U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q/A
Amendment No. 1
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
Commission File No. 0-25386
FX ENERGY, INC.
(Exact name of registrant as specified in its charter)
NEVADA 87-0504461
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
3006 Highland Drive, Suite 206
Salt Lake City, Utah 84106
(Address of principal executive offices)
(801) 486-5555
(Issuer's telephone number)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by section 13 of 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The number of shares of $.001 par value common stock outstanding as of April 30,
1998 was 12,991,892.
<PAGE>
FX ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March December
31, 1998 31, 1997
---------- ----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $3,611,276 $ 4,511,919
Investment in marketable debt securities 4,194,292 3,940,582
Accounts receivable:
Accrued oil sales 144,026 200,414
Interest receivable 112,999 43,561
Joint interest owners and others 740,769 587,473
Inventory 64,771 67,382
Other current assets 69,099 87,013
---------- ----------
Total current assets 8,937,232 9,438,344
Property and equipment, at cost:
Oil and gas properties (successful
efforts method):
Proved 7,399,840 7,358,552
Unproved 1,184,408 1,169,521
Other property and equipment 2,362,867 2,253,750
---------- ----------
10,947,115 10,781,823
Less accumulated depreciation, depletion (2,189,238) (2,021,175)
and amortization
---------- ----------
Net property and equipment 8,757,877 8,760,648
Other assets:
Certificates of deposit 356,500 356,500
---------- ----------
Total other assets 356,500 356,500
TOTAL ASSETS $18,051,609 $18,555,492
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 438,633 $ 654,809
Accrued liabilities 5,636 289,139
----------- -----------
Total current liabilities 444,269 943,948
----------- -----------
Total liabilities 444,269 943,948
----------- -----------
Stockholders' equity
Common stock, $.001 par value,
30,000,000 shares authorized, 12,991,882
issued and outstanding as of March 31,
1998 and 12,661,881 shares issued and
outstanding as of December 31, 1997 12,992 12,662
Additional paid-in capital 30,892,422 30,377,852
Accumulated deficit (13,298,074) (12,778,970)
----------- -----------
Total stockholders' equity 17,607,340 17,611,544
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $18,051,609 $18,555,492
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
FX ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended
March 31,
---------------------------
1998 1997
----------- ----------
Revenues:
Oil sales $ 331,828 $ 578,977
Drilling revenue - 300
Gain on sale of property
interests 466,891 -
------------ -----------
Total revenues 798,719 579,277
------------ -----------
Operating costs and expenses:
Lease operating costs 285,462 353,517
Production taxes 20,899 37,339
Geological and geophysical
costs 251,920 215,831
Exploratory dry hole costs 12,324 1,116,902
Drilling costs 11,386 15,498
Depreciation, depletion and
amortization 178,796 144,822
General and administrative 741,669 643,677
------------ -----------
Total operating costs
and expenses $ 1,502,456 $ 2,527,586
------------ -----------
Operating loss (703,737) (1,948,309)
------------ -----------
Other income (expense):
Interest and other income 184,633 202,831
Interest expense - (33,233)
------------ -----------
Total other income 184,633 169,598
------------ -----------
Net loss $ (519,104) $ (1,778,711)
============ ============
Basic and diluted net loss per
common share $ (.04) $ (.14)
============ ============
Basic and diluted weighted average
number of shares outstanding 12,822,704 12,552,261
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
FX ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For three months ended
March 31,
----------------------
1998 1997
------ --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(519,104) $(1,778,711)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation, depletion and amortization 178,796 144,822
Gain on sale of property interests (466,891) -
Exploratory dry hole costs - 210,205
Increase (decrease) from changes in:
Accounts receivable 414,929 (347,966)
Inventory 2,611 1,750
Other current assets 17,914 42,734
Accounts payable and accrued
liabilities (299,679) 250,191
--------- ----------
Net cash used in operating activities (671,424) (1,476,975)
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties (89,284) (227,198)
Additions to other property and equipment (123,117) (113,189)
Additions to other assets - (1,854)
Proceeds from sale of property interests 500,000 -
Proceeds from sale of other property and 3,267 -
equipment
Advances to officers (331,275) -
Purchase of marketable debt securities (4,038,710) -
Proceeds from maturing marketable debt
securities 3,785,000 5,476,574
--------- ----------
Net cash provided by (used in)
investing activities (294,119) 5,134,333
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long term debt - 609,117
Proceeds from exercise of warrants and
options 64,900 162,052
--------- ----------
Net cash provided by financing
activities 64,900 771,169
--------- ----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (900,643) 4,428,527
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 4,511,919 8,345,914
---------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $3,611,276 $12,774,441
========== ===========
NON CASH INVESTING ACTIVITIES
On February 17, 1998, two Company officers exercised their options to
purchase 150,000 shares each of the Company's common stock at $1.50 per
share. Each officer utilized a $100,000 bonus credit and a $125,000
note payable to the Company to exercise the options.
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
FX ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1: BASIS OF PRESENTATION
The interim financial data are unaudited; however, in the opinion of the
management of FX Energy, Inc. and Subsidiaries ("FX Energy" or the "Company"),
the interim data includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results for the interim
periods. The interim financial statements should be read in conjunction with FX
Energy's annual report on Form 10-KSB for the year ended December 31, 1997,
including the financial statements and notes thereto.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant inter-company accounts and
transactions have been eliminated in consolidation. At March 31, 1998, the
Company owned 100% of the voting stock of its subsidiaries, including FX
Producing Company, Inc. ("FX Producing").
The Company follows the successful efforts method of accounting for its oil
and gas operations. 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.
Certain balances in the 1997 financial statements have been reclassified to
conform to the current quarter presentation. These changes had no effect on
total assets, total liabilities, stockholders' equity or net loss.
NOTE 2: INCOME TAXES
The Company recognized no income tax benefit from the losses generated in
the first quarter of 1998 and the first quarter of 1997.
NOTE 3: COMMON STOCK
During the first quarter of 1998, options for 301,000 shares and warrants
for 29,000 shares of the Company's common stock were exercised, resulting in
proceeds of $452,000 and $63,000, respectively.
In connection with the purchase of the Company's producing oil properties
and well servicing equipment in 1994, the Company agreed to issue to the former
owners up to 400,000 shares of Company common stock in semi-annual increments of
50,000 shares each beginning October 1, 1994 on the attainment of certain levels
of oil production from the properties acquired. The oil production levels from
October 1, 1994 through April 1, 1998 were not attained. No additional shares
were issued and the Company has no further obligations under the agreement.
NOTE 4: LOANS TO OFFICERS
During the quarter ended March 31, 1998, the Company advanced $50,000 to
an officer, bringing the total advances to such officer to $200,000, payable
with interest at 7.7% on December 31, 1998.
On February 17, 1998, two of the Company's officers exercised options that
were to expire on May 6, 1998, to purchase 150,000 shares each of the Company's
Common Stock at a price of $1.50 per share. The closing price of the Company's
Common Stock was $7.375 per share on February 17, 1998. The foregoing option
exercises resulted in taxable income at ordinary rates to each executive of
$881,250, the amount by which the market price of the stock as of the date of
exercise exceeded the exercise price for the 150,000 shares purchased,
notwithstanding the fact that the transaction generated no cash with which the
executives could pay such taxes. In order to assist such executives in meeting
these income tax and other obligations so that they would not be required to
raise funds through the premature sale of Common Stock in the trading market
before the opportunity for the Company to realize results from currently planned
exploration drilling, the disinterested directors unanimously approved interim
loans to such individuals to assist them in meeting their short-term
obligations. The officers paid for the cost of their option exercise by
utilizing a $100,000 bonus credit received by each of the officers in 1997 and
signing a full recourse note payable to the Company for $125,000 each due, with
interest at 7.7%, by December 31, 1998. The officer loans have been classified
in the March 31, 1998 Consolidated Balance Sheet as "Accounts Receivable - Joint
interest owners and others."
NOTE 5: SUBSEQUENT EVENTS
On April 10, 1998, in consideration of the agreement of two officers not to
sell stock in market transactions, the Company agreed to $1,270,000 in
additional advances to such officers through April 15, 1999. Under the new
arrangement, all amounts due from such officers, including amounts for the
exercise of options, discussed above, are now repayable, with interest at 7.7%
from the date of the separate advances, in cash or by the delivery of Common
Stock, by December 31, 1999. The loans are evidenced by limited recourse
promissory notes. The repayment of $125,000 under each loan, the amount of the
exercise price of the options, is a full recourse obligation under the note. To
the extent of all amounts in excess of $125,000 in principal and interest, the
notes are non-recourse and are secured by pledges of shares of Common Stock with
a value at $7.375 per share, the market price of the shares on the date of
exercise, equal to the total amount of the loans. Both of the officers agreed
to not sell any Common Stock until the later of the announcement of the results
of the first two Apache exploratory wells in Poland or the first commercially
successful well in Poland or December 31, 1998. Thereafter, the Company may
demand payment of the obligations on 45 days' written notice, in which case the
officers may elect to repay the obligation by paying cash or tendering the
shares of Common Stock pledged as security or other shares with a current market
value equal to the amount due. The loans may be prepaid by the executives at
any time, and any payments shall be first applied against the full recourse
obligations of the loan.
On April 17, 1998, the Company signed a Prospect Agreement with Apache
Corporation ("Apache") which established an Area of Mutual Interest ("AMI")
within the Polish Lowlands, in central Poland. The AMI covers an area
applicable to the Study Agreement dated March 15, 1998 between the Company,
Apache and the University of Mining and Metallurgy in Cracow, the purpose of
which is to review existing data in the Polish Lowlands for exploration and
development opportunities. The Study Agreement area contains essentially all of
the productive and potentially productive areas within Poland other than the
Carpathians and the Baltic Syneclise where the Company already holds significant
acreage positions. Under terms of the Prospect Agreement, the Company and Apache
will each have a fifty percent interest in any exploration or development
prospects generated from the Study Agreement. The Polish Oil and Gas Company
("POGC") is contributing a substantial amount of data to the project and
controls approximately half of the acreage covered by the AMI. The Company and
Apache anticipate granting POGC an option to participate in any projects
developed as a result of the study agreement.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Forward-Looking Information May Prove Inaccurate
This report contains certain forward-looking statements and information
relating to the Company that are based on the beliefs of management as well as
assumptions made by and information currently available to management. When
used in this document, the words "anticipate," "believe," "estimate," "expect,"
"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.
FINANCIAL CONDITION
Working Capital
The Company's working capital was $8,493,000 at March 31, 1998, virtually
unchanged as compared to $8,494,000 at December 31, 1997.
Operating Activities
Net cash used in operating activities was $671,000 during the first three
months of 1998, a decrease of $806,000, as compared to $1,477,000 for the same
period of 1997. The decrease is primarily attributable to a smaller net loss
during the first quarter of 1998, as compared to the same period in 1997.
Investing Activities
Net cash used in investing activities was $294,000 during the first three
months of 1998, as compared to net cash provided by investing activities of
$5,134,000 during the same period of 1997. During the first three months of
1998, the Company spent $41,000 to upgrade its producing operations (primarily
in the Cut Bank field in northern Montana), $48,000 for additional undeveloped
leasehold ($33,000 in the Baltic Concession and $15,000 in the Williston Basin),
a net amount of $83,000 to upgrade its drilling and well servicing equipment and
$37,000 for additional office equipment. Also, during the first quarter of
1998, the Company received $500,000 from Apache as an up front cash payment
relating to Apache's participation in the Company's Western Carpathian
Concession, advanced $331,000 to officers of the Company (see Notes 4 and 5 to
the financial statements) and had a net increase in marketable debt securities
of $254,000. During the first three months of 1997, the Company spent $51,000
upgrading its producing operations (primarily in the Cut Bank field), $176,000
in acquiring additional undeveloped leasehold in Poland and the Williston
Basin, $75,000 upgrading its drilling and well servicing equipment and $38,000
for office equipment in the Salt Lake City office. In 1997, the Company also
received $5,477,000 in proceeds from maturing marketable debt securities.
The Company currently has unproved capitalized costs of $1,184,000,
including $723,000 domestically and $461,000 in Poland. In accordance with
generally accepted accounting principles, should the Company determine that
prospects' capitalized costs are not recoverable following unsuccessful
exploration drilling or otherwise, the Company would record an impairment charge
which may materially and adversely affect the Company's results of operations
for the period during which such impairment is recognized. There were no
impairments in the first quarter of 1998 or the first quarter of 1997.
Financing Activities
Net cash provided by financing activities was $65,000 during the first
three months of 1998, a decrease of $706,000, as compared to $771,000 in the
same period of 1997. During the first quarter of 1998, options and warrants for
330,000 shares were exercised, resulting in net proceeds of $515,000, of which
the Company received $65,000 in cash. During the first quarter of 1997, the
Company received advances of $609,000 from RWE-DEA and $162,000 from the
exercise of options and warrants representing 91,834 shares.
Capital Requirements
Historically, the Company has relied primarily on proceeds from the sale of
equity securities to fund its operating and investing activities. During 1997,
1996 and 1995, the Company received net proceeds from the sale of securities of
it and its subsidiaries, net of redemptions, of $253,000, $20,400,000 and
$3,711,000, respectively. The Company also benefits from funds provided by its
strategic partners relating to various exploratory projects.
During 1998, the Company expects to have substantially all the cost of its
share of the initial phase of exploratory activities in Poland covered by
Apache and other industry partners. The primary focus for 1998 is expected to
be in the Lublin Concession, where Apache is obligated to pay all of the cost to
drill four exploratory wells and to shoot 2D seismic at an estimated cost of
$4,000,000, of which the Company's share would be approximately $300,000.
As a result of the foregoing, the Company expects to spend limited amounts
of its capital in connection with the initial exploration program now underway
in Poland during 1998. However, the Company will likely face significant
demands on its capital and may require additional capital if the exploration
program results in one or more discoveries that warrant development. In
addition, the Company is actively seeking development opportunities in
cooperation with both POGC and Apache, which could also create demands on the
Company's capital and perhaps require additional capital. Prior to the end of
1998, the Company may need additional capital to accelerate planned exploration
and development programs in Poland. If exploration of the Lublin, Baltic,
Western Carpathian, Northern Carpathian or Pomeranian Concession is successful
in proving commercial oil and/or gas reserves, the Company may require
additional capital to fund a multi-well development program, production
facilities, pipelines or to purchase other assets 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 the Company's interest 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.
RESULTS OF OPERATIONS
Comparison of the First Quarter 1998 to the First Quarter 1997
Oil sales decreased $247,000 in the first quarter of 1998 to $332,000, as
compared to $579,000 in the same quarter of 1997. The average price per bbl
was $11.28 during the first quarter of 1998, a decrease of $7.32 or 39.4%, as
compared to $18.60 for the same period of 1997. Oil production for the first
quarter of 1998 was 29,418 bbls, a decrease of 1,704 bbls or 5.5%, as compared
to 31,122 bbls, for the same period of 1997. The decrease in production is
attributable to the natural decline associated with the Company's oil
properties.
Drilling revenues were zero for the first quarter of 1998, as compared to
$300 for the same period of 1997. The Company typically keeps its drilling rig
idle during the winter months. No exploratory wells were drilled with the
Company's drilling rig during the first quarter of 1998 or the first quarter of
1997. Drilling revenue will vary with the timing of wells being drilled,
costs of the wells and the Company's working interest.
Gain on sale of property interests was $467,000 during the first quarter of
1998, as compared to no gain on sale of property interests for the same period
of 1997. During the first quarter of 1998, Apache paid the Company $500,000 as
up-front cash consideration relating to its participation in the Western
Carpathian Concession, which was offset by associated costs of $33,000.
Lease operating costs were $285,000 for the first quarter of 1998, a
decrease of $69,000 as compared to $354,000 for the same period of 1997. During
the first quarter of 1998, the Company initiated a program to substantially
reduce its operating costs and to defer workovers until the price of oil
rebounds from its current depressed level.
Production taxes were $21,000 for the first quarter of 1998, a decrease of
$16,000 as compared to $37,000 in the same period of 1997. The decrease was
attributable to a 39.4% decrease in the price of oil per bbl and an oil
production decrease of 5.5% in the first quarter of 1998 as compared to the
first quarter of 1997.
Geological and geophysical costs ("G&G") were $252,000 during the first
quarter of 1998, an increase of $36,000 as compared to $216,000 in the same
period of 1997. During the first quarter of 1998 and 1997 the Company's
exploratory efforts were focused on Poland and the Company plans to continue to
do so in the future.
Exploratory dry hole costs were $12,000 during the first quarter of 1998, a
decrease of $1,105,000, as compared to $1,117,000 during 1997. During the first
quarter of 1998, the Company did not drill any exploratory dry holes. However,
the Company did incur additional dry hole costs associated with exploratory dry
holes drilled in 1997 during the first quarter of 1998. During the first
quarter of 1997, the Company drilled the Orneta #1 on its Baltic Concession at a
cost of $1,117,000.
Drilling costs were $11,000 during the first quarter of 1998, a $4,000
decrease as compared to $15,000 in the same period of 1997. The Company's
drilling rig was idle and was not used for exploratory drilling during the first
quarter of 1998 or the first quarter of 1997.
Depreciation, depletion and amortization ("DD&A") was $179,000 for the
first quarter of 1998, an increase $34,000 as compared to $145,000 in the same
period of 1997. The effective DD&A rate for the Company's producing properties
increased $0.43 per bbl to $2.50 per bbl during the first quarter of 1998, as
compared to $2.07 per bbl during the first quarter of 1997, due primarily to
lower volumetric reserves at the of 1997, as compared to the end of 1996. DD&A
for the first quarter of 1998 also increased as compared to the same quarter in
1997, due to equipment additions after the first quarter of 1997.
There were no leasehold impairments in the first quarter of 1998 or the
first quarter of 1997. Leasehold impairments will vary from quarter to quarter
and year to year based upon management's periodic assessment to determine
whether any unproved properties have been impaired.
General and administrative expenses ("G&A") were $742,000 for the first
quarter of 1998, an increase of $98,000 over $644,000 over the same period of
1997. The increase was primarily due to additional professional, legal, travel
and other G&A costs associated with the Company's expanding Polish operations.
Interest and other income was $185,000 for the first quarter of 1998, a
decrease $18,000 as compared to $203,000 in the same period of 1997. The
decrease is primarily due to lower interest earned on the Company's cash and
marketable debt securities. The Company had $7,805,000 of cash and marketable
debt securities on hand at the end of the first quarter of 1998, as compared to
$12,774,000 at the end of the first quarter of 1997.
Interest expense was zero for the first quarter of 1998, as compared to
$33,000 during the same period of 1998. The Company had no outstanding long-
term debt as of March 31, 1998. During 1997, the Company incurred interest
expense of $33,000 relating to advances received from RWE-DEA for joint
operations on the Company's Baltic Concession. On June 30, 1997, RWE-DEA
elected not to earn an interest in the Company's Baltic Concession and the
Company eliminated its outstanding debt associated with RWE-DEA of $3,076,000
and recognized it as an extraordinary gain.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are included as part of this report:
EXHIBIT SEC
NUMBER REFERENCE TITLE OF DOCUMENT LOCATION
NUMBER
- ------- --------- ------------------------------------------------- ---------
Item 10 Material Contracts
- ------------------------------------
10.01 10 Promissory Note for $125,000 dated February 17, 1998, Initial
payable by David N. Pierce to FX Energy, Inc. on or Filing
before December 31, 1998
10.02 10 Promissory Note for $125,000 dated February 17, 1998, Initial
payable by Andrew W. Pierce to FX Energy, Inc. on or Filing
before December 31, 1998
10.03 10 Memorandum of Understanding (reformed June 19, 1998) This
regarding officer loans Filing
10.04 10 Limited Recourse Promissory Note of David N. Pierce This
(reformed June 19, 1998) in the amount of $950,54 Filing
10.05 10 Pledge and Security Agreement (reformed June 19, 1998) This
between FX Energy, Inc. and David N. Pierce Filing
10.06 10 Agreement to Hold Collateral (reformed June 19, 1998) This
between FX Energy, Inc. and David N. Pierce and Kruse, Filing
Landa & Maycock, LLC, as agent to hold collateral
10.07 10 Limited Recourse Promissory Note of Andrew W. Pierce This
(reformed June 19, 1998) in the amount of $769,924 Filing
10.08 10 Pledge and Security Agreement (reformed June 19, 1998) This
between Energy, Inc. and Andrew W. Pierce Filing
10.09 10 Agreement to Hold Collateral (reformed June 19, 1998) This
between FX Energy, Inc. and Andrew W. Pierce and Filing
Kruse, Landa & Maycock, LLC, as agent to hold
collateral
Item 27 Financial Data Schedule
- -----------------------------------------
27.01 27 Financial Data Schedule Initial
Filing
(b) REPORTS ON FORM 8-K
During the quarter ended March 31, 1998, the Company filed the
following reports on Form 8-K
DATE OF EVENT REPORTED ITEM(S) REPORTED
----------------------------- -----------------------------------
January 26, 1998 Item 5. Other Events
March 23, 1998 Item 5. Other Events
Item 7. Financial Statements
and Exhibits
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this amendment to be signed on its behalf by the undersigned, thereunto duly
authorized.
FX ENERGY, INC.
(Registrant)
Date: July 10, 1998 By /s/ David N. Pierce
Chief Executive Officer, President, Chief
Financial and Accounting Officer, and Director
Memorandum
To: Board of Directors
Date: Reformed June 19, 1998
Re: Memorandum of Understanding
Expiring options and related matters
On February 17, 1998, at the conclusion of the quarterly board meeting of FX
Energy (the "company") two of the company's officers and directors, David Pierce
and Andy Pierce, each elected to exercise certain stock options that were
nearing expiration. In anticipation of the need for funds to pay the exercise
price, to pay the income taxes associated with the exercise, and to pay other
income taxes and personal liabilities, David and Andy advised the board that
they would need to sell company common stock in the near future. These matters
and related issues were discussed at length during the two days of board
meetings.
The central point of the discussions was the need to balance two conflicting
interests: on the one hand is the company's need to access the equity capital
markets this year, and on the other hand is David and Andy's need to sell a
portion of their equity holdings. The company plans to raise $15 million (plus
or minus $5 million) in April or May (prior to the first round of drilling by
Apache) and may do a much larger public offering late in 1998. David and Andy
need approximately $1.7 million in the aggregate to cover taxes and other
liabilities, an amount which they believe could be realized through the sale of
their common shares into the market.
The conflict arises because sales by insiders are interpreted by the market as a
lack of confidence in the company's future value, thereby eroding investor
confidence and diminishing the perceived value and market price of the company's
common stock. Sales made by insiders in January 1997 were seen by the board of
directors to have precisely this adverse effect. Insider sales can be expected
to cost the company a considerable amount of money (or stock) to the extent the
company raises funds at a lower price than would be possible absent insider
sales.
The problem is expected to be less severe in the future, once the company has
made hydrocarbon discoveries in Poland. At that point, the perceived value of
the company and its shares is expected to be tied to estimates of reserves and
future production. Until then, much of the company's value will be based on
intangibles, and will remain more or less vulnerable to adverse market reaction
to insider sales.
After much discussion among the board members and the company's legal and
accounting advisors, a compromise proposal seemed to interest most board
members, subject to review and comment by the company's advisors and final
review and approval by the members of the board. The essence of the compromise
is this: David and Andy will agree not to sell any equity securities into the
market until after results are released on the two Apache wells to be spudded by
June 30, or until the first commercially successful well, whichever occurs first
(the "Lockup Period", which shall in no event extend beyond Dec. 31, 1998); in
exchange, the company will provide funds (the "Accommodation Loan") in the
amounts and at the times shown below, which David and Andy will use to pay the
taxes shown.
DAVID ANDY
-------- --------
Existing $200,000 $0 Already outstanding
Loan
Exercise 125,000 $125,000 17-Feb-98 $225,000 exercise price less
Price $100,000 "credit"
FICA 3,255 3,255 15-Mar-98 6.2% of first $65,400 income
Medicare 14,500 14,500 15-Mar-98 1.45% of $100,000 credit plus
$900,000 "gain"
Fed Tax 131,626 143,776 15-Apr-98
State Tax 33,140 35,833 15-Apr-98
Est. Pymt 49,160 48,650 15-Apr-98 safe haven 110% of prior year tax
Est. Pymt 49,160 48,650 15-Jun-98 safe haven 110% of prior year tax
Est. Pymt 49,160 48,650 15-Sep-98 safe haven 110% of prior year tax
Est. Pymt 49,160 48,650 15-Jan-99 safe haven 110% of prior year tax
State Tax 51,258 53,013 15-Apr-99 Est. remaining tax liability due
to option exercise
Fed Tax 195,535 199,947 15-Apr-99 Est. remaining tax liability due
to option exercise
$950,954 $769,924 $1,720,878
Except to the extent of the exercise price of $125,000 for option exercise
payments for each of David and Andy, which shall be a full recourse obligation,
repayment of principal and interest (at the current rate for home mortgages) of
the Accommodation Loan will be without recourse except against that number of
shares (the "Collateral Shares") which, at $7.375 per share, would be required
to cover all of the principal (not interest) amounts actually drawn (a maximum
of 128,943 for David; 104,397 for Andy). The appropriate number of Collateral
Shares will be placed with the company's counsel, Kruse, Landa & Maycock, LLC,
as custodian for the Company prior to any draw date.
The company will have the right at any time on 45 days' notice after the Lockup
Period to demand payment in full of the principal and interest on the
Accommodation Loan. Within such 45 day period or at maturity on December 31,
1999, David and Andy shall either (i) repay in cash the principal and interest
of the Accommodation Loan, (ii) tender that number of shares (including
Collateral Shares) which, at the average bid price for the five trading days
preceding tender, would satisfy the principal and interest in full, (iii) or
tender a number of shares equal to the number of Collateral Shares (not
necessarily the actual Collateral Shares) as full satisfaction of such
obligation. In any event, all principal and interest on the Accommodation Loan
will be due on December 31, 1999.
David and Andy will have the right at any time to satisfy the Loan by tendering
to the Company that number of shares, including Collateral Shares, which, at the
average bid price for the five trading days preceding such tender, would satisfy
the principal and interest in full.
After the Lockup Period, proceeds from any stock sales by David or Andy will be
applied first to repayment of the Loan to the extent it has not already been
paid. If such sales include Collateral Shares, such sales will be effected by
delivering the certificates representing such shares held in custody on behalf
of the Company to the selling broker under irrevocable instructions from the
selling executive and the Company that first net sales proceeds be disbursed
directly to the Company for credit against the Loan.
Unless the Loan has already been satisfied, the company will have the right at
any time to include the Collateral Shares (or substitute shares provided by
David or Andy) in a public or private offering and to retain so much of the sale
proceeds as may be required to satisfy the Accommodation Loan. If the amount due
under such loan is greater than the sale proceeds then the Accommodation Loan
will nevertheless be deemed paid in full.
The Accommodation Loan facility is intended to provide the funds to be drawn, at
David's and Andy's election, as set forth above. Subsequent draws may be made
even though earlier draws have been repaid. The Accommodation Loan facility
will terminate on, and no further draws can be made after, April 15, 1999.
After the Lockup Period, David and Andy will discuss with the board any plans
they may make from time to time to sell shares. To the extent the company plans
to do an offering in the same time frame, all parties will give serious
consideration to including management shares therein.
The foregoing is intended as a memorandum of understanding between the Company
and each of David and Andy. In addition to this memorandum, the transactions
contemplated hereby shall be evidenced by a separate promissory note, pledge
agreement, and letter instructions to the custodian of the shares between the
Company and each of David and Andy, substantially in the forms attached. The
Company and David and Andy shall take such further action and execute such
further instruments as may be appropriate to effectuate the purpose and intent
of this memorandum and the additional documents entered into in connection
herewith.
The foregoing is accepted and agreed to this 19th day of June, 1998.
FX Energy, Inc.
By: /s/ Thomas B. Lovejoy, Chairman
/s/ David N. Pierce
/s/ Andrew W. Pierce
$950,954 REFORMED AS OF JUNE 19, 1998
LIMITED RECOURSE PROMISSORY NOTE
FOR VALUE RECEIVED, DAVID N. PIERCE, an individual ("Maker"), promises to
pay to FX ENERGY, INC., a Nevada corporation with its mailing address at 3006
Highland Drive, Suite 206, Salt Lake City, Utah 84106, facsimile number (801)
486-5575 ("Payee"), the principal amount of up to Nine Hundred Fifty Thousand,
Nine Hundred Fifty-Four Dollars ($950,954.00), consisting of Three Hundred Forty
Two Thousand Seven Hundred and Fifty Five Dollars ($342,755) advanced to date
plus additional amounts of up to Six Hundred Eight Thousand One Hundred and
Ninety Nine Dollars ($608,199) in as the same shall from time to time be
advanced by Payee to Maker in accordance with the terms of the Memorandum of
Understanding between Maker and Payee, as reformed June 19, 1998 (the
"Accommodation Loan") and set forth in the following schedule:
DATE AMOUNT
------- ----------
4/15/98 $ 213,926
6/15/98 49,160
9/15/98 49,160
1/15/99 49,160
4/15/99 246,793
----------
$ 608,199
together with interest on the unpaid principal balance at 7.7% per annum, due
and payable at the times and in the manner hereinafter provided, but in any
event on or before December 31, 1999.
Payee may, at any time after results are released respecting the two Apache
Corp. wells to be spudded by June 30, 1998, in Poland or the first commercially
successful well in which Payee participates in Poland, whichever occurs first,
which shall in no event extend beyond Dec. 31, 1998 (the "Lockup Period"),
demand payment in full of the principal and interest on the Accommodation Loan.
Within 45 days after such demand, Maker shall either (i) repay in cash the
principal and interest due hereunder, (ii) tender that number of shares of Payee
Common Stock which, at the average bid price for the five trading days preceding
such tender, would satisfy the principal and interest due hereunder in full,
(iii) or tender 128,943 shares of Payee common stock in full satisfaction of the
full amount of principal and interest due hereunder.
Maker reserves the right to prepay this Note in whole or in part at any
time, or from time to time, without notice, premium, charge, or penalty, by
paying cash or by tendering shares of Common Stock which, at the average bid
price for the five trading days preceding such tender, would satisfy the
principal and interest due hereunder in full.
Payments of principal and interest shall be made to the above-named Payee
at its mailing address or at such other address as the Payee or other holder
hereof may from time to time designate in writing.
Every Maker, endorser, and guarantor of this Note, or the obligation
represented hereby, waives presentment, demand, notice, protest, notice of
protest, or enforcement of this Note, assents to any extensions or postponements
of the time of payment or any other indulgence and to the addition to release of
any other party or person primarily or secondarily liable. None of the rights
and remedies of the Payee hereunder are to be waived or affected by failure or
delay to exercise them. All remedies of the Payee hereunder are to be waived or
affected by failure or delay to exercise them. All remedies conferred on the
Payee of this Note shall be cumulative and none is exclusive. Such remedies may
be exercised concurrently or consecutively at the Payee's option.
If this Note is placed with an attorney for collection, or if suit be
instituted for collection, or if any other remedy permitted by law is pursued by
the Payee hereof, because of any default in the terms and conditions herein,
then in such event, the undersigned agrees to pay reasonable attorneys' fees,
costs, and other expenses incurred by the Payee hereof in so doing.
This Note shall be governed by and construed in accordance with the laws of
the state of Utah.
This Note is secured by the limited recourse pledge of up to 128,943 shares
of Common Stock of Payee (the "Collateral"). To the extent of all amounts in
excess of $125,000 in principal and interest due thereon, this Note and the
obligation evidenced hereby shall be without recourse to Maker, and Payee will
look solely to the Collateral for payment of the principal and interest due
thereon and shall not seek a deficiency or other personal judgment against Maker
in the event that any proceeds from the Collateral shall be insufficient to
satisfy any amount in excess of $125,000 in principal and interest due thereon
pursuant to this Note. Any payments of principal and interest under this Note
shall first be applied to reduce the full recourse obligations of $125,000 under
this Note.
/s/ David N. Pierce
PLEDGE AND SECURITY AGREEMENT
THIS PLEDGE AND SECURITY AGREEMENT (this "Agreement") is made and entered
into, as reformed on June 19, 1998, by and between FX ENERGY, INC., a Nevada
corporation (hereinafter referred to as "Creditor"), and DAVID N. PIERCE, an
individual resident of the state of Utah (hereinafter referred to as "Debtor").
FOR AND IN CONSIDERATION of the mutual promises and covenants hereinafter
set forth, it is agreed as follows:
1. Creation of Security Interest. To secure the due and timely
performance of the payment by Debtor to Creditor of the obligation represented
by a promissory note dated this date in the principal amount of $950,954 and
payable, together with interest thereon at the rate of 7.7% per annum, on or
before December 31, 1999, a copy of which is attached hereto as Exhibit A and
incorporated herein by reference, and all accessions, renewals, extensions, and
modifications thereto (the "Note"), Debtor hereby pledges, hypothecates,
assigns, transfers, sets over, and grants a security interest in and to only
128,943 shares of common stock of Creditor included in and represented by
certificate(s) no. 1881 for 137,000 shares registered in the name of Debtor,
herein called the "Collateral." The Collateral shall be delivered as
hereinafter provided to be held for and on behalf of Creditor and to be disposed
of in accordance with the terms hereof.
Unless otherwise defined, words used herein shall have the meanings given
them in the Utah Uniform Commercial Code as now adopted and as hereafter amended
from time to time.
2. Delivery of Collateral. So long as any of the Note remains
outstanding, Debtor, will, unless Creditor shall otherwise consent in writing,
(a) at its expense, promptly deliver to Agent, as provided in paragraph 5
below, for holding on behalf of Creditor such stock powers and other documents,
satisfactory in form and substance to Agent, with respect to the Collateral as
Agent may reasonably request to preserve and protect, and to enable Agent to
enforce, Creditor's rights and remedies hereunder; (b) not sell, assign,
exchange, or otherwise transfer any of his right in any of the Collateral;
(c) not create or suffer to exist any lien,security interest, or other charge
or encumbrance against the Collateral, except for the pledge hereunder; (d)
not make or consent to any amendment or other modification or waiver with
respect to any of the Collateral or enter into any agreement or permit to
exist any restriction respecting any of the Collateral other than pursuant
hereto; and (e) not take or fail to take any action which would in any manner
impair the value or enforceability of Creditor's security interest in any of
the Collateral. Any transfer by Debtor of the Collateral shall be subject to
the interest of Creditor as a secured party therein.
3. Power to Vote Shares. During the term of this Agreement and so long
as Debtor is not in default in the performance of any of the terms of this
Agreement or the Note, Debtor shall have the sole right to vote the Collateral
on all corporate questions.
4. Adjustments. In the event that, during the term of this Agreement,
any share dividend, reclassification, readjustment, or other change is declared
or made in the capital structure of Creditor, all new, substitute, and
additional shares, or other securities, issued by reason of any such change
shall be delivered to Agent to be held for and on behalf of Creditor under the
terms of this Agreement in the same manner as the shares of stock originally
pledged hereunder.
5. Agreement to Hold Collateral. Simultaneously with the execution of
this Agreement, Creditor and Debtor shall enter into an agreement in the form
attached hereto as Exhibit B and incorporated herein by reference, providing for
the deposit of the Collateral with an agent of Debtor, which shall hold and
dispose of the Collateral in accordance with the terms thereof.
6. Ownership of Collateral. Debtor owns all the Collateral absolutely,
and no other person has or claims any interest in the Collateral. Debtor will
defend any proceeding which may affect the title to or Creditor's security
interest in any Collateral, and will indemnify Creditor for all costs and
expenses of Creditor's defense.
7 Charges. Liens. and Encumbrances on Collateral. Debtor will pay,
when due, all future charges, liens, obligations, or encumbrances on, and all
taxes and assessments hereafter imposed on or affecting the Collateral.
8 Procedure on Default. In the event of default, at Creditor's
option, without demand or notice, all or any part of the principal of and
interest on the Note shall immediately become due and payable, and Creditor or
any officer of the law may take immediate possession of the Collateral without
demand. Creditor may resell the Collateral at public or private sale, with or
without the Collateral being at the place of sale, and upon such terms and in
such manner as Creditor may determine, and Creditor may become the purchaser
thereof at any public sale, all provided that the foregoing is completed in a
commercially reasonable manner. From the proceeds of any such sale Creditor
shall deduct all expenses of retaking and selling such Collateral, including a
reasonable attorneys' fee. The balance shall be applied to the amount due; any
surplus shall be paid to Debtor.
9. Limitation on Recourse. Except to the extent of the exercise price
of options of $125,000, which shall be a full recourse obligation of Debtor, the
Note shall be without recourse to Debtor, and Creditor will look solely to the
Collateral for payment of the principal and interest due thereon and shall not
seek a deficiency or other personal judgment against Debtor in the event that
any proceeds from the Collateral shall be insufficient to satisfy the Note.
10. Events of Default. Upon the occurrence or during the continuance of
any one or more of the events hereinafter enumerated, Creditor may forthwith or
at any time thereafter during the continuance of any such event, by notice in
writing to Debtor, declare the unpaid balance of the principal and interest on
the Note to be immediately due and payable, without presentation, demand,
protest, notice of protest, or other notice of dishonor, all of which are hereby
expressly waived by Debtor, such events being as follows:
(a) Default in the payment of the principal and interest of the
Note or any portion thereof when the same shall become due and payable,
whether at maturity as herein expressed, by acceleration, or otherwise,
unless cured within ten days after notice thereof by Creditor of the Note
to Debtor;
(b) Debtor shall file a voluntary petition in bankruptcy or a
voluntary petition seeking reorganization, or shall file an answer
admitting the jurisdiction of the court and any material allegations of an
involuntary petition filed pursuant to any act of Congress relating to
bankruptcy or to any act purporting to be amendatory thereof, or shall be
adjudicated bankrupt, or shall make an assignment for the benefit of
creditors, or shall apply for or consent to the appointment of any receiver
or trustee for Debtor, or of all or any substantial portion of its
property, or Debtor shall make an assignment to an agent authorized to
liquidate any substantial part of its assets; or
(c) An order shall be entered pursuant to any act of Congress
relating to bankruptcy or to any act purporting to be amendatory thereof
approving an involuntary petition seeking reorganization of Debtor, or an
order of any court shall be entered appointing any receiver or trustee of
or for Debtor, or any receiver or trustee of all or any substantial portion
of the property of Debtor, or a writ or warrant of attachment or any
similar process shall be issued by any court against all or any substantial
portion of the property of Debtor, and such order approving a petition
seeking reorganization or appointing a receiver or trustee is not vacated
or stayed, or such writ, warrant of attachment, or similar process is not
released or bonded within 60 days after its entry or levy.
11. Notices. Any notices or other communications required or permitted
hereunder shall be sufficiently given if personally delivered to it or if sent
by facsimile transmission or other electronic communication, confirmed by
registered or certified mail, postage prepaid, or if sent by prepaid telegram or
overnight courier addressed as follows:
If to Creditor, to: FX Energy, Inc.
Attn: Scott J. Duncan
3006 Highland Drive, Suite 206
Salt Lake City, Utah 84106
Telecopy (801) 486-5575
If to Debtor, to: David N. Pierce
3006 Highland Drive, Suite 206
Salt Lake City, Utah 84106
Telecopy (801) 486-5575
14. Modification. This Agreement may not be supplemented, varied, or
rescinded, except by a writing which contains an express reference to this
Agreement and which is signed by the party against whom enforcement of the
supplement, variance, or rescission is asserted.
15. Governing Law. This Agreement is being executed and delivered and is
intended to be performed in, and the execution, validity, construction, and
performance of this Agreement shall be construed and enforced in accordance
with, the laws of the state of Utah.
16. Successors and Assigns. This Agreement shall bind and shall inure to
the benefit of the respective successors, assigns, heirs, beneficiaries, and
personal representatives of the parties hereto.
17. Headings. The headings or captions of the paragraphs, sections, or
articles herein are inserted for convenience only and shall not be deemed to
constitute a part of this Agreement for any purpose, and in particular shall not
be construed to limit, define, or explain the subject matter or modify the
meaning of any part or all of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
Creditor:
FX ENERGY, INC.
By /s/ Thomas B. Lovejoy, Chairman
Debtor:
/s/ DAVID N. PIERCE
AGREEMENT TO HOLD COLLATERAL
THIS AGREEMENT TO HOLD COLLATERAL (this "Agreement") is entered into, as
reformed on June 19, 1998, between and among FX ENERGY, INC., a Nevada
corporation (hereinafter referred to as the "Company"), DAVID N. PIERCE, an
individual resident of the state of Utah (hereinafter referred to as "Pierce"),
and KRUSE, LANDA & MAYCOCK, L.L.C., a Utah limited liability company
(hereinafter referred to as "Agent"):
FOR AND IN CONSIDERATION of the mutual promises and covenants hereinafter
set forth, it is agreed as follows:
1. Agent is hereby appointed as the Company's agent to hold the
Collateral and to take such action as may be required under the terms of this
Agreement.
2. Contemporaneously with the execution hereof, (a) Pierce has
delivered to Agent 128,943 shares of common stock of the Company, included in
and represented by certificate number(s) 1880 for 137,000 shares registered in
the name of Pierce, together with a stock power separate from the certificate
endorsed by the appropriate person or persons in blank and containing reasonable
assurances that each such endorsement is genuine and effective (the
"Collateral"), and (b) the Company has delivered the original Limited Recourse
Promissory Note, as reformed June 19, 1998, in the amount of $950,954, and in
which the Company appears as Payee and Pierce appears as Maker (the "Note").
Agent, by its execution and delivery of this Agreement, hereby acknowledges
receipt of the foregoing and agrees to hold and dispose of the foregoing,
together with any property distributed in connection with the Collateral as
dividends or pursuant to any stock split, merger, recapitalization, dissolution,
or total or partial liquidation of the Company as set forth herein.
3. The Collateral and Note shall be held and disposed of by Agent as
follows:
(a) If at any time Agent receives joint written requests of the
Company and Pierce instructing Agent to release the Collateral and the
Note, Agent shall promptly, but in any event within five business days,
deliver such items in accordance with such joint instructions.
(b) If, at any time after results are released respecting the two
Apache Corp. wells to be spudded by June 30, 1998, in Poland or the first
commercially successful well in which the Company participates in Poland,
or Dec. 31, 1998, whichever occurs first, (the "Lockup Period"), Agent
receives (i) a copy of the public announcement of the foregoing drilling
results or commercial success (ii) a Certificate (as hereinafter defined)
to the effect that such announcement has been publicly released, (iii) a
Certificate to the effect that Pierce has failed to pay the amount due on
the Note either (A) within 45 days after demand therefor or (B) in any
event on December 31, 1999, in accordance with the terms of the Note, and
(iv) a request that the items on deposit be delivered in accordance with
this subparagraph (b), Agent shall, within not less than five nor more than
ten business days, deliver the Collateral to the Company and deliver the
Note to Pierce.
(c) If, at any time after the Lockup Period, the Agent receives
a request from Pierce to deliver the items on deposit in accordance with
this subparagraph (c), Agent shall, within not less than five nor more than
ten business days, deliver the Collateral to a securities broker-dealer
selected by Pierce with instructions that the Collateral be sold on such
terms and conditions as Pierce may specify, with the irrevocable
instructions that the net proceeds from such sale(s) be disbursed first to
the Company in an amount sufficient to pay the amount due on the Note and
then to Pierce. Upon such sale and the payment of the amount due on the
Note as evidenced by a Certificate to the foregoing effect from the
Company, Agent shall deliver the Note and any shares remaining unsold to
Pierce.
(d) If, at any time prior to payment in full of the Note, the Company
elects to include the Collateral in a registration statement under the
Securities Act, as evidenced by a Certificate to the foregoing effect
enclosing a copy of the related definitive prospectus, Agent shall, within
not less than five nor more than ten business days, deliver the Collateral
to a securities broker-dealer selected by the Company with instructions
that the Collateral be sold on such terms and conditions as the Company may
specify, with the irrevocable instructions that the net proceeds from such
sale(s) be disbursed first to the Company in an amount sufficient to pay
the amount due on the Note and then to Pierce. Upon such sale and the
payment of the amount due on the Note as evidenced by a certificate to the
foregoing effect from the Company, Agent shall deliver the Note and any
shares remaining unsold to Pierce; if the sale yields net proceeds in an
amount less than the Note, on payment of such net proceeds to the Company,
Agent shall nevertheless deliver the Note to Pierce.
(e) If at any time Pierce instructs Agent to deliver the Collateral
to the Company, Agent shall, within not less than five nor more than ten
business days, deliver the Collateral to the Company and deliver the Note
to Pierce.
(f) At any time on the receipt of written instructions of Pierce,
Agent shall deliver the Collateral to the Company and shall continue to
hold the Note pending the receipt of further joint instructions from the
Company and Pierce.
When used herein, the term "Certificate" shall mean an instrument signed and
verified, in the case of the Company, by either the chairman of the duly
constituted Compensation Committee of the board of directors of the Company or a
majority of the directors who are members of such Compensation Committee or, in
the case of Pierce, by Pierce.
4. If at any time during the term of this Agreement any question,
disagreement, difference, or controversy shall arise among the parties hereto
regarding the meaning or interpretation of this Agreement or the rights, duties,
or obligations of the parties hereunder, such question, disagreement,
difference, or controversy shall be submitted to and determined by arbitration
in accordance with the following paragraphs:
(a) Any party wishing to submit a matter to arbitration shall give to
each other party a notice of arbitration (the "Notice of Arbitration")
setting forth in reasonable detail the issue or issues to be submitted to
arbitration. Within 20 days after such Notice of Arbitration, the Company
shall appoint one arbitrator and Pierce shall appoint one arbitrator. If
the Company or Pierce do not appoint timely each's separate arbitrator, the
arbitrator representing the party not so appointing an arbitrator shall be
appointed by the Third Judicial District Court, Salt Lake County, Utah,
upon the application of any party hereto. The first two arbitrators
appointed or designated as set forth above shall meet within 10 days after
the last of such arbitrator to be appointed is named and attempt to agree
on a resolution of the issues. If, within 30 days thereafter, the first two
arbitrators do not agree upon a resolution of the issues, such two
arbitrators shall themselves appoint a third arbitrator, who shall be a
competent and impartial person, and in the event of their being unable to
agree upon such appointment within l0 days after the time set forth above,
the third arbitrator shall be selected by the parties themselves if they
can agree thereon within a further period of 15 days. If the parties do not
so agree, then either party, on behalf of both, may request such
appointment by the Third Judicial District Court, Salt Lake County, Utah.
In the event of the failure, refusal, or inability of any arbitrator to
act, a new arbitrator shall be appointed in his stead, which appointment
shall be made in the same manner as hereinbefore provided for the
appointment of such arbitrator so failing, refusing, or being unable to
act.
(b) Each party shall pay the fees and expenses of the one of the
two initial arbitrators appointed by such party or in whose stead, as
provided above, such arbitrator was appointed and the fees and expenses of
the third arbitrator, and all other expenses, if any, of the arbitration
shall be borne equally by the Company on the one hand and Pierce on the
other, except as provided below. Notwithstanding the foregoing, the legal,
expert witness, and other representation costs of the Company and Pierce
shall be excluded and allocated in accordance with paragraph 7 hereof. Any
arbitrator designated to serve in accordance with the provisions of this
Agreement shall be disinterested and shall, by reason of education,
experience, or both, be capable of evaluating financial statements and the
presentation of information therein, but shall not be required to be a
certified public accountant.
(c) It shall be the duties of the arbitrators to resolve the
issues in dispute as promptly as practicable after their appointment. A
majority, of the arbitrators may act if one of the arbitrators shall
neglect or refuse to take part in the deliberations of the arbitrators. The
arbitration provided herein shall be conducted in Salt Lake County, Utah,
pursuant to the Utah Arbitration Act, Utah Code Annotated S78-31a-l, et
seq. The arbitrators shall follow such rules in reaching their decision as
they and the parties involved in this dispute shall agree upon and
otherwise, to the extent applicable, shall follow the rules of the American
Arbitration Association. The arbitrators shall set forth their decision in
writing, and the determination of the issues by the above arbitrators shall
be binding upon the parties for the purposes set forth in this Agreement.
(d) The parties involved in the dispute shall be permitted to
submit to the arbitrators written positions, testimonial, documentary, and
other evidence, and arguments concerning the matters in issue.
5. It is understood and agreed by the parties to this Agreement as
follows:
(a) Agent is not and shall not be deemed to be a trustee for any
party for any purpose and is merely acting as a depository and in a
ministerial capacity hereunder with the limited duties herein prescribed;
(b) Agent does not have and shall not be deemed to have any
responsibility in respect of any instruction, certificate, or notice
delivered to it or of the Collateral or the Note other than faithfully to
carry out the obligations undertaken in this Agreement and to follow the
directions in such instruction or notice provided in accordance with the
terms hereof;
(c) Agent is not and shall not be deemed to be liable for any
action taken or omitted by it in good faith and may rely on, and act in
accordance with, the advice of his counsel without liability on his part
for any action taken or omitted in accordance with such advice. In any
event, his liability hereunder shall be limited to liability for gross
negligence, willful misconduct, or bad faith on his part;
(d) Agent may conclusively rely on and act in accordance with any
certificate, instruction, notice, letter, telegram, cablegram, or other
written instrument believed by it to be genuine and to have been signed by
the proper party or parties;
(e) The Company and Pierce agree (i) to pay Agent's reasonable
fees and to reimburse Agent for reasonable expenses including attorneys'
fees incurred in connection with duties hereunder and (ii) to save
harmless, indemnify, and defend Agent for, from, and against any loss,
damage, liability, judgment, cost, and expense, whatsoever, including
counsel fees, suffered or incurred by it by reason of, or on account of,
any misrepresentations made to it or his status or activities as Agent
under this Agreement except for any loss, damage, liability, judgment,
cost, or expense resulting from gross negligence, willful misconduct, or
bad faith on the part of Agent. The obligation of Agent to deliver the
Collateral and the Note shall be subject to the prior satisfaction, upon
demand from Agent, of the obligation of the Company and Pierce to so save
harmless, indemnify, and defend Agent and to reimburse Agent or otherwise
pay his fees and expenses hereunder;
(f) Agent shall not be required to defend any legal proceeding which
may be instituted against it in respect of the subject matter of this
Agreement unless requested to do so by the Company or Pierce and
indemnified to Agent's satisfaction against the cost and expense of such
defense by the party requesting such defense. If any such legal proceeding
is instituted against it, Agent agrees promptly to give notice of such
proceeding to the Company and Pierce. Agent shall not be required to
institute legal proceedings of any kind;
(g) Agent shall not, by act, delay, omission, or otherwise, be
deemed to have waived any right or remedy he may have either under this
Agreement or generally, unless such waiver be in writing, and no waiver
shall be valid unless it is in writing, signed by Agent, and only to the
extent expressly therein set forth. A waiver by Agent under the terms of
this Agreement shall not be construed as a bar to, or waiver of, the same
or any other such right or remedy which he would otherwise have on any
other occasion; and
(h) Agent may resign as such hereunder by giving 30 days' written
notice thereof to the Company and Pierce. Within 20 days after receipt of
such notice, the Company and Pierce shall furnish to Agent written
instructions for the release of the Collateral and the Note (if such
Collateral and the Note has not yet been released pursuant hereto) to a
substitute Agent which (whether designated by written instructions from the
Company and Pierce jointly or in the absence thereof by instructions from a
court of competent jurisdiction to Agent) shall be a bank or trust company
organized and doing business under the laws of the United States and any
state thereof. Such substitute Agent shall thereafter hold any Collateral
and the Note received by it pursuant to the terms of this Agreement and
otherwise act hereunder as if it were Agent originally named herein.
Agent's duties and responsibilities hereunder shall terminate upon the
release of all Collateral and the Note then held according to such written
instruction or upon such delivery as herein provided. This Agreement shall
not otherwise be assignable by Agent without the prior written consent of
the Company and Pierce.
6. Each notice, instruction, or other certificate required or permitted
by the terms hereof shall be in writing and shall be communicated by personal
delivery, by facsimile or telecopy transmission or other electronic
communication confirmed, by prepaid registered or certified mail, or by prepaid
overnight courier, to the parties hereto at the addresses set forth below, or at
such other address as any of them may designate by notice to each of the others:
If to the Company, to: FX Energy, Inc.
Attn: Scott J. Duncan
3006 Highland Drive, Suite 206
Salt Lake City, UT 84106
Telecopy (801) 486-5575
And Thomas B. Lovejoy
48 Burying Hill Road
Greenwich, CT 06831
Telecopy (203) 629-3526
If to Pierce, to: David N. Pierce
FX Energy, Inc.
3006 Highland Drive, Suite 206
Salt Lake City, Utah 84106
Telecopy (801) 486-5575
If to Agent, to: Kruse, Landa & Maycock, LLC
Attn: James R. Kruse
50 West Broadway, 8th Floor
Salt Lake City, Utah 84101
Telecopy (801) 531-7090
Any notice, instruction, or certificate given by any party to another shall be
given at the same time and the same manner to all parties. All notices,
instructions, or certificates given hereunder shall be effective and deemed
received on the date personally delivered or transmitted by facsimile or other
electronic means and on the day following dispatch by overnight courier.
7. In the event of conflicting instructions from the Company and Pierce
or the existence of any other controversy or disagreement between them, as
determined in the sole discretion of Agent, Agent shall be entitled to refuse to
comply with any instruction, claim, or demand of either the Company or Pierce
unless instructed in writing jointly by the Company and Pierce, and in so
refusing Agent shall not be liable to either the Company or Pierce for Agent's
failure or refusal to comply with such conflicting instructions, claims, or
demands. Agent shall be further entitled to continue to so refuse to comply
until such conflicting instructions, controversy, or disagreement either (a)
shall have been resolved by written agreement between the Company and Pierce and
Agent shall have been notified in writing thereof, or (b) shall have been
finally determined by arbitration as provided above.
8. This Agreement shall be governed by and construed in accordance with
the laws of the state of Utah and shall be binding upon and inure to the benefit
of all parties hereto and their respective successors in interest and assigns.
9. This Agreement may be executed in several counterparts, which taken
together shall constitute a single instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the date first above written.
The Company:
FX ENERGY, INC.
By/s/ Thomas B. Lovejoy, Chairman
Pierce:
/s/ David N. Pierce
Agent:
KRUSE, LANDA & MAYCOCK, LLC
By /s/ James R. Kruse, President
$769,924 REFORMED AS OF JUNE 19, 1998
LIMITED RECOURSE PROMISSORY NOTE
FOR VALUE RECEIVED, ANDREW W. PIERCE, an individual ("Maker"), promises to
pay to FX ENERGY, INC., a Nevada corporation with its mailing address at 3006
Highland Drive, Suite 206, Salt Lake City, Utah 84106, facsimile number (801)
486-5575 ("Payee"), the principal amount of up to Seven Hundred Sixty-Nine
Thousand, Nine Hundred Twenty-Four Dollars ($769,924.00), consisting of One
Hundred Forty-Two Thousand Seven Hundred Fifty-Five Dollars ($142,755) advanced
to date plus additional amounts as the same shall from time-to-time be advanced
by Payee to Maker in accordance with the terms of the Memorandum of
Understanding between Maker and Payee, as reformed June 19, 1998 (the
"Accommodation Loan") and the following schedule:
DATE AMOUNT
------- ----------
4/15/98 $ 228,259
6/15/98 48,650
9/15/98 48,650
1/15/99 48,650
4/15/99 252,960
----------
$ 627,169
together with interest on the unpaid principal balance at 7.7% per annum, due
and payable at the times and in the manner hereinafter provided, but in any
event on or before April 30, 1999.
Payee may, at any time after results are released respecting the two Apache
Corp. wells to be spudded by June 30, 1998, in Poland or the first commercially
successful well in which Payee participates in Poland, whichever occurs first,
which shall in no event extend beyond Dec. 31, 1998 (the "Lockup Period"),
demand payment in full of the principal and interest on the Accommodation Loan.
Within 45 days after such demand, Maker shall either (i) repay in cash the
principal and interest due hereunder, (ii) tender that number of shares of Payee
Common Stock which, at the average bid price for the five trading days preceding
such tender, would satisfy the principal and interest due hereunder in full,
(iii) or tender 104,397 shares of Payer common stock in full satisfaction of
the full amount of principal and interest due hereunder.
Maker reserves the right to prepay this Note in whole or in part at any
time, or from time to time, without notice, premium, charge, or penalty, by
paying cash or, in the case of such prepayment after the Company completes an
equity financing, by tendering shares of Common Stock which, at the average bid
price for the five trading days preceding such tender, would satisfy the
principal and interest due hereunder in full.
Payments of principal and interest shall be made to the above-named Payee
at its mailing address or at such other address as the Payee or other holder
hereof may from time to time designate in writing.
Every Maker, endorser, and guarantor of this Note, or the obligation
represented hereby, waives presentment, demand, notice, protest, notice of
protest, or enforcement of this Note, assents to any extensions or postponements
of the time of payment or any other indulgence and to the addition to release of
any other party or person primarily or secondarily liable. None of the rights
and remedies of the Payee hereunder are to be waived or affected by failure or
delay to exercise them. All remedies of the Payee hereunder are to be waived or
affected by failure or delay to exercise them. All remedies conferred on the
Payee of this Note shall be cumulative and none is exclusive. Such remedies may
be exercised concurrently or consecutively at the Payee's option.
If this Note is placed with an attorney for collection, or if suit be
instituted for collection, or if any other remedy permitted by law is pursued by
the Payee hereof, because of any default in the terms and conditions herein,
then in such event, the undersigned agrees to pay reasonable attorneys' fees,
costs, and other expenses incurred by the Payee hereof in so doing.
This Note shall be governed by and construed in accordance with the laws of
the state of Utah.
This Note is secured by the limited recourse pledge of up to 104,397 shares
of Common Stock of Payee (the "Collateral"). To the extent of all amounts in
excess of $125,000 in principal and interest due thereon, this Note and the
obligation evidenced hereby shall be without recourse to Maker, and Payee will
look solely to the Collateral for payment of the principal and interest due
thereon and shall not seek a deficiency or other personal judgment against Maker
in the event that any proceeds from the Collateral shall be insufficient to
satisfy any amount in excess of $125,000 in principal and interest due thereon
pursuant to this Note. Any payments of principal and interest under this Note
shall first be applied to reduce the full recourse obligations of $125,000 under
this Note.
/s/ Andrew W. Pierce
PLEDGE AND SECURITY AGREEMENT
THIS PLEDGE AND SECURITY AGREEMENT (this "Agreement") is made and into, as
reformed on June 19, 1998, by and between FX ENERGY, INC., a Nevada corporation
(hereinafter referred to as "Creditor"), and ANDREW W. PIERCE, an individual
resident of the state of Utah (hereinafter referred to as "Debtor").
FOR AND IN CONSIDERATION of the mutual promises and covenants hereinafter
set forth, it is agreed as follows:
1. Creation of Security Interest. To secure the due and timely
performance of the payment by Debtor to Creditor of the obligation represented
by a promissory note dated this date in the principal amount of $769,924 and
payable, together with interest thereon at the rate of 7.7% per annum, on or
before December 31, 1999, a copy of which is attached hereto as Exhibit A and
incorporated herein by reference, and all accessions, renewals, extensions, and
modifications thereto (the "Note"), Debtor hereby pledges, hypothecates,
assigns, transfers, sets over, and grants a security interest in and to only
104,397 shares of common stock of Creditor included in and represented by
certificate(s) no. 1880 for 150,000 shares registered in the name of Debtor,
herein called the "Collateral." The Collateral shall be delivered as hereinafter
provided to be held for and on behalf of Creditor and to be disposed of in
accordance with the terms hereof.
Unless otherwise defined, words used herein shall have the meanings given
them in the Utah Uniform Commercial Code as now adopted and as hereafter amended
from time to time.
2. Delivery of Collateral. So long as any of the Note remains
outstanding, Debtor, will, unless Creditor shall otherwise consent in writing,
(a) at its expense, promptly deliver to Agent, as provided in paragraph 5 below,
for holding on behalf of Creditor such stock powers and other documents,
satisfactory in form and substance to Agent, with respect to the Collateral as
Agent may reasonably request to preserve and protect, and to enable Agent to
enforce, Creditor's rights and remedies hereunder; (b) not sell, assign,
exchange, or otherwise transfer any of his right in any of the Collateral; (c)
not create or suffer to exist any lien, security interest, or other charge or
encumbrance against the Collateral, except for the pledge hereunder; (d) not
make or consent to any amendment or other modification or waiver with respect to
any of the Collateral or enter into any agreement or permit to exist any
restriction respecting any of the Collateral other than pursuant hereto; and (e)
not take or fail to take any action which would in any manner impair the value
or enforceability of Creditor's security interest in any of the Collateral. Any
transfer by Debtor of the Collateral shall be subject to the interest of
Creditor as a secured party therein.
3. Power to Vote Shares. During the term of this Agreement and so long
as Debtor is not in default in the performance of any of the terms of this
Agreement or the Note, Debtor shall have the sole right to vote the Collateral
on all corporate questions.
4. Adjustments. In the event that, during the term of this Agreement,
any share dividend, reclassification, readjustment, or other change is declared
or made in the capital structure of Creditor, all new, substitute, and
additional shares, or other securities, issued by reason of any such change
shall be delivered to Agent to be held for and on behalf of Creditor under the
terms of this Agreement in the same manner as the shares of stock originally
pledged hereunder.
5. Agreement to Hold Collateral. Simultaneously with the execution of
this Agreement, Creditor and Debtor shall enter into an agreement in the form
attached hereto as Exhibit B and incorporated herein by reference, providing for
the deposit of the Collateral with an agent of Debtor, which shall hold and
dispose of the Collateral in accordance with the terms thereof.
6. Ownership of Collateral. Debtor owns all the Collateral absolutely,
and no other person has or claims any interest in the Collateral. Debtor will
defend any proceeding which may affect the title to or Creditor's security
interest in any Collateral, and will indemnify Creditor for all costs and
expenses of Creditor's defense.
7 Charges. Liens. and Encumbrances on Collateral. Debtor will pay,
when due, all future charges, liens, obligations, or encumbrances on, and all
taxes and assessments hereafter imposed on or affecting the Collateral.
8 Procedure on Default. In the event of default, at Creditor's
option, without demand or notice, all or any part of the principal of and
interest on the Note shall immediately become due and payable, and Creditor or
any officer of the law may take immediate possession of the Collateral without
demand. Creditor may resell the Collateral at public or private sale, with or
without the Collateral being at the place of sale, and upon such terms and in
such manner as Creditor may determine, and Creditor may become the purchaser
thereof at any public sale, all provided that the foregoing is completed in a
commercially reasonable manner. From the proceeds of any such sale Creditor
shall deduct all expenses of retaking and selling such Collateral, including a
reasonable attorneys' fee. The balance shall be applied to the amount due; any
surplus shall be paid to Debtor.
9. Limitation on Recourse. Except to the extent of the exercise
price of options of $125,000, which shall be a full recourse obligation of
Debtor, the Note shall be without recourse to Debtor, and Creditor will look
solely to the Collateral for payment of the principal and interest due thereon
and shall not seek a deficiency or other personal judgment against Debtor in
the event that any proceeds from the Collateral shall be insufficient to
satisfy the Note.
10. Events of Default. Upon the occurrence or during the continuance of
any one or more of the events hereinafter enumerated, Creditor may forthwith or
at any time thereafter during the continuance of any such event, by notice in
writing to Debtor, declare the unpaid balance of the principal and interest on
the Note to be immediately due and payable, without presentation, demand,
protest, notice of protest, or other notice of dishonor, all of which are hereby
expressly waived by Debtor, such events being as follows:
(a) Default in the payment of the principal and interest of the
Note or any portion thereof when the same shall become due and payable,
whether at maturity as herein expressed, by acceleration, or otherwise,
unless cured within ten days after notice thereof by Creditor of the Note
to Debtor;
(b) Debtor shall file a voluntary petition in bankruptcy or a
voluntary petition seeking reorganization, or shall file an answer
admitting the jurisdiction of the court and any material allegations of an
involuntary petition filed pursuant to any act of Congress relating to
bankruptcy or to any act purporting to be amendatory thereof, or shall be
adjudicated bankrupt, or shall make an assignment for the benefit of
creditors, or shall apply for or consent to the appointment of any receiver
or trustee for Debtor, or of all or any substantial portion of its
property, or Debtor shall make an assignment to an agent authorized to
liquidate any substantial part of its assets; or
(c) An order shall be entered pursuant to any act of Congress
relating to bankruptcy or to any act purporting to be amendatory thereof
approving an involuntary petition seeking reorganization of Debtor, or an
order of any court shall be entered appointing any receiver or trustee of
or for Debtor, or any receiver or trustee of all or any substantial portion
of the property of Debtor, or a writ or warrant of attachment or any
similar process shall be issued by any court against all or any substantial
portion of the property of Debtor, and such order approving a petition
seeking reorganization or appointing a receiver or trustee is not vacated
or stayed, or such writ, warrant of attachment, or similar process is not
released or bonded within 60 days after its entry or levy.
11. Notices. Any notices or other communications required or permitted
hereunder shall be sufficiently given if personally delivered to it or if sent
by facsimile transmission or other electronic communication, confirmed by
registered or certified mail, postage prepaid, or if sent by prepaid telegram or
overnight courier addressed as follows:
If to Creditor, to: FX Energy, Inc.
Attn: Scott J. Duncan
3006 Highland Drive, Suite 206
Salt Lake City, Utah 84106
Telecopy (801) 486-5575
If to Debtor, to: Andrew W. Pierce
3006 Highland Drive, Suite 206
Salt Lake City, Utah 84106
Telecopy (801) 486-5575
12. Remedy Cumulative. All remedies provided in this Agreement are
distinct and cumulative to any other right or remedy under this Agreement or
afforded by law or equity, and may be exercised concurrently, independently,
or successively.
13. Waiver. No failure to exercise and no delay in exercising, any right,
power, or privilege hereunder shall operate as a waiver thereof. Any single or
partial exercise of any right, power, or privilege hereunder shall not preclude
any other or further exercise thereof, or the exercise of any other right,
power, or privilege. No wavier of any provision of this Agreement or of any
right or remedy afforded by laws shall be deemed, or shall constitute, a waiver
of any other provision, right, or remedy, whether or not similar, nor shall any
waiver constitute a continuing waiver. No waiver shall be binding unless
evidenced by a writing which contains an express reference to this Agreement and
which is signed by the party against whom enforcement of the waiver is sought.
14. Modification. This Agreement may not be supplemented, varied, or
rescinded, except by a writing which contains an express reference to this
Agreement and which is signed by the party against whom enforcement of the
supplement, variance, or rescission is asserted.
15. Governing Law. This Agreement is being executed and delivered and is
intended to be performed in, and the execution, validity, construction, and
performance of this Agreement shall be CONSTRUED and enforced in accordance
with, the laws of the state of Utah.
16. Successors and Assigns. This Agreement shall bind and shall inure to
the benefit of the respective successors, assigns, heirs, beneficiaries, and
personal representatives of the parties hereto.
17. Headings. The headings or captions of the paragraphs, sections, or
articles herein are inserted for convenience only and shall not be deemed to
constitute a part of this Agreement for any purpose, and in particular shall not
be construed to limit, define, or explain the subject matter or modify the
meaning of any part or all of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
Creditor:
FX ENERGY, INC.
By /s/ Thomas B. Lovejoy, Chairman
Debtor:
/s/ ANDREW W. PIERCE
AGREEMENT TO HOLD COLLATERAL
THIS AGREEMENT TO HOLD COLLATERAL (this "Agreement") is entered into, as
reformed on June 19, 1998, between and among FX ENERGY, INC., a Nevada
corporation (hereinafter referred to as the "Company"), ANDREW W. PIERCE, an
individual resident of the state of Utah (hereinafter referred to as "Pierce"),
and KRUSE, LANDA & MAYCOCK, L.L.C., a Utah limited liability company
(hereinafter referred to as "Agent"):
FOR AND IN CONSIDERATION of the mutual promises and covenants hereinafter
set forth, it is agreed as follows:
1. Agent is hereby appointed as the Company's agent to hold the
Collateral and to take such action as may be required under the terms of this
Agreement.
2. Contemporaneously with the execution hereof, (a) Pierce has
delivered to Agent 104,397 shares of common stock of the Company, included in
and represented by certificate number(s) 1880 for 150,000 shares registered in
the name of Pierce, together with a stock power separate from the certificate
endorsed by the appropriate person or persons in blank and containing reasonable
assurances that each such endorsement is genuine and effective (the
"Collateral"), and (b) the Company has delivered the original Limited Recourse
Promissory Note, as reformed June 19, 1998, in the amount of $769,924, and in
which the Company appears as Payee and Pierce appears as Maker (the "Note").
Agent, by its execution and delivery of this Agreement, hereby acknowledges
receipt of the foregoing and agrees to hold and dispose of the foregoing,
together with any property distributed in connection with the Collateral as
dividends or pursuant to any stock split, merger, recapitalization, dissolution,
or total or partial liquidation of the Company as set forth herein.
3. The Collateral and Note shall be held and disposed of by Agent as
follows:
(a) If at any time Agent receives joint written requests of the
Company and Pierce instructing Agent to release the Collateral and the
Note, Agent shall promptly, but in any event within five business days,
deliver such items in accordance with such joint instructions.
(b) If, at any time after results are released respecting the two
Apache Corp. wells to be spudded by June 30, 1998, in Poland or the first
commercially successful well in which the Company participates in Poland,
or Dec. 31, 1998, whichever occurs first, (the "Lockup Period"), Agent
receives (i) a copy of the public announcement of the foregoing drilling
results or commercial success (ii) a Certificate (as hereinafter defined)
to the effect that such announcement has been publicly released, (iii) a
Certificate to the effect that Pierce has failed to pay the amount due on
the Note either (A) within 45 days after demand therefor or (B) in any
event on December 31, 1999, in accordance with the terms of the Note, and
(iv) a request that the items on deposit be delivered in accordance with
this subparagraph (b), Agent shall, within not less than five nor more than
ten business days, deliver the Collateral to the Company and deliver the
Note to Pierce.
(c) If, at any time after the Lockup Period, the Agent receives
a request from Pierce to deliver the items on deposit in accordance with
this subparagraph (c), Agent shall, within not less than five nor more than
ten business days, deliver the Collateral to a securities broker-dealer
selected by Pierce with instructions that the Collateral be sold on such
terms and conditions as Pierce may specify, with the irrevocable
instructions that the net proceeds from such sale(s) be disbursed first to
the Company in an amount sufficient to pay the amount due on the Note and
then to Pierce. Upon such sale and the payment of the amount due on the
Note as evidenced by a Certificate to the foregoing effect from the
Company, Agent shall deliver the Note and any shares remaining unsold to
Pierce.
(d) If, at any time prior to payment in full of the Note, the Company
elects to include the Collateral in a registration statement under the
Securities Act, as evidenced by a Certificate to the foregoing effect
enclosing a copy of the related definitive prospectus, Agent shall, within
not less than five nor more than ten business days, deliver the Collateral
to a securities broker-dealer selected by the Company with instructions
that the Collateral be sold on such terms and conditions as the Company may
specify, with the irrevocable instructions that the net proceeds from such
sale(s) be disbursed first to the Company in an amount sufficient to pay
the amount due on the Note and then to Pierce. Upon such sale and the
payment of the amount due on the Note as evidenced by a certificate to the
foregoing effect from the Company, Agent shall deliver the Note and any
shares remaining unsold to Pierce; if the sale yields net proceeds in an
amount less than the Note, on payment of such net proceeds to the Company,
Agent shall nevertheless deliver the Note to Pierce.
(e) If at any time Pierce instructs Agent to deliver the Collateral
to the Company, Agent shall, within not less than five nor more than ten
business days, deliver the Collateral to the Company and deliver the Note
to Pierce.
(f) At any time on the receipt of written instructions of Pierce,
Agent shall deliver the Collateral to the Company and shall continue to
hold the Note pending the receipt of further joint instructions from the
Company and Pierce.
When used herein, the term "Certificate" shall mean an instrument signed and
verified, in the case of the Company, by either the chairman of the duly
constituted Compensation Committee of the board of directors of the Company or a
majority of the directors who are members of such Compensation Committee or, in
the case of Pierce, by Pierce.
4. If at any time during the term of this Agreement any question,
disagreement, difference, or controversy shall arise among the parties hereto
regarding the meaning or interpretation of this Agreement or the rights, duties,
or obligations of the parties hereunder, such question, disagreement,
difference, or controversy shall be submitted to and determined by arbitration
in accordance with the following paragraphs:
(a) Any party wishing to submit a matter to arbitration shall give to
each other party a notice of arbitration (the "Notice of Arbitration")
setting forth in reasonable detail the issue or issues to be submitted to
arbitration. Within 20 days after such Notice of Arbitration, the Company
shall appoint one arbitrator and Pierce shall appoint one arbitrator. If
the Company or Pierce do not appoint timely each's separate arbitrator, the
arbitrator representing the party not so appointing an arbitrator shall be
appointed by the Third Judicial District Court, Salt Lake County, Utah,
upon the application of any party hereto. The first two arbitrators
appointed or designated as set forth above shall meet within 10 days after
the last of such arbitrator to be appointed is named and attempt to agree
on a resolution of the issues. If, within 30 days thereafter, the first two
arbitrators do not agree upon a resolution of the issues, such two
arbitrators shall themselves appoint a third arbitrator, who shall be a
competent and impartial person, and in the event of their being unable to
agree upon such appointment within l0 days after the time set forth above,
the third arbitrator shall be selected by the parties themselves if they
can agree thereon within a further period of 15 days. If the parties do not
so agree, then either party, on behalf of both, may request such
appointment by the Third Judicial District Court, Salt Lake County, Utah.
In the event of the failure, refusal, or inability of any arbitrator to
act, a new arbitrator shall be appointed in his stead, which appointment
shall be made in the same manner as hereinbefore provided for the
appointment of such arbitrator so failing, refusing, or being unable to
act.
(b) Each party shall pay the fees and expenses of the one of the
two initial arbitrators appointed by such party or in whose stead, as
provided above, such arbitrator was appointed and the fees and expenses of
the third arbitrator, and all other expenses, if any, of the arbitration
shall be borne equally by the Company on the one hand and Pierce on the
other, except as provided below. Notwithstanding the foregoing, the legal,
expert witness, and other representation costs of the Company and Pierce
shall be excluded and allocated in accordance with paragraph 7 hereof. Any
arbitrator designated to serve in accordance with the provisions of this
Agreement shall be disinterested and shall, by reason of education,
experience, or both, be capable of evaluating financial statements and the
presentation of information therein, but shall not be required to be a
certified public accountant.
(c) It shall be the duties of the arbitrators to resolve the
issues in dispute as promptly as practicable after their appointment. A
majority, of the arbitrators may act if one of the arbitrators shall
neglect or refuse to take part in the deliberations of the arbitrators. The
arbitration provided herein shall be conducted in Salt Lake County, Utah,
pursuant to the Utah Arbitration Act, Utah Code Annotated S78-31a-l, et
seq. The arbitrators shall follow such rules in reaching their decision as
they and the parties involved in this dispute shall agree upon and
otherwise, to the extent applicable, shall follow the rules of the American
Arbitration Association. The arbitrators shall set forth their decision in
writing, and the determination of the issues by the above arbitrators shall
be binding upon the parties for the purposes set forth in this Agreement.
(d) The parties involved in the dispute shall be permitted to
submit to the arbitrators written positions, testimonial, documentary, and
other evidence, and arguments concerning the matters in issue.
5. It is understood and agreed by the parties to this Agreement as
follows:
(a) Agent is not and shall not be deemed to be a trustee for any
party for any purpose and is merely acting as a depository and in a
ministerial capacity hereunder with the limited duties herein prescribed;
(b) Agent does not have and shall not be deemed to have any
responsibility in respect of any instruction, certificate, or notice
delivered to it or of the Collateral or the Note other than faithfully to
carry out the obligations undertaken in this Agreement and to follow the
directions in such instruction or notice provided in accordance with the
terms hereof;
(c) Agent is not and shall not be deemed to be liable for any
action taken or omitted by it in good faith and may rely on, and act in
accordance with, the advice of his counsel without liability on his part
for any action taken or omitted in accordance with such advice. In any
event, his liability hereunder shall be limited to liability for gross
negligence, willful misconduct, or bad faith on his part;
(d) Agent may conclusively rely on and act in accordance with any
certificate, instruction, notice, letter, telegram, cablegram, or other
written instrument believed by it to be genuine and to have been signed by
the proper party or parties;
(e) The Company and Pierce agree (i) to pay Agent's reasonable
fees and to reimburse Agent for reasonable expenses including attorneys'
fees incurred in connection with duties hereunder and (ii) to save
harmless, indemnify, and defend Agent for, from, and against any loss,
damage, liability, judgment, cost, and expense, whatsoever, including
counsel fees, suffered or incurred by it by reason of, or on account of,
any misrepresentations made to it or his status or activities as Agent
under this Agreement except for any loss, damage, liability, judgment,
cost, or expense resulting from gross negligence, willful misconduct, or
bad faith on the part of Agent. The obligation of Agent to deliver the
Collateral and the Note shall be subject to the prior satisfaction, upon
demand from Agent, of the obligation of the Company and Pierce to so save
harmless, indemnify, and defend Agent and to reimburse Agent or otherwise
pay his fees and expenses hereunder;
(f) Agent shall not be required to defend any legal proceeding which
may be instituted against it in respect of the subject matter of this
Agreement unless requested to do so by the Company or Pierce and
indemnified to Agent's satisfaction against the cost and expense of such
defense by the party requesting such defense. If any such legal proceeding
is instituted against it, Agent agrees promptly to give notice of such
proceeding to the Company and Pierce. Agent shall not be required to
institute legal proceedings of any kind;
(g) Agent shall not, by act, delay, omission, or otherwise, be
deemed to have waived any right or remedy he may have either under this
Agreement or generally, unless such waiver be in writing, and no waiver
shall be valid unless it is in writing, signed by Agent, and only to the
extent expressly therein set forth. A waiver by Agent under the terms of
this Agreement shall not be construed as a bar to, or waiver of, the same
or any other such right or remedy which he would otherwise have on any
other occasion; and
(h) Agent may resign as such hereunder by giving 30 days' written
notice thereof to the Company and Pierce. Within 20 days after receipt of
such notice, the Company and Pierce shall furnish to Agent written
instructions for the release of the Collateral and the Note (if such
Collateral and the Note has not yet been released pursuant hereto) to a
substitute Agent which (whether designated by written instructions from the
Company and Pierce jointly or in the absence thereof by instructions from a
court of competent jurisdiction to Agent) shall be a bank or trust company
organized and doing business under the laws of the United States and any
state thereof. Such substitute Agent shall thereafter hold any Collateral
and the Note received by it pursuant to the terms of this Agreement and
otherwise act hereunder as if it were Agent originally named herein.
Agent's duties and responsibilities hereunder shall terminate upon the
release of all Collateral and the Note then held according to such written
instruction or upon such delivery as herein provided. This Agreement shall
not otherwise be assignable by Agent without the prior written consent of
the Company and Pierce.
6. Each notice, instruction, or other certificate required or permitted
by the terms hereof shall be in writing and shall be communicated by personal
delivery, by facsimile or telecopy transmission or other electronic
communication confirmed, by prepaid registered or certified mail, or by prepaid
overnight courier, to the parties hereto at the addresses set forth below, or at
such other address as any of them may designate by notice to each of the others:
If to the Company, to: FX Energy, Inc.
Attn: Scott J. Duncan
3006 Highland Drive, Suite 206
Salt Lake City, UT 84106
Telecopy (801) 486-5575
And Thomas B. Lovejoy
48 Burying Hill Road
Greenwich, CT 06831
Telecopy (203) 629-3526
If to Pierce, to: Andrew W. Pierce
FX Energy, Inc.
3006 Highland Drive, Suite 206
Salt Lake City, Utah 84106
Telecopy (801) 486-5575
If to Agent, to: Kruse, Landa & Maycock, LLC
Attn: James R. Kruse
50 West Broadway, 8th Floor
Salt Lake City, Utah 84101
Telecopy (801) 531-7090
Any notice, instruction, or certificate given by any party to another shall be
given at the same time and the same manner to all parties. All notices,
instructions, or certificates given hereunder shall be effective and deemed
received on the date personally delivered or transmitted by facsimile or other
electronic means and on the day following dispatch by overnight courier.
7. In the event of conflicting instructions from the Company and Pierce
or the existence of any other controversy or disagreement between them, as
determined in the sole discretion of Agent, Agent shall be entitled to refuse to
comply with any instruction, claim, or demand of either the Company or Pierce
unless instructed in writing jointly by the Company and Pierce, and in so
refusing Agent shall not be liable to either the Company or Pierce for Agent's
failure or refusal to comply with such conflicting instructions, claims, or
demands. Agent shall be further entitled to continue to so refuse to comply
until such conflicting instructions, controversy, or disagreement either (a)
shall have been resolved by written agreement between the Company and Pierce and
Agent shall have been notified in writing thereof, or (b) shall have been
finally determined by arbitration as provided above.
8. This Agreement shall be governed by and construed in accordance with
the laws of the state of Utah and shall be binding upon and inure to the benefit
of all parties hereto and their respective successors in interest and assigns.
9. This Agreement may be executed in several counterparts, which taken
together shall constitute a single instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the date first above written.
The Company:
FX ENERGY, INC.
By /s/ Thomas B. Lovejoy, Chairman
Pierce:
/s/ ANDREW W. PIERCE
Agent:
KRUSE, LANDA & MAYCOCK, LLC
By /s/ James R. Kruse, President
