<PAGE>
AS FILED: JULY 15, 1996 SEC FILE NO. 333-05583
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
REGISTRATION STATEMENT ON
FORM S-1
UNDER THE SECURITIES ACT OF 1933
FRONTIER OIL EXPLORATION COMPANY
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
NEVADA 1070 87-0504461
<S> <C> <C>
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
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
GIBSON, DUNN & CRUTCHER LLP
KRUSE LANDA & MAYCOCK, L.L.C. 1801 CALIFORNIA STREET, SUITE 4100
50 WEST BROADWAY, EIGHTH FLOOR DENVER, COLORADO 80202-2694
SALT LAKE CITY, UTAH 84101-2034 TELEPHONE: (303) 298-5700
TELEPHONE: (801) 531-7090 TELECOPY: (303) 296-5310
TELECOPY: (801) 359-3954
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: [_]
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.
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<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.
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEM NUMBER AND HEADING PROSPECTUS CAPTION
- ---------------------------------------------- -------------------------------
<S> <C>
1. Forepart of Registration Statement and Out-
side Front Cover Page of Prospectus......... Front Cover and Forepart
2. Inside Front and Outside Back Cover Pages of
Prospectus.................................. Inside Front Cover 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
Indemnification for Securities Act
Liabilities................................. DESCRIPTION OF SECURITIES
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 OR +
+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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JULY 15, 1996
3,000,000 SHARES
[LOGO APPEARS HERE]
FRONTIER OIL EXPLORATION COMPANY
COMMON STOCK
-----------
All of the shares of Common Stock offered hereby (the "Offering") are being
sold by Frontier Oil Exploration Company, doing business as FX Energy (the
"Company"). The Company's Common Stock ("Common Stock") is quoted on the Nasdaq
SmallCap Market under the symbol "FXEN." The Common Stock has been approved for
listing on the Nasdaq National Market under the symbol "FXEN", subject only to
notice of issuance. On July 12, 1996, the last reported price for the Common
Stock was $8.75 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.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share..................................................... $ $ $
Total(3)...................................................... $ $ $
</TABLE>
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(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.
<PAGE>
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 (the "Securities Act"),
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 (the "Exchange Act"), and accordingly files
reports, proxy statements and other information ("Reports") with the SEC. The
Registration Statement, the Reports and the exhibits thereto 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. In addition, the SEC maintains a web site
that contains reports, proxy and information statements and other information
regarding the Company and other registrants that file electronically with the
SEC at http://www.sec.gov.
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 that is distinct 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 NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET
IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE
"UNDERWRITING."
2
<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 the Company's daily production
.Development program underway
.30(degrees) to 35(degrees) API gravity, low sulfur
<PAGE>
[FOLD OUT INSIDE FRONT COVER--RIGHT PAGE]
AREAS OF ACTIVITY IN POLAND
[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 "Oil
and Gas 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
The Company is engaged in the exploration, development and production of oil
and gas 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.
In May 1996, the Company 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 "Carpathian JSA"). Management believes that
the Company's 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 JSA,
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 exploration and development activities
in Poland through 1997.
The Company currently produces oil exclusively in the United States. At
December 31, 1995, the Company had estimated proved reserves of 5.3 MMBbl with
a PV-10 Value (calculated without regard to future income tax expense) of
approximately $23.8 million. Approximately 78% of the Company's production and
96% of its reserves are concentrated in northern Montana's Cut Bank field. To
enhance production in this field, the Company intends to expand its current
infill drilling program which was initiated in late 1994. 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. The
Company has budgeted approximately $7.6 million for exploration and development
activities in the United States through 1997.
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. This strategy includes the
following key elements:
. Focus on Poland. The Company believes that the Baltic Concession and the
Carpathian JSA 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. Beginning in 1989, Poland
initiated a number of market-based reforms which have resulted in the
country's economy becoming one of the fastest growing in 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 $6.8 billion in direct
foreign investment between 1989 and 1995. 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.
3
<PAGE>
. Access existing 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 a majority
of these wells indicated the presence of hydrocarbons in that formation,
none was completed for production due, in management's opinion, to the
outdated equipment and poor techniques used to locate, drill and test the
wells. The Company, with the assistance of consultants that included
Halliburton Energy Services, Ryder Scott Company and Western Atlas, Inc.,
reevaluated seismic and well data generated by earlier exploration
efforts in the Baltic Concession. As a result of this effort, the Company
believes that it has identified potential oil reservoirs in two
structures that had previously been drilled and over 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 JSA. 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, by
providing up to $2.0 million for an ongoing seismic survey and a planned
exploratory well, and by funding 50% of the cost of a second exploratory
well. The Company will operate all wells it drills jointly with RWE-DEA.
In the Carpathian JSA, the Company is evaluating existing geological and
geophysical data contributed by POGC in order to determine the
hydrocarbon potential of a target area. The Company and POGC may apply
for exploration rights covering such target area upon the completion of
this analysis.
. 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 over
the next two to three years. The Company plans to expand this program to
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
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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 JSA in Poland and
in the western United States;
and for general corporate
purposes.
Nasdaq Symbol................................... FXEN
</TABLE>
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(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."
4
<PAGE>
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)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
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 60 147
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
AS OF ----------------------
DECEMBER 31, PRO FORMA
1995 ACTUAL AS ADJUSTED(6)
------------ ------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................... $ (278) $ 399 $21,779
Net property and equipment.................. 8,612 8,560 8,560
Total assets................................ 10,039 10,148 31,348
Long-term debt.............................. 3,359 3,439 --
Stockholders' equity........................ 5,224 5,750 30,584
</TABLE>
- --------
(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 the convertible preferred stock of FX Producing
Company, Inc., a wholly owned subsidiary of the Company.
(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 $8.75 per share and the
application of the net proceeds therefrom for repayment of bank debt as
described in "Use of Proceeds", (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.
5
<PAGE>
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--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.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------
PROVED PROVED TOTAL
DEVELOPED UNDEVELOPED PROVED
--------- ----------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
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 (1)................................ $ 7,735 $16,046 $23,781
</TABLE>
- --------
(1) The Company's PV-10 Value for total proved reserves, adjusted for future
income tax expense, is $17.7 million as set forth in Note 15 to the
Company's Consolidated Financial Statements.
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 ended
March 31, 1995 and 1996 (unaudited), as derived from the Company's Consolidated
Financial Statements and Notes thereto for such periods.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
------------- ---------------
1994 1995 1995 1996
------ ------ ------- -------
<S> <C> <C> <C> <C>
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 -- --
</TABLE>
- --------
(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."
6
<PAGE>
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. This Prospectus contains
forward-looking statements within the meaning of Section 27A of the Securities
Act. Discussions containing such forward-looking statements may be found in
the material set forth under "Prospectus Summary--The Company", "Prospectus
Summary--Summary Oil Reserve and Operating Data", "Risk Factors",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", "Business and Properties--General", "Business and Properties--
Exploration and Development Activities in Poland", "Business and Properties--
Exploration and Development Activities in the United States", "Business and
Properties--Oil Reserves", "Business and Properties--Baltic Concession Terms",
"Business and Properties--Operational Hazards and Insurance", "Business and
Properties--Government Regulation--United States", "Business and Properties--
Government Regulation--Poland", as well as in the Prospectus generally. Actual
events or results may differ materially from those discussed in the forward-
looking statements as a result of various factors including, without
limitation, the risk factors set forth below and the matters set forth in the
Prospectus generally.
FACTORS RELATING TO THE COMPANY
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 significant and sustained increased production. See "Selected Consolidated
Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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 financial results.
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
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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 securities. 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."
Dependence on 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 would 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, based on informal discussions
among representatives of the Company, RWE-DEA and the Polish government, that
such consent will be granted, 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 certain of 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 preparation 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
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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, and all of the wells
drilled previously by third parties in the Baltic Concession were plugged and
abandoned. Through 1997, the Company has allocated up to $10.8 million of its
capital budget for its activities in Poland. 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
There has not been any commercial production of oil or gas 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. None of these wells has been completed for production.
Notwithstanding the substantial data available regarding the Baltic Concession
from these previous drilling efforts and other exploration programs, the
Company believes that several exploration tests may be required to appraise
the potential of any structure which the Company identifies. 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."
No Assurance of Commercial Production from the Carpathian JSA
The exploration activity in the Carpathian JSA is in its initial stages and
no assurance can be given that it will result in any commercial production.
Although there is currently limited hydrocarbon production from certain
shallow formations in the Carpathian JSA, there has never been any commercial
production from the depths which the Company has the right to evaluate with
the POGC.
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. 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 Mr. Jerzey B. Maciolek, an
executive officer, and another employee, both Polish nationals, who have been
instrumental in assisting the Company in establishing its operations in
Poland, and the
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loss of the services of either person may materially and adversely affect the
Company's activities in Poland. The Company has entered into employment
agreements with Mr. David N. Pierce, Mr. Andrew W. Pierce, and Mr. Maciolek
and intends to enter into an employment agreement with the other individual
who was 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 the 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 assist
in its activities in Poland.
Possible Future Need for Additional Capital
If exploration of either the Baltic Concession or the Carpathian JSA 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 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."
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, $1.3 million of which related to the
Company's Lake Valley, Nevada, 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
that 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.
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Shares Eligible for Future Sale
Substantially all of the approximately 8.7 million shares of Common Stock
currently issued and outstanding either (i) were sold in a registered
offering, (ii) have been held for in excess of two years and are eligible for
resale under Rule 144, promulgated under the Securities Act, (iii) were
registered for resale in registration statements declared effective March 30,
1995, or (iv) will be registered for resale in registration statements to be
filed at the earliest practicable date. Although the resale of 1.6 million of
such shares is subject to contractual restrictions (including 1.1 million
shares which are owned by officers and directors of the Company and are
subject to volume and other restrictions under Rule 144), 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--Covenants to Register Common
Stock."
Substantial and Immediate Dilution
Persons purchasing Common Stock will suffer a substantial and immediate
dilution of $6.14 per share 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 2.9 million 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--Common Stock" 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 and the Carpathian JSA; 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."
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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 volumes, 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 Company's
insurance policies 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.
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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 proposed or 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, 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."
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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 returns, 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 a continuous increase in international demand for oil products and
the fact that Poland reportedly imports over 95% of its oil as the basis for
its belief that an available market exists for any oil that may be discovered.
Subject to obtaining appropriate approval, 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
currently in place and now being further developed in Poland is generally
consistent with the government's stated purpose of encouraging both 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.
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COMPANY HISTORY
In January 1989, the Company began its oil exploration activities with the
formation of its predecessor, Frontier Exploration Company ("Exploration") by
Mr. David N. Pierce and Mr. Andrew W. Pierce. In 1992, Exploration was
reorganized with the Company, then known as Direct West, Inc., which then
changed its name to Frontier Oil Exploration Company and continued under the
management of the former officers and directors of Exploration. Exploration
continued as a wholly owned subsidiary of the Company. In June 1993, the
Company acquired Petrolex Corporation, an oil and gas lease brokerage business
owned principally by David Pierce. 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
production. In August 1995, the Company acquired rights to the Baltic
Concession. At a meeting scheduled for July 22, 1996, the Company's
shareholders will vote on a proposal to change the Company's name from
Frontier Oil Exploration Company to FX Energy, Inc.
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
Based on an assumed offering price of $8.75, the net proceeds to the Company
from the sale of the 3,000,000 shares of Common Stock offered hereby will be
approximately $23.4 million ($27.6 million, assuming exercise of the
Underwriters' over-allotment option) after deducting estimated underwriting
discounts and expenses of the Offering payable by the Company.
A portion of the net proceeds from the Offering will be used to repay the
$3.6 million balance on the Company's bank credit facility. The remainder of
the net proceeds from the Offering, together with cash available under the
Company's continuing bank credit facility and potentially available from
operations, will be used to fund the Company's 1996 and 1997 capital
expenditure budget of $18.4 million 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 JSA, (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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources--Credit
Facility."
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. As of June 30, 1996, the interest rate on
borrowings under the bank credit facility was 9.5%. 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.
15
<PAGE>
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 Common Stock has been approved for
listing on the Nasdaq National Market under the symbol "FXEN," subject only to
notice of issuance.
Management believes that the trading market for Common Stock 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 prior to
September 1995 for the trading of a relatively minor number of shares to result
in a significant change in the trading price of the Common Stock. 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. under the symbol "FOEX" through June 6, 1996, and thereafter based on the
closing sales price the Nasdaq SmallCap Market under the symbol "FXEN."
<TABLE>
<CAPTION>
LOW HIGH
----- -----
<S> <C> <C>
1996
Third Quarter (through July 12, 1996)............................. $7.50 $8.75
Second Quarter.................................................... 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
</TABLE>
On July 12, 1996, the closing sales price for the Common Stock on the Nasdaq
SmallCap Market was $8.75 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 primarily for the 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.
On June 30, 1996, the Company had approximately 1,438 stockholders.
16
<PAGE>
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 from a stock subscription receivable and to give effect to the
sale by the Company of the 3,000,000 shares of Common Stock offered hereby at
an assumed offering price of $8.75 per share and the application of the net
proceeds therefrom for repayment of bank debt as described in "Use of
Proceeds", 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.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
----------------------
PRO FORMA
ACTUAL AS ADJUSTED(1)
------ --------------
(IN THOUSANDS)
<S> <C> <C>
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 35,424
Stock subscription receivable......................... (90) --
Accumulated deficit................................... (4,833) (4,852)
------ -------
Total stockholders' equity............................ 5,750 30,584
------ -------
Total capitalization.................................... $9,189 $30,584
====== =======
</TABLE>
- --------
(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."
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 8,704,596 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.
<TABLE>
<S> <C> <C>
Assumed public offering price per share............................ $8.75
Pro forma net tangible book value per share at March 31,
1996(1)......................................................... $0.76
Increase attributable to new investors........................... 1.85
-----
Pro forma net tangible book value per share after the Offering... 2.61
-----
Dilution per share to purchasers in the Offering................. $6.14
=====
</TABLE>
- --------
(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."
17
<PAGE>
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 months 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.
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Oil sales.............. -- -- -- $1,692 $ 1,981 $ 516 $ 505
Drilling revenue....... -- -- -- 224 111 5 --
Other (1).............. $ 174 $ 342 $ 276 -- 75 60 --
------ ------ ------ ------ ------- ------- -------
Total revenues......... 174 342 276 1,916 2,167 581 505
------ ------ ------ ------ ------- ------- -------
Operating costs and
expenses:
Production and
operating costs(2).... 13 45 7 680 1,272 338 325
Exploration costs...... -- -- 654 651 747 94 189
Depreciation, depletion
and amortization...... 10 7 3 422 503 106 138
General and
administrative........ 178 259 353 816 1,466 276 366
Other(3)............... -- -- -- 178 256 11 24
------ ------ ------ ------ ------- ------- -------
Total operating costs
and expenses.......... 201 311 1,017 2,747 4,244 825 1,042
------ ------ ------ ------ ------- ------- -------
Operating income
(loss)................. (27) 31 (741) (831) (2,077) (244) (537)
Interest and other
income................. 20 36 39 53 98 10 36
Interest expense........ (1) (4) (2) (214) (448) (111) (82)
Minority interest: Non-
cash dividends(4)...... -- -- -- -- (93) (55) --
------ ------ ------ ------ ------- ------- -------
Net income (loss) before
income taxes........... (8) 63 (704) (992) (2,520) (400) (583)
Benefit from (provision
for) income taxes...... 3 (16) 9 -- -- -- --
------ ------ ------ ------ ------- ------- -------
Net income (loss)....... $ (5) $ 47 $ (695) $ (992) $(2,520) $ (400) $ (583)
====== ====== ====== ====== ======= ======= =======
Net income (loss) per
common share........... $(0.00) $ 0.03 $(0.40) $(0.44) $ (0.47) $ (0.14) $ (0.07)
Weighted average shares
outstanding............ 1,400 1,412 1,750 2,229 5,389 2,811 8,086
CASH FLOW STATEMENT
DATA:
Net cash provided by
(used in) operating
activities............. $ (35) $ 96 $ (569) $ (322) $(1,030) $ (64) $ (747)
Net cash (used in)
investing activities... (15) (265) (22) (4,432) (1,489) (127) (47)
Net cash provided by
(used in) financing
activities............. (136) 171 1,046 4,587 2,974 427 909
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
--------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital
(deficit).............. $ 63 $ (154) $ 283 $ (272) $ (278) $ (170) $ 399
Total assets............ 143 374 1,317 8,436 10,039 9,379 10,148
Long-term debt.......... -- -- -- 4,091 3,359 4,009 3,439
Redeemable FX Producing
Company, Inc. preferred
stock.................. -- -- -- 550 -- -- --
Stockholders' equity.... 106 173 910 1,280 5,224 3,140 5,750
</TABLE>
- --------
(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 Company, Inc. convertible preferred
stock.
18
<PAGE>
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 JSA and is
undertaking a long-term development project on its producing Montana
properties to increase cash flows and oil 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
in the western United States and from fees generated by the management of
domestic 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 expanded in May 1996 when the
Company and POGC initiated their joint evaluation of the Carpathian JSA.
The Company currently intends to continue its exploration activities,
principally in the Baltic Concession and Carpathian JSA, 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 of 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 of 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.
19
<PAGE>
COSTS AND EXPENSES
Production and operating costs increased 10.6% 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 costs per Bbl also increased during 1995 due to
a substantial decline in production from a well in Nevada with extremely low
production costs.
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 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.
20
<PAGE>
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. Therefore, in management's opinion, the
results of operations for the fiscal years ended December 31, 1994 and 1995
are not comparable.
REVENUES
During 1995, oil sales increased 17.1% to $2.0 million from $1.7 million in
1994 primarily due to the 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 a production decrease of 17
Bpd from the Cut Bank field. The decline in Cut Bank production 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 as compared to
two wells in 1994. Prospect sales revenue increased in 1995 due to the
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 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, increased maintenance expenditures on the Cut Bank
field in conjunction with the Company's plan to enhance production and a
substantial decline in production from a well in Nevada with extremely low
production costs.
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, which became effective on July
1, 1995, and which applied to most of the Company's Montana production.
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 to
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.
21
<PAGE>
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 to provide a valuation allowance equal to the deferred tax asset.
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, 1993 and 1994
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 and the interest expense from related bank debt,
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, also
primarily due to the Montana Acquisition. 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 after the Montana Acquisition.
22
<PAGE>
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, indicate
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. This increase in the use of cash in
1996 was primarily due to a larger net loss and a substantial reduction in
accounts payable and accrued liabilities. 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, compared to $427,000 for the same period of the preceding
year. The net cash provided during the quarter ended March 31, 1996, resulted
from net proceeds of $966,000 received from the sale of 342,393 shares of
Common Stock and $26,000 received from the exercise of warrants to purchase
22,004 shares of Common Stock, offset by expenditures of $83,000 by the
Company for repayment of long-term debt. The net cash provided during the
quarter ended March 31, 1995, resulted from net proceeds of $395,000 received
from the sale of 260,000 shares of Common Stock and $111,000 received from the
collection of a stock subscription receivable from 1994 related to the sale of
convertible preferred stock of FX Producing, Inc., a wholly owned subsidiary
of the Company ("FX Producing"), offset by expenditures of $79,000 by the
Company for repayment of long-term debt.
23
<PAGE>
In 1993, financing activities provided net cash of $1.0 million principally
from the receipt of net proceeds from the sale of 1,280,000 shares of the
Company's preferred stock. Net cash of $4.6 million provided by financing
activities in 1994 was generated principally from a long-term loan under the
Company's credit facility described below. In 1995, financing activities
provided net cash of $3.0 million, resulting from net proceeds of $4.0 million
received from the sale of 2.1 million shares of Common Stock and $111,000
received from the collection of a stock subscription receivable from 1994
related to the sale of the preferred stock of FX Producing, offset by
expenditures by the Company of $737,000 for repayment of long-term debt, and
$465,000 for redemption of preferred stock of FX Producing.
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's working
capital was increased by $680,000 from the sale of Common Stock, $120,000 from
the exercise of stock options and $90,000 from the collection of a stock
subscription receivable. 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, (the "Bank") to provide a portion of the funds required 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 Bank
based on its analysis of the Company's producing reserves and cash flow. The
borrowing base as of June 30, 1996, was $3.6 million and will next be subject
to redetermination on September 30, 1996. 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 Bank's base rate plus 1.25% and to
reduce the outstanding principal by $25,000 per month. As of June 30, 1996,
the interest rate was 9.5%. As of December 31, 1995, the Company was in
violation of the credit facility'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 credit facility. The Bank, however, waived
the cash flow-to-debt service requirement for the quarters ending December 31,
1995 and March 31, 1996 and amended this provision for the quarters ending
June 30, 1996 and thereafter. This amendment also 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 was pledged as additional collateral to the
bank note. Based on preliminary financial information, the Company believes
that it was in compliance with the amended cash flow-to-debt service
requirement as of June 30, 1996 and expects that it will be in compliance
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 credit
facility's outstanding principal balance of $3.6 million with net proceeds
from the Offering. However, the Company anticipates that the credit facility
will remain in place and the Company may borrow additional funds for the
working capital needs. 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, which consisted primarily of the acquisition
of, or improvement to, oil and gas properties and other property and
equipment. The largest single investment in 1994 was the $4.2 million Montana
Acquisition. 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.
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Capital Requirements
As of March 31, 1996, as adjusted to give effect to the subsequent receipt
of $890,000 from the sale of securities (including $90,000 received from a
stock subscription receivable) and the exercise of options, the Company had
working capital of approximately $1.3 million. This working capital, together
with the $250,000 received during the second quarter of 1996 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, in addition to the
$250,000 paid in the second quarter of 1996, provide up to $2.0 million for an
ongoing seismic study and the cost of drilling and testing the initial test
well in the Baltic Concession. If a second well is drilled in the Baltic
Concession, RWE-DEA must fund 50% of the cost of such well to retain its
interest 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 JSA, (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 received from the net proceeds of the
Offering, combined with capital available under the Company's existing credit
facility and, to the extent available, cash from operations, should be
sufficient to meet the Company's capital requirements through 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 the Carpathian JSA
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.
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BUSINESS AND PROPERTIES
GENERAL
The Company is engaged in the exploration, development and production of oil
and gas 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. In May 1996, the Company 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 "Carpathian JSA").
Management believes that the Company's 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 JSA, 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 exploration and
development activities in Poland through 1997.
The Company currently produces oil exclusively in the United States. At
December 31, 1995, the Company had estimated proved reserves of 5.3 MMBbl with
a PV-10 Value (calculated without regard to future income tax expense) of
approximately $23.8 million. Approximately 78% of the Company's production and
96% of its reserves are concentrated in northern Montana's Cut Bank field. To
enhance production in this field, the Company intends to expand its current
infill drilling program which was initiated in late 1994. 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.
The Company has budgeted approximately $7.6 million for exploration and
development activities in the United States through 1997.
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. This strategy includes the
following key elements:
. Focus on Poland. The Company believes that the Baltic Concession and the
Carpathian JSA 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. Beginning in 1989, Poland
initiated a number of market-based reforms which have resulted in the
country's economy becoming one of the fastest growing in 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 $6.8 billion in direct
foreign investment between 1989 and 1995, according to reports from the
Polish State Foreign Investment Agency published by the Polish embassy.
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.
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. Access existing 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 a
majority of these wells indicated the presence of hydrocarbons in that
formation, none was completed for production due, in management's
opinion, to the outdated equipment and poor techniques used to locate,
drill and test the wells. The Company, with the assistance of
consultants that included Halliburton Energy Services, Ryder Scott
Company and Western Atlas, Inc., reevaluated seismic and well data
generated by earlier exploration efforts in the Baltic Concession. As a
result of this effort, the Company believes that it has identified
potential oil reservoirs in two structures that had previously been
drilled and over 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 JSA. 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, by
providing up to $2.0 million for an ongoing seismic survey and a planned
exploratory well, and by funding 50% of the cost of a second exploratory
well. The Company will operate all wells it drills jointly with RWA-DEA.
In the Carpathian JSA, the Company is evaluating existing geological and
geophysical data contributed by POGC in order to determine the
hydrocarbon potential of a target area. The Company and POGC may apply
for exploration rights covering such target area upon the completion of
this analysis.
. 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 over
the next two to three years. The Company plans to expand this program to
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 the Company's
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 its relatively new policies 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 JSA in the first half of
1997. The Company and POGC may also elect to jointly 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, with a population
of
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approximately 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 Europe. According to a
report published in the June 15, 1996, issue of The Economist, Poland's gross
domestic product grew by an estimated 7.0% in 1995, compared to 5.0% for the
Czech Republic, 1.5% for Hungary and negative 4.0% 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.
Foreign investment in Poland between 1989 and 1995 was $6.8 billion.
Between the 1850s, when oil was first commercially produced in the Carpathian
region of southeastern Poland, and 1945, Poland produced approximately 61.4
MMBbl of oil and 303 Bcf of natural gas. War damage and overproduction
following the 1939 invasions of Poland by Germany and the Soviet Union severely
restricted oil and gas production. Over the last several decades, the
exploration for and the development of Poland's oil and gas resources 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 a geological region known as the Baltic
Platform which covers the southeastern portion of the Baltic Sea and portions
of the bordering onshore areas of Poland, the Kaliningrad district of Russia,
Lithuania and Latvia. The B-3 oilfield, located off Poland's Baltic coast and
first placed into production in 1992, produced over 1.2 MMBbl through 1994,
according to a POGC publication. Onshore, approximately 34 fields have been
discovered in the Baltic Platform in an area that extends from approximately 50
to 100 miles to the northeast of the Baltic Concession in the Kaliningrad
district of Russia. Four of the largest fields in this region reportedly have
produced an aggregate of over 150 MMBbl through 1994. Oil produced from the
Baltic Concession is generally of high quality with an average API gravity of
approximately 40(degrees) and contains insignificant amounts of sulfur, heavy
metals or similar contaminants. See "Risk Factors--Exploration Risks."
Between 1950 and 1993, various agencies of the Polish government explored the
Baltic Concession, gathering hundreds of line miles of seismic data and
drilling seven exploratory wells and eight stratigraphic survey wells to the
same formation that is productive in established fields in the Baltic Platform.
Although none of these wells was completed for production, the majority
indicated the presence of hydrocarbons. The Company, in conjunction with
consultants that included Halliburton Engineering, Western Atlas, Inc. 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
productive wells in other regions 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. This
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information includes contemporaneous drilling reports and core sample
descriptions. Based on the foregoing, the Company has concluded that both
Gladysze wells encountered reservoirs of movable oil.
Although the Company believes that the Gladysze-1 and Gladysze-2 were the
only wells drilled on geological structures, neither of these wells was
completed for production. The Company attributes this fact primarily to the
outdated equipment and poor techniques used to locate, drill and test the
wells. Both wells were drilled with very heavy drilling mud, a common practice
in eastern Europe and the Soviet Union at the time. The heavy drilling mud
likely caused formation damage by sealing off porous reservoir rocks. The
short periods during which the wells were tested were, in Management's
estimation, probably insufficient for the formations to recover from the
damage to permit an accurate test.
There can be no assurance that wells drilled on any structure, including the
Gladysze structures, 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 begun to develop 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
currently intends to drill its first exploratory well to a target depth of
approximately 9,500 feet in late 1996. Ultimately, the Company intends to
drill exploratory wells on all three identified structures. If one or more of
these 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 crude oil produced from existing fields on the Baltic Platform is
generally of high quality with an average API gravity of approximately
40(degrees) and contains no significant amounts of sulfur, heavy metal or
similar contaminants. There are two nearby refineries in Gdansk and Plock,
Poland, both of 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. This refinery might purchase crude
produced from the Baltic Concession. Under current Polish law, the Company
may, upon obtaining appropriate approval, export oil produced in the country.
The Company currently has no agreement or arrangement for the sale, delivery
or refining of any oil that may be produced in Poland. The Company believes,
however, that it would be able to sell any oil produced from the Baltic
Concession in the spot market. The Baltic Concession contains a well-developed
infrastructure of hard surface roads and railways over which oil could
probably be delivered for sale. The Company could incur expenditures for the
construction and operation of crude oil transportation and handling facilities
if substantial oil production were established. Poland currently imports over
95% of its crude oil requirement, principally from the countries of the former
Soviet Union and the Middle East.
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 Baltic
Concession. RWE-DEA, formerly Deutsche
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Texaco AG, is a subsidiary of RWE AG, the fifth largest industrial enterprise
in Germany. RWE-DEA is a fully integrated major oil and gas 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 industry, 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, by providing up to $2.0
million for an ongoing seismic survey and a planned exploratory well, and by
funding 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 a 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 a
fee of $125,000 to an unaffiliated party for activities related to the 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 joint 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 of the
Carpathian JSA in southeastern Poland. Oil was first discovered in the
Carpathian Mountains in the 1850s and has been produced there continuously
from several fields, including discoveries in the 1960s.
The initial goal of the joint study agreement is to identify a promising
target area in the Carpathian JSA (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 of
such data 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 or concessions 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 designated
portions of the Carpathian Target Area, the other party may do so
independently. Upon obtaining
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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,
with the consent of the POGC, by sharing its ownership with a third party. The
Company has budgeted $2.8 million through 1997 for exploration activities in
the Carpathian JSA. See "Use of Proceeds."
EXPLORATION AND DEVELOPMENT ACTIVITIES IN THE UNITED STATES
Cut Bank Field Development
The Company owns and operates producing oil wells 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 the drilling of eight new production wells and five
water injection wells and the conversion of 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 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 the
potential for recoverable reserves of at least 10 MMBOE that can be acquired
or controlled with a limited financial commitment and that 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 (and confirm its own evaluation of the prospect's merit)
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, 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 geologically similar to
Railroad Valley, Nevada's most prolific producing region that lies
approximately 60 miles to the west. 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
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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 has collected a
limited amount of related 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 identify and define 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 Phillips Petroleum Company in 1963. In 1964 Phillips
initiated a pilot waterflood and eventually converted the entire unit to a
waterflood with producing wells on 40 and 80 acre spacings. The Company owns
an interest 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%. The Company's 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 an interest 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 Company owns a 16.9% working interest in one well in the Bacon Flat
field which was drilled in 1993. This well suffered formation damage in mid-
1994, after which production declined significantly to approximately 10 Bpd,
net to the Company.
32
<PAGE>
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.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------- -------------------
1994 1995 1995 1996
------ ------ --------- ---------
<S> <C> <C> <C> <C>
Average daily net 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
</TABLE>
- --------
(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 costs 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.
33
<PAGE>
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 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; --Uncertainty of Reserve Estimates and
Future Net Revenues and --Volatility of Commodity Prices and Markets."
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------
ESTIMATED PROVED RESERVES OIL(Bbl) PV-10 VALUE(1)
------------------------- --------- --------------
<S> <C> <C>
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(2)........................... 5,257,173 $23,781,448
========= ===========
</TABLE>
- --------
(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 the State of
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.
(2) The Company's PV-10 Value for total proved reserves, adjusted for future
income tax expense, is $17.7 million as set forth in Note 15 to the
Company's Consolidated Financial Statements.
34
<PAGE>
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.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1993 1994 1995
--------- --------- ---------
GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C>
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
=== === === === === ===
</TABLE>
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 periods.
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.
<TABLE>
<CAPTION>
DEVELOPED ACREAGE UNDEVELOPED ACREAGE
------------------ --------------------
GROSS NET GROSS NET(1)
--------- -------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
DOMESTIC
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
======== ======== ========= =========
</TABLE>
- --------
(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.
See "Business and Properties--Exploration and Development Activities in
Poland--Strategic Alliance with RWE-DEA".
35
<PAGE>
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 been advised by legal counsel in Poland respecting compliance 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 concession 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 is also required to relinquish 50% of its acreage in the
Baltic Concession by December 1998. 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 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.
36
<PAGE>
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 in the Company's
insurance policies 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
either the industry or 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 operating on
leased land 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.
37
<PAGE>
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 REGULATION--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. The Company's operations in
Poland are subject to the Geological and Mining Law as well as the Act of
January 31, 1980 Concerning the Protection and Management of the environment,
which are the primary statutes governing environmental protection. The
agreements between the Company and the government of Poland relating to the
Baltic Concession also create certain standards to be met by the Company
regarding environmental protection. The Company generally is required to
adhere to good international petroleum industry practice, including practices
relating to the protection of the environment. The Company is required to
prepare and submit to the appropriate agency of state geological
administration for its approval, a geological work plan, with specific
attention to environmental matters, prior to engaging in field operations,
such as seismic acquisition, exploratory drilling and field-wide development.
Poland's regulatory framework respecting environmental protection is not as
fully developed and detailed as that which exists in the United States. The
Company intends that its operations in Poland will be designed to meet good
international petroleum industry practice and, as they develop, Polish
requirements. 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 expects that in
the near future it will expand its executive offices or relocate to larger
facilities. 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.
38
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
NAME TITLE
---- -----
<S> <C>
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
</TABLE>
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. David 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. Mr. David Pierce, whose present
term as a director expires at the 1996 annual meeting, will stand for election
at the stockholders' meeting scheduled for July 22, 1996, for a term expiring
at the 1999 annual meeting.
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 of
oil and gas exploration, drilling, production and leasing experience. Mr.
Andrew 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. Mr. Andrew Pierce's term as a director expires at
the 1997 annual meeting.
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 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. Mr. Duncan, whose present term as a director expires at
the 1996 annual meeting, will stand for election at the stockholders' meeting
scheduled for July 22, 1996, for a term expiring at the 1998 annual meeting.
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. Mr. Lovejoy's term as a director expires at the 1998 annual
meeting.
39
<PAGE>
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. Mr. Raven, whose term as a director expires at
the 1998 annual meeting, will stand for election at the 1996 annual meeting,
for a term expiring at the 1999 annual meeting.
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 over 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 to the Company regarding 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.
NOMINEE TO BOARD OF DIRECTORS
The Company has expanded the board of directors to six persons and has
appointed Mr. Jay W. Decker to the vacancy created thereby, effective on the
day after the closing of the Offering at the 1997 annual meeting. Mr. Decker,
age 44, has been the Executive Vice President and a director of Hugoton Energy
Corporation, a public independent oil company ("Hugoton"), since September
1995. From 1989 until its merger into Hugoton, Mr. Decker was the President
and Chief Executive Officer of Consolidated Oil & Gas, Inc., a private
independent oil company based in Denver, Colorado ("Consolidated"). Between
1989 and 1995, Mr. Decker oversaw and directed the growth of Consolidated and
its predecessor company from a start-up until its merger with Hugoton, at a
net asset value of more than $100 million. Prior to 1989, Mr. Decker served as
Vice President--Operations for General Atlantic Energy Company and in various
capacities for Peppermill Oil Company, Wainoco Oil & Gas and Shell Oil
Company. Mr. Decker received his Bachelor of Science Degree in Petroleum
Engineering from the University of Wyoming. Mr. Decker is also a director of
Patina Oil & Gas Corporation, a public independent oil company. Mr. Decker's
term as a director expires at the 1997 annual meeting.
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.
40
<PAGE>
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 $100,000 for all services rendered in all capacities to the Company and its
subsidiaries.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
-----------------------------
ANNUAL
COMPENSATION AWARDS PAYOUTS
--------------------------- --------------------- -------
SECURITIES
OTHER RESTRICTED UNDERLYING
NAME AND YEAR ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
PRINCIPAL ENDED SALARY BONUS COMPENSATION AWARD(S) SARS PAYOUTS COMPENSATION
POSITION DEC. 31, ($)(1) ($) ($) ($) (NO.) ($) ($)
--------- -------- -------- ----- ------------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David N. Pierce......... 1995 $120,000 -- -- -- 100,000 -- --
President (CEO) 1994 $99,569 -- -- -- 500,000 -- --
1993 $90,000 -- -- -- 150,000 -- --
</TABLE>
- --------
(1) Figures shown for 1993 and 1994 represent the compensation component of
amounts paid to Pierce-Arrow Management, Inc., owned by David N. Pierce
and Andrew W. Pierce.
Option/SAR Grants in Last Fiscal Year
The following table sets forth information respecting all individual grants
of options and stock appreciation rights ("SARs") made during the last
completed fiscal year to the chief executive officer of the Company.
<TABLE>
<CAPTION>
POTENTIAL REALIZED
VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF STOCK
NUMBER OF OPTIONS/SARS APPRECIATION FOR
SECURITIES UNDERLYING GRANTED TO OPTION TERM(2)
OPTIONS/SARS EMPLOYEES DURING EXERCISE OR BASE ----------------------
NAME GRANTED (NO.) FISCAL YEAR PRICE ($/SHARE) EXPIRATION DATE 5%($) 10%($)
---- --------------------- ---------------- ---------------- --------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
David N. Pierce......... 100,000 8.5% $3.00 October 6, 2000 0 $ 62,365
President (CEO)
</TABLE>
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.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT FY OPTIONS/SARS AT FY
SHARES ACQUIRED END (NO.) END ($)
NAME ON EXERCISE (NO.) VALUE REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------------- ------------------ ------------------------- -------------------------
<S> <C> <C> <C> <C>
David N. Pierce......... -- -- 350,000/400,000(1) $56,250/--(2)
President (CEO)
</TABLE>
41
<PAGE>
- --------
(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.
Compensation of Directors
The Company reimburses its directors for costs incurred by them in attending
meetings of the board of directors and its committees. In addition, the
Company has agreed to pay Thomas B. Lovejoy's company, Lovejoy Associates,
Inc., $10,000 per month for certain consulting services. See "Certain
Transactions--Interim Loan Commitment; Consulting Agreement." On Peter L.
Raven's appointment to the board of directors on March 4, 1996, the Company
issued to him 6,000 shares of Common Stock valued at $18,000, the approximate
market price of such stock as of such date, as compensation for his services
as a director through March 1997. The Company is currently determining the
fees to be paid to Mr. Decker upon joining the board of directors. The Company
does not pay any separate compensation to employees who serve on the board of
directors.
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. Mr.
Decker will also serve on the audit committee when he becomes a director after
the completion of the Offering.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
The current members of the compensation committee are Thomas B. Lovejoy and
Peter L. Raven. No member of such committee is a present or former officer or
employee of the Company or any subsidiary. There are no other interlocks. No
member of such committee, his family, or his affiliate was a party to any
material transactions with the Company or any subsidiary since the beginning
of the last completed fiscal year, except Mr. Lovejoy provided a credit
facility, now expired, to the Company, and the Company engaged Mr. Lovejoy's
company, Lovejoy Associates, Inc., as a financial consultant at a fee of
$10,000 per month. In connection with the foregoing transactions, the Company
issued to Lovejoy Associates, Inc., 200,000 shares of Common Stock and granted
to Mr. Lovejoy options to purchase 350,000 shares of Common Stock. See
"Certain Transactions--Interim Loan Commitment; Consulting Agreement". No
executive officer of the Company serves as an executive officer, director, or
member of a compensation committee of any other entity, for which an executive
officer or director of such entity is a member of the compensation committee
of the Company.
42
<PAGE>
OPTIONS AND WARRANTS TO OFFICERS, DIRECTORS AND EMPLOYEES
The Company currently has outstanding options to purchase an aggregate of
2,300,000 shares of Common Stock 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 to be held July 22, 1996.
43
<PAGE>
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.
<TABLE>
<CAPTION>
PERCENTAGE OF OWNERSHIP(2)
------------------------------
NAME OF PERSON OR GROUP NUMBER(1) BEFORE OFFERING AFTER OFFERING
----------------------- --------- --------------- --------------
<S> <C> <C> <C>
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,
Directors and Nominees, as a
Group (7 persons)........... 3,181,493 29.6% 23.1%
PRINCIPAL STOCKHOLDERS
MML Management, Ltd.......... 595,222 (8) 7.0% 4.9%
19 Willis Street
Armadale 3143
Melbourne, Australia
National Mutual Trustees 447,864 (9) 5.3% 3.8%
Limited.....................
271 Collins Street
Melbourne 3000
Australia
</TABLE>
- --------
(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. David N. 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
Alyssa 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. Andrew W.
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.
44
<PAGE>
(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 that 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 warrants to acquire 43,194 shares of Common Stock issuable on
exercise of warrants held by MML Management, Ltd. ("MML"). MML may be
deemed to share voting and dispositive authority over shares owned by
National Mutual Trustees Limited, in which case MML would be deemed
beneficial owner of an aggregate of 1,040,086 shares, or 12.3% and 8.7%,
of the shares issued and outstanding before and after the Offering,
respectively.
(9) Includes 36,500 shares of Common Stock issuable on exercise of warrants
held by National Mutual Trustees Limited.
45
<PAGE>
CERTAIN TRANSACTIONS
The terms of the following transactions between related parties were not
determined as a result of arm's length negotiations. In each case, in the
opinion of management, the terms of the transaction were no less favorable to
the Company than would have been negotiated in an arms' length transaction.
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 same rate at which the shareholder borrowed the funds to be
loaned to the Company, 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. ("LAI"), as financial consultant. The parties
subsequently entered into a formal consulting agreement, effective August 3,
1995, with LAI, 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 out-of-pocket expenses.
In consideration of the consulting agreement and the loan agreement now
expired, the Company issued to LAI, 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 become exercisable on December 31, 1997, unless
the consulting agreement with LAI, 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.
46
<PAGE>
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.
47
<PAGE>
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.
INDEMNIFICATION OF OFFICERS AND DIRECTORS; LIMITATION OF LIABILITY
The Company's articles of incorporation and bylaws provide for
indemnification of the Company's officers and directors to the fullest extent
permitted by the Nevada corporation law, which provides for indemnification for
damages, including costs and attorney's fees, incurred in any pending or
completed action by reason of the fact that such person was an officer or
director of the Company if he acted in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Company. The Company's articles of incorporation contain a provision that
limits the personal liability of the Company's directors or officers for
damages for breach of fiduciary duty as a director or officer, except for
damages resulting from acts or omissions that involve intentional misconduct,
fraud or knowing violations of law or the payment of dividends in violation of
statute. The effect of this provision is to eliminate the rights of the Company
and its stockholders to recover money damages against a director or officer for
breach of fiduciary duty of care except in certain circumstances. This
provision does not limit or eliminate the rights of the Company or any
stockholder to seek non-monetary relief such as an injunction or rescission in
the event of a breach of fiduciary duty. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers and controlling persons of the Company pursuant to the foregoing
provision, or otherwise, the Company 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.
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.
48
<PAGE>
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:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
Oppenheimer & Co., Inc.........................................
Hanifen, Imhoff Inc............................................
-----
Total......................................................
=====
</TABLE>
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.
The rules of the SEC generally prohibit the Underwriters from making a
market in the Common Stock of the Company during the two business days prior
to commencement of sales in this Offering (the "Cooling Off Period"). The SEC
has, however, adopted Rule 10b-6A under the Exchange Act ("Rule 10b-6A"),
which provides an exemption from such prohibition for certain passive market
making transactions. Such passive market making transactions must comply with
applicable price and volume limits and must be identified as passive market
making transactions. In general, pursuant to Rule 10b-6A, a passive market
maker must display its bid for a security at a price not in excess of the
highest independent bid for the security. If all independent bids are lowered
below the passive maker's bid, however, such bid must then be lowered when
certain purchase limits are exceeded. Further, net purchases by a passive
market maker on each day are generally limited to a specified percentage of
the passive market maker's average daily trading volume in a security during a
specified prior period and must be discontinued when such limit is reached.
Pursuant to the exemption provided by Rule 10b-6A, certain of the Underwriters
and selling group members may engage in passive market making in the Common
Stock during the Cooling Off Period. Passive market making may stabilize the
market price of the Common Stock at a level above that which might otherwise
prevail, and, if commenced, may be discontinued at any time.
49
<PAGE>
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 Company has agreed to reimburse the Representatives up to $150,000 for
reasonable accountable expenses in certain circumstances.
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 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 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.
50
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF FRONTIER OIL EXPLORATION COMPANY, DBA
FX ENERGY, 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-5
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-6
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-7
Notes to Consolidated Financial Statements............................... F-8
STATEMENT OF OPERATIONS OF B & B PRODUCTION COMPANY (A GENERAL
PARTNERSHIP)
Report of Hamilton Misfeldt & Company P.C., certified public
accountants............................................................. F-22
Statement of Operations for the year ended December 31, 1993............. F-23
Notes to Financial Statements............................................ F-24
STATEMENT OF OPERATIONS OF J.R. BACON DRILLING, INC.
Report of Barker & Folsom, certified public accountants.................. F-28
Statement of Operations for the year ended December 31, 1993............. F-29
Notes to Financial Statements............................................ F-30
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Frontier Oil Exploration Company, dba FX Energy, and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Frontier Oil
Exploration Company, dba FX Energy, 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, dba FX Energy, 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.
_____________________________________
COOPERS & LYBRAND L.L.P.
Salt Lake City, Utah
March 29, 1996
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Frontier Oil Exploration Company, dba FX Energy, 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.
BARKER & FOLSOM
Ogden, Utah
February 24, 1995
F-3
<PAGE>
FRONTIER OIL EXPLORATION COMPANY, DBA FX ENERGY, AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- MARCH 31,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 289 $ 744 $ 559
Cash--restricted............................... -- -- 300
Receivables:
Accrued oil sales............................. 258 254 284
Due from joint interest owners................ 98 132 125
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
Current liabilities:
Accounts payable............................... $ 220 $ 354 $ 362
Accounts payable--related parties.............. 86 95 35
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
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements
F-4
<PAGE>
FRONTIER OIL EXPLORATION COMPANY, DBA FX ENERGY, 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
-------- -------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
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
F-5
<PAGE>
FRONTIER OIL EXPLORATION COMPANY, DBA FX ENERGY, 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)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activi-
ties:
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
F-6
<PAGE>
FRONTIER OIL EXPLORATION COMPANY, DBA FX ENERGY, AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADDI-
PREFERRED STOCK COMMON STOCK TIONAL STOCK SUB- ACCU-
------------------ ---------------- PAID-IN SCRIPTION MULATED
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 of
$172................... 1,279,500 $ 1 -- -- 1,106 -- --
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
(unaudited)............ -- -- 22,004 -- 27 -- --
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
F-7
<PAGE>
FRONTIER OIL EXPLORATION COMPANY, DBA FX ENERGY, 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. The Company is in the
process of changing its legal name to FX Energy, Inc. 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.
F-8
<PAGE>
FRONTIER OIL EXPLORATION COMPANY, DBA FX ENERGY, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. 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
property and equipment is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, ESTIMATED
------------- MARCH 31, USEFUL LIFE
1994 1995 1996 (IN YEARS)
------ ------ ----------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Drilling and well service equipment...... $1,317 $1,323 $1,378 6
Trucks................................... 137 137 152 5
Building................................. 80 80 80 40
Office equipment......................... 66 85 89 3 to 6
------ ------ ------
$1,600 $1,625 $1,699
====== ====== ======
</TABLE>
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.
F-9
<PAGE>
FRONTIER OIL EXPLORATION COMPANY, DBA FX ENERGY, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Non-cash transactions not reflected in the consolidated statement of cash
flows include the following:
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED
------------------------ --------------
1993 1994 1995 MARCH 31, 1996
--------------- -------- --------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
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
</TABLE>
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
F-10
<PAGE>
FRONTIER OIL EXPLORATION COMPANY, DBA FX ENERGY, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
F-11
<PAGE>
FRONTIER OIL EXPLORATION COMPANY, DBA FX ENERGY, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
PRO FORMA FOR THE
YEARS ENDED
DECEMBER 31,
------------------
1993 1994
-------- --------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
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)
======== ========
</TABLE>
5. LONG-TERM DEBT:
The following is a summary of long-term debt:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1994 1995 1996
------ -------------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
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, collat-
eralized 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
====== ====== ======
</TABLE>
Future maturities of long-term debt are as follows at December 31:
<TABLE>
<S> <C>
1996.................................................................. $ 325
1997.................................................................. 3,359
------
$3,684
======
</TABLE>
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.
F-12
<PAGE>
FRONTIER OIL EXPLORATION COMPANY, DBA FX ENERGY, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1994 1995
------- --------
(IN THOUSANDS)
<S> <C> <C>
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..................................... $ -- $ --
====== ========
</TABLE>
The change in the valuation allowance during the years ended December 31,
1993, 1994 and 1995, is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---- ----- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year............................... $-- $ -- $ (645)
Decrease due to property and equipment basis differ-
ences................................................... -- 24 495
Increase due to net operating loss....................... -- (669) (1,376)
---- ----- -------
Balance, end of year..................................... $-- $(645) $(1,526)
==== ===== =======
</TABLE>
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
F-13
<PAGE>
FRONTIER OIL EXPLORATION COMPANY, DBA FX ENERGY, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
F-14
<PAGE>
FRONTIER OIL EXPLORATION COMPANY, DBA FX ENERGY, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
SHARES PRICE RANGE
--------- -----------
<S> <C> <C>
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
========= ===========
</TABLE>
F-15
<PAGE>
FRONTIER OIL EXPLORATION COMPANY, DBA FX ENERGY, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Warrants
Changes in outstanding warrants during 1993, 1994 and 1995 were as follows:
<TABLE>
<CAPTION>
SHARES PRICE RANGE
------- ------------
<S> <C> <C>
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 agree-
ment; expiring September 30, 1998.................... 60,000 2.20
Warrants granted in consideration of consulting agree-
ment; 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
======= ============
</TABLE>
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
F-16
<PAGE>
FRONTIER OIL EXPLORATION COMPANY, DBA FX ENERGY, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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 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
as the operator of all joint operations. The Company has agreed to pay an
unaffiliated party a fee of approximately $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.
F-17
<PAGE>
FRONTIER OIL EXPLORATION COMPANY, DBA FX ENERGY, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
UNITED STATES POLAND TOTAL
------------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
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
====== ==== ======
</TABLE>
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:
<TABLE>
<CAPTION>
UNITED STATES POLAND TOTAL
------------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
DECEMBER 31, 1993:
Acquisition of properties
Proved properties............................... $ -- $-- $ --
Unproved properties............................. 332 -- 332
Exploration costs................................. 654 -- 654
------ ---- ------
Total costs incurrued......................... $ 986 $-- $ 986
====== ==== ======
DECEMBER 31, 1994:
Acquisition of properties
Proved properties............................... $4,265 -- $4,265
Unproved properties............................. 910 -- 910
Exploration costs................................. 651 -- 651
Development costs................................. 585 -- 585
------ ---- ------
Total costs incurred.......................... $6,411 $-- $6,411
====== ==== ======
</TABLE>
F-18
<PAGE>
FRONTIER OIL EXPLORATION COMPANY, DBA FX ENERGY, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
UNITED STATES POLAND TOTAL
------------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
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
====== ==== ======
</TABLE>
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:
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED DECEMBER 31,
--------------------
1994 1995
--------- ---------
(MBBL)
<S> <C> <C>
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
========= =========
</TABLE>
The downward revisions of previous estimates of total proved reserves in
1994 were principally due to a decline in the average price of oil during the
nine months from April 1, 1994 (date of acquisition), to December 31, 1994,
and an abnormal increase in water production rates in one field causing a
decrease in estimated
F-19
<PAGE>
FRONTIER OIL EXPLORATION COMPANY, DBA FX ENERGY, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
remaining reserves. The decrease in 1995 was principally due to substantial
completion of a water flood project resulting in removal of proved undeveloped
reserves with no corresponding increase in proved developed reserves as
production rates in the field had not then shown adequate production to
justify recognition as proved developed reserves.
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.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
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
========= =========
</TABLE>
F-20
<PAGE>
FRONTIER OIL EXPLORATION COMPANY, DBA FX ENERGY, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
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
======= =======
</TABLE>
F-21
<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.
HAMILTON MISFELDT & COMPANY, P.C.
February 14, 1994
- -------------------------------------------------------------------------------
118 EAST MAIN CUT BANK, MONTANA 59427 (406) 873-5564 FAX (406) 873-4410
F-22
<PAGE>
B & B PRODUCTION COMPANY
(A GENERAL PARTNERSHIP)
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
<S> <C>
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)
----------
LOSS FROM OPERATIONS (brought forward)............................. (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)
==========
</TABLE>
See accompanying notes to financial statements
F-23
<PAGE>
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).
F-24
<PAGE>
B & B PRODUCTION COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993
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:
<TABLE>
<S> <C>
Acquisition costs................................................ $ 62,359
========
Exploration costs................................................ $157,593
========
Development costs................................................ $ 68,871
========
</TABLE>
Results of operations for oil producing activities for the year ended
December 31, 1993, is as follows:
<TABLE>
<S> <C>
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 (exclud-
ing overhead and financing costs)......................... $ (426,783)
===========
</TABLE>
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
F-25
<PAGE>
B & B PRODUCTION COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993
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.
<TABLE>
<CAPTION>
BARRELS
---------
<S> <C>
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
=========
</TABLE>
The Company's proved reserves (in barrels) are located in the following
states at December 31, 1993:
<TABLE>
<CAPTION>
PROVED
PROVED DEVELOPED
RESERVES RESERVES
--------- ---------
<S> <C> <C>
Montana............................................... 3,802,545 2,482,514
Nevada................................................ 428,712 248,904
--------- ---------
Total................................................. 4,231,257 2,731,418
========= =========
</TABLE>
F-26
<PAGE>
B & B PRODUCTION COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
DECEMBER 31, 1993
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.
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, DECEMBER 31,
1993 1993
------------ ------------
<S> <C> <C>
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
============ ============
</TABLE>
The following is a summary by state of the standardized measure of
discounted future net cash flows at December 31, 1993:
<TABLE>
<S> <C>
Montana......................................................... $7,448,281
Nevada.......................................................... 2,446,406
----------
Total........................................................... $9,894,687
==========
</TABLE>
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:
<TABLE>
<CAPTION>
PRO FORMA
1993 1993
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
F-27
<PAGE>
BARKER & FOLSOM
CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholdersof 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.
Barker & Folsom
Ogden, Utah
February 28, 1994
2655 KIESEL AVENUE/OGDEN, UTAH 84401
(801) 621-0390/FAX (801) 392-7729
F-28
<PAGE>
J.R. BACON DRILLING, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
<TABLE>
<S> <C>
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
==========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-29
<PAGE>
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:
<TABLE>
<S> <C>
Gross sales......................................................... $2,997,256
Net income (loss)................................................... (252,440)
Partners' withdrawals............................................... 302,000
</TABLE>
The Company reported 50% of the partnership net loss on their statements of
operations of ($126,220) for the year ended December 31, 1993.
F-30
<PAGE>
J.R. BACON DRILLING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<S> <C>
South West Cut Bank Sand Unit................................. $1,002,405
B & B Production Company...................................... 313,121
----------
Total....................................................... $1,315,526
==========
</TABLE>
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:
<TABLE>
<S> <C>
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
=======
</TABLE>
The provision for income taxes included the following:
<TABLE>
<S> <C>
Current tax....................................................... $49,103
Deferred tax...................................................... 20,861
-------
$69,964
=======
</TABLE>
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.
F-31
<PAGE>
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'sInterest 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:
<TABLE>
<CAPTION>
FUTURE NET INCOME
--------------------------------
RESERVE CATEGORY OIL, BBLS UNDISCOUNTED DISCOUNTED AT 10.0%
- ---------------- --------- ------------ -------------------
<S> <C> <C> <C>
Proved Developed Producing......... 2,427,848 $17,416,164 $ 6,421,659
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
</TABLE>
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
A-1
<PAGE>
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 is 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
A-2
<PAGE>
DEFINITIONS FOR OIL AND GAS RESERVES
PROVED RESERVES
Proved Reserves are 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, by established operating
practice and under current government regulations. Current economic conditions
include prices and costs prevailing at the time of the estimate. Estimates of
proved reservoirs do not include crude oil, natural gas and natural gas
liquids, the recovery of which is subject to reasonable doubt because of
geology, reservoir characteristics or economic factors.
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, 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.
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) that portion
delineated by drilling and defined by fluid contacts, if any and (2) the
immediately adjoining undrilled portions that can be reasonably judged as
economically 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 of the reservoir.
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.
Proved reserves may be developed or undeveloped. 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 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.
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.
A-3
<PAGE>
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.
Reserves estimates are based on interpretation of geologic and/or
engineering data available at the time of the estimate. All reserve 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 RESERVE STATUS CATEGORIES
Proved 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 with
existing equipment and operating methods. Improved recovery reserves are
considered developed only after testing by a pilot project or after the
operation of an installed program has confirmed through production response
that increased recovery can be achieved and when 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. Under no circumstances should estimates
for proved undeveloped reserves be attributable to any acreage for which
improved recovery techniques are contemplated unless such techniques have been
proved effective by actual tests in the area and in the same reservoir.
A-4
<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 IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED 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 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. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN 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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Company History.......................................................... 15
Use of Proceeds.......................................................... 15
Price Range of Common Stock and Dividend Policy.......................... 16
Capitalization........................................................... 17
Dilution................................................................. 17
Selected Consolidated Financial Data..................................... 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 19
Business and Properties.................................................. 26
Management............................................................... 39
Principal Stockholders................................................... 44
Certain Transactions..................................................... 46
Description of Securities................................................ 47
Underwriting............................................................. 49
Legal Matters............................................................ 50
Experts.................................................................. 50
Index to Financial Statements............................................ F-1
Summary Reserve Report................................................... A-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,000,000 SHARES
(LOGO)
FRONTIER OIL EXPLORATION COMPANY
COMMON STOCK
----------------
PROSPECTUS
----------------
OPPENHEIMER & CO., INC.
HANIFEN, IMHOFF INC.
, 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:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.................. $ 11,327
Attorney's fees and expenses......................................... 175,000
State "blue sky" fees and expenses, including attorney's fees........ 15,000
Reimbursement of underwriters' expenses.............................. 150,000
Accounting fees and expenses......................................... 30,000
Nasdaq fees.......................................................... 45,000
NASD Fees............................................................ 3,785
Printing expenses.................................................... 100,000
Reproduction, courier, and other miscellaneous expenses.............. 19,888
--------
Total........................................................ $550,000
========
</TABLE>
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
II-1
<PAGE>
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
II-2
<PAGE>
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.
II-3
<PAGE>
(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 (S)4(2) thereof.
II-4
<PAGE>
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.
II-5
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBITS
The following exhibits are included as part of this Registration Statement:
<TABLE>
<CAPTION>
SEC
EXHIBIT REFERENCE
NUMBER NUMBER TITLE OF DOCUMENT LOCATION
------- --------- ----------------- --------
<C> <C> <S> <C>
ITEM 1. Underwriting Agreement
1.01 1 Form of Underwriting Agreement between This Filing
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 Initial Filing
Schedule
ITEM 3. Articles of Incorporation and Bylaws
3.01 3 Restated and Amended Articles of Incorporated by
Incorporation 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, and Incorporated by
Preferences of 1993 Series preferred Reference(1)
stock of Frontier Oil Exploration
Company
ITEM 5. Opinion Regarding Legality
5.01 5 & 23 Opinion of Kruse, Landa & Maycock, Initial Filing
L.L.C.
ITEM 10. Material Contracts
10.01 10 Purchase and Sale Agreement between Incorporated by
B&B Production Company and FX Reference(1)
Producing Company, Inc., dated April
1, 1994, regarding purchase of B&B/JRB
Assets
10.02 10 Purchase and Sale Agreement between Incorporated by
J.R. Bacon Drilling, Inc., and The Reference(1)
Supply Store Company and FX Drilling
Company, Inc., regarding purchase of
B&B/JRB Assets
10.03 10 Real Property Exchange Agreement Incorporated by
between Frontier Oil Exploration Reference(1)
Company, FX Drilling Company, Inc., 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 by
Producing Company, Inc., and B&B Reference(1)
Production, Inc., and First State 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 by
Exchange Escrow Agreement dated June Reference(1)
8, 1994
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SEC
EXHIBIT REFERENCE
NUMBER NUMBER TITLE OF DOCUMENT LOCATION
------- --------- ----------------- --------
<C> <C> <S> <C>
10.06 10 Loan Agreement dated June 7, 1994, by Incorporated by
and between Bank One, Texas, N.A., and Reference(1)
FX Producing Company, Inc.
10.07 10 Promissory Note dated June 7, 1994, in Incorporated by
the original principal amount of Reference(1)
$5,000,000 payable by FX Producing
Company, Inc., to Bank One, Texas, N.A.
10.08 10 Guaranty dated June 7, 1994, by Incorporated by
Frontier Oil Exploration Company for Reference(1)
the benefit of Bank One, Texas, N.A.,
relating to the Bank Loan
10.09 10 Stock Pledge Agreement dated June 7, Incorporated by
1994, between Frontier Oil Exploration Reference(1)
Company and Bank One, Texas, N.A.,
relating to pledge of common stock of
FX Producing Company, Inc.
10.10 10 Deed of Trust, Security Agreement, Incorporated by
Financing Statement and Fixture Filing Reference(1)
dated June 7, 1994, between FX
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 by
Agreement, Financing Statement, and Reference(1)
Assignment of Production dated June 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 7, Incorporated by
1994, between FX Producing Company, Reference(1)
Inc., and Bank One, Texas, N.A.,
relating to production from producing
properties of FX Producing Company,
Inc.
10.13 10 Promissory Note dated June 7, 1994, in Incorporated by
the original principal amount of Reference(1)
$1,385,000 payable by Frontier Oil
Exploration Company to FX Producing
Company, Inc.
10.14 10 Collateral Transfer of Note dated June Incorporated by
7, 1994, by FX Producing Company, Inc., Reference(1)
and Bank One, Texas, N.A., relating to
transfer of promissory note of Frontier
Oil Exploration Company
10.15 10 Form of Employment Agreement between Incorporated by
R.L. Brown, J.R. Bacon, and L. Bacon Reference(1)
and Frontier Oil Exploration Company
10.16 10 Exchange Agreement between Charles C. Incorporated by
Rumsey, Sunshine Pacific Corporation, Reference(1)
A&C Associates, the Rumsey Royalty
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 7, Incorporated by
1994, between Charles C. Rumsey, Jr., Reference(1)
Sunshine Pacific Corp., A&C Associates,
The Rumsey Royalty Trust, The Wood
River Trust and Frontier Oil
Exploration Company
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
SEC
EXHIBIT REFERENCE
NUMBER NUMBER TITLE OF DOCUMENT LOCATION
------- --------- ----------------- --------
<C> <C> <S> <C>
10.18 10 Investor's Rights Agreement dated June Incorporated by
7, 1994, between Frontier Oil Reference(1)
Exploration Company , Charles C.
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 by
Common Stock at $1.10 issued to George Reference(1)
E. Dullnig & Co.
10.20 10 Form of Warrant to Purchase Shares of Incorporated by
Common Stock at $1.65 with related Reference(1)
schedule of optionees
10.21 10 Employment Agreements between Frontier Incorporated by
Oil Exploration Company and each of Reference(1)
David Pierce and Andrew Pierce,
effective January 1, 1995 *
10.22 10 Form of Stock Option with related Incorporated by
schedule (D. Pierce, Reference(1)
A. Pierce, and Others) *
10.23 10 1994 Employee Incentive Plan * Incorporated by
Reference(1)
10.24 10 Form of Stock Option granted to D. Incorporated by
Pierce and A. Pierce* Reference(1)
10.25 10 Crude Oil Purchase Contract dated March Incorporated by
16, 1994 between Petro Source Partners, Reference(1)
Ltd., and B&B Production Company
10.26 10 Amended Crude Oil Purchase Contract Incorporated by
dated August 15, 1994, between FX Reference(1)
Drilling Company, Inc., and Petro
Source Partners, Ltd.
10.27 10 Agreement effective May 1, 1994 between Incorporated by
J.R. Bacon Drilling, Inc. and Crysen Reference(1)
Refining, Inc.
10.28 10 Amended Agreement Letter dated June Incorporated by
30,1994, between FX Drilling Company, Reference(1)
Inc. and Crysen Refining, Inc.
10.29 10 Agreement dated July 8, 1994 between FX Incorporated by
Drilling Company, Inc. and CENEX, Inc., Reference(1)
regarding Crude Oil Purchase Contract.
10.30 10 Agreements between FX Producing and Incorporated by
each of Jerry R. Bacon and Roy Brown Reference(1)
dated December 2, 1994
10.31 10 Preliminary Agreement between Frontier Incorporated by
Oil Exploration Company and the Reference(1)
Ministry of Environmental Protection,
Natural Resources and Forestry dated
February 10, 1995, with translation
thereof
10.32 10 Agreement between Frontier Oil Incorporated by
Exploration Company and Roy L. Brown, Reference(1)
Jerold R. Bacon, and Laura A. Bacon
dated February 7, 1995
10.33 10 Supplemental Agreement between FX Incorporated by
Producing, Frontier Oil Exploration Reference(1)
Company, Roy L. Brown, and Jerold R.
Bacon dated February 27, 1995
10.34 10 Mining Usufruct Agreement between the Incorporated by
State Treasury of the Republic of Reference(3)
Poland and Frontier Poland Exploration
and Producing Company, Sp.z o.o. dated
August 22, 1995
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
SEC
EXHIBIT REFERENCE
NUMBER NUMBER TITLE OF DOCUMENT LOCATION
------- --------- ----------------- --------
<C> <C> <S> <C>
10.35 10 Amendment No. 1 to Mining Usufruct Incorporated by
Agreement Reference(4)
10.36 10 Frontier Oil Exploration Company 1995 Incorporated by
Stock Option and Award Plan* Reference(4)
10.37 10 Form of Non-Qualified Stock Option Incorporated by
with related schedule* Reference(4)
10.38 10 Non-Qualified Stock Option granted to Incorporated by
Robert I. Coward* Reference(4)
10.39 10 Letter Agreement dated effective Incorporated by
August 3, 1995, between Lovejoy Reference(4)
Associates, Inc., and Frontier Oil
Exploration Company re: Financial
Consulting Engagement*
10.40 10 Loan Agreement between Thomas B. Incorporated by
Lovejoy and Frontier Oil Exploration Reference(4)
Company
10.41 10 Letter Agreement dated effective Incorporated by
August 3, 1995, between Lovejoy Reference(4)
Associates, Inc., and Frontier Oil
Exploration Company re:
Indemnification
10.42 10 Non-Qualified Stock Option granted to Incorporated by
Thomas B. Lovejoy* Reference(4)
10.43 10 Form of Amendment No. 1 to Loan Incorporated by
Agreement dated June 7, 1994, by and Reference(5)
between FX Producing Company, Inc.,
and Bank One, Texas, N.A.
10.44 10 Amendment No. 2 to Loan Agreement Incorporated by
dated June 7, 1994, by and between FX Reference(5)
Producing Company, Inc., and BankOne,
Texas, N.A.
10.45 10 Form of Concession dated December 20, Incorporated by
1995, relating to concessions granted Reference(5)
pursuant to the Mining Usufruct
Agreement, with related schedule
10.46 10 Agreement dated April 16, 1996, Incorporated by
between Frontier Poland Exploration Reference(6)
and Producing Company Sp. Z o o. and
RWE-DEA Aktiengesellschaft fur
Mineraloel und Chemie, including
exhibits, relating to Poland
Concession
10.47 10 Joint Study Agreement dated May 21, Incorporated by
1996, between FX Energy (Frontier Oil Reference(7)
Exploration Company) and the Polish
Oil and Gas Company, including
appendix, relating to joint study of
area of interest.
10.48 10 Amendments to Employment Agreements Initial 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 This Filing
Oil Exploration Company and Jerzey M.
Maciolek
10.50 10 Amendment No. 3 to Loan Agreement This Filing
dated June 7, 1994, by and between FX
Producing, Inc., and Bank One, Texas,
N.A.
ITEM 16. Letter on Change in Certifying
Accountant
16.01 16 Letter from Barker & Folsom, previous Incorporated by
Registrant auditors Reference(2)
</TABLE>
II-9
<PAGE>
<TABLE>
<CAPTION>
SEC
EXHIBIT REFERENCE
NUMBER NUMBER TITLE OF DOCUMENT LOCATION
------- --------- ----------------- --------
<C> <C> <S> <C>
ITEM 21. Subsidiaries of the Registrant
21.01 21 Schedule of Subsidiaries Initial Filing
ITEM 23. Consents of Experts and Counsel
23.01 23 Consent of Coopers & Lybrand This Filing
L.L.P., Registrant auditors
23.02 23 Consent of Barker & Folsom, This Filing
previous 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 & Initial Filing
Maycock, L.L.C., counsel to the (See Item 5)
Registrant
23.06 23 Consent of Larry D. Krause, Initial Filing
Petroleum 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 Initial Filing
(See Signature Page)
ITEM 99. Additional Exhibits
99.01 Consent of Jay W. Decker, to This Filing
serve as director
</TABLE>
- --------
* 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-QSB 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.
II-10
<PAGE>
(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.
II-11
<PAGE>
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 15TH DAY OF JULY, 1996.
Frontier Oil Exploration Company
(Registrant)
/s/ David N. Pierce
By __________________________________
DAVID N. PIERCE, PRESIDENT
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
15TH DAY OF JULY, 1996.
/s/ David N. Pierce Director and
- ----------------------------- President
DAVID N. PIERCE (Principal
Executive and
Financial
Officer)
/s/ Andrew W. Pierce Director, Vice-
- ----------------------------- President and
ANDREW W. PIERCE Secretary
(Principal
Operating
Officer)
/s/ Scott J. Duncan Director
- -----------------------------
SCOTT J. DUNCAN
/s/ David N. Pierce
By ________________________
DAVID N. PIERCE ATTORNEY-
IN-FACT
/s/ Thomas B. Lovejoy Director
- -----------------------------
THOMAS B. LOVEJOY
/s/ Peter L. Raven Director
- -----------------------------
PETER L. RAVEN
/s/ James A. Giauque, III Controller
- -----------------------------
JAMES A. GIAUQUE, III
II-12
<PAGE>
EXHIBIT 1.01
[____________ SHARES]
FX ENERGY, INC.
COMMON STOCK, $.001 PAR VALUE PER SHARE
UNDERWRITING AGREEMENT
__________________, 1996
<PAGE>
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, Inc., 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 facsimile notice, or verbal or telephonic
notice confirmed by written or facsimile 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
-1-
<PAGE>
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. 333-
05583), 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
-2-
<PAGE>
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, and Petrolex
Corporation, a Utah corporation, 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,
a Polish limited liability company ("Frontier Poland"), has been duly
organized and is validly existing as a limited liability company under the
laws of the Republic of Poland. (FX Drilling Company, Inc., FX Producing
Company, Inc., Frontier Oil Exploration Company, Petrolex Corporation, and
Frontier Poland are collectively referred to herein as the "Subsidiaries.")
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 (limited liability company in the case of Frontier Poland) 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
-3-
<PAGE>
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, except
as disclosed in the Registration Statement, free and clear of all material
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)); 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 their
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
-4-
<PAGE>
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 that 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.
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<PAGE>
(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 that 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. 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
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<PAGE>
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.
(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
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<PAGE>
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 that 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 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 or other equity securities or ownership interest in 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 or other equity securities or ownership interest
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
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<PAGE>
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, when issued, 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 material
respects.
(ff) 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.
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<PAGE>
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, 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:
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<PAGE>
(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, 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
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<PAGE>
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, 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.
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<PAGE>
(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 (excluding Frontier
Poland) 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 (excluding Frontier
Poland) 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 (excluding Frontier
Poland) 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 (excluding
Frontier Poland) 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 (excluding Frontier Poland) 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
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<PAGE>
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,
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<PAGE>
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, upon
issuance, 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:
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<PAGE>
(i) Frontier Poland has been duly organized 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 capital stock (or other equity
securities or ownership interests) 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.
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<PAGE>
(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
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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
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<PAGE>
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 options or 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, 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.
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<PAGE>
(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, including the costs and expenses of
its own counsel, except that the Company shall reimburse the Representatives at
the Firm Shares Closing Date the amount, not to exceed $150,000, by which the
Representatives' accountable reasonable fees and expenses (including, but not
limited to, out-of-pocket items such as legal fees, travel, accommodations,
telephone expenses, courier fees, suppliers, and related disbursements) incurred
in connection herewith exceed 2% of the public offering price of the Firm Shares
as set forth in the cover page of the Prospectus.
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 June 6, 1996 or otherwise.
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<PAGE>
(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
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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
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<PAGE>
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
-21-
<PAGE>
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
-22-
<PAGE>
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 150,000 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
Firm Shares 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. Neither the Warrant nor the Warrant Shares may be
disposed of or encumbered (any such action, a "Transfer"), except (i) to
Oppenheimer or Hanifen, 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.
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.
-23-
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
among us.
Very truly yours,
FX ENERGY, INC.
By:___________________________________
David N. Pierce
President
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
-24-
<PAGE>
SCHEDULE I
Number of
Firm Shares to
Name Be Purchased
---- --------------
Oppenheimer & Co., Inc.
Hanifen, Imhoff Inc.
TOTAL [Firm Shares]
===============
-1-
<PAGE>
EXHIBIT 1.02
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, INC.
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, INC., 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 Stock, 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.
1
<PAGE>
(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) ParticipatoryParticipatory 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.
---------
2
<PAGE>
(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 150,000 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
3
<PAGE>
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.
4
<PAGE>
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
5
<PAGE>
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
6
<PAGE>
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
7
<PAGE>
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
8
<PAGE>
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: Participatory 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 "ParticipatoryParticipatory 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 "ParticipatoryParticipatory 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).
9
<PAGE>
(b) Withdrawal of Participatory Registration by Company.
---------------------------------------------------
If, at any time after giving written notice of its intention to register
any securities in a ParticipatoryParticipatory 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 ParticipatoryParticipatory 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) Participatory Registration of Underwritten Public Offerings. If a
-----------------------------------------------------------
Participatory 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 Participatory Registration.
---------------------------------------------------------------
The Company shall pay all Registration Expenses in connection with each
registration of Registrable Securities requested pursuant to a
Participatory Registration Right contained in this Section 6.01.
(e) Priority in Participatory Registration. If a Participatory
--------------------------------------
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
10
<PAGE>
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 Participatory 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
11
<PAGE>
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
12
<PAGE>
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
13
<PAGE>
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, Inc.
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.
14
<PAGE>
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, INC.
By: ___________________________________
Title: _______________________________
Attest: _________________________
Secretary
15
<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
16
<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.
17
<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.
18
<PAGE>
EXHIBIT 10.49
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is made and entered into
this 11th day of July, 1996, by and between JERZY B. MACIOLEK ("Employee") and
FRONTIER OIL EXPLORATION COMPANY, a Nevada corporation (the "Company"), based on
the following:
PREMISES
Employee is presently employed by of the Company. Employee wishes to
continue to be employed by the Company, and the Company desires to continue to
employ Employee, all on the terms and conditions contained herein.
AGREEMENT
NOW, THEREFORE, based on the foregoing premises, which are
incorporated herein by reference, and for and in consideration of the mutual
covenants and agreements hereinafter set forth and the mutual benefit to the
parties to be derived herefrom, it is hereby agreed as follows:
1. Employment and Term.
-------------------
(a) The Company hereby employs Employee and Employee hereby
accepts employment upon the terms and conditions set forth herein. The
term of Employee's employment shall begin on the date hereof. The term
of this Agreement, hereinafter referred to as the "Employment Period,"
shall be three (3) years, unless terminated earlier pursuant to other
provisions of this Agreement.
(b) During the Employment Period, Employee will serve in such
capacities with the Company or any of its subsidiaries as shall, from
time to time, be determined by the Company's board of directors.
Employee agrees to perform such duties as are appropriate for an
employee of the Company as may be assigned to him from time to time by
the Company. The Company shall direct, control, and supervise the
duties and work of Employee.
2. Performance of Services.
-----------------------
(a) During the Employment Period, Employee agrees to perform
faithfully the duties assigned to him by the Company to the best of
his ability and to devote his full and undivided business time,
attention, and services to the business of the Company.
(b) Employee shall observe and comply with the commercially
reasonable rules and regulations of the Company respecting its
business and shall carry out and perform such commercially reasonable
orders, directions, and policies of the Company as they may be from
time to time communicated to Employee either orally or in writing.
Employee shall further observe and comply with all applicable rules,
regulations, and laws governing the business of the Company known to
Employee.
<PAGE>
3. Nondisclosure and Noncompetition.
--------------------------------
(a) Definition of Confidential Information. For purposes of this
Agreement, the term "Confidential Information" shall mean (i)
technical data and other information acquired or prepared by or
disclosed to the Employee as a direct or indirect consequence of or
through his employment with the Company, including but not limited to,
writings, models, descriptions, drawings, photographs, compositions,
maps, geological surveys, computer software and devices, other
tangible documentation, and special proprietary, economic, and
financial information regarding the business, methods, and operation
of the Company; and (ii) all information acquired or prepared by or
disclosed to the Employee, or to which the Employee has access during
the Employment Period, for which there is any reasonable basis to
believe is, or which appears to be, treated by the Company as
confidential information. Employee acknowledges that all Confidential
Information shall be the sole property of the Company.
(b) Protection of Goodwill. The Employee acknowledges that in the
course of carrying out, performing, and fulfilling his
responsibilities to the Company, Employee will have access to and be
trusted with Confidential Information relating to the Company's
business. The Employee recognizes that (i) the goodwill of the Company
depends upon, among other things, the Employee keeping the
Confidential Information confidential and that unauthorized disclosure
of the Confidential Information would irreparably damage the Company;
and (ii) disclosure of any Confidential Information to competitors of
the Company or to the general public would be highly detrimental to
the Company. The Employee further acknowledges that in the course of
performing his obligations to the Company, he will be acting as a
representative of the Company to many clients or other persons and, in
some instances, will be the Company's primary contact with such
clients or other persons, and as such, is responsible for maintaining
or enhancing the business and/or goodwill of the Company with those
clients or other persons.
(c) Nondisclosure of Confidential Information. The Employee will
not, during the Employment Period, or at any time after termination
the Employment Period, use, disclose, copy, or assist any other person
or firm in the use, disclosure, or copying of any Confidential
Information.
(d) Return of Confidential Information. Following termination of
the Employment Period, Employee agrees to deliver to the Company all
files, records, documents, drawings, equipment, computer software and
devices, and similar items relating to the business of the Company,
whether prepared by the Employee during the course of his employment
or otherwise coming into his possession during the course of his
employment and to deliver to the Company all Confidential Information
and all copies thereof.
(e) Noncompetition. Employee agrees that during the Employment
Period and for a term of two years thereafter, he will not, directly
or indirectly, personally or through agents, participate in the
ownership, management, operation or control of, or be connected in any
manner with any individual or entity involved in oil and gas
exploration, development, or production, in any area in which the
Company is actively pursuing oil, gas, or other mineral exploration,
development, or exploitation opportunities, whether or not publicly
announced; Employee shall not be precluded from engaging in activities
where the Company is not actively pursuing such opportunities.
Employee and the Company shall agree in writing at the end of the
Employment Period on the areas covered by this noncompetition
provision. Notwithstanding the foregoing, if at any time during the
term of the foregoing restriction, the Company elects to
2
<PAGE>
abandon and not further pursue any of the foregoing areas or prospects, the
Company shall so notify the Employee and the restrictions set forth herein
shall thereafter not be applicable to such abandoned area or prospect, as
the case may be.
(f) Remedy. The Employee agrees that a breach or threatened breach on
his part of any covenant contained in this Agreement will cause such damage
to the Company as will be irreparable and, for that reason, the Employee
further agrees that the Company shall be entitled as a matter of right to
such equitable relief as any court of competent jurisdiction may deem
appropriate in the circumsntaces to prevent any further violation of such
covenants by the Employee, his employer, employees, partners, agents, or
any other individual or entity associated or affiliated with the Employee.
The right to equitable relief shall be cumulative and in addition to
whatever other legal and equitable remedies the Company may have, including
specifically, recovery of damages.
(g) Reasonableness of Restrictions. The Employee expressly
acknowledges and agrees that the respective covenants and agreements
contained herein are reasonable as to both scope and time. The Employee
further agrees that such covenants and agreements shall be construed in
such a manner as to be enforceable under applicable laws if a court of
competent jurisdiction determines that a more limited scope or time is
required.
(h) Survival of Covenants. The covenants contained in this Agreement
shall survive termination of this Agreement and shall continue in full
force and effect thereafter as if the Employee's employment relationship
were continuing.
4. Business Ideas.
--------------
(a) Employee acknowledges that the Company will own all rights in all
"Business Ideas" (as hereinafter defined) which are originated or developed
by Employee, either alone or with employees or consultants of the Company,
during the Employment Period.
(b) Employee agrees that, during the Employment Period, he will:
(i) assign to the Company all Business Ideas and promptly execute
all documents which the Company may reasonably require to protect its
patent, copyright, and other rights to such Business Ideas throughout
the world; and
(ii) promptly disclose to the Company all information concerning
all material Business Ideas "originated" by Employee or any employee
of the Company, which come to his attention and which concern the
business of the Company.
(c) For purposes of this section 4, "Business Ideas" shall mean all
ideas, whether or not patentable, which are originated or developed by
Employee in connection with his employment by the Company and which relate
to the business of the Company.
5. Compensation and Benefits. For all services rendered by Employee
-------------------------
pursuant to this Agreement, the Company shall compensate Employee as follows:
(a) As annual compensation for Employee's services hereunder, in
accordance with its normal payroll practices, the Company agrees to pay
Employee during the Employment
3
<PAGE>
Period a base salary of $96,000 per annum, with an annual increase as shall
be determined in the sole discretion of the board of directors of the
Company or the designated compensation committee thereof, taking into
consideration the performance of the Company and its subsidiaries, and the
contribution of Employee to such performance, and such other factors as the
board of directors or the designated compensation committee thereof may
deem appropriate. In addition, the rate of salary may be further or
otherwise increased at any time and in such amount as the board of
directors or the designated compensation committee thereof may determine
appropriate.
(b) If all of the projects on which Employee is primarily engaged,
including the Baltic Concession, the Carpathian Joint Study Agreement, and
the proposed Lublin Concession, continue to advance and are successful and
economically profitable to the Company, all at the pace mutually acceptable
to the Employee and the Company, the board of directors or the Compensation
Committee, in its sole discretion, may award Employee annual bonuses to up
to $100,000, payable in cash or stock or options, with lesser amounts (down
to zero) in the event progress is impeded.
(c) The Company shall provide to Employee, at the principal Employee
offices of the Company or elsewhere as determined by the board of
directors, suitable facilities appropriate for Employee's position and
suitable for the performance of Employee's responsibilities.
(d) Employee shall be entitled to vacation and sick leave in
accordance with the general policy of the Company for employees of like
level. Vacations shall be taken by Employee at a time and with starting
and ending dates mutually convenient to the Company and Employee.
Vacations or portions of vacations not used in one employment year shall
carry over to the succeeding employment year, but shall thereafter expire
if not used within such succeeding year, unless further carryover is
expressly authorized in writing by the Company.
(e) The Company shall reimburse Employee for all proper expenses
incurred by him in the performance of his duties hereunder in accordance
with the policies and procedures established by the Company.
(f) The Company shall provide Employee, at the Company's expense, with
health, medical, and disability insurance policies at least as favorable as
those currently in force. the Company shall additionally provide to
Employee incentive, retirement, pension, profit sharing, stock option, or
other employee benefit plans which are consistent with and similar to such
plans provided by the Company to its Employee employees generally. All
costs of such plans shall be an expense of the Company and shall be paid by
the Company. Employee shall also have the right to participate in any
other employee benefit programs provided by the Company.
(g) The Company shall assume and pay reasonable dues of Employee in
local, state, national, and international societies and associations, and
in such other clubs and organizations, as shall be approved and authorized
by the board of directors of the Company.
(h) The Company shall withhold from Employee's compensation hereunder
all proper federal and state payroll taxes and income taxes on compensation
paid to Employee and shall provide an accounting to Employee for such
amounts withheld.
4
<PAGE>
6. Continuation of Compensation During Disability. If Employee is unable
----------------------------------------------
to perform his services by reason of disability due to illness or incapacity,
Employee shall be entitled to the better of (i) the benefits under any
disability policy maintained by the Company on behalf of Employee; or (ii) fifty
percent of his base salary for the unexpired Employment Period; or (iii)
Employee's full salary for the initial six months, one-half of his base salary
during the next succeeding consecutive three-month period, and one-fourth of his
base salary during the following consecutive three-month period. During such
initial six consecutive month period of disability, Employee shall also be
entitled to receive incentive compensation at the same annual rate as incentive
compensation, if any, earned with respect to the Company's fiscal year last
preceding the date such illness or incapacity commenced. Notwithstanding the
foregoing, if such illness or incapacity does not cease to exist within the 12
consecutive month period provided herein, Employee shall not be entitled to
receive any further compensation from the Company and the Company may thereupon
terminate this Agreement. For purposes of this Agreement, Employee is "disabled"
when he is unable to continue his normal duties of employment, by reason of a
medically determined physical or mental impairment. In determining whether or
not Employee is disabled, the Company may rely upon the opinion of any doctor or
practitioner of any recognized field of medicine or psychiatric practice
selected jointly by the Company and Employee and such other evidence as the
Company deems necessary.
7. Termination of Agreement.
------------------------
(a) Termination by the Company for Cause. The Company shall have the
right, without further obligation to Employee other than for compensation
already accrued or stock or options already vested, to terminate this
Agreement for cause ("Cause") by showing that (i) Employee has materially
breached the terms hereof; (ii) Employee, in the reasonable determination
of the board of directors of the Company, has been grossly negligent or
engaged in material willful or gross misconduct in the performance of his
duties; or (iii) Employee has committed or been convicted of fraud,
embezzlement, theft, or dishonesty or other criminal conduct.
(b) Termination Upon Death or Disability of Employee. This Agreement
shall terminate immediately upon Employee's death, subject to the
provisions for payments set forth in this section or upon the disability of
Employee subject to the provisions for payment set forth herein.
(c) Termination Upon Change of Control. Notwithstanding any provision
of this Agreement to the contrary, Employee may terminate this Agreement by
providing written notice of such termination to the Company within one
hundred and twenty days (120) days of the occurrence of any of the
following events:
(i) The sale, lease, exchange or other transfer in one
transaction or a series of transactions of all or substantially all of
the assets of the Company to a single purchaser that is not a wholly
owned subsidiary of the Company or to a group of associated
purchasers;
(ii) The sale, lease, exchange, or other disposition to a single
person or group of persons under common control in one transaction or
a series of related transactions resulting in such person or persons
owning, directly or indirectly, greater than twenty-five percent (25%)
of the combined voting power of the outstanding shares of the
Company's common stock;
5
<PAGE>
(iii) As a result of a merger, consolidation, sale of all or
substantially all of the assets of the Company, a contested election,
or any combination of the foregoing, the persons who were directors of
the Company immediately prior thereto shall cease to constitute a
majority of the board of directors of the Company or any successor to
the Company;
(iv) The decision by the Company to terminate its business and
liquidate its assets;
(v) The merger or consolidation of the Company in a transaction
in which the shareholders of the Company immediately prior to such
merger or consolidation receive less than fifty percent (50%) of the
outstanding voting securities of the new or continuing corporation; or
(vi) A person (within the meaning of Section 3(a)(9) or Section
13(d)(3), as in effect on the date hereof, of the Securities Exchange
Act of 1934 (the "Exchange Act")) shall become the beneficial owner
(within the meaning of rule 13d-3 of the Exchange Act as in effect on
the date hereof) of fifty percent (50%) or more of the outstanding
voting securities of the Company.
If, as a result of one of the foregoing events, the Company is not the
surviving entity, and subject to the rights of Employee to terminate the
Agreement as set forth above, the provisions of this Agreement shall inure
to the benefit of and be binding upon the surviving or resulting entity.
If as a result of the merger, consolidation, transfer of assets, or other
event listed above, the duties of Employee are increased, then the
compensation of Employee provided for by this Agreement shall be reasonably
adjusted upward to compensate for the additional duties and
responsibilities assumed.
(d) Termination by Employee for Cause. Employee shall have the right
to terminate this Agreement in the event of (i) the Company's intentional
breach of any covenant or term of this Agreement, but only if the Company
fails to cure such breach within twenty (20) days following the receipt of
notice by Employee setting forth the conditions giving rise to such breach;
(ii) an assignment to Employee of any duties inconsistent with, or a
significant change in the nature or scope of, Employee's authority or
duties from the authority and duties held by Employee as of the date hereof
and as increased from time to time; (iii) the failure by the Company to
obtain the assumption of the commitment to perform this Agreement by any
successor corporation; or (iv) the exercise of Employee's rights under
subsection 7(c).
(e) Termination Payments.
(i) Termination Other than for Cause. In the event that
Employee's employment is terminated by the Company during the term
hereof for reasons other than Cause as defined in subsection 7(a) or
Employee terminates this Agreement in accordance with subsections 7(c)
or 7(d), the Company shall:
(1) Pay to Employee all amounts accrued through the date of
termination, any unreimbursed expenses incurred pursuant to this
Agreement, and any other benefits specifically provided to
Employee under any benefit plan.
6
<PAGE>
(2) Pay to Employee an amount equal to the salary that would
otherwise accrue to Employee during the remaining Employment
Period.
(3) All forfeiture restrictions governing stock or options
held by Employee shall immediately terminate and such options and
common stock shall be fully vested and held free from forfeiture
by Employee.
(4) Maintain in full force and effect, for the continued
benefit of Employee and his family, for a period equal to the
greater of two (2) years or the remaining Employment Period under
this Agreement, all employee benefit plans and programs in which
Employee was entitled to participate immediately prior to the
date of termination, provided that Employee's continued
participation is possible under the general terms and provisions
of such plans and programs. In the event that the participation
of Employee and his family in group health plans and/or life
insurance programs of the Company is barred, the Company shall
provide Employee and his family with benefits substantially
similar to those which Employee would otherwise have been
entitled to receive under such plan and program from which his
continued participation is barred.
(ii) Termination Upon Death of Employee. If Employee dies during
the term of this Agreement, the Company shall:
(1) immediately pay all compensation (not including bonuses,
if any) accrued through the date of the Employment Period, any
unreimbursed expenses incurred pursuant to this Agreement, and
any other benefits specifically provided to Employee under any
benefit plan to the estate of Employee;
(2) immediately terminate all forfeiture restrictions
governing common stock or options held by Employee and such
common stock and options shall be fully vested and held free from
forfeiture;
(3) maintain in full force and effect, for the continued
benefit of Employee's family covered by such benefits, for a
period equal to the remaining Employment Period under this
Agreement, all group health plans and/or life insurance programs
of the Company. In the event that the participation of
Employee's family in group plans immediately prior to his death
is barred, the Company shall provide Employee's family with
benefits substantially similar to those which they would
otherwise have been entitled to receive under such plan and
program from which their continued participation is barred;
(4) if no life insurance policy maintained by the Company is
then in effect, pay an amount equal to one year's then current
salary provided for by this Agreement, payable in six (6) equal
monthly installments commencing on the first day of the month
following the month in which Employee dies, and payment of the
pro rata portion of the incentive compensation which would have
been payable pursuant to this Agreement, based upon the number of
full months of his employment during the year of his death.
7
<PAGE>
(iii) Termination for Cause or Voluntary Termination by
Employee. If Employee terminates this Agreement for any reason other
than in accordance with the provisions of subsections 7(c) or 7(d), or
if the Company terminates this Agreement for Cause in accordance with
subsection 7(a), the Company shall deliver to Employee, within ten
(10) days following the effective date of such termination, all
amounts accrued through the date of termination, any unreimbursed
expenses incurred pursuant to this Agreement, and any other benefits
specifically provided to Employee under any benefit plan. the Company
shall have no further obligation to Employee.
(f) Exit Interview. To insure a clear understanding of this
Agreement, including but not limited to the protection of the business
interests of the Company, Employee agrees, upon termination of this
Agreement for any reason or the expiration of the Employment Period, at no
additional expense to Employee, to engage in an exit interview with the
Company at a time and place designated by the Company.
8. Indemnification. The Company shall indemnify Employee and hold
---------------
Employee harmless from liability for acts or decisions made by Employee while
performing services for the Company to the greatest extent permitted by
applicable law. the Company shall use its best efforts to obtain coverage for
Employee under any insurance policy now in force or hereafter obtained during
the term of this Agreement insuring officers, directors, and employees of the
Company against such liability. Employee agrees to indemnify and to hold the
Company harmless from any and all damages, losses, claims, liabilities, costs,
or expenses arising from Employee's acts or omissions in violation of his duties
under this Agreement which constitute fraud, gross negligence, or willful and
knowing violations of the terms of this Agreement.
9. Notice. Any notice or request required or permitted to be given
------
hereunder shall be sufficient if in writing and delivered personally, sent by
facsimile transmission, or sent by registered mail, return receipt requested, to
the addresses hereinabove set forth or to any other address designated by either
of the parties hereto by notice similarly given. Such notice shall be deemed to
have been given upon such personal delivery, facsimile transmission, or mailing,
as the case may be, to the addresses set forth below:
If to Employee, to: Jerzy B. Maciolek
1834 Mayweather
Richmond, Texas 77469
If to the Company, to: Frontier Oil Exploration Company
Attn: David N. Pierce, President
3006 Highland Drive, Suite 206
Salt Lake City, Utah 84106
Fax: (801) 486-5575
Confirmation: (801) 486-5555
8
<PAGE>
With a copy to: James R. Kruse
Kruse, Landa & Maycock, L.L.C.
Eighth Floor, Bank One Tower
50 West Broadway
Salt Lake City, Utah 84101
Fax: (801) 531-7091
Confirmation: (801) 531-7090
10. Assignment. Except to any successor or assignee of the Company as
----------
provided in subsection 7(c), subject to the right of Employee to terminat this
Agreemnt pursuant to such subsection, neither this Agreement nor any rights or
benefits hereunder may be assigned by either party hereto without the prior
written consent of the other party.
11. Attorneys' Fees. In the event that any action, suit, arbitration, or
---------------
other proceeding is instituted concerning or arising out of this Agreement, the
prevailing party shall be entitled to recover all of such party's costs,
including reasonable attorneys' fees, incurred in each and every such action,
suit, arbitration, or other proceeding, including any and all appeals or
petitions therefrom.
12. Validity of Provisions and Severability. If any provision of this
---------------------------------------
Agreement is, or becomes, or is deemed invalid, illegal, or unenforceable in any
jurisdiction, such provision shall be deemed amended to conform to the
applicable jurisdiction, or if it cannot be so amended without materially
altering the intention of the parties, it will be stricken. However, the
validity, legality, and enforceability of any such provisions shall not in any
way be effected or impaired thereby in any other jurisdiction and the remainder
of this Agreement shall remain in full force and effect.
13 Entire Agreement. This Agreement constitutes the entire agreement and
----------------
understanding between the parties pertaining to the subject matter of this
Agreement. This Agreement supersedes all prior agreements, if any, any
understandings, negotiations, and discussions, whether oral or written. No
supplement, modification, waiver, or termination of this Agreement shall be
binding unless executed in writing by the party to be bound thereby.
14. Governing Law. This Agreement shall be governed by and construed and
-------------
interpreted in accordance with the laws of the state of Utah.
IN WITNESS WHEREOF, Frontier Oil Exploration Company has caused this
Agreement to be signed by its duly authorized officer and Employee has signed
this Agreement as of the date first above written.
The Company:
FRONTIER OIL EXPLORATION COMPANY
By /s/ Andrew W. Pierce
------------------------------
Duly Authorized Officer
Employee:
/s/
-------------------------------
Jerzy B. Maciolek
9
<PAGE>
EXHIBIT 10.50
AMENDMENT NO. 3
TO
LOAN AGREEMENT DATED JUNE 7, 1994
BY AND BETWEEN FX PRODUCING COMPANY, INC.
AND BANK ONE, TEXAS, NA
This Amendment No. 3 to Loan Agreement dated June 7, 1994 (this "Third
Amendment") by and between FX PRODUCING COMPANY, INC. (the "Borrower") and BANK
ONE, TEXAS, NA, a national banking association (the "Bank"), is entered into
this 20th day of June, 1996, to be effective as of March 1, 1996.
W I T N E S S E T H:
Borrower and Bank entered into a Loan Agreement dated June 7, 1994, which
was amended by Amendment No. l thereto effective as of September 30, 1995, and
by Amendment No. 2 thereto effective as of March 1, 1996 (as such may be further
amended, modified, supplemented or restated, the "Loan Agreement").
Borrower has requested that the Bank change the Termination Date of the
Loans, and the Bank has agreed to such request, subject to the terms and
conditions of the Loan Agreement, as amended by this Amendment No. 3.
NOW, THEREFORE, in consideration of the promises herein contained, and each
intending to be legally bound hereby, the parties agree as follows:
I. Amendments to Loan Agreement.
----------------------------
Article I. DEFINITIONS, is amended by adding the following definition:
------------------------
"Third Amendment" means Amendment No. 3 to the Loan Agreement,
---------------
executed by Borrower and Bank on June 20, 1996.
Article I. DEFINITIONS, is further amended by revising the definition of
------------------------
Termination Date to read as follows:
"Termination Date" means October 1, 1997.
----------------
Section 5.20. Tangible Net Worth Requirement - Borrower, is hereby amended
-------------------------------------------------------
by deleting the text thereof in its entirety, and replacing it with the
following:
5.20 Tangible Net Worth Requirement - Borrower. Borrower
-----------------------------------------
shall maintain a tangible net worth of not less than $2,250,000.00 as
of March 1, 1996, plus (x) eighty percent (80%) of quarterly net
income (excluding losses) after March 31, 1996, and (y) eighty percent
(80%) of any increases in shareholders' equity resulting from the sale
or issuance of any equity subsequent to March 31, 1996. For purposes
of this Section 5.20, Borrower's tangible net worth means
stockholders' equity in Borrower, determined in accordance with GAAP,
(a) plus the amount of all Indebtedness owed by Borrower to Guarantor
(net of all Indebtedness owed by Guarantor to Borrower), and (b) minus
those assets classified in accordance with GAAP as intangible,
including, without limitation, goodwill, patents, trademarks, trade
names, copyrights, franchises and deferred charges.
<PAGE>
II. Reaffirmation of Representations and Warranties. To induce the
-----------------------------------------------
Bank to enter into this Third Amendment, the Borrower hereby reaffirms, as of
the date hereof, its representations and warranties contained in Article IV of
the Loan Agreement and in all other documents executed pursuant thereto, and
additionally represents and warrants as follows:
A. The execution and delivery of this Third Amendment and the
performance by the Borrower of its obligations under this Third Amendment
are within the Borrower's power, have received all necessary governmental
approval (if any shall be required), and do not and will not contravene or
conflict with any provision of law or of any agreement binding upon the
Borrower.
B. The Loan Agreement as amended by this Third Amendment represents
the legal, valid and binding obligations of the Borrower, enforceable
against the Borrower in accordance with their respective terms subject as
to enforcement only to bankruptcy, insolvency, reorganization, moratorium
or other similar laws affecting the enforcement of creditors' rights
generally.
C. No Event of Default or Unmatured Event of Default has occurred and
is continuing as of the date hereof.
III. Defined Terms. Except as amended hereby, terms used herein that are
-------------
defined in the Loan Agreement shall have the same meanings herein.
IV. Reaffirmation of Loan Agreement. This Third Amendment shall be deemed
-------------------------------
to be an amendment to the Loan Agreement, and the Loan Agreement, as amended
hereby, is hereby ratified, approved and confirmed in each and every respect.
All references to the Loan Agreement herein and in any other document,
instrument, agreement or writing shall hereafter be deemed to refer to the Loan
Agreement as amended hereby.
V. Entire Agreement. The Loan Agreement, as hereby amended, embodies the
----------------
entire agreement between the Borrower and the Bank and supersedes all prior
proposals, agreements and understandings relating to the subject matter hereof.
The Borrower certifies that it is relying on no representation, warranty,
covenant or agreement except for those set forth in the Loan Agreement as hereby
amended and the other documents previously executed or executed of even date
herewith.
VI. Governing Law. THIS THIRD AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED
-------------
IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE APPLICABLE LAWS OF THE
UNITED STATES OF AMERICA. This Third Amendment has been entered into in Harris
County, Texas, and it shall be performable for all purposes in Harris County,
Texas. Courts within the State of Texas shall have jurisdiction over any and
all disputes between the Borrower and the Bank, whether in law or equity,
including, but not limited to, any and all disputes arising out of or relating
to this Third Amendment or any other Loan Document; and venue in any such
dispute whether in federal or state court shall be laid in Harris County, Texas.
VII. Severability. Whenever possible each provision of this Third
------------
Amendment shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Third Amendment shall be prohibited
by or invalid under applicable law, such provision shall be ineffective to the
extent of such prohibition or invalidity, without invalidating the remainder of
such provision or the remaining provisions of this Third Amendment.
<PAGE>
VIII. Execution in Counterparts. This Third Amendment may be executed in
-------------------------
any number of counterparts and by the different parties on separate
counterparts, and each such counterpart shall be deemed to be an original, but
all such counterparts shall together constitute but one and the same agreement.
IX. Section Captions. Section captions used in this Third Amendment are
----------------
for convenience of reference only, and shall not affect the construction of this
Third Amendment.
X. Successors and Assigns. This Third Amendment shall be binding upon the
----------------------
Borrower and the Bank and their respective successors and assigns, and shall
inure to the benefit of the Borrower and the Bank, and the respective successors
and assigns of the Bank.
XI. Non-Application of Chapter 15 of Texas Credit Codes. The provisions of
---------------------------------------------------
Chapter 15 of the Texas Credit Code (Vernon's Texas Civil Statutes, Article
5069-15) are specifically declared by the parties hereto not to be applicable to
the Loan Agreement as hereby amended or any of the other Loan Documents or to
the transactions contemplated hereby.
XII. Notice. THIS THIRD AMENDMENT TOGETHER WITH THE LOAN AGREEMENT AND THE
------
OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY
NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to be
duly executed as of the day and year first above written.
BORROWER:
--------
FX PRODUCING COMPANY, INC.
By: /s/ David N. Pierce
-----------------------
DAVID N, PIERCE, PRESIDENT
BANK:
----
BANK ONE, TEXAS, NA
By: /s/ John B. Lane
-------------------------
JOHN B. LANE, VICE PRESIDENT
Agreed To and Accepted:
by GUARANTOR
---------
FRONTIER OIL EXPLORATION COMPANY
By: /s/ David N. Pierce
-----------------------
DAVID N. PIERCE, PRESIDENT
<PAGE>
NOTICE OF FINAL AGREEMENT
TO: FX PRODUCING COMPANY, INC.
3006 Highland Drive, Suite 205
Salt Lake City, Utah 84106
(collectively, whether one or more, "Borrower")
As of the effective date of this Notice, Borrower and BANK ONE, TEXAS, NA
("Bank") have consummated a transaction pursuant to which Bank has agreed to
make a loan or loans to Borrower, or to renew, extend or amend an existing loan
or loans to Borrower, in an aggregate amount up to $5,000,000 with a current
Borrowing Base limit of $3,580,000 which is comprised of a revolving loan in
that amount (the "Loan").
In connection with the Loan, Borrower and Bank and other obligors, if any
(collectively, whether one or more, "Other Obligors") have executed and
delivered certain agreements, instruments and documents (collectively
hereinafter referred to as the "Written Loan Agreement").
It is the intention of Borrower, Bank and Other Obligors that this Notice be
incorporated by reference into each of the written agreements, instruments and
documents comprising the Written Loan Agreement. Borrower, Bank and Other
Obligors each warrants and represents that the entire agreement made and
existing by or among Borrower, Bank and Other Obligors with respect to the Loan
is contained within the Written Loan Agreement, as amended and supplemented
hereby, and that no agreements or promises have been made by, or exist by or
among, Borrower, Bank and Other Obligors that are not reflected in the Written
Loan Agreement.
THE WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES
AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT
ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
Effective Date: June 20, 1996.
BANK ONE, TEXAS, NA
By: /s/ John B. Lane
-----------------------------
John B. Lane, Vice President
ACKNOWLEDGED AND AGREED:
Borrower:
FX PRODUCING COMPANY, INC.
By: /s/ David N. Pierce
--------------------------
David N. Pierce, President
Guarantor:
FRONTIER OIL EXPLORATION COMPANY
By: /s/ David N. Pierce
--------------------------
David N. Pierce, President
<PAGE>
Exhibit 23.01
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We consent to the inclusion in this registration statement on Form S-1
(Registration No. 333-05583) 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.
COOPERS & LYBRAND L.L.P.
Salt Lake City, Utah
July 12, 1996
<PAGE>
Exhibit 23.02
[Letterhead of Barker & Folsom]
CONSENT OF INDEPENDENT AUDITORS
Frontier Oil Exploration Company
Barker & Folsom do hereby consent to (a) the use in this Amendment #1 to the
Registration Statement on Form S-1, SEC File # 333-05583, of our opinion dated
February 4, 1995, relating to the financial statements and to the supplemental
schedules as of December 31, 1994 and the years ended December 31, 1994 and
1993, and (b) the reference to us under the heading "Experts" in such
Registration Statement.
/s/ Barker & Folsom
Barker & Folsom
Ogden, Utah
July 12, 1996
<PAGE>
Exhibit 23.03
[Letterhead of Barker & Folsom]
CONSENT OF INDEPENDENT AUDITORS
J.R. Bacon Drilling, Inc.
Barker & Folsom do hereby consent to (a) the use in this Amendment #1 to the
Registration Statement on Form S-1, SEC File #333-05583, of our opinion dated
February 28, 1994, relating to the financial statements for the year ended
December 31, 1993, and (b) the reference to us under the heading "Experts" in
such Registration Statement.
/s/ Barker & Folsom
Barker & Folsom
Ogden, Utah
July 12, 1996
<PAGE>
Exhibit 23.04
[LETTERHEAD OF HAMILTON MISFELDT & COMPANY, P.C.]
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.
HAMILTON MISFELDT & COMPANY, P.C.
Cut Bank, Montana
July 12, 1996
<PAGE>
Exhibit 23.06
CONSENT OF PETROLEUM ENGINEERING CONSULTANT
I hereby consent to the use in the prospectus constituting part of
amendment no. 1 to the registration statement on Form S-1, SEC File No. 333-
05583, 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.
/s/ Larry D. Krause
LARRY D. KRAUSE
Billings, Montana
July 12, 1996
<PAGE>
Exhibit 23.07
July 12, 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.
Except as provided in the Securities Act, 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
Michael J. Mullen, P.E.
Technical Advisor
<PAGE>
Exhibit 99.01
July 12, 1996
VIA FAX: 310-789-4080
TO: Dave Pierce
FX Energy
Dear Dave:
I hereby accept the appointment to become a member of the Board of Directors for
FX Energy, effective the day after the current public offering of your common
stock.
I look forward to working with you and the other members of the Board.
Sincerely,
/s/ J. W. Decker
J.W. Decker
