U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
COMMISSION FILE NUMBER:0-25386
FX ENERGY, INC.
(Name of small business issuer in its charter)
NEVADA 87-0504461
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3006 HIGHLAND DRIVE, SUITE 206,
SALT LAKE CITY, UTAH 84106
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code:TELEPHONE (801) 486-5555
TELECOPY (801) 486-5575
Securities registered pursuant to section 12(b) of the Act:
Title of Each Class Name of each exchange on which registered
NONE NONE
Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.001
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No o
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. o
The Company's revenues for the fiscal year ended December 31, 1996, were
$2,421,106.
As of March 21, 1997, the aggregate market price of the voting stock held by
non-affiliates was approximately $114,089,677 .
As of March 21, 1997, the Company had outstanding 12,530,381 shares of its
common stock, par value $0.001.
DOCUMENTS INCORPORATED BY REFERENCE. If the following documents are
incorporated by reference, briefly describe them and identify the part of the
Form 10-KSB (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) any annual report to security holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 31, 1990):THE COMPANY'S DEFINITIVE PROXY
STATEMENT IN CONNECTION WITH THE 1997 ANNUAL MEETING OF STOCKHOLDERS IS
INCORPORATED BY REFERENCE IN RESPONSE TO PART III OF THIS ANNUAL REPORT.
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TABLE OF CONTENTS
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ITEM NUMBER AND CAPTION PAGE
PREFACE .............................................................2
PART I................................................................4
ITEM 1. DESCRIPTION OF BUSINESS ....................................4
ITEM 2. DESCRIPTION OF PROPERTY ....................................4
ITEM 3. LEGAL PROCEEDINGS ..........................................6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ........6
PART II...............................................................7
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ...7
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS .4
ITEM 7. FINANCIAL STATEMENTS ......................................16
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE ..........................................17
PART III.............................................................17
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT ........17
ITEM 10. EXECUTIVE COMPENSATION ...................................18
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT ...................................................18
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ...........19
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K .........................19
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PREFACE
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CAUTION RESPECTING FORWARD-LOOKING INFORMATION
This annual report contains certain forward-looking statements and
information relating to the Company that are based on the beliefs of the Company
or management as well as assumptions made by and information currently available
to the Company or management. When used in this document, the words
"anticipate," believe," "estimate," expect," and "intend" and similar
expressions, as they relate to the Company or its management, are intended to
identify forward-looking statements. Such statements reflect the current view
of the Company respecting future events and are subject to certain risks,
uncertainties, and assumptions, including the risks and uncertainties noted.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated, expected, or
intended. In each instance, forward-looking information should be considered in
light of the accompanying meaningful cautionary statements herein.
CERTAIN DEFINITIONS
All defined terms under rule 4-10(a) of Regulation S-X promulgated by the
Securities and Exchange Commission shall have their statutorily prescribed
meanings when used in this report. In addition, the following terms have the
meaning set forth below when used herein.
"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.
"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.
PART I
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ITEM 1. DESCRIPTION OF BUSINESS
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GENERAL
FX Energy, Inc. (the "Company"), currently explores for oil and gas
primarily in Poland and the western United States and produces oil from fields
in Montana and Nevada. During 1996, the Company completed the public sale of
3,450,000 shares of Common Stock for net proceeds of approximately $17.7
million, advanced exploration of its principal oil and gas concession in Poland,
obtained additional exploration rights in Poland, and continued limited
development of its principal oil producing properties in Montana.
The Company believes that its principal strengths are its existing
prospects in Poland, its access to previously collected geological and
geophysical data, its strategic alliances within the oil and gas industry, and
its ability to identify exploration properties and prospects.
During 1996, the Company's principal exploration activities were focused in
Poland, primarily on 2.4 million acres in northern Poland (the "Baltic
Concession") on which the Company acquired exploration rights in August 1995.
The Baltic Concession is in a geological region (the "Baltic Platform") that
contains established producing oil fields located approximately 50 miles to the
northeast in the Kaliningrad district of Russia.
Under an agreement reached in April 1996, the Company intends to explore
and develop the Baltic Concession with RWE-DEA AG ("RWE-DEA"), a subsidiary of
RWE AG, Germany's fifth largest industrial company. The Company and RWE-DEA
have completed a 360 kilometer seismic survey on selected portions of the Baltic
Concession, which assisted in RWE-DEA's selection of the site of the first
exploratory well. In late January 1997 the Company commenced this first well,
the Orneta #1, which is planned to test formations at a depth of approximately
8,600 feet. The Company expects to proceed with a number of additional seismic
surveys and exploration wells to evaluate other structures, identify further
drilling prospects, and assess alternative exploration models and to proceed
with development, if warranted.
In May 1996, the Company 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 joint study area in the
Carpathian region of southeastern Poland (the "Carpathian JSA"). POGC is a
government-owned oil and gas exploration, production, refining, transportation,
and marketing entity. The Company and POGC are conducting a technical
evaluation of the largely undrilled horizons below 2,500 feet with the intention
of selecting specific areas on which to apply for concessions.
In December 1996, the Company obtained exclusive oil and gas exploration
rights and is proceeding with steps to obtain concessions on approximately 2.0
million acres in southeastern Poland near the city of Lublin (the "Lublin
Concession."). The Company has access to approximately 3,000 kilometers of
seismic data and logs of all wells previously drilled in the region, none of
which resulted in commercial production in the Lublin Concession. The nearest
known hydrocarbon discoveries, located 15 to 30 kilometers east of the
exploration area, consist of two gas accumulations and an oil accumulation, as
reported by POGC. The Company is now reinterpreting and reprocessing existing
data from the exploration area and will soon seek a strategic partner to join in
exploration drilling during 1997. The Company's Lublin Concession adjoins a
region reserved by the government of Poland for oil and gas exploration by POGC,
which is collaborating with the Company in an appraisal of the hydrocarbon
potential of such area.
In October 1996, the Company obtained rights to explore for gold and other
associated minerals in a 71,000-acre block in the Sudety region of southwestern
Poland (the "Sudety Exploration Area") and entered into a reconnaissance and
standstill agreement with Homestake Mining Company ("Homestake"), an
international gold mining company, under which the Company and Homestake will
jointly plan limited geological, geochemical, and geophysical reconnaissance of
the area. Subject to the results of the reconnaissance, the two companies may
elect to negotiate a subsequent agreement, in which case Homestake would likely
assume operations with the Company retaining a working or royalty interest. The
Company has agreed not to negotiate with any company other than Homestake
regarding the Sudety Exploration Area until December 1997.
The Company currently produces oil exclusively in the United States. At
December 31, 1996, the Company had estimated proved reserves of 5.4 MMBbl with a
net present value of estimated future net revenue, discounted annually at 10%
("PV-10 Value") of approximately $35.4 million. Approximately 80.4% of the
Company's 1996 production and 97.4% of its reserve base as of December 31, 1996,
are concentrated in northern Montana's Cut Bank field. In January 1996, the
Company completed an infill drilling program on a small portion of the Cut Bank
field and has budgeted to continue the program on strategically selected
additional areas in the field during the next two years. The results of the
initial program are being reviewed and monitored; and if, in the opinion of the
Company, other development opportunities then available to the Company,
including development in the Baltic Concession or other areas in Poland, are
likely to provide a greater financial return to the Company, funds initially
budgeted to Cut Bank field development may be utilized for development of other
fields.
In late 1996, the Company plugged and abandoned an exploratory test at its
Cobb Creek prospect in Nevada drilled in partnership with several independent
energy companies. In view of the Company's other exploration opportunities and
the current lack of industry interest in Nevada, the Company does not anticipate
drilling its existing Nevada prospects in the foreseeable future. The Company
is evaluating several additional exploration prospects in the western United
States, principally in Wyoming, Montana, Nevada, and North Dakota.
When used herein, the term "Company" includes both the Company and its
subsidiaries.
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 its
operations 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. 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, and during 1996, the
Company added three additional exploration projects in Poland. In July 1996,
the Company changed its name from Frontier Oil Exploration Company to FX Energy,
Inc.
BUSINESS STRATEGY
The Company explores and develops oil and gas prospects both
internationally in Poland and domestically in the western United States,
implementing a strategy that includes the following:
- Focus on Poland. The Company believes that the Baltic Concession, the
Lublin Concession, and the Carpathian JSA provide a foundation upon which
to build a significant exploration and development operation in Poland,
capitalizing on Poland's attractive combination of significant reserve
potential, underexplored acreage, and favorable operating environment. In
1989, Poland initiated market-based reforms which have resulted in the
country's economy becoming one of the fastest growing in eastern Europe.
Important elements of this transition have included the introduction of
both a broad-based privatization program and an internationally competitive
tax and royalty structure. Partially as a result of these initiatives,
Poland attracted approximately $10.2 billion in direct foreign investment
between 1989 and mid-1996. Such international oil companies as Texaco,
Inc., Tenneco Co., Exxon Corp., and Shell Oil Co., have either secured, or
obtained the exclusive right to negotiate for, oil and gas exploration
rights. (See below.)
- Access geological and geophysical data. The Company focuses on areas where
it can reevaluate previously collected geological and geophysical data.
During the preceding several decades, state-sponsored agencies in Poland
gathered thousands of line miles of seismic data and drilled numerous oil
and gas exploration or stratigraphic test wells in the various regions of
the country that such agencies believed had hydrocarbon potential. These
exploration efforts were hampered, in the Company's opinion, by the use of
outdated seismic processing, drilling, testing, and completion techniques.
Accessing this data and reevaluating it with modern processing techniques
enables the Company to complete geological and geophysical reconnaissance
of large areas that are relatively underexplored as compared to domestic
regions with similar hydrocarbon potential.
- Capitalize on strategic alliances. The Company seeks to form strategic
alliances to reduce its financial exposure and risk 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 and the Lublin area. 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
acquire a 50% interest in the Baltic Concession by paying the Company
$250,000 and providing up to $2.1 million for a seismic survey now
completed and an exploratory well currently underway, and by funding 50% of
the cost of a second well. The Company will operate all wells it drills
jointly with RWE-DEA. In addition, the Company is now evaluating existing
geological and geophysical data contributed by POGC in order to determine
the hydrocarbon potential of the Lublin Concession, adjacent POGC lands,
and certain target areas within the Carpathian JSA. The Company intends to
propose that it and POGC apply for exploration rights covering selected
target areas within the Carpathian JSA upon the completion of this
analysis.
- Exploit domestic reserve base and prospects. The Company is studying the
results of a 1995-1996 infill drilling program on a 1,000 acre tract of the
Cut Bank field to determine whether, when compared to other opportunities
now available in Poland and elsewhere, such drilling is resulting in
competitive benefits to the Company and warrants expansion of the program
to additional areas in the field. The Company also has an ongoing program
of prospect generation and exploration in the western United States, which
has resulted in the identification of prospects in Wyoming, Montana,
Nevada, and North Dakota on which the Company is now seeking exploration
rights, exploration partners, additional data, or other items.
The Company's oil and gas exploration activities involve significant risks.
There can be no assurance that the use of technical expertise as applied to
geophysical or geological data will ensure that any well will encounter
hydrocarbons. Further, there is no way to know in advance of drilling and
testing whether any prospect encountering hydrocarbons will yield oil or gas in
sufficient quantities to be economically viable. Several test wells are
typically required to explore each prospect or exploration area, particularly
underexplored areas such as the Baltic Concession and the other areas in Poland
where a significant portion of the Company's exploration activities are
concentrated. The Company may continue to incur substantial exploration costs
in specific areas, including the Baltic Concession, the Lublin Concession and
the Carpathian JSA 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 seven
exploratory test wells in the western United States, none of which has resulted
in the establishment of commercial production or reserves.
POLAND EXPLORATION ACTIVITIES
The Company believes that Poland offers an attractive environment in which
to explore for and develop oil and gas prospects potentially containing
recoverable reserves in excess of 25 million barrels of oil equivalent
("MMBOE"). By accessing previously collected geophysical (principally seismic),
geological, and well data and reevaluating it with modern interpretive
techniques, the Company believes that it will be able to capitalize on the
combination of Poland's hydrocarbon potential and relatively new policies and
programs to encourage the development of the country's domestic energy
resources.
Through 1997, the Company has allocated by far the largest portion of its
exploration budget for its activities in Poland. The Company's success will
depend to a high degree on 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 is
reprocessing a portion of 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. The success of the Company's efforts in Poland will
depend, in addition to the risks normally associated with the exploration for
oil, on its ability to maintain its relationship with its exploration partners
and the Polish government and a number of political, economic, and other risks
and uncertainties associated with conducting operations in a foreign country.
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 covers approximately 121,000 square miles and contains almost 40 million
people. Between 1945 and 1989, Poland's political and economic systems were
directly influenced by the former Soviet Union. In 1989, Poland peacefully
asserted its independence, adopted a new constitution which established a
parliamentary democracy, and began the transition to a market-based economy.
Poland's comprehensive economic reform programs and stabilization measures
implemented since 1989 have enabled it to move toward a free market economy and
achieve one of the fastest growing economies in eastern Europe. In 1995, Poland
progressed from International Monetary Fund Stand-By Conditionality and became a
full member of the Organization for Economic Cooperation and Development in July
1996. According to one published report, 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 1995, private enterprises employed 62.5% of
Poland's workforce as compared to 33.3% in 1989. Privatization of large
government assets continues as Poland continues its economic reform programs.
Poland's international trade has also undergone significant change since
Poland gained its independence. As it has developed, the country has turned its
economic ties from the east to the west. 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. According to Poland's Central Statistical Office, at the
end of July 1996, the total value of foreign investment in Poland stood at $10.2
billion, as compared to $6.8 and $4.3 billion at December 31, 1995 and 1994,
respectively. The United States and Germany are the leading foreign investors
in Poland. A Polish government agency has concluded that direct foreign
investment by foreign companies has been a forceful growth factor, generating
over one-third of the country's total investment and acting as a powerful
unemployment restraining factor.
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 gas. War damage and
overproduction following the 1939 invasions of Poland by Germany and the Soviet
Union caused output to drop dramatically by 1945. Over the last several decades,
the exploration and 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. Domestic production of crude oil has increased from
approximately 12,900 tons in 1990 to 13,400 tons in 1995. As industrial output
has grown in most sectors of the economy, the growth in the motor vehicles
industry has been particularly strong.
THE BALTIC CONCESSION
Introduction
In August 1995, the Company was granted the 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. Subsequently, the Company was granted concessions enabling
it to conduct exploration, development, and other field activities in the Baltic
Concession. (See "ITEM 2. DESCRIPTION OF PROPERTIES.")
The Baltic Concession is part of the Baltic Platform geological region that
covers the southeastern portion of the Baltic Sea and portions of the bordering
onshore areas of 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, has reportedly produced over 1.2 MMBbl through 1994.
Onshore, approximately 34 fields have been discovered in the Baltic Platform in
an area from approximately 50 miles northeast of the Baltic Concession in the
Kaliningrad district of Russia to Lithuania, a further 50 miles northward. Four
of the largest fields in this region reportedly have produced an aggregate of
over 150 MMBbl through 1994. Oil produced from the Baltic Platform is generally
high quality with an average API gravity of approximately 40o and contains
insignificant amounts of sulfur, heavy metals, or similar contaminants. To
date, there has not been any commercial production of oil or gas from the Baltic
Concession.
Between 1950 and 1993, 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 include Halliburton Engineering, Western Atlas, and Ryder Scott
Company, was able to apply modern reprocessing techniques to reevaluate a
significant portion of the seismic and well log data obtained from these wells.
This information has enabled the Company to identify two drilled structures (as
indicated by the Gladysze-1 and Gladysze-2 wells) and several undrilled
structures in the Baltic Concession that, in the Company's opinion, may be
similar in structural type and contain the same formations as wells that produce
oil from regions of the Baltic Platform.
The Company commissioned a detailed log analysis of the 15 wells described
above, including the Gladysze-1 and Gladysze-2 wells. This analysis concluded
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 this interpretation of these relatively old
Russian-style well logs accurately reflects actual downhole conditions, the
Company believes that this interpretation is consistent with other geological
and geophysical data reviewed by the Company. This 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 the Gladysze wells was
completed for production. The Company attributes this fact primarily to the
outdated equipment and poor techniques used to drill and test the wells. The
wells, for example, were drilled very slowly and with very heavy drilling mud, a
common practice in eastern Europe and the Soviet Union at the time, which likely
caused formation damage by sealing off porous reservoir rocks. In addition, the
relatively short testing periods that followed were probably insufficient to
overcome damage.
Notwithstanding the substantial data available regarding the Baltic
Concession from 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 have
the potential to contain hydrocarbons, there can be no assurance that such
structures actually contain hydrocarbons, that oil is present in commercial
quantities or that the porosity, permeability or other characteristics of any
reservoir formation will support the production of oil in commercial quantities.
Strategic Alliance with RWE-DEA
On the basis of the results from the above studies, during early 1996 the
Company sought to reduce its financial exposure and risk and gain additional
technical and operational expertise by seeking an industry participant for
further activities on the Baltic Concession. In May 1996, the Company entered
into a strategic alliance with RWE-DEA for joint operations on the Baltic
Concession. RWE-DEA currently produces oil in the Baltic Sea off Germany's
northern coast and is a member of a consortium of German and Russian oil
companies that has been established to develop an offshore oilfield in the
Kaliningrad district of Russia, north of the Company's Baltic Concession. RWE-
DEA, formerly Deutsche Texaco AG, is a subsidiary of RWE AG, the fifth largest
industrial enterprise in Germany. RWE-DEA is a fully integrated major 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 oil and
gas activities which include 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 acquire a 50% interest
in the Baltic Concession by paying the Company $250,000, providing up to $2.1
million for a seismic survey now completed and the cost of an exploratory well
currently underway, 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 is
the operator for all joint operations. The Company agreed to pay a fee of
$125,000 to an unaffiliated party for its help in the Company's first search for
an international joint venture partner.
In order to obtain desired treatment under Polish tax laws for joint
activities with RWE-DEA on the Baltic Concession, the Company and RWE-DEA have
determined to effect their 50-50 ownership in the project through RWE-DEA's
purchase of 50% of the shares of the Company subsidiary which holds the Baltic
Concession, Warmia Petroleum Company, Sp. z o.o.("Warmia"). RWE-DEA's purchase
of 50% of the shares of Warmia is subject to approval by the Polish government.
The Company expects that such approval will be obtained in 1997 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. As of
December 31, 1996, RWE-DEA had advanced Warmia $1.5 million to fund exploration
activity on the Baltic Concession. On November 1, 1996, the Company obtained a
$2.5 million Irrevocable Standby Letter of Credit as security for the repayment
of these advances. This letter of credit expired unused on January 31, 1997.
Upon the purchase by RWE-DEA of a 50% ownership in Warmia, these advances will
be converted into promissory notes to be repaid out of cashflow from the Baltic
Concession. At that time, the Company will deconsolidate Warmia and begin
accounting for its investment in this subsidiary on the equity method.
The Company's plans for exploration and potential development of the Baltic
Concession are based, to a significant degree, on the continued participation of
RWE-DEA. If RWE-DEA elects not to continue its participation in the Baltic
Concession for any reason, or the Polish government does not approve RWE-DEA's
purchase of 50% of the shares of Warmia, the Company could, at its discretion,
either seek a replacement partner or proceed as planned with a substantially
increased budget, subject to available funds. 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.
Exploration, Development, and Production Plans
Between May and October 1996, the Company and RWE-DEA gathered data from a
360 kilometer seismic program, augmenting previously collected data, to assist
in RWE-DEA's selection of the initial drillsite for an exploratory test. In
late January 1997, the Company commenced this first well, the Orneta #1, which
is planned to test formations at a depth of approximately 8,600 feet. The
Company expects to proceed with a number of additional seismic surveys and
exploration wells to evaluate other structures, identify further drilling
prospects, and assess alternative exploration models.
The Company expects that it will be necessary to acquire additional seismic
data and drill a number of tests in order to assess the hydrocarbon potential of
either individual prospects or the Baltic Concession as a whole. There can be no
assurance that wells drilled on any structure will encounter oil reservoirs or
that the porosity, permeability, or other characteristics of any reservoir
formations encountered will support production of oil in commercial quantities.
The results of a single well, particularly the first test or other early tests,
are unlikely to establish conclusively either the presence or absence of oil or
gas in paying or commercial quantities, particularly given the variety of tools
and techniques available for completion, formation treatment, directional
drilling, or production.
The Company intends to develop a comprehensive exploration and, if
warranted, development program for the Baltic Concession in conjunction with
RWE-DEA. At this early stage, the Company and RWE-DEA have identified several
potential exploration targets, and it is likely that additional prospects,
exploration models, and exploration techniques will be identified as exploration
continues. Exploration of the Baltic Concession may continue for years without
achieving a financial return, notwithstanding exploration results that are
sufficiently favorable to warrant, in the opinion of the Company or RWE-DEA,
further expenditures.
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. This may result in
increased costs and delays. (See "ITEM 2. DESCRIPTION OF PROPERTIES: Poland
Concession Terms.")
The Company currently has no agreement or arrangement for the sale,
delivery, or refining of any oil that may be produced. Poland has two nearby
refineries (in Gdansk and Plock) which the Company believes could process crude
oil produced in the Baltic Concession. Subject to obtaining appropriate
approval, the Company is not precluded from exporting oil, but the Company
presently has no such arrangements. RWE-DEA also has an ownership interest in a
refinery in Schwedt, Germany, on the Polish border, which might purchase crude
produced from the Baltic Concession, as the Company is not legally prohibited
from exporting oil.
Poland currently imports over 95% of its crude oil requirement, principally
from the countries of the former Soviet Union and the Middle East. As the
country's petroleum requirements continue to grow and Poland continues economic
reform to establish its economic independence, it is possible that the demand
for oil discovered and produced in Poland will increase. The Company anticipates
that it could capitalize on such factors and 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 produced from discoveries within the Baltic Concession 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.
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.
THE CARPATHIAN JSA
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 to select a region on which to undertake a detailed study
program. As a result of this initial review, in May 1996, the Company entered
into a joint study agreement with POGC in order to identify drillable
hydrocarbon prospects in a selected area in the Carpathian region of
southeastern Poland (the "Carpathian JSA"). 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 was to identify the most
promising target area in the Carpathian JSA (the "Carpathian Target Area"),
primarily through the review of existing geological and geophysical data.
Following this initial phase, the study is now focused on 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 in the largely undrilled horizons below 2,500 feet and to
generate drillable oil and gas prospects. The Company and POGC are each
contributing technical personnel to participate in the study. The Company is
funding approximately $100,000 of the initial technical research and analysis
costs, including seismic data reprocessing, third-party data purchases and
laboratory analysis. Although there is currently limited hydrocarbon production
from certain shallow horizons in the Carpathian JSA, there has been virtually no
commercial production from the depths which the Company has the right to
evaluate with POGC.
In the second quarter of 1997, the Company plans to submit with POGC an
application to the appropriate Polish authorities for exploration rights over
designated portions of the Carpathian Target Area. The Company and POGC will
share equally in any new exploration rights that are obtained through this
arrangement, except that if one party elects not to proceed with an application
for an exploration license over a specific area, the other party may do so
independently. Upon obtaining an exploration license or concession, the Company
will gather additional seismic or other geophysical data to further define
exploration targets and to develop a specific exploration drilling program in
conjunction with POGC. The exploration drilling program may be undertaken by
the Company and POGC on an equal basis or the Company could elect to decrease
its interest in a project by sharing its ownership with a third party.
LUBLIN AREA EXPLORATION
Lublin Concession
In December 1996, the Company obtained exclusive oil and gas exploration
rights and is now proceeding with steps to obtain concessions on the Lublin
Concession covering approximately 2.0 million acres in southeastern Poland near
the city of Lublin. The Company has access, through POGC, to a substantial
amount of seismic data and logs of wells previously drilled in the Lublin
Concession, none of which resulted in commercial production. The nearest known
hydrocarbon discoveries, located 15 to 30 kilometers east of the Lublin
Concession, consist of two gas accumulations and an oil accumulation.
The Company is now reinterpreting and reprocessing existing data from the
exploration area and designing an initial seismic data acquisition program than
can be commenced during the second quarter of 1997. Although the Company has
not undertaken significant efforts to seek a strategic partner to join in the
seismic program and begin test drilling during 1997, it has been contacted by
qualified potential partners that have expressed an interest in joining in
exploration of the Lublin Concession. Based on the nature of such inquiries to
date and the Company's experience in obtaining a strategic partner for the
Baltic Concession, the Company expects that it will be able to reach a joint
exploration arrangement with another energy company so that exploration drilling
can commence in the Lublin Concession during 1997. There can be no assurance
that the Company will be able to reach a joint exploration arrangement with any
other firm, that substantial exploration will be completed in the near future,
or that such exploration will result in a financial return to the Company.
Evaluation of Adjacent POGC Area
The Company's Lublin Concession adjoins a region reserved by Poland for
exclusive oil and gas exploration by POGC. (This POGC area contains the two gas
accumulations and the oil accumulation referred to above.) The Company is
evaluating, interpreting, and reprocessing the geological, geophysical, and
drillhole data on this area made available through POGC and will provide POGC
with the Company's interpretation of the hydrocarbon potential of the area,
including specific oil and gas prospects. If, in the opinion of the Company,
the preliminary appraisal results in the identification of new oil and gas
prospects, the Company may seek to join with POGC in applying for joint
exploration and exploitation rights.
SUDETY EXPLORATION AREA/ STRATEGIC ALLIANCE WITH HOMESTAKE
In October 1996, the Company obtained rights to explore for gold and other
associated minerals in a 71,000-acre block in the Sudety region of southwestern
Poland (the "Sudety Exploration Area") for a four-year exploration term with the
possibility of a three-year extension. The Company has the exclusive right to
apply for an exploitation license covering any mineral deposits discovered
during the exploration phase.
On obtaining exploration rights to the Sudety Exploration Area, the Company
entered into a reconnaissance and standstill agreement with Homestake Mining
Company, an international gold mining company. The Company and Homestake are
jointly planning very limited geological, geochemical, and geophysical
reconnaissance of the area to be carried out during 1997. Subject to the
results of the reconnaissance, the two companies may elect to negotiate a
subsequent agreement, in which case Homestake would likely assume operations,
with the Company retaining a working or royalty interest. The Company has
agreed not to negotiate with anyone other than Homestake regarding the Sudety
Exploration Area until December 1997.
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 Company's common stock ("Common Stock") and the Company's
long-term financial results. The Company is currently drilling its first
exploratory well in Poland and intends 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 the Company's opinion, currently trades to a significant degree
on the potential of the Company's current and planned activities in Poland. The
success of the Company's efforts in Poland will depend, in addition to the risks
normally associated with the exploration for oil, on 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. 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.
The Company has had limited operations and, if its activities in Poland are
successful, may experience rapid growth. 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.
GOVERNMENT REGULATIONS AND RELATED MATTERS
The Company's activities in Poland are subject to political, economic, and
other uncertainties, including the following: 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.
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 little or no administrative or enforcement history or established
practice that can aid the Company in evaluating how the regulatory regime will
affect the Company's operations. Although the Company 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.
Environmental Regulations
The Company's operations are subject to environmental laws and regulations
in Poland. Poland's environmental laws and regulations 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 by
governmental authorities in Poland prior to commencing production.
The Company completed a seismic program in 1996 and has only recently
initiated drilling activities and has not incurred material environmental
remediation costs to date. The Company believes that it 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.
Political Uncertainties
The exploration, development, and production of oil and gas in Poland are
and will be subject to ongoing uncertainties and risks, including risks of
political instability and changes in government, export and transportation
tariffs, local and national tax requirements, expropriation or nationalization
of private enterprises, 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 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, if it did so 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.
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, or 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
conducted through wholly or partially owned subsidiaries. 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 can pay dividends
only once annually and only to the extent of profits, 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 Polish subsidiaries 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.
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.
UNITED STATES EXPLORATION, PRODUCTION, AND DEVELOPMENT ACTIVITIES
CUT BANK FIELD DEVELOPMENT
The Company owns and operates producing oil wells, purchased effective
April 1, 1994, in the Cut Bank and Bears Den fields in Montana and the Bacon
Flat and Trap Spring fields in Nevada. The Company's 10,600 acres in the Cut
Bank field accounted for approximately 80.4% of its 1996 oil production and
97.4% of its proved reserves as of December 31, 1996. (See "ITEM 2.
DESCRIPTION OF PROPERTIES.")
In January 1996, the Company completed a Cut Bank field infill drilling
program on 1,000 acres 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 the
engineering model used in a similar program that resulted in significant
production increases in a separate part of the Company's Cut Bank field
properties under the guidance of 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. The Company has
budgeted to continue this infill drilling program at an estimated cost of $6.0
million during the next two years on strategically selected additional areas in
the field in order to develop currently undeveloped reserves. The results of
the initial program are being reviewed and monitored; and if, in the opinion of
the Company, other development opportunities then available to the Company,
including development in the Baltic Concession or other areas in Poland, are
likely to provide a greater financial return to the Company, funds initially
budgeted to Cut Bank field development may be utilized for development of other
fields.
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 that can be
acquired or controlled with a limited financial commitment and have a sufficient
risk/reward profile to attract drilling partners. The Company's traditional
policy is not to drill an exploratory well until it can reduce its own financial
commitment (and confirm its own evaluation of the prospect's merit) by forming a
drilling group with other energy companies. Where practicable, the Company
seeks to use its own drilling rig and related equipment to drill exploration
tests in which it participates in order to offset some portion of the cost of
participating in specific exploration prospects.
The Cobb Creek prospect is located in Hamlin Valley, Nevada, near the Utah
border approximately 225 miles southwest of Salt Lake City. Through the
reprocessing of geological and geophysical data previously collected by other
parties, the Company identified a large undrilled anticline and formed a
drilling group with several independent energy companies to drill a test in late
1996. The test penetrated the target structure at a shallower depth than
expected and encountered strong water flow, so the test was plugged and
abandoned. The Company has farmed out its acreage position in this prospect and
does not plan further exploration on this prospect in the foreseeable future.
The Lake Valley region of Nevada is similar to Railroad Valley, Nevada's
most prolific producing region that lies approximately 60 miles west of Lake
Valley. The Company, with a group of industry partners, identified and drilled
one structural feature in Lake Valley in 1993. This well was eventually
plugged. In 1994, the Company and a group of industry partners purchased and
reprocessed approximately 70 line miles of seismic data and acquired additional
geophysical and geochemical data over approximately 70,000 acres. The initial
operator discontinued its western United States exploration activities and its
rights reverted to the Company. The Company became the operator and, based on
the reprocessed and reinterpreted seismic data, identified six potential
exploratory drillsites. In view of the Company's other exploration
opportunities and the current lack of industry interest in exploration in
Nevada, the Company does not plan further exploration on this prospect in the
near future and, accordingly, has written down its investment in this prospect.
The Company intends to maintain a property position sufficient to control the
principal drilling prospects.
The Company is evaluating several additional exploration prospects in the
western United States, principally in Wyoming, Montana, Nevada, and North
Dakota, and may undertake exploration or other activities on these prospects
during 1997 if it is successful in obtaining required leases or other
exploration rights, exploration partners, additional data, or other items, of
which there can be no assurance.
GOVERNMENT REGULATION
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.
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.
EMPLOYEES AND CONSULTANTS
As of February 28, 1997, the Company had 30 employees, consisting of eight
in Salt Lake City, Utah; 19 in the Company's Oilmont, Montana, field office; two
in Houston, Texas; and one in Denver, Colorado. 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.
OPERATIONAL HAZARDS AND INSURANCE
The Company is engaged in the drilling and production of oil and, as such,
its operations are subject to the usual hazards incident to the industry. These
hazards include, but are not limited to, blowouts, cratering, explosions,
uncontrollable flows of oil, natural gas or well fluids, fires, pollution,
releases of toxic gas, and other environmental hazards and risks. These hazards
can cause personal injury and loss of life, severe damage to and destruction of
property and equipment, pollution or environmental damage, and suspension of
operations.
In order to lessen the effects of these hazards, the Company maintains
insurance of various types to cover its domestic operations. The Company has
$5.0 million of general liability insurance. This insurance, however, does not
cover all of the risks involved in oil exploration, drilling, and production of
oil and, if coverage does exist, may not be sufficient to pay the full amount of
such liabilities. The Company may not be insured against all losses or
liabilities which may arise from all hazards because such insurance is
unavailable at economic rates, because of limitation on the insurance policy or
because of other factors. For example, the Company does not maintain insurance
against risks related to violations of environmental laws. The occurrence of a
significant adverse event that is not fully covered by insurance could have a
materially adverse effect on the Company. Further, the Company cannot assure
that it will be able to maintain adequate insurance in the future at rates it
considers reasonable.
The Company has investigated preliminarily risk management practices and
the availability of casualty and liability insurance in Poland. In accordance
with the agreement with RWE-DEA, at such time as the Company's Polish subsidiary
acquires tangible assets, the Company would be required to provide for such
insurance coverage. The Company maintains general liability coverage for its
activities in Poland, but has no tangible assets in Poland. The Company's
seismic and drilling contractors are required to maintain insurance coverage for
operations by them on the Baltic Concession or other areas in Poland. There can
be no assurance that the Company will be able to obtain insurance coverage for
proposed activities if or when it acquires tangible assets 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.
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 exploration and production costs.
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ITEM 2. DESCRIPTION OF PROPERTY
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PRODUCING PROPERTIES
All of the Company's producing properties were purchased effective April 1,
1994. The Company is the operator of all of its producing properties, except
for the Bacon Flat well.
CUT BANK FIELD
Production in the Cut Bank field commenced with the discovery of oil in the
1940s at an average depth of approximately 2,900 feet. The Southwest Cut Bank
Sand Unit, which is the core of the Company's interest in the field, was
originally formed by the Phillips Petroleum Company in 1963 which initiated a
pilot waterflood in 1964 and eventually converted the entire unit to a
waterflood with producing wells on 40 and 80 acre spacings. The Company owns 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%. Oil production from this field in 1996
averaged 333 Bpd (285 Bpd net). As of December 31, 1996, the Company's interest
in the Cut Bank field represented 97.4% 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 first well in the Bacon Flat field was drilled in 1981 and produced
over 300,000 Bbl during its seven-year productive life from a depth of
approximately 6,000 feet. The Company owns a 16.9% working interest in a
different Bacon Flat well which was drilled in 1993.
PRODUCTION AND MARKETING
The following table sets forth the Company's average net daily oil
production, average sales price and average production costs associated with
such production during the periods indicated. The Company had no production
prior to 1994 and no gas production for any of the periods for which information
is presented.
YEAR ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
Average daily net oil production (Bbl).... 356 369 436(1)
Average sales price (per Bbl)............. $18.04 $14.67 $14.07
Average production costs (per Bbl) (2)... $ 9.44 $ 9.42 $ 5.81
(1) Daily production after the April 1, 1994, effective date of the purchase of
producing properties.
(2) Production costs include lifting costs (electricity, fuel, water, disposal,
repairs, maintenance, pumper, transportation, and similar items), and
production taxes. Production costs do not include such items as
depreciation and state and federal income taxes. Production costs for 1994
reflect the fact that after the Company acquired the properties in April
1994, it continued routine maintenance consistent with the practice of the
previous owners. Between late 1994 and early 1996, the Company conducted
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.
Effective July 1, 1995, an exemption for certain stripper well production
affecting most of the Company's Montana production resulted in a tax
savings during 1995. Effective January 1, 1996, another production tax of
approximately 5.5% was eliminated in most of the Montana production.
Production costs per Bbl also increased due to the substantial decline in
production from the Bacon Flat well, which had extremely low production
costs in 1995, 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, 1996, 1995, and 1994, over 85% 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. During 1995 and
1996, the Company benefited from increases in the prices at which it is able to
sell oil produced in Montana and Nevada, but will be adversely affected by any
decline in prevailing oil prices. The Company has no gas production.
Oil prices have increased materially during 1996, but there can be no
assurance that such prices will continue. 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; the level of consumer demand; weather conditions; the
competitive position of oil or gas as a source of energy as compared with coal,
nuclear energy, hydroelectric power, and other energy sources; the refining
capacity of prospective oil purchasers; the effect of federal and state
regulation on the production, transportation, and sale of oil; and other
factors, all of which are beyond the control or influence of the Company. In
addition to its direct impact on the prices at which oil or gas may be sold,
adverse changes in the market or regulatory environment would likely have an
adverse effect on the Company's ability to obtain funding from lending
institutions, industry participants, the sale of additional securities, and
other sources.
OIL RESERVES
The Company's oil properties containing proved oil reserves are located in
Montana and Nevada. The following table sets forth the estimated oil reserve
information as of December 31, 1996, for the Company's oil and gas properties
and is based on the independent appraisal by 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 $21.00, the
weighted average oil sales price in effect as of December 31, 1996, the date of
such estimate, and are held constant throughout the life of the properties.
ESTIMATED DECEMBER 31, 1996
PROVED RESERVES OIL(BBL) PV-10 VALUE(1)
------------------------ ---------- ---------------
DEVELOPED PRODUCING
Cut Bank ............. 2,407,662 $ 8,983,459
Other ................ 141,487 922,591
--------- ------------
Total ............... 2,549,149 9,906,050
DEVELOPED NONPRODUCING
Cut Bank ............. 279,594 1,984,391
Other ................ -- --
--------- ------------
Total ............... 279,594 1,984,391
UNDEVELOPED
Cut Bank (2) ......... 2,614,037 23,528,804
Other ................ -- --
--------- ------------
Total ............... 2,614,037 23,528,804
--------- ------------
TOTAL PROVED RESERVES... 5,442,780 $35,419,245
RESERVES........
========= ============
(1) The operating costs, based on information provided by the Company, are
computed by estimating expenditures to be incurred in developing and
producing the proved oil reserves, based on year-end costs and assuming the
continuation of existing economic conditions.
(2) The PV-10 Value has been reduced by the estimated $6.0 million cost of
development over the next two years.
The oil reserves assigned to the properties in this evaluation were
determined by analyzing current test data, extrapolating historical production
data, and comparing field data with the 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 would change substantially. (As of February
1997, the Company was receiving approximately $17.74 per Bbl for oil sold.) The
reserve estimates contained in the engineering report are based on accepted
engineering and evaluation principles. The PV-10 Value does not necessarily
represent an estimate of a fair market value for the evaluated properties.
There are numerous uncertainties inherent in estimating quantities of
proved oil reserves. The estimates in the appraisal 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 that 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.
As noted above, the PV-10 Value has been reduced by estimated development
costs of $6.0 million over the next two years. This reflects the estimated cost
of infill drilling and waterflood operations on four specific areas 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 eight areas in the
field to inverted five-spot waterflood patterns, and drilling six producing
wells at various locations to further develop the field. For purposes of the
reserve evaluation, it was assumed that the subject work will be performed
during 1997 and 1998.
DRILLING ACTIVITIES
The following table sets forth the wells drilled and completed by the
Company during the periods indicated. Wells drilled during 1995 and 1994 include
drilling activities on the Company's Montana and Nevada properties acquired
effective April 1, 1994.
YEARS ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
------------ ------------ ------------
GROSS NET GROSS NET GROSS NET
----- ----- ----- ----- ----- -----
DEVELOPMENT WELLS:
Producing ................ -- -- 5.0 5.0 5.0 3.8
Non-producing ............ -- -- -- -- -- --
----- ----- ----- ----- ----- -----
Total -- -- 5.0 5.0 5.0 3.8
EXPLORATORY WELLS:
Producing ................ -- -- -- -- -- --
Non-producing ............ 1.0 0.7 2.0 1.1 2.0 1.1
----- ----- ----- ----- ----- -----
Total ............... 1.0 0.7 2.0 1.1 2.0 1.1
The above does not include five water injector wells drilled in each of
1994 and 1995 as part of the Cut Bank field infill development program. No gas
wells were drilled by the Company during the indicated periods.
WELLS AND ACREAGE
As of December 31, 1996, the Company had 128 gross and 121 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 December 31, 1996.
DEVELOPED UNDEVELOPED
ACREAGE ACREAGE
--------------------- ---------------------
GROSS NET GROSS NET
---------- ---------- ---------- ----------
DOMESTIC
Montana............. 10,692 10,415 1,150 1,057
Nevada.............. 400 128 37 16
---------- ---------- ---------- ----------
Total............ 11,092 10,543 1,187 1,073
OLAND
Baltic Concession... -- -- 2,375,000 1,187,500
Lublin Concession (2) -- -- 2,000,000 2,000,000
---------- ---------- ---------- ----------
Total -- -- 4,375,000 3,187,500
---------- ---------- ---------- ----------
TOTAL ........... 11,092 10,543 4,376,187 3,188,573
========== ========== ========== ==========
(1) Gives effect to the purchase of 50% of the shares of Warmia, the Company
subsidiary which holds the Baltic Concession, by RWE-DEA under the
Company's joint exploration arrangement discussed under the caption "ITEM
1. DESCRIPTION OF BUSINESS" above. (See "Concession Terms-Baltic" below.)
(2) The Company has entered into a Mining Usufruct Agreement dated December 20,
1996, with the Poland State Treasury represented by the Minister of
Environmental Protection, Natural Resources and Forestry granting the
Company exclusive oil and gas exploration and exploitation rights to
designated concession blocks. The Company is now proceeding with steps to
obtain concession licenses required for surface access.
POLAND 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. All of the Company's rights in Poland have been awarded pursuant to
this law.
Under the Geological and Mining Law, the Ministry of Environmental
Protection, Natural Resources and Forestry of the State Treasury (the
"Concession Authority") enters into mining usufruct agreements that grant the
holder the exclusive right to explore for and exploit the designated minerals
for a specified period under prescribed terms and conditions. The holder of the
mining usufruct then acquires a concession license to obtain surface access to
the exploration area by making further application to the Concession Authority
and providing the opportunity for comment by local governmental authorities.
If a commercially viable discovery is made, the concession holder is
required to obtain an exploitation license for a specified term. 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. On
receiving an exploitation license, the holder is obligated to pay a fee then
negotiated within an already agreed range based on the market value of the
estimated recoverable reserves in place. 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.
BALTIC
In August 1995, the Concession Authority granted oil and gas exploration
rights under a mining usufruct agreement covering the Baltic Concession to a
wholly-owned Polish subsidiary of the Company. The Company subsequently
acquired concession licenses required for surface access to the ten and one-half
concession blocks within the area.
The Company's exploration rights are divided into two successive three-year
phases expiring in December 1998 and December 2001, respectively. In addition
to drilling the first exploratory well now underway, to retain its rights in the
Baltic Concession, the Company must relinquish 50% of the acreage at the end of
the first three-year phase and commence a second exploratory well by December
1999. 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.
LUBLIN
In December 1996, the Concession Authority granted oil and gas exploration
rights under a mining usufruct agreement covering the Lublin Concession to a
wholly-owned Polish subsidiary of the Company. The Company has applied for
concession licenses required for surface access to the eight concession blocks
within the area. Although no assurance can be given as to whether or when the
required concessions will be granted, the Company does not expect that it will
encounter delays that will materially impair proposed exploration of specific
prospects.
The Company's exploration rights are divided into two successive three-year
phases expiring in three and six years, respectively, after grant of the last of
the eight concessions in the concession area. The Company may relinquish rights
to any concession blocks after the first three-year phase. To retain its rights
in the Lublin Concession, the Company must review existing data and gather at
least 500 kilometers of seismic data during the first three-year phase, commence
one exploratory well within the first three-year phase, and commence at least
one exploratory well in each of the retained concession blocks, excluding the
block in which the initial test is located, by the end of the second three-year
phase. The Company is required to pay a concession fee of $25,000 for each
concession block ($200,000 for all eight blocks), payable one-half on award of
the concessions and one-half on expiration of the first three-year phase, 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 Lublin
Concession usufruct agreement.
SUDETY
On October 1, 1996, the Concession Authority granted gold and associated
minerals exploration rights under a mining usufruct agreement covering the
Sudety Exploration Area to a wholly owned subsidiary of the Company, which
subsequently obtained concessions on the three blocks in the area.
The Company's exploration rights expire four years after the grant of
concessions in the exploration area. To retain its rights to the Sudety
Exploration Area, the Company is required to make payments totaling $55,000
during the first year, complete a regional study respecting the prospective
occurrence of gold within six months after the grant of the concession and
continue with phased exploration during the succeeding two years, pay an annual
concession fee of $15,000, and spend an aggregate of $800,000 in exploration of
the area within four years.
EXPLOITATION LICENSE
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 for 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 up to 10% (the current statutory maximum base royalty
rate) by the Council of Ministers. The base royalty rate for gold is 10% by
default, as the Council on Ministers has not yet set a specific rate for gold.
The Concession Authority can set the royalty rate for any particular commercial
production in a range between 50% and 150% of the base royalty rate, depending
on the economic viability of such operation.
TITLE TO PROPERTIES
The Company holds property interests in the western United States
associated with its production and exploration activities and in Poland
associated with it various exploration rights and concessions.
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. 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 its exploration rights and property interests in Poland,
the Company relies on sovereign ownership of such mineral rights by the Polish
government and has not conducted and does not plan to conduct any independent
title examination. The Company has obtained final documentation with the advice
of Polish legal counsel to comply with Polish laws.
OFFICES AND FACILITIES
The Company's executive offices, approximately 3,010 square feet of office
space located at 3006 Highland Drive, Salt Lake City, Utah, are rented at $2,960
per month under a month to month agreement.
The Company owns a 16,160 square foot office building located at the corner
of Central and Main in Oilmont, Montana. The Company utilizes 4,800 square feet
for its field office and rents the remaining space to unrelated third parties
for $880 per month. The registered address of Warmia, at Wal Miedzesynski 646,
03-994 Warszawa, Poland, is provided at nominal cost by an unrelated person.
- -------------------------------------------------------------------------------
ITEM 3. 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.
- -------------------------------------------------------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------------------------
No matter was submitted during the fourth quarter of the fiscal year ended
December 31, 1996, to a vote of the Company's security holders.
PART II
- -------------------------------------------------------------------------------
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
- -------------------------------------------------------------------------------
PRICE RANGE OF COMMON STOCK
Effective August 1, 1996, the Common Stock began to be quoted on the Nasdaq
National Market under the symbol "FXEN." Between June 7 and August 1, 1996, the
Common Stock was quoted on the Nasdaq SmallCap Market under the symbol "FXEN."
The Company 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 for the periods indicated the high and low
closing sale prices for the Common Stock as quoted on Nasdaq under the symbol
"FXEN" commencing June 7, 1996, and the high and low bid quotation for the
Common Stock as quoted on the OTC Electronic Bulletin Board under the symbol
"FOEX" through June 6, 1996, based on interdealer bid quotations, without
markup, markdown, commissions or adjustments:
LOW HIGH
------- --------
1995
First Quarter................. $2.75 $3.38
Second Quarter................ 2.00 3.00
Third Quarter................. 1.25 2.13
Fourth Quarter................ 1.75 2.75
1996
First Quarter................. $ 2.00 $ 3.91
Second Quarter................ 2.63 9.63
Third Quarter................. 5.70 9.75
Fourth Quarter................ 8.25 10.38
On March 21, 1997, the closing sales price for the Common Stock on the
Nasdaq National Market was $9.875 per share.
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 (particularly the first test or other early tests), variations in
quarterly operating results and changes in recommendations by securities
analysts. 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.
DIVIDEND POLICY
The Company has never paid cash dividends on the Common 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.
SHAREHOLDERS
The Company estimates that as of March 21, 1997, it had approximately 900
stockholders.
UNREGISTERED SALES OF COMMON STOCK
During 1996, the year covered by this report, the Company sold securities
without registration under the Securities Act of 1933 (the "Securities Act") in
the following transactions:
1. During the year ended December 31, 1996, individuals exercised outstanding
warrants to purchase an aggregate of 50,004 shares of Common Stock at a
weighted average exercise price of $1.59 per share and options to purchase
369,000 shares of Common Stock at a weighted average exercise price of
$2.01 per share
2. In January 1996, the Registrant sold 12,500 shares of Common Stock to a
business associate of an executive officer and director for aggregate
proceeds of $25,000. A notice on Form D was timely filed with the
Commission respecting the issuance of such shares.
3. During the first quarter of 1996, the Company 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 Company 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 and 10 nonaccredited investors. A notice on Form D
was filed with the Commission respecting these offerings.
4. Between January and April 1996, the Company issued for services provided
40,000 shares of Common stock to three individuals, all of whom are
citizens and residents of Poland.
5. Between March and September 1996, the Company issued 6,000 shares to an
individual on his appointment as a director of the Company; 5,500 shares
of Common Stock to a brother of two executive officers and directors of the
Company for services in connection with the installation and maintenance of
the Company's computer network; and 5,951 shares of Common Stock to a
corporation with principal offices in England that provided services in
relation to assisting the Company in its search for a partner in its
activities in Poland.
6. In January 1996, the Company issued 1,093 shares of Common Stock in
connection with the acquisition of an interest in the Cut Bank field to
increase the Company 's holdings in the field.
The securities issued in the transactions described above were issued in
reliance on the exemption from the registration and prospectus delivery
requirements of the Securities Act provided in Section 4(2) thereof.
Each purchaser was provided with business and financial information
respecting the Company and was provided with the opportunity to obtain
additional information in order to verify the information provided or to further
inform themselves respecting the Company.
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
Company 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 Company's stock transfer records.
In addition to the foregoing, the provisions of Regulation D were relied on
in connection with the sale of certain shares of common stock discussed in
paragraph 2 and 3 above.
Regulation S was also relied on respecting sales of 40,000 shares of Common
Stock as described in paragraph 4, to persons who were not "U.S. Persons," as
that term is defined therein. The offer of such securities was made to persons
in Poland, not in the United States, and at the time the purchases were made,
the buyers were outside the United States. The Company 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 Company and each offshore
purchaser requires the Company to refuse to register any transfer of securities
not made in accordance with Regulation S as provided in Rule
903(c)(3)(iii)(B)(4). All sales were made without the participation of a
distributor.
- -------------------------------------------------------------------------------
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATIONS
- -------------------------------------------------------------------------------
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company for each
of the five years in the period ended December 31, 1996, are derived from the
audited financial statements and notes thereto of the Company, certain of which
are included herein. The selected consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and the Notes
thereto included elsewhere herein.
YEARS ENDED DECEMBER 31,
------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Revenues:
Oil sales .................. $ 2,346 $ 1,981 $ 1,692 -- --
Drilling revenue ........... 75 111 224 -- --
Other (1) .................. -- 75 -- $ 276 $ 342
-------- -------- -------- -------- --------
Total revenues ............ 2,421 $ 2,167 1,916 276 342
-------- -------- -------- -------- --------
Operating costs and expenses:
Production and operating
costs (2) ................. 1,225 1,272 680 7 45
Exploration costs .......... 2,426 747 651 654 --
Depreciation, depletion and
amortization .............. 558 503 422 3 7
General and administrative 1,715 1,466 816 353 259
Leasehold impairment ....... 1,290 115 -- -- --
Drilling costs ............. 154 141 178 -- --
-------- -------- -------- -------- --------
Total operating costs and
expenses .................. 7,368 4,244 2,747 1,017 311
-------- -------- -------- -------- --------
Operating income (loss). (4,947) (2,077) (831) (741) 31
Interest and other income... 370 98 53 39 36
Interest expense............ (333) (448) (214) (2) (4)
Minority interest: Non-cash
dividends(3) .............. -- (93) -- -- --
-------- -------- -------- -------- --------
Net income (loss) before
income taxes .............. (4,910) (2,520) (992) (704) 63
Benefit from (provision for)
income taxes .............. -- -- -- 9 (16)
-------- -------- -------- -------- --------
Net income (loss)........... $(4,910) $(2,520) $ (992) $ (695) $ 47
======== ======== ======== ======== ========
Net income (loss) per common
share ..................... $ (0.49) $ (0.47) $ (0.44) $ 0.03 $(0.40)
Weighted average shares
outstanding ............... 10,018 5,389 2,229 1,750 1,412
CASH FLOW STATEMENT DATA:
Net cash provided by (used
in) operating activities.. $(3,651) $(1,030) $ (322) $ (569) $ 96
Net cash used in investing
activities ................ (7,005) (1,489) (4,432) (22) (265)
Net cash provided by
financing activities ...... 18,259 2,974 4,587 1,046 171
AS OF DECEMBER3 1,
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
BALANCE SHEET DATA: (IN THOUSANDS)
Working capital (deficit) $13,840 $ (278) $ (272) $ 283 $ (154)
Total assets ............... 22,994 10,039 8,436 1,317 374
Long-term debt ............. 1,500 3,359 4,091 -- --
Redeemable FX Producing
preferred stock ........... -- -- 550 -- --
Stockholders' equity ....... 20,908 5,224 1,280 910 173
(1) Other revenues include prospect sales and project management fees.
(2) Includes production taxes.
(3) Non-cash dividend on FX Producing convertible preferred stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
The Company explores for oil and gas primarily in Poland and the western
United States and produces oil from fields in Montana and Nevada. During 1996,
the Company advanced exploration of its principal oil prospect in Poland under
its exploration arrangement with RWE-DEA, obtained additional exploration rights
in Poland, and continued limited development of its principal oil producing
properties in Montana. These substantially expanded activities were funded
principally through the sale of equity securities, including a public offering
of 3,450,000 shares of Common Stock for net proceeds of approximately $17.7
million completed in the third quarter.
In August 1995, the Company acquired exploration rights to the Baltic
Concession and began to focus its exploration efforts in Poland. Since then the
Company has devoted an increasing amount of its financial and other resources to
its activities in Poland.
Effective April 1, 1994, the Company acquired producing properties and
related assets in Montana and Nevada. As a result, 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.
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.
From its inception in January 1989 through December 31, 1996, the Company
incurred cumulative losses of $9.2 million and, because of its ongoing
exploration activities, expects that it will continue to incur losses and that
its accumulated deficit will increase. The Company reported losses of $4.9
million and $2.5 million for the years ended December 31, 1996 and 1995,
respectively. The Company anticipates that it will incur losses through 1997
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 in Montana results in significant and sustained increased production.
RESULTS OF OPERATIONS
The Company's results of operations for the fiscal year ended December 31,
1996 and 1995, include full years of revenues from oil production, well
servicing and related activities and include interest expense related to bank
debt through the third quarter of 1996, whereas the year ended December 31,
1994, includes only revenues and expenses from such items after April 1, 1994,
the effective date of the purchase of the Montana and Nevada producing
properties and related assets. Therefore, in the Company's opinion the results
of operations for the fiscal years ended December 31, 1996 and 1995 are not
comparable with the fiscal year ended December 31, 1994.
Revenues
Oil sales increased 18.4% to $2.3 million in 1996 from $2.0 million in 1995
primarily due to a 22.9% increase in the average price per Bbl sold to $18.04 in
1996 from $14.67 in 1995. These increases were partially offset by a 3.5%
decrease in oil production in 1996 due to the natural decline in production
rates that were not offset by increases in production resulting from the infill
drilling program completed in January 1996 in one area of the Cut Bank field.
(See "ITEM 1. DESCRIPTION OF BUSINESS: United States Exploration and
Development Activities.")
Oil sales increased 17.1% to $2.0 million in 1995 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 average daily net oil
production in 1995. The decrease in average daily net 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. This decline in Cut Bank production
represents a normal production decline in the absence of infill drilling.
Drilling revenue decreased by 32.4% in 1996 to $75,000 as compared to
$111,000 in 1995, and decreased 50.5% in 1995 from $224,000 in 1994. One well
was drilled in each of 1996 and 1995 with the Company's drilling rig as compared
to two wells in 1994.
During the last three years, the Company sold a prospect only in 1995.
Operating Costs and Expenses
Production and operating costs decreased 3.6% to $1.23 million ($9.44 per
Bbl) in 1996 from $1.27 million ($9.42 per Bbl) in 1995. The decrease is due
primarily to a decrease in production taxes, which more than offset increased
maintenance expenditures in the Cut Bank field in conjunction with the Company's
plan to enhance production.
Production and operating costs increased 87.1% to $1.27 million ($9.42 per
Bbl) in 1995 from $680,000 ($5.81 per Bbl) in 1994. The increase in total
production and operating costs 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 and increased
maintenance expenditures on the Cut Bank field in conjunction with the Company's
plan to enhance production, which more than offset an exemption from production
taxes for certain stripper well production, effective July 1, 1995, affecting
most of the Company's Montana production.
Exploration costs increased 224.8% to $2.4 million in 1996 from $747,000 in
1995, and increased 14.7% in 1995 from $651,000 in 1994. The increases in both
1996 and 1995 were due primarily to a continuing expansion of exploration
activities in Poland in 1996 and 1995, which includes a $1.1 million seismic
program and geophysical data review and reprocessing and similar expenses in
1996. Approximately $1.5 million of 1996's $2.4 million in exploration costs was
paid from advances made by RWE-DEA, as discussed below. In the United States,
the Company participated in one dry hole in 1996 and two dry holes in both 1995
and 1994.
Depreciation, depletion, and amortization increased 6.0% to $533,000 ($4.11
per Bbl) in 1996 as compared to $503,000 ($3.73 per Bbl) in 1995, and increased
19.2% in 1995 from $422,000 ($3.61 per Bbl) in 1994. The increase in 1996 as
compared to 1995 was due primarily to increased capital expenditures associated
with the Montana infill drilling program. The increase in 1995 as compared to
1994 was due primarily to the inclusion of one full year of production in 1995
compared to a partial year in 1994.
General and administrative expenses increased 17.0% to $1.7 million in 1996
as compared to $1.5 million in 1995, and increased 79.7% in 1995 from $816,000
in 1994. The increases in each of these years is the result of continuing
increases in administrative requirements due to a general expansion of the
Company's activities. The increase in 1995 as compared to 1994 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.
In 1996 the Company reported a $1.3 million impairment expense related to
the determination by the Company that it was probable that the capitalized costs
of certain unproved properties were not realizable. Most of this expense
related to the Company's Lake Valley, Nevada, exploration prospect. In view of
the Company's other exploration opportunities and the current lack of industry
interest in Nevada, the Company does not anticipate drilling its Nevada
prospects in the foreseeable future. The 1995 impairment expense also related
to certain of the Company's Nevada prospects. The Company did not report any
impairment expense in 1994. As discussed below, impairment allowances will vary
from period to period based upon the Company's determination that capitalized
costs of unproved properties, on a property-by-property basis, are not
considered to be realizable.
Drilling costs increased 9.6% to $154,000 in 1996 as compared to $141,000
in 1995 and decreased 20.1% in 1995 from $178,000 in 1994. Variations in
drilling costs are due primarily to differences in the number of wells drilled
and the costs of drilling in the respective periods.
Interest and Other Income (Expense)
Interest and other income increased 277.6% to $370,000 in 1996 from $98,000
in 1995 and increased 84.9% in 1995 from $53,000 in 1994. This increase in 1996
as compared to 1995 was due primarily to the significantly larger cash balances
on hand during the last part of 1996 as a result of the receipt of $17.7 million
in net proceeds from a public stock offering completed in the third quarter.
This increase in 1995 as compared to 1994 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 decreased 25.7% to $333,000 in 1996 from $448,000 in 1995
and increased 109.0% in 1995 from $214,000 in 1994. These changes are
attributable to the borrowing under the Company's bank credit facility in mid-
1994 to complete the purchase of certain producing properties in Montana and
Nevada and the repayment of the outstanding balance in the third quarter of
1996. As a result, the Company had a full year of interest expense related to
these borrowings in 1995 and only a partial year of interest expense in 1996 and
1994.
Preferred stock of the Company's oil-producing subsidiary required payment
of cumulative dividends 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 1996, 1995, and 1994 which can
be carried forward to offset future taxable income. Statement of Financial
Accounting Standards (SFAS) No. 109 requires that a valuation allowance be
provided if it is more likely than not that some portion or all of a deferred
tax asset will not be realized. The Company's ability to realize the benefit of
its deferred tax asset will depend on the generation of future taxable income
through profitable operations and the expansion of the Company's oil and gas
producing activities. The market and capital risks associated with achieving
the above requirement are considerable, resulting in the Company's conclusion
that a full valuation allowance be provided. Accordingly, the Company did not
recognize any tax benefit in its consolidated statement of operations for the
years ended December 31, 1996, 1995, and 1994.
Net Loss
Net loss increased 94.8% to $4.9 million in 1996 as compared to $2.5
million in 1995, and increased 150.0% in 1995 from $1.0 million in 1994. The
increase in 1996 as compared to 1995 is due primarily to increases in
exploration costs (a substantial portion of which was paid from advances made by
RWE-DEA) and impairment expenses as discussed above. The increase in 1995 as
compared to 1994 is due primarily to increases in production and operating
costs, interest expense, and general and administrative costs as discussed
above.
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 cost 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 not to be realizable. Should future events 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.
AGREEMENT WITH RWE-DEA
Under its agreement with the Company, RWE-DEA will acquire a 50% interest
in the Baltic Concession by paying the Company $250,000 and providing up to $2.1
million for a seismic survey now completed and the cost of an exploratory well
currently underway, 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 is
the operator for all joint operations. The Company agreed to pay a fee of
$125,000 to an unaffiliated party for its help in the Company's first search for
an international joint venture partner.
In order to obtain desired treatment under Polish tax laws for joint
activities with RWE-DEA on the Baltic Concession, the Company and RWE-DEA have
determined to effect their 50-50 ownership in the project through RWE-DEA's
purchase of 50% of the shares of the Company subsidiary which holds the Baltic
Concession, Warmia Petroleum Company, Sp. z o.o.("Warmia"). RWE-DEA's purchase
of 50% of the shares of Warmia is subject to approval by the Polish government.
The Company expects that such approval will be obtained in 1997 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. As of
December 31, 1996, RWE-DEA had advanced Warmia $1.5 million to fund exploration
activity on the Baltic Concession. On November 1, 1996, the Company obtained a
$2.5 million Irrevocable Standby Letter of Credit as security for the repayment
of these advances. This letter of credit expired unused on January 31, 1997.
Upon the purchase by RWE-DEA of a 50% ownership in Warmia, these advances will
be converted into promissory notes to be repaid out of cashflow from the Baltic
Concession. At that time, the Company will deconsolidate Warmia and begin
accounting for its investment in this subsidiary on the equity method.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has relied primarily on proceeds from the sale of
equity securities to fund its operating and investing activities. During 1996
1995, and 1994, the Company received net proceeds from the sale of securities of
it and its subsidiaries, net of redemptions, of $20.4 million, $3.7 million, and
$286,000, respectively. Proceeds from the sale of securities were supplemented
with $4.3 million in proceeds from bank financing to complete the purchase of
producing properties in Montana and Nevada and related assets effective April 1,
1994. The Company also benefits from funds provided by other participants in
drilling groups formed by it to undertake specific drilling or other exploration
activities.
Operating Activities
The Company required net cash of $3.7 million in 1996 to fund operating
activities, an increase of 254.6% over the $1.0 million required in 1995, which
in turn was a 220.1% increase over the $322,000 required in 1994. The increases
in each year were due principally to an increase in each year's exploration
costs and general and administrative expenses as the Company continued to expand
significantly its operations and exploration activities. In addition, during
1996, cash of $567,000 was used to reduce accounts payable and accrued
liabilities, while during 1995, accounts payable and accrued liabilities
increased by $407,000. During 1994, accounts payable and accrued liabilities
increased $206,000, while accounts receivable decreased by $265,000.
Investing Activities
Investing activities used net cash of $7.0 million in 1996, an increase of
370.3% over the $1.5 million used for such activities in 1995. Purchases of
financial instrument investments (net of proceeds received from maturities) used
cash of $5.5 million as the Company invested the net proceeds from its public
offering completed in the third quarter of 1996. Additions to oil and gas
properties; property, plant, and equipment; and other assets relating to the
Company's substantially expanded exploration and development activities used net
cash of $1.6 during the year, while the Company received $100,000 from the sale
of a prospect. During 1995, the Company's investing activities consisted
principally of development expenditures for the Company's enhanced infill
drilling program in the Cut Bank field in Montana The substantial decrease in
cash used in investing activities of $1.5 million in 1995 as compared to $4.4
million in 1994 is almost entirely the result of the purchase of certain
producing oil properties in Montana and Nevada and related assets effective
April 1, 1994.
Financing Activities
Financing activities provided net cash of $18.3 million during 1996, an
increase of 514.0% over the $3.0 million provided by such activities in 1995.
Net cash from financing activities in 1996 includes $20.4 million from issuances
of common stock and warrants, principally $17.7 million in net proceeds from the
public offering of securities completed in the third quarter. A portion of
these net proceeds were used to repay bank indebtedness for a net reduction in
debt of $2.2 million. In 1995, financing activities provided net cash of $3.0
million, consisting of $4.2 million from the sale of securities, less $465,000
spent to redeem stock of a subsidiary, and $737,000 utilized to reduce the bank
indebtedness. In 1994 financing activities provided net cash of $4.6 million,
consisting primarily of $4.3 million in net proceeds from bank indebtedness and
$300,000 from the sale of securities, net of related redemptions.
Strategic Alliances
The Company has benefited and anticipates that it will continue to benefit
from strategic alliances with industry or financial partners to provide funding
and expertise, which helps reduce the Company's financial exposure and risk.
During 1996, the Company estimates that its strategic partners provided
exploration funding of approximately $1.6 million, including $1.5 million
provided by RWE-DEA respecting the Baltic Concession and $110,000 provided by
other members of a Company-formed drilling group which funded drilling of the
Cobb Creek prospect. The Company estimates that during 1995 industry partners
provided approximately $106,000 to fund exploration of prospects in which the
Company participated.
Credit Facility
In June 1994, the Company established a bank credit facility with Bank One,
Texas, NA, to provide a portion of the funds required to purchase properties in
Montana and Nevada. This facility provides for a total loan amount of $5.0
million, with a borrowing base determined at least semi-annually by the lending
bank based on its analysis of the Company's producing reserves and cash flow.
During the third quarter of 1996, the Company used proceeds from the public
offering to pay off its bank debt which had an outstanding principal balance of
$3,565,000. The Company will maintain its borrowing agreement with the bank,
which had a borrowing base of $3,150,000 as of December 31, 1996. (See Note 5
to the Consolidated Financial Statements.)
Working Capital
As of December 31, 1996, the Company had working capital of $13.8 million,
including cash and cash equivalents of $8.3 million, as compared to a working
capital deficit of $278,000 a year earlier. The substantial improvement in the
Company's working capital is attributable to the receipt of net proceeds from
the sale of securities in 1996, including $17.7 in net proceeds received from
the public stock offering in the third quarter.
CAPITAL REQUIREMENTS
The Company has budgeted $8.8 million in capital expenditures through
December 31, 1997, including (i) approximately $2.4 million for exploration and
potential development activities related to the Baltic Concession; (ii)
approximately $3.1 million for the review and evaluation of available geological
and geophysical data and the potential initiation of exploratory activities in
other properties in Poland, including the Lublin Concession and Carpathian JSA;
(iii) approximately $2.8 million for infill development drilling in the Cut Bank
field in Montana during 1997; and (iv) approximately $500,000 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, which cannot be predicted. The Company
believes its working capital is sufficient to meet its operating needs during
1997. The Company estimates that its available working capital, combined with
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 at least December 31, 1997. Consistent with previous practice, the
Company may obtain partial funding for its exploration and development
activities through strategic arrangements with industry or financial partners.
As discussed above relating to Cut Bank field development, the Company will
continue to monitor the results from the infill drilling completed in January
1996 in the Cut Bank field and will study the details of production from other
areas in the field to determine whether such infill drilling is resulting in a
financial return to the Company that is satisfactory as compared to other
opportunities then available to the Company. (See "ITEM 1. DESCRIPTION OF
BUSINESS: United States Exploration and Development Activities.") If, in the
opinion of the Company, other development opportunities then available to the
Company, including development in the Baltic Concession or other areas in
Poland, are likely to provide a greater financial return to the Company, funds
initially budgeted to Cut Bank field development may be utilized for development
of other fields.
In addition to the Company's own expenditures, it expects that it will
continue to benefit from funding provided through its exploration and
development arrangements with strategic partners. In the Baltic Concession,
RWE-DEA is obligated to provide up to $1.0 million in drilling and testing costs
for the initial test well now underway and, if it elects to continue, one half
of all additional costs for exploration and development of the Baltic
Concession. In forming strategic alliances with industry or financial partners,
the Company intends to seek reimbursement of all or a portion of the costs
incurred by the Company in identifying the prospect, obtaining initial
exploration rights, and generating an initial exploration plan. The Company's
ability to form strategic alliances with industry or funding partners is
dependent on the oil and gas potential of specific prospect areas, perceived
political or business risks of the country and region in which the prospect is
located, prevailing prices, and other conditions in the oil and gas industry in
particular and the energy industry in general, and other factors which the
Company is unable to control or predict.
Prior to the end of 1997, 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, Lublin Concession or
Carpathian region is successful in proving substantial oil reserves, the Company
may require additional capital to fund a multi-well development program, install
oil storage and handling facilities or purchase other assets or related
investments required to support large-scale production. The Company has no
arrangement for any such additional financing, but may seek required funds from
the sale of additional securities, project financing, strategic alliances with
other energy or financial partners or other arrangements, all of which may
dilute the interest of existing shareholders in the Company or in the specific
project financed. There can be no assurance that additional funds could be
obtained or, if obtained, would be on terms favorable to the Company.
In order to maintain its interest in the Baltic, Lublin, and Sudety
Concessions, the Company is required to make certain annual payments and meet
certain exploration commitments. The Company has budgeted sufficient funds
under the foregoing budget to meet all of such obligations through at least
December 31, 1997. The Company also maintains its interests in leases in the
United States not held by production by making annual lease payments, but none
of which is material in amount.
CHANGING PRICES, CURRENCY EXCHANGE RATES, AND INFLATION
The Company's revenues and the value of its oil properties have been and
will continue to be affected by changes in oil prices. During the last two
years, the Company as well as the oil industry in general have benefited from
favorable prices. However, there can be no assurance that such prices will
continue. The Company's ability to obtain exploration capital through strategic
alliances with other energy firms and attract additional capital, if required,
through the sale of securities or borrowings on attractive terms are also
affected by oil prices. Such prices are subject to substantial seasonal and
other fluctuations that are beyond the ability of the Company to control or
predict.
Although certain of the Company's costs and expenses are affected by the
level of inflation, inflation did not have a significant effect on the Company's
operations during 1996, 1995, or 1994. The Company customarily contracts for
goods and services, including those related to seismic surveys and drilling, in
US dollars to reduce the potential impact of inflation within Poland. The
Company's activities in Poland may be affected by the rates of inflation in
Poland and other countries. Poland has experienced inflation of approximately
18% (estimated), 22% and 29% during 1996, 1995, and 1994, respectively.
The amounts in the Company's agreements with RWE-DEA and its other
strategic partners and the government of Poland relating to the Company's
activities in Poland are expressed in U.S. dollars. Nevertheless, the Company's
activities in Poland may be effected by fluctuations in exchange rates between
the Polish zloty, the U.S. dollar and other currencies. The exchange rate for
the Polish zloty was 2.85, 2.48 and 2.43 per U.S. dollar as of December 31,
1996, 1995, and 1994, respectively.
OTHER MATTERS
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share. This statement
establishes standards for computing and presenting earnings per share ("EPS")
and applies to entities with publicly-held common stock or potential common
stock. This statement simplifies the standards for computing EPS and makes them
comparable to international EPS standards. This statement is effective for
financial statements for both interim and annual periods ending after December
15, 1997. The Company is currently evaluating the impact of the recently issued
statement and will adopt the requirements for the year ending December 31, 1997.
The Company has reviewed all other recently issued, but not yet adopted,
accounting standards in order to determine their effects, if any, on the results
of operations or financial position of the Company. Based on that review, the
Company believes that none of these pronouncements will have a significant
effect on current or future earnings or operations.
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ITEM 7. FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
The financial statements of the Company, including the required
accountants' reports, are included, following a table of contents, beginning at
page F-1 immediately following the signature page to this report.
- ------------------------------------------------------------------------------
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
- -------------------------------------------------------------------------------
On August 16, 1995, the Company dismissed Barker & Folsom, certified public
accountants, as the Company's independent auditor. On August 17, 1995, the
Company selected Coopers & Lybrand L.L.P. to audit and report on the Company's
financial statements for the year ended December 31, 1995. The above change in
accountants has been reported previously. (See Current Report on Form 8-K dated
August 22, 1995.)
PART III.
- -------------------------------------------------------------------------------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
- -------------------------------------------------------------------------------
The information from the definitive proxy statement for the 1997 annual
meeting of stockholders under the caption "PROPOSAL NO. 1. ELECTION OF
DIRECTORS: Management" and "Compliance with Section 16(a) of the Exchange Act"
is incorporated herein by reference.
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. Jerzy B. Maciolek, an executive
officer, and Eva K. Sokolowska, both Polish nationals, who have been
instrumental in assisting the Company in establishing its operations in Poland,
and the loss of the services of either 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, Mr.
Maciolek, and Ms. Sokolowska. The Company does not maintain key man insurance
on any of its employees.
- -------------------------------------------------------------------------------
ITEM 10. EXECUTIVE COMPENSATION
- -------------------------------------------------------------------------------
The information from the definitive proxy statement for the 1997 annual
meeting of stockholders under the caption " PROPOSAL NO. 1. ELECTION OF
DIRECTORS: Executive Compensation" is incorporated herein by reference.
- -------------------------------------------------------------------------------
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
- -------------------------------------------------------------------------------
The information from the definitive proxy statement for the 1997 annual
meeting of stockholders under the caption " PROPOSAL NO. 1. ELECTION OF
DIRECTORS: Security Ownership of Certain Beneficial Owners and Management" is
incorporated herein by reference.
As of December 31, 1996, the Company had issued and outstanding warrants
and options to purchase an aggregate of up to 3,164,028 shares of Common Stock
at exercise prices ranging from $1.10 to $8.875 with a weighted average exercise
price of $3.71 per share. Of those warrants and options, 2,381,000 shares of
Common Stock are issuable on the exercise of options held by officers and
directors of the Company at exercise prices ranging from $1.50 to $8.875 per
share, including options to purchase 862,500 shares that are not fully vested.
The existence of such warrants and options may prove to be a hindrance to future
financings by the Company, and the exercise of such warrants and options may
further dilute the interests of all other stockholders. The possible future
resale of Common Stock issuable on the exercise of such warrants and options
could adversely affect the prevailing market price of the Common Stock.
Further, the holders of options and warrants 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.
- -------------------------------------------------------------------------------
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------------------------------
The information from the definitive proxy statement for the 1997 annual
meeting of stockholders under the caption " PROPOSAL NO. 1. ELECTION OF
DIRECTORS: Certain Relationships and Related Transactions" is incorporated
herein by reference.
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ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
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(A) EXHIBITS
The following exhibits are included as part of this report:
SEC
EXHIBIT REFERENCE
NUMBER NUMBER TITLE OF DOCUMENT LOCATION
- -------- --------- --------------------------------------- -------------
Item 3. Articles of Incorporation and Bylaws
- ------------------------------------------------------------
3.01 3 Restated and Amended Articles of Incorporated
Incorporation by
Reference(8)
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
Preferences of 1993 Series Preferred by
Stock of Frontier Oil Exploration Reference(1)
Company
Item 10. Material Contracts
- ------------------------------------------------------------
10.01 10 Loan Agreement dated June 7, 1994, by Incorporated
and between Bank One, Texas, N.A., and by
FX Producing Company, Inc. Reference(1)
10.02 10 Promissory Note dated June 7, 1994, in Incorporated
the original principal amount of by
$5,000,000 payable by FX Producing Reference(1)
Company, Inc., to Bank One, Texas, N.A.
10.03 10 Guaranty dated June 7, 1994, by Frontier Incorporated
Oil Exploration Company for the benefit by
of Bank One, Texas, N.A., relating to Reference(1)
the Bank Loan
10.04 10 Stock Pledge Agreement dated June 7, Incorporated
1994, between Frontier Oil Exploration by
Company and Bank One, Texas, N.A., Reference(1)
relating to pledge of common stock of
FX Producing Company, Inc.
10.05 10 Deed of Trust, Security Agreement, Incorporated
Financing Statement and Fixture Filing by
dated June 7, 1994, between FX Reference(1)
Producing Company, Inc., as grantor,
Arthur R. Gralla, as trustee, and Bank
One, Texas, N.A., as grantee, relating
to Nevada properties
10.06 10 Deed of Trust, Mortgage, Security Incorporated
Agreement, Financing Statement, and by
Assignment of Production dated June 7, Reference(1)
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
10.07 10 Transfer Order Letter executed June 7, Incorporated
1994, between FX Producing Company, by
Inc., and Bank One, Texas, N.A., Reference(1)
relating to production from producing
properties of FX Producing Company,
Inc.
10.08 10 Warrant to purchase 150,000 shares of Incorporated
Common Stock at $1.10 issued to George by
E. Dullnig & Co. Reference(1)
10.09 10 Form of Warrant to Purchase Shares of Incorporated
Common Stock at $1.65 with related by
schedule of holders Reference(1)
10.10 10 Employment Agreements between Frontier Incorporated
and each of David Pierce and Andrew by
Pierce, effective January 1, 1995 * Reference(1)
10.11 10 Form of Stock Option with related Incorporated
schedule (D. Pierce, A. Pierce, and by
Others) * Reference(1)
10.12 10 Form of Stock Option granted to D. Incorporated
Pierce and A. Pierce* by
Reference(1)
10.13 10 Crude Oil Purchase Contract dated March Incorporated
16, 1994 between Petro Source Partners, by
Ltd., and B&B Production Company Reference(1)
10.14 10 Amended Crude Oil Purchase Contract Incorporated
dated August 15, 1994, between FX by
Drilling Company, Inc., and Petro Reference(1)
Source Partners, Ltd.
10.15 10 Agreement dated July 8, 1994 between FX Incorporated
Drilling Company, Inc. and CENEX, Inc., by
regarding Crude Oil Purchase Contract. Reference(1)
10.16 10 Preliminary Agreement between Frontier Incorporated
Oil Exploration Company and the by
Ministry of Environmental Protection, Reference(1)
Natural Resources and Forestry dated
February 10, 1995, with translation
thereof
10.17 10 Mining Usufruct Agreement between the Incorporated
State Treasury of the Republic of by
Poland and Frontier Poland Exploration Reference(3)
and Producing Company, Sp.z o.o. dated
August 22, 1995
10.18 10 Amendment No. 1 to Mining Usufruct Incorporated
Agreement by
Reference(4)
10.19 10 Frontier Oil Exploration Company 1995 Incorporated
Stock Option and Award Plan* by
Reference(4)
10.20 10 Form of Non-Qualified Stock Option with Incorporated
related schedule* by
Reference(4)
10.21 10 Letter Agreement dated effective August Incorporated
3 , 1995, between Lovejoy Associates, by
Inc., and Frontier Oil Exploration Reference(4)
Company re: Financial Consulting
Engagement*
10.22 10 Letter Agreement dated effective August Incorporated
3, 1995, between Lovejoy Associates, by
Inc., and Frontier Oil Exploration Reference(4)
Company re: Indemnification
10.23 10 Non-Qualified Stock Option granted to Incorporated
Thomas B. Lovejoy* by
Reference(4)
10.24 10 Form of Amendment No. 1 to Loan Incorporated
Agreement dated June 7, 1994, by and by
between FX Producing Company, Inc., and Reference(5)
Bank One, Texas, N.A.
10.25 10 Amendment No. 2 to Loan Agreement dated Incorporated
June 7, 1994, by and between FX by
Producing Company, Inc., and BankOne, Reference(5)
Texas, N.A.
10.26 10 Form of Concession dated December 20, Incorporated
1995, relating to concessions granted by
pursuant to the Mining Usufruct Reference(5)
Agreement, with related schedule
10.27 10 Agreement dated effective April 16, Incorporated
1996, between Frontier Poland by
Exploration and Producing Company Sp. Reference(6)
Zo.o. and RWE-DEA Aktingesellschaft fur
Mineraloel and Chemie, including
exhibits, relating to Baltic Concession
10.28 10 Amendments to Employment Agreements Incorporated
between Frontier Oil Exploration by
Company and each of David Pierce and Reference(8)
Andrew Pierce, effective May 30, 1996*
10.29 10 Employment Agreement between Frontier Incorporated
Oil Exploration Company and Jerzy B. by
Maciolek* Reference(8)
10.30 10 Amendment No. 3 to Loan Agreement dated Incorporated
June 7, 1994, by and between FX by
Producing, Inc., and Bank One Texas, Reference(8)
N.A.
10.31 10 Joint Operating Agreement dated Incorporated
effective April 16, 1996, between by
Frontier Poland Exploration and Reference(8)
Producing Company Sp. Z o.o., and RWE-
DEA Aktiengesellschaft fur Mineraloel
und Chemie
10.32 10 Joint Study Agreement dated May 21, Incorporated
1996, between FX Energy (Frontier Oil by
Exploration Company) and the Polish Oil Reference(7)
and Gas Company, including appendix,
relating to the Carpathian JSA.
10.33 10 Agreement dated May 21, 1996, between Incorporated
Sudety Mining Company Sp. Zo.o. and the by
State Treasury of the Republic of Reference(9)
Poland, for the establishment of the
mining usufruct for the purpose of gold
exploration
10.34 10 Joint Study Agreement dated effective This Filing
December 20, 1996 between the Polish
Oil and Gas company and FX Energy,
Inc., relating to eight concession
blocks located near Lublin, Poland
10.35 10 Mining Usufruct Agreement between the This Filing
State Treasury of the Republic of
Poland and Lubex Petroleum Company Sp.
Zo.o dated December 20, 1996
10.36 10 Form of Indemnification Agreement This Filing
between FX Energy, Inc., and certain
directors, with related schedule*
10.37 10 Form of Option granted to executive This Filing
officers and directors, with related
schedule*
10.38 10 Form of 1996 Stock Option Plan* This Filing
10.39 10 Letter Agreement effective May 22, 1996, This Filing
between FX Drilling and Crysen
Refining, Inc., regarding sale of crude
oil
10.40 10 Amendment no. 3 dated effective July 1, This Filing
1996 to Agreement dated July 8, 1994
between FX Drilling Company, Inc. and
CENEX, Inc., regarding Crude Oil
Purchase Contract.
Item 16. Letter on Change in Certifying
Accountant
- ------------------------------------------------------------
16.01 16 Letter from Barker & Folsom, previous Incorporated
Company auditors by
Reference(2)
Item 23. Consents of Experts and Counsel
- ------------------------------------------------------------
23.01 23 Consent of Coopers & Lybrand L.L.P., This Filing
independent accountants
23.02 23 Consent of Barker & Folsom, previous This Filing
auditors for the Company
23.03 23 Consent of Larry D. Krause, Petroleum This Filing
Engineer
Item 21. Subsidiaries of the Registrant
- ------------------------------------------------------------
21.01 21 Schedule of Subsidiaries This Filing
Item 24 Powers of Attorney
- ------------------------------------------------------------
24.01 24 Power of Attorney See signature
page
* Identifies each management contract or compensatory plan or arrangement
required to be filed as an exhibit.
(1) Incorporated by reference from the registration statement on Form SB-2, SEC
File No. 33-88354-D.
(2) Incorporated by reference from the report on Form 8-K dated August 16,
1995.
(3) Incorporated by reference from the report on Form 8-K dated August 22,
1995.
(4) Incorporated by reference from the quarterly report on Form 10-Q for the
quarter ended September 30, 1995.
(5) Incorporated by reference from the annual report on Form 10-K for the year
ended December 31, 1995.
(6) Incorporated by reference from the reports on Form 8-K dated May 3, 1996.
(7) Incorporated by reference from the report on Form 8-K dated May 21, 1996.
(8) Incorporated by reference from the registration statement on Form S-1,
SEC File No.333-05583.
(9) Incorporated by reference from the report on Form 8-K dated
October 1, 1996.
(B) REPORTS ON FORM 8-K.
During the last quarter of the period covered by this report, the
registrant filed interim reports on Form 8-K dated October 3 and 9, November 21,
and December 20, 1996.
- -------------------------------------------------------------------------------
SIGNATURES
- -------------------------------------------------------------------------------
In accordance with section 13 or 15(d) of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Dated: March 25, l997. FX ENERGY, INC.
(Registrant)
By /s/ David N. Pierce, President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the date indicated.
Dated: March 25, 1997
/s/ David N. Pierce, Director and President
(Principal Executive and Financial Officer)
/s/ Andrew W. Pierce, Director,
Vice-President and Secretary
(Principal Operations Officer)
/s/ Scott J. Duncan, Director, Vice-
President and Treasurer
(Principal Accounting Officer)
/s/ Thomas B. Lovejoy, Director
/s/ Peter Raven, Director
Jerzy B. Maciolek, Director
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of FX Energy, Inc., and Subsidiaries:
We have audited the accompanying consolidated balance sheets of FX Energy, Inc.,
and Subsidiaries as of December 31, 1996 and 1995,and the related statements
of operations, stockholders' equity, and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of FX Energy, Inc.,
and subsidiaries as of December 31, 1996 and 1995, and the consolidated results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Salt Lake City, Utah
February 18, 1997
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of FX Energy, Inc., and Subsidiaries:
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows for the year ended December 31, 1994,
of FX Energy, Inc. (then known as Frontier Oil Exploration Company).
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 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 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 results of operations,
stockholders' equity, and cash flows of FX Energy, Inc., and subsidiaries
for the year ended December 31, 1994, in conformity with generally accepted
accounting principles.
BARKER & FOLSOM
Ogden, Utah
February 24, 1995
<PAGE>
FX ENERGY, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 1996 and 1995
ASSETS 1996 1995
----------- -----------
Current assets:
Cash and cash equivalents ............ $ 8,345,914 $ 743,721
Investment in marketable debt 5,476,574 --
securities ...........................
Receivables:
Accrued oil sales .................... 332,826 254,293
Due from joint interest owners ....... 54,055 131,871
Interest receivable .................. 131,889 --
Inventory ............................ 20,216 15,951
Other current assets ................. 67,483 32,094
----------- ------------
Total current assets ............... 14,428,957 1,177,930
----------- ------------
Property and equipment, at cost:
Oil and gas properties (successful
efforts method):
Proved ............................... 7,171,539 6,062,684
Unproved ............................. 526,237 1,796,549
Other property and equipment ......... 1,888,966 1,625,225
9,586,742 9,484,458
Less accumulated depreciation,
depletion, and amortization .......... (1,403,072) (872,540)
----------- ------------
Net property and equipment ......... 8,183,670 8,611,918
----------- ------------
Other assets:
Certificates of deposit .............. 381,500 217,400
Loan origination costs, net of
accumulated amortization of $95,891 in
1995 ................................. -- 31,763
----------- ------------
Total other assets ................. 381,500 249,163
----------- ------------
Total assets........................... $22,994,127 $10,039,011
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
----------- ------------
Current liabilities:
Accounts payable-trade ............... $ 250,503 $ 353,767
Accounts payable-related parties ..... -- 95,005
Accrued liabilities .................. 335,693 681,597
Current portion of long-term debt .... -- 325,611
----------- ------------
Total current liabilities......... 586,196 1,455,980
----------- ------------
Long-term debt......................... 1,500,250 3,358,602
----------- ------------
Total liabilities................. 2,086,446 4,814,582
----------- ------------
Commitments (See Notes 2 and 12)
Stockholders' equity:
Preferred stock, $.001 par value,
5,000,000 shares authorized; 1996: no
shares outstanding; 1995: 137,500
shares issued and outstanding,
$137,500 liquidation preference ..... -- 138
Common stock, $.001 par value,
20,000,000 shares authorized; 1996:
12,492,547 shares issued and
outstanding; 1995: 7,898,995 shares
issued and outstanding .............. 12,492 7,899
Additional paid-in capital ........... 30,054,620 9,466,127
Accumulated deficit .................. (9,159,431) (4,249,735)
----------- ------------
Total stockholders' equity 20,907,681 5,224,429
----------- ------------
Total liabilities and stockholders'
equity ............................... $22,994,127 $ 10,039,011
=========== ============
The accompanying notes are an integral part
of these consolidated financial statements
<PAGE>
FX ENERGY, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1996, 1995, and 1994
1996 1995 1994
---------- ----------- -----------
Revenues:
Oil sales .......................... $2,345,634 $ 1,980,546 $ 1,691,726
Drilling revenue ................... 75,472 111,133 24,308
Prospect sales ..................... -- 75,000 --
---------- ----------- -----------
Total revenues ................ 2,421,106 2,166,679 1,916,034
---------- ----------- -----------
Operating costs and expenses:
Production and operating costs ..... 1,059,441 1,000,476 432,737
Production taxes ................... 166,090 270,723 246,439
Exploration costs .................. 2,426,487 747,340 651,312
Drilling costs ..................... 154,178 140,615 178,220
Depreciation, depletion and
amortization ....................... 557,910 503,289 421,831
Leasehold impairments .............. 1,289,610 114,992 --
General and administrative ......... 1,714,625 1,466,340 815,957
---------- ----------- -----------
Total operating costs and
expenses ...................... 7,368,341 4,243,775 2,746,496
---------- ----------- -----------
Operating loss....................... (4,947,235) (2,077,096) (830,462)
---------- ----------- -----------
Other income (expense):
Interest and other income .......... 370,421 98,588 53,063
Interest expense ................... (332,882) (447,608) (214,190)
Minority interest: Non-cash
dividends on FX
Producing convertible preferred
stock .............................. -- (93,466) --
---------- ----------- -----------
Total other income (expense) .. 37,539 (442,486) (161,127)
---------- ----------- -----------
Net loss.............................$(4,909,696) $(2,519,582) $( 91,589)
=========== =========== ============
Net loss per common share............ $ (0.49) $ (0.47) $ (0.44)
=========== =========== ============
Weighted average number of shares
outstanding ......................... 10,018,337 5,388,656 2,229,338
=========== =========== ============
<PAGE>
The accompanying notes are an integral part
of these consolidated financial statements
FX ENERGY, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the years ended December 31, 1996, 1995, and 1994
1996 1995 1994
---------- ---------- ----------
Cash flows from operating
activities:
Net loss ........................$(4,909,696) $ (2,519,582) $ (991,589)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation, depletion and
amortization ................... 557,910 03,289 421,831
Leasehold impairments ........... 1,289,610 114,992 --
Gain on sale of equipment ....... -- (15,991) --
Minority interest: Non-cash
dividends on FX Producing
convertible preferred stock .... -- 93,466 --
Loss on disposition of
partnership ................... -- -- 23,202
Common stock and options issued
for services ................... 147,750 443,000 168,000
Increase (decrease) from
changes in:
Cash-restricted ............... -- -- 142,950
Receivables ................... (717) (29,917) (265,537)
Interest receivable ........... (131,889) -- --
Inventory ..................... (4,265) 1,161 (17,112)
Other current assets .......... (32,948) (27,252) (4,249)
Accounts payable and accrued
liabilities.................... (567,173) 407,138 200,805
---------- ---------- ----------
Net cash used in operating
activities....................(3,651,418) (1,029,696) (321,699)
---------- ---------- ----------
Cash flows from investing
activities:
Additions to oil and gas
properties ...................... (1,198,431) (1,404,227) (2,725,038)
Additions to other property and
equipment ....................... 258,769) (25,177) (1,553,369)
Additions to other assets ....... (164,100) (78,076) (153,460)
Proceeds from sale of interest
in unproved properties .......... 100,000 -- --
Proceeds from sale of equipment . 9,700 18,000 --
Purchase of marketable debt
securities ...................... 6,278,595) -- --
Proceeds from maturities of
marketable debt securities ...... 784,757 -- --
---------- ---------- ----------
Net cash used in investing
activities ................... (7,005,438) (1,489,480) (4,431,867)
---------- ---------- ----------
Cash flows from financing
activities:
Proceeds from long term debt .... 1,518,179 -- 4,364,177
Repayment of long-term debt ..... (3,702,142) (737,193) (63,448)
Proceeds from issuance of FX
Producing convertible preferred
stock ........................... -- 111,000 1,694,527
Proceeds from issuance of
redeemable FX Producing
preferred stock ................. -- -- 550,000
Redemption of FX Producing
convertible preferred stock ..... -- -- (2,150,400)
Redemption of redeemable FX
Producing preferred stock ....... -- (464,666) --
Proceeds from issuance of
preferred stock ................. -- -- 191,800
Proceeds from issuance of common
stock and warrants, net of
offering costs .................. 20,443,012 4,064,884 --
---------- ---------- ----------
Net cash provided by
financing activities ......... 18,259,049 2,974,025 4,586,656
---------- ---------- ----------
Increase (decrease) in cash and
equivalents....................... 7,602,193 454,849 (166,910)
Cash and cash equivalents at
beginning of year................. 743,721 288,872 55,782
---------- ---------- ---------
Cash and cash equivalents at end
of year...........................$ 8,345,914 $ 743,721 $ 288,872
========== =========== ==========
Supplemental disclosure of cash
flow information:
Cash paid during the year for:
Interest ........................$ 238,754 $ 422,104 $ 177,799
Taxes ........................... -- -- --
The accompanying notes are an integral part
of these consolidated financial statements
FX ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
for the years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
---------------- ---------------- ADDITIONAL
PAR PAR PAID IN ACCUMULATED
SHARES VALUE SHARES VALUE CAPITAL DEFICIT
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER
31, 1993..............1,279,500 $1,280 $1,882 $1,724,605 $(738,564)
Common stock issued
for cash, net of
offering costs of
$28,700 ............. 220,500 220 191,580
Common stock issued
for unproved oil and
gas properties ...... 500,000 500 884,737
Common stock issued
for services ........ 112,000 112 167,888
Common stock issued
for cancellation of
note payable ........ 25,453 26 38,154
Common stock issued
as commission for
placement of FX
Producing preferred
stock ............... 75,694 76 (76)
Net loss.............. (991,589)
--------- ------ --------- ------ --------- ----------
BALANCE AT DECEMBER
31, 1994..............1,500,000 1,500 2,595,602 2,596 3,006,888 (1,730,153)
Common stock issued
for cash, net of
offering costs of
$181,616 ............ 2,087,500 2,088 3,991,297
Common stock issued
for services and 207,000 207 417,793
line of credit ......
Conversion of FX
Producing preferred
stock into common
stock ............... 1,504,458 1,504 1,778,958
Conversion of
redeemable FX
Producing preferred
stock into common
stock ............... 64,935 65 85,268
Conversion of
preferred stock into
common stock ........(1,362,500) (1,362) 1,362,500 1,362
Exercise of warrants.. 65,000 65 71,435
Common stock issued
for unproved oil and
gas properties ...... 12,000 12 26,988
Compensation related
to granting of stock 25,000
options at below
market value ........
Additions to oil and
gas properties
resulting from
granting of stock
options at below
market value ........ 62,500
Net loss.............. (2,519,582)
--------- ------ --------- ------ --------- ----------
BALANCE AT DECEMBER
31, 1995.............. 137,500 138 7,898,995 7,899 9,466,127 (4,249,735)
Common stock issued
for cash, net of
offering costs of
$2,028,547 .......... 3,978,504 3,978 19,612,154
Exercise of warrants
and stock options ... 419,004 419 826,461
Conversion of
preferred stock into
common stock ........ (137,500) (138) 137,500 138
Common stock issued 57,451 57 47,693
for services ........
Common stock issued
for oil and gas
properties .......... 1,093 1 2,185
Net loss.............. (4,909,696)
--------- ------ --------- ------ ----------- ----------
BALANCE AT DECEMBER
31, 1996 ............ -- $ -- 12,492,547 $12,492 $30,054,620 $(9,159,431)
========= ====== ========== ======= =========== ===========
</TABLE>
FX ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization
FX Energy, Inc. (formerly known as Frontier Oil Exploration Company), a
Nevada corporation, and its subsidiaries (collectively hereinafter referred to
as the "Company") operate in the oil and gas industry in the United States and
Poland (see Notes 13 and 14). 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.
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, 1996, the
Company owned 100% of the voting common stock or other equity securities of its
subsidiaries.
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 an individual well has found proved
reserves. If it is determined that an exploratory well has not found proved
reserves, the costs of drilling the well are expensed. The costs of development
wells are capitalized whether productive or nonproductive.
Geological and geophysical costs on exploratory prospects and the costs of
carrying and retaining unproved properties are expensed as incurred. An
impairment allowance is provided to the extent that capitalized costs of
unproved properties, on a property-by-property basis, are considered to be not
realizable. Depletion, depreciation and amortization ("DD&A") of capitalized
costs of proved oil and gas properties is provided on a property-by-property
basis using the units of production method. The computation of DD&A takes into
consideration restoration, dismantlement and abandonment costs and the
anticipated proceeds from equipment salvage. The estimated restoration,
dismantlement and abandonment costs are expected to be offset by the estimated
residual value of lease and well equipment.
An impairment loss is 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
equals the excess of net capitalized costs over the expected discounted future
net revenues from the related property.
Gains and losses are recognized on sales of entire interests in proved and
unproved properties. Sales of partial interests are generally treated as a
recovery of costs.
Other Property and Equipment
Other property and equipment, including drilling and well servicing
equipment, are stated at cost. Depreciation of other property and equipment
is calculated using the straight-line method over the estimated useful lives
(ranging from 3 to 40 years) of the respective assets. The cost of normal
maintenance and repairs is charged to operating costs and expenses as incurred.
Material expenditures that 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:
DECEMBER 31, ESTIMATED
----------------- USEFUL
LIFE
(IN
1996 1995 YEARS)
----- ----- ---------
(IN THOUSANDS)
Drilling and well service equipment.. $1,441 1,323 6
Trucks............................... 152 137 5
Building............................. 80 80 40
Office equipment................... 216 85 3 to 6
------ ------
$1,889 $1,625
====== ======
Concentration of Credit Risk
Substantially all of the Company's receivables are within the oil and gas
industry, primarily from the purchasers of its oil (see Note 13) and joint
interest owners in its Montana producing property. The receivables are
generally not collateralized. To date, the Company has experienced minimal bad
debt. The majority of the Company's cash and cash equivalents is held by four
financial institutions in Utah, Montana, Texas, and Illinois.
Net Loss Per Share
Net loss per share of common stock is computed based on the weighted
average number of common and common equivalent shares outstanding during the
period. Options, warrants and convertible preferred stock are excluded from the
calculation when their effect would be antidilutive.
Cash Equivalents and Statement of Cash Flows
The Company considers all highly-liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. Non-cash
transactions not reflected in the consolidated statement of cash flows include
the following:
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
Common stock issued for:
Unproved oil and gas properties ....$ -- $ 27 $ 884
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 .. 138 1,363 --
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 ............................. 23 115 --
Additions to other property and
equipment financed with long-term
leases ............................. 18 -- --
Income Taxes
Deferred income taxes are provided for the difference between the tax basis
of an asset or liability and its reported amount in the financial statements.
Such difference 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.
Foreign Operations
Through December 31, 1996, the Company's investment in Poland was composed
of U.S. dollar expenditures.
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 (see Note 10). The Company also adopted,
as of January 1, 1996, SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and Assets to be Disposed of. The adoption of SFAS No. 121 had no
material impact on the Company's financial statements.
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share. This statement
establishes standards for computing and presenting earnings per share ("EPS")
and applies to entities with publicly-held common stock or potential common
stock. This statement simplifies the standards for computing EPS and makes them
comparable to international EPS standards. This statement is effective for
financial statements for both interim and annual periods ending after December
15, 1997. The Company is currently evaluating the impact of the recently issued
statement and will adopt the requirements for the year ending December 31, 1997.
2. INVESTMENT IN POLAND
Poland Exploration Agreements
On August 22, 1995, the Company entered into an exploration agreement (the
"Baltic Concession Agreement") with the government of Poland covering a 2.4
million acre block in the onshore Baltic Platform area of north central Poland.
The Baltic Concession Agreement provides for a six-year exploration term with a
30-year exploitation right as to any commercial discoveries. To retain its
rights under the Baltic Concession Agreement, the Company is required to pay
annual fees of approximately $58,000 and to commence one additional well by
December 31, 1999. To date, the Company believes that it has satisfied all
material terms of the Baltic Concession Agreement.
On December 20, 1996, the Company entered into an exploration agreement
(the "Lublin Concession Agreement") with the government of Poland covering a 2.0
million acre block near the city of Lublin (the "Lublin Concession"). The
Company's exploration rights are divided into two successive three-year phases
expiring in three and six years, respectively, after grant of the last of the
eight concessions in the concession area. The Company may relinquish rights to
any concession blocks after the first three-year phase. To retain its rights in
the Lublin Concession, the Company must review existing data and gather at least
500 kilometers of seismic data during the first three-year phase, commence one
exploratory well within the first three-year phase, and commence at least one
exploratory well in each of the retained concession blocks, excluding the block
in which the initial test is located, by the end of the second three-year phase.
The Company is required to pay a concession fee of $25,000 for each concession
block ($200,000 for all eight blocks), payable one-half on award of the
concessions and one-half on expiration of the first three-year phase, 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 Lublin
Concession Agreement
On September 30, 1996, the Company entered into an exploration agreement
(the "Sudety Exploration Agreement") with the government of Poland covering
71,000 acres in southwestern Poland. The Sudety Exploration Agreement provides
for a four-year exploration term, with the term of any exploitation license
required to mine deposits subject to negotiation. To retain its rights under
the Sudety Exploration Area, the Company is required to make payments totaling
$55,000 during the first year, complete a regional study respecting the
prospective occurrence of gold within six months after the grant of the
concessions and continue with phased exploration during the succeeding two
years, pay an annual concession fee of $15,000, and spend an aggregate of
$800,000 in exploration of the area within four years.
Agreement with RWE-DEA
Under its agreement with the Company, RWE-DEA will acquire a 50% interest
in the Baltic Concession by paying the Company $250,000, providing up to $2.1
million for a seismic survey now completed and the cost of an exploratory well
currently underway and 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 is the
operator for all joint operations. The Company agreed to pay a fee of $125,000
to an unaffiliated party for its help in the Company's first search for an
international joint venture partner.
In order to obtain desired treatment under Polish tax laws for joint
activities with RWE-DEA on the Baltic Concession, the Company and RWE-DEA have
determined to effect their 50-50 ownership in the project through RWE-DEA's
purchase of 50% of the shares of the Company subsidiary which holds the Baltic
Concession, Warmia Petroleum Company, Sp. z o.o.("Warmia"). RWE-DEA's purchase
of 50% of the shares of Warmia is subject to approval by the Polish government.
The Company expects that such approval will be obtained in 1997 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. As of
December 31, 1996, RWE-DEA had advanced Warmia $1.5 million to fund exploration
activity on the Baltic Concession. On November 1, 1996, the Company obtained a
$2.5 million Irrevocable Standby Letter of Credit as security for the repayment
of these advances. This letter of credit expired unused on January 31, 1997.
Upon the purchase by RWE-DEA of a 50% ownership in Warmia, these advances will
be converted into promissory notes to be repaid out of cashflow from the Baltic
Concession. At that time, the Company will deconsolidate Warmia and begin
accounting for its investment in this subsidiary on the equity method.
3. PERFORMANCE BOND DEPOSITS:
As of December 31, 1996, the Company had certificates of deposit in the
amount of $150,000, which are maintained at financial institutions in Utah,
Montana, and Wyoming. Additionally, as of December 31, 1996, the Company had
provided a replacement bond to a federal agency in the amount of $463,000,
collateralized by certificates of deposit in the amount of $231,500.
4. INVESTMENT IN MARKETABLE DEBT SECURITIES:
The Company follows the provisions of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." In accordance with SFAS No. 115,
the Company has classified all of its marketable debt securities as held-to-
maturity because the Company has both the intent and ability to hold these
investments until they mature. At December 31, 1996, the Company's held-to-
maturity securities consisted of corporate bonds with remaining contractual
maturities of less than three months and the carrying amount of these
investments approximated market value.
5. LONG-TERM DEBT:
In August 1996, the Company repaid the outstanding debt incurred in the
1994 purchase of assets by two of the Company's wholly owned subsidiaries, FX
Producing and FX Drilling. The Company continues to maintain a bank credit
facility providing for borrowings up to a maximum of $5,000,000, with a
borrowing base as of December 31, 1996 which was reduced from $3,150,000 to
$650,000 due to the Company's Irrevocable Standby Letter of Credit (see Note 2),
and which decreases monthly by $25,000. The facility is subject to renewal at
the option of the lender for successive one year periods following semi-annual
reviews of FX Producing's reserve data and recalculations of the borrowing base.
The Company is subject to certain provisions of the loan agreement
governing the bank credit facility, including compliance with certain covenants,
tangible net worth requirements of FX Producing and the Company, and other
financial ratios. In addition, the loan agreement 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.
A covenant of the loan agreement requires financial statements on FX
Producing to be sent to the lender within 45 days following the end of each
month. The Company did not file financial statements with the lender for the
months of October and November 1996 and January 1997. Future borrowings under
the credit facility could be limited by the lender due to this covenant
violation. The Company has subsequently filed the required financial
statements. The Company is negotiating with the lender to change this covenant
to a quarterly reporting requirement through an amendment to the loan agreement.
The Company intends to comply with the covenant in the future.
6. INCOME TAXES:
The Company recognized no income tax benefit from the losses generated
during the years ended December 31, 1996, 1995, and 1994.
The components of the net deferred tax asset as of December 31, 1996 and
1995 are as follows:
DECEMBER 31,
-----------------
1996 1995
------ ------
(IN THOUSANDS)
Deferred tax liability:
Property and equipment basis $ (916) $ (519)
differences .........................
Deferred tax asset:
Net operating loss carryforwards .... 4,117
2,045
Investment in Warmia ................ 661 --
Other ............................... 6 --
Valuation allowance................... (3,868) (1,526)
------- -------
Net deferred tax asset .............. $ -- $ --
------- -------
The change in the valuation allowance during the years ended December 31,
1996 and 1995, is as follows:
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
BALANCE, BEGINNING OF YEAR............$ (1,526) $ (645) $ --
Decrease due to property and equipment
basis differences..................... 397 495 24
Increase due to investment in Warmia.. (661) -- --
Increase due to net operating loss.... (2,072) (1,376) (669)
Other................................. (6) -- --
-------- -------- --------
BALANCE, END OF YEAR..................$ (3,868) $ (1,526) $ (645)
======== ======== ========
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, 1996, the Company had net operating loss ("NOL")
carryforwards of approximately $11,038,000 available to offset future taxable
income, which expire from 2008 through 2011. The utilization of these
carryforwards against future taxable income may become subject to an annual
limitation due to a change in ownership. $519,000 of the NOL carryforward
relates to tax deductions resulting from the exercise of stock options during
1996. The tax benefit from adjusting the valuation allowance related to this
portion of the NOL carryforward will be credited to additional paid-in capital.
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. The
entity no longer provides such management services and office facilities to the
Company. During the year ended December 31, 1994, this company billed the
Company $195,067 for management services. At December 31, 1995, the Company
owed this company a total of $95,005, including interest at 9% of
$17,997. These amounts were paid by the Company in 1996. In addition, the
Company has entered into employment and consulting agreements with officers and
directors of the Company (see Note 12).
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 shares of
redeemable FX Producing preferred stock were redeemed for cash payments of
$464,666, and 64,935 of these shares were converted into common shares valued at
$85,333, resulting in no outstanding shares as of December 31, 1995.
9. MINORITY INTEREST IN FX PRODUCING CONVERTIBLE PREFERRED STOCK:
FX Producing is authorized to issue up to 3,300,000 shares of convertible
preferred stock, bearing 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 was 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
are payable 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.
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.
During the year ended December 31, 1995, FX Producing received $111,000 in
proceeds from 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 outstanding shares of FX Producing preferred stock as of
December 31, 1995. No shares were issued during the year ended December 31,
1996.
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 sellers
up to 400,000 shares of Company common stock in semi-annual increments of 50,000
shares each beginning October 1, 1994 on the attainment of certain levels of oil
production from the properties acquired. Production levels through October 1,
1996 had not attained required levels and thus 250,000 shares which might have
been issued through October 1, 1996, had not been issued. Accordingly, the
number of shares which may be issued in the future was reduced to 150,000 shares
as of December 31, 1996.
Stock Options
On August 31, 1995, the Company adopted the 1995 Stock Option and Award
Plan (the "95 Plan"). The 95 Plan replaced the 1994 Employee Incentive Plan
under which no options were issued. The 95 Plan was approved by the
shareholders of the Company at the 1996 annual meeting. A maximum of 500,000
shares, subject to adjustment for certain events of dilution, are available for
grant under the 95 Plan. During 1995 and 1996, options to purchase an aggregate
of 393,500 shares were granted under the 95 Plan.
On November 5, 1996, the board of directors approved adoption of the 1996
Stock Option and Award Plan (the "96 Plan"), which shall be submitted to the
Company's shareholders for approval at the 1997 annual meeting. A maximum of
500,000 shares, subject to adjustment, is available for grant under the 96 Plan.
On adopting the 96 Plan, the board of directors approved the grant of options to
purchase an aggregate of 130,000 shares.
The 95 Plan and 96 Plan are each administered by a committee (the
"Committee") consisting of the board of directors, or a committee thereof. At
their 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, or options which do not qualify as ISOs or stock
awards. In addition to the options granted under the 95 Plan and 96 Plan, the
Company also issues non-qualified options outside the plans.
As of December 31, 1996, the Company had options outstanding granted under
both plans as well as from other individual grants. The Company applies APB
Opinion No. 25 and related interpretations in accounting for options granted
under either plan and for other option agreements. Had compensation cost for
the Company's options been determined based on the fair value at the grant dates
consistent with FASB Statement No. 123, the Company's net loss and loss per
share would have been increased to the pro forma amounts indicated below:
1996 1995
---------- -----------
Net Loss
As Reported............ $(4,909,696) $ (2,519,582)
Pro Forma.............. (7,616,520) (4,462,758)
Loss Per Share
As Reported............ $ (0.49) $ (0.47)
Pro Forma.............. (0.76) (0.83)
The effects of applying FASB No. 123 are not necessarily representative of
the effects on the reported net income or loss for future years.
The fair value of each option granted during 1996 and 1995 is estimated on
the date of grant using the Black-Scholes option pricing model. The following
weighted-average assumptions were utilized for the Black-Scholes valuation:
expected volatility of 1.08% for each year, risk-free interest rates at the date
of grant ranging from 5.70% to 6.39%, and a dividend yield of zero for each
year.
The following tables summarize information about fixed stock options
outstanding at December 31, 1996:
NUMBER WEIGHTED AVERAGE NUMBER
OUTSTANDING AT REMAINING EXERCISABLE AT
PRICES 12/31/96 CONTRACTUAL LIFE 12/31/96
--------- -------------- ---------------- --------------
$1.500 549,000 2.39 549,000
$2.000 0 0.00 0
$3.000 1,710,334 5.91 1,010,334
$5.750 6,000 4.58 6,000
$8.875 467,500 6.83 233,750
--------- ---------
Total 2,732,834 1,799,084
========= =========
<TABLE>
<CAPTION>
1996 1995 1994
------------------- --------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVG. AVG. AVG.
EXER- EXER- EXER-
CISE CISE CISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- ---------- --------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Fixed Options
Outstanding at
beginning of year .2,595,000 $2.541 1,420,000 $2.556 420,000 $1.500
Granted ...........508,834 8.467 1,175,000 $2.523 1,000,000 3.000
Exercised .........(369,000) 2.008 -- -- -- --
Canceled ..........(2,000) 1.500 -- -- -- --
Forfeited ......... -- -- -- -- --
--------- ------ --------- ------ -------- ------
Outstanding at end $2.556
of year ...........2,732,834 $3.710 2,595,000 $2.541 1,420,000
========= ====== ========= ====== ========= ======
Options exercisable
at year-end.........1,799,084 $3.315 1,420,000 $2.266 420,000 1.500
========= ====== ========= ====== ========= ======
</TABLE>
Weighted-average
fair value of
options granted
during the year .... $7.451 $1.452
Warrants
Changes in outstanding warrants during 1996, 1995, and 1994 were as
follows:
SHARES PRICE RANGE
--------- -----------
OUTSTANDING AND EXERCISABLE AT DECEMBER 31, 1993. 150,000 $1.10
Warrants granted as commission to brokers; 82,198 1.65
expiring September 30,1999 ...................
OUTSTANDING AT DECEMBER 31, 1994................. 232,198 1.10 - 1.65
EXERCISABLE AT DECEMBER 31, 1994................. 232,198 1.10 - 1.65
Warrants granted as commission to brokers;
expiring September 30, 1999 .................. 4,000 1.65
Warrants granted in consideration of consulting
agreement; expiring September 30, 1998 ....... 60,000 2.20
Warrants granted in consideration of consulting
agreement; expiring November 9, 2000 ......... 100,000 3.00
Warrants exercised............................... (65,000) 1.10
--------- ------------
OUTSTANDING AT DECEMBER 31, 1995................. 331,198 1.10 - 3.00
EXERCISABLE AT DECEMBER 31, 1995................. 331,198 1.10-3.00
Warrants granted as commission to brokers;
expiring August 6, 2001 ...................... 150,000 6.90
Warrants exercised............................... (50,004) 1.10 - 3.00
--------- ------------
OUTSTANDING AT DECEMBER 31, 1996................. 431,194 $1.10 - $6.90
========= =============
EXERCISABLE AT DECEMBER 31, 1996................. 281,194 $1.10 - $3.00
========= =============
11. ISSUANCE OF PREFERRED STOCK:
The Company is authorized to issue up to 5,000,000 shares of preferred
stock.
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. Each share of
preferred stock was convertible into one share of common stock and had a
liquidation preference equal to $1.00 per share. 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 totaled $137,500 for this class of
preferred stock at December 31, 1995. During the year ended December 31, 1996,
137,500 preferred shares were converted into the same number of common shares
resulting in no preferred shares of stock outstanding at December 31, 1996.
12. COMMITMENTS
Employment Agreements:
Effective January 1, 1995, the Company entered into three-year employment
agreements with David N. Pierce and Andrew W. Pierce, each of whom is an officer
and director. The agreements provide for annual compensation of $120,000 and
$96,000, 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, which commenced in late January 1997, 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.
On July 1, 1996, the Company entered into a three-year employment agreement
with Jerzy B. Maciolek, who is an officer of the Company, providing for an
initial annual salary of $96,000 with an annual increase to be determined by the
Company's board of directors or a compensation committee. The employment
agreement also provides for annual bonuses of up to $100,000, payable in cash or
stock or options, as may be determined by the board of directors or the
compensation committee, based on the progress of projects which Mr. Maciolek is
primarily engaged. In the event the employment contract is terminated by the
Company, other than for cause, or by Mr. Maciolek for cause or because of a
change in control of the Company, Mr. Maciolek is entitled to a termination
payment equal to any accrued but unpaid salary and unreimbursed expenses and
benefits plus his salary for the remaining term of the employment agreement.
Additionally, all options held by Mr. Maciolek shall immediately vest and not be
forfeited.
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. DISCLOSURE ABOUT OIL AND GAS PROPERTIES AND PRODUCING ACTIVITIES:
The Company's significant oil and gas properties are located in Montana,
Nevada, Utah and Poland.
For the years ended December 31, 1996, 1995, and 1994, the Company sold
over 85% of its total oil sales to one purchaser, all of which occurred in the
United States. The Company believes this purchaser could be replaced, if
necessary, without a loss in revenue.
Capitalized costs relating to oil and gas producing activities as of
December 31, 1996 and 1995 are summarized as follows:
UNITED
STATES POLAND TOTAL
-------- ------- -------
(IN THOUSANDS)
DECEMBER 31, 1996:
Proved properties ............... $ 7,172 $ -- $ 7,172
Unproved properties ............. 132 394 526
-------- ----- --------
7,304 394 7,698
Less accumulated depreciation,
depletion and amortization .... (652) -- (652)
-------- ----- --------
$ 6,652 $ 394 $ 7,046
======== ===== ========
DECEMBER 31, 1995:
Proved properties ............... $ 6,063 $ -- $ 6,063
Unproved properties ............. 1,426 1,796
-------- ----- --------
7,489 370 7,859
Less accumulated depreciation,
depletion and amortization .... (406) -- (406)
-------- ----- --------
$ 7,083 $ 370 $7,453
======== ===== ========
Costs incurred in oil property acquisition, exploration and development
activities during the years ended December 31, 1996, 1995, and 1994, whether
capitalized or expensed, are summarized as follows:
UNITED POLAND TOTAL
STATES
------- ------- -------
(IN THOUSANDS)
DECEMBER 31, 1996:
Acquisition of properties
Proved ........................ $ 10 $ -- $ 10
Unproved ...................... 97 274 371
Exploration costs ............... 676 1,750 2,426
Development Costs ............... 907 -- 907
-------- ------- ---------
$ 1,690 $ 2,024 $ 3,714
======== ======= =========
DECEMBER 31, 1995:
Acquisition of properties
Proved ........................ $ 48 $ -- $ 48
Unproved ...................... 16 370 386
Exploration costs ............... 533 214 747
Development costs ............... 1,175 -- 1,175
-------- ------- ---------
$ 1,772 $ 584 $ 2,356
======== ======= =========
DECEMBER 31, 1994:
Acquisition of properties
Proved ........................ $ 4,265 $ -- $ 4,265
Unproved ...................... 910 -- 910
Exploration costs ............... 651 -- 651
Development costs ............... 585 -- 585
-------- ------- ---------
$ 6,411 $ -- $ 6,411
======== ======= =========
14. 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, 1996 1995, and 1994, are as follows:
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
--------- --------- --------
(BBLS)
otal proved reserves:
Beginning of year ............... 5,257,173 5,733,813 --
Purchase of minerals in-place ... -- 146,465 4,863,005
Extensions and discoveries ...... -- -- 1,254,708
Revisions of previous estimates 315,625 (488,097) (267,088)
Production ...................... (130,018) (135,008) (116,812)
---------- --------- ---------
End of year.................... 5,442,780 5,257,173 5,733,813
========== ========= =========
Proved developed reserves:
Beginning of year ............... 2,682,673 2,654,995 --
========== ========= =========
End of year.................... 2,828,743 2,682,673 2,654,995
========== ========= =========
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 remaining reserves. The decrease in 1995 was principally due to
substantial completion of a water flood project resulting in removal of proved
undeveloped reserves as production rates in the field had not then shown
adequate production to justify recognition as proved developed reserves. The
increase in 1996 was principally due to a substantial increase in oil prices at
year-end 1996 compared to a year earlier, resulting in an increase in useful
economic lives of the wells and a concomitant increase in estimated total
production.
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 net cash flows were computed by applying period-end prices and costs
of oil relating to the Company's proved reserves to the period-end quantities of
those reserves.
The assumptions used to compute the proved reserve valuation do not
necessarily reflect the Company's expectations of actual revenues to be derived
from those reserves nor their present worth. Assigning monetary values to the
reserve quantity estimation process does not reduce the subjective and ever-
changing nature of such reserve estimates.
Additional subjectivity occurs when determining present values because the
rate of producing the reserves must be estimated. In addition to errors
inherent in predicting the future, variations from the expected production rate
also could result directly or indirectly from factors outside the Company's
control, such as unintentional delays in development, environmental concerns and
changes in prices or regulatory controls.
The reserve valuation assumes that all reserves will be disposed of by
production. However, if reserves are sold in place, additional economic
considerations also could affect the amount of cash eventually realized.
Future development and production costs are computed by estimating
expenditures to be incurred in developing and producing the proved oil reserves
at the end of the period, based on period-end costs and assuming continuation of
existing economic conditions.
A discount rate of 10% per year was used to reflect the timing of the
future net cash flows.
AS OF DECEMBER 31,
-------------------------------------
1996 1995 1994
---------- -------- ---------
(IN THOUSANDS)
Future cash flows................. $ 116,405 $ 86,643 $ 72,914
Future production and development
costs ........................... (47,083) (41,463) (33,728)
---------- -------- ---------
Future net cash flows............. 69,322 45,180 39,186
Future income tax expense......... (17,880) (11,628) (8,064)
Future net cash flows........... 51,442 33,552 31,122
10% annual discount for estimated
timing of cash flows ............ (25,158) (15,891) (14,369)
---------- -------- ---------
Standardized measure of discounted
future net cash flows ........... $ 26,284 $ 17,661 $ 16,753
========== ========= =========
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:
1996 1995 1994
---------- ---------- ---------
(IN THOUSANDS)
Balance, beginning of year........ $ 17,661 $ 16,753 $ --
Sales of oil produced, net of
production costs ................ (1,120) (709) (1,035)
Net changes in prices and
production costs ................ 11,374 4,663 (1,377)
Purchases of minerals in-place.... -- 681 20,125
Extensions and discoveries, net of -- -- 5,236
future costs ....................
Changes in estimated future
development costs ............... (1) 349 (630)
Development costs incurred during
the year ........................ 1,070 1,298 134
Revisions in previous quantity
estimates ....................... 2,234 (2,467) (1,015)
Accretion of discount............. 1,766 1,675 1,509
Net change in income taxes........ (3,015) (2,178) (2,404)
Changes in rates of production and
other ........................... (3,685) (2,404) (3,790)
---------- -------- ---------
Balance, end of year.............. $ 26,284 $ 17,661 $ 16,753
========== ========= =========
LUBLIN AREA
JOINT STUDY AGREEMENT
This Lublin Area Joint Study Agreement is made in two original copies,
effective as of December 70, 1996.
Between
The Polish Oil and Gas Company ("POGC") having its offices at ul. Krucza
6/14, Warsaw, Poland 00-537, represented by Dr. Witold Weil, Director
And
FX Energy. Inc., ("FX Energy") having its offices at 3006 Highland Drive,
Suite 206,. Salt Lake City, Utah, 84106, USA, represented by Mr. David N.
Pierce, Chief Executive Officer
hereinafter referred to individually as a "Party" or collectively as the
"Parties".
RECITALS
A. The Minister of Environmental Protection, Natural Resources and Forestry
has awarded exclusive oil and gas exploration and exploitation rights to FX
Energy through its subsidiary, Lubex Petroleum Company Sp. z o.o.
("Lubex"), covering eight concession blocks totaling approximately 2
million acres (the "Lublex Concession") located near the city of Lublin.
B. POGC has certain oil and gas rights to concession blocks (the "POGC Lublin
Blocks") which are located adjacent to the Lublex Concession on the north
and east.
The Parties hereby agree to the following:
1. POGC will deliver to FX Energy copies (both paper and tape where available)
of its geological and geophysical data from the concession blocks
immediately adjacent to the Lubex Concession and from such additional
concession blocks whether or not, immediately adjacent, as the parties may
mutually agree. All of such data is hereinafter referred to as the "POGC
Lublin Data".
2. FX Energy, at its own cost and expense, will evaluate, interpret and
reprocess as much of the POGC Lublin Data as it deems appropriate and will
deliver to POGC copies of such evaluations interpretations and reprocessing
along with its conclusions pertaining to hydrocarbon potential. FX Energy
will at all times strictly maintain the confidentiality of such data and
will return all copies to POGC. FX Energy will use reasonable efforts to
identify oil and gas prospects on the POGC Lublin Blocks and will share its
findings with POGC.
3. In the event the parties identify new hydrocarbon prospects on any of POGC
Lublin Blocks, they will in good faith discuss and negotiate with a view to
jointly applying for the rights to explore and exploit such blocks.
IN WITNESS whereof the Parties have caused this Agreement to be execute by
their duly authorized representatives as of the day, month and year first above
written.
FX Energy Inc. Polish Oil and Gas Company
By /s/ David N. Pierce By /s/ Dr. Witold Weil
CEO Director
MINING USUFRUCT AGREEMENT
with Respect to
Prospecting for and Exploration and Exploitation of
Natural Gas and Oil
between
THE STATE TREASURY OF
THE REPUBLIC OF POLAND
and
LUBEX PETROLEUM COMPANY Sp. zo o.o.
This Agreement is entered into this 20th day of December, 1996 by and
between the STATE TREASURY OF THE REPUBLIC OF POLAND (herein the "Treasury"),
represented by the Minister of Environmental Protection, Natural Resources and
Forestry Mr. Stanistaw Zelichowski (herein the "Minister")
and
LUBEX PETROLEUM COMPANY Sp. z o.o., a Polish limited liability company, with its
seat at Wal Miedzeszynski 646, 03-994 Warszawa, Poland, entered into the
Commercial Register kept by the District Court in Warsaw, under number 48161
(herein the "Company"), represented by Mr. David N. Pierce.
WHEREAS, the Company desires to explore for and exploit Natural Gas and Oil
in the Republic of Poland; and
WHEREAS, the Company, through its parent company, has the experience,
financial and technical ability and resources, and professional expertise
efficiently to explore for, develop and exploit Natural Gas and Oil in the
Republic of Poland; and
WHEREAS, the ownership of all Natural Gas and Oil existing in its natural
condition within the territory of the Republic of Poland belongs to the
Treasury;
NOW, THEREFORE, the Parties agree as follows:
ARTICLE I
DEFINITIONS
1.1 The following terms when used in this Agreement shall have the meaning
ascribed to them in the Geological and Mining Law as in effect on the date of
this Agreement:
Exploration
Exploitation
Geological Documentation
Mineral Deposit
Mining Area
Prospecting
1.2 The following terms when used in this Agreement shall have the meaning
ascribed to them hereunder:
1.2.1 "Block" means the areas specified in Schedule "A". At the
effective date of this Agreement there are eight (8) Blocks, identified in
Schedule "A" hereto as Blocks 255, 275, 295, 296, 316, 336, 337 and 338.
1.2.2 "Joint Concession" or "Joint Concessions" means the
Concessions granted under the Geological and Mining Law for Prospecting for
and the Exploration and Exploitation of Natural Gas and Oil of the type
referred to in Article 24 of the Geological and Mining Law.
1.2.3 "Concession Effective Date" as to any particular Joint
Concession means the date on the Minister signs the Joint Concession.
1.2.4 "Concession Operations" means all or any of the operations
covered by the applicable Joint Concession.
1.2.5 "Exploitation Period" means the thirty (30) years beginning
on the first day after the end of the Second 3-Year Exploration Period, and
with respect to any individual Mining Area from which Natural Gas or Oil in
paying quantities is then being recovered, such Exploitation Period can be
extended from year to year so long as Natural Gas or Oil is being produced
therefrom in paying quantities.
1.2.6 "Exploration Period" means the First 3-Year Exploration
Period and the Second 3-Year Exploration Period.
1.2.7 "First 3-Year Exploration Period" means the three (3) years
beginning on the Concession Effective Date of the last Joint Concession
issued to the Company for all eight (8) Blocks specified in Schedule "A".
1.2.8 "Second 3-Year Exploration Period" means the three (3) years
beginning on the first day after the end of the First 3-Year Exploration
Period.
1.2.9 "Mining Usufruct Area" means the Block or Blocks described
in Schedule "A" excluding any portion thereof in respect of which the
Company's rights hereunder are from time to time relinquished or
surrendered by the Company.
1.2.10 "Oil" means mineral oil, asphalt, ozokerite and all kinds of
hydrocarbons and bitumens, both in solid and in liquid form, in their
natural state or obtained from Natural Gas by condensation or extraction.
1.2.11 "Designated Entity" means an entity designated by the
Minister to represent it for certain purposes under this Agreement as set
forth in Article XVII.
1.2.12 "Natural Gas" or "Gas" means hydrocarbons that are in a
gaseous state under normal atmospheric conditions of temperature and
pressure, including wet gas, dry gas, casinghead gas and all other gaseous
hydrocarbons including the residue gas remaining after the condensation or
extraction of liquid hydrocarbons from gas, but excluding condensed or
extracted liquid hydrocarbons.
1.2.13 "Parties" means the Treasury and the Company, and "Party"
means either of the Parties.
1.2.14 "Geological and Mining Law" means the Act of February 4th,
1994.
ARTICLE II
ESTABLISHMENT OF MINING USUFRUCT
2.1 The Minister acting on behalf of the Treasury, as the sole owner of
the Mineral Deposits, hereby establishes in favor of the Company a mining
usufruct in the Mining Usufruct Area regarding the Prospecting for, Exploration
and Exploitation of Natural Gas and Oil. Such right is of an exclusive nature.
2.2 The mining usufruct with respect to each of the eight (8) Blocks is
subject to the Company obtaining a Joint Concession covering such Block. The
Minister agrees to use its best efforts leading to the issuance of Joint
Concessions covering all of the Blocks and leading to the designation and
approval of Mining Area boundaries which may be requested by the Company from
time to time.
ARTICLE III
GRANT OF RIGHTS AND EFFECTIVENESS
3.1 This Agreement is effective when executed by both Parties, but may be
terminated after sixty (60) days' written notice by the Company if the eight (8)
Joint Concessions referred to in Article 2.2 are not granted within four (4)
months after the Company submits the eight (8) concession applications.
3.2 This Agreement shall terminate if no Joint Concession is granted, or
upon the expiry or withdrawal of the last Joint Concession granted to the
Company within the Mining Usufruct Area, or as otherwise provided by law.
3.3 The duration of this Agreement shall be for so long as any Joint
Concession granted to the Company within the Mining Usufruct Area remains in
effect.
ARTICLE IV
WORK PROGRAM
4.1 The Company will commence ifs work program not later than thirty (30)
days after the beginning of the First 3-Year Exploration Period.
4.2 Geological and Geophysical Evaluation
4.2.1 The Company will carry out and complete a regional
evaluation within one or more Blocks during the first twenty-four (24)
months of the First 3-Year Exploration Period. This evaluation will include
the following:
a. compile, examine, interpret and process existing seismic
data;
b. compile and interpret existing well data;
c. compile, process and interpret existing potential field
data;
d. integrate seismic, well and potential field data in a
regional report;
e. identify prospective ("target") reservoir horizons;
f. identify structural or structural-stratigraphic traps
("potential drill sites").
4.2.2 The Company will carry out and complete an initial prospect
delineation during the First 3-Year Exploration Period, during which it
will:
a. determine optimal seismic acquisition parameters; and
b. acquire 2D or 3D seismic data over 500 km of seismic lines;
4.3 During the First 3-year Exploration Period the Company will drill one
well to the depth necessary to test a Carboniferous/Devonian objective, which is
estimated to be 2,000 to 3,000 meters. The first well may be located anyplace
within the Mining Usufruct Area at the discretion of the Company.
4.4 Unless the Company has relinquished all of its interest in the Mining
Usufruct Area on or before the end of the First 3-Year Exploration Period, then
during the Second 3-year Exploration Period the Company will drill at least one
well in each of the Blocks, excluding the Blocks which have been relinquished on
or before the end of the First 3-Year Exploration Period and the Blocks in which
a well was drilled during the First 3-Year Exploration Period. Each of such
wells shall be drilled to the depth necessary to test a Carboniferous/Devonian
objective, which is estimated to be 2,000 to 3,000 meters.
ARTICLE V
DESIGNATION OF MINING AREAS
5.1 During the term of this Agreement, the Company may discover Natural
Gas and Oil deposits which it believes can be extracted profitably, in which
such case the Company shall prepare appropriate documents and request:
5.1.1. approval of the Geological Documentation by the appropriate
agency of the state geological administration; and
5.1.2 a separate decision from the concessionary agency regarding the
detailed conditions for extracting the Natural Gas and Oil.
5.2 The Mining Area shall be designated based on geological documentation
and it will include the entire surface area within the contour of the deposit of
Natural Gas and Oil demonstrated by available seismic, gravity and well data.
5.3 The Company shall have the right to extract and exploit Natural Gas
and Oil upon approval of Geological Documentation and designation of a Mining
Area.
ARTICLE VI
OWNERSHIP OF DATA AND NATURAL GAS AND OIL
6.1 Ownership of all information and data obtained as a result of
Concession Operations shall be vested in the Company. The Company shall,
however, provide the Minister with the information and reports described in
Article 8.5 and 8.6.
6.2 Ownership of all Natural Gas and Oil produced by the Company from the
Mining Usufruct Area shall pass to the Company at the wellhead.
6.3 After a Concession Effective Date the Company will have access to and
the right to copy, free of cost other than reasonable costs of reproduction and
handling, all geological, geophysical, geochemical, drilling, engineering, well
logs, and other information and data relating to Natural Gas and Oil owned or
possessed by the Treasury or the Minister in relation to such Block.
ARTICLE VII
RELINQUISHMENT
7.1 The Company shall relinquish part or parts of the Mining Usufruct Area
as follows:
7.1.1 At the end of the Second 3-Year Exploration Period the Company
shall relinquish all of the lands within the Mining Usufruct Area which are
not within the boundaries of any Mining Areas that have been designated for
Exploitation or duly applied by the Company for such designation.
7.1.2 The Company may relinquish all or part of the Mining Usufruct
Area upon expiration of the First 3-Year Exploration Period and at any time
during the Second 3-Year Exploration Period subject to fulfillment of any
accrued obligations.
7.2 The areas to be relinquished under this Article shall be determined by
the Company, provided that areas to be relinquished shall be of sufficient size
and convenient shape to enable activities to be carried out thereon by others.
The Company shall give notice in writing to the Minister of said area(s) no
later than thirty (30) days prior to the end of the relevant period, including a
map showing said area(s) with the geographic location and the coordinates of the
connecting points of the boundary lines. The Minister shall advise the Company
within fifteen (15) days of such notice whether it agrees with the area(s)
selected for relinquishment in accordance with the aforementioned criteria
relating to size and shape.
ARTICLE VIII
CONDUCT OF OPERATIONS
8.1 The Company is responsible for the conduct of the Concession
Operations contemplated by this Agreement and the Joint Concessions and is to
provide all capital, machinery, equipment, technology and personnel necessary
for the conduct of Concession Operations.
8.2 The Company shall conduct the Concession Operations diligently and in
accordance with the laws of Poland and good international petroleum industry
practices as designed to permit the economic, efficient and safe exploration
for, and development and production of, Natural Gas and Oil.
8.3 The Minister will endeavor to provide the Company with assistance as
described below when the Minister believes it is in the best interest of the
Company to do so, but failure to provide the described assistance will not
result in an extension of time in which the Company is to perform the relevant
obligations, nor create any liability or responsibility on the part of the
Treasury.
8.3.1 The Minister will assist the Company in its application for and
insofar as possible in granting by national and local Polish government of
permissions required for the performance of Concession Operations,
including, but not limited to, licenses, permits, approvals,
authorizations, consents, visas, work permits, surface rights and
easements.
8.3.2 The Minister will assist in obtaining and providing to the
Company such general information as may be reasonably required by the
Company for planning and executing projects incidental to Concession
Operations.
8.4 In addition to all other notices and reports required by law, the
Company shall notify the Minister in advance (two months in advance, if
possible) of all significant scheduled field activities, such as geological and
geophysical surveys and drilling. The Company shall also notify the Minister in
advance (two months in advance, if possible) of abandonment of any wells that
have been in production. In the event such advance notice is not practical, or
in the event of emergency, the Company shall notify the Minister within
forty-eight (48) hours following such event.
8.5 The Company shall provide to the Minister or to the Designated Entity,
as defined in Article XVII, data and information collected and compiled with
respect to Concession Operations in the Mining Usufruct Area, as follows:
8.5.1 one set of geological reports, studies, or interpretations
and the maps, sections and other documents related thereto;
8.5.2 one set of all geophysical recordings, measurements and
reports, with all maps profiles, sections, interpretations, studies, and
other documents relating thereto, and copies of recordings (tapes or
otherwise and all supporting data);
8.5.3 one set of final well reports and composite logs
representiing the lithology and other parameters relating to each well
drilled;
8.5.4 a representative portion of all cores, samples, fluids and
other materials taken from outcrops and wells; and
8.5.5 one set of fluid measurements, analyses or other results in
final form produced by or for the Company in connection with Concession
Operations
All of such information shall be kept confidential by the Minister or the
Designated Entity for a period of one year after it is provided.
8.6 The Company shall make such other reports to the Minister in such
form, detail, and at such tune as the Minister may reasonably require with
respect to exploration, production, employment or training, or such other
matters related to the conduct of Concession Operations hereunder, provided,
however, that the Minister's requests for such reports shall not interfere
unreasonably with the Company's ability to carry out Concession Operations
efficiently or necessitate any undue expense. Pursuant to the above mentioned
determination, the Company shall submit monthly to the Minister a report of the
progress of the work and a short memorandum of the results thereof.
8.7 The Company shall give prompt written notice to the Minister in the
event of any change of the Company's name, organizational form, increase or
decrease of the Company's capital structure, petition for bankruptcy,
restructuring of debt, or liquidation. The Minister may request any necessary
clarification in these matters.
ARTICLE IX
PROTECTION OF ENVIRONMENT AND SAFETY
9.1 The Company shall conduct Concession Operations in accordance with the
laws of Poland and good international petroleum industry practice relating to
the protection of the environment, including but not necessarily limited to the
following:
9.1.1 The Company shall in particular take all commercially
reasonable steps required by Polish law and good international petroleum
industry practice to.
a. ensure that its operations minimize ecological damage or
destruction;
b. control the flow and prevent the avoidable escape or waste
of Natural Gas and Oil or ground water discovered in or produced from
the Mining Usufruct Area;
c. prevent damage to Natural Gas and Oil or ground water
bearing strata; and
d. prevent damage to land, fresh water supplies, animal life,
flora, crops, buildings or other structures.
9.1.2 If there is a release of Natural Gas or Oil or other
material on land, fresh water, or any other form of pollution or other harm
to fresh water, land, animal life or flora as a result of Concession
Operations, the Company shall promptly take all necessary measures to
control the pollution, to clean up any Natural Gas and Oil or released
material, or to repair, to the extent commercially feasible, any damage
resulting from such circumstances.
9.1.3 In the event of an emergency the Company shall notify the
Minister immediately and shall take such action as may be prescribed by the
appropriate governmental authority and otherwise act in accordance with
good international petroleum industry practice.
9.1.4 The Company shall take steps to ensure restoration of the
operating environment upon termination of the Joint Concessions. The
Company shall provide the Minister a copy of the plans for restoration of
the operating environment that are required by law.
ARTICLE X
EMPLOYMENT AND TRAINING
10.1 Subject to the applicable provisions of law, the Company shall be
free to employ such personnel and sub-contractors as it may choose for the
purpose of carrying out the Concession Operations. To the extent the Company
deems it reasonable and prudent to do so, and as far as is consistent with
efficient operations and with the Company's responsibility for the conduct of
the Concession Operations, in recruiting employee candidates the Company shall
give preference to Polish citizens who are qualified by education, training and
experience to conduct the tasks for which they are considered; and in selecting
subcontractors to carry out the Concession Operations in the Republic of Poland
the Company shall give preference to Polish sub-contractors, provided they are
competitive in terms of quality, cost, and the ability to meet required
schedules.
10.2 The Company shall provide such training as it deem appropriate
for Polish citizens employed directly or indirectly in the Concession Operations
during term of this Agreement.
10.3 Notwithstanding the above, the Company will spend US$ 25,000 per
year during the Exploration Period on training of Polish citizens, as directed
by the Minister. The amounts and kinds of such expenditures thereafter shall be
determined from time to time by further agreement between the Company and the
Minister.
ARTICLE XI
ASSIGNMENT
11.1 The Company has the right to assign or transfer all or part of
its rights and obligations under this Agreement to any affiliate or third party,
subject to the requirement that the Company obtain the prior written consent of
the Treasury, which consent shall not be unreasonably withheld or delayed
provided that the Minister shall be satisfied that any such assignee shall be
technically and financially able to carry out the terms and conditions of this
Agreement.
11.2 A change of ownership of the Company's shares shall not be
considered an assignment or transfer of rights under this Agreement.
ARTICLE XII
FORCE MAJEURE
12.1 Performance under this Agreement by the Company or the Treasury
shall be excused in the event such performance is delayed or prevented by acts
of Force Majeure. Acts of Force Majeure are events beyond the reasonable control
of the Party claiming to be affected by any such event, which have not been
brought about at its insistence and include, but are not limited to, war,
insurrection, riot, civil disorder, embargo, blockade, explosion, fire,
lightening, earthquake or other adverse weather conditions, strikes,
non-availability of equipment or any other event of a similar nature, whether or
not of the same type or kind. The foregoing is based on the proviso, however,
that the Company or the Treasury, as the case may be, shall be required to use
reasonable diligence to seek to overcome the obstacle and resume performance
within a reasonable time after the obstacle is removed.
12.2 If Concession Operations are delayed, curtailed or prevented by
such causes, then the time for carrying out the obligations affected thereby,
the duration of the relevant period of Concession Operations, the term of this
Agreement, and all rights and obligations hereunder, all shall be extended for a
period equal to the delay caused by the Force Majeure occurrence plus such
period of time as is necessary to reestablish operations.
12.3 The Party whose ability to perform its obligations is so affected
shall notify forthwith the other Party thereof in writing stating the cause, and
the Parties shall do all that is reasonably within their power to remove such
cause.
ARTICLE XIII
TERMINATION
13.1 The Company may relinquish all or any part of its rights and be
relieved of the related obligations under this Agreement on 60 days' notice to
the Minister.
13.2 In the event the Company takes an action or fails to take an
action which results in a material breach of this Agreement, then within ninety
(90) days of receiving written notice from the Minister of such alleged material
breach the Company shall take action reasonably intended to remedy such alleged
breach. If within the time allowed the Company fails to take remedial action,
then this Agreement may be terminated by the Minister on behalf of the Treasury
on 60 days' written notice.
13.3 Should the Company dispute the existence of circumstances in
Article 13.2, the Company may refer the dispute at any time before the end of
ninety (90) days after receipt of the notice of termination from the Minister to
arbitration as provided by Article XIV and termination of the Agreement by the
Minister on behalf of the Treasury shall not take effect except under the terms
of any arbitration award which results.
13.4 Termination under this Article XIII shall take place without
prejudice to any right which may have accrued to the Treasury or the Company
under the Agreement prior to such termination.
ARTICLE XIV
ARBITRATION
14.1 Any dispute as to any matter or operation arising out of or in
connection with this Agreement, including, without limitation, any dispute as to
the validity, construction, enforceability or breach of this Agreement shall be
exclusively and finally settled by arbitration, and any Party may submit such a
dispute to arbitration.
14.2 Arbitration proceedings shall be conducted by three (3)
arbitrators in accordance with the Rules of UNCITRAL, the United Nations
Commission on International Trade Law.
14.3 Unless otherwise agreed in writing by the Parties, the third
arbitrator appointed pursuant to Article 14.2 shall not be a national of Poland
or of the same nationality as the main shareholder(s) of Company.
14.4 In any arbitration proceeding hereunder:
14.4.1 proceedings shall, unless otherwise agreed in writing by the
Parties, be held in Warsaw, Poland;
14.4.2 the Polish language shall be the official language for all
purposes; and
14.4.3 the decision of the majority of the arbitrators shall be
final and binding and shall be enforceable in any court of competent
jurisdiction.
14.5 In case of arbitration, the Parties shall continue their
performance of this Agreement unless it is impossible to do so for reason of
Force Majeure or unless the Company's rights hereunder have been expropriated,
nationalized or otherwise taken.
14.6 The costs of arbitration shall be borne in the manner determined
by the arbitration tribunal.
14.7 Each of the Parties hereby irrevocably waives any and all claims
to immunity in regard to the arbitration proceedings and any proceedings to
enforce, recognize or execute any arbitral award rendered by a tribunal
constituted pursuant to this Agreement including, without limitation, immunity
from service of process, immunity from jurisdiction of any court, and immunity
of such of his property as is of a commercial nature from execution.
ARTICLE XV
GOVERNING LAW AND STABILIZATION
15.1 This Agreement shall be governed by the laws of Poland and
international treaties which Poland has adopted.
15.2 The Minister on behalf of the Treasury acknowledges that the
Company has entered into this Agreement in reliance on the Polish law as in
existence on the date the Company executes this Agreement, particularly the laws
and ordinances relating to royalties, taxation, the export of Oil, the sale of
Natural Gas, and the repatriation of profits. The Minister on behalf of the
Treasury hereby represents that all rights granted to the Company hereunder are
in conformity with Polish law as in effect on the date the Company executes this
Agreement, as such law applies to the Company. In the event that any change to
the law of Poland occurs or the Government takes any other action which
restricts, divests or limits any rights or benefits accruing to the Company or
which increases the Company's obligations or costs of operation under this
Agreement or under the law of Poland, the Company may, at any time thereafter so
notify the Minister in writing. Promptly upon receipt of such notice, the
Minister and the Company shall meet to negotiate in good faith and agree upon
the modifications which need to be made to the terms of this Agreement to
restore the Company's rights and benefits to a level equal to what they would
have been had such change not occurred, or upon such other remedy as they agree
may be appropriate. In the event the Parties are unable to agree within ninety
(90) days after the Company's notice to the Minister upon the modifications
which are needed to the Agreement or upon such other remedy as may be required,
then either Party may at any time thereafter refer the matter or matters in
dispute to arbitration pursuant to Article XIV.
ARTICLE XVI
MINING USUFRUCT FEES & OTHER PAYMENTS
16.1 The Company shall pay the Treasury a mining usufruct fee as
follows:
16.1.1 The Company shall pay the Polish zloty equivalent of US$ 2,500
per each Block within 30 days from obtaining the eight Joint Concessions
covering the entire Mining Usufruct Area;
16.1.2 Moreover, the Company will be obligated to pay the Treasury a
mining usufruct fee in Zlotys based on the market value of the reserves in
place. The fee will be negotiated by the Treasury and the Company within
the range of 0.01 to 0.5 per mil of market value of the reserves in place
as determined in accordance with standard international petroleum industry
engineering criteria. The mining usufruct fee shall:
a. apply to only so much of the reserves that can be extracted
using conventional primary recovery methods;
b. be negotiated and determined with respect to each Mining
Area at the time the boundaries thereof are designated pursuant to
Article 5.2 above; and
c. be payable in five consecutive annual installments,
commencing on the date such Mining Area is designated.
16.1.3 The mining usufruct fee shall be paid to the following bank
account:
Ministry of Environmental Protection, Natural Resources and
Forestry,
Biuro Administracyjno -Budzetowe
NBP O/O Warszawa
account # 1052-680-223-1
title: 28.31.3996 Section 64 - mining usufruct;
or such other account as the Minister may notify to the Company in
writing.
16.2 The concession fee referred to in Article 85 of the Geological
and Mining Law of February 4, 1994 shall amount to the zloty equivalent of US$
25,000 per each Joint Concession covering one Block, of which US$ 12,500 shall
be payable within 30 days from obtaining the Joint Concession and 12,500 shall
be payable within 30 days from expiration of the First 3-Year Exploration
Period. The Company may be relieved from payment of the second part of the
concession fee with respects to the Blocks it shall relinquish in accordance
with Article 7.1.1 above. 60 percent of the fee shall constitute the revenue of
the local authorities on whose territory the activities under the Joint
Concession are to be conducted and the remaining 40 percent shall constitute the
revenue of the National Fund for Environmental Protection and Water Management.
16.3 The Company envisages that it will spend the equivalent of US$
2,000,000 to US$ 4,000,000 during the First 3-Year Exploration Period and US$
4,000,000 to US$ 10,000,000 during the Second 3-Year Exploration Period.
ARTICLE XVII
DESIGNATED ENTITY
17.1 The Minister may designate an entity of its choice to represent
the Minister for the purposes of receipt and safekeeping of reports,
interpretations, maps, data, cores, samples, and other information.
17.2 The appointment of a Designated Entity notwithstanding, the
Treasury shall remain responsible to the Company for all of its obligations to
the Company as provided herein.
17.3 The Minister shall notify the Company in writing of its naming of
the Designated Entity, of the specific purpose to which such designation
relates, and of all communication and other details which the Company requires
to know about such Designated Entity. Such notification shall be made in good
time to enable the Company to comply with its obligations hereunder and so as
not to disrupt or delay Concession Operations.
ARTICLE XVIII
NOTICES
18.1 All notices, applications, requests, agreements, approval,
consents, instructions, delegations, waivers or other communications to be
given, submitted or made hereunder by any Party to another shall be sufficiently
given if in writing and delivered in person to an authorized representative of
the Party to whom such notice is directed or when sent by registered post,
postage paid, or by telegram, telex, facsimile or cable, to the address or
addressee of the other Party as follows, or to such other address as a Party may
specify in writing to the other:
for the Treasury Jacek Wroblewski, Director
or the Minister: Bureau of Geological Concessions
Ministry of Environmental Protection,
Natural Resources and Forestry
52/54 Wawelska Street
00-922 Warsaw
Facsimile: 25-15-03
for the Company: Jozef Rokicki
Lubex Petroleum Company, Sp. z o.o.
Wal Miedzeszynski 646
03-994 Warszawa Poland
Facsimile: 671-66-40, 671-97-72
18.2 Notices when given in terms of Article 18.1 shall be made in the
Polish language shall be effective when delivered, if delivered during business
hours of working days; if received outside business hours such notices shall be
effective on the next following working day.
IN WITNESS WHEREOF, the representatives of the Parties of this Agreement
being duly authorized have hereunto set their hands and have executed these
presents this 20th day of December, 1996.
The Minister of Environmental Protection, Natural Resources and Forestry of The
Republic of Poland
by: /s/ Dr. Krzysztof Szamalek
Secretary State
Lubex Petroleum Company, Sp. z o.o.
by: /s/ David N. Pierce
Member of the Management Board
SCHEDULE "A "
MAP AND COORDINATES OF THE MINING USUFRUCT AREA
In the event of conflict between the coordinates specified below and the map
attached hereto, the coordinates shall control.
The Mining Usufruct Area shall include all of the lands within Blocks 255, 275,
295, 296, 316, 336, 337 and 338. The coordinates of the Blocks are as follows:
Block 255 21.00'00" 21.30'00"
52.00'00" 52.00'00"
21.00'00" 21.30'00"
51.45'00" 51.45'00"
Block 275 21.00'00" 21.30'00"
51.45'00" 51.45'00"
21.00'00" 21.30'00"
51.30'00" 51.30'00"
Block 295 21.00'00" 21.30'00"
51.30'00" 51.30'00"
21.00'00" 21.30'00"
51.15'00" 51.15'00"
Block 296 21.30'00" 22.00'00"
51.30'00" 51.30'00"
21.30'00" 22.00'00"
51.15'00" 51.15'00"
Block 316 21.30'00" 22.00'00"
51.15'00" 51.15'00"
21.30'00" 22.00'00"
51.00'00" 51.00'00"
Block 336 21.30'00" 22.00'00"
51.00'00" 51.00'00"
21.30'00" 22.00'00"
50.45'00" 50.45'00"
Block 337 22.00'00" 22.30'00"
51.00'00" 51.00'00"
22.00'00" 22.30'00"
50.45'00" 50.45'00"
Block 338 22.30'00" 23.00'00"
51.00'00" 51.00'00"
22.30'00" 23.00'00"
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (this "Agreement") is entered into effective
as of November , 1996, by and between FX ENERGY, Inc., a Nevada corporation
----
(the "Corporation"), and [Indemnitee Name] ("Indemnitee"), based on the
following premises.
PREMISES
A. The articles of incorporation of the Corporation (the "Articles") and
the bylaws (the "Bylaws") provide for indemnification of the Corporation's
directors and officers in accordance with the Domestic and Foreign Corporation
laws of Nevada (the "Statute").
B. The Articles, Bylaws, and Statute contemplate that contracts and other
arrangements may be entered into with respect to indemnification of officers and
directors.
C. It is reasonable, prudent, and necessary for the Corporation to
obligate itself contractually to indemnify Indemnitee so that he will to serve
as a director and/or officer of the Corporation and will be able to serve the
Corporation free from undue concern that he will not be adequately protected.
D. Indemnitee is willing to serve the Corporation on condition that he is
indemnified on the terms and conditions of this Agreement.
E. The directors of the Corporation have duly approved this Agreement and
the indemnification provided herein with the express recognition that the
indemnification arrangements provided herein exceed that which the Corporation
would be required to provide pursuant to Section 78.751 of the Statute.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the covenants
contained herein, the Corporation and Indemnitee do hereby covenant and agree as
follows:
1. Definitions. As used in this Agreement:
(a) The term "Proceeding" shall include any threatened, pending, or
completed action, suit, or proceeding, whether brought by or in the right
of the Corporation or otherwise and whether of a civil, criminal,
administrative, or investigative nature, in which Indemnitee was, is, or
will be involved as a party, as a witness, or otherwise, by reason of the
fact that Indemnitee is or was a director, officer, agent, or advisor of
the Corporation, by reason of any action taken by him or of any inaction on
his part while acting as a director, officer, agent, or advisor of the
Corporation, or by reason of the fact that he is or was serving at the
request of the Corporation as a director, officer, employee, agent, or
advisor of another corporation, partnership, joint venture, trust, limited
liability company, or other entity or enterprise, in each case whether or
not he is acting or serving in any such capacity at the time any liability
or expense is incurred for which indemnification or reimbursement can be
provided under this Agreement; provided, that any such action which is
brought by Indemnitee to enforce his rights under this Agreement shall not
be a Proceeding without prior approval of a majority of the board of
directors of the Corporation.
(b) The term "Expenses" shall include, without limitation, any
judgments, fines, and penalties against Indemnitee in connection with a
Proceeding; amounts paid by Indemnitee in settlement of a Proceeding; and
all attorneys' fees and disbursements, accountants' fees and disbursements,
private investigation fees and disbursements, retainers, court costs,
transcript costs, fees of experts, fees and expenses of witnesses, travel
expenses, duplicating costs, printing and binding costs, telephone charges,
postage, delivery service fees, and all other disbursements or expenses
reasonably incurred by or for Indemnitee in connection with prosecuting,
defending, preparing to prosecute or defend, investigating, or being or
preparing to be a witness in a Proceeding or establishing Indemnitee's
right or entitlement to indemnification for any of the foregoing.
(c) Reference to "other enterprise" shall include employee benefit
plans; references to "fines" shall include any excise tax assessed with
respect to any employee benefit plan; references to "serving at the request
of the Corporation" shall include any service as a director, officer,
employee, agent, or advisor with respect to an employee benefit plan, its
participants or beneficiaries; and a person who acted in good faith and in
a manner he reasonably believed to be in the interests of the participants
and beneficiaries of an employee benefit plan shall be deemed to have acted
in a manner "not opposed to the best interest of the Corporation" as
referred to in this Agreement.
(d) The term "substantiating documentation" shall mean copies of
bills or invoices for costs incurred by or for Indemnitee, or copies or
court or agency orders or decrees or settlement agreements, as the case may
be, accompanied by a sworn statement from Indemnitee that such bills,
invoices, court or agency orders or decrees or settlement agreements,
represent costs or liabilities meeting the definition of "Expenses" herein.
(e) The term "he" and "his" have been used for convenience and mean
"she" and "her" if Indemnitee is female.
2. Indemnity of Director or Officer. The Corporation hereby agrees to
hold harmless and indemnify Indemnitee against any and all Expenses incurred by
reason of the fact that Indemnitee is or was a director, officer, agent, or
advisor of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee, agent or advisor of another
corporation, partnership, joint venture, trust, limited liability company, or
other entity or enterprise, but only if Indemnitee acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interest of
the Corporation and, in the case of a criminal proceeding, had no reasonable
cause to believe that his conduct was unlawful. The termination of any
Proceeding by judgment, order of the court, settlement, conviction, or upon a
plea of nolo contendere, or its equivalent, shall not, of itself, create a
presumption that Indemnitee did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interest of the
Corporation, and with respect to any criminal proceeding, shall not create a
presumption that such person believed that his conduct was unlawful. The
indemnification provided herein shall be applicable whether or not negligence or
gross negligence of the Indemnitee is alleged or proven. Notwithstanding the
foregoing, in the case of any Proceeding brought by or in the right of the
Corporation, Indemnitee shall not be entitled to indemnification for any claim,
issue, or matter as to which Indemnitee has been adjudged by a court of
competent jurisdiction, after exhaustion of all appeals therefrom, to be liable
to the Corporation or for amounts paid in settlement to the Corporation, unless
and only to the extent that, the court in which the Proceeding was brought or
another court of competent jurisdiction determines, on application, that in view
of all the circumstances, the person is fairly and reasonably entitled to
indemnity for such expenses as the court deems proper.
3. Choice of Counsel. Indemnitee shall be entitled to employ, and be
reimbursed for the fees and disbursements of, counsel separate from that chosen
by any other person or persons whom the Corporation is obligated to indemnify
with respect to the same or any related or similar Proceeding.
4. Advances of Expenses. Expenses (other than judgments, penalties,
fines, and settlements) incurred by Indemnitee shall be paid by the Corporation,
in advance of the final disposition of the Proceeding, within 10 days after
receipt of Indemnitee's written request accompanied by substantiating
documentation and Indemnitee's unsecured undertaking to repay such amount to the
extent it is ultimately determined that Indemnitee is not entitled to
indemnification.
5. Right of Indemnitee to Indemnification Upon Application; Procedure
upon Application. Any indemnification under this Agreement, other than pursuant
to Section 4 hereof, shall be made no later than 45 days after receipt by the
Corporation of the written request of Indemnitee, accompanied by substantiating
documentation, unless a determination is made within said 45-day period by (a)
the board of directors by a majority vote of a quorum consisting of directors
who are not or were not parties to such Proceeding, or (b) independent legal
counsel in a written opinion (which counsel shall be appointed if such a quorum
is not obtainable), that Indemnitee has not met the relevant standards for
indemnification set forth in Section 2 hereof.
The right to indemnification or advances as provided by this Agreement
shall be enforceable by Indemnitee in any court of competent jurisdiction. The
burden of proving that indemnification is not appropriate shall be on the
Corporation. Neither the failure of the Corporation (including its board of
directors or independent legal counsel) to have made a determination prior to
the commencement of such action that indemnification is proper in the
circumstances because Indemnitee has met the applicable standard of conduct, nor
an actual determination by the Corporation (including its board of directors or
independent legal counsel) that Indemnitee has not met such applicable standard
of conduct, shall be a defense to the action or create a presumption that
Indemnitee has not met the applicable standard of conduct.
6. Undertaking by Indemnitee. Indemnitee hereby undertakes to repay to
the Corporation any advances of Expenses pursuant to this Agreement to the
extent that it is ultimately determined that Indemnitee is not entitled to
indemnification.
7. Indemnification Hereunder Not Exclusive. The indemnification and
advancement of Expenses provided by this Agreement shall not be deemed exclusive
of any other rights to which Indemnitee may be entitled under the Articles or
Bylaws, the Statute, any policy or policies of directors' and officers'
liability insurance, any agreement, or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office. However, Indemnitee shall reimburse the Corporation for amounts paid to
him under this Agreement in an amount equal to any payments received pursuant to
such other rights to the extent such payments duplicate any payments received
pursuant to this Agreement.
8. Continuation of Indemnity. All agreements and obligations of the
Corporation contained herein shall continue during the period Indemnitee is a
director, officer, agent, or advisor of the Corporation (or is or was serving at
the request of the Corporation as a director, officer, employee, agent, or
advisor of another corporation, partnership, joint venture, trust, limited
liability company, or other enterprise) and shall continue thereafter so long as
Indemnitee shall be subject to any possible Proceeding.
9. Partial Indemnification. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Corporation for some or a
portion of Expenses, but not, however, for the total amount thereof, the
Corporation shall nevertheless indemnify Indemnitee for the portion of such
Expenses to which Indemnitee is entitled.
10. Settlement of Claims. The Corporation shall not be liable to
indemnify Indemnitee under this Agreement for any amounts paid in settlement of
any Proceeding effected without the Corporation's written consent. The
Corporation shall not settle any Proceeding in any manner which would impose any
penalty or limitation on Indemnitee's rights under this Agreement without
Indemnitee's written consent. Neither the Corporation nor Indemnitee will
unreasonably withhold their consent to any proposed settlement. The Corporation
shall not be liable to indemnify Indemnitee under this Agreement with regard go
any judicial award if the Corporation was not given a reasonable and timely
opportunity, at its expense, to participate in the defense of such action.
11. Enforcement.
(a) The Corporation expressly confirms and agreed that it has entered
into this Agreement and assumed the obligations imposed on the Corporation
hereby in order to induce Indemnitee to serve as a director or officer of
the Corporation, and acknowledges that Indemnitee is relying upon this
Agreement in continuing as a director or officer.
(b) In the event Indemnitee is required to bring any action or other
proceeding to enforce rights or to collect monies due under this Agreement
and is successful in such action, the Corporation shall reimburse
Indemnitee for all of the Indemnitee's Expenses in bringing and pursuing
such action.
12. Governing Law; Binding Effect; Amendment and Termination.
(a) This Agreement shall be interpreted and enforced in accordance
with the laws of the State of Nevada.
(b) This Agreement shall be binding upon the Corporation, its
successors and assigns, and shall inure to the benefit of Indemnitee, his
heirs, personal representatives, and assigns, and to the benefit of the
Corporation, its successors and assigns.
(c) No amendment, modification, termination, or cancellation of this
Agreement shall be effective unless in writing signed by the Corporation
and Indemnitee.
13. Severability. If any provision of this Agreement shall be held to be
invalid, illegal, or unenforceable,
(a) the validity, legality, and enforceability of the remaining
provisions of this Agreement shall not be in any way affected or impaired
thereby; and
(b) to the fullest extent possible, the provisions of this Agreement
shall be construed so as to give effect to the intent manifested by the
provision held invalid, illegal, or unenforceable.
Each section of this Agreement is a separate and independent portion of this
Agreement. If the indemnification to which Indemnitee is entitled as respects
any aspect of any claim varies between two or more sections of this Agreement,
that section providing the most comprehensive indemnification shall apply.
14. Notice. All notices, demands, requests, or other communications
required or authorized hereunder shall be deemed given sufficiently if in
writing and if personally delivered; if sent by facsimile transmission,
- 8 -
confirmed with a written copy thereof sent by overnight express delivery; if
sent by registered mail or certified mail, return receipt requested and postage
prepaid; or if sent by overnight express delivery:
If to the Corporation, to: FX Energy, Inc.
3006 Highland Drive, Suite 206
Salt Lake City, Utah 84106
Telecopy No.: (801) 486-5575
If to the Indemnitee, to:
Telecopy No.:
or such other addresses and facsimile numbers as shall be furnished by any party
in the manner for giving notices hereunder, and any such notice, demand,
request, or other communication shall be deemed to have been given as of the
date so delivered or sent by facsimile transmission, five business days after
the date so mailed, or one day after the date so sent by overnight delivery.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and
as of the day and year first above written.
Corporation:
FX ENERGY, INC.
By: /s/ David N. Pierce, President
Indemnitee:
SCHEDULE OF INDEMNITEES
ANDREW W. PIERCE DAVID N. PIERCE
JERZY B. MACIOLEK JAY W. DECKER
PETER L. RAVEN SCOTT J. DUNCAN
THOMAS B. LOVEJOY
FX ENERGY, INC.
NON-QUALIFIED STOCK OPTION
IT IS IMPORTANT THAT YOU RETAIN THIS DOCUMENT. THIS ORIGINAL NON-
QUALIFIED STOCK OPTION MUST BE DELIVERED TO THE COMPANY ON EXERCISE OR
TRANSFER OF THE OPTION.
THIS OPTION AND THE COMMON STOCK ISSUABLE ON EXERCISE OF THIS
OPTION ARE SUBJECT TO SUBSTANTIAL RESTRICTIONS ON TRANSFER
AS SET FORTH HEREIN.
THIS NON-QUALIFIED STOCK OPTION (this "Option") is granted effective the
5th day of November, 1996, by FX ENERGY, INC., a Nevada corporation (the
"Company"), under the terms of the Company's 1995 Stock Option and Award Plan
(the "Plan") to ("Optionee").
---------------------
1. Grant of Option. The Company hereby irrevocably grants to Optionee
the right and option to purchase all or any part of an aggregate of
------
shares of common stock, par value $0.001 per share, of the Company (the "Common
Stock") on the terms and conditions hereinafter set forth.
2. Exercise Price. The exercise price of this Option shall be $8.875 per
Share of Common Stock (the "Exercise Price"), the fair market value of the
Common Stock on the date of grant as determined by the board of directors.
3. Term of Option. 3. The right to exercise this Option shall vest
commencing on the date of grant to the extent of 50% of the total number of
shares of Common Stock purchasable under this Option and to the extent of the
remaining 50% of the total number of shares of Common Stock purchasable under
this Option on the first anniversary of the date of grant. This Option shall
expire on the fifth anniversary of the date of grant.
4. Shareholder's Rights. The Optionee shall have the rights of a
shareholder only with respect to Shares fully paid for by Optionee under this
Option.
5. Persons Entitled to Exercise; Prohibited Transfers and Encumbrances.
During Optionee's lifetime, this Option can only be exercised by Optionee, and
neither this Option nor any right hereunder can be transferred other than by
testamentary disposition or the laws of descent and distribution. Neither this
Option nor any right hereunder shall be subject to lien, attachment, execution,
or similar process. In the event of any alienation, assignment, pledge,
hypothecation, or other transfer of this Option or any right hereunder or in the
event of any levy, attachment, execution, or similar process, this Option and
all rights granted hereunder shall be immediately null and void.
6. Adjustment of Exercise Price and Number of Shares. The number of
shares of Common Stock subject to this Option shall be adjusted to take into
account any stock split, stock dividend, or recapitalization of the Common Stock
as provided in the Plan.
7. Notice of Certain Events. In the event of:
(a) any taking by the Company of a record of the holders of any class
of securities of the Company for the purpose of determining the holders
thereof who are entitled to receive any dividends or other distribution, or
any right to subscribe for, purchase, or otherwise acquire any shares of
stock of any class or any other securities or property, or to receive any
other rights;
(b) any capital reorganization of the Company, any reclassification
or recapitalization of the capital stock of the Company, or any transfer of
all or substantially all of the assets of the Company to any other person,
or any consolidation, share exchange, or merger involving the Company; or
(c) any voluntary or involuntary dissolution, liquidation, or winding
up of the Company,
the Company will mail to the Optionee, at least 20 days prior to the earliest
date specified therein, a notice specifying the date on which any such record is
to be taken for the purpose of such dividend, distribution, or right; the amount
and character of such dividend, distribution, or right; or the date on which any
such reorganization, reclassification, transfer, consolidation, share exchange,
merger, dissolution, liquidation, or winding up of the Company will occur and
the terms and conditions of such transaction or event.
8. Method of Exercise. This Option may be exercised, in accordance with
all of the terms and conditions set forth in this Option and the Plan, by
delivery of this Option together with a notice of exercise, a form of which is
attached hereto as Exhibit "A" and incorporated herein by this reference,
indicating the number of Shares which the Optionee then elects to purchase and
with payment made in accordance with the following:
(a) If Optionee elects to exercise the Option and make payment, in
whole or in part, for the shares of Common Stock in cash, Optionee shall
include with the notice of exercise a certified check or official bank
check payable to the order of the Company in the amount of the full option
price of the Common Stock being purchased for cash.
(b) If Optionee elects to exercise the Option and make payment, in
whole or in part, for the shares of Common Stock in installments, Optionee
shall include with the notice of exercise a certified check or official
bank check payable to the order of the Company in the amount of any cash to
be paid on exercise, and a promissory note, in form satisfactory to the
Company, executed by the Optionee and evidencing the obligation of the
Optionee to pay the balance of the exercise price on terms and conditions
acceptable to the board of directors of the Company at the time of exercise
of the Option.
(c) If Optionee elects to exercise the Option and make payment, in
whole or in part, for the shares of Common Stock by delivery of shares of
Common Stock of the Company that have been owned by Optionee for over six
months, Optionee shall surrender or transfer to the Company, in a form
satisfactory to it, such shares of Common Stock valued at their fair market
value. Fair market value shall mean the closing price for such stock as
quoted on a registered national securities exchange or, if not listed on a
national exchange, the Nasdaq Stock Market ("Nasdaq"), over the five-day
trading period immediately preceding the date of exercise of such Option,
or, if not listed on such an exchange or included on Nasdaq, shall mean the
closing price (or, if no closing price is available from sources deemed
reliable by the Company, the closing bid quotation) for such stock as
determined by the Company through any other reliable means of determination
available on the close of business on the trading day last preceding the
date of exercise of such Option.
As soon as practicable after receipt by the Company of such notice and of
payment in full of the option price of all the Shares of Common Stock with
respect to which the Option has been exercised (including interest if payment is
made in installments), a certificate or certificates representing such Shares of
Common Stock having been paid for shall be issued in the name of the Optionee,
or, if the Optionee shall so request in the notice exercising the Option, in the
name of the Optionee and another person jointly, with right of survivorship, and
shall be delivered to the Optionee. To the extent required by the terms of this
Option, all Common Stock shall be issued only upon receipt by the Company of the
Optionee's representation that the shares are purchased for investment and not
with a view to distribution thereof. If this Option is not exercised with
respect to all Shares subject hereto, Optionee shall be entitled to receive a
similar Option of like tenor covering the number of Shares with respect to which
this Option shall not have been exercised.
9. Availability of Common Stock. During the term of this Option, the
Company shall at all times keep available the number of Shares of Common Stock
required to satisfy the Option.
10. Limitation on Exercise. If the board of directors of the Company, in
its sole discretion, shall determine that it is necessary or desirable to list,
register, or qualify the Common Stock under any state or federal law, this
Option may not be exercised, in whole or part, until such listing, registration,
or qualification shall have been obtained free of any conditions not acceptable
to the board of directors.
11. No Right of Employment. Nothing contained in this Option shall be
construed as conferring any right to continue or remain as an officer, director,
or employee of the Company or any subsidiary.
12. Restrictions on Transfer. The Option and the Shares subject to the
Option (collectively referred to as the "Securities") are subject to
registration under the Securities Act of 1933, as amended (the "Securities
Act"), and any applicable state securities statutes. Optionee acknowledges
that unless a registration statement with respect to the Securities is filed and
declared effective by the Securities and Exchange Commission and the appropriate
state governing agency, the Securities have or will be issued in reliance on
specific exemptions from such registration requirements for transactions by an
issuer not involving a public offering and specific exemptions under state
statutes. Any disposition of the Securities may, under certain circumstances,
be inconsistent with such exemptions. The Securities may be offered for sale,
sold, or otherwise transferred only if (i) registered under the Securities Act,
and in come cases, under the applicable state securities acts, or, if not
registered, (ii) only if pursuant to an exemption from such registration
requirements and only after the Optionee provides an opinion of counsel or other
evidence satisfactory to the Company to the effect that registration is not
required. In some states, specific conditions must be met or approval of the
securities regulatory authorities may be required before any such offer or sale.
The Company is under no obligation to register the Securities with the
Securities and Exchange Commission or any state agency. If rule 144 is
available (and no assurance is given that it will be), only routine sales of the
Common Stock in limited amounts can be made after two years following the
acquisition date of the Securities, as determined under rule 144(d), in
accordance with the terms and conditions of rule 144. The Company is under no
obligation to make rule 144 available. In the event rule 144 is not available,
compliance with regulation A or some other disclosure exemption may be required
before the Optionee can sell, transfer, or otherwise dispose of the Securities
without registration. The Company and its registrar and transfer agent will
maintain a stop transfer order against the transfer of the Securities, and this
Option and any other certificate or agreement representing the Securities is
subject to the following legend:
THE SECURITIES REPRESENTED BY THIS OPTION, AGREEMENT, OR CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), AND ARE "RESTRICTED SECURITIES" WITHIN THE
MEANING OF RULE 144 PROMULGATED UNDER THE SECURITIES ACT. THE
SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD OR
TRANSFERRED WITHOUT COMPLYING WITH RULE 144 IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION OR OTHER COMPLIANCE UNDER THE SECURITIES ACT.
The Company may refuse to transfer the Securities to any transferee who
does not furnish in writing to the Company the same representations and
warranties set forth in this paragraph and agree to the same conditions with
respect to such Securities as are set forth herein. The Company may further
refuse to transfer the Securities if certain circumstances are present
reasonably indicating that the proposed transferee's representations are not
accurate. In any event, the Company may refuse to consent to any transfer in
the absence of an opinion of legal counsel, satisfactory to and independent of
counsel of the Company, that such proposed transfer is consistent with the above
conditions and applicable securities laws.
13. Registration. At the request of the Optionee, the Company will
utilize its best efforts to file a registration statement on Form S-8 with the
Securities and Exchange Commission covering the issuance of the Common Stock on
exercise of this option and to maintain the effectiveness of such registration
statement or a subsequent registration statement or other qualification in
order to permit the exercise of this Option as set forth herein, although, there
is no guaranty that such registration statement will be effective when the
Option is exercised.
If no registration statement is effective on the date of exercise of this
Option, the shares of Common Stock will not be issued unless and until there is
available to the Company evidence, including representations from the Optionee,
that such shares are being acquired for investment and not for resale, on which
the Company may reasonably rely as to the availability of an exemption from
registration in issuing such Common Stock.
14. Payment in the Event of a Change in Control. In the event of a
"Change in Control" (as defined), at the election of the Optionee, as evidenced
by Optionee's notice thereof in writing to the Company in writing within 90 days
after the occurrence of such Change in Control Event, in consideration of the
cancellation of this Option, the Company shall pay to Optionee within 10 days
after such election a cash amount equal to the number of Options set forth in
paragraph 1, excluding any Options previously exercised, terminated, canceled,
or expired, but disregarding whether such Options are then exercisable pursuant
to the provisions of paragraph 3, times the amount by which the "Fair Market
Value" (as defined) exceeds the exercise price of such Options. For purposes
hereof:
(a) A "Change in Control" shall be deemed to have occurred if (i)
the Company shall be merged or consolidated into another corporation and as
a result of such merger or consolidation less than seventy-five percent
(75%) of the outstanding voting securities of the surviving or resulting
corporation shall be owned in the aggregate by the former shareholders of
the Company as the same shall have existed prior to such merger or
consolidation, (ii) the Company shall sell, lease, exchange, or otherwise
transfer (in one transaction or a series of transactions) all or
substantially all of the assets of the Company to an entity that is not a
wholly owned subsidiary of the Company or to a group of associated
purchasers, (iii) a person, within the meaning of Section 3(a)(9) or
Section 13(d)(3) (as in effect on the date hereof) of 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, or (iv) if as a
result of a merger, consolidation, sale of all or substantially all of the
Company's assets, 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.
(b) "Fair Market Value" shall be the closing price for such stock on
the close of business on the day last preceding the occurrence of the
Change of Control as quoted on a registered national securities exchange
or, if not listed on such an exchange, the Nasdaq Stock Market or, if not
listed on such an exchange or included on the Nasdaq Stock Market, the
closing price (or, if no closing price is available from sources deemed
reliable by the Company, the closing bid quotation) for such stock as
determined by the Company through any other reliable means of determination
available on the close of business on the day last preceding the date of
such Change of Control.
15. Withholding. The Company may, in its sole discretion, satisfy any
obligation to withhold income and employment taxes resulting from the grant or
exercise of this Option (or any other event giving rise to such obligation) in
any of the following ways:
(a) The Optionee may, at Optionee's election, deliver to the Company
at the time of exercise of this Option an amount of cash equal to such
withholding obligation.
(b) If authorized by the action of the board of directors of the
Company (or a duly appointed committee of the board) upon request by the
Optionee, the Company may defer payment of the withholding obligation for a
reasonable period, but in no event beyond the due date specified by the
Internal Revenue Code or the regulations promulgated thereunder for the
deposit of such withholding, to allow the Optionee an opportunity to sell
Shares issuable on the exercise of this Option. In the event of such
deferral, the Optionee hereby grants to the Company a continuing security
interest in such Shares and all proceeds thereof and appoints the President
of the Company, and any successor thereto, as attorney-in-fact to sell the
number of Shares and collect the proceeds therefrom as may be necessary, in
the opinion of the Company, to satisfy all obligations for the payment of
such taxes.
(c) The Company may withhold from any compensation or other amount
owing to Optionee the amount (in cash, Common Stock, or other property as
the Company may determine) of the withholding obligation.
(d) Upon request by the Optionee, the Company shall withhold a number
of Shares otherwise deliverable upon exercise of this Option having a
value, determined in accordance with the provisions of this Option,
equivalent to the amount of such withholding obligation.
In all events, delivery of Shares issuable on exercise of this Option shall
be conditioned upon and subject to the satisfaction or making provision for the
satisfaction of the withholding obligation of the Company resulting from the
exercise of this Option. The Company is hereby further authorized to take such
other action as may be necessary, in the opinion of the Company, to satisfy all
obligations for the payment of such taxes.
16. Validity and Construction. The validity and construction of this
Option shall be governed by the laws of the state of Utah.
EFFECTIVE as of the date first above written.
FX ENERGY, INC.
By
David N. Pierce, President
Attest:
Andrew W. Pierce, Secretary
EXHIBIT A
FORM OF EXERCISE
(TO BE SIGNED ONLY UPON EXERCISE OF OPTION)
TO: FX ENERGY, INC.
The undersigned, the owner of the attached Option, hereby irrevocably
elects to exercise the purchase rights represented by the Option for, and to
purchase thereunder, shares of Common Stock of FX Energy, Inc.
----------
Enclosed is payment in the amount of $ , the exercise price of the Common
-------
Stock to be acquired, in the form of [insert description of manner of payment]
.
- ----------------------------------------------------------------------------
Please have the certificate(s) registered in the name of
, social security no.
- ------------------------------------- ---------------------
and delivered to the following address:
. If this exercise does not include all of the Common Stock covered by the
- --
attached Option, please deliver a new option of like tenor for the balance of
the Common Stock to the undersigned at the foregoing address.
DATED this day of , .
---- -------------- -------
Signature of Optionee (Signature
must be guaranteed by a bank
or securities broker-dealer)
Signature Guarantee:
Schedule of Optionees
Name Amount
David N. Pierce 75,000
Andrew W. Pierce 65,000
Thomas B. Lovejoy 65,000
Scott J. Duncan 55,000
FX ENERGY, INC.
1996 STOCK OPTION AND AWARD PLAN
FX ENERGY, INC., a Nevada corporation (the "Company"), hereby adopts this
"FX Energy, Inc., 1996 Stock Option and Award Plan" (the "Plan"), effective as
of the 1st day of October, 1996, under which options to acquire stock of the
Company or bonus stock may be granted from time to time to employees, including
officers and directors, of the Company or its subsidiaries. In addition, at the
discretion of the board of directors or other administrator of this Plan,
options to acquire stock of the Company or bonus stock may from time to time be
granted under this Plan to other individuals who contribute to the success of
the Company or its subsidiaries but who are not employees of the Company, all on
the terms and conditions set forth herein.
1. Purpose of the Plan. The Plan is intended to aid the Company in
maintaining and developing a management team, attracting qualified officers and
employees capable of assisting in the future success of the Company, and
rewarding those individuals who have contributed to the success of the Company.
It is designed to aid the Company in retaining the services of executives and
employees and in attracting new personnel when needed for future operations and
growth and to provide such personnel with an incentive to remain employees of
the Company, to use their best efforts to promote the success of the Company's
business, and to provide them with an opportunity to obtain or increase a
proprietary interest in the Company. It is also designed to permit the Company
to reward those individuals who are not employees of the Company but who are
perceived by management as having contributed to the success of the Company or
who are important to the continued business and operations of the Company. The
above aims will be effectuated through the granting of options ("Options") to
purchase shares of common stock of the Company, par value $0.001 per share (the
"Stock"), or the granting of awards of bonus stock ("Stock Awards"), all subject
to the terms and conditions of this Plan. It is intended that the Options
issued pursuant to this Plan include, when designated as such at the time of
grant, options which qualify as Incentive Stock Options ("Incentive Options")
within the meaning of section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), or any amendment or successor provision of like tenor. If
the Company has a class of securities registered under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), it is intended that Options or
Stock Awards granted pursuant to this Plan qualify for the exemption provided
for in Rule 16b-3 ("Rule 16b-3") promulgated under the Exchange Act or any
amendment or successor rule of like tenor when granted in accordance with the
provisions of such rule.
2. Shareholder Approval. The Plan shall become effective immediately on
adoption by the board of directors of the Company (the "Board") and awards under
the Plan can be made at that time or at any subsequent time. The Plan shall be
submitted to the Company's shareholders in the manner set forth below:
(a) Within twelve months after the Plan has been adopted by the
Board, the Plan shall be submitted for approval by those shareholders of
the Company who are entitled to vote on such matters at a duly held
shareholders' meeting or approved by the unanimous written consent of the
holders of the issued and outstanding Stock of the Company. If the Plan is
presented at a shareholders' meeting, it shall be approved by the
affirmative vote of the holders of a majority of the issued and outstanding
Stock in attendance, in person or by proxy, at such meeting.
Notwithstanding the foregoing, the Plan may be approved by the shareholders
in any other manner not inconsistent with the Company's articles of
incorporation and bylaws, the applicable provisions of state corporate
laws, and the applicable provisions of the Code and regulations adopted
thereunder.
(b) In the event the Plan is so approved, the secretary of the
Company shall, as soon as practicable following the date of final approval,
2
prepare and attach to this Plan certified copies of all relevant
resolutions adopted by the shareholders and the Board.
(c) Failure to obtain shareholder approval on or before the date that
is twelve months subsequent to the adoption of this Plan by the Board shall
not affect awards previously granted under the Plan; provided that, none of
the Options issued under this Plan will qualify as Incentive Options.
3. Administration of the Plan. Administration of the Plan shall be
determined by the Board. Subject to compliance with applicable provisions of
the governing law, the Board may delegate administration of the Plan or specific
administrative duties with respect to the Plan, on such terms and to such
committees of the Board as it deems proper. Any Option or Stock Award approved
by the Board shall be approved by a majority vote of those members of the Board
in attendance at a meeting at which a quorum is present. Any Option or Stock
Award approved by a committee designated by the Board shall be approved as
specified by the Board at the time of delegation. The interpretation and
construction of the terms of the Plan by the Board or a duly authorized
committee shall be final and binding on all participants in the Plan absent a
showing of demonstrable error. No member of the Board or duly authorized
committee shall be liable for any action taken or determination made in good
faith with respect to the Plan.
The Board's or duly authorized committee's determination under the Plan
(including without limitation determinations of the persons to receive Options
or Stock Awards, the form, amount, and timing of such Options or Stock Awards,
the terms and provisions of such Options or Stock Awards, and the agreements
evidencing same) need not be uniform and may be made by the Board or duly
authorized committee selectively among persons who receive, or are eligible to
receive, Options or Stock Awards under the Plan, whether or not such persons are
similarly situated.
4. Shares of Stock Subject to the Plan. A total of ----------- shares of
Stock may be subject to, or issued pursuant to, Options or Stock Awards granted
under the terms of this Plan. Any shares subject to an Option or Stock Award
under the Plan, which Option or Stock Award for any reason expires or is
forfeited, terminated, or surrendered unexercised as to such shares, shall be
added back to the total number of shares reserved for issuance under the terms
of this Plan. If any right to acquire Stock granted under the Plan is exercised
by the delivery of shares of Stock or the relinquishment of rights to shares of
Stock, only the net shares of Stock issued (the shares of Stock issued less the
shares of Stock surrendered) shall count against the total number of shares
reserved for issuance under the terms of this Plan.
5. Reservation of Stock on Granting of Option. At the time of granting
any Option under the terms of this Plan, there will be reserved for issuance on
the exercise of the Option the number of shares of Stock of the Company subject
to such Option. The Company may reserve either authorized but unissued shares
or issued shares that have been reacquired by the Company.
6. Eligibility. Options or Stock Awards under the Plan may be granted to
employees, including officers and directors, of the Company or its subsidiaries,
as may be existing from time to time, and to other individuals who are not
employees of the Company as may be deemed in the best interest of the Company by
the Board or a duly authorized committee. Such Options or Stock Awards shall be
in the amounts, and shall have the rights and be subject to the restrictions, as
may be determined by the Board or a duly authorized committee at the time of
grant, all as may be within the general provisions of this Plan.
7. Term of Options and Certain Limitations on Right to Exercise.
(a) Each Option shall have the term established by the Board or duly
authorized committee at the time the Option is granted but in no event may
an Option have a term in excess of ten years.
(b) The term of the Option, once it is granted, may be reduced only
as provided for in this Plan or under the written provisions of the Option.
(c) Unless otherwise specifically provided by the written provisions
of the Option, no holder or his or her legal representative, legatee, or
distributee will be, or shall be deemed to be, a holder of any shares
subject to an Option unless and until the holder exercises his or her right
to acquire all or a portion of the Stock subject to the Option and delivers
the required consideration to the Company in accordance with the terms of
this Plan and the Option and then only to the extent of the number of
shares of Stock acquired. Except as specifically provided in this Plan or
as otherwise specifically provided by the written provisions of the Option,
no adjustment to the exercise price or the number of shares of Stock
subject to the Option shall be made for dividends or other rights for which
the record date is prior to the date the Stock subject to the Option is
acquired by the holder.
(d) Options under the Plan shall vest and become exercisable at such
time or times and on such terms as the Board or a duly authorized committee
may determine at the time of the grant of the Option.
(e) Options granted under the Plan shall contain such other
provisions, including, without limitation, further restrictions on the
vesting and exercise of the Option, as the Board or a duly authorized
committee shall deem advisable.
(f) In no event may an Option be exercised after the expiration of
its term.
8. Exercise Price. The exercise price of each Option issued under the
Plan shall be determined by the Board or a duly authorized committee on the date
of grant.
9. Payment of Exercise Price. The exercise of any Option shall be
contingent on receipt by the Company of cash, certified bank check to its order,
or other consideration acceptable to the Company; provided that, at the
discretion of the Board or a duly authorized committee, the written provisions
of the Option may provide that payment can be made in whole or in part in shares
of Stock of the Company that have been owned by the optionee for more than six
months or by the surrender of Options to acquire Stock from the Company that
have been held for more than six months, which Stock or Options shall be valued
at their then fair market value as determined by the Board or a duly authorized
committee. Any consideration approved by the Board or a duly authorized
committee that calls for the payment of the exercise price over a period of more
than one year shall provide for interest, which shall not be included as part of
the exercise price, that is equal to or exceeds the imputed interest provided
for in section 483 of the Code or any amendment or successor section of like
tenor.
10. Withholding. If the grant of a Stock Award or the grant or exercise
of an Option pursuant to this Plan, or any other event in connection with any
such grant or exercise, creates an obligation to withhold income and employment
taxes pursuant to the Code or applicable state or local laws, such obligation
may, at the discretion of the Board or a duly authorized committee at the time
of the grant of the Option or Stock Award and to the extent permitted by the
terms of the Option or Stock Award and the then governing provisions of the Code
and the Exchange Act, be satisfied (i) by the holder of the Option or Stock
Award delivering to the Company an amount of cash equal to such withholding
obligation; (ii) by the Company withholding from any compensation or other
amount owing to the holder of the Option or Stock Award the amount (in cash,
Stock, or other property as the Company may determine) of the withholding
obligation; (iii) by the Company withholding shares of Stock subject to the
Option or Stock Award with a fair market value equal to such obligation; or (iv)
by the holder of the Option or Stock Award either delivering shares of Stock
that have been owned by the holder for more than six months or canceling Options
or other rights to acquire Stock from the Company that have been held for more
than six months with a fair market value equal to such requirements. In all
events, delivery of shares of Stock issuable on exercise of the Option or on
grant of the Stock Award shall be conditioned upon and subject to the
satisfaction or making provision for the satisfaction of the withholding
obligation of the Company resulting from the grant or exercise of the Option,
grant of the Stock Award, or any other event. The Company shall be further
authorized to take such other action as may be necessary, in the opinion of the
Company, to satisfy all obligations for the payment of such taxes.
11. Incentive Options--Additional Provisions. In addition to the other
restrictions and provisions of this Plan, any Option granted hereunder that is
intended to be an Incentive Option shall meet the following further
requirements:
(a) The exercise price of an Incentive Option shall not be less than
the fair market value of the Stock on the date of grant of the Incentive
Option as determined by the Board or a duly authorized committee based on
the closing price for the Stock as quoted on a registered national
securities exchange or, if not listed on a national exchange, the Nasdaq
Stock Market ("Nasdaq"), over the five-day trading period immediately prior
to the date of grant of such Incentive Option, or, if not listed on such an
exchange or included on Nasdaq, the closing price for the Stock as
determined by the Board or a duly authorized committee through any other
reliable means of determination available on the close of business on the
trading day last preceding the date of grant of such Incentive Option and
permitted by the applicable provisions of the Code.
(b) No Incentive Option may be granted under the Plan to any
individual that owns (either of record or beneficially) Stock possessing
more than 10% of the combined voting power of the Company or any parent or
subsidiary corporation unless both the exercise price is at least 110% of
the fair market value of the Stock on the date the Option is granted and
the Incentive Option by its terms is not exercisable more than five years
after the date it is granted.
(c) Incentive Options may be granted only to employees of the Company
or its subsidiaries and only in connection with that employee's employment
by the Company or the subsidiary. Notwithstanding the above, directors and
other individuals who have contributed to the success of the Company or its
subsidiaries may be granted Incentive Options under the Plan, subject to,
and to the extent permitted by, applicable provisions of the Code and
regulations promulgated thereunder, as they may be amended from time to
time.
(d) The aggregate fair market value (determined as of the date the
Incentive Option is granted) of the shares of Stock with respect to which
Incentive Options are exercisable for the first time by any individual
during any calendar year under the Plan (and all other plans of the Company
and its subsidiaries) may not exceed $100,000.
(e) No Incentive Option shall be transferable other than by will or
the laws of descent and distribution and shall be exercisable, during the
lifetime of the optionee, only by the optionee to whom the Incentive Option
is granted.
(f) No individual acquiring shares of Stock pursuant to any Incentive
Option granted under this Plan shall sell, transfer, or otherwise convey
the Stock until after the date that is both two years after the date the
Incentive Option was granted and one year after the date the Stock was
acquired pursuant to the exercise of the Incentive Option. If any
individual makes a disqualifying disposition, he or she shall notify the
Company within 30 days of such transaction.
(g) No Incentive Option may be exercised unless the holder was,
within three months of such exercise, and had been since the date the
Incentive Option was granted, an eligible employee of the Company as
specified in the applicable provisions of the Code, unless the employment
was terminated as a result of the death or disability (as defined in the
Code and the regulations promulgated thereunder as they may be amended from
time to time) of the employee or the employee dies within three months of
the termination. In the event of termination as a result of disability,
the holder shall have a one year period following termination in which to
exercise the Incentive Option. In the event of death of the holder, the
Incentive Option must be exercised within six months after the issuance of
letters testamentary or administration or the appointment of an
administrator, executor, or personal representative, but not later than one
year after the date of termination of employment. An authorized absence or
leave approved by the Board or a duly authorized committee for a period of
90 days or less shall not be considered an interruption of employment for
any purpose under the Plan.
(h) All Incentive Options shall be deemed to contain such other
limitations and restrictions as are necessary to conform the Incentive
Option to the requirements for "incentive stock options" as defined in
section 422 of the Code, or any amendment or successor statute of like
tenor.
All of the foregoing restrictions and limitations are based on the governing
provisions of the Code as of the date of adoption of this Plan. If at any time
the Code is amended to permit the qualification of an Option as an incentive
stock option without one or more of the foregoing restrictions or limitations or
the terms of such restrictions or limitations are modified, the Board or a duly
authorized committee may grant Incentive Options, and may modify outstanding
Incentive Options in accordance with such changes, all to the extent that such
action by the Board or duly authorized committee does not disqualify the Options
from treatment as incentive stock options under the provisions of the Code as
may be amended from time to time.
12. Awards to Directors and Officers. To the extent the Company has a
class of securities registered under the Exchange Act, Options or Stock Awards
granted under the Plan to directors and officers (as used in Rule 16b-3
promulgated under the Exchange Act or any amendment or successor rule of like
tenor) intended to qualify for the exemption from section 16(b) of the Exchange
Act provided in Rule 16b-3 shall, in addition to being subject to the other
restrictions and limitations set forth in this Plan, be made as follows:
(a) A transaction whereby there is a grant of an Option or Stock
Award pursuant to this Plan must satisfy one of the following:
(i) The transaction must be approved by the Board or a duly
authorized committee composed solely of two or more non-employee
directors of the Company (as defined in Rule 16b-3);
(ii) The transaction must be approved or ratified, in compliance
with section 14 of the Exchange Act, by either: the affirmative vote
of the holders of a majority of the securities of the Company present
or represented and entitled to vote at a meeting of the shareholders
of the Company held in accordance with the applicable laws of the
state of incorporation of the Company; or, if allowed by applicable
state law, the written consent of the holders of a majority, or such
greater percentage as may be required by applicable laws of the state
of incorporation of the Company, of the securities of the Company
entitled to vote. If the transaction is ratified by the shareholders,
such ratification must occur no later than the date of the next annual
meeting of shareholders; or
(iii) The Stock acquired must be held by the officer or
director for a period of six months subsequent to the date of the
grant; provided that, if the transaction involves a derivative
security (as defined in section 16 of the Exchange Act), this
condition shall be satisfied if at least six months elapse from the
date of acquisition of the derivative security to the date of
disposition of the derivative security (other than on exercise or
conversion) or its underlying equity security.
(b) Any transaction involving the disposition to the Company of its
securities in connection with Options or Stock Awards granted pursuant to
this Plan shall:
(i) be approved by the Board or a duly authorized committee
composed solely of two or more non-employee directors; or
(ii) be approved or ratified, in compliance with section 14 of
the Exchange Act, by either: the affirmative vote of the holders of a
11
majority of the securities of the Company present, or represented, and
entitled to vote at a meeting duly held in accordance with the
applicable laws of the state of incorporation of the Company or, if
allowed by applicable state law, the written consent of the holders of
a majority, or such greater percentage as may be required by
applicable laws of the state of incorporation of the Company, of the
securities of the Company entitled to vote; provided that, such
ratification occurs no later than the date of the next annual meeting
of shareholders.
All of the foregoing restrictions and limitations are based on the governing
provisions of the Exchange Act and the rules and regulations promulgated
thereunder as of the date of adoption of this Plan. If at any time the
governing provisions are amended to permit an Option to be granted or exercised
or Stock Award to be granted pursuant to Rule 16b-3 or any amendment or
successor rule of like tenor without one or more of the foregoing restrictions
or limitations, or the terms of such restrictions or limitations are modified,
the Board or a duly authorized committee may award Options or Stock Awards to
directors and officers, and may modify outstanding Options or Stock Awards, in
accordance with such changes, all to the extent that such action by the Board or
a duly authorized committee does not disqualify the Options or Stock Awards from
exemption under the provisions of Rule 16b-3 or any amendment or successor rule
of similar tenor.
13. Stock Appreciation Rights and Other Tandem Rights. The Board or a
duly authorized committee, at the time of granting any award under the terms of
this Plan, shall have the authority to grant stock appreciation rights or other
tandem rights with respect to all or some of the shares of Stock covered by such
award pursuant to which the holder shall have the right to surrender all or part
of such award and thereby exercise the tandem rights; provided, however, that
the holder shall not have such right to surrender and obtain payment during the
first six months of the term of the award, except in the event of death or
disability of the holder during such six-month period. Any payment under the
terms of the tandem rights may be made by the Company, at the discretion of the
Board or a duly authorized committee as set forth in the written award, in Stock
(at its fair market value on the date of the notice of exercise, as determined
by the Board or committee) or in cash, or partly in Stock and partly in cash, as
the Company may determine. Any stock appreciation rights or other tandem rights
granted under the terms of this section may be exercised only when, and only to
the extent that, the holder is entitled to exercise all or a portion of the
underlying award. The terms of any stock appreciation or other rights granted
shall, within the provisions of this Plan, be established by the Board or
committee at the time of grant, and any rights created thereby can only be
transferred in connection with the transfer of the underlying award. Stock
appreciation rights may only be exercised at a time when the fair market value
of the Stock subject to the award exceeds the exercise price of the award.
14. Stock Awards. The Board or a duly authorized committee may grant
Stock Awards to individuals eligible to participate in this Plan, in the amount,
and subject to the provisions determined by the Board or a duly authorized
committee. The Board or a duly authorized committee shall notify in writing
each person selected to receive a Stock Award hereunder as soon as practicable
after he or she has been so selected and shall inform such person of the number
of shares he or she is entitled to receive, the approximate date on which such
shares will be issued, and the Forfeiture Restrictions applicable to such
shares. (For purposes hereof, the term "Forfeiture Restrictions" shall mean any
prohibitions against sale or other transfer of shares of Stock granted under the
Plan and the obligation of the holder to forfeit his or her ownership of or
right to such shares and to surrender such shares to the Company on the
occurrence of certain conditions.) The Board or a duly authorized committee
may, at its discretion, require the payment in cash to the Company by the award
recipient of the par value of the Stock. The shares of Stock issued pursuant to
a Stock Award shall not be sold, exchanged, transferred, pledged, hypothecated,
or otherwise disposed of during such period or periods of time which the Board
or a duly authorized committee shall establish at the time of the grant of the
Stock Award. If a Stock Award is made to an employee of the Company or its
subsidiaries, the employee shall be obligated, for no consideration other than
the amount, if any, of the par value paid in cash for such shares, to forfeit
and surrender such shares as he or shall have received under the Plan which are
then subject to Forfeiture Restrictions to the Company if he or she is no longer
an employee of the Company or its subsidiaries for any reason; provided that, in
the event of termination of the employee's employment by reason of death or
total and permanent disability, the Board or duly authorized committee, in its
sole discretion, may cancel the Forfeiture Restrictions. Certificates
representing shares subject to Forfeiture Restrictions shall be appropriately
legended as determined by the Board or a duly authorized committee to reflect
the Forfeiture Restrictions, and the Forfeiture Restrictions shall be binding on
any transferee of the shares.
15. Assignment. At the time of grant of an Option or Stock Award, the
Board or duly authorized Committee, in its sole discretion, may impose
restrictions on the transferability of such Option or Stock Award and provide
that such Option shall not be transferable other than by will or the laws of
descent and distribution or pursuant to a qualified domestic relations order as
defined in the Code and that, except as permitted by the foregoing, such Options
or Stock Awards, granted under the Plan and the rights and privileges thereby
conferred shall not be transferred, assigned, pledged, or hypothecated in any
way (whether by operation of law or otherwise), and shall not be subject to
execution, attachment, or similar process. On any attempt to transfer, assign,
pledge, hypothecate, or otherwise dispose of the Option or Stock Award, or of
any right or privilege conferred thereby, contrary to the provisions thereof, or
on the levy of any attachment or similar process on such rights and privileges,
the Option or Stock Award and such rights and privileges shall immediately
become null and void.
16. Additional Terms and Provisions of Awards. The Board or duly
authorized committee shall have the right to impose additional limitations on
individual awards under the Plan. For example, and without limiting the
authority of the Board or a duly authorized committee, an individual award may
be conditioned on continued employment for a specified period or may be voided
based on the award holder's gross negligence in the performance of his or her
duties, substantial failure to meet written standards established by the Company
for the performance of his or her duties, criminal misconduct, or willful or
gross misconduct in the performance of his or her duties. In addition, the
Board or a duly authorized committee may establish additional rights in the
holders of individual awards at the time of grant. For example, and without
limiting the authority of the Board or a duly authorized committee, an
individual award may include the right to immediate payment of the value
inherent in the award on the occurrence of certain events such as a change in
control of the Company, all on the terms and conditions set forth in the award
at the time of grant. The Board or a duly authorized committee may, at the time
of the grant of the Option or Stock Award, establish any other terms,
restrictions, or provisions on the exercise of an Option or the holding of Stock
subject to the Stock Award as it deems appropriate. All such terms,
restrictions, and provisions must be set forth in writing at the time of grant
in order to be effective.
17. Dilution or Other Adjustment. In the event that the number of shares
of Stock of the Company from time to time issued and outstanding is increased
pursuant to a stock split or a stock dividend, the number of shares of Stock
then covered by each outstanding Option granted hereunder shall be increased
proportionately, with no increase in the total purchase price of the shares then
so covered, and the number of shares of Stock subject to the Plan shall be
increased by the same proportion. Shares awarded under the terms of a Stock
Award shall be entitled to the same rights as other issued and outstanding
shares of Stock, whether or not then subject to Forfeiture Restrictions,
although any additional shares of Stock issued to the holder of a Stock Award
shall be subject to the same Forfeiture Restrictions as the Stock Award. In the
event that the number of shares of Stock of the Company from time to time issued
and outstanding is reduced by a combination or consolidation of shares, the
number of shares of Stock then covered by each outstanding Option granted
hereunder shall be reduced proportionately, with no reduction in the total
purchase price of the shares then so covered, and the number of shares of Stock
subject to the Plan shall be reduced by the same proportion. Shares awarded
under a Stock Award shall be treated as other issued and outstanding shares of
Stock, whether or not then subject to Forfeiture Restrictions. In the event
that the Company should transfer assets to another corporation and distribute
the stock of such other corporation without the surrender of Stock of the
Company, and if such distribution is not taxable as a dividend and no gain or
loss is recognized by reason of section 355 of the Code or any amendment or
successor statute of like tenor, then the total purchase price of the Stock then
covered by each outstanding Option shall be reduced by an amount that bears the
same ratio to the total purchase price then in effect as the market value of the
stock distributed in respect of a share of the Stock of the Company, immediately
following the distribution, bears to the aggregate of the market value at such
time of a share of the Stock of the Company plus the stock distributed in
respect thereof. Shares issued under a Stock Award shall be treated as issued
and outstanding whether or not subject to Forfeiture Restrictions, although any
stock of the other corporation to be distributed with respect to the shares
awarded under the Stock Award shall be subject to the Forfeiture Restrictions
then applicable to such shares and may be held by the Company or otherwise
subject to restrictions on transfer until the expiration of the Forfeiture
Restrictions. In the event that the Company distributes the stock of a
subsidiary to its shareholders, makes a distribution of a major portion of its
assets, or otherwise distributes significant portion of the value of its issued
and outstanding Stock to its shareholders, the number of shares then subject to
each outstanding Option and the Plan, or the exercise price of each outstanding
Option, may be adjusted in the reasonable discretion of the Board or a duly
authorized committee. Shares awarded under a Stock Award shall be treated as
issued and outstanding, whether or not subject to Forfeiture Restrictions,
although any Stock, assets, or other rights distributed shall be subject to the
Forfeiture Restrictions governing the shares awarded under the Stock Award and,
at the discretion of the Board or a duly authorized committee, may be held by
the Company or otherwise subject to restrictions on transfer by the Company
until the expiration of such Forfeiture Restrictions. All such adjustments
shall be made by the Board or duly authorized committee, whose determination
upon the same, absent demonstrable error, shall be final and binding on all
participants under the Plan. No fractional shares shall be issued, and any
fractional shares resulting from the computations pursuant to this section shall
be eliminated from the respective Option or Stock Award. No adjustment shall be
made for cash dividends, for the issuance of additional shares of Stock for
consideration approved by the Board, or for the issuance to stockholders of
rights to subscribe for additional Stock or other securities.
18. Options or Stock Awards to Foreign Nationals. The Board or a duly
authorized committee may, in order to fulfill the purposes of this Plan and
without amending the Plan, grant Options or Stock Awards to foreign nationals or
individuals residing in foreign countries that contain provisions, restrictions,
and limitations different from those set forth in this Plan and the Options or
Stock Awards made to United States residents in order to recognize differences
among the countries in law, tax policy, and custom. Such grants shall be made
in an attempt to provide such individuals with essentially the same benefits as
contemplated by a grant to United States residents under the terms of this Plan.
19. Listing and Registration of Shares. Unless otherwise expressly
provided on the granting of an award under this Plan, the Company shall have no
obligation to register any securities issued pursuant to this Plan or issuable
on the exercise of Options granted hereunder. Each award shall be subject to
the requirement that if at any time the Board or a duly authorized committee
shall determine, in its sole discretion, that it is necessary or desirable to
list, register, or qualify the shares covered thereby on any securities exchange
or under any state or federal law, or obtain the consent or approval of any
governmental agency or regulatory body as a condition of, or in connection with,
the granting of such award or the issuance or purchase of shares thereunder,
such award may not be made or exercised in whole or in part unless and until
such listing, registration, consent, or approval shall have been effected or
obtained free of any conditions not acceptable to the Board or a duly authorized
committee.
20. Expiration and Termination of the Plan. The Plan may be abandoned or
terminated at any time by the Board or a duly authorized committee except with
respect to any Options or Stock Awards then outstanding under the Plan. The
Plan shall otherwise terminate on the earlier of the date that is: (i) ten
years after the date the Plan is adopted by the Board; or (ii) ten years after
the date the Plan is approved by the shareholders of the Company.
21. Form of Awards. Awards granted under the Plan shall be represented by
a written agreement which shall be executed by the Company and which shall
contain such terms and conditions as may be determined by the Board or a duly
authorized committee and permitted under the terms of this Plan. Option
agreements evidencing Incentive Options shall contain such terms and conditions,
among others, as may be necessary in the opinion of the Board or a duly
authorized committee to qualify them as incentive stock options under section
422 of the Code or any amendment or successor statute of like tenor.
22. No Right of Employment. Nothing contained in this Plan or any Option
or Stock Award shall be construed as conferring on a director, officer, or
employee any right to continue or remain as a director, officer, or employee of
the Company or its subsidiaries.
23. Leaves of Absence. The Board or duly authorized committee shall be
entitled to make such rules, regulations, and determinations as the Board or
duly authorized committee deems appropriate under the Plan in respect of any
leave of absence taken by the recipient of any Option or Stock Award. Without
limiting the generality of the foregoing, the Board or duly authorized committee
shall be entitled to determine (a) whether or not any such leave of absence
shall constitute a termination of employment within the meaning of the Plan, and
(b) the impact, if any, of any such leave of absence on any Option or Stock
Award under the Plan theretofore made to any recipient who takes such leave of
absence.
24. Amendment of the Plan. The Board or a duly authorized committee may
modify and amend the Plan in any respect; provided, however, that to the extent
such amendment or modification would cause the Plan to no longer comply with the
applicable provisions of the Code with respect to Incentive Options, such
amendment or modification shall also be approved by the shareholders of the
Company. Subject to the foregoing and, if the Company is subject to the
provisions of 16(b) of the Exchange Act, the limitations of Rule 16b-3
promulgated under the Exchange Act or any amendment or successor rule of like
tenor, the Plan shall be deemed to be automatically amended as is necessary (i)
with respect to the issuance of Incentive Options, to maintain the Plan in
compliance with the provisions of section 422 of the Code, and regulations
promulgated thereunder from time to time, or any amendment or successor statute
thereto, and (ii) with respect to Options or Stock Awards granted to officers
and directors of the Company, to maintain the awards made under the Plan in
compliance with the provisions of Rule 16b-3 promulgated under the Exchange Act
or any amendment or successor rule of like tenor.
ATTEST:
/s/ Andrew W. Pierce, Secretary
SECRETARY'S CERTIFICATE
The undersigned, the duly constituted and elected secretary of FX Energy,
Inc., hereby certifies that a duly constituted meeting of the shareholders held
on , 1996, pursuant to notice and at which a quorum was present in
--------- ---
accordance with the requirements of law and the Company's articles of
incorporation and bylaws, the foregoing FX Energy, Inc. 1996 Stock Option and
Award Plan was approved by the affirmative vote of the holders of a majority of
the shares of Common Stock in attendance, in person or by proxy, at such
meeting.
DATED this day of , 1996.
--- -------------
/s/ Andrew W. Pierce, Secretary
May 22, 1996
FX Drilling Company, Inc.
P.O. Box 379
Oilmont, Montana 59466
Fax # 406-33-72061
Att: Laura Bacon
Crysen Contract No. 329-P-96
FX Contract No. Please advise
This Agreement, by and between FX Drilling Company, Inc. (FX), and Crysen
Refining, Inc. (Crysen), covers the sale by FX and the purchase and receipt by
Crysen of crude oil under the following terms and conditions:
1. Term: The term of said contract shall be for one year commencing July
1, 1996 through June 30, 1997, then continued thereafter on a month-to-
month basis until written notice is given by one party to the other at
least 30 days prior to the end of the month for which termination is
sought.
2. Quantity and Quality: All of FX's production of Nevada type crude oil
from the properties operated by FX in Nye County, Nevada.
3. Price: Chevron's Myton black wax posting, adjusted for gravity, less
$2.30 per barrel.
4. Equal Daily Deliveries: All crude oil delivered hereunder during any
calendar month shall be considered to have been delivered in equal daily
quantities during such month.
5. Payment: Payment shall be made by wire transfer in immediately
available funds on the twentieth day of the month following the month of
delivery. Payments due on Saturday shall be paid the preceding Friday, and
payments due on Sunday shall be made the following Monday. Similarly,
payments due on a federal bank holiday shall be paid the preceding business
day except when a federal bank holiday falls on Monday, when payment shall
be due the following day.
6. Delivery: Title and risk of loss shall pass to Crysen as the crude oil
is transferred from Seller's lease storage tanks outlet flange into the
receiving manifold of trucks designated by Crysen Refining, Inc. in Woods
Cross, Utah.
7. Warranty: The delivering party warrants (a) that it has good and
sufficient legal title to the crude oil delivered by it hereunder and its
right to deliver same, (b) that said oil has been produced, handled, and
transported to the delivery point hereunder in accordance with the laws
rules and regulations of all local, state, or federal authorities having
jurisdiction hereunder in accordance with the laws, rules, and regulations
of all local, state, or federal authorities having jurisdiction thereof.
The delivering party agrees to indemnify and hold receiving party harmless
from and against any loss, claim, or demand by reason of any failure of
such title to such crude oil or failure or breach of the warranty.
9. Indemnity: Each party to this Agreement shall indemnify and save
harmless the other from and against all claims, liabilities, and courses of
action for injury to or death of any person or persons and for damages to
or loss of property resulting from willful or negligent acts or omissions
of such party or its agents, employees, representatives, or subcontractors.
10. Force Majeure: a) Except for Crysen's obligation to make payment for
crude oil purchased and received by it hereunder, neither party shall be
liable to the other party for any failure to perform the terms of the
Agreement when such failure is due to "force majeure" as employed in this
Agreement shall mean all causes and events which are not reasonably within
the control of the party claiming the force majeure, including but not
limited to, acts of God, strikes, lockouts, or industrial disputes or
disturbances, civil disturbances, arrests and restraint from rulers of
people, interruptions by government or court orders, or by future valid
orders of any regulatory body having proper jurisdiction, acts of the
public enemy, wars, riots, blockades, insurrections, inability to secure
labor or materials on reasonable terms, epidemics, landslides, lightning,
earthquakes, fire, floods, washouts of roads, explosions, breakage,
accident, freezing of or the necessity to make repairs or alterations to
machinery, pipelines or Buyer's refinery, or any other such cause, whether
of the kind herein enumerated or otherwise.
b) Upon the occurrence of an event of force majeure, the party claiming
force majeure shall remedy such event with all reasonable diligence,
provided, however, that the party claiming force majeure shall not be
required to settle strikes, lockouts, industrial disputes or disturbances,
or litigation by acceding to the demands of any opposing party therein when
such course is inadvisable in the discretion of the party claiming force
majeure.
c) Upon the occurrence of an event of force majeure, the party making such
claim shall promptly provide the other party with written notice of the
occurrence of a force majeure event, including full details of the event,
the causes ( if known), a statement as to whether the party claiming force
majeure intends to cure the force majeure and, if so, the nature of the
remedy and an estimate of the time reasonably needed to remedy the force
majeure.
d) Upon remedy of force majeure, contract shall then resume, and continue
until expiration.
11. Quality: Neither party shall be obligated to accept crude oil
containing B S & W in excess of 1 percent by volume. Crude oil delivered
hereunder shall be merchantable, virgin crude oil, free of organic
chlorides, oxygenated hydrocarbons, lead and any other contaminants not
normally associated with crude oil, and acceptable to the carriers
involved.
12. Governing Law: This Agreement shall be governed by and construed in
accordance with the law of the State of Utah.
In confirmation of the above, the parties have executed the agreement as of the
date indicated beneath their respective signatures below:
CRYSEN REFINING, INC. FX Drilling Company
By: /s/ David McSwain By: /s/ Scott Duncan
Title: Vice President Title: Vice President
Date: May 23, 1996 Date: May 23, 1996
July 8, 1996
FX Drilling Company, Inc.
Attn: Mr. David N. Pierce
3006 Highland Dr., Suite 206
Salt Lake City, UT 84106
Re: CENEX Contract No: FX-94-P90243
Amendment #3
Gentlemen:
In accordance with our mutual understanding, it is hereby agreed that effective
7:00 A.M., July 1, 1996, the above referenced contract, dated July 8, 1994, and
the existing amendments thereto, shall be amended to read as follows:
PAYMENTS:
EFFECTIVE June 1, 1996 payment will be based on gauged run tickets per load for
all properties except MT 9118, Tract 84 will be based off of operators meter at
lease on a P/L ticket for beginning and ending month totalizers. Effective July
1, 1996, Tract 84 will be purchased off operators meter at the lease based on a
PER LOAD basis.
Except as herein provided, all terms and provisions of said contract and
amendment(s) thereto, shall remain in full force and in effect as written.
If this amendment meets with your understanding of our Agreement, please execute
and retain one copy for your records and return two copies to our office.
CENEX, will then execute and return one copy fully executed copy to you for your
records.
AGREED TO AND ACCEPTED ON THIS 16th day of July, 1996
Yours very truly,
FX DRILLING COMPANY, INC. CENEX, Inc.
BY: /s/ David N. Pierce, President /s/ Paul H. Mutter,
Manager, Lease Crude
Purchasers and Operations
Raw Material Marketing &
Supply
Schedule of Subsidiaries
Exhibit 21.01
State or Country of
Name Organization
FX DRILLING COMPANY, INC. Nevada
FX PRODUCING COMPANY, INC. Nevada
FRONTIER EXPLORATION COMPANY Utah
PETROLEX CORPORATION Utah
KARPATY PRODUCTION COMPANY SP. ZO.O Poland
SUDETY MINING COMPANY SP. ZO.O Poland
LUBEX PETROLEUM COMPANY SP. ZO.O Poland
WARMIA PETROLEUM COMPANY SP. ZO.O Poland
(previously Frontier Poland Exploration and
BARKER & FOLSOM
CERTIFIED PUBLIC ACCOUNTANTS
Thomas G. Barker, Jr., CPA P.C. Randy K. Parker, CPA
M. Bradley Folsom, CPA, P.C. Nikki J. Thon
Member of APCPA Division of Firms
Member of SEC Practice Section
CONSENT OF INDEPENDENT AUDITORS
FX Energy, Inc. and Subsidiaries
We consent to the incorporation by reference into the Registration Statements on
Form S-3, SEC File Nos. 333-08557 and 333-16439, and the Registration Statements
on Form S-8, SEC File Nos. 333-12385, 333-11417, 333-17543 and 333-20641, of FX
Energy, Inc. (the "Company"), of our report dated February 25, 1995, respecting
consolidated results of operations, stockholders' equity, and cash flows of the
Company for the year ended December 31, 1994, as included in the Company's
annual report on Form 10-KSB for the year ended December 31, 1996.
/s/ BARKER & FOLSOM
Ogden, Utah
February 20, 1997
CONSENT OF PETROLEUM ENGINEERING CONSULTANT
I consent to the use of my report respecting the estimated oil reserve
information as of December 31, 1996, for the Montana and Nevada producing
properties of FX Energy, Inc. (the "Company"), and the discussion of such report
as contained in the Company's annual report on Form 10-KSB of FX Energy, Inc.
for the year ended December 31, 1996. I also consent to the incorporation by
reference of such report as it is referred to in the Company's annual report
into the Registration Statements on Form S-3, SEC File Nos. 333-08557 and 333-
16439, and the Registration Statements on Form S-8, SEC File Nos. 333-12385,
333-11417, 333-17543 and 333-20641.
/s/ LARRY D. KRAUSE
Billings, Montana
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference into the registration statements of
FX Energy, Inc., and subsidiaries on Form S-8 (SEC File Nos. 333-12385, 333-
11417, 333-17543 and 333-20641) and the registration statements on Form S-3 (SEC
File Nos. 333-08557 and 333-16439) of our report dated February 18, 1997, on our
audits of the consolidated financial statements of FX Energy, Inc., and
subsidiaries as of December 31, 1996 and 1995, and for the years then ended,
which report is included in this Annual Report on Form 10-KSB.
/s/ Coopers & Lybrand, L.L.P.
COOPERS & LYBRAND, L.L.P.
Salt Lake City, Utah
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET
AS OF DECEMBER 31, 1996, AND STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31,
1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1996
<CASH> 8,345,914
<SECURITIES> 5,476,574
<RECEIVABLES> 518,770
<ALLOWANCES> 0
<INVENTORY> 20,216
<CURRENT-ASSETS> 14,428,957
<PP&E> 9,586,742
<DEPRECIATION> 1,403,072
<TOTAL-ASSETS> 22,994,127
<CURRENT-LIABILITIES> 586,196
<BONDS> 0
<COMMON> 12,492
0
0
<OTHER-SE> 20,895,189
<TOTAL-LIABILITY-AND-EQUITY> 22,994,127
<SALES> 2,345,634
<TOTAL-REVENUES> 2,421,106
<CGS> 0
<TOTAL-COSTS> 7,368,341
<OTHER-EXPENSES> (370,421)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 332,882
<INCOME-PRETAX> (4,909,696)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,909,696)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,909,696)
<EPS-PRIMARY> (0.49)
<EPS-DILUTED> (0.49)
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