U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November
12, 1998, was 13,051,003.
<PAGE>
FX ENERGY, INC. AND SUBSIDIARIES
INDEX
Page
Number
PART I. Financial Information
Item 1. - Financial Statements
Consolidated Balance Sheets (unaudited) 3
Consolidated Statements of Operations (unaudited) 5
Consolidated Statements of Cash Flows (unaudited) 6
Notes to Consolidated Financial Statements
(unaudited) 7
Item 2. - Management's Discussion and Analysis
of Financial Condition and Results
of Operations 11
PART II. Other Information 19
Signatures 19
<PAGE>
FX ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September December
30, 1998 31, 1997
----------- -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,554,661 $ 4,511,919
Investment in marketable debt securities 3,781,373 3,940,582
Accounts receivable:
Accrued oil sales 142,678 200,414
Interest receivable 132,064 43,561
Joint interest owners and others 230,765 587,473
Inventory 65,096 67,382
Other current assets 92,604 87,013
----------- -----------
Total current assets 5,999,241 9,438,344
----------- -----------
Property and equipment, at cost:
Oil and gas properties (successful efforts
method):
Proved 1,841,597 7,358,552
Unproved 1,179,408 1,169,521
Other property and equipment 2,474,587 2,253,750
----------- -----------
5,495,592 10,781,823
----------- -----------
Less accumulated depreciation, depletion
and amortization (2,545,192) (2,021,175)
----------- -----------
Net property and equipment 2,950,400 8,760,648
----------- -----------
Other assets:
Certificates of deposit 356,500 356,500
Other 144,695 -
----------- -----------
Total other assets 501,195 356,500
----------- -----------
TOTAL ASSETS $ 9,450,836 $18,555,492
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 312,245 $ 654,809
Accrued liabilities 181,336 289,139
----------- -----------
Total current liabilities 493,581 943,948
----------- -----------
Stockholders' equity:
Common stock, $.001 par value, 30,000,000
shares authorized, 13,051,003 issued and
outstanding as of September 30, 1998 and
12,661,881 shares issued and outstanding 13,051 12,662
as of December 31, 1997
Notes receivable from officers (1,119,080) -
Additional paid-in capital 31,107,089 30,377,852
Accumulated deficit (21,043,805) (12,778,970)
----------- -----------
Total stockholders' equity 8,957,255 17,611,544
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,450,836 $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)
<TABLE>
For the three months ended For the nine months ended
September 30, September 30,
1998 1997 1998 1997
---------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Revenues:
Oil sales $ 275,523 $ 483,910 $ 879,668 $ 1,562,624
Drilling revenue 150,065 414,674 150,065 487,140
Gain on sale of property interests - 202,258 466,891 202,258
---------- ---------- ---------- -----------
Total revenues 425,588 1,100,842 1,496,624 2,252,022
---------- ---------- ---------- -----------
Operating costs and expenses:
Lease operating costs 231,114 226,106 727,990 777,427
Production taxes 16,644 30,322 58,092 108,313
Geological and geophysical costs 232,504 149,500 1,120,406 540,759
Exploratory dry hole costs (3,421) 1,502,831 8,903 3,307,369
Impairments 5,639,645 121,057 5,639,645 121,492
Drilling costs 114,170 178,028 135,282 311,761
Depreciation, depletion and
amortization 180,897 160,777 537,028 469,294
General and administrative 524,955 592,985 1,948,850 1,841,766
---------- ---------- ---------- -----------
Total operating costs and
expenses 6,936,508 2,961,606 10,176,196 7,478,181
---------- ---------- ---------- -----------
Operating loss (6,510,920) (1,860,764) (8,679,572) (5,226,159)
---------- ---------- ---------- -----------
Other income (expense):
Interest and other income 118,552 179,806 414,737 571,709
Interest expense - (534) - (83,273)
---------- ---------- ---------- -----------
Total other income 118,552 179,272 414,737 488,436
Net loss before extraordinary gain (6,392,368) (1,681,492) (8,264,835) (4,737,723)
Extraordinary gain:
Baltic Project Area - 15,183 - 3,076,242
---------- ---------- ---------- -----------
Net loss $(6,392,368) $(1,666,309) $(8,264,835) $(1,661,481)
========== ========== ========== ===========
Basic and diluted net loss per common
share:
Net loss before extraordinary gain (0.49) (0.13) (0.64) (0.37)
Extraordinary gain - - - 0.24
---------- ---------- ---------- -----------
Basic and diluted net loss per common
share $ (0.49) $ (0.13) $ (0.64) $ (0.13)
========== ========== ========== ===========
Weighted average number
of average common shares outstanding 13,034,449 12,597,316 12,954,439 12,580,872
========== ========== ========== ===========
</TABLE>
<PAGE>
The accompanying notes are an integral part of the consolidated financial
statements.
FX ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
For nine months ended
September 30,
1998 1997
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(8,264,835) $(1,661,481)
Adjustments to reconcile net loss to net
cash used in operating activities:
Extraordinary gain - (3,076,242)
Depreciation, depletion and 537,028 469,294
amortization
Gain on sale of property interests (466,891) (202,258)
Exploratory dry hole costs - 210,000
Impairments 5,639,645 435
Common stock issued for services 119,375 38,125
Increase (decrease) from changes in:
Accounts receivable 325,941 (228,971)
Inventory 2,286 285
Other current assets (5,591) (8,243)
Accounts payable and accrued
liabilities (250,367) 430,184
---------- ----------
Net cash used in operating
activities (2,363,409) (4,028,872)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties (170,686) (1,162,526)
Additions to other property and equipment (237,115) (349,528)
Additions to other assets (144,695) (32,292)
Proceeds from sale of property interests 505,000 545,339
Proceeds from sale of other property and
equipment 3,267 13,051
Advances to officers (869,080) -
Purchase of marketable debt securities (5,790,791) (3,350,161)
Proceeds from maturing marketable 5,950,000 5,476,574
debt securities
---------- ----------
Net cash provided by (used in)
investing activities (754,100) 1,140,457
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt - 1,575,992
Proceeds from exercise of warrants
and options 160,251 173,052
---------- ----------
Net cash provided by
financing activities 160,251 1,749,044
---------- ----------
DECREASE IN CASH AND CASH EQUIVALENTS (2,957,258) (1,139,371)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 4,511,919 8,345,914
---------- ----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $1,554,661 $7,206,543
========== ==========
</TABLE>
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 presentation of the results for the interim
periods. The interim financial statements should be read in conjunction with FX
Energy's quarterly report on Form 10-Q for the three months ended March 31,
1998, the quarterly report on Form 10-Q for the six months ended June 30, 1998
and the 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 September 30, 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 nine months of 1998 and the first nine months of 1997. Due to the
Company's net operating loss carryforwards, no tax provision was allocated to
the 1997 extraordinary gain.
NOTE 3: COMMON STOCK
During the first nine months of 1998, options and warrants for 379,122
shares of the Company's common stock were exercised, resulting in cash proceeds
of $160,000, notes receivable of $250,000, and a reduction in liabilities of
$200,000. The Company also issued 10,000 shares of common stock for services
valued at approximately $120,000.
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
As of December 31, 1997, the Company had outstanding advances to an officer
of the Company totaling $150,000. During February 1998, the Company advanced an
additional $50,000 to the officer, bringing the total of such advances to
$200,000. The advances were originally evidenced by a note payable to the
Company with interest at 7.7% payable on or before 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 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 originally due, with interest at 7.7%, by December 31, 1998. 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 the Company's
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.
On April 10, 1998, in consideration of the agreement of the two officers
not to sell the Company's common stock in market transactions, the Company
agreed to $1,270,000 in additional advances to such officers through April 15,
1999. The total advance commitment to such officers by the Company under the
new agreement, including prior loan amounts, is $1,720,000. All amounts due from
such officers, including amounts for the exercise of options and prior advances
discussed above, are now repayable, with interest at 7.7% from the date of the
separate advances, in cash or by the delivery of the Company's 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 balance 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 collateralized by shares of the Company's
common stock valued at $7.375 per share, which equals the amount of the loans.
Both of the officers agreed to not sell any of the Company's common stock until
the announcement of the results of either the first two exploratory wells in
Poland or the first commercially successful well in Poland, whichever occurs
later, 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 the Company's
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. As of September 30, 1998, notes receivable from
officers was $1,119,000.
NOTE 5: APACHE DRILLING COMMITMENT - LUBLIN PROJECT AREA
Under terms of the Lublin Participation Agreement between Apache
Corporation ("Apache") and the Company effective April 16, 1997, one of the
primary obligations Apache must perform at its own expense to earn a fifty
percent interest in the Company's Lublin Project Area is to drill seven
exploratory wells.
Apache spudded the first exploratory well on the Lublin Project Area, the
Czernic 277-2, on October 6, 1998. The Czernic 277-2 is located on POGC option
acreage and is expected to be drilled to a vertical depth of approximately 3,000
meters. Although the Czernic 277-2 is not located within the Company's Lublin
Concession acreage, the Company and Apache agreed to have Apache carry the
Company's share of costs of the Czernic 277-2. The Polish Oil and Gas Company
("POGC") elected to exercise its option to participate in the drilling of the
Czernic 277-2 with a one-third working interest. The Company and Apache will
also each have a one-third working interest in the Czernic 277-2, but Apache
will pay all of the Company's pro-rata share of drilling and completion costs.
Apache spudded the second exploratory well on the Lublin Project Area, the
Poniatowa 317-1, on October 9, 1998. The Poniatowa 317-1 is located within the
Company's Additional 16 Blocks section of the Company's Lublin Concession and is
expected to be drilled to a vertical depth of approximately 2,600 meters. The
Poniatowa 317-1 is the second well drilled under the Lublin Participation
Agreement. POGC elected to exercise its option to participate in the drilling
of the Poniatowa 317-1 with a five percent working interest. The Company and
Apache will each have a 47.5% working interest in the Poniatowa 317-1, but
Apache will pay all of the Company's pro-rata share of drilling and completion
costs. The Carboniferous and Devonian formations are the primary target
formations of both wells. Drilling operations for both wells are expected to
take two to three months.
Apache completed the initial 2D seismic acquisition program on the
Company's Lublin Project Area during August 1998. Under terms of the Lublin
Participation Agreement, Apache is required to shoot a minimum of 1,650
kilometers of 2D seismic at its own expense, except on part of the Original 8
Blocks, where the Company's share of costs was approximately $400,000. The
completed 2D seismic program included over 2,250 kilometers of new seismic data
costing a gross amount of approximately $4,000,000.
Apache advised the Company it plans to begin the drilling of the remaining
five wells under the Lublin Participation Agreement on or before December 31,
1999.
NOTE 6: CEILING TEST WRITEDOWN
In accordance with generally accepted accounting principles, the Company
must record an impairment expense if the Company determines the net book value
of its domestic proved properties oil and gas properties, on a property by
property basis, exceeds the aggregate future net revenues from such properties.
The Company's total net book value and related future net revenues of its
domestic proved properties at September 30, 1998 are detailed below:
Net book value (before $ 6,359,000
impairment) -----------
Future Net Revenues
--------------------------
Undiscounted P-V10
Domestic proved developed $ 1,900,000 $ 727,000
reserves
Domestic proved undeveloped
reserves
(net of $6,284,000 of future 6,723,000 3,913,000
development costs) ----------- -----------
Total $ 8,623,000 $ 4,640,000
=========== ===========
The future net revenues at September 30, 1998 were computed using a price
of $9.32 per barrel, the average price for the third quarter of 1998 and the
price the Company believes it is likely it will receive in the foreseeable
future.
In view of the Company's increased focus on its Polish exploration and
development opportunities and the probability of continued depressed oil prices,
management believes it is unlikely the Company will incur any domestic
development costs in the foreseeable future. Accordingly, the Company's
management has determined it is probable the Company will not recover the
domestic proved undeveloped reserves reflected above.
As a result of eliminating the future net revenues attibutable to its
domestic proved undeveloped reserves, the Company recorded an impairment expense
of $5,640,000 for the quarter ended September 30, 1998. This charge reduced the
carrying value of its domestic proved properties to $719,000 an amount
approximately equal to the PV-10 Value of its domestic proved developed reserves
as of September 30, 1998 and which approximates management's estimate of their
current value.
NOTE 7: NET LOSS PER SHARE:
Earnings per share for all periods presented has been restated to reflect
the adoption of Statement of Financial Accounting Standards No. 128, Earnings
Per Share ("SFAS 128"). SFAS 128 requires companies to present basic earnings
per share, and if applicable, diluted earnings per share, instead of primary and
fully diluted earnings per share. Basic earnings per share excludes dilution
and is computed by dividing net earnings available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if options
and warrants to purchase common stock were exercised. Options to purchase
2,977,501 shares and warrants to purchase 274,072 shares of the Company's common
stock, 3,270,239 shares in total, were outstanding at September 30, 1998 at
prices ranging from $1.65 to $10.25 per share. Options to purchase 2,892,000
shares and warrants to purchase 408,694 shares of the Company's common stock,
3,300,694 shares in total, were outstanding at September 30, 1997 at prices
ranging from $1.10 to $10.25 per share. The outstanding options and warrants
were not included in the computation of diluted earnings per share because the
effect would have been antidilutive.
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 $5,506,000 at September 30, 1998, a
decrease of $2,988,000 as compared to $8,494,000 at December 31, 1997. The
decrease was primarily attributable to negative cash flows of $2,363,000 from
operating activities and $754,000 from investing activities during the first
nine months of 1998.
Operating Activities
Net cash used in operating activities was $2,363,000 during the first nine
months of 1998, a decrease of $1,666,000 as compared to $4,029,000 for the same
period of 1997. The decrease is primarily attributable to a smaller operating
loss of $3,040,000 before the non-cash impairment charge of $5,640,000 during
the first nine months of 1998, a decrease of $2,186,000 as compared to an
operating loss of $5,226,000 in the same period in 1997.
Investing Activities
Net cash used in investing activities was $754,000 during the first nine
months of 1998, as compared to net cash provided by investing activities of
$1,140,000 during the same period of 1997. During the first nine months of
1998, the Company spent $123,000 to upgrade its producing operations (primarily
in the Cut Bank field in northern Montana), $48,000 for additional undeveloped
leaseholds ($33,000 in the Baltic Project Area and $15,000 in the Williston
Basin), a net amount of $149,000 to upgrade its drilling and well servicing
equipment, $85,000 for additional office equipment and $144,000 for other
assets. Also, during the first nine months of 1998, the Company received
$500,000 from Apache as an up front cash payment relating to Apache's
participation in the Company's Carpathian Project Area, received $5,000 from
Lyco Energy as part of an advance relating to participating in the exploration
of a portion of the Company's Williston Basin leases, advanced $869,000 to
officers of the Company (see Note 4 to the financial statements) and had a net
increase in marketable debt securities of $159,000. During the first nine
months of 1997, the Company spent $306,000 to upgrade its producing operations
(primarily in the Cut Bank field), $24,000 to drill a successful exploration
well in central Montana, $832,000 relating to undeveloped leaseholds in Poland
and the western United States, a net amount of $196,000 to upgrade its drilling
rig and well servicing equipment, $141,000 on additional office equipment and
$32,000 on other assets. Also, in 1997, the Company received $545,000 from
Apache relating to the Lublin Project Area and had a net increase in marketable
debt securities of $2,126,000.
The Company currently has unproved oil and gas properties with capitalized
costs of $1,179,000, including $718,000 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 will 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.
Financing Activities
Net cash provided by financing activities was $160,000 during the first
nine months of 1998, a decrease of $1,589,000, as compared to $1,749,000 in the
same period of 1997. During the first nine months of 1998, options and warrants
for 379,122 shares were exercised, resulting in net proceeds of $610,000,
composed of $160,000 in cash, notes receivable of $250,000 and a reduction in
liabilities of $200,000. The Company also issued 10,000 shares of common stock
for services valued at approximately $120,000. During the first nine months of
1997, the Company received advances of $1,576,000 from RWE-DEA
Aktiengesellschaft fur Mineraloel und Chemie, Hamburg, Germany ("RWE-DEA") and
$173,000 from the exercise of options and warrants representing 111,834 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 the remainder of 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 has
been the Lublin project area, where Apache is contractually obligated to drill
and pay all the cost of drilling seven exploratory wells in order to earn a
fifty percent interest in the Company's Lublin Project Area. Each well is
expected to cost approximately $2,800,000. Drilling of the first two wells
began during October 1998. Apache has advised the Company it expects to
commence drilling the remaining five wells under the Lublin Participation
Agreement on or before December 31, 1999. Apache also completed a 2D seismic
survey covering over 2,250 kilometers in the Lublin Project Area during August
1998 costing approximately $4,000,000, of which the Company's share was
approximately $400,000.
On May 23, 1998, the Company signed a Memorandum of Understanding ("MOU")
with POGC to jointly explore and develop POGC's Lachowice Concession, an
undeveloped gas discovery located within the Company's Carpathian project area,
with Apache as operator. Contract negotiations are underway to re-enter up to
three existing wells; if warranted, construct related pipeline and production
facilities; and if warranted, drill three or more development wells. The
Company plans to start the re-entry work during the first quarter of 1999.
The Company will likely face significant demands on its capital and may
require additional capital in 1999 if the re-entry of the three existing
Lachowice wells or other exploration drilling result in discoveries that warrant
production and development. If drilling now underway and planned in the Lublin
Project Area is successful in proving commercial oil and/or gas reserves, the
Company may require additional capital to fund production facilities and
pipelines, to purchase other assets required to support large-scale production
and to initiate a multi-well development program. Similarly, if exploration of
the Carpathian, Pomeranian, or Baltic project areas is successful in proving
commercial oil and/or gas reserves, the Company may require additional capital
to fund well completion, production facilities and pipelines; to purchase other
assets required to support large-scale production; or to undertake a multi-well
development program. In addition, the Company is actively seeking development
opportunities in other areas of Poland in cooperation with both POGC and Apache,
which could also create demands on the Company's capital and perhaps require
additional capital. 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, 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 third Quarter 1998 to the third Quarter 1997
Revenues
Oil sales were $276,000 for the third quarter of 1998, a decrease of
$208,000, or 43.0%, as compared to $484,000 in the same period of 1997. The
average price per bbl was $9.32 during the third quarter of 1998, a decrease of
$6.06 or 39.4%, as compared to $15.38 for the same period of 1997. Oil
production for the third quarter of 1998 was 29,572 bbls, a decrease of 1,884
bbls or 6.0%, as compared to 31,456 bbls, for the same period of 1997. The
decrease in production is attributable to a combination of the Company's effort
to shut in marginal wells and to defer workovers due to current depressed oil
prices and the natural production decline associated with the Company's
producing properties. The Company had no gas production during the third
quarter of 1998 or the third quarter of 1997.
Drilling revenues were $150,000 for the third quarter of 1998, a decrease
of $265,000 as compared to $415,000 for the same period of 1997. During the
third quarter of 1998, the Company's drilling rig contracted to drill four
shallow wells in northern Montana. The Company realized a gross profit of
$36,000 after direct drilling expenses of $93,000 and indirect downtime expenses
of $21,000. The Company did not retain a working interest in any of the wells
drilled during the third quarter of 1998. During the same period of 1997, the
Company's rig drilled the Murray #12-30, a dry hole located in central Montana.
An operating profit of $237,000 from drilling the Murray #12-30 offset dry hole
costs of $211,000, which resulted from the Company retaining a 27.69% interest
in the well. Drilling revenue will continue to vary due to the timing of wells
being drilled, cost of the wells and the Company's working interest.
There was no revenue recognized from gain on sale of property interests in
the third quarter of 1998, as compared to $202,000 for the same period of 1997.
During the third quarter of 1997, Apache paid the Company $545,000 as up-front
cash relating to its participation in the Company's Lublin Project Area, which
was partially offset by associated costs of $343,000.
Operating Costs and Expenses
Lease operating costs were $231,000 for the third quarter of 1998, an
increase of $5,000 as compared to $226,000 for the same period of 1997. Lease
operating costs for the third quarter of 1998 in comparison to the same period
of 1997 were substantially unchanged, primarily due to the Company's continuing
program to minimize its operating costs, shut in marginal wells and defer
workovers until the price of oil rebounds from its current historically
depressed level.
Production taxes were $17,000 for the third quarter of 1998, a decrease of
$13,000 as compared to $30,000 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 6.0% in the third quarter of 1998 as compared to the same
period of 1997.
Geological and geophysical costs ("G&G") were $233,000 for the third
quarter of 1998, an increase of $83,000 as compared to $150,000 in the same
period of 1997. During the third quarter of 1998, the Company accrued an
additional $100,000 relating to its share of the initial Lublin Project Area
seismic program. The Company's share of the initial Lublin Project Area seismic
program cost is expected to total approximately $400,000. The Company expects
its G&G expenditures will continue at current or higher levels as it continues
to focus its exploratory efforts on Poland.
Exploratory dry hole costs were a negative $3,000 for the third quarter of
1998, as compared to $1,503,000 in the same period of 1997. During the third
quarter of 1998, the Company received a credit of $3,000 from a vendor relating
to the Murray #12-30, a dry hole drilled during 1997. During the third quarter
of 1997, the Company drilled three dry holes; the Gladysze #1-A on the Baltic
Project Area costing $1,242,000; the Murray #12-30 on the Devil's Basin prospect
in central Montana costing $211,000; the Mega Springs Federal #7 in Nye County,
Nevada costing $21,000 and incurred an additional $29,000 of cost relating to
the Orneta #1, a dry hole drilled in the Baltic Project Area during the first
quarter of 1997.
Impairments were $5,640,000 for the third quarter of 1998, an increase of
$5,519,000 as compared to $121,000 in the same period of 1997. During the third
quarter of 1998, the Company recognized a domestic proved oil and gas property
impairment of $5,640,000 (see Note 6 to the financial statements) due to
curtailed future domestic development plans resulting from the Company's
increased focus on its Polish exploration and development opportunities and the
probability of continued depressed oil prices. During the third quarter of
1997, the Company had leasehold impairments of $45,000 relating to the Devil's
Basin prospect in central Montana and $76,000 relating to the Mega Spring
prospect in Nevada, both of which had unsuccessful exploratory wells drilled
during the third 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.
Drilling costs were $114,000 for the third quarter of 1998, a $64,000
decrease as compared to $178,000 in the same period of 1997. During the third
quarter of 1998, the Company contracted to drill four shallow wells in northern
Montana. The Company realized a gross profit of $36,000 after direct drilling
expenses of $93,000 and indirect downtime expenses of $21,000. The Company did
not retain a working interest in any of the wells drilled during the third
quarter of 1998. During the same period of 1997, the Company's rig drilled the
Murray #12-30, a dry hole located in central Montana. An operating profit of
$237,000 from drilling the Murray #12-30 offset dry hole costs of $211,000,
which resulted from the Company retaining a 27.69% interest in the well.
Drilling expenses will continue to vary due to the timing of wells being
drilled, cost of the wells and the Company's working interest.
Depreciation, depletion and amortization ("DD&A") was $181,000 for the
third quarter of 1998, an increase of $20,000 as compared to $161,000 in the
same period of 1997. The effective DD&A rate for the Company's producing
properties increased $0.35 per bbl to $2.39 per bbl during the third quarter of
1998, as compared to $2.04 per bbl during the third quarter of 1997, due
primarily to lower volumetric reserves at the end of 1997, as compared to the
end of 1996. The increased DD&A rate was partially offset by lower production
volumes in the third quarter of 1998. DD&A for the third quarter of 1998 also
increased as compared to the same period in 1997 due to equipment additions
after the third quarter of 1997.
General and administrative expenses ("G&A") were $525,000 for the third
quarter of 1998, a decrease of $68,000 as compared to $593,000 in the same
period of 1997. The Company incurred less travel, legal, professional and other
costs during the third quarter of 1998 as compared to the same period of 1997,
primarily because Apache established an office in Warsaw during late 1997 and
now performs a substantial amount of administrative activity in Poland on the
Company's behalf. Under terms of the Lublin Participation Agreement and the
Carpathian Participation Agreement, Apache may not charge the Company for Polish
G&A costs until Apache fulfills its exploratory well drilling requirements on a
usufruct by usufruct basis.
Interest and other income was $119,000 for the third quarter of 1998, a
decrease of $61,000 as compared to $180,000 in the same period of 1997. The
decrease is primarily due to lower interest earned on the Company's cash
equivalents and marketable debt securities. The Company had $5,336,000 of cash
equivalents and marketable debt securities on hand at September 30, 1998, as
compared to $10,557,000 at September 30, 1997.
There was no interest expense for the third quarter of 1998, as compared to
$534 during the same period of 1997. The Company had no outstanding long-term
debt as of September 30, 1998 or as of September 30, 1997.
Comparison of the first nine months of 1998 to the first nine months of 1997
Revenues
Oil sales were $880,000 for the first nine months of 1998, a decrease of
$683,000, or 43.7%, as compared to $1,563,000 in the same period of 1997. The
average price per bbl was $10.18 during the first nine months of 1998, a
decrease of $6.40 or 38.6%, as compared to $16.58 for the same period of 1997.
Oil production for the first nine months of 1998 was 86,407 bbls, a decrease of
7,840 bbls or 8.3%, as compared to 94,247 bbls, for the same period of 1997.
The decrease in production is attributable to a combination of the Company's
effort to shut in marginal wells and to defer workovers due to current depressed
oil prices and the natural production decline associated with the Company's
producing properties. The Company had no gas production during the first nine
months of 1998 or the first nine months of 1997.
Drilling revenues were $150,000 during the first nine months of 1998, a
decrease of $337,000 as compared to $487,000 for the same period of 1997.
During the first nine months of 1998, the Company's drilling rig contracted to
drill four shallow wells in northern Montana. The Company realized a gross
profit of $15,000 after direct drilling expenses of $93,000 and year to date
indirect downtime costs of $42,000. The Company did not retain a working
interest in any of the wells drilled during the first nine months of 1998.
During the same period of 1997, the Company's rig drilled a successful
exploratory well, the State #31-8, and a dry hole, the Murray #12-30, both
located central Montana. An operating profit of $175,000 from drilling both
wells helped offset the 6.25% working interest cost of $24,000 for the State
#31-8 (successful exploratory well) and the 27.69% working interest cost of
$211,000 for the Murray #12-30 (dry hole). Drilling revenue will continue to
vary due to the timing of wells being drilled, cost of the wells and the
Company's working interest.
The gain on sale of property interests was $467,000 during the first nine
months of 1998, an increase of $265,000 as compared to $202,000 for the same
period of 1997. During the first nine months of 1998, Apache paid the Company
$500,000 as up-front cash consideration relating to its participation in the
Carpathian Project Area, which was offset by associated costs of $33,000.
During the first nine months of 1997, Apache paid the Company $545,000 as up-
front cash relating to its participation in the Company's Lublin Project Area,
which was partially offset by associated costs of $343,000.
Operating Costs and Expenses
Lease operating costs were $728,000 for the first nine months of 1998, a
decrease of $49,000 as compared to $777,000 for the same period of 1997. During
the first nine months of 1998, the Company continued its program to minimize its
operating costs, shut in marginal wells and defer workovers until the price of
oil rebounds from its current historically depressed level.
Production taxes were $58,000 for the first nine months of 1998, a decrease
of $50,000 as compared to $108,000 in the same period of 1997. The decrease was
attributable to a 38.6% decrease in the price of oil per bbl and an oil
production decrease of 8.3% in the first nine months of 1998 as compared to the
same period of 1997.
G&G costs were $1,120,000 for the first nine months of 1998, an increase of
$579,000 as compared to $541,000 in the same period of 1997. During the first
nine months of 1998, the Company incurred $400,000 relating to its share of cost
of the initial Lublin Project Area seismic program and issued common stock
valued at approximately $120,000 for G&G consulting services in Poland. During
the first nine months of 1997, the Company did not participate in any material
seismic programs. The Company expects its current G&G expenditures will
continue at current or higher levels as it continues to focus its exploratory
efforts on Poland.
Exploratory dry hole costs were $9,000 for the first nine months of 1998, a
decrease of $3,298,000 as compared to $3,307,000 in the same period of 1997.
The exploratory dry hole costs recorded in the first nine months of 1998 relate
to exploratory dry holes drilled by the Company during 1997. The Company did
not drill any exploratory dry holes during the first nine months of 1998.
During the first nine months of 1997, the Company drilled four dry holes; the
Orneta #1 on the Baltic Project area costing $1,833,000; the Gladysze #1-A on
the Baltic Project Area costing $1,242,000; the Murray #12-30 on the Devil's
Basin prospect in central Montana costing $211,000; and the Mega Springs Federal
#7 in Nye County, Nevada costing $21,000.
Impairments were $5,640,000 for the first nine months of 1998, an increase
of $5,519,000 as compared to $121,000 in the same period of 1997. During the
first nine months of 1998, the Company recognized a domestic proved oil and gas
property impairment of $5,640,000 (see Note 6 to the financial statements) due
to curtailed future domestic development plans resulting from the Company's
increased focus on its Polish exploration and development opportunities and the
probability of continued depressed oil prices. During the first nine months of
1997, the Company had leasehold impairments of $45,000 relating to the Devil's
Basin prospect in central Montana and $76,000 relating to the Mega Spring
prospect in Nevada, both of which had unsuccessful exploratory wells drilled
during the first nine months of 1997. Leasehold impairments will vary from
period to period based upon management's periodic assessment to determine
whether any unproved properties have been impaired.
Drilling costs were $135,000 for the first nine months of 1998, a $177,000
decrease as compared to $312,000 in the same period of 1997. During the first
nine months of 1998, the Company contracted to drill four shallow wells in
northern Montana. The Company realized a gross profit of $15,000, after direct
drilling expenses of $93,000 and indirect downtime costs of $42,000. The
Company did not retain a working interest in any of the wells drilled during the
first nine months of 1998. During the same period of 1997, the Company's rig
drilled the State #31-8 and the Murray #12-30, both located in central Montana
and realized a gross profit of $175,000 after direct drilling expenses of
$268,000 and indirect downtime expenses of $44,000. The Company retained 6.25%
and a 27.69% working interest in the State #31-8 and the Murray #12-30,
respectively. Drilling expenses will continue to vary due to the timing of
wells being drilled, cost of the wells and the Company's working interest.
DD&A expense was $537,000 for the first nine months of 1998, an increase of
$68,000 as compared to $469,000 in the same period of 1997. The effective DD&A
rate for the Company's producing properties increased $0.38 per bbl to $2.44 per
bbl during the first nine months of 1998, as compared to $2.06 per bbl during
the first nine months of 1997, due primarily to lower volumetric reserves at the
end of 1997, as compared to the end of 1996. The increased DD&A rate was
partially offset by lower production volumes in the first nine months of 1998.
DD&A for the first nine months of 1998 also increased as compared to the same
period in 1997 due to equipment additions after the first nine months of 1997.
G&A expenses were $1,949,000 for the first nine months of 1998, an increase
of $107,000 as compared to $1,842,000 in 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 operations. The Company expects G&A
costs to possibly increase in future periods as it further expands its business
activities.
Interest and other income was $415,000 for the first nine months of 1998, a
decrease of $157,000 as compared to $572,000 in the same period of 1997. The
decrease is primarily due to lower interest earned on the Company's cash
equivalents and marketable debt securities. The Company had $5,336,000 of cash
equivalents and marketable debt securities on hand at September 30, 1998, as
compared to $10,557,000 at September 30, 1997.
There was no interest expense for the first nine months of 1998, as
compared to $83,000 during the same period of 1997. The Company had no
outstanding long-term debt as of September 30, 1998. During the first nine
months of 1997, the Company incurred interest expense of $83,000 relating to
advances received from RWE-DEA for joint operations on the Company's Baltic
Project Area. On June 30, 1997, RWE-DEA elected not to earn an interest in the
Company's Baltic Project Area and the Company eliminated its outstanding debt
associated with advances received from RWE-DEA and recognized an extraordinary
gain of $3,061,000.
YEAR 2000
The Company uses computers principally for administrative functions such as
word processing, accounting, management reporting and financial forecasting.
The Company also uses computers for scientific functions such as map making,
geological interpretations and geophysical analysis. Substantially all of the
Company's principal computer systems have been purchased since 1996. The
Company's core software systems (accounting, internet, word processing and
spreadsheet) are certified as year 2000 compliant.
An ongoing program has been implemented by the Company to ensure that its
operational and financial systems will not be adversely affected by year 2000
software failures. In addition to its own computer systems, in connection with
its activities in the United States and in Poland, the Company interacts with
suppliers, customers, creditors, and financial service organizations
domestically and globally which use computer systems. The Company is surveying
all of the major businesses the Company interacts with during the normal course
of business and is requesting a certification of year 2000 compliance from each
of them. Substantially all of the Company's core vendors (banking, insurance,
stock market-makers, strategic partners, oil purchasers, communications, etc.)
have either already certified that they are year 2000 compliant or have a
program underway to become year 2000 compliant before the year 2000.
The Company intends to modify or replace those systems, if any, which are
not year 2000 compliant. Although the Company intends to interact only with
those third parties that have year 2000 compliant computer systems, it is
impossible for the Company to monitor all such systems, particularly those of
parties in another country. There can be no assurance that such systems will not
have material adverse impacts on the Company's business and operations. The
Company estimates that the cost to redevelop, replace, or repair its technology
will not be material and has not expended any significant costs to date.
OTHER MATTERS
The Company has reviewed all other recently issued, but not yet adopted,
accounting standards in order to determine their effects, if any, on the results
of operations or financial position of the Company. Based on that review, the
Company believes that none of these pronouncements will have a significant
effect on current or future earnings or operations.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. None.
(b) Reports on Form 8-K. During the quarter ended September 30, 1998,
the Company filed the following reports on Form 8-K:
DATE OF EVENT REPORTED ITEM(S) REPORTED
---------------------- ---------------------
July 28, 1998 Item 5. Other Events
September 10, 1998 Item 5. Other Events
September 17, 1998 Item 5. Other Events
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FX ENERGY, INC.
(Registrant)
Date: November 12, 1998 By /s/ David N. Pierce
Chief Executive Officer, President, Chief
Financial and Accounting Officer, and Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET AS OF SEPTEMBER 30, 1998, AND STATEMENTS OF OPERATIONS FOR THE
QUARTER ENDED SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,554,661
<SECURITIES> 3,781,373
<RECEIVABLES> 505,507
<ALLOWANCES> 0
<INVENTORY> 65,096
<CURRENT-ASSETS> 5,999,241
<PP&E> 2,950,400
<DEPRECIATION> 2,545,192
<TOTAL-ASSETS> 9,450,836
<CURRENT-LIABILITIES> 493,581
<BONDS> 0
<COMMON> 13,051
0
0
<OTHER-SE> 8,944,204
<TOTAL-LIABILITY-AND-EQUITY> 15,090,481
<SALES> 879,668
<TOTAL-REVENUES> 1,496,624
<CGS> 0
<TOTAL-COSTS> 10,176,196
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (8,264,835)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,264,835)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (8,264,835)
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