under
this Section 6.01. Such rights are referred to hereinafter as "Piggyback
Registration Rights." Upon the written request of any such Holder made
within 20 days after receipt of any such notice (which request shall
specify the Registrable Securities intended to be disposed of by such
Holder and the intended manner of distribution of such securities), the
Company shall use its best efforts to include in the Registration Statement
the Registrable Securities which the Company has been so requested to
register by the Holders thereof (subject to paragraph (e) below) and the
Company shall keep such registration statement in effect and maintain
compliance with each Federal and state law or regulation for the period
necessary for such Holder to effect the proposed sale or other disposition
(but in no event for a period greater than 90 days).
(b) Withdrawal of Piggyback Registration by Company. If, at any time
after giving written notice of its intention to register any securities in
a Piggyback Registration but prior to the effective date of the related
Registration Statement, the Company shall determine for any reason not to
register such securities, the Company shall give written notice of such
determination to each Holder and, thereupon, shall be relieved of its
obligation to register any Registrable Securities in connection with such
Piggyback Registration. All best efforts obligations of the Company
pursuant to Section 6.04 shall cease if the Company determines to terminate
prior to such effective date any registration where Registrable Securities
are being registered pursuant to this Section 6.01.
(c) Piggyback Registration of Underwritten Public Offerings. If a
Piggyback Registration involves an offering by or through underwriters,
then, (i) all Holders requesting to have their Registrable Securities
included in the Company's Registration Statement must sell their
Registrable Securities to the underwriters selected by the Company on the
same terms and conditions as apply to other selling shareholders and (ii)
any Holder requesting to have his or its Registrable Securities included in
such registration Statement may elect in writing, not later than three
Business Days prior to the Company's request for effectiveness of the
Registration Statement filed in connection with such registration, not to
have his or its Registrable Securities so included in connection with such
registration.
(d) Payment of Registration Expenses for Piggyback Registration. The
Company shall pay all Registration Expenses in connection with each
registration of Registrable Securities requested pursuant to a Piggyback
Registration Right contained in this Section 6.01.
(e) Priority in Piggyback Registration. If a Piggyback Registration
involves an offering by or through underwriters, the Company, except as
otherwise provided herein, shall not be required to include Registrable
Securities therein if and to the extent the underwriter managing the
offering reasonably believes in good faith and advises each Holder
requesting to have Registrable Securities included in the Company's
Registration Statement that such inclusion would materially adversely
affect such offering; provided that any such reduction or elimination shall
be pro rata to all shares of Common Stock proposed to be included in the
Company's Registration Statement in proportion to the respective number of
shares that have been requested to be registered by the Company, any Holder
or any other selling shareholder, as the case may be.
Section 6.02: Demand Registration.
(a) Request for Registration. If, at any time subsequent to
, 1997 and prior to the Expiration Date, any 50% Holders make a
written request that the Company file a registration statement under the
Securities Act, the Company as soon as practicable shall use its best
efforts to file a registration statement with respect to all Warrant Shares
that it has been so requested to include and obtain the effectiveness
thereof, and to take all other action necessary under any Federal or state
law or regulation to permit the Warrant Shares that are then held and/or
that may be acquired upon the exercise of the Warrants specified in the
notices of the Holders or Holders thereof to be sold or otherwise disposed
of, and the Company shall maintain such compliance with each such Federal
and state law and regulation for the period necessary for such Holder or
Holders to effect the proposed sale or other disposition (but in no event
for more than 90 days) (the "Demand Registration"); provided, however, the
Company shall be entitled to defer such Demand Registration for a period of
up to 90 days if and to the extent that its Board of Directors shall
determine in good faith that such registration would interfere with a
pending corporate transaction. The Company shall also promptly give
written notice to the Holder and the Holders of any other Warrants and/or
the Holders of any Warrant Shares who or that have not made a request to
the Company pursuant to the provisions of this subsection (a) of its
intention to effect any required registration or qualification, and shall
use its best efforts to effect as expeditiously as possible such
registration or qualification of all other such Warrant Shares that are
then held or that may be acquired upon the exercise of the Warrants, the
Holder or Holders of which have made a written request for such
registration or qualification, within 15 days after such notice has been
given by the Company, as provided in the preceding sentence. The Company
shall be required to effect a registration or qualification pursuant to
this subsection (a) on one occasion only. Each written request of the
Holders shall specify the names of the Holders making such request and the
number of Warrant Shares to be sold by each Holder.
(b) Payment of Registration Expenses for Demand Registration. The
Company shall pay all Registration Expenses in connection with the Demand
Registration.
(c) Selection of Underwriters. If any Demand Registration is
requested to be in the form of an underwritten offering, the managing
underwriter shall be Oppenheimer & Co., Inc., the co-manager shall be
Hanifen, Imhoff Inc. and the independent pricer required under the rules of
the NASD (if any) shall be selected and obtained by the Holders of a
majority of the Warrant Shares to be registered. Such selection shall be
subject to the Company's consent, which consent shall not be unreasonably
withheld. All fees and expenses (other than Registration Expenses
otherwise required to be paid) of any managing underwriter, any co-manager
or any independent underwriter or other independent pricer required under
the rules of the NASD shall be paid for by such underwriters or by the
Holder or Holders whose shares are being registered. If Oppenheimer & Co.,
Inc. or Hanifen, Imhoff Inc. should decline to serve as managing
underwriter, the Holders of a majority of the Warrant Shares to be
registered may select and obtain one or more managing underwriters. Such
selection shall be subject to the Company's consent, which shall not be
unreasonably withheld.
Section 6.03: Buy-outs of Registration Demand. Upon receipt of any request
pursuant to Section 6.01 or a demand pursuant to Section 6.02 that Registrable
Securities be included in a registration statement, and in lieu of any
obligation under such Sections to effect either a Piggyback or a Demand
Registration with respect to such Registrable Securities, the Company may,
within five business days of receipt of such request, purchase all, but not less
than all, such Registrable Securities at an amount in cash equal to with respect
to Warrants not yet exercised the difference between (a) the then current market
value (as determined in Section 3.01(e)) of the Common Stock on the day of such
repurchase, and (b) the Exercise Price in effect on such day and with respect to
issued Warrant Shares, the then current market value (as determined in Section
3.01(e)) of the Common Stock on the day of such repurchase.
Section 6.04: Registration Procedures. If and whenever the Company is required
to use its best efforts to take action pursuant to any Federal or state law or
regulation to permit the sale or other disposition of any Warrant Shares that
are then held or that may be acquired upon exercise of the Warrants in order to
effect or cause the registration of any Registrable Securities under the
Securities Act as provided in this Article VI, the Company shall, as
expeditiously as practicable;
(a) furnish to each selling Holder of Registrable Securities and the
underwriters, if any, without charge, as many copies of the Registration
Statement, the Prospectus or the Prospectuses (including each preliminary
prospectus) and any amendment or supplement thereto as they may reasonably
request;
(b) enter into such agreements (including an underwriting agreement)
and take all such other actions reasonably required in connection therewith
in order to expedite or facilitate the disposition of such Registrable
Securities and in such connection, if the registration is in connection
with an underwritten offering (i) make such representations and warranties
to the underwriters in such form, substance and scope as are customarily
made by issuers to underwriters in underwritten offerings and confirm the
same if and when requested; (ii) obtain opinions of counsel to the Company
and updates thereof (which counsel and opinions in form, scope and
substance shall be reasonably satisfactory to the underwriters and their
counsel) addressed to the underwriters covering the matters customarily
covered in opinions requested in underwritten offerings and such other
matters as may be reasonably requested by such underwriters; (iii) obtain
"cold comfort" letters and updates thereof from the Company's accounts
addressed to the underwriters, such letters to be in customary form and
covering matters of the type customarily covered in "cold comfort" letters
to underwriters in connection with underwritten offerings; (iv) set forth
in any underwriting agreement entered into the indemnification provisions
and procedures of Section 6.05 hereof with respect to all parties to be
indemnified pursuant to said Section or such other alternative
indemnification language reasonably satisfactory to such persons; and
(v) deliver such documents and certificates as may be reasonably requested
by the underwriters and their counsel to evidence compliance with clause
(i) above and with any customary conditions contained in the underwriting
agreement or other agreement entered into by the Company; the above shall
be done at each closing under such underwriting or similar agreement or as
and to the extent required thereunder;
(c) make available for inspection by one or more representatives of
the Holders of Registrable Securities being sold, any underwriter
participating in any disposition pursuant to such registration, and any
attorney or accountant retained by such Holders or underwriter, all
financial and other records, pertinent corporate documents and properties
of the Company, and cause the Company's officers, directors and employees
to supply all information reasonably requested by any such representatives;
and
(d) otherwise use its best efforts to comply with all applicable
Federal and state regulations and take such other action as may be
reasonably necessary to or advisable to enable each such Holder and each
such underwriter to consummate the sale or disposition in such jurisdiction
or jurisdictions in which any such Holder or underwriter shall have
requested that the Registrable Securities be sold.
Except as otherwise provided in this Agreement, the Company shall have sole
control in connection with the preparation, filing, withdrawal, amendment or
supplementing of each Registration Statement, the selection of underwriters, and
the distribution of any preliminary prospectus included in the Registration
Statement, and may include within the coverage thereof additional shares of
Common Stock or other securities for its own account or for the account of one
or more of its other security holders; provided, however, with respect to the
Demand Registration that additional shares of Common Stock may be included only
if the managing underwriter determines in its judgment that the inclusion of
such additional shares will not adversely affect such offering.
Each seller of Registrable Securities as to which any registration is being
effected shall furnish to the Company such information regarding the
distribution of such securities and such other information as may otherwise be
required by the Securities Act to be included in such Registration Statement.
Section 6.05: Indemnification.
(a) Indemnification by Company. In connection with each Registration
Statement relating to disposition of Registrable Securities, the Company
shall indemnify and hold harmless each Holder and each Person, if any, who
controls such Holder (within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act) against any and all losses, claims,
damages and liabilities, joint or several (including any reasonable
investigation, legal and other expenses incurred in connection with, and
any amount paid in settlement of any action, suit or proceeding or any
claim asserted), to which they, or any of them, may become subject under
the Securities Act, the Exchange Act or other Federal or state law or
regulation, at common law or otherwise, insofar as such losses, claims,
damages or liabilities arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact contained in any
Registration Statement, Prospectus or preliminary prospectus or any
amendment thereof or supplement thereto, or arise out of or are based upon
any omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein in light
of the circumstances in which they are made not misleading; provided,
however, that such indemnity shall not inure to the benefit of any Holder
(or any Person controlling such Holder within the meaning of Section l5 of
the Securities Act or Section 20 of the Exchange Act) on account of any
losses, claims, damages or liabilities arising from the sale of the
Registrable Securities if such untrue statement or omission or alleged
untrue statement or omission was made in such Registration Statement,
Prospectus or preliminary prospectus, or such amendment or supplement, in
reliance upon and in conformity with information furnished in writing to
the Company by such Holder specifically for use therein. The Company shall
also indemnify underwriters, selling brokers, dealer managers and similar
securities industry professionals participating in the distribution, their
officers and directors and each Person who controls such Persons (within
the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act) to the same extent as provided above with respect to the
indemnification of the Holders of Registrable Securities, if requested.
This indemnity agreement shall be in addition to any liability which the
Company may otherwise have.
(b) Indemnification by Holder. In connection with each Registration
Statement, each selling Holder shall indemnify, to the same extent as the
indemnification provided by the Company in Section 6.05(a), the Company,
its directors, officers, employees, agents and counsel and each Person who
controls the Company (within the meaning of Section 15 of the Securities
Act and Section 20 of the Exchange Act) but only insofar as such losses,
claims, damages and liabilities arise out of or are based upon any untrue
statement or omission or alleged untrue statement or omission which was
made in the Registration Statement, the Prospectus or preliminary
prospectus or any amendment thereof or supplement thereto, in reliance upon
and in conformity with information furnished in writing by such Holder to
the Company specifically for use therein. In no event shall the liability
of any selling Holder of Registrable Securities hereunder be greater in
amount than the dollar amount of the net proceeds received by such Holder
upon the sale of the Registrable Securities giving rise to such
indemnification obligation.
(c) Conduct of Indemnification Procedure. Any party that proposes to
assert the right to be indemnified hereunder will, promptly after receipt
of notice of commencement of any action, suit or proceeding against such
party in respect of which a claim is to be made against an indemnifying
party or parties under this section, notify each such indemnifying party of
the commencement of such action, suit or proceeding, enclosing a copy of
all papers served. No indemnification provided for in Section 6.05(a) or
6.05(b) shall be available to any party who shall fail to give notice as
provided in this Section 6.05(c) if the party to whom notice was not given
was unaware of the proceeding to which such notice would have related and
was prejudiced by the failure to give such notice, but the omission so to
notify such indemnifying party of any such action, suit or proceeding shall
not relieve it from any liability that it may have to any indemnified party
for contribution or otherwise than under this Section. In case any such
action, suit or proceeding shall be brought against any indemnified party,
and the indemnified party notifies the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to
participate in, and, to the extent that it shall wish, jointly with any
other indemnifying party similarly notified, assume the defense thereof,
with counsel satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its election so to
assume the defense thereof and the approval by the indemnified party of
such counsel, the indemnifying party shall not be liable to such
indemnified party for any legal or other expenses, except as provided below
and except for the reasonable costs of investigation subsequently incurred
by such indemnified party in connection with the defense thereof. The
indemnified party shall have the right to employ separate counsel in any
such action, but the fees and expenses of such counsel shall be at the
expense of such indemnified party unless (i) the employment of counsel by
such indemnified party has been authorized in writing by the indemnifying
parties; (ii) the indemnified party shall have been reasonably advised by
counsel that there may be a conflict of interest between the indemnifying
parties and the indemnified party in the conduct of the defense of such
action (in which case the indemnifying parties shall not have the right to
direct the defense of such action on behalf of the indemnified party); or
(iii) the indemnifying parties shall not have employed counsel to assume
the defense of such action within a reasonable time after notice of the
commencement thereof, in each of which cases the fees and expenses of
separate counsel for the indemnified party shall be at the expense of the
indemnifying parties. An indemnifying party shall not be liable for any
settlement of any action, suit, proceeding or claim effected without its
written consent.
(d) Contribution. In connection with each Registration Statement
relating to the disposition of Registrable Securities, if the
indemnification provided for in subsection (a) or (b) hereof is unavailable
to an indemnified party thereunder in respect of any losses, claims,
damages or liabilities referred to therein, then the indemnifying party
shall, in lieu of indemnifying such indemnified party, contribute to the
amount paid or payable by such indemnified party as a result of such
losses, claims, damages or liabilities. The amount to be contributed by
the indemnifying party hereunder shall be an amount which is in the same
proportionate relationship to the total amount of such losses, claims,
damages or liabilities as the total net proceeds from the offering (before
deducting expenses) of the Registrable Securities sold by such party bears
to the total price to the public (including underwriters' discounts) for
the offering of the securities covered by such registration.
(e) Specific Performance. The Company and the Holder acknowledge that remedies
at law for the enforcement of this Section 6.05 may be inadequate and intend
that this Section 6.05 shall be specifically enforceable.
ARTICLE VII
OTHER MATTERS
Section 7.01: Amendments and Waivers. The provisions of this Warrant,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waiver or consents to departures from the provisions hereof
may not be given unless the Company has obtained the written consent of Holders
of at least a majority of the outstanding Registrable Securities. Holders shall
be bound by any consent authorized by this Section whether or not Certificates
representing such Registrable Securities have been marked to indicate such
consent.
Section 7.02: Counterparts. This Warrant may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
so executed shall be deemed to be an original and all of which taken together
shall constitute one and the same agreement.
Section 7.02: Governing Law. This Warrant shall be governed by and construed
in accordance with the laws of the State of New York, U.S.A.
Section 7.03: Severability. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstances, is
held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provisions in every other respect and of the
remaining provisions contained herein shall not be affected or impaired thereby.
Section 7.05: Attorneys' Fees. In any action or proceeding brought to enforce
any provisions of this Warrant, or where any provisions hereof or thereof are
validly asserted as a defense, the successful party shall be entitled to recover
reasonable attorneys' fees and disbursements in addition to its costs and
expenses and any other available remedy.
Section 7.06: Computations of Consent. Whenever the consent or approval of
Holders of a specified percentage of Registrable Securities is required
hereunder, Registrable Securities held by the Company or its affiliates (other
than the Warrantholder or subsequent Holders if they are deemed to be such
affiliates solely by reason of their holdings of such Registrable Securities)
shall not be counted in determining whether such consent or approval was given
by the Holders of such required percentage.
Section 7.07: Notice. Any notices or certificates by the Company to the Holder
and by the Holder to the Company shall be deemed delivered if in writing and
delivered in person or by registered mail (return receipt requested) to the
Holder addressed to him in care of [OPPENHEIMER & CO., INC., Oppenheimer Tower,
World Financial Center, New York, New York 10281 or HANIFEN, IMHOFF INC., 1125
17th St., Suite 600, Denver, CO 80202] or, if the Holder has designated, by
notice in writing to the Company, any other address, to such other address, and
if to the Company, addressed to it at:
FX Energy Corporation
3006 Highland Drive, Suite 206
Salt Lake City, Utah 84106
The Company may change its address by written notice to the Holder and the
Holder may change its address by written notice to the Company.
Section 7.08: Investment Representation of the Holder. By accepting delivery
of this Warrant, the Holder represents to the Company that it has acquired this
Warrant solely for its own account for investment (except as contemplated in
Section 5.02) and not with a view to distribution or sale in violation of the
Securities Act, but subject, nevertheless, to any requirement of law that the
disposition of the Holder's property be at all times within its control. The
Holder represents that it understands that this Warrant has been issued in a
transaction that is exempt from the registration requirements of the Securities
Act and that this Warrant must be held by the Holder and may not be resold
unless subsequently registered under the Securities Act or an exemption from
such registration is available.
Section 7.09: Currency. All amounts used in this Agreement are expressed in
U.S. Dollars unless otherwise specified.
IN WITNESS WHEREOF, this Warrant has been duly executed by the Company under its
corporate seal as of the day of , 1996.
FX ENERGY CORPORATION
By:
Title:
Attest:
Secretary
<PAGE>
ASSIGNMENT
(To be executed only upon assignment of Warrant Certificate)
For value received, hereby sells, assigns and transfers unto
the within Warrant Certificate, together with all right, title
and interest therein, and does hereby irrevocably constitute and appoint
attorney to transfer said Warrant Certificate on the books of the
within-named Company with respect to the number of Warrants set forth below,
with full power of substitution in the premises:
Name(s) of
Assignee(s)
Address No. of Warrants
And if said number of Warrants shall not be all the Warrants represented by the
Warrant Certificate, a new Warrant Certificate is to be issued in the name of
said undersigned for the balance remaining of the Warrants registered by said
Warrant Certificate.
Dated: , 19
Note: The above signature should correspond exactly
with the name on the face of this Warrant
Certificate
<PAGE>
SUBSCRIPTION FORM
(To be executed upon exercise of Warrant)
:
The undersigned hereby irrevocably elects to exercise the right of purchaser
represented by the within Warrant Certificate for, and to purchase thereunder,
shares of Common Stock, as provided for therein, and tenders
herewith payment of the purchase price in full in the form of cash or a
certified or official bank check for the amount of $ .
Please issue a certificate or certificates for such Common Stock in the name of,
and pay any cash for any fractional share to:
Name
(Please print Name, Address and Social Security
No.)
Signature
Note: The above signature should correspond exactly
with the name on the first page of this Warrant
Certificate or with the name of the assignee
appearing in the assignment form below.
And if said number of shares shall not be all the shares purchasable under the
within Warrant Certificate, a new Warrant Certificate is to be issued in the
name of said undersigned for the balance remaining of the shares purchasable
thereunder rounded up to the next higher number of shares.
<PAGE>
CASHLESS EXERCISE FORM
(To be executed upon exercise of Warrant
pursuant to Section 2.02(a)(ii))
The undersigned hereby irrevocably elects to Exchange its Warrant for such
shares of Common Stock pursuant to the Cashless Exercise provisions of the
within Warrant Certificate, as provided for in Section 2.02(a)(ii) of such
Warrant Certificate.
Please issue a certificate or certificates for such Common Stock in the name of:
Name
(Please print Name, Address and Social Security
No.)
Signature
NOTE: The above signature should correspond exactly with the name on the first
page of this Warrant Certificate or with the name of the assignee appearing in
the assignment form below.
And if said number of shares shall not be all the shares exchangeable or
purchasable under the within Warrant Certificate, a new Warrant Certificate is
to be issued in the name of the undersigned for the balance remaining of the
shares purchasable rounded up to the next higher number of shares.
FORM OF LOCK-UP AGREEMENT
FX ENERGY CORPORATION
LOCK-UP LETTER
June , 1996
OPPENHEIMER & CO., INC.
HANIFEN IMHOFF, INC.
c/o OPPENHEIMER & CO., INC.
World Financial Center
New York, NY 10281
Dear Sirs:
The undersigned understands that you and certain other firms propose to
enter into an Underwriting Agreement (the "Underwriting Agreement") providing
for the purchase by you and such other firms (the "Underwriters") of shares (the
"Shares") of Common Stock, par value $.001 per share (the "Common Stock"), of FX
Energy Corporation (the "Company") and that the Underwriters propose to reoffer
the Shares to the public.
In consideration of the execution of the Underwriting Agreement by the
Underwriters, and for other good and valuable consideration, the undersigned
hereby irrevocably agrees that without the prior written consent of
Oppenheimer & Co., Inc. the undersigned will not, directly or indirectly, offer,
sell, offer or agree to sell, grant any option for the sale of or otherwise
dispose (or announce any offer, sale, grant of an option to sell or other
disposition) of any shares of Common Stock, or any securities convertible into,
exercisable for or exchangeable for shares of Common Stock, for a period of 180
days after the date of the final Prospectus relating to the offering of the
Shares to the public by the Underwriters. The foregoing shall not apply with
respect to: (i) transfers made to family members, trusts or other similar
transfers for estate planning purposes; (ii) transfers to affiliated entities;
and (iii) pledges in connection with loans; in each case provided the recipients
agree to be bound by the terms of this letter.
The undersigned agrees that the provisions of this agreement shall be
binding also upon the successors, assigns, heirs and personal representatives of
the undersigned.
In furtherance of the foregoing, the Company and [ ], its
Transfer Agent, are hereby authorized to decline to make any transfer of
securities if such transfer would constitute a violation or breach of this
letter agreement.
It is understood that, if the Underwriting Agreement does not become
effective, or if the Underwriting Agreement (other than the provisions thereof
which survive termination) shall terminate or be terminated prior to payment for
the delivery of the Shares, you will release us from our obligations under this
letter agreement.
Very truly yours,
By: [NAME]
Date: June , 1996
<PAGE>
SCHEDULE TO
LOCK-UP AGREEMENT
As a condition precedent to the closing of the Offering, the following
individuals will be required to execute a Lock-Up Agreement in the above form
whereby they shall not sell those shares of Common Stock of Frontier Oil
Exploration Company (the "Company") which they beneficially own as set forth
under the caption "Principal Stockholders" in the Company's prospectus contained
in the registration statement on Form S-1.:
David N. Pierce
Andrew W. Pierce
Thomas B. Lovejoy
Scott J. Duncan
Peter L. Raven
Jerzy B. Maciolek
KRUSE, LANDA & MAYCOCK, L.L.C.
EIGHTH FLOOR, BANK ONE TOWER
50 WEST BROADWAY (300 SOUTH)
SALT LAKE CITY, UTAH 84101-2034
TELEPHONE: (801) 531-7090
ATTORNEYS AT LAW TELECOPY: (801) 359-3954
(801) 531-9892
June 7, 1996
Board of Directors
Frontier Oil Exploration Company
3006 Highland Drive, Suite 206
Salt Lake City, Utah 84106
Re: FX Energy
(Frontier Oil Exploration Company)
Registration Statement on Form S-1
Gentlemen:
We have been engaged by Frontier Oil Exploration Company (the "Company") to
render our opinion respecting the legality of certain securities to be offered
and sold pursuant to the registration statement on form S-1 being filed by the
Company with the Securities and Exchange Commission (the "Registration
Statement"). Capitalized terms used but not defined herein have the same
meanings as set forth in the Registration Statement.
In connection with this engagement, we have examined the following:
1. Articles of incorporation of the Company;
2. Bylaws of the Company;
3. The Registration Statement; and
4. Unanimous consents of the Company's board of directors.
We have examined such other corporate records and documents and have made
such other examination as we deemed relevant.
Based upon the above examination, we are of the opinion that the Common
Stock to be sold pursuant to the Registration Statement will be, when sold in
accordance with the terms set forth in the Registration Statement, legally
issued, fully paid, and nonassessable under the Nevada Revised Statutes, as
amended.
We are members of the Utah State Bar; however, we are generally familiar
with the Nevada Revised Statutes and, for the limited purposes of this opinion,
did not feel it necessary to obtain the opinion of Nevada counsel.
This firm consents to being named in the Prospectus included in the
Registration Statement as having rendered the foregoing opinion and as having
represented the Company in connection with the Registration Statement.
Sincerely yours,
/s/ KRUSE, LANDA & MAYCOCK, L.L.C.
KL&M/JRK:sp
AMENDMENT TO
EXECUTIVE EMPLOYMENT AGREEMENT
THIS AMENDMENT TO EXECUTIVE EMPLOYMENT AGREEMENT is made and entered into
this 30th day of May, 1996, by and between FRONTIER OIL EXPLORATION COMPANY, a
Nevada corporation ("Employer"), and DAVID N. PIERCE ("Executive") and based on
the following:
PREMISES
Employer and Executive entered into that certain Executive Employment
Agreement dated the first day of January 1995 (the "Agreement"), which provided,
inter alia, for the payment of a $100,000 cash bonus to Executive if, prior to
the end of 1996, the Employer repaid the entire unpaid balance of the Company's
revolving loan owed to Bank One, Texas, N.A. In an effort to facilitate the
future financing plans of Employer, in which Executive has a significant
financial interest, the parties desire to amend the Agreement as follows:
AGREEMENT
NOW, THEREFORE, based on the foregoing premises and for and in
consideration of the mutual promises and covenants contained herein, it is
hereby agreed as follows:
1. Subparagraph (c) of section 2.1 is hereby amended by striking the
first sentence and inserting in lieu thereof the following:
On the initiation of the first test well in the Baltic Concession
in Poland, Employer shall grant to Executive a bonus in the form of a
$100,000 credit that may be applied at such time and in such amounts
as Executive may determine by Executive, against the exercise of
options to purchase Common Stock.
2. Except as modified herein, the Agreement is hereby ratified and shall
remain in full force and effect as provided therein.
DATED year and date first above written.
Frontier:
FRONTIER OIL EXPLORATION COMPANY
By /s/ Scott J. Duncan
Duly Authorized Officer
Executive:
/s/ David N. Pierce
<PAGE>
AMENDMENT TO
EXECUTIVE EMPLOYMENT AGREEMENT
THIS AMENDMENT TO EXECUTIVE EMPLOYMENT AGREEMENT is made and entered into
this 30th day of May, 1996, by and between FRONTIER OIL EXPLORATION COMPANY, a
Nevada corporation ("Employer"), and ANDREW W. PIERCE ("Executive") and based
on the following:
PREMISES
Employer and Executive entered into that certain Executive Employment
Agreement dated the first day of January 1995 (the "Agreement"), which provided,
inter alia, for the payment of a $100,000 cash bonus to Executive if, prior to
the end of 1996, the Employer repaid the entire unpaid balance of the Company's
revolving loan owed to Bank One, Texas, N.A. In an effort to facilitate the
future financing plans of Employer, in which Executive has a significant
financial interest, the parties desire to amend the Agreement as follows:
AGREEMENT
NOW, THEREFORE, based on the foregoing premises and for and in
consideration of the mutual promises and covenants contained herein, it is
hereby agreed as follows:
1. Subparagraph (c) of section 2.1 is hereby amended by striking the
first sentence and inserting in lieu thereof the following:
On the initiation of the first test well in the Baltic Concession
in Poland, Employer shall grant to Executive a bonus in the form of a
$100,000 credit that may be applied at such time and in such amounts
as Executive may determine by Executive, against the exercise of
options to purchase Common Stock.
2. Except as modified herein, the Agreement is hereby ratified and shall
remain in full force and effect as provided therein.
DATED year and date first above written.
Frontier:
FRONTIER OIL EXPLORATION COMPANY
By /s/ Scott J. Duncan
Duly Authorized Officer
Executive:
/s/ Andrew W. Pierce
Schedule of Subsidiaries
Exhibit 21.01
Name State of
Incorporation
FRONTIER OIL EXPLORATION COMPANY Nevada
FX DRILLING COMPANY, INC. Nevada
FX PRODUCING COMPANY, INC. Nevada
FRONTIER EXPLORATION COMPANY Utah
PETROLEX CORPORATION Utah
FRONTIER POLAND EXPLORATION AND Poland
PRODUCING COMPANY SP. ZO.O
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of our
report dated March 29, 1996 on our audit of the financial statements of Frontier
Oil Exploration Company. We also consent to the reference to our firm under the
caption "Experts".
/s/ COOPERS & LYBRAND, L.L.P.
Salt Lake City, Utah
June 7, 1996
CONSENT OF INDEPENDENT AUDITORS
Frontier Oil Exploration Company
Barker & Folsom do hereby consent to (a) the use in the Registration Statement
on Form S-1 to be filed by Frontier Oil Exploration Company (the "Company") of
our opinion dated February 24, 1995 respecting the financial statements as of
December 31, 1994 and 1993, and for the years then ended, and (b) the reference
to us under the headings "Experts" in the Registration Statement.
/S/
BARKER & FOLSOM
Ogden, Utah
June 6, 1996
CONSENT OF INDEPENDENT AUDITORS
J.R. Bacon Drilling, Inc.
Barker & Folsom do hereby consent to (a) the use in the Registration Statement
on Form S-1 to be filed by Frontier Oil Exploration Company of our opinion dated
February 28, 1994, respecting the statement of operations of J.R. Bacon Drilling
, Inc., and (b) the reference to us under the headings "Experts" in the
Registration Statement.
/S/
BARKER & FOLSOM
Ogden, Utah
June 6, 1996
[LETTERHEAD]
HAMILTON MISFELDT & COMPANY P.C.
Certified Public Accountants
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of our
report dated February 14, 1994, on our audit of the statement of operations of B
& B Production Company. We also consent to the reference to our firm under the
caption "Experts".
/s/
HAMILTON MISFELDT & COMPANY, P.C.
Cut Bank, Montana
June 4, 1996
118 East Main ---Cut Bank, Montana 59427 ---(406) 873-5563 ---Fax (406) 873-4410
CONSENT OF PETROLEUM ENGINEERING CONSULTANT
I hereby consent to the use in the prospectus constituting part of the
registration statement on Form S-1 of Frontier Oil Exploration Company (the
"Company") of my report as of December 31, 1995, respecting the estimated oil
reserve information for the Montana and Nevada producing properties of the
Company, and the inclusion of the summary reserve report respecting such
properties as an appendix to the prospectus. I also consent to the reference to
me under the headings "Experts" respecting such reports in such prospectus.
LARRY D. KRAUSE
/s/ Larry D. Krause
Billings, Montana
May 31, 1996
HALLIBURTON
HALLIBURTON ENERGY SERVICES
- ------------------------------------------------------------------------------
410 17th Street, Suite 900/Denver, CO 80202/Tel:303-899-4700/Fax:303-573-7856
May 31, 1996
David Pierce
Frontier Exploration Company
3006 Highland Drive, Suite 206
Salt Lake City, UT 84106
Dear Mr. Pierce:
We hereby consent to the use of our name as having completed a detailed log
analysis of the Gladysze #1 and Gladysze #2 wells and having reported that both
wells appear to have encountered movable hydrocarbons, with eight percent or
more effective porosity and calculated water saturations of less than 30%. This
was based on the available log data. We hereby consent to being named as
experts respecting such matters in the Registration Statement on Form S-1 to be
filed by Frontier Oil Exploration Company May/June 1996.
Halliburton Energy Services does not guarantee the accuracy of any
interpretation of the log data which may be given by Halliburton personnel. Any
user of such data, interpretations or recommendations agrees that Halliburton is
not responsible except where due to gross negligence or willful misconduct for
any loss, damages, or expenses resulting from the use thereof.
Sincerely,
/s/ Michael J. Mullen, P.E.
Technical Advisor
