U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NUMBER: 0-25386
FX ENERGY, INC.
(Name of small business issuer in its charter)
NEVADA 87-0504461
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3006 HIGHLAND DRIVE, SUITE 206,
SALT LAKE CITY, UTAH 84106
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: TELEPHONE (801) 486-5555
TELECOPY (801) 486-5575
Securities registered pursuant to section 12(b) of the Act:
Title of each class Name of each exchange on which
registered
NONE NONE
Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.001
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. o
The Company's revenues for the fiscal year ended December 31, 1997, were
$2,808,625.
As of March 16, 1998, the aggregate market price of the voting stock held by
non-affiliates was approximately $105,573,977.
As of March 16, 1998, the Company had outstanding 12,991,882 shares of its
common stock, par value $0.001.
DOCUMENTS INCORPORATED BY REFERENCE. If the following documents are
incorporated by reference, briefly describe them and identify the part of the
Form 10-KSB (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) any annual report to security holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 31, 1990):THE COMPANY'S DEFINITIVE PROXY
STATEMENT IN CONNECTION WITH THE 1998 ANNUAL MEETING OF STOCKHOLDERS IS
INCORPORATED BY REFERENCE IN RESPONSE TO PART III OF THIS ANNUAL REPORT.
<PAGE>
PREFACE
CAUTION RESPECTING FORWARD-LOOKING INFORMATION
This annual report contains certain forward-looking statements and
information relating to the Company that are based on the beliefs of the Company
or management as well as assumptions made by and information currently available
to the Company or management. When used in this document, the words
"anticipate," "believe," "estimate," "expect," "intend" and similar expressions,
as they relate to the Company or its management, are intended to identify
forward-looking statements. Such statements reflect the current view of the
Company respecting future events and are subject to certain risks, uncertainties
and assumptions, including the risks and uncertainties noted. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated, expected, or intended. In
each instance, forward-looking information should be considered in light of the
accompanying meaningful cautionary statements herein. Neither the Company nor
any other person undertakes any obligation to revise these forward-looking
statements to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
FX Energy, Inc. ("FX" or the "Company") is an independent oil and gas
exploration company founded in 1989. Its original area of operation was in
exploration and production in the northern Rocky Mountain states. The Company's
headquarters are in Salt Lake City, Utah.
In 1993, on the initiative of Jerzy Maciolek, a Polish born geophysical
consultant retained by the Company to work on its U.S. exploration activities,
FX commenced its review of the opportunities in Poland and in 1995 signed its
first exploration license. Mr. Maciolek is now a director of the Company and
its Vice President of Exploration.
Today, FX is one of the most active oil and gas exploration companies in
Poland, holding more acreage there for the exploration and potential development
of oil and gas than any other entity, except the Polish national energy company
(Poland Oil and Gas Company, "POGC"). Although the Company holds producing and
exploration interests in the U.S., the focus of its activity and the core of its
potential value lies in its Polish interests. There are two main elements to
the Company's strategy:
-Acquire a leading acreage position in the known hydrocarbon provinces of
Poland. The Company has acquired the largest acreage position in Poland,
excluding POGC. The Company holds exploration rights on approximately 10.9
million gross acres, has applied for rights to an additional 1.7 million
gross acres and holds options to earn into POGC Concessions covering an
additional 2.1 million acres. The Company's acreage lies in four
geologically separate hydrocarbon provinces, giving access to a diversity of
exploration plays and targets.
-Leverage the exploration opportunities and manage early exploration risk by
farming out to larger industry partners. The Company has used its
significant acreage position and its operating experience in Poland to
attract industry partners, thereby gaining financial and operational leverage
in the exploration of its properties. This validates the Company's technical
assessment of prospects and has allowed the Company to focus its resources on
expanding its gross acreage position in Poland.
The Company believes that Poland offers an attractive combination of
significant reserve potential, underexplored acreage and a favorable operating
environment, with the opportunity of diversifying exploration risk over numerous
exploration targets with different geological and geophysical features in a
number of different prospect areas. The Company believes that its principal
strengths in Poland are its ability to identify areas of high exploration
potential through the acquisition, processing and interpretation of new and
existing seismic data; its exploration and drilling experience in Poland; and
its cooperative relationship with Polish government agencies and enterprises.
Oil and gas exploration and development in Poland has been conducted with
limited resources and without the aid of modern technology over the past half
century; for the most part, only shallow, simple plays have been exploited.
Although current hydrocarbon production in Poland is small, the country contains
geologic trends, in addition to those in which the Company now has an interest,
that have produced approximately 1 billion barrels of oil and gas equivalents
("BOE").
Poland currently produces only two percent of the oil and forty percent of
the gas it consumes. In an effort to reduce its energy dependence, Poland has
created a fiscal regime regarding the development of oil and gas properties,
including policies respecting the repatriation of earnings, royalty rates and
income taxes, that is internationally competitive. The country contains an
infrastructure of crude oil and natural gas pipeline networks that are
integrated with neighboring European markets. As one of the first foreign
companies to explore for oil in Poland's post-communist era, the Company has
found the operating environment to be very favorable.
To date, the Company has acquired four major oil and gas exploration
project areas comprising nearly 15 million gross acres, including existing
options and Concessions applied for by the Company. In two of these project
areas, the Company has farmed out a 50% working interest to Apache Corporation
("Apache"), one of the largest U.S. based international E&P companies. The
Company has granted Apache an option to farm into a third project area, and is
currently discussing the fourth area with another international E&P company. An
active seismic and drilling program currently underway should enable the Company
to test a number of its mapped prospects and establish a further inventory of
drillable prospects. In summary, under terms of the agreements with the
Company, Apache has committed to paying all of the Company's share of costs in
each Concession relating to the items below:
2D Seismic Concession/Usufruct Cash
Concession Wells (Kilometers) Costs Consideration
- ------------ ------ ----------- ------------------ -------------
Lublin 7 1,650 All during first 3 $ 450,000
year period
Western 3 350 All during first 3 500,000
Carpathian year period
Pomeranian (1) 1 600 All during first 3 --
year period
---- ----- ---------
Total 11 2,600 $ 950,000
(1) Assumes Apache will elect to exercise its option to participate in the
Pomeranian Concession
The Company's share of initial exploratory activities in the Lublin and
Western Carpathian Concessions is almost entirely covered by Apache, the
Company's strategic partner in both Concessions. As a result of the contracts
with Apache, the Company will not need to dedicate significant funds to this
program during 1998 and will be able to apply its existing working capital to
its current effort to identify and acquire development opportunities in Poland.
In the event an exploratory discovery is commercial or if the Company
participates in a POGC Concession, the Company expects to have the need to raise
additional capital to cover its share of costs.
The Company has also entered into several strategic alliances with POGC.
Under the terms of its agreements with POGC, the Company has the right to earn
an interest in several POGC Concessions within the Lublin Basin and the
Carpathian mountain region. POGC, in turn, has a reciprocal right to earn an
interest in the Company's Lublin and Western Carpathian Concessions. The
Company has established a strong working relationship with POGC, and expects to
continue sharing data, exploration ideas and acreage interests with POGC. In
particular, the Company, POGC and Apache are currently discussing potential
joint operations relating to development and production enhancement
opportunities on POGC acreage.
The Company was the first foreign entity to actually commence drilling
operations on oil and gas Concessions in Poland, although FX was not the first
foreign company to obtain such a concession in Poland. Management believes the
Company has established a solid reputation with the government of Poland for
accomplishing its operational goals, fulfilling its work commitments and
bringing exploration expertise and capital to Poland. Management believes the
Company's principal strengths are its existing prospects in Poland, its access
to existing geological and geophysical data, its operational experience in
Poland and its strong relationships with both POGC and Apache. Management
believes that these factors will contribute to the early phase exploration of
the Company's prospects with minimum financial exposure to the Company and will
increase the likelihood that the Company will participate in additional
opportunities in Poland.
The Company's activities in Poland grew out of and were supported by its
oil production and exploration program in the United States. At December 31,
1997, the Company had approximately 10,546 net developed acres and 17,948 net
undeveloped acres in several western states. The Company had estimated net
proved reserves of 4.8 MMBbls representing a PV-10 Value of approximately $13.6
million at December 31, 1997. The Company owns and operates 125 gross (117 net)
producing oil wells in Montana and Nevada that produced 346 Bpd during 1997.
Approximately 75% of the Company's production and 98% of its proved reserves are
concentrated in the Cut Bank field of northern Montana. The Company has
identified exploration prospects on its properties in the Williston Basin of
North Dakota and in Nye County, Nevada, and is currently seeking industry
partners before committing to a specific exploration program. At the same time,
the Company is currently reviewing all of its U.S. operations in light of its
strategic focus on Poland.
Finally, the Company has entered into an agreement with Homestake Mining
Company ("Homestake") under which Homestake will expend a minimum of $1.1
million over two years and an additional $2.0 million over an optional four
additional years in connection with the Company's gold exploration rights
covering approximately 166,000 acres in the Sudety region (the "Sudety
Concession") in southwestern Poland.
The Company's oil and gas exploration activities involve significant risks.
There can be no assurance that the use of technical expertise as applied to
geophysical or geological data will ensure that any well will encounter
hydrocarbons. Further, there is no way to know in advance of drilling and
testing whether any prospect encountering hydrocarbons will yield oil or gas in
sufficient quantities to be economically viable. Several test wells are
typically required to explore each prospect or exploration area. The Company
may continue to incur exploration costs in specific areas even if initial test
wells are plugged and abandoned or, if completed for production, do not result
in production of commercial quantities. The Company has drilled two exploratory
wells in the Baltic Concession, neither of which was completed for commercial
production. To date, the Company has participated in eight exploratory test
wells in the western United States, one of which has resulted in the
establishment of commercial production. There can be no assurance that the
Company's exploration efforts will be successful. Many of the Company's
exploration decisions are based on scientific data gathered by third parties,
some of which was gathered prior to recent significant technological advances.
Although the Company has reprocessed such data, there can be no assurance that
such data is as reliable as data gathered either using modern technology or
under the Company's supervision. See "Item 2. Description of Property."
For the meaning of certain oil and gas and other terms used in this annual
report, see "Definitions" at the end of this Item 1.
EXPLORATION AND DEVELOPMENT ACTIVITIES IN POLAND
The Company believes that Poland offers an attractive environment in which
to explore for and develop oil and gas prospects. The Company is currently
pursuing oil and gas exploration activities in four separate regions of Poland
that collectively cover approximately 10.9 million gross acres. By accessing
previously collected geophysical, geological and well data and reevaluating it
with modern interpretive techniques through its own efforts and those of its
strategic partners, the Company believes that it will be able to capitalize on
the combination of Poland's hydrocarbon potential and relatively new Polish
policies and programs to encourage the development of the country's domestic
energy resources.
THE REPUBLIC OF POLAND
The Republic of Poland is bordered on the north by the Baltic Sea, on the
west by Germany, on the south by the Czech Republic and Slovakia and on the east
by Lithuania, Belorussia, Ukraine and the Kaliningrad district of Russia.
Poland covers approximately 121,000 square miles and has a population of almost
40 million people. Between 1945 and 1989, Poland's political and economic
systems were directly influenced by the former Soviet Union. In 1989, Poland
peacefully asserted its independence, adopted a new constitution which
established a parliamentary democracy, and began the transition to a market-
based economy.
Poland's comprehensive economic reform programs and stabilization measures
implemented since 1989 have enabled it to move toward a free market economy and
achieve one of the fastest growing economies in eastern Europe since 1994, with
growth rates of 7% in 1995, 6% in 1996 and an estimated growth rate of 5% - 6%
in 1997. In 1995, Poland progressed from International Monetary Fund Stand-By
Conditionality and became a full member of the Organization for Economic
Cooperation and Development in July 1996 as a result of its liberalizing its
trade, foreign exchange and investment policies. Poland is poised to join the
European Union in the near future. One of the most important elements of
Poland's economic growth has been the country's development of an
entrepreneurial private sector. In 1995, private enterprises employed 62.5% of
Poland's workforce as compared to 33.3% in 1989. It is estimated that over 70%
of Poland's gross domestic product is now produced by the private sector.
Privatization of large government assets progresses as Poland continues its
economic reform programs. In 1998, the government plans to privatize its oil
and gas sector, which accounts for approximately 8.5% of the country's gross
domestic product, by restructuring POGC into several joint stock companies.
POGC is currently the government-owned monopoly covering all of the exploration
and production of oil and gas, as well as petroleum product processing and
distribution, with approximately 40,000 employees. Poland's economic strategies
continue to include maintaining its high rate of economic growth, enhancing
privatization in the economy, improving Poland's international competitiveness
and reducing budget deficits.
Poland's international trade has also undergone significant change since
Poland gained its independence. As it has developed, the country has turned its
economic ties from the east to the west. For example, in 1986, the former
Soviet Union accounted for 33% of Poland's imports and 28% of its exports. By
1993, these figures had decreased to 4.6% and 5.5%, respectively, while the
countries of the European Union purchased 71.3% of Poland's exports and provided
63.9% of its imports. According to Poland's Foreign Investment Agency, at the
end of 1997, the total value of foreign investment in Poland since 1990 was
$20.7 billion, as compared to $14.1, $6.8 and $4.3 billion at the end of 1996,
1995 and 1994 respectively. The United States and Germany are the leading
foreign investors in Poland. A Polish government agency has concluded that
direct foreign investment by foreign companies has been a forceful growth
factor, generating over one-third of the country's total investment and acting
as a powerful unemployment restraining factor.
Between the 1850s, when oil was first commercially produced in the
Carpathian region of southeastern Poland, and 1945, Poland produced
approximately 61.4 MMBbl of oil and 303 Bcf of gas. War damage and
overproduction following the 1939 invasions of Poland by Germany and the Soviet
Union caused output to drop dramatically by 1945. Over the last several decades,
the exploration and development of Poland's oil and gas resources have been
hindered by a combination of limited financial resources, political difficulties
and a lack of modern exploration technology. Poland currently imports
approximately 98% of its oil, primarily from the countries of the former Soviet
Union and the Middle East. In 1996, production was 6,000 Bpd of oil and 466
MMcf per day of natural gas. Currently, POGC owns all onshore production and is
the largest holder of oil and gas exploration and exploitation rights. Oil
refineries are located in Gdansk and Plock in Poland and another is located in
Germany on the western Polish border. Poland is expected to account for over
one-half of the increase in demand for liquefied petroleum gas in eastern Europe
over the next few years. Poland imports approximately 60% of its gas
consumption, which is distributed over a network of pipelines serving principal
cities, commercial and industrial areas.
LUBLIN INTERESTS
General
The Company's Lublin Interests consist of its Lublin Concession containing
approximately 5.0 million acres and the right to earn an interest in several
POGC Concessions comprising approximately 0.6 million acres that lie within the
Lublin Basin. The Company's Lublin Concession consists of 24 exploration
blocks, comprising 8 exploration blocks (the "Original 8 Blocks") which were
acquired by the Company in late 1996 and 16 exploration blocks (the "Additional
16 Blocks") which were acquired by the Company in July 1997.
The Company's Lublin Interests cover most of that portion of the Lublin
Basin that lies within Poland. The Lublin Basin has been explored extensively
by POGC and other Polish agencies and enterprises in recent years, resulting in
the discovery of four fields within the area covered by the Lublin Interests.
One, the Melgiew field on a POGC exploitation concession, is currently producing
at a rate of 5 MMcf per day from a Devonian reef structure. According to POGC,
the Melgiew field contains estimated ultimate recoverable reserves of 102 Bcf.
A second field, the Swidnik, was apparently depleted after producing 5 MMBOE and
80 Bcf from Carboniferous channel sands. POGC has reported that a third field,
the Komarow, a gas discovery in a Devonian reef structure, contains 39 Bcf of
estimated ultimate recoverable reserves. A fourth field, the Ciecierzyn in
Block 298, is a shut-in gas discovery in a Devonian reef structure, which POGC
appraises as containing 56 Bcf of estimated ultimate recoverable reserves.
Additional wells drilled by POGC within the area of the Lublin Interests have
confirmed the presence of oil and/or gas in other Devonian and Carboniferous
structures.
The Company is cooperating with Apache, its partner in the Lublin
Interests, in developing a comprehensive long-term exploration and development
program for the area. A 1,650 kilometer seismic survey of portions of the
Lublin Interests now underway is scheduled for completion in the first quarter
of 1998. Additionally, approximately 6,000 kilometers of existing seismic data
are currently being analyzed, reprocessed and evaluated by the Company and
Apache. The seismic data, together with well log and core analysis data, will
be used to select locations for commencing at least four wells during 1998 under
Apache's seven-well drilling commitment (refer below to "Strategic Alliance with
Apache--Lublin Basin"), with two wells scheduled to commence drilling by June
30, 1998. Seismic data analyzed to date and correlated with test results from
previous drilling show a number of Carboniferous, Devonian, Cambrian and
Triassic potential structures within the area covered by the Lublin Interests
that the Company believes warrant drilling. As this exploration plan is
implemented, the Company expects that the number of exploration and development
wells drilled will exceed the seven well minimum required to be drilled by
Apache. If one or more of the scheduled wells is found to have commercial
production, the Company anticipates that Apache will prepare and propose a long-
term development plan for participation by the Company, which may increase the
funds to be budgeted by the Company for the Lublin Interests. See "Item 6.
Management's Discussion and Analysis or Plan of Operations--Liquidity and
Capital Resources."
Strategic Alliance with Apache--Lublin Basin
On April 16, 1997, the Company entered into its initial strategic alliance with
Apache for joint operations on the Lublin Interests. Apache is an independent
energy company with more than $3.3 billion in assets. In addition to
significant oil and gas production in North America, Apache's international
focus areas are Egypt's Western Desert, the Carnavon Basin offshore Western
Australia and Poland. Apache also has operations in People's Republic of China,
Indonesia and Africa's Ivory Coast. Apache's average daily production during
1996 was 53.2 MBbls of oil and 561 MMcf of natural gas. Giving effect to 1996
acquisitions, dispositions and drilling activity, Apache's estimated proved
reserves increased by 85.6 MMBOE in 1996 to 506.2 MMBOE, of which approximately
54% was natural gas.
In April 1997, the Company initially entered into an agreement with Apache
covering the Original 8 Blocks in the Lublin Concession obtained by the Company
in late 1996. Thereafter, following the grant of oil and gas exploration rights
on the Additional 16 Blocks to the Company by the Polish government in July
1997, the agreement with Apache was expanded to include all 24 blocks in the
Lublin Concession on August 1, 1997. Additionally, the Company and Apache
entered into an option agreement with POGC whereby POGC was granted an option to
participate in the Company's Lublin Concession in exchange for an option for
the Company and Apache to participate in POGC Concessions located in the Lublin
Basin.
Under the Company's agreement with Apache, it may acquire a fifty percent
interest in the Lublin Concession by paying the Company $450,000 in cash; all of
the concession and usufruct costs for the first three-year exploration period;
all of the cost of drilling seven wells (two wells must be spudded by June 1998,
two by December 1998, and three by June 1999); all seismic costs until the
required wells are drilled (except for a portion paid by the Company for the
first 1,650 kilometers); all geological, geophysical and general administrative
costs relating to field operations; $40,000 per percentage point of reduction in
the Company's interest if POGC exercises its option to join in the Original 8
Blocks (a maximum of $1.0 million per block); costs incurred by the Company in
assisting with permits, governmental approvals and similar matters; and the
Company's share of costs required to carry POGC in any earning well in the
Ciecierzyn field, if drilled. The fifty-fifty interest of the Company and
Apache will be reduced proportionately in the event that POGC participates in
the Additional 16 Blocks. Apache will act as operator on the Lublin
Concession. The agreement also granted Apache the first right to participate
with the Company in the exploration of the Company's Carpathian Joint Study
Agreement area with POGC.
Strategic Alliance with POGC--Lublin Basin
Effective July 1997, the Company, Apache and POGC entered into an option
agreement providing for the right of each party to earn an interest in each
party's exploration interests in the Lublin Basin. Under the agreement, POGC
has the option to join in the first well in each block in the Lublin Concession
on a block-by-block basis of up to a twenty-five percent interest in the
Original 8 Blocks and up to a one-third interest in the Additional 16 Blocks,
except for Block 298, which it may elect a 40% interest, by joining in the first
well drilled in each such block. If POGC elects to earn an interest in the
Original 8 Blocks, the Company's interests will be reduced by such interest
while in the Additional 16 Blocks, both the Company's and Apache's interest will
be reduced proportionately. POGC is not required to pay any geological and
geophysical or related costs prior to drilling. After electing to participate
in a specified percentage in each block, POGC can retain that percentage
interest in all additional activities within that block by paying its pro-rata
share of ongoing costs. Under this agreement, the Company and Apache have the
right to explore the POGC Concession containing the Ciecierzyn field in Block
298. If the Company and Apache elect to gather 3D seismic data in the
Ciecierzyn field and drill one well, POGC will withdraw its exploitation
concession and can participate up to a forty percent interest with the Company
and Apache in a new exploitation concession on the Ciecierzyn field. If POGC
elects at least a one-third interest, it can be the operator on the Ciecierzyn
field. The Company and Apache have the first right of refusal to join in the
Melgiew and Glinnik POGC Concessions.
POGC has granted the Company and Apache each independent and separate
options to participate up to a one-third interest each in the first well in
several POGC Concessions covering approximately 0.6 million acres within the
Lublin Basin. The Company and Apache each can maintain its respective interest
in successive activities on specific POGC Concessions by bearing their
respective share of ongoing costs.
CARPATHIAN INTERESTS
General
The Company's Carpathian Interests consist of its Western Carpathian
Concession on approximately 1.4 million acres, its rights to earn an interest
in POGC Concessions on approximately 1.5 million acres and the right under a
1996 Joint Study Agreement ("JSA") to study the hydrocarbon potential of an
approximately 3.3 million acre adjacent area on which POGC has exclusive rights
to explore for oil and gas. With POGC's consent, the Company has applied for an
additional Concession comprising approximately 1.7 million acres ("Northern
Carpathian Concession") within the JSA area. The Northern Carpathian Concession
lies within an Area of Mutual Interest ("AMI") between Apache and the Company.
Under terms of the AMI, the Company must offer Apache the option to participate
in exploring the acreage at terms decided by the Company. The Company has also
granted POGC an option to participate in exploring the Northern Carpathian
Concession with the Company.
Commercial hydrocarbons were first discovered in the Carpathian Mountains
in Poland in 1854 and have been produced there continuously from several fields,
including discoveries in the 1960s. To date, the Carpathian Mountains have
produced an estimated 122 MMBbl of oil and 2.6 Tcf of gas, including production
from acreage that was once under control of Poland and is now part of the
Ukraine and Romania. Principally as a result of production from the Carpathian
Mountains, Poland was the world's leading oil producer in 1910, accounting for
approximately a twenty-five percent of world-wide production. Poland's
isolation from western technology, due primarily to the Poland's communist
regime and Soviet influence from the 1940s to 1989, has constrained exploration
and production in the Carpathians as well as the rest of Poland. The extensive
production of oil and gas from shallower depths in the Carpathian region
confirms the generation of hydrocarbons within the system and a limited number
of deep wells drilled in recent years by POGC evidences additional possible
reservoir development within the area. There have been several notable oil
and gas discoveries in the Carpathian region over the past few years. For
example, the recently drilled Noskowa well had a production test of 735 barrels
of oil per day from Carboniferous sands on a POGC Concession and the Lachowice
well, also on a POGC Concession, had a production test of 7.6 MMcf per day from
a Devonian reef structure. Additional drilling tests by POGC have had positive
oil and gas shows from Myocene, Jurassic, and Cretaceous formations.
POGC Joint Study Agreement
As a result of a limited review by the Company and POGC of Poland's
hydrocarbon potential in May 1996, the Company entered into the JSA with POGC in
order to identify drillable hydrocarbon prospects in a selected area in the
Carpathian region of southern Poland where POGC holds exclusive rights to
explore for and develop hydrocarbons. Although there is currently limited
hydrocarbon production from certain shallow horizons in the areas covered by the
JSA, there has been virtually no commercial production from the depths being
evaluated by the Company and POGC under such agreement.
The initial goal of the JSA was to identify the most promising target
areas covered by the agreement, primarily through the review of existing
geological and geophysical data. Once these areas were identified, the focus of
the study progressed to a more detailed analysis of existing seismic and other
data contributed by POGC, supplemented by limited reprocessing of such data in
order to assess hydrocarbon potential in the largely undrilled horizons below
2,500 feet and to generate drillable oil and gas prospects. The Company and
POGC are each contributing technical personnel to participate in the study. The
Company has expended approximately $100,000 and has budgeted a similar amount in
1998 for additional technical research and analysis costs, including seismic
data reprocessing, third-party data purchases and laboratory analysis for
continuation of the study, which has been extended to June 30, 1998.
The JSA provides that the Company and POGC will share equally in any new
exploration rights obtained in the joint study area through this arrangement,
except that if one party elects not to proceed with an application for an
exploration license over a specific area, the other party may do so
independently. Under this latter provision, the Company independently applied
for the Northern Carpathian Concession covering approximately 1.7 million acres
during early 1998.
Western Carpathian Concession
While continuing the joint study within the area covered by the JSA with
POGC, the Company sought exploration rights on adjacent areas south of the joint
study area to explore the formations at depths that are productive at shallower
depths to the north in the joint study area. In the fourth quarter of 1997, the
Company was awarded the Western Carpathian Concession, which contains
approximately 1.4 million acres located in the southwest Carpathian region of
Poland, extending to Poland's border with Slovakia to the south and the Czech
Republic to the west.
Strategic Alliance with Apache - Carpathian Region
Under terms of the Lublin Concession agreement with Apache, the Company
was obligated to offer Apache the right to earn an interest in the Western
Carpathian Concession at terms decided by the Company. On February 27, 1998,
the Company and Apache agreed to a strategic alliance to jointly explore for oil
and gas in the Western Carpathian Concession. Apache paid the Company
$500,000 and has agreed to pay for all Concession costs and other fees during
the first three-year phase of the six-year exploration period, the cost of
acquiring 350 kilometers of 2D seismic, and the cost of drilling three
exploratory wells to earn a 50% interest in the Western Carpathian Concession.
The Company and Apache are currently evaluating over 7,000 kilometers of
seismic data initially provided to the Company by POGC and are continuing their
own 350 kilometer seismic data acquisition program on the Western Carpathian
Concession as well as the POGC Wola and Godowa Concessions. As a result of an
analysis of the existing seismic data and well logs and core samples together
with initial data received from the Company's own seismic study, the Company has
identified over 85 possible structural leads within the area covered by the
Carpathian Interests. Based on this data, the Company expects that drill sites
will be selected for drilling exploratory wells during 1998 and 1999.
During early 1998, the Company applied for an additional 1.7 million acre
Northern Carpathian Concession, which lies within the AMI between the Company
and Apache. Under terms of the AMI, the Company must offer Apache on option to
participate in exploring the Concession at terms decided by the Company.
Strategic Alliance with POGC in the Carpathian Region
In September 1997, the Company and POGC amended the JSA to provide for
joint exploration of three areas in the Carpathian Mountains. The Company
acquired the right of first refusal to participate in any POGC Concession south
of the northern boundary of the Company's Western Carpathian Concession. POGC
Concessions subject to this agreement cover approximately 1.5 million acres.
The Company acquired additional seismic data during 1997 over the Wola prospect,
now under a POGC Concession in the Carpathian area, which is now being analyzed
by reprocessing existing seismic lines, evaluating well logs and core data
provided by POGC in order to select a possible drill site. The Company is
similarly evaluating Godowa, another POGC Concession in the JSA area. POGC has
the option to participate up to 60% and be the operator in each prospect by
bearing that percentage of costs of drilling and subsequent activities. If POGC
elects not to operate or takes a 49% or less interest, the Company may be the
operator. In the Jordanow prospect area located within the Company's Western
Carpathian Concession, the Company has granted POGC the option to take up to a
one-third interest by bearing that portion of the costs of the initial well and
subsequent activities.
POMERANIAN CONCESSION
In October 1997, the Company was granted exploration rights to the 2.3
million acre Pomeranian Concession in northwestern Poland. This project is in
the early exploration stage. There has been little previous exploration of the
Pomeranian Concession, although the Wierzchowa field within the concession area
has produced 14 Bcf of gas at a rate of approximately 5.7 Mcf per day from a
Permian structure. In addition, stratigraphic tests drilled by an agency of the
Polish government had oil and gas shows from the Devonian horizon. POGC has
made available to the Company the existing seismic data and well logs and cores
from the Pomeranian Concession for reprocessing and analysis.
The Company granted Apache an option to participate with the Company in
jointly exploring the Pomeranian Concession on February 27, 1998. Under terms
of the option agreement, Apache must evaluate and reprocess 1,000 kilometers of
existing 2D seismic on the Pomeranian Concession. Within six months after
receiving the 2D seismic data, but no later than December 31, 1998, Apache must
make an election of whether to participate with the Company in exploring the
Pomeranian Concession. In the event Apache elects to participate, it must pay
all concession costs and other fees, the cost of acquiring an additional 600
kilometers of 2D seismic data and the cost of the first exploratory well during
the first three years of a six year exploration period to earn a fifty percent
interest in the Pomeranian Concession. Should Apache elect to participate in
the Pomeranian Concession, it will be the operator of the Concession.
BALTIC CONCESSION
In August 1995, the Company was granted exploration rights to the 2.1
million acre Baltic Concession located onshore in northern Poland.
The Baltic Concession covers part of the Baltic Platform geological region
that covers the southeastern portion of the Baltic Sea and portions of the
bordering onshore areas of Poland, the Kaliningrad district of Russia, Lithuania
and Latvia. The B-3 oilfield, located off Poland's Baltic coast was first
placed into production in 1992 and has reportedly produced over 1.2 MMBbl
through 1994. Onshore, approximately 34 fields have been discovered in the
Baltic Platform in an area from approximately 50 miles northeast of the Baltic
Concession in the Kaliningrad district of Russia to Lithuania, a further 50
miles northward. Four of the largest fields in this region reportedly have
produced an aggregate of over 150 MMBbl through 1994. Oil produced from the
Baltic Platform is generally high quality with an average API gravity of
approximately 40o and contains insignificant amounts of sulfur, heavy metals, or
similar contaminants. To date, there has not been any commercial production of
oil or gas from the Company's Baltic Concession. Between 1950 and 1993,
agencies of the Polish government explored the Baltic Concession, gathering
hundreds of line miles of seismic data and drilling seven exploratory wells and
eight stratigraphic survey wells to the same formation that is productive in
established fields in the Baltic Platform.
In May 1996, the Company entered into an agreement with RWE-DEA
Aktiengesellschaft fur Mineraloel und Chemie, Hamburg, Germany ("RWE-DEA"), in
which RWE-DEA was granted the right to earn a fifty percent interest in the
concession area by paying the Company $250,000 in initial cash consideration,
$1,100,000 for a 2D seismic survey, the first $1,000,000 of cost relating to the
first exploratory well and fifty percent of the cost of the second exploratory
well. The Orneta #1, the first exploratory oil well drilled by a foreign
company in Poland, was drilled with RWE-DEA as a partner to the Cambrian
formation at a depth of approximately 8,000 feet during the first quarter of
1997. The well encountered substantial water flows, but no commercial
hydrocarbons and was subsequently plugged and abandoned. On June 30, 1997, RWE-
DEA elected to not fund its fifty percent share of costs relating to the second
exploratory well in the Baltic Concession. As a result, RWE-DEA forfeited its
right to earn a fifty percent interest in the Baltic Concession. RWE-DEA had
advanced a total of $3,076,000, all of which the Company was not obligated to
reimburse back to RWE-DEA. The Gladysze #1-A, the second exploratory well
drilled by the Company in the Baltic Concession, was drilled without a partner
to the Cambrian formation at a depth of approximately 8,000 feet during the
third quarter of 1997. The target formation contained shows of oil and gas, but
was not commercial due to low permeability in the formation. The well was
subsequently plugged and abandoned.
The Company is evaluating the results of its first two exploratory wells to
determine how to proceed and expects to enter into a strategic alliance with an
industry partner before undertaking substantial additional exploration. The
Company may be required to drill a another well by March 2000 in the Baltic
Concession to maintain its rights and must relinquish at least fifty percent of
its acreage in March 1999. The Company is currently seeking an industry partner
for its Baltic Concession and expects to drill its third well in 1998 or 1999.
SUDETY CONCESSION
In October 1996, the Company obtained rights to explore for gold and
associated minerals in three exploration blocks containing approximately 71,000
acres near the city of Zlotorya in the Sudety region of southwestern Poland for
a four-year exploration term with the possibility of a three-year extension. In
October 1997, the Company obtained four additional gold exploration blocks
containing approximately 95,000 acres. At the end of 1997, the Company's gold
exploration rights totaled 166,000 acres in seven exploration blocks. The
Zlotorya area has a long history of gold production, dating back to the fifth
century, which increased in importance through the thirteenth century. Gold
production in the Zlotorya area continued through the early twentieth century,
but extraction techniques available at that time made further production
uneconomical.
Shortly after obtaining its initial exploration rights to the Sudety
Concession in 1996, the Company entered into a reconnaissance and standstill
agreement with Homestake Mining Company, an international gold mining company.
During 1997, the Company and Homestake conducted a limited geological,
geochemical and geophysical reconnaissance of the area. The Company and
Homestake entered into a strategic alliance on December 30, 1997, to jointly
explore for gold on the Company's Sudety Concession, with Homestake as operator.
Under terms of the agreement, Homestake paid the Company $212,000 and has agreed
to fund all concession costs, usufruct costs and future exploration costs,
including spending a minimum of $1,100,000 during 1998 and 1999 exploring the
Sudety Concession or pay the Company the difference if it spends less than
$1,100,000. Should Homestake propose to construct a mine, the Company may elect
(on a mine by mine basis) to convert its interest into a six percent net smelter
return royalty or a seven and one half percent net proceeds interest, both at no
cost to the Company, or into a twenty-five percent working interest by paying
back costs according to a pre-determined formula.
POLAND EXPLORATION RISKS
There has not been any commercial production of oil or gas from acreage
within the Company's Lublin, Western Carpathian, Pomeranian or Baltic
Concessions, although wells have been drilled in nearby areas that have either
produced hydrocarbons or have hydrocarbon shows that confirm the generation of
hydrocarbons within the area. Various agencies of the Polish government have
drilled exploratory and stratigraphic wells in various locations in the
Company's Concessions, but none of these wells have been completed for
production. The first two exploratory wells drilled by the Company in the Baltic
Concession did not result in commercial production. Notwithstanding the
substantial data available from these previous drilling efforts and other
exploration programs, there can be no assurance that the Company will be able to
achieve commercial production. Although the Company has identified or expects
that it will identify certain structures within its interests that it believes
contain oil or gas reservoirs, there can be no assurance that hydrocarbons are
present on such interests or that any existing hydrocarbons can be produced in
commercial quantities. The Company holds certain exploration rights to prospect
areas adjacent to the Company's Lublin and Western Carpathian Concession on
which wells have been drilled that have either produced or have hydrocarbon
shows that confirm the generation of hydrocarbons within the system, but there
can be no assurance that such hydrocarbons will be found in the Company's
adjacent areas. Even if hydrocarbons are encountered, the Company believes that
several exploration tests may be required to appraise the potential of any
structure that the Company identifies in any of its Concessions or interests.
There can be no assurance that such tests will be successful. Further, there
can be no assurance that the porosity, permeability or other characteristics of
any reservoir formation will support the production of oil or gas in commercial
quantities.
PRODUCTION, TRANSPORTATION AND MARKETING
Should the Company's exploration efforts discover hydrocarbons in Poland,
the Company will be required to engage in negotiations with national and local
government officials of Poland regarding certain of the terms and conditions of
the required exploitation licenses. This may result in increased costs and
delays. See Item 2. "Description of Property--Oil and Gas Exploitation
Licenses."
Poland currently imports approximately 98% of its crude oil and 40% of its
natural gas requirements. As the country's economy continues to grow and Poland
continues economic reform to establish its economic independence, it is possible
that the demand for oil and gas discovered and produced in Poland will increase.
The Company anticipates that it could capitalize on such factors and would be
able to sell any oil or gas produced from its interests in Poland in the spot
market.
The Company currently has no agreement or arrangement for the sale,
delivery, or refining of any oil or gas that may be produced. The Company
expects that gas and oil produced from its interests in Poland would be sold for
domestic production under marketing arrangements to be negotiated. Subject to
obtaining appropriate approval, the Company is not precluded from exporting oil
or gas, but the Company presently has no such arrangements. Poland has crude
oil pipelines traversing the country and a network of gas pipelines serving
major cities, commercial and industrial areas.
Poland has a well-developed infrastructure of hard-surfaced roads and
railways over which the Company believes oil produced could be transported for
sale. There are refineries in Gdansk and Plock in Poland and one in Germany on
the western Polish border which the Company believes could process crude oil
produced in Poland. The Company may incur expenditures for constructing and
operating crude oil transportation and handling facilities if substantial oil
production were established.
In the event that the Company's exploration efforts discover the existence
of natural gas reserves, production and sale of such reserves will be dependent
upon the availability, proximity and capacity of gathering systems, pipelines
and processing facilities. Although Poland has a crude oil and natural gas
pipeline network, there can be no assurance that such pipeline is in close
proximity to any oil or gas reserves that may be discovered by the Company or
that the Company can obtain access to use such pipeline. Wells may be
temporarily be shut-in for lack of a market or to the unavailability of pipeline
and/or gathering system capacity. This would correspondingly delay the
Company's operations. Further, if the Company is required to construct a
pipeline or gathering system, the costs of such project might render the
development of a prospect area uneconomical and would have a material adverse
effect on the Company's business.
In the case of the Lublin Interests, the city of Lublin with a population
of 350,000 lies near the center of the Lublin Interests and within
approximately thirty miles of several exploration leads. It would be necessary
to incur expenditures to construct gas gathering, treatment and transmission
lines prior to the delivery and sale of gas that may be discovered, which would
likely require expenditures for the development of several wells in any field
before revenues could be received.
There can be no assurance that the Company will be able to establish
transportation, refining, processing, or marketing arrangements to sell any oil
or gas discovered and produced in Poland on terms favorable to the Company or
that the Company will be able to make arrangements for the exportation of oil or
gas in the event such exportation is desirable to the Company.
DEPENDENCE ON ACTIVITIES IN POLAND
The Company has allocated substantially all of its exploration budget for
its activities in Poland. The Company's success will depend to a high degree on
its activities in Poland. This dependence is likely to be reflected in both the
short and long-term performance of the Company's Common Stock and the Company's
financial results as well. The market price of the Common Stock has experienced
in the past and may continue to experience in the future, significant
fluctuations based on the outcome of individual wells and the Company's
exploration efforts in Poland. Previously, the price of the Common Stock
declined significantly after the Company announced that each of its first two
exploratory wells in Poland did not result in commercial production. These
fluctuations may be exacerbated by the fact that the Common Stock, in
management's opinion, currently trades to a significant degree on the potential
of the Company's current and planned activities in Poland. The success of the
Company's efforts in Poland will depend on, in addition to the risks normally
associated with the exploration for oil and gas, its ability to maintain its
relationships with its exploration partners and the Polish government and a
number of other risks associated with conducting operations in a foreign
country. If the Company's activities in Poland are unsuccessful, the market
price of the Common Stock would likely suffer a material decline and investors
would face the possible loss of a substantial portion of their investment.
Because of the preliminary stage of the Company's activities in Poland, no
assurance can be given that such activities will be successful. See "Item 1.
Description of Business."
The Company has had limited operations in Poland. If its activities in
Poland are successful, it may experience rapid growth. The Company's ability to
manage this growth will depend, in part, upon its ability to attract and retain
quality management and technical personnel. No assurance can be given that the
Company will be able to attract or retain such employees or otherwise manage any
potential expansion of its business. The likelihood of the success of the
Company must be considered in light of the expenses, difficulties, complications
and delays frequently encountered in connection with the early stages of an oil
and gas company. In particular, the Company's operations in Poland to date have
focused primarily on the evaluation of prospects and the drilling of two wells,
neither of which resulted in commercial production. The Company has little or
no experience in Poland regarding development, production and marketing of oil
and gas and has not yet completed a well in Poland for production. Although the
Company does have experience in these areas in the United States, there can be
no assurance that such experience will assist in its activities in Poland.
There can be no assurance that the Company will be able to conduct an
effective and efficient exploration program in Poland. Further, the limited
availability of certain modern exploration, drilling and production equipment,
supplies and services and the lack of availability or limited capacity of oil
and gas gathering, storage, transportation and processing facilities subject the
Company to certain risks that could substantially increase the cost of
exploration, development and production activities and reduce potential
financial return.
In the future, the Company may become more reliant upon the expertise of
its strategic partners. Apache, the operator of the Company's Lublin and
Western Carpathian Concessions, has extensive oil and gas operational expertise
in an international environment. In late 1997, Apache opened an office in
Warsaw with approximately twenty employees. POGC, Poland's state-owned oil and
gas monopoly, engages in virtually all aspects of the oil and gas business.
Homestake, the operator of the Company's Sudety Concession, has extensive
operational expertise in international gold exploration.
The Company is actively pursuing potential partners to participate in
exploration of its Baltic Concession. Although the Company believes it will be
able to locate strategic partners, there can be no assurance that the Company
will be successful in obtaining the participation of any such partner, that the
terms of any such arrangement would be favorable to the Company or that such
efforts will not delay the Company's exploration and development projects.
UNITED STATES EXPLORATION, PRODUCTION AND DEVELOPMENT ACTIVITIES
Cut Bank Field Development
The Company owns interests in producing oil wells in the Cut Bank, Bears
Den and Rattler's Butte fields in Montana and in the Bacon Flat and Trap Spring
fields in Nevada. The Company's 10,600 acres in the Cut Bank field accounted
for approximately 75% of its 1997 oil production and 98% of its proved reserves
as of December 31, 1997.
In January 1996, the Company completed a Cut Bank field infill drilling
program on 1,000 acres which included the drilling of eight new production
wells, five water injection wells and the conversion of two production wells to
water injection wells. The Company's infill drilling program was based on the
engineering model used in a similar program that resulted in significant
production increases in a separate part of the Company's Cut Bank field
properties under the guidance of a previous owner. Although it appears that
this program has reduced the rate of decline of production from the affected
wells, the results of the Company's development program may not achieve the
results of the engineering model on which it is based. Although the Company
continues to monitor and review the continuing results of the initial infill
drilling program, the Company has concluded other opportunities available to the
Company, including exploration or development in Poland, are likely to provide a
greater financial return to the Company. Therefore, funds initially budgeted
for further Cut Bank field development during 1998 are expected to be utilized
for other activities.
Domestic Exploration Prospects
The Company has a number of exploratory prospects in the western United
States in various stages of evaluation, prospect identification and drill site
selection. Domestically, the Company seeks exploration prospects that can be
acquired or controlled with a limited financial commitment and have a sufficient
risk/reward profile to attract drilling partners. The Company's traditional
policy is not to drill an exploratory well until it can reduce its own financial
commitment (and confirm its own evaluation of the prospect's merit) by forming a
drilling group with other energy companies. Where practicable, the Company
seeks to use its own drilling rig and related equipment to drill exploration
tests in which it participates in order to offset some portion of the cost of
participating in specific exploration prospects. Based on the current depressed
price of crude oil, the Company believes potential drilling partners may defer
participating in the Company's exploration prospects until the price of crude
oil increases.
During 1997, the Company participated in three domestic exploratory wells:
the Murray #12-30, an exploratory dry hole in Musselshell County, Montana, in
which the Company had a 27.69% interest; the State #31-8, an oil discovery which
is currently producing approximately 200 BPD in Rosebud County Montana, in which
the Company owns a 6.25% working interest; and the Mega Springs Federal #7 an
exploratory dry hole in Nye County, Nevada in which the Company had a 100%
interest.
GOVERNMENT REGULATIONS AND RELATED MATTERS
GOVERNMENT REGULATIONS--POLAND
The Company's activities in Poland are subject to political, economic and
other uncertainties, including the adoption of new laws, regulations or
administrative policies that may adversely affect the Company or the terms of
its exploration or production rights; political instability and changes in
government or public or administrative policies; export and transportation
tariffs and local and national taxes; foreign exchange and currency restrictions
and fluctuations; repatriation limitations; inflation; environmental regulations
and other matters. The Company's operations in Poland are subject to the
Geological and Mining Law as well as the Act of January 31, 1994 concerning the
Protection and Management of the Environment, which are the primary statutes
governing environmental protection. The agreements between the Company and the
government of Poland create certain standards to be met by the Company regarding
environmental protection. The Company generally is required to adhere to good
international petroleum industry practice, including practices relating to the
protection of the environment. The Company is required to prepare and submit
geological work plans, with specific attention to environmental matters, to the
appropriate agency of state geological administration for its approval prior to
engaging in field operations such as seismic acquisition, exploratory drilling
and field-wide development. Poland's regulatory framework respecting
environmental protection is not as fully developed and detailed as that which
exists in the United States. The Company intends that its operations in Poland
will be designed to meet good international petroleum industry practice and, as
they develop, Polish requirements.
Governmental Regulation
The Company's activities in Poland are subject to certain laws and
regulations relating to exploration and development, production, marketing,
transportation and storage of oil and/or gas, including measures relating to the
protection of the environment. The regulatory regime governing these
activities was recently promulgated and is relatively untested. Therefore,
there is little or no administrative or enforcement history or established
practice that can aid the Company in evaluating how the regulatory regime will
affect the Company's operations. Although the Company believes that the
regulatory infrastructure currently in place and now being further developed in
Poland is generally consistent with the government's stated purpose of
encouraging both foreign investment and the development of Poland's natural
resources, there can be no assurance that such governmental policy will not
change or that new laws and regulations, administrative practices or policies or
interpretations of existing laws and regulations will not materially and
adversely affect the Company's activities in Poland.
Environmental Regulations
The Company's operations are subject to environmental laws and regulations
in Poland. Poland's environmental laws and regulations provide for restrictions
and prohibitions on spills, releases, or emissions of various substances
produced in association with oil and gas exploration and development.
Additionally, if significant quantities of gas are produced in conjunction with
the Company's production of oil, regulations prohibiting the flaring of gas and
the absence of a gas gathering and delivering system may restrict production or
may require significant expenditures by the Company to develop such a system
prior to the production of oil. Certain aspects of the Company's proposed
operations may require the submission and approval of environmental impact
assessments by governmental authorities in Poland prior to commencing
production.
The Company has drilled two wells and acquired several hundred kilometers
of seismic data and has not incurred material environmental remediation costs to
date. Management believes that the Company is currently in material compliance
with all applicable laws and regulations. However, there can be no assurance of
such compliance or that applicable regulations or administrative policies or
practices will not be changed by the Polish government. The cost of compliance
with current regulations or any changes in environmental regulations could
require significant expenditures, and breaches of such regulations may result in
the imposition of fines and penalties, any of which may be material. There can
be no assurance that these environmental costs will not have a material adverse
effect on the Company's financial condition or results of operations in the
future.
Currency Risks
The Company will be subject to a variety of currency risks, including the
risks that currencies will not be convertible at satisfactory rates, that the
official conversion rates between United States and Polish currencies may not
accurately reflect the relative value of goods and services available or
required in Poland, or that inflation will lead to the devaluation of the Polish
Zloty.
Repatriation of Earnings
The Company may be restricted as to the amount, manner, or timing of the
repatriation to the United States of earnings from activities in Poland
conducted through wholly or partially owned subsidiaries. Currently, there are
no restrictions on the ability of a Polish entity to repay debt to a foreign
parent corporation or to pay fair market compensation to a foreign parent
corporation for legitimate services. However, Polish entities can pay dividends
only once annually and only to the extent of profits, as determined in
compliance with Polish accounting and regulatory requirements and as verified by
an audit satisfying Polish professional standards. In addition, the payment of
dividends by Polish subsidiaries to its U.S. parent are subject to a 5%
withholding tax. Although the Company is entitled to a credit against its
United States tax obligations equal to the Polish withholding tax, the Company
may not be able to use this credit unless the Company owes taxes in the United
States.
Political Uncertainties
The exploration, development and production of oil and gas in Poland are
and will be subject to ongoing uncertainties and risks, including risks of
political instability and changes in government, export and transportation
tariffs, local and national tax requirements, expropriation or nationalization
of private enterprises and other risks arising out of foreign government
sovereignty over the exploration, development and production area. The terms of
the agreements with governmental agencies are subject to administration by
government officials and are, therefore, subject to changes in government
personnel, the development of new administrative policies and practices and
political changes in Poland. There can be no assurance that the laws,
regulations and policies applicable to the Company will not change, that the
laws and regulations will be applicable in any particular circumstance, or that
the Company will be able to enforce its rights in Poland. The Company
anticipates that it will be required to demonstrate, to the satisfaction of the
Polish authorities, the Company's compliance with Concession terms respecting
exploration expenditures, results of exploration, environmental protection
matters and other factors. Although the exploration and exploitation rights of
the Company may be canceled by the Company at any time, if it did so the Company
would likely not be able to recover previous payments made under the rights or
any other costs incurred respecting the rights upon such cancellation. There can
be no assurance that the Company will be able to take measures to provide
adequate protection against any of the political uncertainties discussed above.
GOVERNMENT REGULATION--UNITED STATES
State and Local Regulation of Drilling and Production
State regulatory authorities have established rules and regulations
requiring permits for drilling, drilling bonds and reports concerning drilling
and producing activities. Such regulations also cover the location of wells,
the method of drilling and casing wells, the surface use and restoration of well
locations, the plugging and abandoning of wells, the density of wells (well
spacing) within a given area and other matters. The Company believes it is
currently in full compliance with all material provisions of such regulations.
Environmental Regulations
The Company's activities are subject to numerous federal and state laws and
regulations concerning the storage, use and discharge of materials into the
environment, the remediation of environmental impacts and other matters relating
to environmental protection, all of which may adversely affect the Company's
operations and the costs of doing business. There can be no assurance that
future legislation or administrative regulations or interpretations will not
impose stricter requirements that could have an adverse impact on the operating
costs of the Company and the oil and gas industry in general. The Company does
not currently believe that it will be required in the near future to expend
material amounts due to environmental laws and regulations. A bond is posted
with the Environmental Protection Agency as security for the Company's
compliance with the environmental requirements administered by that agency
respecting the water injection wells in the Company's Montana producing
properties.
Federal and Bureau of Indian Affairs Leases
A substantial part of the Company's Montana producing properties are
operated under oil and gas leases issued by the Bureau of Land Management or by
certain Indian nations under the supervision of the Bureau of Indian Affairs.
These activities must comply with rules and orders that regulate aspects of the
oil and gas industry, including drilling and operating on leased land and the
calculation and payment of royalties to the federal government or the governing
Indian nation. Operations on Indian lands must also comply with applicable
requirements of the governing body of the tribe involved including, in some
instances, the employment of tribal members. The Company believes it is
currently in full compliance with all material provisions of such regulations.
Safety and Health Regulations
The Company must also conduct its operations in accordance with various
laws and regulations concerning occupational safety and health. Currently, the
Company does not foresee expending material amounts to comply with these
occupational safety and health laws and regulations. However, since such laws
and regulations are frequently changed, the Company is unable to predict the
future effect of these laws and regulations.
EMPLOYEES AND CONSULTANTS
As of December 31, 1998, the Company had 32 employees, consisting of nine
in Salt Lake City, Utah; 20 in the Company's Oilmont, Montana, field office; one
in Denver, Colorado; and two in Houston, Texas. None of the Company's employees
is represented by a collective bargaining organization and the Company considers
its relationship with its employees to be satisfactory. In addition to its
employees, the Company regularly engages technical consultants to provide
specific geological, geophysical and other professional services.
OPERATIONAL HAZARDS AND INSURANCE
The Company is engaged in the drilling and production of oil and gas and,
as such, its operations are subject to the usual hazards incident to the
industry. These hazards include blowouts, cratering, explosions, uncontrollable
flows of oil, natural gas or well fluids, fires, pollution, releases of toxic
gas and other environmental hazards and risks. These hazards can cause personal
injury and loss of life, severe damage to and destruction of property and
equipment, pollution or environmental damage and suspension of operations.
In order to lessen the effects of these hazards, the Company maintains
insurance of various types to cover its domestic operations. The Company has
$5.0 million of general liability insurance. This insurance, however, does not
cover all of the risks involved in oil exploration, drilling and production of
oil and, if coverage does exist, may not be sufficient to pay the full amount of
such liabilities. The Company may not be insured against all losses or
liabilities which may arise from all hazards because such insurance may be
unavailable at economic rates, there may be limitations on existing insurance
policy coverage and other factors. For example, the Company does not maintain
insurance against risks related to violations of environmental laws. The
occurrence of a significant adverse event that is not fully covered by insurance
could have a materially adverse effect on the Company. Further, the Company
cannot assure that it will be able to maintain adequate insurance in the future
at rates it considers reasonable.
The Company maintains general liability coverage for its activities in
Poland, but has no material tangible assets in Poland. The Company's seismic
and drilling contractors are required to maintain insurance coverage for
operations by them on the Baltic Concession or other areas in Poland. There can
be no assurance that the Company will be able to obtain insurance coverage for
proposed activities if or when it acquires tangible assets in Poland or that any
insurance obtained will provide coverage customary in either the industry or in
the United States, or be comparable to the insurance now maintained by the
Company. The failure or inability to obtain adequate insurance would expose the
Company to additional risks.
A significant portion of the Company's exploration and development
activities are subject to periodic interruptions due to weather conditions which
may be quite severe in the areas where such activities are conducted. Heavy
precipitation may make travel to exploration sites or drilling locations
difficult or impossible. Extremely cold temperatures may delay or interrupt
drilling, well servicing and production. The foregoing may reduce production
volumes or increase production costs and could delay the Company's planned
exploration and development activities.
CERTAIN DEFINITIONS
All defined terms under rule 4-10(a) of Regulation S-X promulgated by the
Securities and Exchange Commission shall have their statutorily prescribed
meanings when used in this report. In addition, the following terms have the
meaning set forth below when used herein.
"BPD" means barrels of oil per day.
"BBL" means barrel of oil.
"BCF" means billion cubic feet of natural gas.
"DEVELOPMENT WELL" means a well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive.
"EXPLORATORY WELL" means a well drilled to find and produce oil or gas in an
unproved area, to find a new reservoir in a field previously found to be
productive of oil or gas in another reservoir, or to extend a known reservoir.
"E&P" means exploration and production, a phrase used to describe companies
engaged in oil and gas exploration and production activities.
"MBBL" means thousand barrels of oil.
"MMBBL" means million barrels of oil.
"MMCF" means million cubic feet of natural gas.
"MMBOE" means million barrels of oil equivalent.
"PROVED RESERVES" means the estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions, i.e., prices and costs as of
the date the estimate is made. "Proved reserves" may be developed or
undeveloped.
"PV-10 VALUE" means the estimated future net revenue to be generated from the
production of proved reserves discounted to present value using an annual
discount rate of 10%. These amounts are calculated net of estimated production
costs and future development costs, using prices and costs in effect as of a
certain date, without escalation and without giving effect to non-property
related expenses such as general and administrative expense, debt service,
future income tax expense or depreciation, depletion and amortization.
"RESERVOIR" means a porous and permeable underground formation containing a
natural accumulation of producible oil and/or gas that is confined by
impermeable rock or water barriers and that is distinct and separate from other
reservoirs.
"STRATIGRAPHIC TEST" means a drilling effort, geologically directed, to obtain
information pertaining to a specific geological condition. Such wells
customarily are drilled without the intention of being completed for hydrocarbon
production.
"TCF" means trillion cubic feet of natural gas.
ITEM 2. DESCRIPTION OF PROPERTY
PRODUCING PROPERTIES
The Company currently produces oil domestically in Montana and Nevada.
Substantially all of its producing properties were purchased from B&B Production
Company effective April 1, 1994. The Company is the operator of its oil fields
in Cut Bank, Bears Den and Trap Spring. The Company's oil fields in Bacon Flat
and Rattler's Butte are operated by other industry partners. At the end of
1997, the Company had no producing activities outside the United States.
CUT BANK FIELD
Production in the Cut Bank field in northern Montana commenced with the
discovery of oil in the 1940s at an average depth of approximately 2,900 feet.
The Southwest Cut Bank Sand Unit, which is the core of the Company's interest in
the field, was originally formed by the Phillips Petroleum Company in 1963. An
initial pilot waterflood program was started in 1964 by Phillips Petroleum
Company and eventually encompassed the entire unit with producing wells on 40
and 80 acre spacing. The Company owns an average working interest ranging from
99.5% to 100% in 112 producing oil wells, 38 water injection wells and three
water supply wells in the Cut Bank field. Oil production from this field in
1997 averaged 328 Bpd (280 Bpd net). As of December 31, 1997, the Company's
interest in the Cut Bank field represented 96.4% of the Company's total PV-10
Value.
BEARS DEN FIELD
The Bears Den field in northern Montana was discovered in 1929 and has been
under waterflood since 1990. Oil is produced at an average depth of
approximately 2,430 feet. The Company owns a 48.0% working interest in five
producing oil wells, four water injection wells and one water supply well. The
field is undergoing an evaluation by the Company to determine the economic
viability of additional developmental drilling to enable the Company to realize
the full potential of this field.
TRAP SPRING FIELD
The Trap Spring field in Nye County, Nevada was discovered in 1976 and
produces oil from fractured volcanics at an average depth of 3,700 feet. The
Company owns working interests ranging from 21.6% to 50.5% in six producing oil
wells in the field.
BACON FLAT FIELD
The first well in the Bacon Flat field, located in Nye County, Nevada, was
drilled in 1981 and produced over 300,000 Bbl during its seven-year productive
life from a depth of approximately 6,000 feet. The Company owns a 16.9% working
interest in a different Bacon Flat well, which was drilled in 1993.
RATTLER'S BUTTE FIELD
The Rattler's Butte field was discovered in central Montana during 1997.
The State #31-8 well was drilled utilizing the Company's FX Drilling Rig #5 to a
depth of approximately 5,800 feet. The well currently produces approximately
200 Bpd from the Tyler formation. The Company has a 6.25% working interest in
the well.
PRODUCTION AND MARKETING
The following table sets forth the Company's average net daily oil
production, average sales price and average production costs associated with
such production during the periods indicated. The Company had no gas production
for any of the periods for which information is presented.
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
------ ------- -------
Average daily net oil
production (Bbl) ............ 346 356 369
Average sales price (per Bbl). $16.16 $ 18.04 $14.67
Average production costs (per
Bbl) (1) .................... $ 9.82 $ 9.44 $ 9.42
(1) Production costs include lifting costs (electricity, fuel, water, disposal,
repairs, maintenance, pumper, transportation and similar items) and
production taxes. Production costs do not include such items as
depreciation and state and federal income taxes. Between late 1994 and
early 1996, the Company conducted an infill drilling and enhanced
waterflood operation on portions of the Cut Bank property and, therefore,
increased the level of maintenance to support such development.
The Company sells oil at posted field prices to one of several purchasers
in each of the areas in which it has productive oil wells. For the years ended
December 31, 1995, 1996 and 1997, over 85% of the Company's total oil sales were
to CENEX, a regional refiner and marketer. Posted prices are published and are
generally competitive among the various purchasers. The crude oil sales
contracts are terminable by either party on 30 days' notice. During 1995 and
1996, the Company benefited from increases in the prices at which it was able to
sell oil produced in Montana and Nevada, but was adversely affected by
subsequent declines in prevailing oil prices during 1997. The Company has no gas
production.
Oil prices increased substantially during 1996 and subsequently declined
during 1997. Oil and gas prices have been and are likely to continue to be
volatile and subject to wide fluctuations in response to any of the following
factors: relatively minor changes in the supply of and demand for oil and gas;
market uncertainty; political conditions in international oil producing regions;
the extent of domestic production and importation of oil; the level of consumer
demand; weather conditions; the competitive position of oil or gas as a source
of energy as compared with coal, nuclear energy, hydroelectric power and other
energy sources; the availability, proximity and capacity of gathering systems,
pipelines and processing facilities; the refining capacity of prospective oil
purchasers; the effect of federal and state regulation on the production,
transportation and sale of oil; and other factors, all of which are beyond the
control or influence of the Company. In addition to its direct impact on the
prices at which oil or gas may be sold, adverse changes in the market or
regulatory environment would likely have an adverse effect on the Company's
ability to obtain funding from lending institutions, industry participants, the
sale of additional securities and other sources.
OIL RESERVES
All of the Company's oil properties containing proved oil reserves are
located in Montana and Nevada. All information set forth in this document
regarding proved reserves, related future net revenues and PV-10 Value is taken
from the report of Larry D. Krause, independent petroleum engineer, Billings,
Montana. Mr. Krause's estimates were based upon the review of production
history and other geological, economic, ownership and engineering data provided
by the Company. In accordance with SEC guidelines, the Company's estimates of
future net revenues from the Company's proved reserves and the PV-10 Value are
made using a sales price of $13.80, the weighted average oil sales price as of
December 31, 1997, the date of such estimate, and are held constant throughout
the life of the properties. No estimates of reserves have been filed with or
included in any report to any other federal agency during 1997.
DECEMBER 31, 1997
-----------------------------
ESTIMATED PV-10 VALUE
PROVED RESERVES OIL(BBL) (1)
- --------------------- ------------ -------------
DEVELOPED PRODUCING
Cut Bank ........... 1,965,730 $ 2,961,279
Other .............. 73,199 364,641
---------- -------------
Total............ 2,038,929 3,325,920
DEVELOPED NON-PRODUCING
Cut Bank ........... 242,893 724,520
Other .............. -- --
---------- -------------
Total............ 242,893 724,520
---------- -------------
Total Developed 2,281,822 4,050,440
---------- -------------
UNDEVELOPED
Cut Bank ........... 2,439,905 9,470,306
Other .............. 37,760 117,643
---------- -------------
Total Undeveloped. 2,477,665 9,587,949
---------- -------------
TOTAL PROVED RESERVES (2) 4,759,487 $ 13,638,389
========== =============
(1) The operating costs, based on information provided by the Company to Larry
D. Krause, represent actual recurring expenses for each of the properties,
held constant for the purposes of the evaluation. See Note 13 to the
Company's Consolidated Financial Statements.
(2) The Company's PV-10 Value for total proved reserves, adjusted for future
income tax expenses, is $13.6 million, as set forth in Note 13 to the
Company's Consolidated Financial Statements.
The oil reserves assigned to the properties in this evaluation were
determined by analyzing current test data, extrapolating historical production
data and comparing field data with the production history of similar wells in
the area. The current volatility of oil prices provides an element of
uncertainty. Prices may vary significantly from the $13.80 per barrel used in
the reserve study. (As of February 1998, the Company was receiving
approximately $12.60 per Bbl for oil sold.) The reserve estimates contained in
the engineering report are based on accepted engineering and evaluation
principles. The PV-10 Value does not necessarily represent an estimate of a
fair market value for the evaluated properties.
There are numerous uncertainties inherent in estimating quantities of
proved oil reserves. The estimates in this document are based on various
assumptions relating to rates of future production, timing and amount of
development expenditures, oil prices and the results of planned development
work. Actual future production rates and volumes, revenues, taxes, operating
expenses, development expenditures and quantities of recoverable oil reserves
may vary substantially from those assumed in the estimates. Any significant
change in these assumptions, including changes which result from variances
between projected and actual results, could materially and adversely affect
future reserve estimates. In addition, such reserves may be subject to downward
or upward revision based upon production history, results of future development,
prevailing oil prices and other factors. In the event the Company's exploration
efforts establish the existence of gas reserves, similar uncertainties will
exist in estimating quantities of such reserves.
The PV-10 Value in the Cut Bank field has been reduced by estimated
development costs of $6.0 million over two years. This reflects the estimated
cost of infill drilling and waterflood operations on four specific areas within
the Cut Bank field to increase production rates, flood efficiency and ultimate
oil recovery. These efforts include returning eight shut-in wells to producing
status, converting 12 shut-in water injection wells to producing oil wells,
converting eight areas in the field to inverted five-spot waterflood patterns
and drilling six producing wells at various locations to further develop the
field. For purposes of the reserve evaluation, it was assumed that the subject
work will be performed during 1999 and 2000.
DRILLING ACTIVITIES
The following table sets forth the wells drilled and completed by the
Company during the periods indicated.
YEARS ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
------------- ------------- ----------------
GROSS NET GROSS NET GROSS NET
DEVELOPMENT WELLS:
Producing (domestic) .. -- -- -- -- 5.0 5.0
Non-producing ......... -- -- -- -- -- --
---- ---- ---- ---- ---- ----
Total ................. -- -- -- -- 5.0 5.0
==== ==== ==== ==== ==== ====
EXPLORATORY WELLS:
Producing (domestic) .. 1.0 0.1 -- -- -- --
Non-Producing
Poland .............. 2.0 1.5 -- -- -- --
Domestic ............ 2.0 1.3 1.0 0.7 2.0 1.1
---- ---- ---- ---- ---- ----
Total ................. 5.0 2.9 1.0 0.7 2.0 1.1
==== ==== ==== ==== ==== ====
The above does not include five water injector wells drilled in 1995 as
part of the Cut Bank field infill development program. No gas wells were
drilled by the Company during the indicated periods.
WELLS AND ACREAGE
As of December 31, 1997, the Company had 125 gross and 117 net producing
oil wells, all of which are in Montana and Nevada.
The following table sets forth the Company's gross and net acres of
developed and undeveloped oil and gas leases as of December 31, 1997.
DEVELOPED ACREAGE UNDEVELOPED ACREAGE
------------------- ---------------------
GROSS NET GROSS NET
DOMESTIC
North Dakota.......... -- -- 16,875 16,875
Montana............... 10,732 10,418 1,150 1,057
Nevada................ 400 128 37 16
------- ------- ------- -------
Total.............. 11,132 10,546 18,062 17,948
------- ------- ------- -------
POLAND CONCESSIONS
Baltic................ -- -- 2,122,168 2,122,168
Lublin (1) .......... -- -- 5,036,471 2,518,236
Western Carpathian (1)
(2) ................ -- -- 1,420,028 710,014
Pomeranian (3)........ -- -- 2,275,053 2,275,053
------- ------- ---------- ---------
Total............... -- -- 10,853,720 7,625,471
------- ------- ---------- ---------
TOTAL............. 11,132 10,546 10,871,782 7,643,419
======= ======= ========== =========
(1) Gives effect to 50% beneficial ownership of Apache in the Lublin and
Western Carpathian Concessions under the Company's joint exploration
arrangements with Apache. Does not give effect to options on POGC
Concessions containing approximately 0.6 million acres in the Lublin
Concession and 2.1 million acres in the Western Carpathian Concession. See
"Item 1. Description of Business: Exploration and Development activities in
Poland--Lublin Interests" and "Item 1. Description of Business: Exploration
and Development activities in Poland--Carpathian Interests."
(2) During 1998, the Company applied for an additional 1.7 million acre
Concession in the Carpathian region which lies within the AMI between the
Company and Apache. See "Item 1. Description of Business: Exploration and
Development activities in Poland- Carpathian Interests."
(3) The Company granted Apache an option to participate in exploring the
Pomeranian Concession. Apache must make an election to participate within
six months of receiving existing seismic data for review, but no later than
December 31, 1998. Should Apache elect to participate, it may earn a 50%
interest in the Concession.
NON-PRODUCING PROPERTIES
INTERNATIONAL - POLAND
General
In 1994, Poland adopted the Geological and Mining Law which outlined the
process for energy companies to obtain domestic exploration and exploitation
rights. All of the Company's rights in Poland have been awarded pursuant to
this law.
Under the Geological and Mining Law, the Ministry of Environmental
Protection, Natural Resources and Forestry of the State Treasury (the
"Concession Authority") enters into mining usufruct agreements that grant the
holder the exclusive right to explore for and exploit the designated minerals
for a specified period under prescribed terms and conditions. The holder of the
mining usufruct must then acquire a Concession license to obtain surface access
to the exploration area by making further application to the Concession
Authority and providing the opportunity for comment by local governmental
authorities. When used in this document, unless the context otherwise requires,
the term "Concession" generally refers to rights held under both a mining
usufruct and a concession license.
If a commercially viable discovery is made in a Concession area, the
Concession holder is required to obtain an exploitation license for a specified
term. The granting of an exploitation license requires the consent of the local
government units having jurisdiction over the production area. Negotiations with
national and local government officials of Poland regarding certain of the terms
and conditions of the required exploitation licenses could result in increased
costs and delays. On receiving an exploitation license, the holder is obligated
to pay a one-time fee then negotiated within an already agreed range based on
the market value of the estimated recoverable reserves in place and will
thereafter be obligated to pay a royalty with respect to any actual production.
Additionally, the granting of an exploitation license requires the holder to
comply with certain environmental regulations and may require the preparation of
an environmental impact statement.
Oil and Gas Concessions
The Concession Authority has granted the Company oil and gas exploration
rights in the Lublin, Western Carpathian, Pomeranian and Baltic Concessions.
The agreements divide these areas into blocks, generally containing
approximately 250,000 acres each. The Company has received Concession licenses
required for surface access to the Baltic Concession and to sixteen of the
twenty four blocks contained in the Lublin Concession and has applied for such
Concession licenses respecting its other usufruct areas. Although no assurance
can be given as to whether or when the required Concession licenses will be
granted, the Company expects that all of such licenses will be granted during
1998 and does not expect that this process will cause delays that will
materially impair proposed exploration of specific prospects. To date, the
Company believes that it has satisfied all material Concession terms.
Each of the oil and gas usufructs divides the Company's exploration rights
into successive exploration phases expiring in three and six years,
respectively, after the grant of the last concession agreements covered by the
applicable usufruct. The Company must make certain expenditures, complete
seismic work and drill a required number of wells during the two exploration
phases, all as set forth in the applicable usufructs, in order to retain its
interests. If all of the Concession licenses are granted, the Company will be
required to pay an aggregate of approximately $1.4 million in usufruct and other
fees during the first exploration phase of the usufructs through the year 2001,
of which $175,000 has previously been paid and of which Apache has committed to
pay $892,500. Additionally, the Company will be required to pay annual training
fees aggregating approximately $145,000 during each year of the six-year
exploration term, assuming all of the Concession licenses are granted, of which
Apache is obligated to pay approximately $95,000 each year through 2000. The
Company's drilling and other work requirements under the usufructs are set forth
below:
<TABLE>
<CAPTION>
First Second
No. of Last Required Exploration Exploration
Blocks Usufruct Concession Seismic Phase Phase
Concession Name (1) Date Date Work Drilling Drilling (2)
<S> <C> <C> <C> <C> <C> <C>
BALTIC 11 8/22/95 3/7/96 None One well(3) One well (4)
LUBLIN (5)
West 8 12/20/96 8/8/97 500 km One well One well per
block
Middle 7 7/18/97 Note (6) 500 km Two wells One well per
block
Block 298 1 7/18/97 Note (6) 150 km One well Two wells
block
East (6) 11 7/18/97 3/4/98 500 km Two wells One well per
block
WESTERN CARPATHIAN(7) 12 10/14/97 Note (6) 350 km One well Two wells
POMERANIAN 10 0/30/97 Note (6) 600 km One well Two wells
</TABLE>
(1) The Baltic Concession includes one block that is approximately half the
size of the other blocks. The Lublin East Concession includes three extra
partial blocks adjacent to the border of Poland and the Ukraine.
(2) The Company may terminate its drilling commitments in a block or area by
relinquishing such block or the entire area at the end of the first 3-year
phase. The Company must relinquish 50% of the acreage at the end of the
first three-year exploration phase of the Baltic Concession.
(3) The Company has satisfied the first exploratory drilling phase of the
Baltic Concession.
(4) Unless it is determined that the Company has fulfilled this requirement,
the Company must notify the Concession Authority of its selected drill site
by Sept 6, 1999, and begin drilling by March 6, 2000.
(5) Under the Company's agreement with Apache, it is committed to fulfill the
Company's concession obligation, including the seismic work and drilling
requirement of six wells during the first exploration phase plus drill an
additional seventh well in the Lublin Concession. POGC has the right to
earn from a 25% to a 40% interest in the Lublin Concession. See "Item 1.
Description of Business: Exploration and Development Activities in Poland--
Lublin Interests."
(6) The Company has applied for concession licenses in each of these areas.
Although no assurance can be given as to whether or when the required
concession licenses will be granted, the Company expects that all
Concessions will be granted during 1998.
(7) Under the Company's agreement with Apache, it is committed to fulfill the
Company's concession obligation, including the seismic work and drilling
requirement of three wells during the first exploration phase in order to
earn a 50% interest in the Western Carpathian Concession. See "Item 1.
Description of Business: Exploration and Development Activities in Poland--
Carpathian Interests."
Oil and Gas Exploitation Licenses
If a commercially viable discovery of oil were made in any of its
Concessions, the Company would be required to apply for an exploitation license,
as provided by the usufructs, with a term of 30 years and thereafter for the
productive life of the property. At this point, the Company would become
obligated to pay a fee, to be negotiated within the range of 0.01% to 0.5% of
the market value of the estimated recoverable reserves in place, payable in five
equal annual installments. The Company would also be required to pay a royalty
on any production, the amount of which will be set by the Concession Authority,
within a range established on the base royalty rate for the mineral being
extracted. The base royalty rate for oil and gas is currently 6%, but could be
increased unilaterally up to 10% (the current statutory maximum base royalty
rate) by the Council of Ministers. The Concession Authority can set the royalty
rate for any particular commercial production in a range between 50% and 150% of
the base royalty rate, depending on the economic viability of such operation,
but not to exceed the statutory maximum rate. Therefore, with the current base
rate of 6% for oil and gas, the Concession Authority could establish the royalty
rate between 3% and 9%. The royalty rate may vary for different producing
fields and may be changed from time to time during the productive life of a
field. Local governments in such areas will receive 60% of any royalties paid
on production. The Company could be subject to significant delays in obtaining
the consents of local authorities or satisfying other governmental requirements
prior to obtaining an exploitation license.
According to terms of the agreements between the Company and Apache, all
usufruct costs, Concession costs, seismic work commitment and well drilling
commitments for the Lublin Concession and the Western Carpathian Concession will
be paid by Apache during the first three year exploration period. Additionally,
should Apache exercise its option to earn an interest in the Pomeranian
Concession, Apache will be required to pay for all usufruct costs, concession
costs, seismic work commitment and well drilling commitments in the Pomeranian
Concession. See "Item 1. Description of Business."
Gold Concessions
The Concession Authority has entered into mining usufruct agreements to
explore for gold on seven exploration blocks in the Sudety Concession. The
Company has obtained Concession licenses on three of the blocks ("Original 3
Blocks") and expects to complete the Concession licenses for the other four
blocks ("Additional 4 Blocks") in 1998.
The Company's exploration rights to the Original 3 Blocks expire July 2000,
but are subject to an extension for three additional years. Under the usufruct
terms for the Original 3 Blocks, the Company is required to make cash payments
totaling $55,000 during the first year, complete a regional study, pay annual
Concession fees of $15,000 and spend a minimum of $800,000 exploring the
Original 3 Blocks over four years. The Company's exploration rights for the
Additional 4 Blocks expire six years after the grant of Concession licenses for
such blocks. Under the usufruct terms for the Additional 4 Blocks, the Company
is required to make cash payments of $30,000 during the first year, pay annual
Concession fees of $30,000 and spend a minimum of $640,000 exploring the
Additional 4 Blocks over six years. The Company entered into an agreement with
Homestake on December 30, 1997, in which Homestake agreed to cover all of the
Company's costs relating to the Sudety Concession in order to earn an interest
in the Sudety Concession. See "Item 1. Description of Business--Sudety
Concession."
DOMESTIC NON-PRODUCING PROPERTY
During 1996 and 1997, the Company acquired 16,875 acres of undeveloped oil
and gas leases in the Williston Basin area of North Dakota. The Williston Basin
area has established oil and gas production from numerous zones, including the
Mississippian, Devonian, Silurian and Ordovician reservoirs with recoveries of
one MMBOE or more per well common. The Company has established several leads
over its acreage and intends to pursue a strategic alliance with an industry
partner to jointly explore the acreage.
TITLE TO PROPERTIES
The Company holds property interests in the western United States
associated with its production and exploration activities and in Poland
associated with its various exploration rights and Concessions.
Nearly all of the Company's domestic working interests are held under
leases from third parties. It is the Company's policy to obtain a title opinion
concerning such properties prior to the commencement of drilling operations.
The Company has obtained such title opinions or other third party review on
nearly all of its producing properties and is of the opinion that it has
satisfactory title to all such properties sufficient to meet standards generally
accepted in the oil and gas industry. The Company's properties are subject to
common burdens, including customary royalty interests and liens for current
taxes, but the Company has concluded that such burdens do not materially
interfere with the use of such properties. Further, the Company believes that
the economic effects of such burdens have been appropriately reflected in the
Company's acquisition costs of such properties. Title investigation before the
acquisition of undeveloped properties is less thorough than that conducted prior
to drilling, as is standard practice in the industry. A title opinion is
typically obtained prior to the commencement of drilling exploratory wells.
With respect to its exploration rights and property interests in Poland,
the Company relies on sovereign ownership of such mineral rights by the Polish
government and has not conducted and does not plan to conduct any independent
title examination. The Company has obtained final documentation with the advice
of Polish legal counsel to comply with Polish laws.
OFFICES AND FACILITIES
The Company's executive offices, approximately 3,010 square feet of office
space located at 3006 Highland Drive, Salt Lake City, Utah, are rented at $2,960
per month under a month to month agreement. The Company owns a 16,160 square
foot office building located at the corner of Central and Main in Oilmont,
Montana. The Company utilizes 4,800 square feet for its field office and rents
the remaining space to unrelated third parties for $880 per month. The Company
rents approximately 500 square feet of office space for $500 per month in
Warsaw, Poland at Staroscinska 5, 03-994 Warszawa-Centrum for its Polish
activities.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings, and no
material legal proceedings have been threatened by the Company or, to the best
of its knowledge, against it.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year ended
December 31, 1997, to a vote of the Company's security holders.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Effective August 1, 1996, the Common Stock began to be quoted on the Nasdaq
National Market under the symbol "FXEN." Between June 7 and August 1, 1996, the
Common Stock was quoted on the Nasdaq Small Cap Market under the symbol "FXEN."
The following table sets forth for the periods indicated the high and low
closing sale prices for the Common Stock as quoted on Nasdaq under the symbol
"FXEN" commencing June 7, 1996, and the high and low bid quotation for the
Common Stock as quoted on the OTC Electronic Bulletin Board under the symbol
"FOEX" through June 6, 1996, based on inter-dealer bid quotations, without
markup, markdown, commissions, or adjustments:
LOW HIGH
------ -------
1996
First Quarter.................... $ 2.00 $ 3.91
Second Quarter................... 2.63 9.63
Third Quarter.................... 5.70 9.75
Fourth Quarter................... 8.25 10.38
1997
First Quarter.................... $ 9.00 $13.25
Second Quarter................... 5.50 12.13
Third Quarter.................... 5.50 9.50
Fourth Quarter................... 5.75 8.00
On March 16, 1998, the closing sales price for the Common Stock on the
Nasdaq National Market was $9.00 per share.
The market price for the Common Stock has been volatile in the past and
could fluctuate significantly in response to the results of specific exploration
drilling tests, variations in quarterly operating results and changes in
recommendations by securities analysts. In addition, the securities markets
regularly experience significant price and volume fluctuations that are often
unrelated or disproportionate to the results of operations of particular
companies. These broad fluctuations may adversely affect the market price of
the Common Stock.
DIVIDEND POLICY
The Company has never paid cash dividends on the Common Stock and does not
anticipate that it will pay dividends in the foreseeable future. The Company
intends to reinvest any future earnings to further expand its business.
SHAREHOLDERS
The Company estimates that as of March 16, 1998, it had approximately 4,200
stockholders.
UNREGISTERED SALES OF COMMON STOCK
During 1997, the year covered by this report, the Company sold securities
without registration under the Securities Act of 1933 (the "Securities Act") in
the following transactions:
1. During the year ended December 31, 1997, individuals exercised outstanding
warrants to purchase an aggregate of 81,000 shares of the Company's Common
Stock at a weighted average price of $1.48 per share and options to
purchase 78,334 shares of the Company's Common Stock at a weighted average
price of $1.70 per share.
2. During the year ended December 31, 1997, the Company issued for services
provided, 10,000 shares of the Company's Common Stock to a citizen of
Poland.
The securities issued in the transactions described above were issued in
reliance on the exemption from the registration and prospectus delivery
requirements of the Securities Act provided in S 4(2) thereof.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATIONS
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company for each
of the past five years including the period ended December 31, 1997, are derived
from the audited financial statements and notes thereto of the Company, certain
of which are included herein. The selected consolidated financial data should be
read in conjunction with the Company's Consolidated Financial Statements and the
Notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues:
Oil sales $2,040 $2,346 $1,981 $1,692 $ --
Drilling revenue 496 75 111 224 --
Gain on sale of property
interests 272 -- 75 -- 276
------ ------ ------ ------ ------
Total revenues: 2,808 2,421 2,167 1,916 276
------ ------ ------ ------ ------
OPERATING COSTS AND EXPENSES:
Lease operating costs (1) 1,239 1,225 1,272 680 7
Exploration costs (2) 5,162 2,426 747 651 654
Depreciation, depletion and
amortization 635 558 503 422 3
General and administrative 2,566 1,715 1,466 816 353
Leasehold impairments 152 1,290 115 -- --
Drilling costs 329 154 141 178 --
------ ------ ------ ------ ------
Total operating costs and
expenses
10,083 7,368 4,244 2,747 1,017
------ ------ ------ ------ ------
Operating loss (7,275) (4,947) (2,077) (831) (741)
Interest and other income 662 370 98 53 39
Interest expense (83) (333) (448) (214) (2)
Minority interest: Non-cash
dividends (3)
-- -- (93) -- --
------ ------ ------ ------ ------
Net loss before income taxes (6,696) (4,910) (2,520) (992) (704)
Benefit from (provision for)
income taxes -- -- -- -- 9
------ ------ ------ ------ ------
Net loss before extraordinary
gain (6,696) (4,910) (2,520) (992) (695)
Extraordinary gain 3,076 -- -- -- --
------ ------ ------ ------ ------
Net loss $(3,620) $(4,910) $(2,520) $ (992) $ (695)
======= ====== ====== ====== ======
Basic and diluted net loss per
common share $(.29) $ (0.49) $(0.47) $(0.44) $(0.40)
Weighted average shares
outstanding 12,597 10,018 5,389 2,229 1,750
CASH FLOW STATEMENT DATA:
Net cash used in operating
activities $ (5,881) $ (3,651)$ (1,030) $ (322) $ (569)
Net cash provided by (used in)
investing activities 218 (7,005) (1,489) (4,432) (22)
Net cash provided by financing
activities 1,829 18,259 2,974 4,587 1,046
BALANCE SHEET DATA:
Working capital (deficit) $ 8,494 $13,840 $ (278) $ (272) $ 283
Total assets 18,555 22,994 10,039 8,436 1,317
Long-term debt -- 1,500 3,359 4,091 --
Redeemable FX Producing
preferred stock -- -- -- 550 --
Stockholders' equity 17,612 20,908 5,224 1,280 910
</TABLE>
(1) Includes lease operating costs and production taxes.
(2) Includes dry hole and geophysical and geological costs.
(3) Non-cash dividend on FX Producing convertible preferred stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
The Company explores for oil and gas in Poland and the western United
States, produces oil currently from fields in Montana and Nevada, and has a
drilling and well servicing company in Montana. During 1997, the Company
expanded its international undeveloped acreage base by adding approximately 6.8
million gross acres of oil and gas exploration rights and approximately 166,000
gross acres of gold exploration rights in Poland. Domestically, the Company
added 16,875 net acres of undeveloped oil and gas leases in the Williston Basin
area in North Dakota.
From its organization in January 1989 to the first quarter of 1994, the
Company generated revenue principally from the sale of oil and gas prospects in
the western United States and management fees from domestic exploration groups
formed by the Company. During this period, the Company reported substantial
operating losses.
In the second quarter of 1994, the Company purchased certain producing oil
properties in Montana and Nevada, well servicing equipment and a small drilling
rig. The Company then realized increased operating revenues but continued to
report operating losses.
Since 1995, when the Company acquired exploration rights to the Baltic
Concession in Poland, the Company has focused an increasing amount of resources
and activities towards oil and gas exploration in Poland. By the end of 1997,
the Company had acquired oil and gas exploration rights to four separate
Concessions covering approximately 10.9 million gross acres in Poland, by far
the largest acreage position held by a foreign company in Poland. The Company
minimized its financial exposure in Poland by forming strategic alliances with
several industry partners such as Apache Corporation, Polish Oil and Gas
Company, Homestake Mining Company and RWE-DEA.
The Company realized net proceeds of $17.6 million from the sale of
3,450,000 shares of common stock in the third quarter of 1996. The proceeds
from the stock offering were used to pay off long term debt of $3.7 million and
to fund the Company's exploration activities for the remainder of 1996 and the
entire year of 1997. At the end of 1997, the Company had $8.4 million in cash
and marketable debt securities and no outstanding long-term debt.
Since its inception in 1989 through 1997, the Company has incurred
cumulative net losses of $12.6 million and could continue to possibly incur
losses due to its ongoing exploration activities. The Company incurred net
losses of $3.6 million, $4.9 million and $2.5 million for the years ended 1997,
1996 and 1995, respectively. The Company might incur net losses during 1998 and
beyond, depending on results from its exploration activities in Poland and the
western United States.
RESULTS OF OPERATIONS
Revenues
Oil sales of $2,040,000 for 1997 decreased 13.04% as compared to $2,346,000
for 1996. The decrease was primarily the result of a lower average oil price
during 1997 of $16.16 per bbl, 10.42% lower than the 1996 average oil price of
$18.04. In 1997, 126,271 bbls of oil were produced, 2.88% below the 1996
production amount of 130,018 bbls. Oil sales of $2,346,000 for 1996 increased
18.42% as compared to $1,981,000 for 1995. The increase was primarily the
result of a higher average oil price during 1996 of $18.04 per bbl, 22.97%
higher than the 1995 average oil price of $14.67. In 1996, 130,018 bbls of oil
were produced, representing a 3.70% decline from the 1995 production amount of
135,008 bbls. The slight decrease in production during 1997 and 1996 is
attributable primarily to natural production declines by the Company's producing
properties.
Drilling revenues were $496,000 in 1997, an increase of $421,000 over the
1996 amount of $75,000. Two wells were drilled by the Company in central
Montana utilizing FX Drilling Rig #5 during 1997, resulting in revenues of
$424,000 from the Murray #12-30 and $72,000 from the State #31-8 respectively.
In addition to the drilling revenues received, the Company had a 27.69% working
interest in the Murray #12-30, a dry hole and a 6.25% working interest in the
State #31-8, an oil discovery. A net operating profit from drilling operations
of $167,000 was realized during 1997, consisting of $220,000 from drilling both
wells, less $53,000 in downtime costs. The drilling net profit helped offset
the combined working interest well cost of $242,000 the Company incurred in both
wells. Only one well was drilled during each year in 1996 and 1995, resulting
in revenues of $75,000 and $111,000 respectively. Revenues from drilling will
continue to vary substantially from year to year, depending on the number of
wells drilled.
Gain on the sale of interest in properties was $272,000 during 1997, as
compared to no gain on the sale of interest in properties during 1996. During
1997, the Company received $450,000 from Apache in initial cash consideration
relating to its participation in the Lublin Concession which was offset by
$344,000 in associated costs and also paid the Company $95,000 to purchase Lubex
Petroleum Company, the Company's wholly owned Polish exploration subsidiary
which operates the Lublin Concession, in exchange for Polish tax loss deductions
approximating the same amount. Homestake agreed to pay the Company $212,000 in
initial cash consideration relating to its participation in the Sudety
Concession on December 30, 1997, which was offset by $141,000 of associated
costs during 1997. The Company received $212,000 from Homestake in January 1998.
During 1995, the Company sold one prospect for $75,000.
Operating Costs and Expenses
Lease operating costs were $1,094,000, or $8.66 per bbl for 1997, a slight
increase over the 1996 amount of $1,059,000, or $8.15 per bbl, due primarily to
increased maintenance costs. The Company performed primarily routine
maintenance on its producing properties in 1997 and 1996. Lease operating costs
increased $59,000, or $.74 per bbl in 1996 as compared to the 1995 amount of
$1,000,000, or $7.41 per bbl. Costs during 1995 were lower as compared to 1996,
primarily due to the Company drilling five wells in its Cut Bank in-fill
drilling program in northern Montana, which shifted costs of certain regular
employees from production to drilling activities.
Production taxes were $145,000 in 1997, a decrease of 12.7% below the 1996
amount of $166,000. The decrease was directly associated with a 10.4% decrease
in the 1997 average oil price of $16.16 per bbl versus the 1996 average oil
price of $18.04. Production taxes were $105,000 lower in 1996 as compared to
the 1995 amount of $271,000 due to the substantial reduction of production tax
rates applicable to the Company's Cut Bank field by taxing authorities during
1995.
Geological and geophysical costs ("G&G") were $1,684,000 in 1997, a
decrease of $587,000 below the 1996 amount of $2,271,000. As a result of
Apache's participation in the Lublin Concession effective April 16, 1997, G&G
costs relating to the Lublin Concession were paid by Apache for most of 1997.
The Company completed a seismic survey on Wola, a POGC Concession in the Western
Carpathian area, costing $210,000 during 1997 and a seismic survey costing
approximately $1,100,000 in the Baltic Concession during 1996. G&G costs were
$1,603,000 higher in 1996 as compared to the 1995 amount of $668,000. The
Company obtained its first Polish Concession, the Baltic Concession, in August
1995, but did not complete any seismic surveys in Poland during 1995. As of the
end of 1997, the Company had four oil and gas Concessions and one gold
Concession in Poland.
Dry hole costs were $3,478,000 in 1997, an increase of $3,323,000 over the
1996 amount of $155,000. The Company drilled two dry holes on the Baltic
Concession during 1997. The Orneta #1, the first exploratory oil well drilled
by a western company in Poland, was drilled in the first quarter of 1997 at a
cost of $1,834,000. The Gladysze #1-A, the second well drilled on the Baltic
Concession, was drilled in the third quarter of 1997 at a cost of $1,262,000.
Domestically, the Company drilled two dry holes during 1997, the Murray #12-30
in Central Montana at a cost of $222,000 and the Mega Springs Federal #7 in
Nevada at a cost of $160,000. The Company drilled one dry hole in 1996 costing
$155,000 and two dry holes in 1995 costing $79,000, all of which were in Nevada.
Leasehold impairments were $152,000 in 1997, a decrease of $1,138,000 over
the 1996 amount of $1,290,000. During 1997, the Company wrote off $45,000
relating to its Devil's Basin prospect in Central Montana where the Murray #12-
30 was drilled, $78,000 relating to its Mega Springs Prospect in Nevada where
the Mega Springs Federal #7 was drilled and $29,000 relating to its Horse Trap
prospect in Wyoming where the Company does not plan to drill at all. In 1996,
the Company wrote off its Lake Valley prospect in Nevada at a cost of $1,290,000
and its Hamlin Valley prospect in Nevada during 1995 at a cost of $115,000.
Leasehold impairments will vary from period to period based on the Company's
determination that capitalized costs of unproved properties, on a property by
property basis, are not realizable.
Depreciation, depletion and amortization expense ("DD&A") was $635,000 in
1997, a $77,000 increase over the 1996 amount of $558,000, due principally to
additional assets purchased during 1997. The Company spent $155,000 upgrading
its office equipment and software and $210,000 upgrading its well servicing and
drilling equipment during 1997. Depletion expense for 1997 was essentially the
same as 1996 due to approximately equal production volumes. DD&A was $55,000
higher in 1996 as compared to the 1995 amount of $503,000. The increase in 1996
as compared to 1995 was due principally to the inclusion of capital costs
associated with the Company's Cut Bank field infill drilling program, begun in
1995, for the entire year of 1996.
General and administrative expenses ("G&A") were $2,566,000 for 1997, an
increase of $851,000 over the 1996 amount of $1,715,000. The Company incurred
substantially more G&A costs associated with its expanded Polish activities
during 1997, principally as a result of forming three new exploration
subsidiaries, Karpaty Petroleum Company, Lubex Petroleum Company, and Sudety
Mining Company in Poland during 1997, and generally expanding its activities.
G&A was $249,000 higher in 1996 as compared to the 1995 amount of $1,466,000.
The Company incurred G&A associated with its Baltic Concession in Poland for the
entire year in 1996 as compared to approximately six months in 1995.
Interest and other income was $662,000 for 1997, an increase of $292,000
over the 1996 amount of $370,000. The Company received net proceeds of $17.6
million from a public stock offering in the third quarter of 1996, which
resulted in substantially higher cash balances for the remainder of 1996 and all
of 1997. During 1997, the Company earned $616,000 on its cash and marketable
debt securities, as compared to $333,000 during 1996. Interest and other income
was $271,000 higher in 1996 as compared to $99,000 in 1995, due principally to
interest earned on substantially higher average cash balances in 1996 versus
1995.
Interest expense was $83,000 for 1997, a decrease of $250,000 below the
1996 amount of $333,000. The decrease is primarily due to a lower average
outstanding amount of long-term debt in 1997. The Company's long-term debt of
$3,702,000 was paid off in August 1996 using net proceeds from a public stock
offering. The Company had long-term debt associated with RWE-DEA of $1,500,000
as of December 31, 1996 and received $1,576,000 in additional funding from RWE-
DEA during the first six months of 1997. However, upon RWE-DEA's election not
to participate in the second Baltic Concession well to earn its Concession
rights on June 30, 1997, the Company eliminated its long-term debt associated
with RWE-DEA and recognized an extraordinary gain of $3,076,000. Interest
expense was $115,000 lower in 1996 as compared to the 1995 amount of $448,000
due primarily to the Company paying off its long-term bank debt in August 1996
which was outstanding for all of 1995.
Preferred stock of the Company's oil producing subsidiary required payment
of cumulative dividends on preferred stock of such subsidiary in 1995. All of
the outstanding preferred stock of such subsidiary had been converted into
common stock of the Company as of December 31, 1995.
Income Taxes
The Company incurred net operating losses in 1997, 1996 and 1995 which can
be carried forward to offset future taxable income. Statement of Financial
Accounting Standards (SFAS) No. 109 requires that a valuation allowance be
provided if it is more likely than not that some portion or all of a deferred
tax asset will not be realized. The Company's ability to realize the benefit of
its deferred tax asset will depend on the generation of future taxable income
through profitable operations and the expansion of the Company's oil and gas
producing activities. The market and capital risks associated with achieving
the above requirement are considerable, resulting in the Company's conclusion
that a full valuation allowance be provided. Accordingly, the Company did not
recognize any tax benefit in its consolidated statement of operations for the
years ended December 31, 1997, 1996 and 1995.
Net Loss
The Company incurred net losses of $3,620,000, $4,910,000 and $2,520,000
for the years ended December 31, 1997, 1996 and 1995, respectively. The net
loss in 1997 was due principally to G&G costs of $1,684,000, dry hole cost of
$1,262,000 associated with the Gladysze #1-A, which was drilled without an
outside partner, and leasehold impairments of $152,000, all of which resulted in
expenditures without any substantial offsetting revenues. In 1996, G&G costs
and lease impairments were $2,271,000 and $1,290,000, respectively, as compared
to the 1995 amount of $668,000 and $115,000, respectively, resulting in a
combined increased cost of $2,778,000 in 1996 as compared to 1995. The Company
incurred a net loss of $4,910,000, primarily a result of increased G&G costs and
leasehold impairments in 1996, as compared to a net loss of $2,520,000 in 1995.
CAPITALIZED COSTS FOR UNPROVED OIL AND GAS PROPERTIES
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 the well has found proved reserves.
If an exploratory well has not found proved reserves, the cost of drilling the
well is expensed. The costs of development wells are capitalized, whether
productive or nonproductive. Geological and geophysical costs on exploratory
prospects and the costs of carrying and retaining unproved properties are
expensed as incurred. An impairment allowance is provided to the extent that
capitalized costs of unproved properties, on a property by property basis, are
considered not to be realizable. Should future events indicate that such an
impairment has occurred, the impact on the relevant period of results of
operations could be significant. As a result of the foregoing, the results of
operations of the Company for any particular period may not be indicative of the
results that could be expected in the future.
LUBLIN CONCESSION AGREEMENT WITH APACHE
Apache and the Company finalized a strategic alliance agreement on August
1, 1997 to jointly explore for oil and gas on the Company's Lublin Concession
with Apache as operator. The agreement covers approximately 5.0 million acres
in the twenty-four exploration blocks, including eight blocks the Company
acquired in 1996 ("Original 8 Blocks") and sixteen blocks the Company acquired
in 1997 ("Additional 16 Blocks"). In order to earn a fifty percent interest in
the Lublin Concession, Apache paid the Company $450,000 and agreed to pay the
cost of drilling seven wells (a minimum of two wells per six months must be
commenced beginning in June 1998), the cost of shooting approximately 1,650
kilometers of 2D seismic, all Concession costs, all usufruct costs and all in-
Poland general and administrative costs during the first three years of the
Lublin Concession's six-year exploration term.
LUBLIN AREA OPTION AGREEMENT WITH APACHE, POGC AND THE COMPANY
POGC was granted an option to participate in the Lublin Concession by
Apache and the Company during 1997. Under terms of the agreement, POGC may earn
up to a twenty-five percent interest in the Original 8 Blocks by paying its pro-
rata share of costs, on a block by block basis, of the initial exploratory well
on each block. Should POGC make such an election on any of the Original 8
Blocks, only the Company's interest would be reduced and Apache will pay the
Company $40,000 for each percentage point reduction in the Company's interest as
a result of POGC's election. POGC may earn up to one-third interest in the
Additional 16 Blocks, except for Block 298, in which it may earn a 40% interest,
on a block by block basis, by paying its pro-rata share of costs of the initial
exploratory well on each block. If POGC makes such an election in the
Additional 16 Blocks, Apache's and the Company's interest would be reduced
proportionately. POGC must make their election prior to the commencement of the
drilling of the initial exploratory well on each block. POGC also granted the
Company and Apache an option to participate in exploration on POGC Concessions
containing approximately 0.6 million acres within the Lublin Basin, in which all
parties would have a one-third interest.
SUDETY CONCESSION AGREEMENT WITH HOMESTAKE
Homestake and the Company entered into a strategic alliance on December
30, 1997 to jointly explore for gold on the Company's Sudety Concession with
Homestake as operator. Under terms of the agreement, Homestake paid the
Company $212,000 and agreed to fund all Concession costs, usufruct costs and
future exploration costs, including spending a minimum of $1,100,000 during
1998 and 1999 exploring the Sudety Concession or pay the Company the difference
if it spends less than $1,100,000. Should Homestake propose to construct a
mine, the Company may elect (on a mine by mine basis) to convert its interest
into a six percent net smelter return royalty or a seven and one half percent
net proceeds interest, both at no cost to the Company, or into a twenty-five
percent working interest by paying back costs according to a predetermined
formula.
BALTIC CONCESSION AGREEMENT WITH RWE-DEA
RWE-DEA and the Company agreed to a strategic alliance to jointly explore
for oil and gas on the Company's Baltic Concession in May 1996. RWE-DEA was
entitled to earn a fifty percent interest in the Baltic Concession by paying the
Company $250,000 in cash, $1,100,000 for a seismic survey, the first $1,000,000
of the initial exploratory well's cost, and fifty percent of the cost of the
second exploratory well on the Baltic Concession with the Company as operator.
Formal approval by the Polish government was required to effect the fifty-
fifty ownership between the Company and RWE-DEA in the Baltic Concession. Prior
to the Polish government's approval in June 1997, the Company recorded all funds
received from RWE-DEA as a long term notes payable. Through June 30, 1997, RWE-
DEA advanced the Company $3,076,000 to fund its agreed upon share of costs
incurred in the Baltic Concession. On June 30, 1997, RWE-DEA elected to not fund
its fifty percent share of the second exploratory well. As a result, RWE-DEA
forfeited its right to earn a fifty percent interest in the Baltic Concession.
The Company was not obligated to repay any of the advances it had received from
RWE-DEA. As a result, the Company eliminated its long term notes payable
associated with RWE-DEA and recognized an extraordinary gain of $3,076,000.
During 1997, the Company drilled the Orneta #1 and the Gladysze #1-A wells
in the Baltic Concession at a cost of $1,834,000 and $1,262,000, respectively,
both of which were dry holes. The Orneta #1 was drilled with RWE-DEA as a
partner and the Gladysze #1-A was drilled without an industry partner. Future
exploration efforts in the Baltic Concession may depend on whether or not the
Company is able to execute a strategic alliance with an industry partner.
WESTERN CARPATHIAN CONCESSION
On October 14, 1997, the Company was awarded exclusive oil and gas
exploration rights on approximately 1.4 million acres located in the western
region of the Carpathian mountains by the Polish government. Under terms of the
agreement, the Company is obligated to pay approximately $205,000 in Concession
costs and other fees, shoot 350 kilometers of 2D seismic, drill one well during
the first three years and drill two wells during the second three years of a six
year exploration term.
On February 27, 1998, Apache signed an agreement with the Company, whereby
Apache may earn a 50% interest in the Western Carpathian Concession. According
to terms of the agreement, Apache paid the Company $500,000 in initial cash
consideration and agreed to fund all Concession costs and other fees during the
first three year exploration period, pay for the cost of acquiring 350
kilometers of 2D seismic and the cost of drilling three exploratory wells.
Apache will be the operator of the Western Carpathian Concession.
POMERANIAN CONCESSION
On October 30, 1997, the Company was awarded exclusive oil and gas
exploration rights on approximately 2.3 million acres located in northwest
Poland by the Polish government. Under terms of the agreement, the Company is
obligated to pay approximately $375,000 in Concession costs and other fees,
shoot 600 kilometers of 2D seismic, drill one well during the first three years
and drill two wells during the second three years of a six year exploration
term.
On February 27, 1998, the Company signed an option agreement with Apache,
granting it the right to earn a 50% interest in the Company's Pomeranian
Concession. Apache agreed to reprocess approximately 1,000 kilometers of
existing seismic data in the Pomeranian Concession. Within six months of
receiving the seismic data, but no later than December 31, 1998, Apache must
make an election to participate or not participate in exploring the Pomeranian
Concession with the Company. If Apache elects to participate in the Pomeranian
Concession, it will be the operator and will be required to pay all concession
costs and other fees, the costs of acquiring 600 kilometers of additional 2D
seismic and the cost of drilling one exploratory well during the first three
year exploration period.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has relied primarily on proceeds from the sale of
equity securities to fund its operating and investing activities. During 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 other
participants in drilling groups formed by it to undertake specific drilling or
other exploration activities.
Operating Activities
The Company used net cash of $5,881,000 to fund its operating activities
during 1997, a $2,230,000 increase over the 1996 amount of $3,651,000. During
1997, a major portion of the Company's net cash used in operating activities
resulted from $5,314,000 in exploration costs which was comprised of $1,684,000
in G&G costs, $3,478,000 in dry hole costs and $152,000 in leasehold
impairments. The net cash used in operating activities during 1996 was
$2,621,000 higher than the 1995 amount of $1,030,000. During 1996 and 1995, the
Company utilized its net cash used in operating activities to fund additional
exploration and G&A costs related to its expanding activities in Poland.
Investing Activities
The Company received net cash of $218,000 from its investing activities
during 1997, an increase of $7,223,000 over the 1996 amount of $7,005,000 used
in investing activities. During 1997, the Company spent a net amount of
$1,531,000 on asset additions, which were partially offset by the net amount of
$1,536,000 the Company received relating to investing in marketable debt
securities. During 1996, the Company spent $1,621,000 on asset additions,
realized $110,000 from asset sales and invested a net amount of $5,494,000 in
marketable debt securities. Net cash used in investing activities in 1996 was
$5,515,000 higher than the 1995 amount of $1,490,000. During 1995, the Company
spent a net amount of $1,507,000 on asset additions and realized $18,000 from
asset sales.
Financing Activities
The Company received net cash of $1,829,000 from its financing activities
during 1997, a decrease of $16,430,000 below the 1997 amount of $18,259,000.
During 1997, the Company realized $1,576,000 in advances from RWE-DEA and
$253,000 from the exercise of warrants and options on its common stock.
During 1996, the Company received $1,518,000 in proceeds from long term debt
($1,500,250 relating to RWE-DEA), paid off all of its other long term debt
totaling $3,702,000 and realized net proceeds of $20,443,000 from stock
offerings. Net cash provided from financing activities in 1996 was $15,285,000
higher than the 1995 amount of $2,974,000. During 1995, the Company reduced
long-term debt by $737,000 and realized a net amount of $3,711,000 from issuing
and redeeming its stock.
Strategic Alliances
The Company has benefited and anticipates that it will continue to benefit
from strategic alliances with industry or financial partners to provide funding
and expertise, which helps reduce the Company's financial exposure and risk.
During the period of 1995 through early 1998, the Company estimates that its
strategic partners have paid or committed to carry approximately $23,800,000 of
the Company's share of costs in various projects. In 1997, Apache committed to
cover approximately $15,000,000 of the Company's cost relating to exploring its
Lublin Concession in exchange for a 50% percent interest in the project. During
early 1998, Apache committed to cover approximately $6,000,000 of the Company's
cost relating to exploring the Western Carpathian Concession in exchange for a
50% percent interest in the project. Also, during 1997, Homestake committed to
paying approximately $1,000,000 of the Company's cost relating to its gold
Concession in Poland. RWE-DEA committed approximately $1,600,000 to cover the
Company's cost relating to the Baltic Concession during 1996 and 1997. Other
industry partners committed approximately $200,000 to cover the Company's costs
in other projects during 1995 and 1996.
Credit Facility
In June 1994, the Company established a bank credit facility with Bank One,
Texas, NA, to provide a portion of the funds required to purchase properties in
Montana and Nevada. This facility provides for a total loan amount of $5.0
million, with a borrowing base determined at least semi-annually by the lending
bank based on its analysis of the Company's producing reserves and cash flow.
During the third quarter of 1996, the Company used proceeds from a public
offering to pay off its bank debt which had an outstanding principal balance of
$3,565,000. The Company revised its credit facility with Bank One in May 1997.
The new credit facility provides for an initial borrowing base of $3,000,000
which is reduced by $25,000 per month effective June 1, 1997, and a revolving
commitment of $100,000. Due to its favorable working capital position and no
long-term debt, the Company does not plan to utilize the credit facility during
1998. (See Note 5 to the Consolidated Financial Statements.)
Working Capital
The Company had working capital of $8,494,000, $13,843,000 and negative
$278,000 as of December 31, 1997, 1996 and 1995, respectively. Working capital
was $5,349,000 lower as of December 31, 1997 as compared to the end of 1996 due
primarily to the net cash used for operating activities of $5,881,000 during
1997. The substantial improvement in the Company's working capital at December
31, 1996 as compared to the same period in 1995 is attributable to the receipt
of net proceeds totaling $20,443,000 from the sale of securities during 1996.
CAPITAL REQUIREMENTS
During 1998, the Company expects to have substantially all the cost of its
share of exploration activities 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 costing more than $4,000,000, of which the Company's share
would be approximately $300,000. In the Western Carpathian Concession, Apache
has paid the Company $500,000 and agreed to fund all Concession costs and
related fees, the cost of drilling three wells and the cost of acquiring at
least 350 kilometers of 2D seismic to earn a fifty percent interest. In the
Pomeranian Concession, Apache has been granted an option to earn a fifty percent
interest by funding all Concession costs and related fees, the cost of drilling
one well and the cost of acquiring 600 kilometers of 2D seismic after it reviews
and reprocesses 1,000 kilometers of existing 2D seismic. In the Baltic
Concession, the Company intends to continue to collect data, evaluate the
potential and to seek joint exploration strategic alliance with an industry
partner. In the Sudety Concession, Homestake has paid the Company $212,000 and
committed to covering all future gold exploration costs in order to earn an
interest. The Company completed its leasehold acreage acquisition program in
the Williston Basin area of North Dakota in late 1997 and intends to seek an
industry partner to jointly explore the acreage.
As a result of the foregoing, the Company will expend virtually none of its
capital in connection with the initial exploration program now underway in
Poland. 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
give result in the need for additional capital.
The allocation of the Company's capital among the categories of anticipated
expenditures is discretionary and will depend upon future events that cannot be
predicted. Such events include the actual results and costs of future
exploration and development drilling activities. Consistent with previous
practice, the Company may obtain partial funding for its exploration and
potential development activities through strategic arrangements with industry or
financial partners.
In view of the continuing expansion of activities and opportunities in
Poland as discussed above, the Company is currently deferring the commitment of
capital for additional infill development drilling in the Cut Bank Field in
Montana and is investigating other possible means of realizing the value of this
field.
In addition to the Company's own expenditures, and strategic alliances
already established, the Company expects that it will continue to benefit from
funding provided through its other exploration and development arrangements with
strategic partners. In forming strategic alliances with industry or financial
partners, the Company intends to seek reimbursement of all or a portion of the
costs incurred by the Company in identifying the prospect, obtaining initial
exploration rights and generating an initial exploration plan. The Company's
ability to form strategic alliances with industry or funding partners is
dependent on the oil and gas potential of specific prospect areas, perceived
political or business risks of the country and region in which the prospect is
located, prevailing prices and other conditions in the oil and gas industry in
particular and the energy industry in general and other factors which the
Company is unable to control or predict.
Prior to the end of 1998, the Company may need additional capital to
accelerate planned exploration and development programs in Poland. If
exploration of the Lublin, Baltic, Western Carpathian, or Pomeranian Concession
is successful in proving commercial oil reserves, the Company may require
additional capital to fund a multi-well development program, install oil storage
and handling facilities or purchase other assets or related investments required
to support large-scale production. The Company has no arrangement for any such
additional financing, but may seek required funds from the sale of additional
securities, project financing, strategic alliances with other energy or
financial partners or other arrangements, all of which may dilute the interest
of existing shareholders in the Company or 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.
In order to maintain its interest in the Lublin, Baltic, Western
Carpathian, Pomeranian and Sudety Concessions, the Company is required to make
certain annual payments and meet certain exploration commitments. The Company
has budgeted sufficient funds and obtained financial commitments from Apache and
Homestake to meet all of such obligations through at least December 31, 1998.
The Company also maintains its interests in leases in the United States not held
by production by making annual lease payments, which are not material in amount.
See "Item 1. Description of Business" and "Item 2. Description of Property."
CHANGING PRICES, CURRENCY EXCHANGE RATES AND INFLATION
The Company's revenues and the value of its oil properties have been and
will continue to be affected by changes in oil prices. During the last three
years, the Company and the oil industry, in general, had benefited from higher
prices and have endured lower prices as well. The Company's ability to obtain
exploration capital through strategic alliances with other energy firms and
attract additional capital, if required, through the sale of securities or
borrowings on attractive terms are also affected by oil prices. Such prices are
subject to substantial seasonal and other fluctuations that are beyond the
ability of the Company to control or predict. In the past, the Company has not
hedged its oil production and has no future plans to do so.
Although certain of the Company's costs and expenses are affected by the
level of inflation, inflation did not have a significant effect on the Company's
operations during 1997, 1996, or 1995. The Company customarily contracts for
goods and services, including those related to seismic surveys and drilling, in
US dollars to reduce the potential impact of inflation within Poland. The
Company's activities in Poland may be affected by the rates of inflation in
Poland and other countries. Poland has experienced a gradually decreasing
inflation rate of approximately 13% (estimated), 18% (estimated) and 22% during
1997, 1996 and 1995, respectively.
The amounts in the Company's agreements with Apache, Homestake and its
other strategic partners and the government of Poland relating to the Company's
activities in Poland are expressed in U.S. dollars. Nevertheless, the Company's
activities in Poland may be effected by fluctuations in exchange rates between
the Polish Zloty, the U.S. dollar and other currencies. The exchange rate for
the Polish Zloty was 3.51, 2.85 and 2.48 per U.S. dollar as of December 31,
1997, 1996 and 1995, respectively. In the past, the Company has not hedged its
foreign currency activities and has no future plans to do so.
YEAR 2000
The Company uses computers principally for processing and analyzing
geophysical and geological data, map making and administrative functions such as
word processing, accounting and management and financial reporting. The
Company's principal computer systems have been purchased since December 31,
1996. The Company has an ongoing program to ensure that its operational and
financial systems will not be adversely affected by year 2000 software failures.
While the Company believes it is taking all appropriate steps to assure year
2000 compliance, it is dependent substantially on vendor compliance. The
Company intends to modify or replace those systems that are not year 2000
compliant. The Company is requiring its systems and software vendors to
represent that the services and products provided are, or will be, year 2000
compliant, and has planned a program to test compliance. The Company estimates
that the cost to redevelop, replace, or repair its technology will not be
material. 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 who use computer systems. 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.
OTHER MATTERS
In March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share. This statement
establishes standards for computing and presenting earnings per share ("EPS")
and applies to entities with publicly held common stock or potential common
stock. This statement simplifies the standards for computing EPS and makes them
comparable to international EPS standards. This statement is effective for
financial statements for both interim and annual periods ending after December
15, 1997. Adoption of this statement did not have a material impact on the
Company's financial statements for the years ended December 31, 1997, 1996, or
1995.
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.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company, including the required
accountants' reports, are included, following a table of contents, beginning at
page F-1 immediately following the signature page to this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The Company and its auditors have not disagreed on any items of accounting
treatment or financial disclosure.
PART III.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information from the definitive proxy statement for the 1998 annual
meeting of stockholders under the caption "PROPOSAL NO. 1. ELECTION OF
DIRECTORS: Management" and "Compliance with Section 16(a) of the Exchange Act"
is incorporated herein by reference.
The Company is dependent upon Mr. David N. Pierce, President, Mr. Andrew W.
Pierce, Operations Vice President, and other key personnel for its various
activities. In addition, with respect to its activities in Poland, the Company
is dependent on Mr. Jerzy B. Maciolek, Vice President of International
Operations, a Polish national who is instrumental in assisting the Company in
its operations in Poland. The loss of the services of any of these individuals
may materially and adversely affect the Company. The Company has entered into
employment agreements with Mr. David N. Pierce, Mr. Andrew W. Pierce and Mr.
Maciolek. The Company does not maintain key man insurance on any of its
employees.
ITEM 10. EXECUTIVE COMPENSATION
The information from the definitive proxy statement for the 1998 annual
meeting of stockholders under the caption " PROPOSAL NO. 1. ELECTION OF
DIRECTORS: Executive Compensation" is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information from the definitive proxy statement for the 1998 annual
meeting of stockholders under the caption " PROPOSAL NO. 1. ELECTION OF
DIRECTORS: Security Ownership of Certain Beneficial Owners and Management" is
incorporated herein by reference.
As of December 31, 1997, the Company had issued and outstanding warrants
and options to purchase an aggregate of up to 3,707,694 shares of Common Stock
at exercise prices ranging from $1.10 to $10.25, with a weighted average
exercise price of $4.45 per share. Of those warrants and options, 3,357,500
shares of Common Stock are issuable on the exercise of options held by officers
and directors of the Company at exercise prices ranging from $1.50 to $10.25 per
share, with a weighted average exercise price of $4..47 per share, including
options to purchase 1,306,000 shares that are not fully vested. The existence
of such warrants and options may prove to be a hindrance to future financing by
the Company, and the exercise of such warrants and options may further dilute
the interests of all other stockholders. The possible future resale of Common
Stock issuable on the exercise of such warrants and options could adversely
affect the prevailing market price of the Common Stock. Further, the holders of
options and warrants may exercise them at a time when the Company would
otherwise be able to obtain additional equity capital on terms more favorable to
the Company. See "Description of Securities" and "Principal Stockholders."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information from the definitive proxy statement for the 1998 annual
meeting of stockholders under the caption "PROPOSAL NO. 1. ELECTION OF
DIRECTORS: Certain Relationships and Related Transactions" is incorporated
herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
The following exhibits are included as part of this report:
SEC
EXHIBIT REFERENCE
NUMBER NUMBER TITLE OF DOCUMENT LOCATION
Item 3. Articles of Incorporation and Bylaws
- ------------------------------------------------------
3.01 3 Restated and Amended Articles of Incorporated by
Incorporation Reference(11)
3.02 3 Bylaws Incorporated by
Reference(1)
Item 4. Instruments Defining the Rights of
Security Holders
- ------------------------------------------------------
4.01 4 Specimen Stock Certificate Incorporated by
Reference(1)
4.02 4 Form of Designation of Rights, Incorporated by
Privileges, and Preferences of Series A Reference(14)
Preferred Stock
4.03 4 Form of Rights Agreement dated as of Incorporated by
April 4, 1997, between the Company and Reference(14)
Fidelity Transfer Corp.
Item 10. Material Contracts
- ------------------------------------------------------
10.01 10 Preliminary Agreement between the Company Incorporated by
and the Ministry of Environmental Reference(1)
Protection, Natural Resources and
Forestry dated February 10, 1995, with
translation thereof
10.02 10 Mining Usufruct Agreement between the Incorporated by
State Treasury of the Republic of Poland Reference(3)
and Frontier Poland Exploration and
Producing Company, Sp. z o.o. dated
August 22, 1995, relating to Blocks 51,
52, 71, 72, 91, 92, 93, 111, 112, and
113 (Baltic)
10.03 10 Amendment No. 1 to Mining Usufruct Incorporated by
Agreement dated August 15, 1996 (Baltic) Reference(4)
10.04 10 Amendment No. 2 to Mining Usufruct This Filing
Agreement dated August 22, 1996 (Baltic)
10.05 10 Form of Concession dated December 20, Incorporated by
1995, relating to Baltic Concessions Reference(5)
granted pursuant to the Mining Usufruct
Agreement dated August 15, 1996, with
related schedule
10.06 10 Agreement dated effective April 16, 1996, Incorporated by
between Frontier Poland Exploration and Reference(6)
Producing Company Sp. z o.o. and RWE-DEA
Aktiengesellschaft fur Mineraloel and
Chemie, including exhibits, relating to
Baltic Concessions
10.07 10 Joint Operating Agreement dated effective Incorporated by
April 16, 1996, between Frontier Poland Reference(8)
Exploration and Producing Company Sp. z
o.o., and RWE-DEA Aktiengesellschaft fur
Mineraloel und Chemie, relating to
Baltic Concessions
10.08 10 Joint Study Agreement dated May 21, 1996, Incorporated by
between the Company and the Polish Oil Reference(7)
and Gas Company, including appendix,
relating to the Carpathian JSA.
10.09 10 Addendum No. 1 to Joint Study Agreement This Filing
dated May 21, 1996, effective June 1,
1997, between the Company and the Polish
Oil and Gas Company
10.10 10 Joint Study Agreement dated effective Incorporated by
December 20, 1996 between the Polish Oil Reference(10)
and Gas Company and the Company relating
to eight Concession blocks located near
Lublin, Poland
10.11 10 Mining Usufruct Agreement between the Incorporated by
State Treasury of the Republic of Poland Reference(10)
and Lubex Petroleum Company Sp. z o.o.
dated December 20, 1996, relating to
Concession blocks 255, 275, 295, 316,
336, 337, and 338 (Lublin)
10.12 10 Mining Usufruct Agreement between the Incorporated by
State Treasury of the Republic of Poland Reference(12)
and Apache Poland Sp. z o.o. and FX
Energy Poland Sp. z o.o. (East),
commercial partnership dated October 14,
1997, related to Concession blocks 257,
258, 277, 278, 297, 317, and 318
(Lublin)
10.13 10 Mining Usufruct Agreement between the Incorporated by
State Treasury of the Republic of Poland Reference(12)
and Apache Poland Sp. z o.o. and FX
Energy Poland Sp. z o.o. (East),
commercial partnership dated October 14,
1997, related to Concession block 298
(Lublin)
10.14 10 Mining Usufruct Agreement between the Incorporated by
State Treasury of the Republic of Poland Reference(12)
and Apache Poland Sp. zo.o. and FX
Energy Poland Sp. z o.o. (East),
commercial partnership dated October 14,
1997, related to Concession blocks 319,
320, 339, 340, 340A, 359, 360, 360A,
379, 380, and 380A (Lublin)
10.15 10 Mining Usufruct Agreement between the Incorporated by
State Treasury of the Republic of Poland Reference(12)
and Gasex Production Company Sp. z o.o.
and Company, commercial partnership
dated October 14, 1997, related to
Concession blocks 410, 411, 412, 413,
414, 415, 430, 431, 432, 433, 452 and
453 (Western Carpathian)
10.16 10 Mining Usufruct Agreement between the Incorporated by
State Treasury of the Republic of Poland Reference(12)
and FX Energy Poland Sp. z o.o. and
Partners, commercial partnership dated
October 30, 1997, related to Concession
blocks 85, 86, 87, 88, 89, 105,108, 109,
129, and 149, in northwestern Poland
(Pomeranian)
10.17 10 Option Agreement dated July 18, 1997, Incorporated by
between Polish Oil and Gas Company, the Reference(12)
Company, and Apache Overseas, Inc.
10.18 10 Participation Agreement dated effective Incorporated by
as of April 16, 1997, between Apache Reference(13)
Overseas, Inc., and the Company,
pertaining to the Lublin Concessions
10.19 10 Letter Agreement dated February 27, 1998, This Filing
between the Company and Apache Overseas,
Inc., regarding modification to all
agreements for acreage in Poland under
established area of mutual interest.
10.20 10 Participation Agreement dated effective This Filing
February 27, 1998, between the Company
and Apache Overseas, Inc., pertaining to
the Western Carpathian Concession
10.21 10 Participation Option Agreement dated This Filing
effective February 27, 1998, between the
Company and Apache Overseas, Inc.,
pertaining to the Pomeranian Concession
10.22 10 Option Agreement dated effective as of This Filing
February 2, 1998, between POGC, FX
Energy, Inc., and Apache Overseas, Inc.,
pertaining to the Western Carpathian
Concessions
10.23 10 Agreement dated October 21, 1996, between Incorporated by
Sudety Mining Company Sp. z o.o. and the Reference(9)
State Treasury of the Republic of
Poland, for the establishment of the
mining usufruct for the purpose of gold
exploration in the Sudety Concessions
10.24 10 Earn-In and Exploration Letter of Intent Incorporated by
dated June 13, 1997, between the Company Reference(12)
and Homestake Mining Company of
California
10.25 10 Form of Mining Usufruct Agreement between This Filing
the State Treasury of the Republic of
Poland and FX Energy Poland Sp. z o.o.
Commercial Partnership, dated October
16, 1997, relating to Sudety Concession
blocks 43, 63, 64, 65, with related
schedule.
10.26 10 Earn-in, Exploration, and Joint Venture This Filing
Agreement between Homestake Mining
Company of California and the Company
effective December 31, 1997, regarding
exploration for precious metals in the
Republic of Poland
10.27 10 Agreement dated July 8, 1994 between FX Incorporated by
Drilling Company, Inc. and CENEX, Inc., Reference(1)
regarding Crude Oil Purchase Contract.
10.28 10 Amendment no. 3 dated effective July 1, Incorporated by
1996 to Agreement dated July 8, 1994 Reference(10)
between FX Drilling Company, Inc. and
CENEX, Inc., regarding Crude Oil
Purchase Contract.
10.29 10 Frontier Oil Exploration Company 1995 Incorporated by
Stock Option and Award Plan* Reference(4)
10.30 10 Form of FX Energy, Inc., 1996 Stock Incorporated by
Option Plan* Reference(10)
10.31 10 Employment Agreements between the Company Incorporated by
and each of David Pierce and Andrew Reference(1)
Pierce, effective January 1, 1995 *
10.32 10 Amendments to Employment Agreements Incorporated by
between the Company and each of David Reference(8)
Pierce and Andrew Pierce, effective May
30, 1996*
10.33 10 Form of Stock Option with related Incorporated by
schedule (D. Pierce and A. Pierce) * Reference(1)
10.34 10 Form of Stock Option granted to D. Pierce Incorporated by
and A. Pierce* Reference(1)
10.35 10 Form of Non-Qualified Stock Option with Incorporated by
related schedule* Reference(4)
10.36 10 Letter Agreement dated effective August Incorporated by
3, 1995, between Lovejoy Associates, Reference(4)
Inc., and the Company re: Financial
Consulting Engagement*
10.37 10 Letter Agreement dated effective August Incorporated by
3, 1995, between Lovejoy Associates, Reference(4)
Inc., and the Company re:
Indemnification
10.38 10 Non-Qualified Stock Option granted to Incorporated by
Thomas B. Lovejoy* Reference(4)
10.39 10 Letter Agreement dated effective December This Filing
31, 1997, between the Company and
Lovejoy Associates, Inc., re: Extension
of Consulting Engagement*
10.40 10 Employment Agreement between the Company Incorporated by
and Jerzy B. Maciolek* Reference(8)
10.41 10 Addendum to Employment Agreement between This Filing
the Company and Jerzy B. Maciolek*
10.42 10 Second Addendum to Employment Agreement This Filing
between the Company and Jerzy B.
Maciolek*
10.43 10 Employment Agreement between the Company This Filing
and Scott J. Duncan*
10.44 10 Form of Indemnification Agreement between Incorporated by
the Company and certain directors, with Reference(10)
related schedule*
10.45 10 Form of Option granted to executive Incorporated by
officers and directors, with related Reference(10)
schedule*
10.46 10 Loan Agreement dated June 7, 1994, by and Incorporated by
between Bank One, Texas, N.A., and FX Reference(1)
Producing Company, Inc.
10.47 10 Promissory Note dated June 7, 1994, in Incorporated by
the original principal amount of Reference(1)
$5,000,000 payable by FX Producing
Company, Inc., to Bank One, Texas, N.A.
10.48 10 Guaranty dated June 7, 1994, by the Incorporated by
Company for the benefit of Bank One, Reference(1)
Texas, N.A., relating to the Bank Loan
10.49 10 Stock Pledge Agreement dated June 7, Incorporated by
1994, between the Company and Bank One, Reference(1)
Texas, N.A., relating to pledge of
common stock of FX Producing Company,
Inc.
10.50 10 Deed of Trust, Security Agreement, Incorporated by
Financing Statement and Fixture Filing Reference(1)
dated June 7, 1994, between FX Producing
Company, Inc., as grantor, Arthur R.
Gralla, as trustee, and Bank One, Texas,
N.A., as grantee, relating to Nevada
properties
10.51 10 Deed of Trust, Mortgage, Security Incorporated by
Agreement, Financing Statement, and Reference(1)
Assignment of Production dated June 7,
1994, between FX Producing Company,
Inc., as mortgagor and debtor, Arthur R.
Gralla, as trustee, and Bank One, Texas,
N.A., as mortgagee and secured party,
relating to Montana properties
10.52 10 Transfer Order Letter executed June 7, Incorporated by
1994, between FX Producing Company, Reference(1)
Inc., and Bank One, Texas, N.A.,
relating to production from producing
properties of FX Producing Company, Inc.
10.53 10 Form of Amendment No. 1 to Loan Agreement Incorporated by
dated June 7, 1994, by and between FX Reference(5)
Producing Company, Inc., and Bank One,
Texas, N.A.
Amendment No. 2 to Loan Agreement dated Incorporated by
June 7, 1994, by and between FX Reference(5)
Producing Company, Inc., and Bank One,
Texas, N.A.
10.54 10 Amendment No. 3 to Loan Agreement dated Incorporated by
June 7, 1994, by and between FX Reference(8)
Producing, Inc., and Bank One Texas,
N.A.
Item 21. Subsidiaries of the Registrant
- ------------------------------------------------------
21.01 21 Schedule of Subsidiaries This Filing
Item 23. Consents of Experts and Counsel
- ------------------------------------------------------
23.01 23 Consent of Coopers & Lybrand L.L.P., This Filing
independent accountants
23.02 23 Consent of Larry D. Krause, Petroleum This Filing
Engineer
Item 27 Financial Data Schedule
- ------------------------------------------------------
27.01 27 Financial Data Schedule This Filing
* Identifies each management contract or compensatory plan or arrangement
required to be filed as an exhibit.
(1) Incorporated by reference from the registration statement on Form SB-2,
SEC File No. 33-88354-D.
(2) Incorporated by reference from the report on Form 8-K dated August 16,
1995.
(3) Incorporated by reference from the report on Form 8-K dated August 22,
1995.
(4) Incorporated by reference from the quarterly report on Form 10-Q for the
quarter ended September 30, 1995.
(5) Incorporated by reference from the annual report on Form 10-K for the year
ended December 31, 1995.
(6) Incorporated by reference from the reports on Form 8-K dated May 3, 1996.
(7) Incorporated by reference from the report on Form 8-K dated May 21, 1996.
(8) Incorporated by reference from the registration statement on Form S-1, SEC
File No.333-05583.
(9) Incorporated by reference from the report on Form 8-K dated October 1,
1996.
(10) Incorporated by reference from the annual report on Form 10-KSB for the
year ended December 31, 1996.
(11) Incorporated by reference from the proxy statement respecting the 1997
annual meeting of shareholders.
(12) Incorporated by reference from the quarterly report on Form 10-Q for the
quarter ended September 30, 1997.
(13) Incorporated by reference from the report on Form 8-K dated August 6,
1997.
(14) Incorporated by reference from the report on Form 8-K dated April 4, 1997.
(B) REPORTS ON FORM 8-K.
During the last quarter of the period covered by this report, the
registrant filed interim reports on Form 8-K dated October 15 and November
10, 1997 to report on events deemed by the Company to be important to its
shareholders but otherwise not required by Form 8-K.
SIGNATURES
In accordance with section 13 or 15(d) of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Dated: March 19, l998. FX ENERGY, INC.
(Registrant)
By /s/ David N. Pierce, President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the date indicated.
Dated: March 19, 1998
/s/ David N. Pierce, Director and
President
(Principal Executive and
Financial Officer)
Andrew W. Pierce, Director, Vice
President and Secretary
(Principal Operations Officer)
/s/ Scott J. Duncan, Director, Vice
President and Treasurer
(Principal Accounting Officer)
/s/ Thomas B. Lovejoy, Director
/s/ Peter L. Raven, Director
Jerzy B. Maciolek, Director
Jay W. Decker, Director
<PAGE>
Report of Independent Accountants
To the Stockholders and Board of Directors
of FX Energy, Inc., and Subsidiaries:
We have audited the accompanying consolidated balance sheets of FX Energy, Inc.,
and Subsidiaries as of December 31, 1997 and 1996, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of FX Energy, Inc.,
and subsidiaries as of December 31, 1997 and 1996, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
Salt Lake City, Utah
February 27, 1998
<PAGE>
<TABLE>
<CAPTION>
FX ENERGY, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 1997 and 1996
1997 1996
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,511,919 $ 8,345,914
Investment in marketable debt securities 3,940,582 5,476,574
Receivables:
Accrued oil sales 200,414 332,826
Joint interest and other receivables 587,473 54,055
Interest receivable 43,561 131,889
Inventory 67,382 20,216
Other current assets 87,013 67,483
------------ ------------
Total current assets 9,438,344 14,428,957
------------ ------------
Property and equipment, at cost:
Oil and gas properties (successful efforts
method):
Proved 7,358,552 7,171,539
Unproved 1,169,521 526,237
Other property and equipment 2,253,750 1,888,966
------------ ------------
10,781,823 9,586,742
Less accumulated depreciation, depletion and
amortization (2,021,175) (1,403,072)
------------ ------------
Net property and equipment 8,760,648 8,183,670
------------ ------------
Other assets:
Certificates of deposit 356,500 381,500
------------ ------------
Total other assets 356,500 381,500
------------ ------------
Total assets $18,555,492 $22,994,127
============ ============
</TABLE>
-Continued-
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE>
<TABLE>
<CAPTION>
FX ENERGY, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 1997 and 1996
1997 1996
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable $ 654,809 $ 250,503
Accrued liabilities 289,139 335,693
------------ ------------
Total current liabilities 943,948 586,196
Long-term debt -- 1,500,250
------------ ------------
Total liabilities 943,948 2,086,446
Commitments (Notes 2 and 11)
Stockholders' equity:
Preferred stock, $.001 par value, 5,000,000
shares authorized; 1997 and 1996: no shares
outstanding -- --
Common stock, $.001 par value, 30,000,000
shares authorized; 1997: 12,661,881 shares
issued and outstanding; 1996: 12,492,547
shares issued and outstanding 12,662 12,492
Additional paid-in capital 30,377,852 30,054,620
Accumulated deficit (12,778,970) (9,159,431)
------------ ------------
Total stockholders' equity 17,611,544 20,907,681
------------ ------------
Total liabilities and stockholders' equity $18,555,492 $22,994,127
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE>
<TABLE>
<CAPTION>
FX ENERGY, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Oil sales $2,040,233 $2,345,634 $1,980,546
Drilling revenue 496,158 75,472 111,133
Gain on sale of property interests 272,234 -- 75,000
------------ ------------ ------------
Total revenues 2,808,625 2,421,106 2,166,679
------------ ------------ ------------
Operating costs and expenses:
Lease operating costs 1,094,043 1,059,441 1,000,476
Production taxes 145,372 166,090 270,723
Geological and geophysical costs 1,683,753 2,271,208 668,046
Exploratory dry hole costs 3,478,456 155,279 79,294
Leasehold impairments 152,105 1,289,610 114,992
Drilling costs 328,820 154,178 140,615
Depreciation, depletion and amortization 634,559 557,910 503,289
General and administrative 2,565,690 1,714,625 1,466,340
------------ ------------ ------------
Total operating costs and expenses 10,082,798 7,368,341 4,243,775
------------ ------------ ------------
Operating loss (7,274,173) (4,947,235) (2,077,096)
------------ ------------ ------------
Other income (expense):
Interest and other income 661,665 370,421 98,588
Interest expense (83,273) (332,882) (447,608)
Minority interest: non-cash dividends on
FX Producing convertible preferred stock -- -- (93,466)
------------ ------------ ------------
Total other income (expense) 578,392 37,539 (442,486)
------------ ------------ ------------
Net loss before extraordinary gain (6,695,781) (4,909,696) (2,519,582)
Extraordinary gain (Note 2) 3,076,242 -- --
------------ ------------ ------------
Net loss $(3,619,539) $(4,909,696) $(2,519,582)
============ ============ ============
Basic and diluted net loss per share
Net loss before extraordinary gain $ (0.53) $ (0.49) $ (0.47)
Extraordinary gain 0.24 -- --
------------ ------------ ------------
Net Loss $ (0.29) $ (0.49) $ (0.47)
============ ============ ============
Basic and diluted weighted average number of
shares outstanding $12,596,977 $10,018,337 $ 5,388,656
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE>
<TABLE>
<CAPTION>
FX ENERGY, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(3,619,539) $(4,909,696) $(2,519,582)
Adjustments to reconcile net loss to net cash
used in operating activities:
Extraordinary gain (3,076,242) -- --
Depreciation, depletion and amortization 634,559 557,910 503,289
Leasehold impairments 28,515 1,289,610 114,992
Gain on sale of property interests (272,234) -- (75,000)
Gain on sale of equipment -- -- (15,991)
Minority interest: non-cash dividends on FX
Producing convertible preferred stock -- -- 93,466
Exploratory dry hole costs 210,205 -- --
Common stock and options issued for services 70,625 147,750 443,000
Increase (decrease) from changes in:
Receivables (147,678) (132,606) (29,917)
Inventory (47,166) (4,265) 1,161
Other current assets (19,530) (32,948) (27,252)
Accounts payable and accrued liabilities 357,752 (567,173) 407,138
------------ ------------ ------------
Net cash used in operating activities (5,880,733) (3,651,418) (1,104,696)
------------ ------------ ------------
Cash flows from investing activities:
Additions to oil and gas properties (1,136,935) (1,198,431) (1,404,227)
Additions to other property and equipment (394,291) (258,769) (25,177)
Net change in other assets 25,000 (164,100) (78,076)
Proceeds from sale of property interests 340,152 100,000 75,000
Proceeds from sale of equipment 13,051 9,700 18,000
Purchase of marketable debt securities (3,940,582) (6,278,595) --
Proceeds from maturities of marketable debt
securities 5,476,574 784,757 --
Employee advances (165,000) -- --
------------ ------------ ------------
Net cash provided by (used in) investing
activities 217,969 (7,005,438) (1,414,480)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt 1,575,992 1,518,179 --
Repayment of long-term debt -- (3,702,142) (737,193)
Proceeds from issuance of FX Producing preferred 111,000
stock -- --
Redemption of redeemable FX Producing preferred (464,666)
stock -- --
Proceeds from issuance of common stock, options
and warrants, net of offering costs 252,777 20,443,012 4,064,884
------------ ------------ ------------
Net cash provided by financing activities 1,828,769 18,259,049 2,974,025
------------ ------------ ------------
Increase (decrease) in cash and equivalents (3,833,995) 7,602,193 454,849
Cash and cash equivalents at beginning of year 8,345,914 743,721 288,872
------------ ------------ ------------
Cash and cash equivalents at end of year $ 4,511,919 $8,345,914 $ 743,721
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
FX ENERGY, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
for the years ended December 31, 1997, 1996 and 1995
Preferred Stock Common Stock Additional
------------------------ ------------------------ Paid-in Accumulated
Shares Par Value Shares Par Value Capital Deficit
----------- ------------ ----------- ------------ --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 1,500,000 $ 1,500 2,595,602 $ 2,596 $3,006,888 $(1,730,153)
Common stock issued for cash, net of
offering costs of $181,616 2,087,500 2,088 3,991,297
Common stock issued for services and
line of credit 207,000 207 417,793
Conversion of FX Producing preferred
stock into common stock 1,504,458 1,504 1,778,958
Conversion of redeemable FX Producing
preferred stock into common stock 64,935 65 85,268
Conversion of preferred stock into
common stock (1,362,500) (1,362) 1,362,500 1,362
Exercise of warrants 65,000 65 71,435
Common stock issued for unproved oil
and gas properties 12,000 12 26,988
Compensation related to granting of
stock options at below market value 25,000
Additions to oil and gas properties
resulting from granting of stock
options at below market value 62,500
Net loss (2,519,582)
----------- ------------ ----------- ------------ --------------- ---------------
Balance at December 31, 1995 137,500 138 7,898,995 7,899 9,466,127 (4,249,735)
Common stock issued for cash, net of
offering costs of $2,028,547 3,978,504 3,978 19,612,154
Exercise of warrants and options 419,004 419 826,461
Conversion of preferred stock into
common stock (137,500) (138) 137,500 138
Common stock issued for services 57,451 57 147,693
Common stock issued for oil and gas
properties 1,093 1 2,185
Net loss (4,909,696)
----------- ------------ ----------- ------------ --------------- ---------------
Balance at December 31, 1996 -- -- 12,492,547 12,492 30,054,620 (9,159,431)
Exercise of warrants and options 159,334 160 252,617
Common stock issued for services 10,000 10 70,615
Net loss (3,619,539)
----------- ------------ ----------- ------------ --------------- ---------------
Balance at December 31, 1997 -- $ -- 12,661,881 $ 12,662 $30,377,852 $(12,778,970)
=========== ============ =========== ============ =============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE>
FX ENERGY, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Organization
------------
FX Energy, Inc., a Nevada corporation, and its subsidiaries (collectively
hereinafter referred to as the "Company") operate in the oil and gas
industry in the United States and Poland (see Notes 12 and 13). The
Company is engaged in acquiring, exploring and developing oil and gas
properties. In addition, the Company owns and operates a drilling and well
servicing company.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation. At December 31,
1997, the Company owned 100% of the voting common stock or other equity
securities of its subsidiaries.
Inventory
---------
Inventory consists primarily of tubular supplies and other well equipment
and is valued at the lower of average cost or market.
Oil and Gas Properties
----------------------
The Company follows the successful efforts method of accounting for its oil
and gas 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.
Geological and geophysical costs on exploratory prospects and the costs of
carrying and retaining unproved properties are expensed as incurred. An
impairment allowance is provided to the extent that capitalized costs of
unproved properties, on a property-by-property basis, are considered to be
not realizable. Depletion, depreciation and amortization ("DD&A") of
capitalized costs of proved oil and gas properties is provided on a
property-by-property basis using the unit-of-production method. The
computation of DD&A takes into consideration restoration, dismantlement and
abandonment costs and the anticipated proceeds from equipment salvage. The
estimated restoration, dismantlement and abandonment costs are expected to
be offset by the estimated residual value of lease and well equipment.
An impairment loss is recorded if the net capitalized costs of proved oil
and gas properties exceed the aggregate undiscounted future net revenues
determined on a property-by-property basis. The impairment loss recognized
equals the excess of net capitalized costs over the expected discounted
future net revenues from the related property.
Gains and losses are recognized on sales of entire interests in proved and
unproved properties. Sales of partial interests are generally treated as a
recovery of costs.
Other Property and Equipment
----------------------------
Other property and equipment, including drilling and well servicing
equipment, are stated at cost. Depreciation of other property and
equipment is calculated using the straight-line method over the estimated
useful lives (ranging from 3 to 40 years) of the respective assets. The
cost of normal maintenance and repairs is charged to operating costs and
expensed as incurred. Material expenditures that increase the life of an
asset are capitalized and depreciated over the estimated remaining useful
life of the asset. The cost of other property and equipment sold, or
otherwise disposed of, and the related accumulated depreciation are removed
from the accounts, and any gain or loss is reflected in current operations.
Other property and equipment is summarized as follows:
December 31, Estimated
Useful Life
--------------------
1997 1996 (in years)
--------- --------- -------------
(In thousands)
Drilling and well service $ 1,628 $ 1,441 6
equipment
Trucks 175 152 5
Building 80 80 40
Office equipment 371 216 3 to 6
--------- ---------
$ 2,254 $ 1,889
========= =========
Concentration of Credit Risk
----------------------------
The majority of the Company's receivables are within the oil and gas or
mining industries, primarily from the purchasers of its oil (see Note 12)
and its industry partners. The receivables are generally not
collateralized. To date, the Company has experienced minimal bad debt.
The majority of the Company's cash and cash equivalents is held by four
financial institutions in Utah, Montana, New York, and Illinois.
Cash Equivalents and Statement of Cash Flows
--------------------------------------------
The Company considers all highly-liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. Non-cash
transactions not reflected in the consolidated statements of cash flows
include the following:
Years Ended December 31,
------------------------------------
1997 1996 1995
---------- ----------- -----------
Common stock issued for:
Unproved oil and gas properties $ -- $ -- $ 27
Conversion of FX Producing
convertible preferred stock into
the Company's common stock -- -- 1,781
Conversion of redeemable FX
Producing preferred stock into the
Company's common stock -- -- 85
Conversion of the Company's
preferred stock into common stock -- 138 1,363
Additions to oil and gas properties
resulting from granting of stock
options at below market value -- -- 63
Additions to oil and gas properties
financed with trade accounts
payable -- 23 115
Additions to other property and
equipment financed with long-term
leases -- 18 --
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Interest $ 534 $238,754 $422,104
Taxes -- -- --
Income Taxes
------------
Deferred income taxes are provided for the difference between the tax basis
of an asset or liability and its reported amount in the financial
statements. Such difference will result in taxable or deductible amounts
in future years when the reported amount of the asset or liability is
recovered or settled, respectively.
Reclassifications
-----------------
Certain balances in the 1996 and 1995 financial statements have been
reclassified to conform to the current year presentation. These changes
had no effect on total assets, total liabilities, stockholders' equity or
net loss.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Foreign Operations
------------------
Through December 31, 1997, the Company's investment in Poland was composed
of U.S. dollar expenditures.
Net Loss Per Share
------------------
In 1997, the Company adopted the provisions of SFAS No. 128, "Earnings per
Share." All prior periods have been restated to conform to the new
requirements. Basic earnings per share was computed by dividing the net
loss by the weighted average number of common shares outstanding. Diluted
earnings per share was computed by dividing the net loss by the sum of the
weighted average number of common shares and the effect of dilutive
unexercised stock options and warrants and convertible preferred stock.
Options and warrants to purchase 3,707,694, 3,164,028 and 2,926,198 shares
of common stock at prices ranging from $1.10 to $10.25 per share were
outstanding at December 31, 1997, 1996 and 1995, respectively, but were not
included in the computation of diluted earnings per share because the
effect would have been antidilutive.
2. Investment in Poland:
Poland Exploration Agreements
-----------------------------
Baltic Concession
-----------------
On August 22, 1995, the Company entered into an exploration agreement (the
"Baltic Concession") with the government of Poland covering a 2.1 million
acre block in the onshore Baltic Platform area of north central Poland.
The Baltic Concession provides for a six-year exploration term with a 30-
year exploitation right as to any commercial discoveries. To retain its
rights under the Baltic Concession, the Company is required to
pay annual fees of approximately $58,000 and to commence one additional
well by March 2000. At December 31, 1997, the Company had approximately
$427,000 of capitalized leasehold costs related to this concession.
On May 3, 1996, the Company entered into an agreement with RWE-DEA
Aktiengesellschaft fur Mineraloel und Chemie, Hamburg, Germany ("RWE-DEA"),
which would provide for joint operations on the Company's Baltic
Concession. The agreement granted RWE-DEA the right to earn a 50% interest
in the concession area by paying the Company $250,000 in cash, paying up to
$1,100,000 for a seismic survey and $1,000,000 of cost relating to the
initial exploratory well to be drilled at a location to be designated by
RWE-DEA. To retain its interest in the Baltic Concession RWE-DEA was also
required to fund fifty percent of the cost relating to the second
exploratory well at a location designated by the Company.
In order to obtain the desired treatment under Polish tax laws for joint
activities with RWE-DEA on the Baltic Concession, the Company and RWE-DEA
agreed to effect their 50-50 ownership in the project through RWE-DEA's
purchase of 50% of the shares of the Company's subsidiary which holds the
Baltic Concession, Warmia Petroleum Company, Sp. z o.o. ("Warmia"). The
transaction required approval by the Polish government. The Company agreed
to reimburse RWE-DEA for its direct expenditures related to the Baltic
Concession if the Polish government did not approve of the transaction.
This commitment was supported by a $2.5 million Irrevocable Standby Letter
of Credit which expired unused on January 31, 1997. The Polish government
approved the transaction in June 1997. RWE-DEA had advanced Warmia
$3,076,000 through June 30, 1997 to fund exploration activity on the Baltic
Concession which the Company had recorded as a long-term note payable.
The Orneta #1, the initial exploratory well on the Baltic Concession, was
plugged and abandoned as a dry hole in April 1997 at a cost of $1,834,000.
On June 30, 1997, RWE-DEA elected to not fund its fifty percent share of
the second exploratory well on the Baltic Concession, which resulted in the
termination of RWE-DEA's right to earn a fifty percent interest in the
Baltic Concession. The Company was not obligated to reimburse RWE-DEA for
any funds received from RWE-DEA prior to the termination of its right to
earn a fifty percent interest in the Baltic Concession. Upon termination of
RWE-DEA's right to earn a fifty percent interest in the Baltic Concession,
the Company eliminated its long-term notes payable relating to RWE-DEA and
recognized an extraordinary gain of $3,076,000.
The Gladysze #1-A, the second exploratory well on the Baltic Concession,
was plugged and abandoned as a dry hole in September 1997 at a cost of
$1,262,000. RWE-DEA did not participate in drilling this well.
Lublin Concession
-----------------
On December 20, 1996, the Company entered into an exploration agreement
(the "Lublin Concession") with the government of Poland covering a 2.0
million acre block near the city of Lublin. The Company's exploration
rights are divided into two successive three-year phases expiring in three
and six years, respectively, after grant of eight concessions ("Original 8
Blocks") in the concession area. The Company may relinquish rights to any
concession blocks after the first three-year phase. To retain its rights
in the Lublin Concession, the Company must review existing data and gather
at least 500 kilometers of seismic data during the first three-year phase,
commence one exploratory well within the first three-year phase, and
commence at least one exploratory well in each of the retained concession
blocks, excluding the block in which the initial test is located,
by the end of the second three-year phase. The Company is required to pay
a concession fee of $25,000 for each concession block ($200,000 for all
eight blocks), payable one-half on award of the concessions and one-half on
expiration of the first three-year phase, and to spend at least $25,000
annually in the training of Polish citizens.
On July 18, 1997, the Company entered into an additional exploration
agreement covering the Lublin area with the government of Poland. This
agreement covers an additional 16 concession blocks ("Additional 16
Blocks"), containing approximately 3.0 million acres adjacent to the
Original 8 Blocks. Under terms of the agreement, the Company is required
to shoot 1,000 kilometers of seismic, drill five wells during the first
three years of a six year exploration term, pay approximately $237,500 in
concession fees and spend $55,000 per year training Polish citizens.
On April 16, 1997, the Company entered into an initial agreement with
Apache Corporation ("Apache") whereby Apache will earn a 50% interest in
the Company's Original 8 Blocks by paying the Company $150,000 in cash,
shooting 500 kilometers of seismic, and drilling two exploratory wells at
Apache's sole cost. On August 1, 1997 the agreement was expanded and
modified to include the adjacent Additional 16 Blocks. The terms of the
original agreement were modified to include an additional cash payment of
$300,000 by Apache and a commitment by Apache to pay all of the costs to
drill five additional exploratory wells, all concession costs, all usufruct
costs, and the costs of shooting approximately 1,150 kilometers of
additional seismic.
Apache and the Company granted the Polish Oil and Gas Company ("POGC") the
right to participate in the Lublin Concession on a block by block basis. In
the Original 8 blocks, POGC may earn up to a twenty-five percent interest
by paying for up to twenty-five percent of the cost, on a block by block
basis, of the initial exploratory well on each block. POGC's election will
proportionately reduce the Company's interest only. Should POGC make such
an election on the Original 8 Blocks, Apache has agreed to pay the Company
$40,000 for each percentage point reduction in the Company's interest as a
result of POGC's election. In the Additional 16 Blocks, POGC may earn up
to a one-third interest, except for Block 298 in which it may earn up to a
40% interest, by paying its proportionate share of the drilling cost of the
first exploratory well on each block. Should POGC make such an election on
the Additional 16 Blocks, Apache's and the Company's interest would be
reduced proportionately. POGC granted the Company and Apache a reciprocal
right to participate in POGC Concessions in the Lublin Basin covering
approximately 0.6 million acres, with each participant having a one-third
interest.
In summary, in order to earn a fifty percent interest in the Company's
total of 24 Lublin area concession blocks containing approximately 5.0
million acres, Apache has paid the Company $450,000 in cash and committed
to pay: (1) the cost of drilling seven exploratory wells, (2) the cost of
shooting approximately 1,650 kilometers of seismic, (3) all concession
costs, and (4) all usufruct costs during the first three year exploration
period.
Joint Study Agreement ("JSA")
-----------------------------
In May 1996, the Company entered into a Joint Study Agreement ("JSA") with
the POGC in order to identify drillable oil and gas prospects in the
Carpathian Mountains in southern Poland where oil and gas exploration
rights are controlled by POGC. The Company and POGC have identified
several prospective targets and plan to proceed with exploring this area
during 1998.
Western Carpathian Concession
-----------------------------
On October 14, 1997, the Company was awarded by the Polish government
exclusive rights to explore for oil and gas on twelve blocks containing
approximately 1.4 million acres located in the Western Region of the
Carpathian Mountains. The Company is obligated to pay approximately
$205,000 in concession costs and other fees, shoot 350 kilometers of
seismic, and drill one well during the first three years and two additional
wells in the second three years of a six year exploration period.
The Carpathian region lies within the area of mutual interest ("AMI")
between the Company and Apache created on April 16, 1997. According to the
agreement, the Company must offer Apache the opportunity to participate
with the Company in the exploration and development of the Carpathian
region on terms decided by the Company. On February 27, 1998, the Company
and Apache formed a strategic alliance to jointly explore the Western
Carpathian Concession, (refer to Note 14 "Subsequent Events").
Pomeranian Concession
---------------------
On October 30, 1997, the Company was awarded by the Polish Government the
right to explore for oil and gas in northwest Poland ("Pomeranian
Concession"), an area containing ten blocks on approximately 2.3 million
acres. The Company is obligated to pay approximately $375,000 in concession
costs and other fees, shoot 600 kilometers of seismic, and drill one well
during the first three years and two additional wells during the second
three years of a six year exploration period. On February 27, 1998, the
Company granted Apache an option to jointly explore the Pomeranian
Concession with the Company (refer to Note 14 "Subsequent Events").
Sudety Concession
-----------------
On October 1, 1996, the Company entered into a gold exploration agreement
(the "Sudety Exploration Agreement") with the government of Poland covering
71,000 acres in southwestern Poland. The Sudety Exploration Agreement
provides for a four-year exploration term, with the term of any
exploitation license required to mine deposits subject to negotiation. To
retain its rights under the Sudety Exploration Agreement, the Company is
required to make payments totaling $70,000 during the first year, and
continue with phased exploration during the succeeding two years, and pay
an annual concession fee of $15,000.
On October 16, 1997, the Company was awarded by the Polish Government
exclusive gold exploration rights covering four additional blocks in
southwestern Poland covering 95,000 acres . Under terms of the agreement,
the Company is required to spend a minimum of $160,000 in work program
costs and to pay $15,000 in concession and usufruct costs during a six year
exploration term.
On December 30, 1997, Homestake Mining Company ("Homestake") and the
Company signed an agreement to jointly explore for gold on the Company's
gold concessions in Poland. Under terms of the agreement, Homestake has
the right to earn at least a seventy-five percent interest in the Sudety
Concession by paying the Company $212,000 in cash and funding all future
exploration costs. The $212,000, which is included in joint interest and
other receivables in the December 31, 1997 balance sheet, was collected in
January 1998. Homestake also agreed to spend at least $500,000 per year
with a minimum commitment of $1,100,000 during the initial two year period.
If Homestake does not spend the minimum amount, it must pay the Company the
difference in order to retain its interest in the gold concessions. In the
event Homestake elects to construct one or more mines, the Company may
elect to retain a six percent net smelter return royalty, or a 7.5 percent
net proceeds interest, both at no cost to the Company, or to retain a
twenty-five percent interest by reimbursing Homestake certain costs
according to a predetermined formula. The Company may make such elections
on a mine by mine basis.
3. Performance Bond Deposits:
As of December 31, 1997, the Company had $356,500 in performance bonds at
financial institutions in Utah and Montana, composed of a replacement bond
to a federal agency in the amount of $463,000 which was collateralized by a
certificate of deposit in the amount of $231,500, and $125,000 in
certificates of deposit covering performance bonds in various states.
During 1997, the state of Wyoming relinquished a $25,000 bond which
terminated the Company's bonding requirement in the state.
4. Investment in Marketable Debt Securities:
The Company follows the provisions of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." In accordance with SFAS No.
115, the Company has classified all of its marketable debt securities as
held-to-maturity because the Company has both the intent and ability to
hold these investments until they mature. At December 31, 1997 and 1996,
the Company's held-to-maturity securities consisted of corporate bonds with
remaining contractual maturities of less than nine months and the carrying
amount of these investments approximated market value.
5. Long-term Debt:
Bank One
--------
In August 1996, the Company repaid the outstanding debt incurred in the
1994 purchase of assets by two of the Company's wholly owned subsidiaries,
FX Producing and FX Drilling. In May 1997 the Company amended its bank
credit facility with Bank One whereby a borrowing base of $3,000,000 was
established using assets owned by FX Producing, a wholly owned subsidiary,
as collateral. The borrowing base will be reduced by $25,000 per month
effective June 1, 1997. The Company also arranged a revolving commitment
amount of $100,000. The facility is subject to renewal at the option of the
lender for successive one year periods following semi-annual reviews of FX
Producing's reserve data and recalculation of the borrowing base. At
December 31, 1997, the borrowing base was $2,825,000.
The Company is subject to certain provisions of the loan agreement
governing the bank credit facility, including compliance with certain
covenants, tangible net worth requirements of FX Producing and the Company,
and other financial ratios. In addition, the agreement imposes
restrictions on other indebtedness, guarantees, loans to other parties and
sales or pledges of collateralized assets. The Company is also prohibited
from declaring or paying cash dividends on any class of FX Producing's or
the Company's capital stock, and is prohibited from making distributions
on, and purchasing or redeeming any shares of any class of FX Producing's
or the Company's capital stock.
6. Income Taxes:
The Company recognized no income tax benefit from the losses generated
during the years ended December 31, 1997, 1996 and 1995. Due to the
Company's net operating loss carryforwards, no tax provision was allocated
to the 1997 extraordinary gain.
The components of the net deferred tax asset as of December 31, 1997 and
1996 are as follows:
December 31,
---------------------
1997 1996
---------- ----------
(In thousands)
Deferred tax liability:
Property and equipment basis differences $ (940) $ (916)
Deferred tax asset:
Net operating loss carryforwards 6,993 4,117
Investment in Warmia -- 661
Other 78 6
Valuation allowance (6,131) (3,868)
---------- ----------
Net deferred tax asset $ -- $ --
========== ==========
The change in the valuation allowance during the years ended December 31,
1997, 1996 and 1995 is as follows:
December 31,
------------------------------
1997 1996 1995
-------- -------- --------
(In thousands)
Balance, beginning of year $(3,868) $(1,526) $ (645)
Decrease due to property and
equipment basis differences 24 397 495
Decrease (increase) due to
investment in Warmia 661 (661) --
Increase due to net operating (2,876) (2,072) (1,376)
loss
Other (72) (6) --
-------- -------- --------
Balance, end of year (6,131) $(3,868) $(1,526)
======== ======== ========
SFAS No. 109 requires that a valuation allowance be provided if it is more
likely than not that some portion or all of a deferred tax asset will not
be realized. The Company's ability to realize the benefit of its deferred
tax asset will depend on the generation of future taxable income through
profitable operations and expansion of the Company's oil and gas producing
activities. The market and capital risks associated with that growth
requirement are considerable, resulting in the Company's conclusion that a
full valuation allowance be provided.
At December 31, 1997, the Company had net operating loss ("NOL")
carryforwards of approximately $18,749,000 available to offset future
taxable income, which expire from 2008 through 2012. The utilization of
these carryforwards against future taxable income may become subject to an
annual limitation due to a change in ownership. $3,911,500 of the NOL
carryforward relates to tax deductions resulting from the exercise of stock
options during 1997 and 1996. The tax benefit from adjusting the valuation
allowance related to this portion of the NOL carryforward will be credited
to additional paid-in capital.
7. Related Party Transactions:
During 1997, an officer of the Company entered into an agreement whereby
the Company would loan the officer up to $400,000 payable on or before
December 31, 1998 plus interest at 7.7%. As of December 31, 1997, the
Company had advanced the officer $150,000 under the agreement. This amount
is reflected in joint interest and other receivables at December 31, 1997.
8. Minority Interest in FX Producing Convertible Preferred Stock:
FX Producing is authorized to issue up to 3,300,000 shares of convertible
preferred stock, bearing a dividend of 8% payable in cash or kind. Holders
of FX Producing convertible preferred stock have preference on liquidation
proceeds from FX Producing. One share of FX Producing preferred stock was
convertible at the election of the holder to one share of Company common
stock, subject to adjustment, at any time during 1995. Dividends on FX
Producing preferred stock are cumulative from the date of issuance and are
payable at the rate of 8% of the original issuance price of $1.50 per
share, payable in cash or in additional shares of FX Producing preferred
stock at the Company's discretion, and subject to bank loan covenants.
During the year ended December 31, 1995, FX Producing received $111,000 in
proceeds from stock subscriptions receivable, accrued for issuance 62,311
convertible preferred shares at a value of $93,466 as dividends, and
converted 1,504,458 shares into the Company's common stock at a value of
$1,780,462, resulting in no outstanding shares of FX Producing preferred
stock as of December 31, 1995. No shares were issued during the years
ended December 31, 1996 or 1997.
9. Common Stock Issuable, Stock Options and Warrants:
Common Stock Issuable
---------------------
In connection with the purchase of the Company's producing oil properties
and well servicing equipment in 1994, the Company agreed to issue to the
sellers up to 400,000 shares of Company common stock in semi-annual
increments of 50,000 shares each beginning October 1, 1994 on the
attainment of certain levels of oil production from the properties
acquired. Production levels through October 1, 1997 had not attained
required levels and thus 350,000 shares which might have been issued
through October 1, 1997, are no longer issuable. Accordingly, the number
of shares which may be issued in the future was reduced to 50,000 shares as
of December 31, 1997.
Stock Options
-------------
On August 31, 1995, the Company adopted the 1995 Stock Option and Award
Plan (the "95 Plan"). The 95 Plan replaced the 1994 Employee Incentive
Plan under which no options were issued. The 95 Plan was approved by the
stockholders of the Company at the 1996 annual meeting. A maximum of
500,000 shares, subject to adjustment for certain events of dilution, is
available for grant under the 95 Plan. As of December 31, 1997, 491,500
shares had been granted under the 95 Plan.
On November 5, 1996, the board of directors approved adoption of the 1996
Stock Option and Award Plan (the "96 Plan"), which was approved by the
Company's stockholders at the 1997 annual meeting. A maximum of 500,000
shares, subject to adjustment for certain events of dilution, is available
for grant under the 96 Plan. As of December 31, 1997, 490,500 shares had
been granted under the 96 Plan.
On December 1, 1997, the board of directors approved adoption of the 1997
Stock Option and Award Plan (the "97 Plan"), which will be submitted to the
Company's stockholders for approval at the 1998 annual meeting. A maximum
of 500,000 shares, subject to adjustment for certain events of dilution, is
available for grant under the 97 Plan. On adopting the 97 Plan, the board
of directors approved the grant of options to purchase an aggregate of
197,500 shares.
The 95 Plan, 96 Plan, and 97 Plan (the "Plans") are each administered by a
committee (the "Committee") consisting of the board of directors, or a
committee thereof. At their discretion, the Committee may grant stock
options to any employee, including officers, in the form of incentive stock
options ("ISOs"), as defined in the Internal Revenue Code, or options which
do not qualify as ISOs or stock awards. In addition to the options granted
under the Plans, the Company also issues non-qualified options outside the
Plans. Options granted under these Plans have terms ranging from five to
seven years and vest over periods ranging from the date of grant to three
years.
As of December 31, 1997, the Company had options outstanding under the
Plans as well as from other individual grants. The Company applies APB
Opinion No. 25 and related interpretations in accounting for options
granted under the Plans and for other option agreements. Had compensation
cost for the Company's options been determined based on the fair value at
the grant dates consistent with SFAS No. 123, the Company's net loss and
loss per share would have been increased to the pro forma amounts indicated
below:
December 31,
------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
Net Loss
As Reported $ (3,619,539) $ (4,909,696) $ (2,519,582)
Pro Forma (5,991,169) (7,616,520) (4,462,758)
Net Loss Per Share
As Reported $ (0.29) $ (0.49) $ (0.47)
Pro Forma (0.48) (0.76) (0.83)
The effects of applying SFAS No. 123 are not necessarily representative
of the effects on the reported net income or loss for future years.
The fair value of each option granted during 1997, 1996 and 1995 is
estimated on the date of grant using the Black-Scholes option pricing
model. The following weighted-average assumptions were utilized for
the Black-Scholes valuation: expected volatility of 80.4% for 1997 and
108.3% for 1996 and 1995, expected lives ranging from four to seven years,
risk-free interest rates at the date of grant ranging from 5.70% to 6.43%,
and a dividend yield of zero for each year.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------
1997 1996 1995
---------------------- -------------------- ---------------------
Weighted Weighted Weighted
Avg. Avg. Avg.
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ----------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Fixed Options
Outstanding at beginning of year 2,732,834 $3.710 2,595,000 $2.541 1,420,000 $2.556
Granted 725,500 7.203 508,834 8.467 1,175,000 2.523
Exercised (78,334) 1.698 (369,000) 2.008 -- --
Canceled (22,500) 9.486 (2,000) 1.500 -- --
Forfeited -- -- -- -- -- --
---------- ----------- ---------- --------- ---------- ----------
Outstanding at end of year 3,357,500 $4.473 2,732,834 $3.710 2,595,000 $2.541
========== ========== ==========
Options exercisable at year-end 2,242,000 $3.878 1,799,084 $3.315 1,420,000 $2.266
========== ========== ==========
Weighted-average fair value of
options granted during the year $4.458 $7.451 $1.452
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
Options Outstanding Options Exercisable
------------------------------------- ----------------------
Weighted
Average
Remaining Weighted Weighted
Number Contractual Average Number Average
Exercise Outstanding Life Exercise Exercisable Exercise
Prices at 12/31/97 (in years) Price at 12/31/97 Price
---------- ----------- ------------ --------- ----------- ---------
$1.500 481,000 1.22 $ 1.500 481,000 $ 1.500
3.000 1,700,000 4.90 3.000 1,300,000 3.000
5.750-7.250 570,500 6.72 6.747 6,000 5.750
8.250-8.875 575,000 4.78 8.745 455,000 8.875
10.250 31,000 6.32 10.250 -- --
----------- -----------
Total 3,357,500 4.67 $ 4.473 2,242,000 $ 3.878
=========== ===========
Warrants
--------
Changes in outstanding warrants during 1997, 1996 and 1995 were as follows:
Shares Price Range
--------------------- ----------------
Outstanding at December 31, 1994 232,198 $1.10 - 1.65
Exercisable at December 31, 1994 232,198 1.10 - 1.65
=========
Warrants granted as commission to
brokers; expiring September 30, 1999 4,000 1.65
Warrants granted in consideration of
consulting agreement; expiring
September 30, 1998 60,000 2.20
Warrants granted in consideration of
consulting agreement; expiring
November 9, 2000 100,000 3.00
Warrants exercised (65,000) 1.10
---------
Outstanding at December 31, 1995 331,198 1.10 - 3.00
Exercisable at December 31, 1995 331,198 1.10 - 3.00
=========
Warrants granted as commission to
brokers; expiring August 6, 2001 150,000 6.90
Warrants exercised (50,004) 1.10 - 3.00
---------
Outstanding at December 31, 1996 431,194 1.10 - 6.90
Exercisable at December 31, 1996 281,194 1.10 - 3.00
=========
Warrants exercised (81,000) 1.10 - 2.60
---------
Outstanding at December 31, 1997 350,194 1.10 - 6.90
=========
Exercisable at December 31, 1997 350,194 $1.10 - 6.90
=========
10. Issuance of Preferred Stock:
The Company is authorized to issue up to 5,000,000 shares of preferred
stock.
In 1993 and 1994, the Company issued a total of 1,500,000 shares of
preferred stock in a private placement at $1.00 per share. Each share of
preferred stock was convertible into one share of common stock and had a
liquidation preference equal to $1.00 per share. During the year ended
December 31, 1995, 1,362,500 preferred shares were converted into the same
number of common shares resulting in 137,500 preferred shares of stock
outstanding at December 31, 1995. During the year ended December 31, 1996,
the 137,500 preferred shares were converted into the same number of common
shares resulting in no preferred shares of stock outstanding at December
31, 1996 or 1997.
11. Commitments:
Employment Agreements
---------------------
Effective January 1, 1995, the Company entered into three-year employment
agreements with David N. Pierce and Andrew W. Pierce, each of whom is an
officer and director. The agreements provide for annual compensation of
$120,000 and $96,000, respectively, with annual increases of at least 7.5%,
as determined by the board of directors or the compensation committee.
Each employment agreement, as amended, provides that on the initiation of
the first test well in the Baltic Concession, which commenced in late
January 1997, the executive employee is entitled to receive a bonus in the
form of a $100,000 credit that may be applied against the exercise of
options to purchase common stock. The Company has accrued $200,000 at
December 31, 1997 to reflect this obligation. The terms of such employment
agreements are automatically extended for an additional year on the
anniversary date of each such agreement. In the event of termination of
employment resulting from a change in control of the Company not approved
by the Board of Directors, each of the two officers would be entitled to a
termination payment equal to 150% of his annual salary at the time of
termination and the value of previously granted employee benefits,
including stock options and stock awards.
On July 1, 1996, the Company entered into a three-year employment agreement
with Jerzy B. Maciolek, who is an officer of the Company, providing for an
initial annual salary of $96,000 with an annual increase to be
determined by the Company's board of directors or the compensation
committee. The employment agreement also provides for annual bonuses of up
to $100,000, payable in cash or stock or options, as may be determined by
the board of directors or the compensation committee, based on the progress
of projects which Mr. Maciolek is primarily engaged. In the event the
employment contract is terminated by the Company, other than for cause, or
by Mr. Maciolek for cause or because of a change in control of the Company,
Mr. Maciolek is entitled to a termination payment equal to any accrued but
unpaid salary and unreimbursed expenses and benefits plus his salary for
the remaining term of the employment agreement. Additionally, all options
held by Mr. Maciolek shall immediately vest and not be forfeited. The
agreement will automatically be extended for an additional one year upon
each anniversary date of the effective date unless otherwise terminated
pursuant to the terms thereof.
Consulting Agreement
--------------------
The Company entered into a consulting agreement, effective August 3, 1995,
with a director's consulting company under which it advises the Company
respecting future financing alternatives, identifying possible sources of
debt and equity financing, with particular emphasis on funding for the
Company's Polish activities and the Company's relationship with the
investment community at a fee of $10,000 per month commencing October 15,
1995, and continuing through December 31, 1997. The agreement was extended
through December 31, 1998 at a rate of $15,000 per month.
12. Disclosure About Oil and Gas Properties and Producing Activities:
The Company's significant oil and gas properties are located in Montana,
Nevada, Utah and Poland.
For the years ended December 31, 1997, 1996 and 1995, the Company sold over
85% of its total oil sales to one purchaser located in Montana. The
Company believes this purchaser could be replaced, if necessary, without a
loss in revenue.
Capitalized costs relating to oil and gas producing activities as of
December 31, 1997 and 1996 are summarized as follows:
United
States Poland Total
---------- ---------- ----------
(In thousands)
December 31, 1997:
Proved properties $ 7,359 $ -- $ 7,359
Unproved properties 710 460 1,170
---------- ---------- ----------
8,069 460 8,529
Less accumulated depreciation,
depletion and amortization (912) -- (912)
---------- ---------- ----------
$ 7,157 $ 460 $ 7,617
========== ========== ==========
December 31, 1996:
Proved properties $ 7,172 $ -- $ 7,172
Unproved properties 132 394 526
---------- ---------- ----------
7,304 394 7,698
Less accumulated depreciation,
depletion and amortization (652) -- (652)
---------- ---------- ----------
$ 6,652 $ 394 $ 7,046
========== ========== ==========
Costs incurred in oil property acquisition, exploration and development
activities during the years ended December 31, 1997, 1996 and 1995, whether
capitalized or expensed, are summarized as follows:
United
States Poland Total
---------- ---------- ----------
(In thousands)
December 31, 1997:
Acquisition of properties:
Proved $ -- $ -- $ --
Unproved 733 66 799
Exploration costs 1,419 3,895 5,314
Development costs 187 -- 187
---------- ---------- ----------
$ 2,339 $ 3,961 $ 6,300
========== ========== ==========
December 31, 1996:
Acquisition of properties:
Proved $ 10 $ -- $ 10
Unproved 97 274 371
Exploration costs 676 1,750 2,426
Development costs 907 -- 907
---------- ---------- ----------
$ 1,690 $ 2,024 $ 3,714
========== ========== ==========
December 31, 1995:
Acquisition of properties:
Proved $ 48 $ -- $ 48
Unproved 16 370 386
Exploration costs 533 214 747
Development costs 1,175 -- 1,175
---------- ---------- ----------
$ 1,772 $ 584 $ 2,356
========== ========== ==========
13. Summary Oil and Gas Reserve Data (Unaudited):
The following quantity and value information is based on prices as of the
end of each respective reporting period. No price escalations were
assumed except for sales made under terms of contracts which include
fixed and determinable escalations. Operating costs and production taxes
were deducted in determining the quantity and value information. Such
costs were estimated based on current costs and were not adjusted to
anticipate increases due to inflation or other factors. No amounts were
deducted for general overhead, depreciation, depletion and amortization and
interest expense.
The determination of oil and gas reserves is based on estimates and is
highly complex and interpretive. The estimates are subject to continuing
change as additional information becomes available, and an accurate
determination of the reserves may not be possible for several years after
discovery.
Estimated Quantities of Proved Oil Reserves
-------------------------------------------
Following is a reconciliation of the Company's interest in net quantities
of proved oil reserves. All proved oil reserves are located in the United
States. Proved reserves are the estimated quantities of crude oil which
geological and engineering data demonstrate with reasonable certainty
to be recoverable in future years from known reserves under existing
economic and operating conditions. Changes in estimated oil reserves of
the Company for the years ended December 31, 1997, 1996 and 1995 are as
follows:
For the Years Ended December 31,
-----------------------------------------
1997 1996 1995
------------ ------------ ------------
(Bbls)
Total proved reserves:
Beginning of year 5,442,780 5,257,173 5,733,813
Purchase of minerals in-place -- -- 146,465
Extensions and discoveries 18,130 -- --
Revisions of previous estimates (575,152) 315,625 (488,097)
Production (126,271) (130,018) (135,008)
------------ ------------ ------------
End of year 4,759,487 5,442,780 5,257,173
------------ ------------ ------------
Proved developed reserves:
Beginning of year 2,828,743 2,682,673 2,654,995
------------ ------------ ------------
End of year 2,281,822 2,828,743 2,682,673
------------ ------------ ------------
The increase in 1996 was principally due to a substantial increase in oil
prices at year-end 1996 compared to year-end 1995, resulting in an increase
in the economic life of the proved reserves. The decrease in 1997 was
principally due to a substantial decrease in oil prices at year-end 1997 as
compared to year-end 1996, resulting in a decrease in the economic life of
the proved reserves.
Standardized Measure of Discounted Future Net Cash Flows and Changes
--------------------------------------------------------------------
Therein Relating to Proved Oil Reserves
---------------------------------------
Estimated discounted future net cash flows and changes therein were
determined in accordance with SFAS No. 69. Certain information concerning
the assumptions used in computing the valuation of proved reserves and
their inherent limitations are discussed below. The Company believes such
information is essential for a proper understanding and assessment of the
data presented.
Future net cash flows were computed by applying the year-end oil prices of
$13.81, $21.38 and $16.48 for the years ended December 31, 1997, 1996 and
1995, respectively, and production costs per bbl of $6.86, $7.53 and $6.72
for 1997, 1996 and 1995, respectively, to the period-end quantities of the
Company's proved reserves.
The assumptions used to compute the proved reserve valuation do not
necessarily reflect the Company's expectations of actual revenues to be
derived from those reserves nor their present worth. Assigning monetary
values to the reserve quantity estimation process does not reduce the
subjective and ever-changing nature of such reserve estimates.
Additional subjectivity occurs when determining present values because the
rate of producing the reserves must be estimated. In addition to errors
inherent in predicting the future, variations from the expected production
rate also could result directly or indirectly from factors outside the
Company's control, such as unintentional delays in development,
environmental concerns and changes in prices or regulatory controls.
The reserve valuation assumes that all reserves will be disposed of by
production. However, if reserves are sold in place, additional economic
considerations also could affect the amount of cash eventually realized.
Future development and production costs are computed by estimating
expenditures to be incurred in developing and producing the proved oil
reserves at the end of the period, based on period-end costs and assuming
continuation of existing economic conditions.
A discount rate of 10% per year was used to reflect the timing of the
future net cash flows.
As of December 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
Future cash flows $ 65,740 $ 116,405 $ 86,643
Future production and development
costs (38,931) (47,083) (41,463)
---------- ---------- ----------
Future net cash flows 26,809 69,322 45,180
Future income tax expense (125) (17,880) (11,628)
---------- ---------- ----------
Future net cash flows 26,684 51,442 33,552
10% annual discount for estimated
timing of cash flows (13,109) (25,158) (15,891)
---------- ---------- ----------
Standardized measure of discounted
future net cash flows $ 13,575 $ 26,284 $ 17,661
---------- ---------- ----------
The following are principal sources of changes in the standardized measure
of discounted future net cash flows:
December 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
(In thousands)
Balance, beginning of year $ 26,284 $ 17,661 $ 16,753
Sales of oil produced, net of
production costs (801) (1,120) (709)
Net changes in prices and (16,707) 11,374 4,663
production costs
Purchases of minerals in place -- -- 681
Extensions and discoveries, net of
future costs 108 -- --
Changes in estimated future
development costs (79) (1) 349
Development costs incurred during
the year 394 1,070 1,298
Revisions in previous quantity (1,969) 2,234 (2,467)
estimates
Accretion of discount 2,628 1,766 1,675
Net change in income taxes 9,071 (3,015) (2,178)
Changes in rates of production and
other (5,354) (3,685) (2,404)
---------- ---------- ----------
Balance, end of year $ 13,575 $ 26,284 $ 17,661
========== ========== ==========
14. Subsequent Events:
On February 17, 1998, two of the Company's officers elected to exercise
their options to purchase 150,000 shares each, 300,000 shares in total, of
the Company's common stock at a price of $1.50 per share. The closing
price of the Company's common stock on the NASDAQ exchange was $7 3/8 on
February 17, 1998. Both officers paid for the cost of their option
exercise by utilizing a $100,000 bonus credit they received in 1997 and
signing a full recourse note payable to the Company in the amount of
$125,000 which is due on or before December 31, 1998, and bears interest at
a rate of 7.7%.
On February 27, 1998 the Company signed an agreement with Apache, whereby
Apache may earn a fifty-percent interest in the Company's Western
Carpathian Concession. Under terms of the agreement, Apache agreed to pay
the Company $500,000 in initial cash consideration, all concession costs,
usufruct costs, training fees, the cost of acquiring 350 kilometers of 2D
seismic and the cost of drilling three exploratory wells, Apache will be
the operator of the Western Carpathian Concession.
On February 27, 1998, the Company also signed an option agreement with
Apache, whereby Apache may elect to earn a fifty-percent interest in the
Company's Pomeranian Concession. Apache has agreed to reprocess
approximately 1,000 kilometers of existing seismic data in the Pomeranian
Concession. Within six months of receiving the seismic data, but no later
than December 31, 1998, Apache must make an election to participate or not
participate in exploring the Pomeranian Concession with the Company. If
Apache elects to participate in the Pomeranian Concession, it will be
required to pay all concession, usufruct and training costs, the costs of
acquiring 600 kilometers of additional 2D seismic and the cost of drilling
one exploratory well during the first three year exploration period.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET AS OF DECEMBER 31, 1997, AND STATEMENTS OF OPERATIONS FOR
THE YEAR THEN ENDED, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,511,919
<SECURITIES> 3,940,582
<RECEIVABLES> 831,448
<ALLOWANCES> 0
<INVENTORY> 67,382
<CURRENT-ASSETS> 9,438,344
<PP&E> 10,781,823
<DEPRECIATION> 2,021,175
<TOTAL-ASSETS> 18,555,492
<CURRENT-LIABILITIES> 943,948
<BONDS> 0
<COMMON> 12,662
0
0
<OTHER-SE> 17,598,882
<TOTAL-LIABILITY-AND-EQUITY> 18,555,492
<SALES> 2,040,233
<TOTAL-REVENUES> 2,808,625
<CGS> 0
<TOTAL-COSTS> 10,082,798
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 83,273
<INCOME-PRETAX> (6,695,781)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,695,781)
<DISCONTINUED> 0
<EXTRAORDINARY> 3,076,242
<CHANGES> 0
<NET-INCOME> (3,619,539)
<EPS-PRIMARY> (0.29)
<EPS-DILUTED> (0.24)
</TABLE>
Apache Overseas, Inc.
2000 Post Oak Boulevard
Suite 100
Houston, TX 77056-4400
Telephone (713) 296-6000
Facsimile (713) 296-6450
27 February 1998
Mr. David Pierce
FX Energy, Inc.
3006 Highland Dr. #206
Salt Lake City, UT 84106
Dear David:
FX Energy and Apache Overseas agree that in respect of all their agreements for
acreage in Poland in which there are provisions relating to "Protection
Acreage", the following procedures will apply and will modify the provisions in
such agreements:
1) When a party ("Acquiring Party") to one of the agreements acquires acreage
covered by the Protection Acreage clause, it will inform the other party,
promptly, in writing.
2) No transfer of interest will take place at that time, and the potential
transferee shall not be involved in operations on the Protection Acreage
until the time referred to below.
3) When the Acquiring Party identifies and plans to drill a structure which
extends on to any which extends onto any part of the Protection Acreage, it
will inform the other party at least three months before the planned spud
date of a well, together with all relevant data, and give the other party
the opportunity to participate on a "ground floor" basis, equal to half the
interest of the offering party, in return for reimbursement of the same
share of the seismic and other G and G costs incurred by the Acquiring
Party in developing the prospect.
4) The other party will respond within on month, and if it elects to
participate, the parties will enter into additional documentation to give
the other party rights of beneficial ownership to one-half of Acquiring
Party's interest in the area covered by the prospect.
If you agree to the above, please so indicate by signing and returning a copy of
this letter.
Very truly yours,
/s/ Floyd R. Price
President
Accepted and agreed to this 1st day of March, 1998.
/s/ David N. Pierce
PARTICIPATION AGREEMENT
Dated Effective as of February 27, 1998
Between
APACHE OVERSEAS, INC.
and
FX ENERGY, INC.
Pertaining to the Western Carpathian Concession
<PAGE>
PARTICIPATION AGREEMENT
This Participation Agreement (this "Agreement"), is entered into effective
as of February 27, 1998, by and between FX Energy, Inc., a Nevada corporation
("FXEN), and APACHE Overseas, Inc., a Delaware corporation ("APACHE").
RECITALS
A. FXEN, through one or more subsidiaries, is the holder of or the applicant
for certain rights to explore for and exploit natural gas and oil (the
"Hydrocarbon Rights") in certain lands in the western Carpathian area of
the Republic of Poland pursuant to mining usufruct agreements.
B. APACHE wishes to acquire an undivided beneficial interest in the
Hydrocarbon Rights and FXEN is willing to transfer such interest to APACHE
and to grant operational control of the Hydrocarbon Rights to APACHE, all
on and subject to the terms and conditions set forth herein. APACHE and
FXEN intend to accomplish this by arranging for a wholly owned Polish
subsidiary of APACHE to become a partner in the applicable Polish
commercial partnership which currently holds or has applied for the
usufructs.
C. The parties have agreed to cooperate fully with each other in order to
accomplish their common primary goals to share the Hydrocarbon Rights and
to expedite the exploration and exploitation thereof under the operational
control of APACHE. If and to the extent the applicable law and regulatory
structure permit from time to time, AND SO LONG AS the same can be
accomplished without adverse tax or other consequences, the parties will
work together to transfer ownership of the Hydrocarbon Rights into separate
and several ownership.
NOW, THEREFORE, in consideration of the foregoing recitals, which are
incorporated herein by this reference, and for other good and valuable
consideration, the receipt and legal sufficiency of which are hereby
acknowledged, the parties hereto agree as follows.
DEFINITIONS
"Interest Transfer Documents" shall have the meaning given in Article 1 4.
"Participation Interest(s) shall have the meaning described in Article 1.5.
"Hydrocarbon Concession Block(s)" refers to one or more of the 480 numbered
rectangular areas, each encompassing approximately 1,000 square kilometers,
which in the aggregate comprise a grid promulgated by the Bureau of Geological
Concessions for the purpose of identifying hydrocarbon concession areas.
"Required Earning Well(s)" shall have the meaning given in Article 2.3.
"First 3-Year Exploration Phase" shall have the meaning given in the Usufruct.
"Second 3-Year Exploration Phase" shall have the meaning given in the
Usufruct."New Usufruct Area" refers to lands covered by the New Usufruct in one
or more of the following eighteen Hydrocarbon Concession Blocks: nos. 388, 389,
390, 391, 392, 393, 394, 39S, 396, 408, 409, 410, 411, 412, 413, 414, 415, and
416.
"New Usufruct" means the mining usufruct agreement being applied for by FX
Energy Poland Sp. z o.o. and Gasex Production Company Sp. z o.o., Commercial
Partnership, with the State Treasury of the Republic of Poland, represented by
THE MINISTER OF ENVIRONMENTAL PROTECTION, Natural Resources and Forestry in his
capacity as Concession Authority covering Hydrocarbon Rights in all or
designated portions of those lands comprising the New Usufruct Area.
"Western Carpathian Usufruct Area" refers to lands covered by the Western
Carpathian Usufruct in one or more of the following twelve Hydrocarbon
Concession Blocks: no. 410, 411, 412, 413,414, 415, 430, 431, 432, 433, 452, and
453.
"Western Carpathian Usufruct" means that certain Mining Usufruct Agreement dated
October 14, 1997, between FX Energy Poland Sp. z o.o. and Gasex Production
Company Sp. z o.o., Commercial Partnership, and the State Treasury of the
Republic of Poland, represented by the Minister of Environmental Protection,
Natural Resources and Forestry in his capacity as Concession Authority covering
Hydrocarbon Rights in all or designated portions of those lands comprising the
Western Carpathian Usufruct Area.
ARTICLE 1. MANNER OF OWNERSHIP AND TRANSFER OF INTERESTS
1.1 The parties acknowledge that this Agreement is intended to describe
the principal financial, business and operational terms and conditions of
their association in connection with the Hydrocarbon Rights.
1.2 The parties have selected the Polish commercial partnership as being the
structure which, in their best judgment, will best implement the terms
contained herein while minimizing the tax costs, administrative overhead
and operational complexity of their association. If and to the extent
possible, from time to time during their association, the parties will use
their commercially reasonable best efforts to utilize a structure which
most closely resembles the usual oil industry method of operating under a
joint operating agreement with several rather than joint ownership of the
Hydrocarbon Rights. As of the date ofthis Agreement; however, the parties
intend for APACHE to join, through one or more subsidiary Polish limited
liability companies, in the Polish commercial partnership which now holds
the Western Carpathian Usufruct.
1.3 The operating documents described in Article 3 will govern the actions,
rights and obligations of the parties, subject to the terms and conditions
of this Agreement. However, for the reasons set forth above in this
Article 1, the parties may subsequently elect or be required to use
alternative documents, methods or structures. For example, an obligation
to "pay" might ultimately be changed into an obligation to make an
unsecured loan repayable only out of production revenue. Similarly, the
names used herein, "APACHE", "FXEN"' and "POGC", shall be deemed to mean
the entities defined above and/or other entities used or created to serve
in their stead to implement the purposes of this Agreement.
1.4 Subject to the foregoing, each party shall (or shall cause its applicable
affiliate to) execute such documents and instruments (the "Interest
Transfer Documents") as may be necessary or appropriate in order that
APACHE and FXEN each initially shall own, indirectly through one or more
affiliates, a 50% beneficial interest in the Polish commercial partnership
which is the holder of the Western Carpathian Usufruct. Apache's full and
timely performance of the obligations set forth in Articles 2 below shall
be a condition subsequent to its ownership of its beneficial interest in
the Western Carpathian Usufruct and if and when issued, the New Usufruct,
provided that nothing herein shall terminate Apache's right to any
discovery made prior to full performance of such condition.
1.5 FXEN and APACHE acknowledge that POGC is expected to hold an option to
acquire or earn an interest in the Western Carpathian Usufruct and the New
Usufruct pursuant to an option agreement with all of the parties thereto
are currently negotiating. To the extent POGC acquires or earns such
interest or exercises such option, the interest acquired or earned by POGC
shall reduce the interests of both FXEN and APACHE in equal proportions,
and FXEN and APACHE shall share in equal proportions any consideration
received therefrom. The beneficial interest of FXEN, APACHE or POGC at any
given time in each usufruct is referred to herein as such party's
"Participation Interest".
1.6 FXEN will promptly cause the partnership to which the New Usufruct is
issued to promptly transfer to Apache's chosen affiliate a 50% interest in
such partnership and usufruct, when issued. The participation of the
parties in the New Usufruct shall be on a "ground floor" basis.
ARTICLE 2. PARTICIPATION OBLIGATIONS
2.1 Within fifteen (15) days of execution of this Agreement APACHE will pay to
FXEN a one-time fee of $500,000.
2.2 APACHE will pay all amounts referred to in the Western Carpathian Usufruct
that are required to maintain such Usufruct in full force and effect during
the First Three-year Exploration Period, consisting of the one-time mining
usufruct fee, the concession fees, and the annual training fees.
2.3 APACHE hereby commits to drill, test, and complete or abandon, and will pay
all of the APACHE and FXEN Participation Interest share of all costs of
drilling, testing, and abandoning (but not the costs after the decision to
run production casing, which shall be paid in proportion to Participation
Interests) each of the three wells specified in Articles 4.3 and 4.4 of the
Western Carpathian Usufruct. Such three wells are referred to herein as the
"Required Earning Wells". Each of the Required Earning Wells shall be an
exploratory well and not an appraisal or development well. APACHE will have
the ultimate decision in selecting the drilling location of each Required
Earning Well. Apache shall spud the first Required Earning Well in the
Western Carpathian Usufruct before December 31, 1999, and the remaining two
Required Earning Wells in the Western Carpathian Usufruct before June 30,
2000.
2.4 APACHE will pay all of the APACHE and FXEN Participation Interest share of
all costs in connection with the acquisition and processing of: (a) not
less than the 350 km of seismic in the Western Carpathian Usufruct area,
and (b) all seismic acquired or processed in the Western Carpathian
Usufruct Area until such time as the last of the Required Earning Wells
applicable to such Usufruct has been drilled and completed or abandoned,
provided, that FXEN shall pay its Participation Interest share of all
seismic acquisition over and above 500 km.
2.5 APACHE will pay all of the APACHE and FXEN Participation Interest share of
all costs of every kind connected with the ownership, administration and
operation of the Western Carpathian Usufruct until such time as the last of
the Required Earning Wells has been drilled and completed or abandoned.
After the last of the three Required Earning Wells has been drilled and
completed or abandoned, FXEN shall pay its Participation Interest share
of all costs relating to ownership, administration and operation including
drilling and seismic but excluding costs to be paid by Apache pursuant to
Article 2.2 during the First three-year Exploration Period. To the extent
APACHE authorizes or requests FXEN personnel to assist APACHE in initiating
relations and operational interactions in Poland pursuant to an agreed
budget, the cost will be borne by the joint account.
2.6 To the extent POGC pays for any of the items described in Article 2.2
through 2.5 above, APACHE's costs will be reduced by an equal amount.
2.7 APACHE shall pay the amount due under paragraph 2.1 above by wire transfer
to the account of FXEN at Bank One Texas, NA, in Houston, Texas. APACHE
shall pay the amounts required under paragraphs 2.2 through 2.5 in an
appropriate and timely manner.
2.8 If permission to acquire seismic is not granted within 30 days after a
properly completed application is submitted, or if permission to drill a
Required Earning Well is not granted within 60 days after a properly
completed application is submitted, then the requirement herein to spud the
applicable Required Earning Well shall be extended for a number of days
equal to such excess delay. If impenetrable strata or other cause prevents
drilling to required depth, a substitute well may be drilled by an
appropriately extended deadline. If any other event or circumstance beyond
the control of APACHE should cause a delay, then the time for performance
shall be appropriately extended.
2.9 If FXEN and APACHE jointly elect to drill one or more wells (other than
Required Earning Wells) in the general area of the Western Carpathian
Usufruct Area, they shall agree to an appropriate extension of time for
drilling the Required Earning Wells. With reference to that certain
Participation Agreement dated effective as of April 16, 1997, pertaining to
the Lublin area, FXEN and APACHE further agree that one of the three wells
required under Article 2.3 thereof to be spudded before July 1, 1999, may
instead be spudded before December 31, 1999, if APACHE so elects.
ARTICLE 3. CONDUCT AND CONTROL OF OPERATIONS
3.1 The parties intend for APACHE to have ultimate responsibility for the
conduct and control of operations through management and control of the
Polish commercial partnership which holds the Western Carpathian Usufruct.
To this end, the parties will promptly prepare amendments to the existing
Partnership Agreement, and prepare a Joint Operating Agreement and
Accounting Procedure (collectively with this Agreement, the "Operating
Documents"). In the event the anticipated structure or parties are changed,
the Operating Documents shall be changed accordingly.
3.2 The Operating Documents shall be deemed to apply to all operations carried
out hereunder, including the Required Earning Wells and the seismic
acquisition referred to in Article 2. FXEN and APACHE shall comply with the
requirements of the Operating Documents in the conduct of such operations,
except as specifically superseded by the terms of this Agreement. FXEN and
APACHE shall cooperate fully so as to enable APACHE's personnel to manage
the conduct and control of operations.
3.3 The Operating Documents shall contain provisions that are considered usual
or standard in the industry in operations of this kind; provided, that the
following specific substantive provisions (or functional equivalent) shall
be contained in the Operating Documents:
(a) Neither APACHE nor FXEN will charge the joint account for home office
general or administrative expenses, nor will they or the operator
charge the joint account a "drilling well rate" "producing well rate"
or "construction rate" or similar charge in lieu of overhead, but each
may charge the joint account for technical personnel while engaged in
operations, general or administrative expenses incurred in Poland
shall be properly allocated among projects and charged to the joint
account.
(b) The parties agree to cooperate in sharing information and finding the
best methods to market production of oil or gas.
(c) Each party to the Operating Documents, in proportion to its interest
therein, shall have the right (but not the obligation) to participate
on a "ground floor" basis in the construction, operation, and
ownership of any gathering line or processing facility proposed by any
other party thereto to be used in connection with production from
lands subject to the Operating Documents.
(d) FXEN and APACHE shall have the right of access at all reasonable times
and at their respective sole risk and expense to the seismic and other
operations and to the location of the Required Earning Wells and/or
the drilling operations provided they give reasonable notice of the
date such access is required and identify the representatives to whom
such access is to be granted.
(e) The Operating Documents shall provide for prior AFE approval of all
operations or construction anticipated to cost more than $200,000 and
shall provide for prepayment or "cash calls" at the request of the
operator.
(f) The Operating Documents shall not contain a "challenge of operator"
provision, but shall provide for change, replacement or resignation of
operator (or of the party in control of the operator) only in the
usual circumstances (e.g. bankruptcy, failure to comply with Usufruct
terms, reduction of interest below 15%, etc.).
(g) The "sole risk" or "non-consent" penalty contained in the Operating
Documents shall provide a 400% penalty in connection with development
wells and a complete loss of interest in the productive reservoir in
connection with non-development wells. In any Western Carpathian
Usufruct Area Block or New Usufruct Area Block not drilled during the
First 3-year Exploration Period, the non-consent penalty for the first
well drilled in such Exploration Block during the Second 3-year
Exploration Period shall be complete loss of interest in the
Exploration Block in question, unless each party elects to drill its
own sole risk well. There shall be a limit of four sole risk
development wells per year and two sole risk non-development wells per
year during the First 3-year Exploration Phase, and double those
numbers in the Second 3-year Exploration Phase.
(h) The Operating Documents shall provide that an operating committee
comprised of representatives of each participating party shall meet
from time to time and shall prepare an annual budget and schedule of
operations. Decisions shall be by majority interest and "deadlocks"
shall be "resolved" by sole risk or non-consent provisions.
(i) The Operating Documents shall provide that Polish contractors shall be
utilized preferentially if they are reasonably competitive in terms of
cost, availability, quality of work and speed of operation.
(j) The Operating Documents shall not contain a preferential right to
purchase provision, but shall provide for 60 days' prior notice to
afford an opportunity to make a competitive offer.
(k) The Operating Documents shall provide that, with respect to any
payments required to be made to any agency of the government of the
Republic of Poland or to the Polish Oil and Gas Company ("POGC"), if
evidence of payment has not been received by FXEN seven days prior to
the due DATE THEN FXEN SHALL HAVE the right, but not the obligation,
to make such payment and to receive reimbursement (plus interest at
the Accounting Procedure rate) from the operator or other responsible
party.
ARTICLE 4. PROTECTION ACREAGE
FXEN and APACHE hereby establish an area of mutual interest ("Halo")
consisting of all lands within 5 kilometers of the exterior boundaries of the
area of southwestern Poland bounded on the north by 50. 15' 00"; on the east by
22. 00' 00"; and on the south and west by the border of Poland. The Halo shall
expire two years after the effective date of this Agreement unless extended by
mutual agreement. After acquiring acreage within the Halo, the acquiring party
shall within 20 days after execution of a Usufruct or other agreement for a
given parcel of acreage offer the same to non-acquiring party for the latter's
participation on a "ground floor" 50%/50% basis, subject to proportional
reduction if and to the extent of any POGC participation.
ARTICLE 5. INFORMATION AND CONFIDENTIALITY
5.1 All information and data (geophysical, geological, engineering,production
marketing or otherwise) acquired or developed by the parties under this
Agreement in connection with joint operations hereunder shall be kept
confidential by the parties unless the release of such information to a
third party is agreed upon by the parties or until such information or
data otherwise becomes public information other than through breach by any
of the parties of the provisions of this Article. Such confidential data
and information shall not be traded, sold, exchanged or disclosed to
others except:
(a) to an affiliate for its use only, subject to the disclosing party
being responsible for such affiliate maintaining the confidentiality
of the data and information so disclosed, or
(b) as required by law or by any stock exchange on which the shares of a
party or an affiliate of a party are listed, or
(c) to a bona fide prospective purchaser or assignee, or
(d) to outside professional consultants of a party, provided that such
party shall promptly inform the other parties of the names of such
professional consultants, or
(e) to contractors by the operator if disclosure is necessary in
connection with the conduct of joint operations, or
(f) to financial institutions and investment banks and their consultants
where and to the extent such disclosure is necessary in connection
with financing arrangements.
Disclosures pursuant to (c), (d), (e) and (f), above, shall be made only
under written agreement of the party to whom disclosure is made not to
disclose for the period specified in Article 6.2 except as required by law.
The foregoing obligations shall remain binding on a party and its
affiliates after it ceases to be a party hereto.
5.2 The term during which information and data is to be kept secret and
confidential shall coincide with the term of this Agreement or for a period
of three years from the effective date of this Agreement, whichever is
later. For purposes of this Article 5 the term "party" shall include an
affiliate of a party.
5.3 The parties hereto agree to strictly observe and abide by the terms and
conditions governing data received by any of them from the government of
the Republic of Poland or from POGC or from any affiliate, division or unit
thereof.
ARTICLE 6. FURTHER ASSURANCE
The parties agree to execute and deliver to each other all such additional
documents and instruments and do all such further acts and things as may be
reasonably requested by any party to effectively carry out the intent of this
Agreement.
ARTICLE 7. ASSIGNMENT
7.1 Each of the parties may assign or transfer the whole or any part of its
interest in accordance with the terms of the Usufruct Agreement and the
Operating Documents provided that any assignee or transferee is a
financially responsible party and shall as a condition to such assignment
agree in writing to become a party to the Operating Documents and fulfill
the obligations of the assignor under this Agreement to the extent that
they are not fulfilled by assignor.
7.2 Neither party hereto shall sell or transfer its interest herein (other than
to a close affiliate or POGC) without first giving the other party hereto
60 days' prior notice of proposed sale in order to afford an opportunity to
make a competitive offer. No sale or other transfer (other than to a close
affiliate) shall convey a right to control operations or a right to benefit
from the terms referred to in Article 3.3(a).
7.3 The provisions of this Agreement shall inure to the benefit of and be
binding on the successors and permitted assignees of the parties.
ARTICLE 8. AMENDMENT; PRIOR AGREEMENTS
This Agreement may only be altered, varied or amended by written instrument
executed by all the parties. This agreement supercedes all prior agreements
between FXEN and Apache relating to the Western Carpathian Usufruct.
ARTICLE 9. RELATIONSHIP
9.1 The parties intend will operate as required through a Polish commercial
partnership to carry out the activities contemplated herein, but nothing in
this Agreement shall be construed as creating any other partnership of any
kind, or association or trust, or as imposing upon any party any duty,
obligation or liability of a partnership nature and each party shall be
individually and severally responsible hereunder only for its obligations
as set out in this Agreement.
9.2 Those parties subject to the taxing jurisdiction of the United States of
America agree to elect, under Section 761 (a) of the Internal Revenue Code
of 1986, as amended (the "Code"), to be excluded from all of the provisions
of Subchapter K of Chapter l, Subtitle A of the Code.
9.3 Notwithstanding anything to the contrary contained in this Agreement, a
party not subject to the income tax laws of the United States of America
shall not be required to do or execute anything which might subject it or
its income to any United States of America tax and nothing contained in
this Agreement shall constitute or shall be construed as constituting a
submission by any party to the taxation jurisdiction of the United State of
America.
ARTICLE 10. NOTICES
Any notice required to be given pursuant to this Agreement shall be in
writing and shall be given by delivering the same by hand at, or by sending the
same by prepaid first class post (confirmed by telefax/facsimile) or
telefax/facsimile to, the relevant address set out below or such other addresses
as any party wishing to change its address may notify to the other party from
time to time. Any such notice given as aforesaid shall be deemed to have been
given or received at the time of delivery (if delivered by hand), the first
working day next following the day of sending (if sent by facsimile) and the
first working day next following the day of receipt (if sent by post).
David Pierce, CEO Floyd R. Price, President
FX Energy, Inc. APACHE Overseas, Inc.
3006 Highland Drive, Suite 206 2000 Post Oak Boulevard
Salt Lake City, UT 84106 Houston, TX 77056-4400
Telephone: 1-801-486-5555 Telephone: 1-713-296-6000
Fax: 1-801-486-5575 Fax: 1-713-296-6451
ARTICLE 11. TERMINATION
In the event of termination of this Agreement for any reason, such
termination shall be without prejudice to any rights, liabilities and
obligations accrued or outstanding at the date of termination or otherwise
arising in respect of operations carried out prior to such termination.
ARTICLE 12. GOVERNING LAW; ARBITRATION
12.1 The laws of Texas shall govern the validity, construction, interpretation,
and effect of this Agreement, excluding any choice of law rules which would
otherwise require the application of laws of any other jurisdiction.
12.2 Any dispute arising in connection with this Agreement shall be exclusively
and finally settled by arbitration in Houston in accordance with the Rules
of the American Arbitration Association, which shall be the appointing
authority in case of need.
The arbitration panel shall render its decisions in writing, and such written
decisions and conclusions with respect to the disputes so settled shall be final
and binding on the parties to the arbitration proceeding, and confirmation and
enforcement of the awards so rendered may be obtained and entered in any court
having jurisdiction thereof.
IN WITNESS whereof the parties have caused this Agreement to be executed by
their duly authorized representatives the day month and year first above
written.
Signed this 27 day of February, 1998 Signed this 27 day of February, 1998
FX Energy, Inc. Apache Overseas, Inc.
/s/ David N. Pierce /s/ Floyd R. Price
PARTICIPATION OPTION AGREEMENT
Dated Effective as of February 27, 1998
Between
APACHE OVERSEAS, INC.
and
FX ENERGY, INC.
Pertaining to the Pomeranian Area Concession
<PAGE>
PARTICIPATION OPTION AGREEMENT
This Participation Option Agreement (this "Agreement"), is entered into
effective as of February 27, 1998, by and between FX Energy, Inc., a Nevada
corporation ("FXEN"), and APACHE Overseas, Inc., a Delaware corporation
("APACHE").
RECITALS
A. FXEN, through one or more subsidiaries, is the holder of certain rights to
explore for and exploit natural gas and oil (the "Hydrocarbon Rights") in
certain lands in the Pomeranian area of the Republic of Poland pursuant to a
Mining Usufruct Agreement.
B. APACHE wishes to acquire an undivided beneficial interest in the Hydrocarbon
Rights and FXEN is willing to transfer such interests to APACHE and to grant
operational control of the Hydrocarbon Rights to APACHE, all on and subject
to the terms and conditions set forth herein. APACHE and FXEN intend to
accomplish this by arranging for a wholly owned Polish subsidiary of APACHE
to become a partner in the Polish commercial partnership which currently
holds the applicable Usufruct.
C. The parties have agreed to cooperate fully with each other in order to
accomplish their common primary goals to share the Hydrocarbon Rights and to
expedite the exploration and exploitation thereof under the operational
control of APACHE. If and to the extent the applicable law and regulatory
structure permit from time to time, and so long as the same can be
accomplished without adverse tax or other consequences, the parties will work
together to transfer ownership of the Hydrocarbon Rights into separate and
several ownership.
NOW, THEREFORE, in consideration of the foregoing recitals, which are
incorporated herein by this reference, and for other good and valuable
consideration, the receipt and legal sufficiency of which are hereby
acknowledged, the parties hereto agree as follows.
DEFINITIONS
"Interest Transfer Documents" shall have the meaning given in Article 1.4.
"Participation Interest(s) shall have the meaning described in Article 1.5.
"Hydrocarbon Concession Block(s)" refers to one or more of the 480 numbered
rectangular areas, each encompassing approximately 1,000 square kilometers,
which in the aggregate comprise a grid promulgated by the Bureau of Geological
Concessions for the purpose of identifying hydrocarbon concession areas.
"Required Earning Well" shall have the meaning given in Article 2.2.
"First 3-Year Exploration Phase" shall have the meaning given in the Usufruct.
"Second 3-Year Exploration Phase" shall have the meaning given in the Usufruct.
"Pomeranian Usufruct Area" refers to lands covered by the Pomeranian Usufruct in
one or more of the following ten Hydrocarbon Concession Blocks: no. 85, 86, 87,
8%, 89, 105, 108, 109, 129, and 149.
"Pomeranian Usufruct" means that certain Mining Usufruct Agreement dated October
30, 1997, between FX Energy Poland Sp. z o.o. and Partners, Commercial
Partnership, and the State Treasury of the Republic of Poland, represented by
the Minister of Environmental Protection, Natural Resources and Forestry in his
capacity as Concession Authority covering Hydrocarbon Rights in all or
designated portions of those lands comprising the Pomeranian Usufruct Area.
ARTICLE 1. MANNER OF OWNERSHIP AND TRANSFER OF INTERESTS
1.1 The parties acknowledge that this Agreement is intended to describe the
principal financial, business and operational terms and conditions of their
association in connection with the Hydrocarbon Rights.
1.2 The parties have selected the Polish commercial partnership as being the
structure which, in their best judgment, will best implement the terms
contained herein while minimizing the tax costs, administrative overhead
and operational complexity of their association. If and to the extent
possible, from time to time during their association, the parties will use
their commercially reasonable best efforts to utilize a structure which
most closely resembles the usual oil industry method of operating under a
joint operating agreement with several rather than joint ownership of the
Hydrocarbon Rights. As of the date of this Agreement, however, the parties
intend for APACHE to join, through one or more subsidiary Polish limited
liability companies, in the Polish commercial partnership which now holds
the Pomeranian Usufruct.
1.3 The operating documents described in Article 3 will govern the actions,
rights and obligations of the parties, subject to the terms and conditions
of this Agreement. However, for the reasons set forth above in this Article
1, the parties may subsequently elect or be required to use alternative
documents, methods or structures. For example, an obligation to "pay" might
ultimately be changed into an obligation to make an unsecured loan
repayable only out of production revenue. Similarly, the names used herein,
"APACHE", "FXEN" and "POGC", shall be deemed to mean the entities defined
above and/or other entities used or created to serve in their stead to
implement the purposes of this Agreement.
1.4 Subject to the foregoing, and following Apache's timely and irrevocable
election described below in this Agreement, each party shall (or shall
cause its applicable affiliate to) execute such documents and instruments
(the "Interest Transfer Documents") as may be necessary or appropriate in
order that APACHE and FXEN each initially shall own, indirectly through one
or more affiliates, a 50% beneficial interest in the Polish commercial
partnership which is the holder of the Pomeranian Usufruct, if APACHE
elects to exercise its option Apache's full and timely performance of the
obligations set forth in Article 2 below shall be a condition subsequent to
its ownership of its beneficial interest in the Pomeranian Usufruct.
1.5 FXEN and APACHE acknowledge that FXEN may, in its absolute unfettered
discretion, grant to POGC an interest, or an option to acquire or earn an
interest, in the Pomeranian Usufruct, provided that any such agreement with
POGC is reduced to writing before the date on which APACHE is required to
make its election under Article 1.6. If a definitive agreement with POGC
has not been reached before the date on which APACHE's election is
required, and if APACHE makes an affirmative election, then any decision to
grant an interest or option to POGC shall be a joint decision of APACHE and
FXEN. To the extent POGC acquires or earns such interest or exercises such
option, the interest acquired or earned by POGC shall reduce the interests
of both FXEN and APACHE in equal proportions, and FXEN and APACHE shall
share in equal proportions any consideration received therefrom. The
beneficial interest of FXEN, APACHE or POGC at any given time in the
Pomeranian Usufruct is referred to herein as such party's "Participation
Interest".
1.6 Apache hereby agrees to reprocess approximately 1,000 km of existing
seismic in or near the Pomeranian Usufruct Area and to pay all of the costs
thereof. By March 15, 1998, FXEN and APACHE shall jointly select the lines
to be reprocessed and FXEN shall be responsible to obtain the applicable
data tapes, to the extent available. APACHE shall have the right,
exercisable at any time within six months after the data tapes have been
made available to APACHE or identified as unavailable, to elect to
participate in the Pomeranian Usufruct. Such election shall be made by
written notice to FXEN, and in no event shall the time for making such
election extend beyond December 31, 1998. If APACHE does not exercise its
election then it shall have no further obligation or right under this
Agreement except for the obligation to reprocess 1,000 km of existing
seismic and pay the costs thereof.
ARTICLE 2. PARTICIPATION OBLIGATIONS
2.1 If APACHE exercises its option then APACHE shall pay all amounts referred
to in the Pomeranian Usufruct that are required to maintain such Usufruct
in full force and effect during the First Three-year Exploration Period,
consisting of the one-time mining usufruct fee, the concession fees, and
the annual training fees.
2.2 If APACHE exercises its option then APACHE thereby shall commit to drill,
test, and complete or abandon, and will pay all of the APACHE and FXEN
Participation Interest share of all costs of drilling, testing, and
abandoning (but not the costs after the decision to run production casing,
which shall be paid in proportion to Participation Interests) the one well
specified in Article 4.3 of the Pomeranian Usufruct. Such one well is
referred to herein as the "Required Earning Well". The Required Earning
Well shall be an exploratory well and not an appraisal or development well.
APACHE will have the ultimate decision in selecting the drilling location
of the Required Earning Well. Apache shall spud the Required Earning Well
in the Pomeranian Usufruct Area at any time it decides within the First
3-year Exploration Period.
2.3 If APACHE exercises its option then APACHE will pay all of the APACHE and
FXEN Participation Interest share of all costs in connection with the
acquisition and processing of: (a) not less than the 600 km of seismic in
the Pomeranian Usufruct area, and (b) all seismic acquired or processed in
the Pomeranian Usufruct Area until such time as the Required Earning Well
has been drilled and completed or abandoned.
2.4 If APACHE exercises its option then APACHE will pay all of the APACHE and
FXEN Participation Interest share of ail costs of every kind connected with
the ownership, administration and operation of the Pomeranian Usufruct
until such time as the Required Earning Well and the two additional earning
wells described in Article 4.4 of the Pomeranian Usufruct have been drilled
and completed or abandoned. After the Required Earning Well and the two
additional earning wells described in Article 4.4 of the Pomeranian
Usufruct have been drilled and completed or abandoned, FXEN shall pay its
Participation Interest share of all costs of ownership, administration and
operation including drilling and seismic but excluding costs to be paid by
Apache pursuant to Article 2.1 during the First three-year Exploration
Period. To the extent APACHE authorizes or requests FXEN personnel to
assist APACHE in initiating relations and operational interactions in
Poland pursuant to an agreed budget, the cost will be borne by the joint
account.
2.5 To the extent POGC pays for any of the items described in Article 2.1
through 2.4 above, APACHE's costs will be reduced by an equal amount.
2.6 APACHE shall pay the amounts required under paragraphs 2.1 through 2.4 in
an appropriate and timely manner.
2.7 If impenetrable strata or other cause prevents drilling the Required
Earning Well to required depth, a substitute well may be drilled by an
appropriately extended deadline. If any other event or circumstance beyond
the control of APACHE should cause a delay, then the time for performance
shall be appropriately extended.
2.8 At any time after the Required Earning Well has been drilled, tested and
completed or abandoned APACHE shall have the right to elect not to
participate further in the Pomeranian usufruct. In such case, upon written
notice to FXEN, APACHE shall be relieved of any obligation thereafter
arising pursuant to Article 2.1, 2.3(b) or 2.4. The parties shall enter
into such documents of transfer as may be necessary or appropriate to
transfer to FXEN all of APACHE's right, title and interest in and to the
Pomeranian Usufruct.
ARTICLE 3. CONDUCT AND CONTROL OF OPERATIONS
3.1 Subject to full performance and a timely election by APACHE, the parties
intend for APACHE to have ultimate responsibility for the conduct and
control of operations through management and control of the Polish
commercial partnership which holds the Pomeranian Usufruct. To this end,
the parties will promptly prepare amendments to the existing Partnership
Agreement, and prepare Joint Operating Agreements and Accounting Procedures
(collectively with this Agreement, the "Operating Documents"). In the event
the anticipated structure or parties are changed, the Operating Documents
shall be changed accordingly.
3.2 The Operating Documents shall be deemed to apply to all operations carried
out hereunder, including the Required Earning Well and the seismic
acquisition referred to in Article 2. FXEN and APACHE shall comply with the
requirements of the Operating Documents in the conduct of such operations,
except as specifically superseded by the terms of this Agreement. FXEN and
APACHE shall cooperate fully so as to enable APACHE's personnel to manage
the conduct and control of operations.
3.3 The Operating Documents shall contain provisions that are considered usual
or standard in the industry in operations of this kind; provided, that the
following specific substantive provisions (or functional equivalent) shall
be contained in the Operating Documents:
(a) Neither APACHE nor FXEN will charge the joint account for home office
general or administrative expenses, nor will they or the operator
charge the joint account a "drilling well rate," "producing well rate"
or "construction rate" or similar charge in lieu of overhead, but each
may charge the joint account for technical personnel while engaged in
operations; general or administrative expenses incurred in Poland
shall be properly allocated among projects and charged to the joint
account.
(b) The parties agree to cooperate in sharing information and finding the
best methods to market production of oil or gas.
(c) Each party to the Operating Documents, in proportion to its interest
therein, shall have the right (but not the obligation) to participate
on a "ground floor" basis in the construction, operation, and
ownership of any gathering line or processing facility proposed by any
other party thereto to be used in connection with production from
lands subject to the Operating Documents.
(d) FXEN and APACHE shall have the right of access at all reasonable times
and at their respective sole risk and expense to the seismic and other
operations and to the location of the Required Earning Well and/or the
drilling operations provided they give reasonable notice of the date
such access is required and identify the representatives to whom such
access is to be granted.
(e) The Operating Documents shall provide for prior AFE approval of all
operations or construction anticipated to cost more than $200,000 and
shall provide for prepayment or "cash calls" at the request of the
operator.
(f) The Operating Documents shall not contain a "challenge of operator"
provision, but shall provide for change, replacement or resignation of
operator (or of the party in control of the operator) only in the
usual circumstances (e.g., bankruptcy, failure to comply with Usufruct
terms, reduction of interest below 15%, etc.).
(g) The "sole risk" or "non-consent" penalty contained in the Operating
Documents shall provide a 400% penalty in connection with development
wells and a complete loss of interest in the productive reservoir in
connection with nondevelopment wells. In any Pomeranian Usufruct Area
Block not drilled during the First 3-year Exploration Period, the
non-consent penalty for the first well drilled in such Exploration
Block during the Second 3-year Exploration Period shall be complete
loss of interest in the Exploration Block in question, unless each
party elects to drill its own sole risk well. There shall be a limit
of four sole risk development wells per year and two sole risk non
development wells per year during the First 3-year Exploration Phase,
and double those numbers in the Second 3-year Exploration Phase.
(h) The Operating Documents shall provide that an operating committee
comprised of representatives of each participating party shall meet
from time to time and shall prepare an annual budget and schedule of
operations. Decisions shall be by majority interest and "deadlocks"
shall be "resolved" by sole risk or NON-CONSENT PROVISIONS.
(i) The Operating Documents shall provide that Polish contractors shall be
utilized preferentially if they are reasonably competitive in terms of
cost, availability, quality of work and speed of operation.
(j) The Operating Documents shall not contain a preferential right to
purchase provision, but shall provide for 60 days' prior notice to
afford an opportunity to make a competitive offer.
(k) The Operating Documents shall provide that, with respect to any
payments required to be made to any agency of the government of the
Republic of Poland or to the Polish Oil and Gas Company ("POGC"), if
evidence of payment has not been received by FXEN seven days prior to
the due date then FXEN shall have the right, but not the obligation,
to make such payment and to receive reimbursement (plus interest at
the Accounting Procedure rate) from the operator or other responsible
party.
ARTICLE 4. PROTECTION ACREAGE
FXEN and APACHE hereby establish an area of mutual interest ("Halo")
consisting of all lands within 5 kilometers of the exterior boundaries of the
ten Hydrocarbon Concession Blocks which are subject to the Pomeranian Usufruct.
The Halo shall expire two years after the effective date of this Agreement
unless extended by mutual agreement. After acquiring acreage within the Halo,
the acquiring party shall within 20 days after execution of a Usufruct or other
agreement for a given parcel of acreage offer the same to non-acquiring party
for the latter's participation on a "ground floor" 50%/50% basis, subject to
proportional reduction if and to the extent of any POGC participation.
ARTICLE 5. INFORMATION AND CONFIDENTIALITY
5.1 All information and data (geophysical, geological, engineering, production
marketing or otherwise) acquired or developed by the parties under this
Agreement in connection with joint operations hereunder shall be kept
confidential by the parties unless the release of such information to a
third party is agreed upon by the parties or until such information or data
otherwise becomes public information other than through breach by any of
the parties of the provisions of this Article. Such confidential data and
information shall not be traded, sold, exchanged or disclosed to others
except:
(a) to an affiliate for its use only, subject to the disclosing party
being responsible for such affiliate maintaining the confidentiality
of the data ant information so disclosed, or
(b) as required by law or by any stock exchange on which the shares of a
party or an affiliate of a party are listed, or
(c) to a bona fide prospective purchaser or assignee, or
(d) to outside professional consultants of a party, provided that such
party shall promptly inform the other parties of the names of such
professional consultants, or
(e) to contractors by the operator if disclosure is necessary in
connection with the conduct of joint operations, or
(f) to financial institutions and investment banks and their consultants
where and to the extent such disclosure is necessary in connection
with financing arrangements.
Disclosures pursuant to (c), (d), (e) and (f), above, shall be made only
under written agreement of the party to whom disclosure is made not to
disclose for the period specified in Article 6.2 except as required by law.
The foregoing obligations shall remain binding on a party and its
affiliates after it ceases to be a party hereto.
5.2 The term during which information and data is to be kept secret and
confidential shall coincide with the term of this Agreement or for a period
of three years from the effective date of this Agreement, whichever is
later. For purposes of this Article 5 the term "party" shall include an
affiliate of a party.
5.3 The parties hereto agree to strictly observe and abide by the terms and
conditions governing data received by any of them from the government of
the Republic of Poland or from POGC or from any affiliate, division or unit
thereof.
ARTICLE 6. FURTHER ASSURANCE
The parties agree to execute and deliver to each other all such additional
documents and instruments and do all such further acts and things as may be
reasonably requested by any party to effectively carry out the intent of this
Agreement.
ARTICLE 7. ASSIGNMENT
7.1 Each of the parties may assign or transfer the whole or any part of its
interest in accordance with the terms of the usufruct Agreement and the
Operating Documents provided that any assignee or transferee is a
financially responsible party and shall as a condition to such assignment
agree in writing to become a party to the Operating Documents and fulfill
the obligations of the assignor under this Agreement to the extent that
they are not fulfilled by assignor.
7.2 Neither party hereto shall sell or transfer its interest herein (other than
to a close affiliate or POGC) without first giving the other party hereto
60 days' prior notice of proposed sale in order to afford an opportunity to
make a competitive offer. No sale or other transfer (other than to a close
affiliate) shall convey a right to control operations or a right to benefit
from the terms referred to in Article 3.3(a).
7.3 The provisions of this Agreement shall inure to the benefit of and be
binding on the successors and permitted assignees of the parties.
ARTICLE 8. AMENDMENT; PRIOR AGREEMENTS
This Agreement may only be altered, varied or amended by written instrument
executed by all the parties. This agreement supercedes all prior agreements
between FXEN and Apache relating to the Pomeranian usufruct.
ARTICLE 9. RELATIONSHIP
9.1 The parties intend will operate as required through a Polish commercial
partnership to carry out the activities contemplated herein, but nothing in
this Agreement shall be construed as creating any other partnership of any
kind, or association, or trust, or as imposing upon any party any duty,
obligation or liability of a partnership nature and each party shall be
individually and severally responsible hereunder only for its obligations
as set out in this Agreement.
9.2 Those parties subject to the taxing jurisdiction of the United States of
America agree to elect, under Section 761 (a) of the Internal Revenue Code
of 1986, as amended (the "Code"), to be excluded from all of the provisions
of Subchapter K of Chapter 1, Subtitle A of the Code.
9.3 Notwithstanding anything to the contrary contained in this Agreement, a
party not subject to the income tax laws of the United States of America
shall not be required to do or execute anything which might subject it or
its income to any United States of America tax and nothing contained in
this Agreement shall constitute or shall be construed as constituting a
submission by any party to the taxation jurisdiction of the United State of
America.
ARTICLE 10. NOTICES
Any notice required to be given pursuant to this Agreement shall be in
writing and shall be given by delivering the same by hand at, or by sending the
same by prepaid first class post (confirmed by telefax/facsimile) or
telefax/facsimile to, the relevant address set out below or such other addresses
as any party wishing to change its address may notify to the other party from
time to time. Any such notice given as aforesaid shall be deemed to have been
given or received at the time of delivery (if delivered by hand), the first
working day next following the day of sending (if sent by facsimile) and the
first working day next following the day of receipt (if sent by post).
David Pierce, CEO Floyd R. Price, President
FX Energy, Inc. APACHE Overseas, Inc.
3006 Highland Drive, Suite 206 2000 Post Oak Boulevard
Salt Lake City, UT 84106 Houston, TX 77056-4400
Telephone: 1-801-486-5555 Telephone: 1-713-296-6000
Fax: 1-801-486-5575 Fax: 1-713-296-6451
ARTICLE 11. TERMINATION
In the event of termination of this Agreement for any reason, such
termination shall be without prejudice to any rights, liabilities and
obligations accrued or outstanding at the date of termination or otherwise
arising in respect of operations carried out prior to such termination.
ARTICLE 12. GOVERNING LAW; ARBITRATION
12.1 The laws of Texas shall govern the validity, construction, interpretation,
and effect of this Agreement, excluding any choice of law rules which would
otherwise require the application of laws of any other jurisdiction.
12.2 Any dispute arising in connection with this Agreement shall be exclusively
and finally settled by arbitration in Houston in accordance with the Rules
of the American Arbitration Association, which shall be the appointing
authority in case of need.
The arbitration panel shall render its decisions in writing, and such written
decisions and conclusions with respect to the disputes so settled shall be final
and binding on the parties to the arbitration proceeding, and confirmation and
enforcement of the awards so rendered may be obtained and entered in any court
having jurisdiction thereof.
In WITNESS whereof the parties have caused this Agreement to be executed by
their duly authorized representatives the day month and year first above
written.
Signed this 27 day of February, 1998 Signed this 27 day of February, 1998
FX Energy, Inc. Apache Overseas, Inc.
/s/ David N. Pierce /s/ Floyd R. Price
OPTION AGREEMENT
Dated Effective as of February 2, 1998
Between
Polskie Gornictwo Naftowe I Gazownictwo S.A.
Oddzial Biuro Geologiczne - GEONAFTA
and
FX ENERGY, INC.
and
APACHE OVERSEAS, INC.
Pertaining to the Western Carpathian Area Concessions
<PAGE>
OPTION AGREEMENT
This Option Agreement (this "Agreement') is entered into on March 4, 1998, but
shall become effective when FXEN, APACHE and/or their subsidiary first obtains
one or more concessions under the New Usufruct, as that term is defined below.
This Agreement is between and among Polskie Gornictwo Naftowe I Gazownictwo
S.A., Oddzial Buro Geologiczne-GEONAFTA, ("POGC") and FX Energy, Inc., a Nevada
corporation ("FXEN") and APACHE Overseas, Inc., a Delaware corporation
("APACHE")
RECITALS
A. Through the support and cooperation of POGC, FXEN and APACHE (through Polish
subsidiaries) have acquired certain rights to explore for and exploit natural
gas and oil in the Western Carpathian region of the Republic of Poland, under
the FX/APA Usufruct and the New Usufruct (as defined in this Agreement).
B POGC has acquired certain rights to explore for natural gas and oil in the
same region, under the POGC Concessions (as defined in this Agreement). In
addition, POGC has acquired a substantial amount of geological and
geophysical data in the Western Carpathian region, and has generous1y shared
this data with FXEN and APACHE.
C. In view of the mutual interests of POGC, FXEN and APACHE in the Western
Carpathians, FXEN and APACHE wish to grant to POGC the option to participate
with them in operations on the FX/APA Usufruct and the New Usufruct and POGC
wished to grant to FXEN and APACHE the option to participate with POGC in
operations on the POGC Concessions.
NOW, THEREFORE, in consideration of thc foregoing recitals, which are
incorporated herein by this reference, and for other good and valuable
consideration, the receipt and legal sufficiency of which are hereby
acknowledged, the parties hereto agree as follows.
DEFINITIONS
"Participation Interest(s)" shall have the meaning described in Article 3.2.
"Hydrocarbon Concession Block(s)" or "Block(s)", refers to one or more of the
480 numbered rectangular areas, each encompassing approximately 1,000 square
kilometers, which in the aggregate comprise a and promulgated by the Bureau of
Geological Concessions for the purpose of identifying hydrocarbon concession
areas.
"FX/APA Usufruct"' means that certain Mining Usufruct Agreement dated October
14, 1997, between FX Energy Poland Sp. z o.o and Gasex Production Company Sp.
zo.o., Commercial Partnership and the State Treasury of the Republic of Poland,
covering the following twelve Hydrocarbon Concession Blocks no. 410, 411, 412,
413, 414, 415, 430, 431, 432, 433, 452 and 453.
"New Usufruct" means that certain Mining Usufruct Agreement now being applied
for by FXEN and APACHE in the region of southwestern Poland bordered on the
north by 50. 15' 00" north latitude, on the east by 22. 00' 00" east longitude,
on the south by 49. 50' 00" and on the west by the border of the Republic of
Poland, covering all or parts of Blocks 388-396 and 408-416.
"POGC Concession(s)" refers to one or more of the following. Rozlropica-Rudzica
35/95/p; ZywiecWadowice 6/95/p; Lachowice 9/95/p; Stryszawa-Lanckorona 4/96/p;
Wisniowa-Raciechowice 3/96/p; Gdow-Cichawa-Bochnia 17/96/p; Myslenice-
Limanowa-Czchow 14/95/p; Tarnow-Zawada-Garbek 5/97/p; Tarnow-Zawada 27/96/p.
ARTICLE 1. IDENTIFICATION OF INTERESTS
1.1 FXEN and APACHE, through wholly-owned subsidiaries, are the holders of
rights to explore for and explore natural gas and oil ("Hydrocarbon
Rights") in those lands covered by the FX/APA usufructs. POGC, directly or
through wholly-owned subsidiaries, is the holder of Hydrocarbon Rights in
those lands covered by the POGC Concessions. FXEN and APACHE, through
wholly-owned subsidiaries, have applied to the State Treasury of the
Republic of Poland for the New Usufruct with the consent and support of
POGC.
1.2 FXEN and APACHE have entered into agreements dividing the beneficial
interest in the FX/APA Usufruct and the New Usufruct between them initially
on a 50./50% basis. FXEN and APACHE to arrange for the FX/APA Usufruct and
the New Usufruct and the concessions issued pursuant thereto to be held by
a Polish comrnercia1 partnership comprised of one Polish limited liability
company owned by FXEN and another Polish limited liability company owned by
APACHE. In cases where this Agreement results in ownership being shared by
APACHE, FXEN and POGC, (or any two of them), they shall hold such
interests through a Polish commercial partnership composed of one Polish
limited liability company owned by POGC, another Polish limited liability
company owned by FXEN and another Polish limited liability company owned by
APACHE (or any two of them).
1.3 POGC as the sole owner of the POGC Concession, is not at present a party to
any operating agreement or similar document (other than the applicable
concession agreements) with respect to its ownership of the mineral rights
therein or the operation thereof. POCC will promptly inform FXEN and
APACHE in writing about any agreements affecting ownership of the interests
in and operations on the POGC Concessions. FXEN and APACHE are in the
process of drafting the documents which will govern their respective rights
and obligations, which at present include Partnership Agreements, Joint
Operating Agreements, and Accounting Procedure Agreements (collectively,
and including substitute documents, the "Operating Documents"). FXEN and
APACHE have agreed that APACHE will be responsible for management and
control of operations and of the partnerships which will hold the Usufructs
and the concessions. FXEN and APACHE will promptly inform POGG in writing
about any agreements affecting ownership of the interests in and operations
on the FX/APA or New Usufructs.
1.4 FXEN and APACHE have reviewed end analyzed a substantial amount of existing
data pertaining to the lands covered by the FX/APA Usufruct and the New
Usufruct and plan to review and analyze additional existing data. FXEN and
APACHE also plan to acquire a significant amount of new seismic data during
1989 and 1999. FXEN and APACHE are formulating plans for future activity,
and expect to drill a significant number of new exploratory wells in the
FX/USUFRUCT and the New Usufruct during 1998 and 1999, subject to data
supporting prospective drill sites.
ARTICLE 2. GRANT OF OPTIONS TO POGC
2. FXEN and APACHE hereby grant to POGC an option to take an interest of up to
thirty-three and one-third percent (33.333%) in all or part of the FK/APA
Usufruct and the New Usufruct.
2.2 POCC may exercise its option in each Usufruct on a "Block by Block" basis;
that is, it may take an interest in one, or several, or all of the
Hydrocarbon Concession Blocks in a particular Usufruct. In order to
maintain uniform interests, when POGC first designates the percentage
interest (other than zero percent) it will take in a Block within a
particular Usufruct, then it must thereafter take either the same (non-
zero) percentage, or it may take zero, with respect to all other Blocks in
the same Usufruct.
2.3 The FX/APA Usufruct and the New Usufruct cover only a small portion of the
land in certain Hydrocarbon Concession Blocks, either because of other
existing Usufructs or because the Blocks lie outside the territory of
Poland. Therefore, the following groups of Blocks will be considered just
one Block for purposes of the "Block by Block" option described in Article
2.2
a. Blocks 388, 389, 408 and 409;
b. Blocks 430, 431, 45O and 451; and
c. Blocks 452 and 453.
2.4 A discovery well in one Block may lead to the grant of a single
exploitation concession covering land within that Block as well as
contiguous land within an adjacent Block. In such case, the ownership
interests of the parties in such exploitation concession shall be the same
as their interests in the discover well first drilled by one or more of the
parties hereto after the date of this Agreement, whether or not a First
Well (defined below) has been drilled in the adjacent Block. For all
purposes of this Agreement, including the "Block by Block" option described
in Article 2.2, the land covered by the exploitation concession shall be
considered to be in the Block where the initial discovery was made.
ARTICLE 3. EXERCISE OF OPTION BY POGC
3.1 APACHE, as Operator, will provide at 1east 60 days' notice to POGO of its
intention to drill the first well after the date of this Agreement (the
"First Well") in each Block (as that term is modified by Articles 2.3 and
2.4) on lands covered by the FX/APA Usufruct or thc New Usufruct. The
notice of the proposed First Well shall include an estimate of costs, an
anticipated spud date, and technical information supporting the proposed
well, such as seismic sections, maps and petrophysical logs (where
available). If POGC wished to take an interest in such Block it may do so
by exercising its option as provided below and by participating in such
First Well. If POGC does not exercise its option and participate in any
particular First Well, it shall have no further interest in the Block (as
that term is modified by Articles 2.3 and 2.4) in which such First Well was
drilled.
3.2 POGC shall have thirty (30) days from the date of notice of a First Well to
give written notice to APACHE and FXEN the POGC has elected to join in the
proposed well and in the related Block. If POGC elects to exercise it
option, it shall designate in the notice of election the amount of interest
it wished to take (its "Participation Interest"), which may be any amount
up to the maximum permitted under Article 2.1, subject to the provisions
for uniform interest in Article 2.2. If POGC does not provide a notice of
election within said thirty (30) day period such failure shall be deemed
conclusively and irrevocably to be an election by POGC not to exercise the
applicable option. Any delay in the actual spud of the well shall not
extend the time for exercise of the option.
3.3 If POGC makes an affirmative election to join in a First Well, then it
shall be responsible for its Participation Interest share of all costs of
such well, regardless of whether such costs were incurred before or after
the election. In addition, POGC shall also be responsible for its
Participation Interest share of all other costs related to the applicable
Block which accrue on or after (but not before) the actual spud date of the
applicable First Well, including any usufruct fees, concession fees,
training fees, general and administrative costs, geological and geophysical
costs, drilling, production and operating costs, and taxes and royalties,
all in accordance with the Operating Documents.
3.4 If POGC makes an affirmative election to participate in a First We11 it
shall, within thirty (30) days after its notice of election, become a
signatory to the applicable Operating Documents.
ARTICLE 4. GRANT OF OPTIONS TO FXEN AND APACHE
4.1 POGC hereby grants to APACHE an option to take an interest of up to thirty
three and one-third percent (33.333%) in all or any one or more of the POGC
Concessions as specified in, Definitions. POGC hereby grants to FXEN an
option to take an interest of up to thirty three and one-third percent (33
333%) in all or any one or more of the POGC Concessions as specified in
Definitions.
4.2 FXEN and APACHE each may exercise its option independently of the other and
each may exercise its option on a "Usufruct by Usufruct" or "Concession by
Concession" basis; that is, each may take an interest in one, or several,
or al1 of the POGC Concessions.
ARTICLE 5. EXERCISE OF OPTIONS BY FXEN and APACHE
5.1 POGC, as Operator, will provide at least 60 days' notice to FXEN and APACHE
of its intention to drill the First Well after the date of this Agreement
in each POGC Concession. The notice of the proposed First Well shall
include an estimate of costs, an anticipated spud date, and technical
information supporting the proposed well, such as seismic sections, maps
and petrophysical logs (where available). In addition, the notice shall be
accompanied by copies of any and all documents relating to the applicable
mineral rights and the operations thereon. If either FXEN or APACHE wished
to take an interest in such POGC Concession may do so by exercising its
option as provided below and by participating in such First Well. If
either APACHE or FXEN does not exercise its option and participate in any
particular First Well, it shall have no further interest in the POGC
Concession in which such First Well was drilled.
5.2 FXEN and APACHE each shall have thirty (30) days from the date of notice of
a First Well.
5.3 If either FXEN or APACHE makes an affirmative election to join in a First
Well, then it will be responsible for its Participation Interest share of
all costs of such well, regardless of whether such costs were incurred
before or after the election. In addition, FXEN or APACHE, as applicable,
shall also be responsible for its Participation Interest share of all other
costs related to the applicable POGC Concession which accrue on or after
(but not before) the actual spud date of the applicable First Well,
including any usufruct fees, concession fees, training fees, general and
administrative costs, geological and geophysical costs, drilling,
production and operating costs, and taxes and royalties, al1 in accordance
with the Operating Documents.
5.4 If either FXEN or APACHE makes an affirmative election to participate in a
First Well it shall, within thirty (30) days after its notice of election,
become a signatory to a set of operating documents to be prepared which
mirror the Operating Documents referred to in Article 1.3.
5.5 In the event that one of FXEN or APACHE elects to take up its option on a
given POGC Concession and the other does not, the party electing to
exercise its option shall also have the right to take up al1 or part of the
share of the party which has elected not to exercise its option, on giving
notice to POCC to that effect within the time set out in Article 5.2 above.
The party electing to exercise its option shall not have the right to take
an interest greater than forty nine percent (49%) in the aggregate without
the consent of POGC.
ARTICLE 6. GRANT OF RIGHT TO INITIATE OPERATIONS ON POGC USUFRUCTS IN CERTAIN
CIRCUMSTANCES
6.1 It is possible that APACHE and FXEN may wish to initiate and conduct
geological and geophysical investigations or drilling operations on POGC
Concessions. In principle, POGC is willing to give its consent to such
activities on a case by case basis, especially in cases where APACHE and
FXEN agree to operate and pay for further investigations at their sole
risk. APACHE and FXEN are encouraged to present any detailed proposal for
consideration by POGC, including in such proposal the specific
investigations or operations proposed to be carried out at the sole risk of
APACHE and FXEN and the specific operations which will be earning events
under Articles 4 and 5. Subject to POGC approval, APACHE shall have the
right to serve as operator in the applicable POGC Concession pursuant to
the Operating Documents.
ARTICLE 7. INFORMATION AND CONFIDENTIALITY
7 1 All information and data (geophysical, geological, engineering, production
marketing or otherwise) provided to party hereunder shall be kept
confidential by such party unless the release of such information to a
third party is required by law. The term during which information is to be
kept secret and confidential shall coincide with the term of this Agreement
or for a period of three years from the effective date of this Agreement,
whichever is later.
7.2 The parties hereto agree to strictly observe and abide by the terms and
conditions governing date received by any of them from the government of
the Republic of Poland or from any party hereto.
7.3 The applicable operating party shall notify each of the other parties
hereto at least monthly of progress toward selection of First Wells. So
1ong as there is any POGC Concession, or any Hydrocarbon Concession Block
within the area covered by the FX/FPA Usufruct or the New Usufruct, where a
First Well has not been drilled, each party hereto shall have access to all
data of the other parties hereto pertaining to the selection of First Well
drill sites in, which the accessing party has a right to participate,
including all seismic and other geological, geophysical, geochemical and
production data, in order to allow such party to be ready to make its
determination whether or not to exercise its options.
ARTICLE 8. FURTHER ASSURANCE AND ASSISTANCE
The Parties agree to execute and deliver to each other all such additional
documents and instruments and do all such further acts and things as may bc
reasonably requested by any Party to effectively carry out the intent of this
Agreement. In particular, POGC will use its best efforts to help obtain the
necessary concessions and permits on behalf of itself; APACHE and FXEN in those
parts of the FX/APA Usufruct area and the New Usufruct area where POGC is or has
the right to be a participant.
ARTICLE 9. ASSIGNMENT; ABANDONMENT
9.1 To the extent that option rights under this Agreement have not yet become
exercisable, the rights and obligations under this Agreement shall be
assigned only to:
a. an affiliate of the assigning party; or
b. a third patty (with the prior consent of the other parties hereto
which shall not be unreasonably withheld in the case of a technically
and financially competent assignee) provided that such third party
also receives assignment of all the Usufruct rights of the assigning
party which are still subject to option rights of the other parties
hereto.
After exercise (or expiry, as the case may be) of any option granted
hereunder, the rights of the participating parties in any Usufruct shall be
governed by the Operating Documents which apply to that Usufruct.
9.2 Each party to this Agreement may exercise its rights and perform its
obligations hereunder through one or more subsidiaries or affiliates, in
which case the term "APACHE", "POGC" or "FXEN", as applicable, shall be
deemed to refer to and include such subsidiaries or affiliates.
9.3 If any party decides to abandon, relinquish or allow to expire undrilled
any Block or Usufruct that is subject to this Agreement, it shall give
notice to the other parties and an opportunity to take over such Block or
Usufruct on terms to be agreed at the time. The parties shall endeavor to
give notice sufficiently far in advance to allow the other parties adequate
time to evaluate, decide and commence any required operations.
ARTICLE 10. AMENDMENT
This Agreement may only be altered, varied or amended by written instrument
executed by all the parties.
ARTICLE 11. NOTICE
Any notice required to be given pursuant to this Agreement shall be in writing
and shall be given by delivering the same by hand at, or by sending the same by
prepaid first class post (confirmed by telefax/facsimile) or telefax/facsimile
to, the relevant address set out below or such other addresses as any party
wishing to change its address may notify to the other party from time to time.
Any such notice given as aforesaid shall be deemed to have been given or
received at the time of delivery (if delivered by hand), the first working day
next following the day of sending (if sent by facsimile) and the first working
day next following, the day of receipt (if sent by post).
FX Energy, Inc. Polish Oil and Gas Company
Geological Bureau - GEONAFTA
Attn: David N. Pierce Attn: Marek Hoffmann
3006 Highland Drive, Suite 206 Jagiellonska 76
Salt Lake City, UT 84106 03-301 Warsaw, Poland
Telephone: 1-801-486-5555 Telephone: 48-22-811-2606
Fax: 1-801-486-5575 Fax: 48-22-811-2878
APACHE Overseas, Inc.
Attn: Floyd R Price
2000 Post Oak Boulevard
Houston, Texas 77056-4400
Telephone: 1-713-296-6000
Fax: 1-713-296-6451
In WITNESS whereof the parties have caused this Agreement to be executed by
their duly authorized representatives the day month and year first written.
FX Energy, Inc. Polskie Gornictwo Naftowe Gazownictwo S. A.
Oddzia1 Buro Geologiczne - GEONAFTA
By /s/Andrew W. Pierce, Director By /s/ Marek Hoffmann, Director
Apache Overseas, Inc.
By /s/ Floyd R. Price, President
MINING USUFRUCT AGREEMENT
This Agreement is entered into this 16th day of October, 1997 by and between the
STATE TREASURY OF THE REPUBLIC OF POLAND (herein the "Treasury"), represented by
the Minister of Environmental Protection, Natural Resources and Forestry Mr.
Stanislaw Zelichowski (herein the "Minister'), acting through Dr. Krzysztof
Szamalek Secretary of State
and
[Entity Named on attached Schedule], a Polish commercial partnership (spolka
jawna) with its seat at Wal Miedzeszyuski 646, 03-994 Warszawa, Poland, entered
into the Commercial Register kept by the District Court in Warsaw, under number
RHA (herein the "Partnership"), represented by Mr. David N. Pierce.
WHEREAS, the Partnership desires to explore for Gold in the Republic of Poland;
and
WHEREAS, the Partnership, through its partners and their parent companies, has
the experience, financial and technical ability and resources, and professional
expertise efficiently to explore for Gold; and
WHEREAS, the ownership of all Gold existing in its natural condition within the
territory of the Republic of Poland belongs to the Treasury,
NOW, THEREFORE, the Parties agree as follows:
ARTICLE I
DEFINITIONS
1.1 The following terms when used in this Agreement shall have the meaning
ascribed to them in the Geological and Mining Law as in effect on the date
of this Agreement:
Prospecting
Exploration
Exploitation
Geological Documentation
Mineral Deposit
Mining Area
Geological Works
Geological Works Plan
1.2 The following terms when used in this Agreement shall have the meaning
ascribed to them hereunder:
1.2.1 "Block" means any of the areas designated by the Minister as
prospective concession areas for the purposes of granting concessions
regarding the Prospecting for and Exploration of Gold. At its
effective date, this Agreement covers one (1) Block identified and
described in Schedule "A" as [Block identified on attached Schedule].
1.2.2 "Concession" means a Prospecting Concession or an Exploitation
Concession.
1.2.3 "Prospecting and Exploration Concession" means the Concession granted
under the Geological and Mining Law for the Prospecting for and
Exploration of Gold, of the type referred to in Article 15.1 of the
Geological and Mining Law.
1.2.4 "Exploitation Concession" means the Concession granted under the
Geological and Mining Law for the Exploitation of Gold of the type
referred to in Article 15.2 of the Geological and Mining Law.
1.2.5 "Concession Effective Date" as to any particular Concession means the
date on which the Minister signs the Concession.
1.2.6 "Concession Operations" means all or any of the operations undertaken
pursuant by the applicable Concession.
1.2.7 "Exploration Period" means the six (6) years beginning on the
Concession Effective Date of the Prospecting and Exploration
Concession issued to the Partnership for the Block specified in
Schedule "A", provided that such period may be extended by agreement
of both Parties.
1.2.8 "Mining Usufruct Area " means the Block described in Schedule "A"
excluding any portion thereof in respect of which the Partnership's
rights hereunder are from time to time relinquished or surrendered by
thc Partnership.
1.2.9 "Designated Entity" means an entity designated by the Minister to
represent it for certain purposes under this Agreement as set forth in
Article XVII.
1.2.10 "Parties" means the Treasury and the Partnership, and "Party " means
either of the Parties.
1.2.11 "Geological and Mining Law" means the Act of February 4th, 1994.
1.2.12 "Gold" means gold in any quantity and form existing in the soil or
rock, whether as natural or anthropogenic, separately or in
combination with any other metals or metal ores. For the purposes of
this Agreement the term "Gold" shall also include deposits of any
other precious metals or other minerals which can. be discovered by
methods used in gold exploration.
1.2.13 "Affiliate" shall mean any party which, directly or indirectly,
controls, is controlled by or is under common control with the
Partnership or any of its partners. For the purposes of this Agreement
"control" shall mean the ability to direct strategic decisions of
another entity, whether by exercising voting rights at the
shareholders meeting, appointing members of governing bodies or
otherwise.
ARTICLE II
ESTABLISHMENT OF MINING USUFRUCT
2.1 The Minister acting on behalf of the Treasury, as the sole owner of the
Mineral Deposits, hereby establishes in favor of the Partnership a mining
usufruct in the Mining Usufruct Area regarding the Prospecting for and
Exploration of Gold. Such right is of an exclusive nature.
2.2 The mining usufruct regarding the Prospecting for and Exploration with
respect to the Block is subject to the Partnership obtaining a Prospecting
and Exploration Concession covering the Block.
2.3 Subject to the fulfillment by the Partnership of the requirements set forth
by law, upon request of the Partnership the Treasury shall enter with it
into a mining usufruct agreement regarding the Exploitation of Gold, on
terms and conditions agreed by the Parties and enabling continuation of
activities regarding exploitation of gold within a given block.
ARTICLE III
GRANT OF RIGHTS AND EFFECTIVENESS
3.1 This Agreement shall come into effect when signed by the Parties. If the
Prospecting and Exploration Concession referred to in Article 2.2 is not
granted within four (4) months after the Partnership submits the concession
application, then the Partnership shall have the right to immediately
terminate this Agreement by written notice within sixty (60) days'
following the expiration of the four-month period.
3.2 The Partnership shall submit application for the Prospecting and
Exploration Concession within ninety (90) days from the date hereof.
ARTICLE IV
WORK PROGRAM
The Partnership shall implement the work program described in Schedule B. The
Partnership will commence its work program not later than thirty (30) days after
the beginning of the Exploration Period. The Partnership shall expend not less
than US$20,000 during the first eighteen (18) months of the Exploration Period
in carrying out the work program Unless the Partnership shall have relinquished
the Mining usufruct Area at the end of the first part of the Exploration Period
lasting eighteen (18) months, the Partnership shall expend not less than
US$40,000 during months nineteen (19) through forty two (42) of the Exploration
Period in carrying out the work program Unless the Partnership shall have
relinquished the Mining usufruct Area at the end of the second part of the
Exploration Period, lasting 24 months, the Partnership shall expend not less
than US$100,000 during months forty three (43) through seventy two (72) of the
Exploration Period in carrying out the work program.
ARTICLE V
DESIGNATION OF MINING AREAS
5.1 During the term of this Agreement, if the Partnership discovers deposits of
Gold or Gold and other minerals which it believes can be extracted
profitably, the Partnership may elect to prepare appropriate documents and
requests:
5.1.1 approval of the Geological Documentation by the appropriate agency of
the state geological administration; and
5.1.2 establishing of mining usufruct regarding Exploitation and granting an
Exploitation Concession.
5.2 The Mining Area shall be designated based on geological documentation and
it will include the entire surface area within the contour of the deposit
of Gold, as demonstrated by the Geological Documentation.
ARTICLE VI
OWNERSHIP OF DATA AND GOLD
6.1 Ownership of all information and data obtained as a result of Concession
Operations shall be vested in the Partnership. The Partnership shall,
however, provide the Minister with the information and reports described in
Article 5.5 and 8.6.
6.2 Ownership of all Gold produced by the Partnership from the Mining Usufruct
Area shall pass to the Partnership upon separation from the soil or rock in
which it is deposited.
6.3 After the Concession Effective Date of the Prospecting and Exploration
Concession, the Partnership will have access to and the right to copy, free
of cost other than reasonable costs of reproduction and handling, all
geological, geophysical, geochemical, drilling, engineering, well log, and
other information and data relating to Gold owned or possessed by the
Treasury or the Minister in relation to the Block or to the work program
referred to in Article IV.
ARTICLE VII
RELINQUISHMENT
7.1 The Partnership may relinquish any part or all of the Mining Usufruct Area
at any time, but shall complete the expenditure of funds in carrying out
the then current work program which has accrued before such relinquishment.
7.2 Any areas to be relinquished under this Article shall be determined by the
Partnership, provided that areas to be relinquished shall be of sufficient
size and convenient shape to enable activities to be carried out thereon by
others. The Partnership shall give notice in writing to the Minister of
said area(s) no later than thirty (30) days prior to the intended
relinquishment, including a map showing said area(s) with the geographic
location and the coordinates of the connecting points of the boundary
lines. The Minister shall advise the Partnership within fifteen (15) days
of such notice whether it agrees with the area(s) selected for
relinquishment.
The Minister shall not refuse or withhold its consent if the aforementioned
criteria relating to size and shape are fulfilled and if the Partnership
meets the requirements set forth by regulations of law regarding protection
of the environment in respect to the areas to be relinquished.
ARTICLE VIII
CONDUCT OF OPERATIONS
8.1 The Partnership is responsible for the conduct of the Concession Operations
contemplated by this Agreement and the applicable Concession. All capital,
machinery, equipment, technology and personnel which is necessary for the
Partnership to conduct Concession Operations will be for ten account of the
Partnership.
8.2 The Partnership shall conduct the Concession Operations diligently and in
accordance with the laws of Poland and good international mining sector
practices as designed to permit the economic, efficient and safe
exploration for and development of Gold.
8.3 The Minister will endeavor to provide the Partnership with assistance as
described below when the Minister believes it is in the best interest of
the Partnership to do so, but failure to provide the described assistance
will not result in an extension of time in which the Partnership is to
perform the relevant obligations, nor create any liability or
responsibility on the part of the Treasury.
8.3.1 The Minister will assist the Partnership in its application for and
insofar as possible in granting by national and local Polish
government of permissions required for the performance of Concession
Operations, including, but not limited to, licenses, permits,
approvals, authorizations, consents, visas, work permits, surface
rights and easements.
8.3.2 The Minister will assist in obtaining and providing to the Partnership
such general information, other than information referred to in
Article 6.3, as may be reasonably required by the Partnership for
planning and executing projects incidental to Concession Operations.
8.4 Prior to commencing any Geological Works, the Partnership shall submit to
the Minister the applicable Geological Works Plan.
8.5 The Partnership shall provide to the Minister or to the Designated Entity,
as defined in Article XVII, data and information collected and compiled
with respect to Concession Operations in the Mining Usufruct Area, as
follows:
8.5.1 one set of geological reports, studies, or interpretations and the
maps, sections and other documents related thereto;
8.5.2 one set of all geophysical recordings, measurements and reports, with
all maps profiles, sections, interpretations, studies, and other
documents relating thereto;
8.5.3 one set of final well reports and composite logs representing the
Ethnology and other parameters relating to each well drilled;
8.5.4 a representative portion of all cores, samples and other materials
taken from outcrops and wells; and
8.5.5 one set of analyses or other results in final form produced by or for
the Partnership in connection with Concession Operations.
All of such information shall be kept confidential by the Minister or
the Designated Entity for a period of one year after it is provided.
8.6 The Partnership shall make such other reports to the Minister in such form,
detail and at such time as the Minister may reasonably require with respect
to exploration, production, employment or training, or such other matters
related to the conduct of Concession Operations hereunder, provided,
however, that the Minister's requests for such reports shall not interfere
unreasonably with the Partnership's ability to carry out Concession
Operations efficiently or necessitate any undue expense. Pursuant to the
above mentioned determination, the Partnership shall submit annually to the
Minister a report of the progress of the work and a short memorandum of the
results thereof.
8.7 The Partnership shall give prompt written notice to the Minister in the
event of any change of the Partnership's name, organizational form,
increase or decrease of the partners' contributions to the Partnership,
petition for bankruptcy, restructuring of debt, or liquidation. The
Minister may request any necessary clarification in these matters. For the
avoidance of doubt, none of the above shall require the consent of the
Treasury.
ARTICLE IX
PROTECTION OF ENVIRONMENT AND SAFETY
9.1 The Partnership shall conduct Concession Operations in accordance with the
laws of Poland and good international mining industry practice relating to
the protection of the environment, including but not necessarily limited to
the following:
9.1.1 The Partnership shall in particular take all commercially reasonable
steps required by Polish law and good international mining industry
practice to:
a ensure that its operations minimize ecological damage or
destruction;
b. prevent damage to Gold or ground water bearing strata; and
c. prevent damage to land, fresh water supplies, animal life, flora,
crops, buildings or other structures.
9.1.2 If there is a release of any hazardous material on land, fresh water,
or any other form of pollution or other harm to fresh water, land,
animal life or flora as a result of Concession Operations, the
Partnership shall promptly take all necessary measures to control the
pollution, to clean up any released material or to repair, to the
extent commercially feasible, any damage resulting from such
circumstances.
9.1.3 In the event of an emergency the Partnership shall notify the Minister
immediately and shall take such action as may be prescribed by the
appropriate governmental authority and otherwise act in accordance
with good international mining industry practice.
9.1.4 The Partnership shall take steps to ensure restoration of the
operating environment upon termination of the Concessions. The
Partnership shall provide the Minister a copy of the plans for
restoration of the operating environment that are required by law.
ARTICLE X
EMPLOYMENT AND TRAINING
10.1 Subject to the applicable provisions of law, the Partnership shall be free
to employ such personnel and sub-contractors as it may choose for the
purpose of carrying out the Concession Operations. To the extent the
Partnership deems it reasonable and prudent to do so, and as far as is
consistent with efficient operations and with the Partnership's
responsibility for the conduct of the Concession Operations, in recruiting
employee candidates the Partnership shall give preference to Polish
citizens who are qualified by education, training and experience to conduct
the tasks for which they are considered; and in selecting subcontractors to
carry out the Concession Operations in the Republic of Poland the
Partnership shall give preference to Polish sub-contractors, provided they
are competitive in terms of quality, cost, and the ability to meet required
schedules.
10.2 The Partnership shall provide such training as it deems appropriate for
Polish citizens employed directly or indirectly in the Concession
Operations during term of this Agreement.
ARTICLE XI
ASSIGNMENT
11.1 The Partnership has the right to assign or transfer all or part of its
rights and obligations under this Agreement to any Affiliate. Upon request
of the Partnership, the Treasury shall execute such documents as the
Partnership may reasonably require to evidence the Treasury's consent to
such transfer to a particular Affiliate. The Partnership has the right to
assign or transfer all or part of its obligations and rights under this
Agreement to any third party, subject to the requirement that the
Partnership obtain the prior written consent of the Treasury, which consent
shall not be unreasonably withheld or delayed provided that the Minister
shall be satisfied that any such assignee shall be technically and
financially able to carry out the terms and conditions of this Agreement.
11.2 A change of the legal persons who form the Partnership or a change of
ownership of shares of any of such legal persons shall not be considered an
assignment or transfer of rights under this Agreement and shall not require
the consent of the Treasury.
ARTICLE XII
FORCE MAJEURE
12.1 Performance under this Agreement by the Partnership or the Treasury shall
be excused in the event such performance is delayed or prevented by acts of
Force Majeure. Acts of Force Majeure are events beyond the reasonable
control of the Party claiming to be affected by any such event, which have
not been brought about at its insistence and include, but are not limited
to, war, insurrection, riot, civil disorder, embargo, blockade, explosion,
fire, lightening, earthquake or other adverse weather conditions, strikes,
non-availability of equipment, failure to obtain public or private permits
or authorizations to explore the Mining usufruct Area, or any other event
of a similar nature, whether or not of the same type or kind. The Parties
shall use reasonable diligence to seek to overcome the obstacle and resume
performance within a reasonable time after the obstacle is removed.
12.2 If Concession Operations are delayed, curtailed or prevented by such
causes, then the time for carrying out the obligations affected thereby,
the duration of the relevant period of Concession Operations, the term of
this Agreement, and all rights and obligations hereunder, all shall be
extended for a period equal to the delay caused by the Force Majeure
occurrence plus such period of time as is necessary to reestablish
operations.
12.3 The Party whose ability to perform its obligations is so affected shall
notify forthwith the other Party thereof in writing stating the cause, and
the Parties shall do all that is reasonably within their power to remove
such cause.
ARTICLE XIII
TERMINATION
13.1 The Partnership may terminate this Agreement, in whole or in part, on sixty
(60) days' notice subject to implementation of the work program prescribed
for the part of the Exploration Period (pursuant to Article IV) within
which the Partnership declares termination of the Agreement.
13.2 In the event the Partnership takes an action or fails to take an action
which results in a material breach of this Agreement, then within sixty
(60) days of receiving written notice from the Minister of such alleged
material breach the Partnership shall take action reasonably intended to
remedy such alleged breach If within the time allowed the Partnership fails
to take remedial action, then the Minister, on behalf of the Treasury, may
give the Partnership a notice of termination and then this Agreement shall
terminate upon expiration of sixty (60) days from the receipt of such
notice by the Partnership, subject to Article 13.3 below.
13.3 Should the Partnership dispute the existence of circumstances in Article
13.2, the Partnership may refer the dispute, at any time before the end of
sixty (60) days after receipt of the notice of termination from the
Minister, to arbitration as provided by Article XIV and termination of the
Agreement by the Minister on behalf of the Treasury shall be suspended and
not take effect except under the terms of any arbitration award which
results.
ARTICLE XIV
ARBITRATION
141 Any dispute as to any matter or operation arising out of or in connection
with this Agreement, including, without limitation, any dispute as to the
validity, construction, enforceability or breach of this Agreement shall be
exclusively and finally settled by arbitration, and any Party may submit
such a dispute to arbitration.
14.2 Arbitration proceedings shall be conducted by three (3) arbitrators in
accordance with the Rules of UNCITRAL, the United Nations Commission on
International Trade Law.
14.3 Unless otherwise agreed in writing by the Parties, the third arbitrator
appointed pursuant to Article 14.2 shall not be a national of Poland or of
the same nationality as the main shareholder(s) of Partnership.
14.4 In any arbitration proceeding hereunder:
14.4.1 proceedings shall, unless otherwise agreed in writing by the Parties,
be held in Warsaw, Poland;
14.4.2 the Polish language shall be the official language for all purposes;
and
14.4.3 the decision of the majority of the arbitrators shall be final and
binding and shall be enforceable in any court of competent
jurisdiction.
14.5 The costs of arbitration shall be borne in the manner determined by the
arbitration tribunal.
14.6 Each of the Parties hereby irrevocably waives any and all claims to
immunity in regard to the arbitration proceedings and any proceedings to
enforce, recognize or execute any arbitral award rendered by a tribunal
constituted pursuant to this Agreement including, without limitation,
sovereign immunity, immunity from service of process, immunity from
jurisdiction of any court, and immunity of such of its property as is of a
commercial nature from execution.
ARTICLE XV
GOVERNING LAW AND STABILIZATION
15.1 This Agreement shall be governed by the laws of Poland and international
treaties which Poland has adopted.
15.2 The Minister on behalf of the Treasury acknowledges that the Partnership
has entered into this Agreement in reliance on the Polish law as in
existence on the date the Partnership executes this Agreement, particularly
the laws and ordinances relating to Article 84 exploitation charges
(subject to Article 15.3 below), taxation, the export of Gold, and the
repatriation of profits. The Minister on behalf of the Treasury hereby
represents that all rights granted to the Partnership hereunder are in
conformity with Polish law as in effect on the date the Partnership
executes this Agreement, as such law applies to the Partnership. In the
event that any change to the law of Poland occurs or the Government takes
any other action which restricts, divests or limits any rights or benefits
accruing to the Partnership or which increases the Partnership's
obligations or costs of operation under this Agreement or under the law of
Poland, the Partnership may, at any time thereafter so notify the Minister
in writing. Promptly upon receipt of such notice, the Minister and the
Partnership shall meet to negotiate in good faith and agree upon the
modifications which need to be made to the terms of this Agreement to
restore the Partnership's rights and benefits to a level equal to what they
would have been had such change not occurred, or upon such other remedy as
they agree may be appropriate. In the event the Parties are unable to agree
within ninety (90) days after the Partnership's notice to the Minister upon
the modifications which are needed to the Agreement or upon such other
remedy as may be required, then either Party may at any time thereafter
refer the matter or matters in dispute to arbitration pursuant to Article
XIV.
15.3 The Partnership and the Treasury acknowledge that the Council of Ministers
has not specified the Article 84 exploitation charge rate with respect to
Gold in Poland, that the statutory default rate is 10%, and that this rate
could make Gold Exploitation non-economic. The Minister shall initiate a
procedure to review the exploitation charge for Gold and consider
specifying the exploitation charge for Gold at a reasonable lower level.
ARTICLE XVI
MINING USUFRUCT FEES & OTHER PAYMENTS
16.1 The Partnership shall pay the Treasury a mining usufruct fee as follows:
16.1.1 As mining usufruct fee with respect to the Prospecting and Exploration
for one Block, the Partnership shall pay the Polish zloty equivalent
of US$ 7,500 within 60 days from obtaining the Exploration Concession.
16.1.3 The mining usufruct fee shall be paid to the following bank account:
Ministry of Environmental Protection,
Natural Resources and Forestry
Biuro Adrninistracyjno-Budzetowe
NBP 0/0 Warszawa
account# 10101010-680-273-1
title: 28.31.3996 S 64 - Mining usufruct fee;or such other account as
the Minister may notify to the Partnership in writing.
16.2 The concession fee referred to in Article 85 of the Geological and Mining
Law of February 4, 1994 shall amount to the zloty equivalent of US $7,500,
payable in full within sixty (60) days from obtaining the Exploration
Concession. Sixty percent (60%) of the fee shall constitute the revenue of
the local authorities on whose territory the activities under the
Exploration Concession are to be conducted and the remaining forty percent
(40%) shall constitute the revenue of the National Fund for Environmental
Protection and Water Management.
ARTICLE XVII
DESIGNATED ENTITY
17.1 The Minister may designate an entity of its choice to represent the
Minister for the purposes of receipt and safekeeping of reports,
interpretations, maps, data, cores, samples, and other information.
17.2 The appointment of a Designated Entity notwithstanding, the Treasury shall
remain responsible to the Partnership for al of its obligations to the
Partnership as provided herein
17.3 The Minister shall notify the Partnership in writing of its naming of the
Designated Entity, of the specific purpose to which such designation
relates, and of all communication and other details which the Partnership
requires to know about such Designated Entity. Such notification shall be
made in good time to enable the Partnership to comply with its obligations
hereunder and so as not to disrupt or delay Concession Operations.
ARTICLE XVIII
NOTICES
18.1 All notices, applications, requests, agreements, approval, consents,
instructions, delegations, waivers or other communications to be given,
submitted or made hereunder by any Party to another shall be sufficiently
given if in writing and delivered in person to an authorized representative
of the Party to whom such notice is directed or when sent by registered
post, postage paid, or by telegram, telex, facsimile or cable, to the
address or addressee of the other Party as follows, or to such other
address as a Party may specify in writing to the other:
for the Treasury Jacek Wroblewski, Vice-Director
or the Minister: Department of Geology and Geological Concessions
Ministry of Environmental Protection,
Natural Resources and Forestry
52/54 Wawelska Street
00-922 Warszawa Poland
Facsimile: 25-15-03
for the Partnership: David N. Pierce
FX Energy Poland Sp. z o.o. & Partners
(Block 43), Commercial Partnership
Wal Miedzeszyuski 646
03-994 Warszawa Poland
Facsimile: 671-6640, 671-97-72
18.2 Notices when given in terms of Article 18.1 shall be made in the Polish
language, shall be effective when delivered, if delivered during business
hours of working days; if received outside business hours such notices
shall be effective on the next following working day.
18.3 The Partnership shall appoint, by written notice to the Minister, a
plenipotentiary for cooperation with the Minister and other state
authorities. Such plenipotentiary shall be authorized to act on behalf of
the Partnership in any matters regarding this Agreement. The first such
plenipotentiary shall be Mr. David N. Pierce. Any removal of
plenipotentiary and appointment of a new one shall require a written notice
to the Minister.
IN WITNESS WHEREOF, the representatives of the Parties to this Agreement being
duly authorized have hereunto set their hands and have executed these presents
this 16th day of October 1997.
The Minister of Environmental Protection, FX Energy Poland Sp. z o.o.
Natural Resources and Forestry & Partners (Block 43),
of The Republic of Poland commercial partnership
by: /s/ Krzysztof Szamalek by: /s/ David N. Pierce
<PAGE>
SCHEDULE TO
FORM OF
MINING USUFRUCT AGREEMENT
Name of FX Energy-related entity Concession Block(s) covered
- ---------------------------------- ---------------------------
FX Energy Poland Sp. zo.o. &
Partners (Block 43), Commercial Block 43
Partnership
FX Energy Poland Sp. zo.o. &
Partners (Block 63), Commercial Block 63
Partnership
FX Energy Poland Sp. zo.o. &
Partners (Block 64), Commercial Block 64
Partnership
FX Energy Poland Sp. zo.o. &
Partners (Block 65), Commercial Block 65
Partnership
EARN-IN, EXPLORATION, AND JOINT VENTURE AGREEMENT
This EARN-IN, EXPLORATION, AND JOINT VENTURE AGREEMENT between HOMESTAKE MINING
COMPANY OF CALIFORNIA, a California corporation having its principal place of
business at 650 California St., San Francisco, California 94108 ("Homestake"),
and FX ENERGY, INC., a Utah corporation having its principal place of business
at 3006 Highland Drive, Suite 206, Salt Lake City, Utah 84106 ("FX"), is entered
into as of the date of the execution hereof ("Effective Date") to establish
terms and conditions upon which Homestake and FX will engage in exploration for
precious metals in an area in the Republic of Poland more particularly described
in Section 1.1 of this Agreement.
WHEREAS:
(A) The principal activity of FX is the exploration and development of
properties having potential for oil and gas deposits;
(B) The principal activity of Homestake is the exploration, extraction,
processing, and marketing of precious metals;
(C) FX has obtained, acting by and through Sudety, certain usufructs and
concessions for the exploration for precious metals on properties located
in the Area of Interest;
(D) FX and Homestake, acting by and through certain commercial partnerships in
contemplation of this Agreement, have obtained four additional usufructs
for exploration for precious metals in the Area of Interest, and intend to
apply for related concessions; and
(E) FX and Homestake desire to associate themselves for the purpose of
exploring for and, if justified, exploiting precious metal deposits in the
Area of Interest.
IT IS AGREED as follows:
ARTICLE 1
INTERPRETATION
1.1 Definitions
In this Agreement and its Exhibits the following terms shall have the following
meanings unless the context otherwise requires:
"Affiliate" means any person, partnership, joint venture, limited liability
company, corporation or other form of enterprise which directly or indirectly
controls, or is controlled by, or is under common control with, a Party. For
purposes of the preceding sentence, the word "control" shall mean possession,
directly or indirectly, of the power to direct or cause direction of management
and policies through ownership of voting securities, contract, voting trust or
otherwise.
"Area of Interest" means that area bounded on the north by latitude 51. 30' N,
on the east by longitude 17. 30' E, and on the south and west by the border of
the Republic of Poland and is that area shown on the map attached hereto as
Exhibit A.
"Articles" means, in the case of a Holding Vehicle which is a limited liability
company, the Articles of Incorporation of such company and, in the case of a
Holding Vehicle which is a commercial partnership, the Articles of Partnership,
as the context may require.
"Business" means the exploration, and any development and exploitation of
property covered by one or more Mineral Entitlements and all partnership,
corporate, and other business matters directly or indirectly related thereto,
including related processing, refining, sale of product, and reclamation of
mined lands.
"Committed Expenditures" has the meaning ascribed to such term in Section
6.2(b).
"Distributive Interest" means the right of FX to receive payments from a Holding
Vehicle subsequent to any election or deemed election pursuant to Section
7.7(d), 7.7(e) or 7.7(f), provided that, if the Holding Vehicle is a
partnership, such right shall be a partnership interest; and, if the Holding
Vehicle is a limited liability company or other entity, such right shall be a
contractual right to receive payment from the Holding Vehicle.
"Encumbrance" means any mortgage, charge (whether fixed or floating), lien,
hypothecation, pledge, encumbrance, security interest or other right or interest
of every nature or kind over or in respect of a particular asset.
"Expenditures" has the meaning ascribed to it in Section 6.2(b)
"Exploitation Fee" has the meaning ascribed to such term in Section 7.4(b)
"Holding Vehicle" means a Polish commercial partnership, Polish limited
liability company, or other Polish legal entity holding a Mineral Entitlement or
application therefor subject to the provisions of this Agreement.
"Homestake Earned Interest" has the meaning ascribed to such term in Section
6.1.
"Initial Capital Contribution" means for each Party the value attributed to the
property and funds contributed (by Loan or otherwise) by such Party to a Joint
Venture on the date of its formation and is calculated for FX by dividing the
total amount expended in connection with the related Mineral Entitlement(s) as
of the date of the formation of the related Joint Venture by 0.75 and
multiplying such product by 25% and for Homestake by multiplying such product by
75%.
"Insolvency Event" has the meaning ascribed to such term in Section 23.2(b).
"Joint Venture" means one or more joint ventures created pursuant to Article 9
between Homestake and FX in respect of Mineral Entitlement(s) as to which FX has
made an election pursuant to Section 7.7(c) and the Holding Vehicle holding such
Mineral Entitlement(s).
"loan(s)" means one or more interest-bearing advances made to one or more
Holding Vehicles (i) by Homestake pursuant to Sections 6.5 and 8.1, and (ii) by
FX and Homestake and their respective Affiliates pursuant to Section 8.2(b).
"Mineral Entitlement(s)" shall have the meaning ascribed to such term in Section
3.2.
"Operator" means the person or entity engaged by any Holding Vehicle to manage
its Business.
"Ownership Interest" means for Homestake and for FX, respectively, in the event
and to the extent FX makes one or more elections pursuant to Section 7.7(c):
(1) in the case of a Holding Vehicle which is a limited liability company, the
direct and indirect ownership of a percentage of the share capital of such
company, the indirect ownership in the same percentage of such company's
Mineral Entitlement(s) as to which FX has made an election pursuant to
Section 7.7(c), and the related Joint Venture, including but not limited to
the obligation to fund or otherwise pay the costs of such Holding Vehicle
in proportion to such ownership by and through its related Joint Venture;
and
(2) in the case of a Holding Vehicle which is a commercial partnership, the
direct and indirect ownership of a percentage interest in -such
partnership, the indirect ownership in the same percentage of such
partnership's Mineral Entitlement(s) as to which FX has made an election
pursuant to Section 7.7(c), and the related Joint Venture, including but
not limited to the right to receive distributions and the obligation to
fund or otherwise pay the costs of such Holding Vehicle by and through its
related Joint Venture.
For clarity, the definition of "Ownership Interest" does not include a
"Distributive Interest" or contractual royalty.
"Party" or "Parties" means FX, Homestake and any of their respective Affiliates,
as appropriate to the context, including without limitation an Affiliate of
either of them which holds an Ownership Interest pursuant to this Agreement,
provided that such term shall not include Homestake or its Affiliate acting as
Operator.
"Permian Prospect" has the meaning ascribed to such term in Section 3.2(b).
"Program and Budget" has the meaning ascribed to such term in Section 10.3
"Standstill Agreement" has the meaning ascribed to such term in Section 6.4.
"Subordinate Agreement(s)" has the meaning ascribed to such term in Section 4.1.
"Sudety" means Sudety Mining Company Sp. z o.o., a wholly-owned subsidiary of FX
incorporated in the Republic of Poland.
"Sudety Prospect" has the meaning ascribed to such term in Section 3.2(a).
"Term of Association" has the meaning ascribed to such term in Section 5.1.
"Warranties" means those warranties and covenants of FX set forth in Article 14.
"Year" means each consecutive 12 month period during the Term of Association,
commencing with the Effective Date.
1.2 Headings and References
For the purposes of this Agreement, unless otherwise specified:
(a) article and sections headings in this Agreement and its Exhibits are
inserted for convenience only and shall not affect the construction of this
Agreement;
(b) the singular includes the plural and vice versa; and the plural includes
the singular and vice versa; and
(c) references to articles, sections and Exhibits are to articles, sections and
Exhibits of this Agreement unless otherwise indicated.
1.3 Parties to Secure Performance of Obligations by Others
Where any obligation in this Agreement is expressed to be undertaken or assumed
by any Party, such obligation shall be construed as requiring that Party to
exercise all rights and powers of control over the affairs of any other person
or entity which that Party is able to exercise (whether directly or indirectly)
in order to secure performance of such obligation.
ARTICLE 2
PURPOSE AND LIMITATION
2.1 Purposes
This Agreement is entered into for the purposes of:
(a) granting to Homestake on the terms and conditions contained herein the
right to earn an ownership interest in the Sudety Prospect and the Permian
Prospect by expending funds for the exploration of such prospects;
(b) creating the association between the Parties described in Article 3 as the
exclusive vehicle for exploration by one or both of the Parties in the Area
of Interest;
(c) establishing a joint venture between the Parties in the United States under
California law to govern their respective rights and duties to each other
in respect of the subject matter of this Agreement; and
(d) establishing a series of partnerships, or, as necessary, other legal
entities, under the law of the Republic of Poland to hold their mineral
interests located in that country in accordance with the provisions of this
Agreement.
2.2 Limitations
Nothing in this Agreement is intended to create any obligation inside or outside
of Poland of either Party to the other with respect to Mineral Entitlements or
other property interests other than those for precious and base metals located
inside the Area of Interest. Each Party is free to engage in activities for its
own account without obligation to the other (a) with respect to minerals other
than precious and base metals in the Area of Interest and (b) with respect to
precious and base metals outside of the Area of Interest.
ARTICLE 3
ASSOCIATION; EXCLUSIVITY OF PARTIES' DEALING IN AREA OF
INTEREST
3.1 Exclusive Association
The Parties hereby enter into an exclusive association with each other for a
period of six years for the purpose of engaging in reconnaissance, prospecting,
and exploration for precious and associated base metals in the Area of Interest
on the terms and conditions contained in this Agreement.
3.2 Mineral Entitlements
During the Term of Association all concessions, usufructs, mining titles,
mineral interests, or other property interests or rights to explore for or
exploit precious and base metals held by or for either Party ("Mineral
Entitlement(s)") in the Area of Interest, and all exploration and exploitation
of precious and base metals in the Area of Interest by either Party, shall be
held by and carried out for the joint benefit of Homestake and FX in accordance
with the terms and conditions of this Agreement. For greater clarity, Mineral
Entitlements include but are not limited to:
(a) that certain usufruct and those three related concessions for the
exploration of precious metals in Blocks 21, 22, and 23) held by Sudety and
more particularly described in Exhibit B hereto (collectively the "Sudety
Prospect), provided, however, that the usufructs and concessions
constituting the Sudety Prospect shall comprise a single Mineral
Entitlement for purposes of this Agreement;
(b) those four certain usufructs for the exploration of precious metals held,
and those four related concession applications to be made, by four Polish
commercial partnerships organized in contemplation of this Agreement for
the purpose of holding one such usufruct and related concession each for
the benefit of FX and Homestake with respect to Blocks 43, 63, 64, and 65
and more particularly described on Exhibit C (collectively the "Permian
Prospect"), each of such commercial partnerships being comprised of one
wholly-owned subsidiary of FX incorporated in the Republic of Poland and
two wholly-owned subsidiaries of Homestake incorporated in the Republic of
Poland; and
(c) such other usufructs, concessions, and entitlements to engage in
exploration, mining, and exploitation of precious or base metals in the
Area of Interest as the Parties may obtain, whether from public or private
sources.
(d) FX represents that the documents attached hereto as a part of Exhibits B
and C are true and correct copies of the usufructs and concessions
constituting the Sudety Prospect and the usufructs constituting the Permian
Prospect, respectively
ARTICLE 4
PRINCIPAL FINANCIAL AND BUSINESS TERMS;
SUBORDINATE AGREEMENTS
4.1 Intent of Agreement and Subordinate Agreements
This Agreement is intended to serve as the definitive agreement establishing and
governing the fundamental relationships between FX and Homestake and their
respective Affiliates with respect to activities in the Area of Interest,
including but not limited to the principal financial and other business terms
and conditions of the association established by Article 3. The Parties have
agreed on the form, of additional, subordinate agreements (copies of which are
attached hereto as Exhibits D and E respectively) which are intended to
implement this Agreement (the "Subordinate Agreements"). The Subordinate
Agreements include:
(a) a form of Articles of Partnership for use in connection with a series of
partnerships organized under the laws of the Republic of Poland in
contemplation of or in accordance with this Agreement between one or more
Affiliates of FX and one or more Affiliates of Homestake to act as Holding
Vehicles with respect to one or more Mineral Entitlements and related
assets (including those partnerships contemplated in Sections 7.1(a) and
7.2 hereof to hold the Sudety Prospect and the Permian Prospect) for the
benefit of and subject to the respective rights and duties of the Parties,
including but not limited to the right of Homestake to earn the Homestake
Earned Interest and the right of FX to such Ownership Interest or
Distributive Interest as it may elect hereunder. Such form of Articles of
Partnership is attached hereto as Exhibit D; and
(b) a form of promissory note to be used in connection with Loans by one or
more of the Parties to one or more of the Holding Vehicles, as otherwise
provided in this Agreement, including the funding contemplated by Homestake
as Expenditures or Committed Expenditures pursuant to Section 6.5. Such
form of promissory note is attached hereto as Exhibit E.
4.2 Modification of Agreement and Subordinate Agreements
Notwithstanding Section 4.1, the Parties recognize that Polish laws and business
practices are evolving rapidly and express their mutual agreement to use best
efforts during the term of this Agreement to implement the objectives hereof,
taking into account Polish law and institutions as well as the financial and tax
considerations of the Parties. The Parties acknowledge that it may be necessary
or useful to vary or modify from time to time provisions of this Agreement and
the Subordinate Agreements in order to implement the objectives of this
Agreement and agree to cooperate and use good faith efforts to do so; provided,
however, that this Section shall not be construed to require either Party to
agree to any variance or modification it reasonably believes to be prejudicial
to its interests.
4.3 Undertaking to Implement Agreement
In the event of any conflict between the provisions of this Agreement and the
Articles of any Holding Vehicle or any other agreement or document pursuant to
which a Holding Vehicle implements this Agreement, the provisions of this
Agreement shall prevail. The Parties shall exercise all voting and other rights
and powers available to them so as to give effect to the provisions of this
Agreement and agree to such amendments to Articles and such other agreements or
documents as may be necessary for this purpose.
ARTICLE 5
DURATION OF TERM OF ASSOCIATION
5.1 Term of Association
The Term of Association created pursuant to Article 3 (the "Term of
Association") shall terminate on the sixth anniversary of the Effective Date
unless sooner terminated as provided in Section 7.4 or Section 24.2 or otherwise
extended by the Parties. Those provisions of this Agreement establishing,
implementing, or governing the rights and obligations of the Parties as
venturers pursuant to the Joint Ventures created in accordance with this
Agreement or as partners or shareholders of one or more Holding Vehicles shall
survive termination or expiration of the Term of Association.
5.2 Term of Agreement
Notwithstanding any termination or expiration of the Term of Association, this
Agreement shall otherwise continue in effect until expiration of termination
thereof in accordance with Section 24.2.
ARTICLE 6
EARN-IN BY HOMESTAKE
6.1 Entitlement to Homestake Earned Interest
Pursuant to the terms and conditions of this Agreement, Homestake shall have the
right to earn an ownership interest in and to each Mineral Entitlement and each
Holding Vehicle holding one or more Mineral Entitlements (the "Homestake Earned
Interest") as follows:
(a) Upon the vesting of the Homestake Earned Interest, Homestake and FX shall
hold each of the Mineral Entitlements through one or more Holding Vehicles
organized pursuant to Polish law as contemplated by Sections 4. l(a), 7.1
and 7.2.
(b) In the case of a Holding Vehicle which is a commercial partnership, the
Homestake Earned Interest shall be 100% of the right, title, and interest
of each such partnership and the Mineral Entitlements and other assets it
holds, subject only to the right of FX to receive from such partnership, as
a partnership distribution, payment of such amounts as are equal to 7.5% of
the Net Proceeds with respect to each mine held (or to be held) and
operated by such Holding Vehicle determined pursuant to the terms and
conditions of Exhibit G.
(c) In the event that one or more Mineral Entitlements continue to be held by
Sudety as a Holding Vehicle, or by another Holding Vehicle which is a
limited liability company or other entity as contemplated by Section 7.1,
the Homestake Earned Interest shall be a 100% Ownership Interest in such
Holding Vehicle, subject only to the contractual right of FX to receive
from such Holding Vehicle payment of such amounts as are equal to 7.5% of
Net Proceeds with respect to each mine held by such Holding Vehicle
determined pursuant to the terms and conditions of Exhibit G.
(d) Each Holding Vehicle shall hold its Mineral Entitlements for the benefit of
the Parties and subject to the rights of FX to convert its right to payment
under Sections 6.1(b) and 6. l(c) into an Ownership Interest or a
Distributive Interest as provided in Section 7.7.
6.2 Committed Expenditures and Expenditures
(a) Homestake may earn the Homestake Earned Interest by expending or causing to
be expended during each Year $500,000 (i) for exploration for and
development of precious metals on or with respect to one or more of the
Mineral Entitlements or otherwise in the Area of Interest as the Parties
may agree and (ii) to maintain in good standing each Mineral Entitlement
subject to this Agreement.
(b) During the first two Years, Homestake agrees that such $500,000
expenditures shall be firm commitments on the part or Homestake ("Committed
Expenditures"); thereafter such $500,000 expenditures shall be mere
conditions of continuing this Agreement in effect (`'Expenditures"). If
Homestake does not expend such $500,000 in any Year, it may continue this
Agreement in effect by paying FX the difference between $500,000 and the
amount expended or, if the failure arises from conditions reasonably beyond
Homestake's control such as failure to obtain usufructs, concessions,
permits, etc., Homestake may continue this Agreement in effect by
committing to carry such obligation forward and expending such difference
in the next Year; provided, however, that no such obligation may be carried
forward for more than six years.
6.3 Examples of Qualifying Expenditures
Spending with respect to the following matters and costs are examples of
expenditures that qualify as Expenditures and Committed Expenditures within the
meaning of Section 6.2:
(a) funds expended in Poland by Homestake or its Affiliates on or for the
direct or indirect benefit of the Mineral Entitlements;
(b) overhead of Homestake's Polish Affiliates, including but not limited to
each of the Holding Vehicles, including Sudety if the capital stock of
Sudety is conveyed to Homestake in accordance with the terms of this
Agreement;
(c) funds expended outside of Poland for the direct benefit of the Mineral
Entitlements; and
(d) charges for the time, fringes, and costs of Homestake's technical personnel
and consultants who render services with respect to Mineral Entitlements,
e.g., geologists, engineers, metallurgists, and environmental personnel,
wherever rendered. For greater clarity, no home office overhead or other
charges incurred in the United States by executive or administrative
personnel of Homestake shall qualify as Expenditures.
6.4 Credits Against Committed Expenditures
(a) Homestake shall credit against Committed Expenditures, amounts expended
prior to the execution of this Agreement (a) pursuant to the agreement of
the Parties contained in that certain letter from Dennis Goldstein of
Homestake to David Pierce of FX dated July 30, 1997 and (b) pursuant to the
Reconnaissance and Standstill Agreement between Homestake and FX made the
27th day of September, 1996 (including the supplement made by letter
agreement dated April 9, 1997) (the "Standstill Agreement"). Upon the
Effective Date, Homestake's expenditure requirement of $40,000 contained in
the Standstill Agreement shall be deemed to have been satisfied and the
Standstill Agreement shall terminate.
(b) Notwithstanding any other provision of this Agreement, amounts expended by
Homestake prior to the Effective Date or reimbursed to FX for expenditures
made prior to the Effective Date, shall qualify as Committed Expenditures
and Expenditures if such amounts would have so qualified had they been
expended by Homestake after the Effective Date.
6.5 Expenditures May Be Contributions or Loans
Notwithstanding any other provision of this Agreement, Homestake may make the
Expenditures and Committed Expenditures provided for in Section 6.2 by direct
expenditure on behalf of or for the benefit of one or more of the Holding
Vehicles or by making contributions or Loans to such Holding Vehicles (evidenced
by such promissory notes in the form contemplated by Section 4.1(b)). In the
event Homestake elects to make Loans or contributions to such Holding Vehicles,
such Loans and contributions will otherwise qualify as Expenditures under
Section 6.2 only to the extent they are expended by such Holding Vehicle in such
Year.
6.6 Vesting of Homestake Earned Interest
Upon completion of the Expenditures and Committed Expenditures provided for in
Section 6.2 (totaling US $3,000,000), and the reimbursements and payments
provided for in Section 7.3, Homestake shall have irrevocably earned, and its
rights shall have irrevocably vested in and to, the Homestake Earned Interest as
provided in Section 6. l(a), all subject to FX's rights to convert its interest
in such Mineral Entitlements and the Holding Vehicles holding them into a 25%
Ownership Interest or one of the Distributive Interests pursuant to Section 7.7.
6.7 Acceleration of Vesting of Homestake Earned Interest
Homestake shall have the right to accelerate the vesting of the Homestake Earned
Interest by completing the Expenditures and the Committed Expenditures earlier
than otherwise contemplated by this Article 6. In such event, the Homestake
Earned Interest shall vest on the date Homestake first completes the
expenditures, Committed Expenditures and the reimbursements and payments
provided for in Section 7.3.
ARTICLE 7
FUNDAMENTAL RIGHTS AND DUTIES OF THE PARTIES
The fundamental rights and duties of the Parties include the following:
7.1 Sudety Prospect
(a) Following execution of this Agreement, FX shall use its best efforts to
cause Sudety to obtain all consents and approvals required in order to
convey, and to thereafter convey, the usufruct and concessions constituting
the Sudety Prospect to one or more commercial partnerships organized under
the law of the Republic of Poland, each of which shall be formed through
Articles of Partnership substantially in the form of those attached hereto
as Exhibit D, with each Party holding the interests in such partnerships
contemplated by Section 6.1(b), each of which shall be managed and operated
exclusively by Homestake in accordance with this Agreement.
(b) If the conveyances contemplated by Section 7.1(a) have not been
successfully completed within six months following the Effective Date, then
on request by Homestake at any time FX will promptly convey to Homestake,
or an Affiliate of Homestake, 100% of the capital stock of Sudety to be
held by Homestake for the benefit of the Parties pursuant to the terms and
conditions of this Agreement or as the Parties may otherwise then agree.
(c) Promptly upon the conveyance of such capital stock to Homestake as
contemplated by Section 7.1(b), Homestake and FX shall negotiate and
execute a shareholders agreement with respect to Sudety using good faith
efforts to reach by virtue of such shareholders agreement and the related
Holding Vehicle similar economic, tax and business results and
relationships between and for Homestake and FX as are otherwise provided
for in this Agreement, including FX's rights of election in Section 7.7. In
such event, Homestake will, after consultation with FX, cause the Articles
of Sudety to be amended in such manner as is reasonable to implement the
objectives of this Agreement.
(d) In the event the Parties acquire any other limited liability company or
other entity holding a Mineral Entitlement, the Parties shall attempt to
convey such Mineral Entitlement to a commercial partnership as is otherwise
described in Section 7.1(a). In the event that such conveyance cannot be
completed, or cannot be completed within six months following such
acquisition, the capital stock (or other ownership) of such entity shall be
conveyed to Homestake pursuant to the provisions of Section 7.1(b) and
7.1(c). In such event, Homestake will, after consultation with FX cause the
Articles of such limited liability company to be amended in such manner as
is reasonable to implement the objectives of this Agreement. FX hereby
represents and warrants that, except for the Sudety Prospect and the
Permian Prospect, neither FX nor any Affiliate of FX now holds a Mineral
Entitlement or application therefor in the Area of Interest.
(f) FX agrees that until the Mineral Entitlements constituting the Sudety
Prospect have been conveyed to a partnership or until the capital stock of
Sudety has been transferred to Homestake, FX will keep the stock of Sudety
and the usufruct, concessions and other assets constituting the Sudety
Prospect free and clear of mortgages, pledges, liens and security
interests.
7.2 Permian Prospect
Within sixty days following execution of this Agreement, FX and Homestake shall
execute with respect to each of the partnerships holding one of the usufructs
constituting the Permian Prospect as of the Effective Date such amendments,
conveyances, and other documents as are required to substantially conform the
applicable Articles to those attached as Exhibit D and convey to each Party
respectively the interests in such Partnerships contemplated by Section 6.1(b).
Each of such partnerships shall be managed and operated exclusively by Homestake
in accordance with this Agreement.
7.3 Reimbursement to FX
Within ten days following execution of this Agreement, Homestake will pay FX US
$100,000 and reimburse FX US $112,500 for previous expenditures of FX incurred
in connection with the Sudety Prospect and the Permian Prospect. Unless
Homestake sooner terminates this Agreement, Homestake will pay FX US $250,000 on
or before December 31, 1999. Notwithstanding any other provision of this
Agreement, only US $24,500 of such $112,500 shall be credited to Committed
Expenditures and Expenditures.
7.4 Termination or Abandonment by Homestake in Certain Circumstances
(a) Homestake may terminate this Agreement at any time after completing the
Committed Expenditures or after paying FX the difference between the
Committed Expenditures and the amounts actually expended. In the event of
any such termination, Homestake will have no further obligation or
liability to FX except as expressly set forth in this Article.
(b) In the event the Republic of Poland establishes the exploitation fee
payable to Poland by law in connection with the exploitation of precious
metals ("Exploitation Fee") at more than 6% with respect to one or more
Mineral Entitlements or announces prior to completion of the Committed
Expenditures by Homestake that it will make no modifications in the rate of
the Exploitation Fee, Homestake may abandon such Mineral Entitlements or
terminate the term of this Agreement and any related Subordinate Agreements
without completing the Committed Expenditures or making any payments in
lieu thereof.
(c) If Homestake terminates this Agreement or abandons any Mineral Entitlement
after September 1 of any calendar year and Homestake has not then made all
payments and completed all activities required to maintain in good standing
through December 31 of the same calendar year, in the case of termination,
all of the Mineral Entitlement(s) or, in the case of abandonment, those
Mineral Entitlements subject to such abandonment, then Homestake shall
reimburse FX the prorated amounts of such payments and the costs of such
activities for the remainder of such calendar year; provided, however, if
Homestake before any such termination commits one or more of the Holding
Vehicles to obligations that must be paid or performed in whole or in part
after such termination, Homestake will reimburse FX for the reasonable cost
of paying or performing such obligation notwithstanding termination.
(d) In the event Homestake terminates this Agreement before FX has made, or has
been deemed to have made, an election pursuant to Section 7.7, all Loans
receivable by Homestake shall be assigned to FX upon such termination. In
the event that Homestake abandons any Mineral Entitlement hereunder any
Loans receivable by Homestake with respect to the abandoned Mineral
Entitlement (but not unallocated Loans for general exploration funding)
shall be assigned to FX upon such abandonment.
(e) In the event Homestake determines that it will terminate this Agreement for
any reason, Homestake will use good faith efforts to effect such
termination as promptly thereafter as possible.
7.5 Rights and Obligations of Parties After Termination or Abandonment
(a) Upon any abandonment or termination by Homestake as provided in Section
7.4, Homestake shall arrange for the transfer to FX at no cost to FX and
without warranty except as to claims made by or through Homestake acting
solely in its personal capacity (and not when acting on behalf of or for
the benefit of both Parties pursuant to this Agreement or one of the
Subordinate Agreements), of all direct or indirect interests of Homestake
in all Mineral Entitlements to be abandoned and, in the case of such
termination, in all Joint Ventures and Holding Vehicles holding any Mineral
Entitlement(s) in the Area of Interest on the date of termination.
(b) In the event of any abandonment or termination by Homestake as provided in
Section 7.4 (except abandonment or termination arising out of or related to
an Exploitation Fee of more than 6% as provided in Section 7.4(b) above),
Homestake shall be entitled to a contractual royalty of 1% of Net Smelter
Returns from FX on the terms and conditions contained in Exhibit F in
respect of all of the Mineral Entitlement(s) so abandoned or, in the case
of termination, held pursuant to this Agreement on the date of such
termination. Such contractual royalty shall survive termination of this
Agreement.
(c) In the event of any abandonment by Homestake as provided in Section 7.4,
Homestake will not thereafter acquire any Mineral Entitlement within the
boundaries of the Mineral Entitlement so abandoned before the later of
termination or expiration of the Term of Association or that date which is
two years following such abandonment without offering FX the right to
participate therein on terms substantially equivalent to those set forth in
this Agreement.
(d) In the event Homestake terminates this Agreement as provided in Section
7.4, and except as otherwise provided in Section 7.5(c), Homestake will not
thereafter acquire any Mineral Entitlement in the Area of Interest before
the sooner of the sixth anniversary of the Effective Date or that date
which is two years following such termination without offering FX the right
to participate therein on terms substantially equivalent to those set forth
in this Agreement.
7.6 FX Assistance
(a) FX will assist Homestake in its exploration and development activities in
Poland and will provide advice with respect to dealing with the government
of Poland and its subdivisions:
(i) in applying for usufructs, concessions and other permits,
(ii) in lobbying in connection with mineral activities,
(iii) in clarifying or establishing the terms that apply to the
exploration and exploitation of precious metals whether legislative
or administrative in nature,
(iv) in arranging for and engaging employees, and
(v) in obtaining services, materials, and equipment.
(b) In performing any such services at Homestake's request, FX shall be
reimbursed the reasonable salaries, fringes, and out-of-pocket expenses of
its employees who provide such services, but not including any general,
administrative or home office costs incurred in the United States.
(c) Homestake shall have the right to represent that its activities in Poland
are being conducted in association with FX.
7.7 FX Election
(a) If at any time and from time to time during the term of this Agreement,
Homestake makes a decision to construct a commercial mine on the property
subject to any Mineral Entitlement in the Area of Interest acquired during
or before the Term of Association, then Homestake shall give notice thereof
to FX. Such notice shall be accompanied by the feasibility study on which
Homestake's decision was based and shall contain a detailed description of
the area to be included as a part of the mine, which area shall be
determined by Homestake in light of geological conditions, environment, and
topography; such area shall be reasonably compact in form and large enough
to accommodate reasonable alternative locations for sites for mining,
processing, waste disposal and all related uses.
(b) Within 120 days following receipt of such notice and feasibility study, FX
shall elect with respect to such Mineral Entitlement, in lieu of its right
to payment provided for in Sections 6.1(b) and 6.1 (c) and in lieu of any
other interest in such Mineral Entitlement and the Holding Vehicle
therefor, one of the three interests specified in Sections 7.7(c), 7.7(d),
and 7.7(e).
Pursuant to Section 7.7(b), FX may elect a 25% Ownership Interest, which
election shall be subject to the following:
(i) FX will reimburse Homestake or an Affiliate designated by Homestake
for such purpose for such interest the amount determined by the
following formula: (25%) multiplied by (250%) multiplied by (the
total expenditures and reasonable allocations made with respect to
the relevant Mineral Entitlement to the date of election, less
$6,000,000).
(ii) The phrase "25% Ownership Interest' means in all cases a full
participation requiring FX to provide 25% of all funds and costs
required to construct and operate the contemplated mine in
accordance with Section 8.2(b), Articles 9, 10, 11 and 12 by and
through a Joint Venture formed pursuant to Article 9 and other
relevant provisions of this Agreement relating to a Joint Venture,
and entitling FX to enjoy 25% of all of the financial benefits
thereof
(iii) Subject to Section 7.7(c)(iv), such 2S% Ownership Interest shall take
the form of a 25% partnership interest where the Holding Vehicle
holding the relevant Mineral Entitlement is a partnership, with
Homestake or a Homestake Affiliate holding the remaining 75%
partnership interest.
If one or more of the relevant Mineral Entitlements is held by Sudety or another
Holding Vehicle which is a limited liability company, such 25% Ownership
Interest shall entitle FX to 25% of the capital stock thereof, with Homestake or
a Homestake Affiliate holding the remaining 75% of the capital stock, and the
rights and duties of Homestake and FX with respect to such their respective
Ownership Interests will be contained in the shareholders agreement contemplated
by Section 7.1(c).
Upon reimbursement by FX pursuant to Section 7.7(c)(i), Homestake will assign to
FX 25% of the principal and interest payable pursuant to any promissory notes
held by Homestake from the Holding Vehicle holding the Mineral Entitlement as to
which FX has made the election provided for in Section 7.7(c) for repayment of
Loans advanced to such Holding Vehicle for the benefit of such Mineral
Entitlement prior to such election of FX. Such Loans include those made by
Homestake pursuant to the provisions of Sections 6.5 and 8.1.
(d) Pursuant to Section 7.7(b), FX may elect a Distributive Interest entitling
FX to receive a partnership distribution (or, in the case of a Holding
Vehicle which is a limited liability company or other entity, a contractual
payment) in an amount equal to such percentage of Net Smelter Returns as is
equal to 6% less any percentage Exploitation Fee payable to the Republic of
Poland with respect to the relevant Mineral Entitlement . Net Smelter
Returns shall be determined pursuant to the terms and conditions attached
as Exhibit F. It is the intent of the Parties that such Distributive
Interest shall be payable without regard to profitability of the Holding
Vehicle.
(e) Pursuant to Section 7.7(b), FX may elect a Distributive Interest entitling
FX to receive a partnership distribution (or, in the case of a Holding
Vehicle which is a limited liability company or other entity, a contractual
payment) equal to 7.5% of Net Proceeds on the terms and conditions attached
as Exhibit G.
(f) In the event FX does not make a timely election in accordance with Section
7.7(b), FX will be deemed to have irrevocably elected to convert its right
to payment pursuant to Sections 6. l(b) and 6.1 (c) and its interests in
the relevant Holding Vehicle and Mineral Entitlements into the Net Proceeds
Distributive Interest as provided for in Section 7.7(e).
(g) Upon any election (or deemed election) by FX pursuant to Section 7.7(d),
Section 7.7(e), or Section 7.7(f), FX shall cease to have any other
interest with respect to the Holding Vehicle which holds the Mineral
Entitlement(s) containing the area designated by Homestake as the mine in
the notice of decision to construct and shall be entitled with respect
thereto only to the Distributive Interest so elected. Promptly upon such
election, FX and its Affiliates shall provide Homestake with such
assignments, conveyances, releases and other documents in the United States
and Poland as are reasonably satisfactory to counsel for Homestake to
convey or terminate any partnership, capital stock or other interest of FX
with respect to such Holding Vehicle and relevant Mineral Entitlement(s)
other than the Distributive Interest.
7.8 Homestake or Homestake Affiliate as Operator
(a) Until FX makes (or is deemed to have made) the election required with
respect to a proposed mine pursuant to Section 7.7, Homestake, or an
Affiliate of Homestake, shall be engaged as the Operator of each Holding
Vehicle.
(b) As Operator, Homestake or its Affiliate shall be responsible for conducting
the Business of each Holding Vehicle, for exploring and developing the
Mineral Entitlements as is warranted and for carrying out such other
matters related thereto on substantially the same terms and conditions and
with substantially the same powers and duties as are customarily granted to
or exercised by joint venture operators of like properties in the United
States. Such responsibilities shall include the right, duty and authority
to carry out those matters set forth in Exhibit H on the terms and
conditions and for the compensation contained therein.
(c) Following (i) any election (or deemed election) by FX pursuant to Sections
7.7(d), (e), or (f) and (ii) the conveyance or other termination of FX's
interests as contemplated by Section 7.7(g), Homestake's engagement as
Operator may continue at the discretion of Homestake, but any Distributive
Interest payable to FX shall be calculated without the deduction of any fee
payable to Homestake as Operator (but any such fee paid to a third party
arms' length operator in good faith shall be deducted).
7.9 Due Diligence
(a) Homestake shall have 90 days following the Effective Date to perform a due
diligence examination both in the United States and in Poland with respect
to FX Sudety, the Sudety Prospect and other matters arising out of or
related to this Agreement. Such examination shall extend to matters of
title, environment, physical condition, financial condition, capital
structure, contractual obligations, permits, obligations and liabilities,
and reputation.
(b) FX will cooperate with Homestake, and its auditors and attorneys, and make
available for their examination at Homestake's request and cost (i) all its
records and books as they pertain to Sudety and each Affiliate of FX that
is a partner in one of the partnerships that holds one of usufructs
constituting the Permian Prospect (ii) and all of the books and records of
Sudety and such other Affiliates.
(c) In the event that Homestake is not satisfied with the results of its due
diligence examination for any reason, Homestake may terminate this
Agreement without liability or obligation thereafter of any kind including
the Committed Expenditures; provided, however, that FX shall not in any
case be liable to Homestake for any cost or reimbursement.
7.10 Exploration Technical Committee
The Parties will create a technical committee (the "Exploration Technical
Committee") which will have regular access to all data and technical reports
with respect to exploration and development of all properties subject to a
Mineral Entitlement(s) prior to any FX election under Section 7.7. The
Exploration Technical Committee will have the opportunity to review and make
suggestions to the Parties with respect to exploration and development, and the
opportunity to review and comment on the draft of any feasibility study(ies)
prepared in contemplation of building any mine. Each Party will appoint one
member to the Exploration Technical Committee. Upon formation of a Joint Venture
with respect to any Mineral Entitlement, the role of the Committee with respect
to such Mineral Entitlement will be transferred to the Committee established
pursuant to Section 12.7.
ARTICLE 8
FUNDING OF HOLDING VEHICLES
8.1 Funding Before FX Election
Homestake shall bear 100% of the cost of funding all exploration and development
of the property covered by each Mineral Entitlement through such time as FX
makes the election required by Section 7.7. Such funding may be by way of Loans.
8.2 Funding After FX Election
(a) In the event that FX elects or is deemed to have elected to receive a
Distributive Interest pursuant to Sections 7.7(d), 7.7(e), or 7.7(f) with
respect to a Mineral Entitlement, FX shall have no obligation to provide
any funding to the Holding Vehicle holding such Mineral Entitlement
including but not limited to funding for the construction of the mine as to
which FX's election pertained.
(b) In the event that FX elects a 25% Ownership Interest in a Mineral
Entitlement as provided in Section 7.7(c), FX covenants to thereafter make
available to the Holding Vehicle holding such Mineral Entitlement, in
proportion to such 25% Ownership Interest, (i) the funds required for
construction of the mine as to which FX's election pertained and (ii) such
other funding as may from time to time be required for the maintenance,
development, construction, mining, and reclamation of the property covered
by such Mineral Entitlement, all in accordance with Articles 9, 10, and 11
and the other provisions of this Agreement. Unless the Parties agree
otherwise, such funding shall be provided by the Parties or their
respective Affiliates by way of Loans evidenced by promissory notes
substantially in the form attached hereto as Exhibit E.
ARTICLE 9
FORMATION OF JOINT VENTURES; INITIAL INTERESTS AND CONTRIBUTIONS:
MODIFICATION OF JOINT VENTURE AND OWNERSHIP, INTERESTS
9.1 Creation of Joint Ventures: Initial Interests and Contributions
(a) Upon every election by FX pursuant to Section 7.7(c), the Parties shall
automatically associate themselves into an unincorporated joint venture
pursuant to the terms and conditions of this Agreement with respect to the
Mineral Entitlement(s) as to which FX makes such election(s) and the
Holding Vehicle holding such Mineral Entitlement(s) (each such joint
venture being a "Joint Venture"). The purpose of each such Joint Venture
shall be to manage, operate, and otherwise conduct the Business of its
related Holding Vehicle and Mineral Entitlement(s) in accordance with the
terms of this Agreement.
(b) Upon the date of its formation each of the Parties shall contribute to each
Joint Venture that is formed pursuant to this Agreement 100% of its
Ownership Interest in the Mineral Entitlement(s) as to which FX has made
the related election pursuant to Section 7.7(c) and the Holding Vehicles
holding such Mineral Entitlement(s). The initial venture interests of the
Parties shall be: Homestake, 75% and FX 25%. The respective Ownership
Interests of the Parties shall be held by the Parties pursuant to this
Agreement for the benefit of and pursuant to the related Joint Venture.
(c) The initial contribution of each Party to a Joint Venture shall be valued
as provided in Section 1.1 under the definition of "Initial Capital
Contribution".
(d) In the event that FX makes an election under Section 7.7(c) with respect to
Mineral Entitlement(s) held by a Holding Vehicle that also holds other
Mineral Entitlement(s), the Parties shall use good faith efforts to cause
such Holding Vehicle to convey the Mineral Entitlement(s) as to which FX
has made such an election into a different Holding Vehicle so that each
Mineral Entitlement as to which FX has made such an election will be the
sole asset of the related Joint Venture and Holding Vehicle.
9.2 Changes in Ownership Interests
Following creation of a Joint Venture, a Party's Ownership Interest may
thereafter be changed:
(a) upon an election by a Party pursuant to Section 10.6 to contribute less to
an adopted Program and Budget than its percentage Ownership Interest; or
(c) in the event of default by a Party in making its agreed-upon contribution
to an adopted Program and Budget, followed by an election by the other
Party to invoke Section 9.4; or
(d) transfer of an interest by a Party in accordance with Article 13; or
(e) acquisition of less than all of the Ownership Interest of the other Party,
however arising.
9.3 Voluntary Reduction in Ownership Interest
Except with respect to any Program and Budget for the construction of the mine
and related facilities which was the basis of FX's election pursuant to Section
7.7(c), a Party may elect, as provided in Section 10.6, to limit its
contributions to an adopted Program and Budget to some lesser amount than its
respective percentage Ownership Interest or not at all. If a Party elects to
contribute to an adopted Program and Budget some lesser amount than its
respective Ownership Interest, or not at all, the Ownership Interest of such
Party in the related Joint Venture shall be recalculated at the time of election
by dividing: (i) the sum of (a) the value of the Party's Initial Capital
Contribution to such Joint Venture, plus (b) the total of all of the Party's
subsequent contributions to such Joint Venture, plus (c) the amount, if any,
such Party elects to contribute to the adopted Program and Budget, less (d) the
related Joint Venture's cumulative cash cost of producing any Product previously
taken in kind by such Party, by (ii) the sum of (a), (b), and (c) above for all
Parties, less (d) above for all Parties; and then (iii) multiplying the result
by one hundred. The Ownership Interest of the other Party shall thereupon become
the difference between 100% and the recalculated Ownership Interest, provided,
however, that in reducing contributions by the cash cost of production as
provided in (i)(d) and (ii)(d), the contributions of each Party shall for
purposes of any subsequent adjustments under this Section 9.3 be restated in
dollars to reflect the existing ratio of the Parties' respective Ownership
Interests.
9.4 Default in Making Contributions
The Parties acknowledge that if a Party defaults in making a contribution or
meeting a cash call required by an approved Program and Budget for a Joint
Venture in respect of which such Party is required to provide funding in
accordance with Section 10.5 or has elected, or is deemed to have elected, to
provide funding in accordance with Section 10.6 or in repaying a loan made
pursuant to Sections 9.4(a) or 11.5, it will be difficult to measure the damages
resulting from such default. In the event of such default, as reasonable
liquidated damages, the nondefaulting Party may, with respect to any such
default not cured within 30 days after notice to the defaulting Party of such
default, elect one of the following remedies by giving notice to the defaulting
Party:
(a) Thc non-defaulting Party may advance the defaulted contribution on behalf
of the defaulting Party and treat the same, together with any accrued
interest, as a demand loan to the defaulting Party bearing interest from
the date of the advance at the Prime Rate plus three percent. The failure
of the defaulting Party to repay said loan upon demand shall be a material
default under this Agreement and shall be subject to the provisions of
Section 9.3.
(b) The defaulting Party shall be deemed to have withdrawn from the related
Joint Venture, Holding Vehicle, and associated Business and to have
automatically relinquished its Ownership Interest to the non-defaulting
Party. Thereafter the defaulting Party shall have no further interest of
any kind with respect to such Holding Vehicle or Mineral Entitlement(s).
(c) Each Party shall grant to the other a lien upon its Ownership Interest and
a security interest in all of its rights under the related Holding Company
and Mineral Entitlement(s), and any proceeds, distributions, payments or
dividends therefrom, to secure every obligation or liability of the Party
granting such lien or security interest created under this Agreement,
including but not limited to any advance or loan made under this Agreement
(whether or not a Loan), including interest thereon, reasonable attorneys
fees and all other reasonable costs and expenses incurred in recovering the
Loan with interest and in enforcing such lien or security interest, or
both.
(d) A non-defaulting Party may elect the applicable remedy under this Section
9.4 or, to the extent a Party has a lien or security interest under
applicable law, it shall be entitled to such rights and remedies at law and
in equity. All such remedies shall be cumulative, and shall be in addition
to, and not in substitution of, other remedies available to the non-
defaulting Party under Article 23. The election of one or more remedies
shall not waive the election of any other remedies. Each Party shall
appoint the other its attorney-in-fact to execute, file and record all
instruments necessary to perfect or effectuate the provisions hereof
9.5 Elimination of Minority Interest in a Joint Venture
Upon the reduction of a Party's Ownership Interest in and with respect to a
Joint Venture (and its related Holding Vehicle and Mineral Entitlement(s)) to
less than 10%, such Party shall be deemed to have relinquished in favor of the
other Party, the entirety of such Ownership Interest, and thereafter shall have
in lieu thereof a contractual royalty of 1% of Net Smelter Returns with respect
to the sale of gold and silver and associated metals from the related Mineral
Entitlement(s) until such Party has received an amount equal to the aggregate of
the defaulting Party's Initial Capital Contribution and subsequent contributions
to the related Joint Venture. Upon receipt of such amount such Party shall have
no further interest of any kind with respect to such Holding Vehicle or Mineral
Entitlement(s).
9.6 Continuing Liabilities Upon Adjustments of Ownership Interests
Any reduction or relinquishment of a Party's Ownership Interest in a Joint
Venture under this Article 9 shall not relieve such Party of its share of any
liability, whether it accrues before or after such reduction or relinquishment,
arising out of operations of the related Joint Venture and Mineral
Entitlement(s) conducted prior to such reduction or relinquishment, including
but not limited to its proportionate share of the cost of remediation,
reclamation, and long-term care and monitoring of properties related to Mineral
Entitlements. For purposes of this Article 9, such Party's share of such
liability shall be equal to its related Ownership Interest at the time such
liability was incurred. The increased Ownership Interest accruing to a Party as
a result of the reduction or relinquishment of the other Party's Ownership
Interest shall be free of royalties, liens or other Encumbrances arising by,
through or under such other Party, other than those existing at the time of the
execution of this Agreement or those to which both Parties have given their
written consent. An adjustment to an Ownership Interest shall be reflected, to
the extent necessary, in the relevant Articles and other documents, and either
Party, at any time upon the request of the other Party, shall execute and
acknowledge instruments necessary to evidence such adjustment.
9.7 Subordination of Interests
Each Party shall, from time to time, take all necessary actions, including
execution of appropriate agreements, to pledge and subordinate its Ownership
Interest to any secured borrowings for activities or operations approved by the
Management Committee, including any secured borrowings relating to project
financing, and any modifications or renewals thereof
ARTICLE 10
PROGRAMS AND BUDGETS
10.1 Applicability
The provisions of this Article 10 shall apply only to Joint Ventures created
pursuant to this Agreement.
10.2 Joint Venture Operator
Homestake shall be the engaged as the Operator of each Joint Venture. As
Operator, Homestake or its Affiliate shall be responsible for conducting the
Business of each Holding Vehicle, for exploring, developing, exploiting and
marketing the products thereof, and for carrying out such other matters related
thereto on substantially the same terms and conditions and with substantially
the same powers and duties as are customarily granted to or exercised by joint
venture operators of like properties in the United States. Such responsibilities
shall include the right, duty and authority to carry out those matters set forth
in Exhibit H on the terms and conditions and for the compensation contained
therein, subject to the contrary directions of a majority in interest of the
partners of a Holding Vehicle that is a partnership (or a majority of the board
of directors of any Holding Vehicle that is a limited liability company) holding
the relevant Mineral Entitlement acting in conformity with decisions of the
Management Committee.
10.3 Presentation of Programs and Budgets
Proposed Programs and Budgets for each Joint Venture shall be prepared by the
Operator for a period of one year or any longer period and presented to the
Management Committee for adoption. Each Program and Budget shall consist of a
plan of operations and a budget therefor with a description in reasonable detail
of the operations and activities to be accomplished by such Joint Venture in the
period covered. Each adopted Program and Budget, regardless of length, shall be
reviewed at least once each year by the Management Committee. During the period
covered by any Program and Budget, and at least three months prior to its
expiration, a proposed Program and Budget for the succeeding period shall be
prepared by the Operator and submitted to the Parties and the Management
Committee.
10.4 Review and Approval of Proposed Programs and Budgets
Within 30 days after submission of a proposed Program and Budget with respect to
any Holding Vehicle, each Party shall submit to the Management Committee:
(a) notice that such Party approves the proposed Program and Budget; or
(b) proposed modifications to the proposed Program and Budget.
If a Party fails to give either of the foregoing responses within the allotted
time, the failure shall be deemed to be an approval by such Party of the Program
and Budget as proposed. If a Party makes a timely submission to the Management
Committee pursuant to Section 10.4(b), the Management Committee shall consider
and discuss such proposed modifications in good faith. In the event the
Management Committee is unable to reach a consensus with respect to such
proposed modifications within 30 days after the submission of the proposed
modifications, the Management Committee shall vote on the Program and Budget as
proposed by the Operator.
10.5 Obligation to Contribute to Construction Program and Budget
A Party shall be obligated to provide funds in accordance with its respective
Ownership Interest in compliance with all Programs and Budgets adopted by the
Management Committee implementing the construction of the mine and related
facilities which were the basis of the election by FX pursuant to Section 7.7(c)
resulting in the formation of the related Joint Venture. Failure to meet a cash
call, or to otherwise provide funding in accordance with this Agreement, in
accordance with such Program and Budget shall be a material breach of this
Agreement.
10.6 Elections With Respect to Contributions
Except for Programs and Budgets adopted by the Management Committee to implement
the construction of the mine and related facilities which were the basis of the
election by FX pursuant to Section 7.7(c) resulting in the formation of the
related Joint Venture, a Party may, by notice to the Management Committee within
20 days after the final vote of the Management Committee adopting a Program and
Budget, elect to contribute to an adopted Program and Budget some lesser amount
than its respective Ownership Interest, or not at all, in which case its
Ownership Interest in the related Joint Venture shall be reduced as provided in
Section 9.3. If a Party fails to so notify the Management Committee, the Party
shall be deemed to have elected to contribute to such Program and Budget in
proportion to its respective Ownership Interest in the related Joint Venture as
of the beginning of the period covered by the Program and Budget, and failure to
provide funding accordingly shall be a material breach of this Agreement.
10.7 Failure to Approve Proposed Programs and Budgets
If the Management Committee fails to approve a Program and Budget by the
beginning of the period to which the proposed Program and Budget applies, the
Operator may continue to operate the Business of the related Joint Venture and
Holding Vehicle at the same budgetary level applicable to the previous budget
period.
10.8 Budget Overruns; Program Changes
The Operator shall immediately notify the Management Committee of any material
departure from an adopted Program and Budget. If the Operator's expenditures
exceed those set forth in an adopted Program and Budget by more than 15%, then
the excess over 15%, unless directly caused by an emergency or unexpected
expenditure made pursuant to Section 10.9 or unless otherwise authorized by the
Management Committee, shall be for the sole account of the Operator and such
excess shall not be included in the calculation of the Ownership Interests.
Budget overruns of 15% or less shall be borne by the Parties in proportion to
their respective Ownership Interests as of the time the overrun occurs.
10.9 Emergency or Unexpected Expenditures
In case of emergency, the Operator may take any reasonable action it deems
necessary to protect life, limb or property, to protect the assets of the
Holding Vehicle or to comply with law or government regulation. The Operator may
also make reasonable expenditures for unexpected events which are beyond its
reasonable control and which do not result from a breach by it of the standard
of care specified in Section II of Exhibit H. The Operator shall promptly notify
the Parties of the emergency or unexpected expenditure, and the Operator shall
be reimbursed for all resulting costs by the Parties in proportion to their
respective Ownership Interests in the related Joint Venture at the time the
emergency or unexpected expenditures are incurred.
ARTICLE 11
ACCOUNTS AND SETTLEMENTS
11.1 Applicability
The provisions of this Article 12 shall apply only to Joint Ventures created
pursuant to this Agreement.
11.2 Accounting Procedures
(a) The accounts of each Holding Vehicle shall be maintained by the Operator
in accordance with the procedures set forth in this Agreement and in
Exhibit I, and otherwise in accordance with applicable law.
(b) The Operator shall maintain separate accounts with respect to each Mineral
Entitlement as to which FX has made an election pursuant to Section 7.7(c).
In the event that one Joint Venture controls or holds more than one Holding
Vehicle or Mineral Entitlement, such accounts shall be further separated or
subdivided by Holding Vehicle and by Mineral Entitlement.
11.3 Monthly Statements
The Operator shall promptly submit to the Management Committee monthly
statements of account reflecting in reasonable detail charges and credits to the
accounts and subaccounts in respect of each Holding Vehicle and Mineral
Entitlement subject to a Joint Venture during the preceding month.
11.4 Cash Calls
On the basis of a Program and Budget approved pursuant to Section 10.4, the
Operator shall submit to each Party holding an Ownership Interest, prior to the
last day of each month, a billing for estimated cash requirements for the next
60 days. Within 10 days after receipt of each billing, each such Party shall
advance to the Operator its proportionate share of the estimated amount in
proportion to its Ownership Interest. Time is of the essence of payment of such
billings. The Operator shall have the right, but not the obligation, to maintain
working capital in such amounts reasonable to pay disbursements of the related
Joint Venture for up to ninety days as may be reasonably estimated by the
Operator, provided, however, that amounts held by Operator in the reclamation
fund provided for in Section III of Exhibit H shall not be deemed to be working
capital for purposes of such determination. All funds in excess of immediate
cash requirements shall be invested in interest-bearing accounts, if
practicable.
11.5 Failure to Meet Cash Calls
A Party that fails to meet cash calls in the amount and at the times specified
in Section 11.4 shall be in default of this Agreement, and the amounts of the
defaulted cash call shall be treated as a loan and bear interest from the date
due at an annual rate equal to three percentage points over the Prime Rate, but
in no event shall said rate of interest exceed the maximum permitted by law. The
non-defaulting Party shall have those rights, remedies and elections specified
in Section 9.4 in addition to those specified in Article 23.
11.6 Audits
With respect to any Joint Venture, upon request made by any Party within 24
months following the end of any calendar year (or, if the Management Committee
has adopted an accounting period other than the calendar year, within 24 months
after the end of such period), the Operator shall order an audit of the
accounting and financial records for such calendar year (or other accounting
period). All written exceptions to and claims upon the Operator for
discrepancies disclosed by such audit shall be made not more than 3 months after
receipt of the audit report. Failure to make any such exception or claim within
the 3 month period shall mean the audit is correct and binding upon the Parties.
The audits shall be conducted by an independent firm of certified public
accountants of recognized international standing selected by the Operator,
unless otherwise agreed by the Management Committee, and shall be charged to the
account of the Holding Vehicle audited.
ARTICLE 12
MANAGEMENT OF THE BUSINESS
12.1 Applicability and Intent
(a) The provisions of this Article 12 shall apply only to Joint Ventures
created pursuant to this Agreement.
(b) Decisions affecting a Joint Venture shall be made by the Management
Committee unless previously delegated to the Operator. Accordingly, each of
the Parties agrees to cause each Holding Vehicle to refrain from taking any
action reserved for decision by the Management Committee and to cause each
such Holding Vehicle to comply promptly with any decision made by the
Management Committee.
12.2 Organization and Composition of Management Committee
One Management Committee shall be established by the Parties with respect to all
Joint Ventures created pursuant to this Agreement. The Management Committee
shall consist of a total of four members, with three members appointed by
Homestake (one of whom shall be designated Chairman) and one by FX. Each Party
may appoint one or more alternates to act in the absence of a regular member.
Any alternate so acting shall be deemed a member. Appointments shall be made or
changed by notice to the other Party.
12.3 Decisions of Management Committee
(a) Each member of the Management Committee shall have one vote; provided that
the vote of any member or members appointed by Homestake not present at a
meeting may be cast by another member representing Homestake who is present
at such meeting.
(b) Unless otherwise provided in this Agreement, a simple majority of votes
shall determine the decisions of the Management Committee.
12.4 Meetings of Management Committee
The Management Committee shall hold regular meetings at least annually in San
Francisco, California, or at other mutually agreed places. The Chairman of the
Management Committee shall give not less than 20 days notice to FX of such
regular meetings. Additionally, either Party may call a special meeting upon 10
days notice to the other. In case of emergency, reasonable notice of a special
meeting shall suffice. There shall be a quorum if at least one member
representing each Party is present. Each notice of a meeting shall include an
itemized agenda prepared by the Chairman in the case of a regular meeting, or by
the Party calling the meeting in the case of a special meeting, but any matters
may be considered with the consent of both Panties. One member present at any
meeting shall be designated to prepare minutes of such meeting and shall
distribute copies of such minutes to the Parties within 30 days after the
meeting. The minutes, when signed by both Parties, shall be the official record
of the decisions made by the Management Committee and shall be binding on the
Operator and the Parties with respect to the related Joint Venture. If personnel
employed in operations are required to attend a Management Committee meeting,
reasonable costs incurred in connection with such attendance shall be a cost of
the related Joint Venture. All other costs shall be paid by the Parties
individually.
12.5 Action Without Meeting
In lieu of physical meetings, the Management Committee may hold telephone
meetings, so long as all decisions are promptly confirmed in writing by the
Parties.
12.6 Matters Requiring Approval of Management Committee
(a) Except as otherwise expressly delegated to the Operator pursuant to this
Agreement, the Management Committee shall have exclusive authority to
determine overall policies, objectives, procedures, methods and actions
under this Agreement with respect to any Joint Venture and the assets held
or controlled by and through such Joint Venture.
(b) Decisions on the following matters with respect to any Joint Venture and
the assets held or controlled by and through such Joint Venture shall
require a unanimous vote of the Management Committee:
(i) the borrowing of money by a Joint Venture or a Holding Vehicle
except in the ordinary course of business;
(ii) the mortgage, pledge or grant of security of the Mineral
Entitlements or the facilities of a Holding Vehicle except as
required in the ordinary course of such Holding Vehicle's business;
(iii) the sale, assignment or abandonment of any interest in the Mineral
Entitlements or the facilities of a Holding Vehicle;
(iv) the appointment or removal of the independent auditors of a Holding
Vehicle;
(v) the sale or other disposition of any asset of such Holding Vehicle
with a fair market value reasonable estimated to be in excess of US
$1,000,000;
(vi) the sale of all or substantially all of the assets of a Holding
Vehicle; and
(vii) except for contracts engaging Homestake as Operator, approval of any
contract or series of related contracts or other dealings between a
Joint Venture or its Holding Vehicle on the one hand, and FX
Homestake or an Affiliate of either of them on the other hand.
The Parties shall use their respective rights and powers as shareholders or
partners in the Holding Vehicles and otherwise to ensure, so far as they are
legally able, that decisions of the Management Committee with respect to any of
the matters specified in this Section 12.6 shall be implemented by each Holding
Vehicle affected thereby.
12.7 Mining Technical Committee
With respect to each Joint Venture and the assets held or controlled by and
through such Joint Venture, the Parties will create a technical committee (the
"Mining Technical Committee") which will have regular access to all data and
technical reports with respect to the mining of the properties subject to the
related Mineral Entitlement(s). Each Party will appoint one member to the
Exploration Technical Committee. The Mining Technical Committee will have the
opportunity to review and make suggestions to the Operator with respect to the
construction and operation of the relevant mine.
12 8 General Meetings of Limited Liability Company Holding Vehicles
(a) In the case of a Holding Vehicle which is a limited liability company,
general meetings that require formal decisions by shareholders shall take
place in accordance with the applicable provisions of the relevant Articles
which shall provide that:
(i) a quorum shall be one (1) duly authorized representative or
alternate of the Homestake shareholder and one (1) duly authorized
representative or alternate of the FX shareholder,
(ii) the notice of meeting shall (unless otherwise agreed by each of the
shareholders) set out an agenda identifying in reasonable detail the
matters to be discussed and shall be agreed to by the shareholders
by way of facsimile; and
(iii) no matter shall be considered, nor shall any decision be taken, with
respect to a matter reserved for the Management Committee under this
Agreement, unless such matter already has been the subject of a
Management Committee decision, and then only in accordance with such
decision.
(b) Any matters requiring a general meeting of or approval by the shareholders
under Polish law but not covered by this Agreement, shay be dealt with in
accordance with the Articles. General meetings shall take place in Warsaw,
Poland unless otherwise agreed.
12.9 Decisions of Commercial Partnership Holding Vehicles
Matters reserved by this Agreement for the Management Committee pursuant to
Section 12.6 that require a formal decisions by a Holding Vehicle which is a
partnership shall be dealt with in accordance with the relevant Articles and
this Agreement. No matter shall be considered, nor shall any decision taken, by
taken by any such Holding Vehicle with respect to a matter reserved for the
Management Committee unless such matter has been the subject of a Management
Committee decision, ant then only in accordance with such decision.
ARTICLE 13
ASSIGNMENT AND TRANSFER OF INTERESTS
13.1 General Restrictions
(a) Other than in accordance with this Article 13, FX shall not (i) assign or
transfer any or all of its interest in this Agreement, the association
created by Article 3, any Holding Vehicle, any Mineral Entitlement, any
Joint Venture or Ownership Interest created pursuant to this Agreement
(collectively "Restricted Interests"), (ii) grant, declare, create or
otherwise dispose of any right or interest in any or all of its Restricted
Interests; or (iii) create or permit to exist any pledge, lien, charge
(whether fixed or floating) or other Encumbrance over any or all of its
Restricted Interests.
(b) Notwithstanding any other provisions of this Article 13, no assignment or
transfer of a Restricted Interest, or any other right or obligation under
this Agreement, shall be permitted by either Party under any circumstances
if, in the reasonable opinion of the non transferring Party, such transfer
will in any way jeopardize usufructs, concessions or rights related to any
Mineral Entitlements held by any Holding Vehicle.
(c) Without the express written consent of Homestake, which may be withheld, no
transfer by FX of any Restricted Interest shall convey any rights or
obligations of FX hereunder with respect to the association contemplated by
Article 3.
13.2 Transfers by FX to Affiliates
FX shall be entitled, at any time, to transfer any of its Restricted Interests
to any Affiliate, provided that such Affiliate first agrees in writing for the
benefit of Homestake to be bound by the provisions of this Agreement (including
this Article 13) and, further, that if such Affiliate ceases, at any time, to be
an Affiliate of FX such Affiliate shall have transferred all of the Restricted
Interests back to such Party prior to ceasing to be an Affiliate.
13.3 Transfers by FX to non-Affiliates
Subject to Homestake's right of first refusal as provided in Section 13.4, FX
shall be entitled to transfer any Restricted Interest to a third party with the
prior consent in writing of Homestake, such consent not to be withheld (except
any rights or obligations of FX hereunder with respect to the association
contemplated by Article 3) in the event the proposed third party transferee is,
in the discretion of Homestake (acting reasonably), financially able to carry
out the financial obligations and assume the obligations and financial
liabilities which are to be assigned to such third party transferee in
accordance with Sections 13.5 and 13.6.
13.4 Right of First Refusal With Respect to Transfer of FX Interest
(a) Subject to the provisions of Sections 13.1,13.2 and 13.3, FX may at any
time assign or transfer all (but not less than all) of its Restricted
Interests to a third party purchaser (the "Third Party Purchaser") provided
that FX shall first give to Homestake notice in writing of a written offer
(and a copy thereof) from the proposed Third Party Purchaser to purchase
FX's Restricted Interests (a "Transfer Notice") and a copy of FX's contract
with the proposed Third Party Purchaser (the "Sale Contract"). Every such
Sale Contract shall be conditional on Homestake not exercising its right of
first refusal contained herein to purchase FX's Ownership Interest and must
also set forth:
(i) the selling price for the Restricted Interest denominated in US
dollars;
(ii) all the provisions of payment for the Restricted Interest;
(iii) an enforceable undertaking by the Third Party Purchaser to comply
with each of the conditions set forth in Section 13.5; and,
(iv) all the other terms and conditions relating to the sale of the
Restricted Interest.
(b) On receipt of a Transfer Notice and a copy of the Sale Contract, Homestake
shall have the right of first refusal pursuant to which it may purchase all
(but not less than all) of FX's Restricted Interest at the selling price
specified in the Sale Contract by giving written notice to FX within thirty
(30) days of receipt of the Transfer Notice and a copy of the Sale Contract
(the "Acceptance Period").
(c) Homestake shall become bound (subject only to any necessary approvals of
any competent regulatory authorities) to purchase FX's Restricted Interest
on giving written notice to FX of its intent to exercise its rights under
Section 13.4(b). In such event, Homestake shall purchase FX's Restricted
Interest at the US dollar selling price and otherwise on the same terms and
conditions set out in the Sale Contract. Completion of the sale and
purchase of the Restricted Interest shall take place within thirty (30)
days after the giving of such notice or, if later, the receipt of all
necessary approvals of any competent regulatory authorities.
(d) If Homestake does not exercise, in relation to a Transfer Notice and a
Sale Contract, its right of first refusal under Section 13.4(b), FX shall
(subject to Section 13.5) be entitled in the ninety (90) days following
such non-exercise (or such longer period as may reasonably be required to
obtain any necessary approvals of any competent regulatory authorities) to
transfer the Restricted Interest to the Third Party Purchaser at the US
dollar selling price and on the other terms and conditions specified in the
Sale Contract. If the Restricted Interest is not so sold in that period the
provisions of this Section 13.4 shall again apply.
13.5 Conditions on Transfer of FX Ownership Interest to Third Party Purchaser
Completion of any assignment or transfer of a Restricted Interest by FX to a
Third Party Purchaser shall be subject to the conditions that:
(a) the Third Party Purchaser shall first have entered into an agreement with
and for the benefit of Homestake whereby it agrees to be bound (in form
reasonably satisfactory to Homestake) by provisions substantially the same
as the provisions of this Agreement and the Exhibits hereto, including, in
the event that the Restricted Interest sold is an Ownership Interest, the
obligation to provide funding to the related Holding Vehicle on the terms
and conditions as set forth in this Agreement;
(b) any Loans, borrowings and other indebtedness owing at that time to FX and
any of its Affiliates from a Holding Vehicle(s) in respect of which the
Restricted Interest is being sold, shall first have been assigned to and
accepted by such Third Party Purchaser; and
(c) the Third Party Purchaser shall first have assumed the obligations and
liabilities of FX under any financings, guarantees and/or indemnities to
third parties in relation to the Business(es) of such Holding Vehicle(s),
provided that any such assumption shall be without prejudice to any right
of Homestake to receive a contribution from FX for its proportion of any
liabilities attributable to or arising in respect of the period during
which FX and/or its Affiliates held the Restricted Interests being sold.
13.6 Transfers By FX to Secure Financing for Mineral Entitlements
(a) Notwithstanding any other provision of this Article, FX may make an
assignment or transfer that is a grant of a security interest by mortgage,
deed of trust, pledge, lien or other Encumbrance of any Restricted Interest
in order to secure a loan or other indebtedness of FX in connection with
the financing of FX's proportionate share of funding for construction of a
mine on a Mineral Entitlement as to which FX has made an election pursuant
to Section 7.7(c) ("Financing Transfer"). Each Financing Transfer shall be
expressly subordinate to the terms of this Agreement and the rights and
interests of Homestake hereunder and shall provide that upon any
foreclosure, judicial sale, or other enforcement of rights resulting in or
intended to result in acquisition of a Restricted Interest by any third
party (including the original holder of the security interest), such
acquiring third party shall (i) comply with the provisions of Section
13.5(a), (b), and (c) and (ii) otherwise assume the position of FX with
respect to this Agreement and Homestake, including but not limited to FX's
continuing obligation to bring current any past default by FX in advancing
or otherwise providing FX's proportionate share of funds required under
this Agreement.
(b) The right of first refusal granted to Homestake pursuant to Section 13.4
shall not apply to the creation of any Financing Transfer but shall apply
to any assignment or transfer of a Restricted Interest by way of
foreclosure, judicial sale, or other enforcement of the security interest
created in connection with a Financing Transfer.
13.7 Continuing Liability of Party Transferring a Restricted Interest
A Party which sells a Restricted Interest to a Third Party Purchaser shall
remain liable for its proportionate share of all the liabilities and obligations
of the Holding Vehicle(s) and Mineral Entitlements in respect of which the
Restricted Interest is being sold and which arose at any time prior to such
sale.
13.8 Transfers of Distributive Interests by FX
In the event FX desires to transfer or assign a Distributive Interest or a right
to payment under Section 6(a), it shall first offer such interest or right to
Homestake by written notice. Within ten days following receipt of such notice,
Homestake shall indicate to FX whether Homestake desires to acquire such
Distributive Interest or right to payment. If Homestake desires to do so, the
Parties shall negotiate in good faith to effect such acquisition. In the event
Homestake does not desire to do so, or the Parties do not reach agreement within
75 days following the receipt of such notice, FX shall be free to assign or
otherwise transfer such Distributive Interest for 90 days, after which period
the provisions of this Section shall again apply.
13.9 Parties to Implement Transfers
The Parties undertake to cause the respective Holding Vehicle(s) to give their
approval, in accordance with the Articles, to any transfer of Restricted
Interests permitted by this Article 13.
ARTICLE 14
WARRANTIES AND RELATED COVENANTS OF FX AND SUDETY
14.1 Warranties of FX and Sudety
FX warrants the following to Homestake:
(a) FX has good title, free from Encumbrances, to all of the shares in the
capital of Sudety and each Affiliate that is a partner in a partnership
holding one of the usufructs constituting the Permian Prospect.
(b) No person or entity has any right, actual or contingent, to call at any
time for the allotment, issue, sale or transfer of any share or loan of
capital of Sudety.
(c) FX has the requisite power and authority to enter into and perform this
Agreement and the transactions and other acts contemplated hereby.
(d) When duly executed, this Agreement and the other agreements contemplated
hereby will constitute binding obligations of FX enforceable against FX in
accordance with their respective terms and conditions.
(e) The execution, delivery and performance of this Agreement and the other
agreements contemplated hereby will not (i) result in a breach of any
provision of the articles of incorporation or other organic documents or by
laws of FX or Sudety or any Affiliate of FX that is a partner in a
partnership holding one of the usufructs constituting the Permian Prospect;
(ii) result immediately or with the passage of time in any breach of or
constitute a default under, any instrument, agreement, authorization, or
entitlement to which FX or Sudety or any Affiliate of FX that is a partner
in a partnership holding one of the usufructs constituting the Permian
Prospect is a Party or by which FX or Sudety or any such affiliate is
bound, including but not limited to the Sudety Prospect and the Permian
Prospect; (iii) result immediately or with the passage of time in a breach
of any order, judgment, or decree of any court or governmental agency to
which FX or Sudety or any Affiliate of FX that is a partner in a
partnership holding one of the usufructs constituting the Permian Prospect
is a Party or by which FX or Sudety or such Affiliate is bound; or (iv)
require the consent of the shareholders of FX, Sudety or any Affiliate of
FX that is a partner in a partnership holding one of the usufructs
constituting the Permian Prospect or of any third party.
(f) The Sudety Prospect is held exclusively by Sudety and grants the right to
Sudety to explore for gold as set forth therein and is not the subject of
any Encumbrance, agreement (written or oral), royalty or undertaking to pay
on deferred terms or any similar agreement or undertaking not preciously
disclosed to Homestake in writing, excluding such payments and fees as may
be required to be paid to the Republic of Poland or its political
subdivisions in accordance with the terms of the Sudety Prospect or as may
be otherwise required by Polish law.
(g) Within 30 days following the Effective Date, FX and Sudety will have
delivered to Homestake all books, records, data, usufructs, concessions,
agreements and information (including all geological and geophysical data)
concerning the Sudety Prospect and the Permian Prospect held by FX or
Sudety or in the possession or control of their Affiliates.
(h) There are no litigation, arbitration, or administrative proceedings
relating to FX Sudety or an FX Affiliate that is a partner in a partnership
holding one of the usufructs constituting the Permian Prospect, or the
properties or Mineral Entitlements controlled by them, including but not
limited to the Sudety Prospect and the Permian Prospect, in progress,
threatened, or pending; nor are there any circumstances known to FX which
are likely to give rise to any such proceedings. Neither FX nor Sudety nor
any Affiliate of FX which is a partner in a partnership holding one of the
usufructs constituting the Permian Prospect is subject to any unsatisfied
order or judgment given by any court or governmental agency or to any
undertaking or assurance given to any court or governmental agency which is
still in force.
(i) Sudety has complied in all respects with all requirements imposed by any
applicable mining, environmental, health and safety laws in Poland and has
incurred no liabilities as a result of any breach of any such requirements.
There are no circumstances known to FX likely to give rise to a third party
claim or render any of the usufructs or concessions constituting the Sudety
Prospect, or any of the usufructs constituting the Permian Prospect
unusable or subject to an order for decontamination or a similar procedure.
(j) FX and Sudety have in all other respects complied with the laws of Poland
and with respect to all activities in and in respect of Poland have
complied with the United States Foreign Corrupt Practices Act (15 U.S.C.
Sections 78dd-1 et seq.).
(k) Each of the Mineral Entitlements, including the Sudety Prospect and the
Permian Prospect, are in good standing and are valid and enforceable in
accordance with their terms and conditions. There is no violation or
default by Sudety or any other Affiliate of FX with respect to any statute,
regulation order, decree, or judgment of any court (whether of Poland or
any other applicable jurisdiction) which may have an adverse effect on the
implementation of the transactions contemplated under this Agreement or the
carrying out of exploration pursuant to the terms of any of the Mineral
Entitlements.
(1) The most recent unaudited balance sheet of Sudety are attached hereto as
Exhibit J. All material liabilities of Sudety are shown in such balance
sheet[s] and there have been no material adverse changes in the financial
position of Sudety or the condition of its assets since the date thereof.
14.2 Continuing Nature of Warranties
FX represents and warrants to Homestake that each of the Warranties is true and
accurate in all respects at the Effective Date and will continue to be true and
accurate in all respects up to and through the conveyance contemplated by
Section 7.1 and the amendments and conveyances contemplated by Section 7.2.
14.3 Assurances as to Warranties
FX shall perform, and shall cause Sudety and any Affiliate that is a partner in
a partnership holding one of the usufructs constituting the Permian Prospect to
perform, all acts which are necessary to avoid the breach of any of the
Warranties at any time up to and including the time of the conveyances
contemplated by Section 7.1 and the amendments and conveyances contemplated by
Section 7.2.
14.4 Reliance on Warranties
FX acknowledges that Homestake is entering into this Agreement in reliance upon
each of the Warranties.
14.5 Warranties independent
Each of the Warranties shall be construed as a separate and independent warranty
and (unless expressly provided to the contrary) will not be limited or
restricted by reference to or inference from the teens of any other Warranty or
any other term of this Agreement.
14.6 Covenants of FX
(a) FX covenants that FX and its Affiliates shall disclose in writing to
Homestake anything which is or may constitute a breach of or be
inconsistent with any of the Warranties immediately after it comes to its
or their notice at any time during the term of this Agreement whether
before or after the conveyances contemplated by Section 7.1 and the
amendments and conveyances contemplated by Section 7.2.
(b) FX covenants that until the conveyances contemplated by Section 7. l are
effected, FX will keep the capital stock of Sudety, and that until the
amendments and conveyances contemplated by Section 7.2 are effected, FX
will keep the stock of any FX Affiliate which is partner in a partnership
holding one of the usufructs constituting the Permian Prospect, free and
clear from all Encumbrances.
14.7 Remedies for Breach of Warranties
Homestake's remedies in respect of a breach of the Warranties include those set
out in Section 23.3.
ARTICLE 15
CONFIDENTIALITY
15.1 Covenant With Respect to Confidential Information
Each Party covenants to the other that it shall use all reasonable efforts to
keep confidential (and to ensure that its directors, officers, employees, agents
and other advisers keep confidential) all data, reports, records and other
information relating to this Agreement, and any information proprietary to such
other Party or to one or more Holding Vehicles in relation to the Mineral
Entitlements and the Business which such Party may have or acquire in
consequence of being a joint venturer, partner or shareholder or by virtue of
the exercise of its rights or performance of its obligations hereunder
("Confidential Information").
15.2 Exceptions
The obligation of confidentiality under Section 15.1 shall not apply to:
(a) the disclosure of information to a Party's directors, officers, advisors
and shareholders on a "need to know" basis or where such disclosure is
otherwise necessary to effect the purposes of this Agreement;
(b) the disclosure of information to the extent required to be disclosed by
law, by any stock exchange on which the stock of either Party or any of its
Affiliates trades, or by any binding judgment, order or requirement of any
court, arbitration panel or other competent authority;
(c) the disclosure of information to any tax authority to the extent reasonably
required in connection with the tax affairs of a Party and any of its
Affiliates;
(d) information which is or becomes within the public domain (otherwise than as
a result of a breach of this Article 15); the disclosure of information (i)
in connection with prospective financing relating to the construction of a
mine on one or more Mineral Entitlements, and (ii) to prospective
purchasers of an interest under this Agreement who enter into a
confidentiality agreement with such Party for the benefit of the other
Party containing substantially the same terms as this Article 1S; or (f)in
connection with any dispute or enforcement action arising out of or related
to this Agreement or any of the Holding Vehicles or Mineral Entitlements.
15.3 Return of Confidential Information
If at any time after an election by FX pursuant to Section 7.7, either Homestake
or FX no longer holds an Ownership Interest in any particular Holding Vehicle,
the Party continuing to hold any such interest may demand in writing from the
other the return of its Confidential Information relating thereto by notice in
writing whereupon the other shall (and shall ensure that their directors,
officers, employees, agents, and any other advisers shall) return to the Party
continuing to hold such an Ownership Interest or destroy all documents
containing Confidential Information in its possession or the possession of its
Affiliates; provided, however, that each Party may retain one copy of such
Confidential Information as is necessary to evidence its compliance with the
terms of this Agreement, to determine and evidence the accuracy of their books
and records (including tax records), for use in connection with any dispute,
arbitration or litigation concerning this Agreement and to otherwise comply with
all laws and regulations. Each Party covenants to the other that it shall use
reasonable efforts to keep confidential (and to ensure that its directors,
officers, employees, agents and other advisers keep confidential) any
information proprietary to any Holding Vehicle.
15.4 Duty to Bind Others to Confidentiality
Each Party shall inform (and shall be responsible to the other Party for) its
directors, officers, employees, agents and any professional or other advisers to
whom it provides Confidential Information of the obligation contained in this
Agreement and shall ensure that they keep such information confidential and do
not disclose it to any third party except in accordance with the terms of this
Agreement.
15.5 Survival of Confidentiality Obligation
The provisions of this Article 15 shall survive any termination of this
Agreement with respect to any particular Holding Vehicle or Mineral Entitlement
for a period of two (2) years after its termination with respect thereto.
15.6 Applicability of Section
In the event that FX elects a Distributive Interest with respect to one or more
Mineral Entitlements, Homestake shall have no further obligation arising under
this Section with respect to such Mineral Entitlements.
ARTICLE 16
ANNOUNCEMENTS
Each Party shall be free to issue press releases and make public announcements
with respect to this Agreement or the transactions contemplated by it but before
doing so shall afford the other a reasonable opportunity to review and comment
on them. Neither Party shall issue any release or announcement that includes the
name of the other without receiving the other's written consent, which consent
shall not be unreasonably withheld, conditioned or delayed. In the event that FX
elects a Distributive Interest with respect to one or more Mineral Entitlements,
Homestake shall have no further obligation arising under this Section with
respect to such Mineral Entitlements.
ARTICLE 17
ASSURANCES
17.1 Undertaking to Observe Agreements
Each Party undertakes with the other that (so far as it is legally able) it will
exercise all rights and powers, direct and indirect, available to it in relation
to any so as to ensure the complete and punctual fulfillment, observance and
performance of the provisions, the purposes of this Agreement, and the
conveyances and adjustments of interests and other matters arising out of this
Agreement and the Subsidiary Agreements.
17.2 Affiliates to Observe Agreements
Each Party shall ensure the performance by its Affiliates of all obligations
under this Agreement and the Subordinate Agreements (whether as shareholders,
partners, joint venturers or otherwise) and of all obligations under any
agreement entered into by any of its Affiliates pursuant to this Agreement. The
liability of a Party under this Section l 7.2 shall not be discharged or
impaired by any amendment to or variation of this Agreement, any release of or
granting of time or other indulgence to any Affiliate or any third party, or any
other act, event or omission which but for this provision would operate to
impair or discharge the liability of such Party under this Section 17.2.
ARTICLE 18
This Article intentionally left blank.
ARTICLE 19
DEALINGS BETWEEN THE HOLDING VEHICLE AND THE PARTIES
Except for any contract engaging Homestake as Operator, any contracts or other
dealings between a Joint Venture or any Holding Vehicle on the one hand, and FX
Homestake or an Affiliate of either of them on the other hand, in respect of the
supply of services, products or components, shall be made on arm's length terms
and conditions. Subject the approval of the Management Committee, a Joint
Venture or any Holding Vehicle shall be free to source from a third party as it
may determine to be in the best interests of its Business.
ARTICLE 20
DISTRIBUTION POLICY
With respect to any Holding Vehicle, for so long as more than one Party holds an
Ownership Interest therein, each Party holding an Ownership Interest (but not a
Distributive Interest) shall be entitled to receive, in respect of any dividends
or distributions made by such Holding Vehicle, a proportion thereof equal to its
then Ownership Interest; provided, however, that any funds available after
paying the costs of the Business shall, before payment of such dividends or
distributions, be applied in repaying any Loans then due, in setting aside
working capital and in funding the reclamation fund provided for in Section III
of Exhibit H.
ARTICLE 21
TAX MATTERS
21.1 Cooperation
The Parties agree to the general principle that they will cooperate, and will
cause their Affiliates and the Joint Ventures and Holding Vehicles to cooperate,
in taking all measures reasonably appropriate to ensure that the Joint Ventures
and the Holding Vehicles are run in a tax efficient manner, including but not
limited to the filing by the Operator on behalf of the Parties of such elections
and notifications under US and Polish law necessary or useful to ensure that the
Parties are separately responsible for taxes measured by sales revenue or net
income.
21.2 Tax Information
Each Party will keep the other Party informed of any fact, matter or thing of
which it becomes aware which might reasonably be expected to be of material
concern in relation to the tax affairs of one or more of the Holding Vehicles
(other than information about changes in law or published practice which is
generally available).
ARTICLE 22
INFORMATION
22.1 Access to Information
Each Party holding an Ownership Interest in a Holding Vehicle shall be entitled
upon reasonable prior notice to examine the books, records and accounts to be
kept by such Holding Vehicle or its Operator and to be provided with all
information reasonably required to keep it properly informed about such Holding
Vehicle's Business. Each Party holding a Distributive Interest shall be entitled
to the audit rights available to such holder as respectively provided in Exhibit
F and Exhibit G.
22.2 Audited Accounts and Business Plans
Prior to the election of FX required by Section 7.7, FX and Homestake each shall
be provided with copies of: (i) annual accounts for each Holding Vehicle
(complying with all relevant legal requirements and audited if require by law or
deemed appropriate by the Operator); and, (ii) not later than November 1 5th of
each year, a business plan itemizing estimated operating and capital costs for
the succeeding year of such Holding Vehicle's operation. After the election by
FX required by Section 7.7, only those Parties holding an Ownership Interest in
the Holding Vehicle which holds the Mineral Entitlement in respect of which FX
has made such election shall be entitled to such copies in respect of such
Holding Vehicle.
ARTICLE 23
BREACH AND INSOLVENCY EVENTS
23.1 Notice of Breach
If a Party (the "Defaulting Party") commits a breach of any of the provisions of
this Agreement, the other Party may serve notice upon the Defaulting Party
specifying such breach (the "Breach") and requiring the Defaulting Party
immediately to cease the Breach and to cure within ninety (90) days the results
of the Breach. Any such cure shall not affect the other Party's right
subsequently to damages or other compensation under applicable law for the
Breach or, where appropriate, to seek the remedy of an injunction, specific
performance or similar court order to enforce the obligations of the Defaulting
Party.
23.2 Remedies With Respect to Insolvency Event or Breach
If an Insolvency Event occurs in relation to a Party or a Breach is not cured
within the ninety (90) day period referred to in Section 23. l by a Party (the
"Affected Party"), the other Party shall have the right to damages or other
compensation under applicable law for the Breach or, where appropriate, to seek
the remedy of an injunction, specific performance or similar court order to
enforce the obligations of the Affected Party.
(b) It shall be an "Insolvency Event" in relation to a Party if:
(i) an order is made by a court of competent jurisdiction, or a
resolution is passed, for the winding up, dissolution or
administration of that Party (otherwise than in the course of a
reorganization or restructuring previously approved in writing by
the other Party); or
(ii) any step is taken (and not withdrawn within ninety (90) days) to
appoint a manager, receiver, administrator, trustee or other similar
officer in respect of any assets which include the Ownership
Interest held by that Party or any Affiliate thereof; or
(iii) such Party convenes a meeting of its creditors or makes or proposes
any arrangement or composition with, or any assignment for the
benefit of, its creditors.
23.3 Breach of Warranties
(a) In addition to such other remedies as may be available to Homestake at law
or in equity or otherwise in accordance with this Article 23, if, between
the Effective Date and the date of any conveyance contemplated by Section
7.1 or any amendment contemplated by Section 7.2, any of the Warranties is
or was untrue, inaccurate or materially misleading, or there has been any
material breach of any other provision in this Agreement, Homestake shall
be entitled to terminate this Agreement from such time without further
obligation or liability of any kind to FX.
(b) If this Agreement is terminated in accordance with Section 23.3(a), FX will
reimburse to Homestake on demand the sum of US $88,000; and all obligations
of Homestake under this Agreement shall cease except for the
confidentiality restrictions contained in Article 15.
23.4 Scope of Article
For clarity, reference to a particular Party in this Article 23 includes any
Affiliate of such Party that is a direct or indirect shareholder of such Party
or is a shareholder or partner of a Holding Vehicle, but does not include any
Holding Vehicle.
ARTICLE 24
TERMINATION OF JOINT VENTURES AND AGREEMENT
24.1 General
Except as otherwise provided in Section 7.9(c) and Section 23.3, each Joint
Venture shall continue in effect until the termination of this Agreement
pursuant to Section 24.2 or by Homestake pursuant to Section 7.4.
24.2 Agreement to Survive Termination of Term of Association; Termination of
Joint Venture: Termination of Agreement
(a) Upon expiration or termination of the Term of Association, the Joint
Ventures formed hereunder shall continue in effect until terminated as
provided in Section 24.2(b). Notwithstanding any termination of the Term of
Association, for so long as this Agreement otherwise remains in effect
Homestake and FX shall retain their then existing respective Ownership
Interests, Distributive Interests and contractual royalties and FX shall
retain any continuing right to payment pursuant to Section 6.1. After
termination of the Term of Association; neither Homestake nor FX shall have
any obligation to the other with respect to any property or rights in the
Area of Interest acquired by either Party after the effective date of such
expiration or termination except within the outer boundaries of such
Mineral Entitlement(s) as continue to be held by a Holding Vehicle.
(b) Unless sooner terminated by the Parties or pursuant to Section 7.4, each
Joint Venture created pursuant to this Agreement shall terminate at such
time as no Mineral Entitlement or other asset or liability is held by and
through such Joint Venture. This Agreement shall terminate (i) if
terminated by Homestake pursuant to Section 7.4, (ii) at such time after
expiration of the Term of Association as no Joint Venture continues in
effect; or (iii) when otherwise terminated or dissolved by agreement of the
Parties or by operation of law.
ARTICLE 25
WAIVER OF RIGHTS
25.1 Waiver Not to Be Construed as Subsequent Waiver
No waiver by a Party of a failure by the other Party to perform any provision of
this Agreement shall operate or be construed as a waiver in respect of any other
failure whether of a like or different character.
25.2 Delay Not to Be Construed as Waiver
No delay or omission on the part of any Party in exercising any right, power or
remedy provided by law or under this Agreement or any other documents referred
to herein shall (a) impair such right, power or remedy or (b) operate as a
waiver thereof
25.3 Partial Exercise of Rights
The single or partial exercise of any right, power or remedy provided by law or
under this Agreement shall not preclude any other or further exercise thereof or
the exercise of any other right, power or remedy.
25.4 Cumulative Nature of Rights. Powers and Remedies
The rights, powers and remedies provided in this Agreement are cumulative and
not exclusive of any rights, powers and remedies provided by law.
ARTICLE 26
DISPUTE RESOLUTION
Any disagreement or dispute arising out of or related to this Agreement and its
Exhibits, their existence, interpretation, performance or enforcement not
resolved by the disputing Parties within fifty days from the date on which any
Party notifies the other of any such disagreement or dispute shall be decided
finally by arbitration before three arbitrators in San Francisco, California
under the commercial rules of the American Arbitration Association pursuant to a
notice of arbitration which shall detail the matter in dispute and the remedy
requested by the Party giving such notice. Such notice shall appoint one
arbitrator and for the purpose of such arbitration FX and its Affiliates shall
be treated as one Party and Homestake and its Affiliates as the other Party.
Within ten days of the receipt of such notice, the other Party shall appoint a
second arbitrator and the two arbitrators so named shall within ten days of the
appointment of the second, appoint the third. If the two arbitrators appointed
cannot agree upon the third arbitrator within such ten days, either Party may
apply to a Judge of the Superior Court of the City and County of San Francisco
to designate the third arbitrator. Each arbitrator shall be an individual
qualified by training and experience in mining or mining exploration matters.
No discovery shall be available. Each arbitrating Party shall bear the costs of
the arbitrator appointed by such Party and the costs of the third arbitrator
shall be borne equally by all of arbitrating Parties. The prevailing Party shall
be entitled to recover its costs of arbitration (including attorneys' fees and
the expenses of the arbitrators). The arbitrators shall enter their award within
45 days following the appointment of the third arbitrator. The award shall be
final and binding on each of the arbitrating Parties and its Affiliates and
there shall be no appeal therefrom. The award may be enforced in any court
having jurisdiction over the person or property of any person against whom
enforcement of the award is sought, including the courts of the Republic of
Poland.
ARTICLE 27
AMENDMENTS
This Agreement may be amended only by an instrument in writing signed by duly
authorized representatives of each of the Parties.
ARTICLE 28
INVALIDITY
If any of the provisions of this Agreement is or becomes invalid, illegal or
unenforceable, the validity, legality or enforceability of the remaining
provisions of this Agreement shall not in any way be affected or impaired. The
Parties shall nevertheless negotiate in good faith in order to agree to the
terms of a mutually satisfactory provision, achieving as nearly as possible the
same commercial effect, to be substituted for the provision so found to be
invalid, illegal or unenforceable.
ARTICLE 29
ENTIRE AGREEMENT; RELATIONSHIP; EFFECT
29.1 Entire Agreement
This Agreement, the Subordinate Agreements, and their Exhibits and the other
documents contemplated by them, constitute the sole and only agreements between
the Parties relating to their association created pursuant to Article 3, the
exploration, development and exploitation of the Mineral Entitlements and the
Holding Vehicles through which the Business is conducted. All other agreements
and understandings between the Parties, whether oral or written, express or
implied, are hereby terminated, extinguished and superseded, including but not
limited to any prior drafts, agreements, undertakings, representations,
warranties and arrangements of any nature whatsoever, whether or not in writing,
that certain Letter of Intent between Homestake and FX executed on June 13,
1997, and the Confidentiality Agreement between the same Parties made effective
August 1, 1997.
29.2 No Reliance on Prior Representations
Each of the Parties acknowledges that in entering into this Agreement, it is not
relying upon any representation, warranty, promise or assurance made or given by
any other Party or any other person, whether or not in writing, at any time
before the execution of this Agreement and not expressly set out in this
Agreement.
29.3 Agreement to Control in Case of Conflict
The Parties have entered into this Agreement in the United States with the
intent that it shall govern their respective rights and duties relating to its
subject matter. In the event of any conflict between the text of this Agreement
and its Exhibits or the Subordinate Agreements, the text of this Agreement shall
control.
29.4 Partnership in Poland for Convenience Only; No Partnership Elsewhere
Notwithstanding that the Parties for convenience, tax, and other reasons
relating to their activities in Poland have agreed to hold certain Mineral
Entitlements in Poland through commercial partnerships organized under the law
of the Republic of Poland, they do not intend that this Agreement or any other
agreement create, or be construed to create, in the United States or in any
other jurisdiction outside of Poland, any mining, commercial or other
partnership, or other special or fiduciary relationship not expressly set forth
in this Agreement, and nothing contained in this Agreement shall be deemed to
constitute either Party the partner of the other, nor, except as otherwise
herein expressly provided, to constitute either Party the agent or legal
representative of the other.
29.5 Limitation of Capacity of Parties to Act for One Another
Except as expressly set forth in this Agreement or a Subordinate Agreement and
except as required by Polish law with respect to the assets of a Holding Vehicle
in Poland, (i) neither Party shall have any authority to act for or to assume
any obligation or responsibility on behalf of the other Party; (ii) the rights,
duties, obligations and liabilities of the Parties created under this Agreement
shall be several and not joint and several; and (iii) each Party shall be
responsible only for its respective share of any obligations, liabilities and
costs arising from the relationships and the venture contemplated herein, it
being the purpose and intention of the Parties that their ownership of assets
and the rights acquired hereunder shall be as tenants in common.
29.6 Force Majeure
If either Party shall be prevented by Force Majeure from timely performance of
any obligations arising under this Agreement except the payment of money, the
failure shall be excused and the period for performance shall be extended for a
period equal to the duration of Force Majeure. The Party claiming benefit of
Force Majeure shall promptly give the other notice of commencement and
termination of Force Majeure. The Party claiming benefit of Force Majeure shall
use reasonable diligence to remove Force Majeure but shall not be required
against its will to institute legal proceedings, adjust any labor dispute or
challenge the validity of any law, regulation, action or inaction of government.
"Force Majeure" includes any cause beyond reasonable control of a Party, whether
or not foreseeable, including but not limited to: law, regulation, action or
inaction of government; inability to obtain on acceptable terms any public or
private license, permit or authorization which may be required for operations in
connection with one or more Mineral Entitlements or other property, including
removal and disposal of waters, wastes and tailings and reclamation; fire;
explosion; inclement weather, flood; civil commotion; labor dispute; inability
to obtain workmen or material; delay in transportation; and acts of God.
ARTICLE 30
COSTS AND EXPENSES
Except as otherwise expressly stated herein, each Party shall pay its own costs
and expenses in relation to the execution and performance of this Agreement and
the other agreements contemplated hereby, and the preparation, execution and
implementation of this Agreement. Each of the Parties represents that it has not
engaged any broker, finder, or intermediary in this matter who is entitled to a
fee or commission for which any other might be liable.
ARTICLE 31
COMPLIANCE WITH LAWS
Homestake and FX shall perform, and shall cause all of their respective
Affiliates and all of the Holding Vehicles to perform, all activities and
operations relating to the subject manner of this Agreement and the Subordinate
Agreements in accordance with the United States Foreign Corrupt Practices Act
(15 U.S.C. Sections 78dd-1 et seq.) and the laws of the Republic of Poland.
ARTICLE 32
GOVERNING LAW
The interpretation and enforcement of this Agreement shall be governed by the
domestic law of the State of California.
ARTICLE 33
NOTICES
All notices under this Agreement shall be in writing and shall be delivered in
person or sent by registered or certified mail, postage prepaid, telecopier or
other means providing for receipt of the communication in written form. Notices
sent by certified or registered mail shall be effective on the next business day
after the date of actual delivery. Notices sent by telecopier shall be effective
on the next business day after the day of transmission provided that the sending
Party has received electronic confirmation of successful transmission. Until a
change of address is so given, notices shall be addressed as follows:
To Homestake
Homestake Mining Company of California
650 California Street, 11th Floor
San Francisco, CA 94108
Tel: 415-981-8150
Fax: 415-397-0952
Attn: Dennis B. Goldstein.
To FX:
FX Energy, Inc
3006 Highland Drive, Suite 206
Salt Lake City, Utah 84106
Tel: 801-486-5555
Fax: 801-486-5575
Attn: David N. Pierce
IN WITNESS WHEREOF, the Parties have caused their duly authorized
representatives to execute this Agreement on the Effective Date.
AGREED TO ON BEHALF OF FX ENERGY INC.
By: /s/ David N. Pierce
Its: President
Dated: December 30, 1997
AGREED TO ON BEHALF OF HOMESTAKE MINING COMPANY OF CALIFORNIA
By: /s/ W. F. Lundquist
Its: Vice President
Dated: December 31, 1997
FX ENERGY, INC.
Effective December 31, 1997
Mr. Thomas B. Lovejoy
Lovejoy & Associates
48 Burying Hill Road
Greenwich, Connecticut 06831
Dear Tom:
Lovejoy Associates, Inc. (the "Consultant"), has been engaged to render
financial consulting services to FX Energy, Inc. (the "Company") pursuant to a
letter agreement dated August 3, 1995. The consulting fee payable under the
engagement was $10,000 per month through December 31, 1997. Pursuant to action
of the board of directors on November 11, 1997, this letter will confirm the
understanding of the Consultant and the Company to extend the consulting
engagement through December 31, 1998, for a monthly consulting fee of $15,000.
Please confirm the foregoing by signing the enclosed duplicate of this
letter in the space provided and returning it.
FX ENERGY, INC.
/s/ Scott J. Duncan
Duly authorized officer
AGREED EFFECTIVE as of December 31, 1997
LOVEJOY ASSOCIATES, INC.
/s/ Thomas B. Lovejoy, President
ADDENDUM TO
EMPLOYMENT AGREEMENT
THIS ADDENDUM TO EMPLOYMENT AGREEMENT is made and entered into effective
the 12th day of May, 1997, by and between FX ENERGY, INC., a Nevada corporation
("Employer"), and JERZY B. MACIOLEK ("Employee"), based on the following:
PREMISES
Employer and Executive entered into that certain Employment Agreement dated
July 11, 1996 (the "Agreement"). The board of directors and Compensation
Committee of the Employer have approved that, in addition to the compensation
and benefits provided under the Agreement, in consideration of the continued
employment of Employee by Employer, the Employer will provide an annual bonus of
$100,000 in the form of a credit that may be used to exercise any options for
the purchase of Employer's common stock held by Employee.
AGREEMENT
NOW, THEREFORE, based on the foregoing premises and for and in
consideration of the mutual promises and covenants contained herein, it is
hereby agreed as follows:
1. Subparagraph (i) of section 5 shall be added to the Agreement as
follows:
On each of May 12, 1998, 1999, and 2000, Employer shall grant to
Employee a bonus in the form of a $100,000 credit that may be applied
by Employee at such time and in such amounts as Employee may
determine, against the exercise of Employee's options to purchase
Common Stock of Employer.
2. Except as modified herein, the Agreement is hereby ratified and shall
remain in full force and effect as provided therein.
DATED year and date first above written.
Employer:
FX ENERGY, INC.
By /s/ Andrew W. Pierce
Employee:
/s/ Jerzy B. Maciolek
2
SECOND ADDENDUM TO
EMPLOYMENT AGREEMENT
THIS SECOND ADDENDUM TO EMPLOYMENT AGREEMENT is made and entered into
effective the 8th day of July, 1997, by and between FX ENERGY, INC., a Nevada
corporation ("Employer"), and JERZY B. MACIOLEK ("Employee"), based on the
following:
PREMISES
Employer and Executive entered into that certain Employment Agreement dated
July 11, 1996 (the "Agreement"). Currently, the Agreement provides for a three-
year Employment Period, commencing on the effective date of the Agreement. The
board of directors and Compensation Committee of the Employer have approved that
the Employment Period should be automatically extended for an additional year on
each anniversary date of the Agreement.
AGREEMENT
NOW, THEREFORE, based on the foregoing premises and for and in
consideration of the mutual promises and covenants contained herein, it is
hereby agreed as follows:
1. Subparagraph (c) of section 1 shall be added to the Agreement as
follows:
The Employment Period shall be automatically extended for an
additional one (1) year upon each anniversary date of this Agreement
unless otherwise terminated pursuant to the terms of this Agreement.
2. Except as modified herein, the Agreement is hereby ratified and shall
remain in full force and effect as provided therein.
DATED year and date first above written.
Employer:
FX ENERGY, INC.
By /s/ Andrew W. Pierce
Employee:
/s/ Jerzy B. Maciolek
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EXECUTIVE EMPLOYMENT AGREEMENT (this "Agreement") is entered into
April 18, 1997, to take effect the 18th day of April, 1997 (the "Effective
Date"), by and between FX Energy, Inc., a Nevada corporation (the "Employer"),
and SCOTT J. DUNCAN (the "Executive").
RECITALS:
WHEREAS, the Executive desires employment as an employee of the Employer,
and the Employer desires to employ the Executive, under the terms and conditions
hereof.
NOW THEREFORE, in consideration of the mutual covenants herein contained,
the parties agree as follows:
ARTICLE I
ASSOCIATION AND RELATIONSHIP
1.1 Nature of Employment. The Employer hereby employs the Executive and
the Executive hereby accepts employment from the Employer upon the terms and
conditions set forth herein.
1.2 Full Time Services. The Executive shall devote his full working
time, attention, and services to the business and affairs of the Employer and
shall not, without the Employer's written consent, be engaged during the term of
this Agreement in any other substantial business activity other than normal
investment activities, whether or not such business activity is pursued for
gain, profit, or other pecuniary advantages, that significantly interferes or
conflicts with the reasonable performance of his duties hereunder.
1.3 Duties. During the term of this Agreement, the Executive shall be
employed by the Employer and shall initially occupy the office of Vice-President
and shall serve as Employer's Treasurer. The Executive agrees to serve in such
offices or positions with the Employer or any subsidiary of the Employer and
such substitute or further offices or positions of substantially consistent rank
and authority as shall, from time to time, be determined by the Employer's board
of directors. The Executive agrees to perform such duties appropriate for an
executive officer of Employer as may be assigned to him from time to time by the
Employer and as described in the Employer's bylaws. The Employer shall direct,
control, and supervise the duties and work of the Executive.
1.4 Satisfaction of Employer. The Executive agrees that he will, at all
times faithfully, promptly, and to the best of his ability, experience, and
talent, perform all of the duties that may be required of him pursuant to the
express and implicit terms hereof. Such duties shall be rendered at Salt Lake
City, Utah, and, on a temporary basis, at such other place or places as the
interests, needs, business, and opportunities of the Employer shall require or
make advisable; provided, however, that Executive shall not be required to move
his residence from Salt Lake City, Utah without the mutual consent of the
Employer and the Executive.
1.5 Compliance with Rules. The Executive shall observe and comply with
the rules and regulations of the Employer respecting its business and shall
carry out and perform orders, directions, and policies of the Employer as they
may be from time to time communicated to the Executive either orally or in
writing. The Executive shall further observe and comply with all applicable
rules, regulations, and laws governing the business of Employer.
1.6 Fees for Services. All income or other compensation generated by
the Executive other than from the Employer for any services performed by him
during the term of this Agreement in connection with the business of the
Employer, including, but not limited to, management fees, consulting fees,
advisory fees, commissions, or similar items, shall belong to the Employer
whether paid to the Employer or to the Executive, either directly or indirectly,
or an affiliate of the Executive. The Executive agrees to remit to the Employer
any such income or other compensation received by him or his affiliates within
ten (10) days after receipt of such income or other compensation. The Executive
agrees, upon request by the Employer, to render an accounting of all
transactions relating to his business endeavors related to the business of the
Employer during the term of his employment hereunder.
ARTICLE II
COMPENSATION AND BENEFITS
2.1 Compensation. For all services rendered by the Executive pursuant
to this Agreement, the Employer shall compensate the Executive as follows:
(a) Salary. The Executive shall be paid in accordance with the
normal payroll practice of the Employer annual compensation in the amount
of $90,000.
(b) Salary Escalation. At the beginning of each year, the annual
salary payable to the Executive pursuant to Section 2.1(a) above shall
automatically be increased as the board of directors or the designated
compensation committee thereof may deem appropriate, provided however, in
no event shall this annual increase be less than 7.5% of the annual salary
amount for the previous year. In addition, the rate of salary may be
further or otherwise increased at any time and in such amount as the board
of directors or the designated compensation committee thereof may determine
appropriate, based on results of operations, increased activities of the
Employer, or such other factors as the board of directors or the designated
compensation committee thereof may deem appropriate.
(c) Bonus. The Employer shall pay the Executive a cash bonus in the
amount of $100,000 if, prior to the end of the Employer's 1996 fiscal year,
the Employer shall have paid off (with funds other than proceeds from other
debt financing) the revolving loan owed to Bank One Texas, N.A., in the
maximum principal amount of $5,000,000, under the terms of that certain
Loan Agreement dated June 7, 1994. The Employer shall provide the
Executive with additional incentive compensation in the form of cash
bonuses not less often than once each year during the term of this
Agreement. The amount of such bonuses shall be determined in the sole
discretion of the board of directors of the Employer or the designated
compensation committee thereof taking into consideration the growth and
profitability of the Employer, the relative contribution by the Executive
to the business of the Employer, the economy in general, and such other
factors as the board of directors or designated compensation committee
deems relevant.
(d) Other Benefits. The Employer shall additionally provide to the
Executive incentive, retirement, pension, profit sharing, stock option,
health, medical, or other employee benefit plans which are consistent with
and similar to such plans provided by the Employer to its employees
generally. All costs of such plans shall be an expense of the Employer and
shall be paid by Employer.
2.2 Continuation of Compensation During Disability. If the Executive is
unable to perform his services by reason of disability due to illness or
incapacity for a period of more than six consecutive months, the compensation
thereafter payable to him during the next succeeding consecutive three-month
period shall be one-half of the compensation provided for in Section 2.1(a)
hereof, and during the following consecutive three-month period shall be one-
fourth of the salary provided for in Section 2.1(a); provided, however, that no
such compensation shall be payable after the termination of this Agreement.
During such initial six consecutive month period of disability, the Executive
shall be entitled to receive incentive compensation at the same annual rate as
incentive compensation, if any, earned with respect to the Employer's fiscal
year last preceding the date such illness or incapacity commenced.
Notwithstanding the foregoing, if such illness or incapacity does not cease to
exist within the 12 consecutive month period provided herein, the Executive
shall not be entitled to receive any further compensation from the Employer and
the Employer may thereupon terminate this Agreement. For purposes of this
Agreement, the Executive is "disabled" when he is unable to continue his normal
duties of employment, by reason of a medically determined physical or mental
impairment. In determining whether or not the Executive is disabled, the
Employer may rely upon the opinion of any doctor or practitioner of any
recognized field of medicine or psychiatric practice selected jointly by the
Employer and Executive and such other evidence as the Employer deems necessary.
2.3 Working Facilities. The Employer shall provide to the Executive at
the Employer's principal executive offices suitable executive offices and
facilities appropriate for his position and suitable for the performance of his
responsibilities.
2.4 Vacations and Meetings. The Executive shall be entitled each year
to a paid vacation of at least four (4) weeks and to attendance at appropriate
meetings and conventions of such duration and at such time as may be in
accordance with the Employer's policy. Vacations shall be taken by the
Executive at a time and with starting and ending dates mutually convenient to
the Employer and the Executive. Vacations or portions of vacations not used in
one employment year shall carry over to the succeeding employment year, but
shall thereafter expire if not used within such succeeding year.
2.5 Expenses. The Employer will reimburse the Executive for expenses
incurred in connection with the Employer's business, including expenses for
travel, lodging, meals, beverages, entertainment, and other items. The
Executive shall provide the following for all expenses for which the Executive
desires reimbursement:
(a) A report in which the Executive has recorded at or near the time
each expenditure was made: (i) the amount of the expenditure; (ii) the
time, date, place and designation of the type of entertainment, travel or
other expense; (iii) the business reason for the expenditure and the nature
of the business benefit derived or expected to be derived as a result of
the expenditure; and (iv) the names, occupations, addresses and other
information concerning each person who was entertained sufficient to
establish the business relationship to the Employer; and
(b) Documentary evidence (such as receipts or paid bills), which
states sufficient information to establish the amount, date, place and the
essential character of the expenditure, for each expenditure: (i) of
twenty-five dollars ($25.00) or more (except for transportation charges if
not readily available); and (ii) for lodging while traveling away from
home.
2.6 Dues and Club Memberships. The Employer shall assume and pay
reasonable dues of the Executive in local, state, and national societies and
associations, and in such other clubs and organizations, as shall be approved
and authorized by the Employer.
2.7 Payroll Taxes. The Employer shall withhold from the Executive's
compensation hereunder all federal and state payroll taxes and income taxes on
compensation paid to the Executive and shall provide an accounting to the
Executive for such amounts withheld.
ARTICLE III
COVENANT TO NOT DISCLOSE CONFIDENTIAL INFORMATION
3.1 Definition of Confidential Information. For purposes of this
Agreement, the term "Confidential Information" does not apply to information
generally available to the public or to businesses in the oil and gas
exploration and development industry, but otherwise shall mean information in
written or electronic form under the care or custody of Executive as a direct or
indirect consequence of or through his employment with the Employer, including,
but not limited to, the special proprietary and economic information regarding
the business, methods, and operation of the Employer that is designated by the
Employer as "Limited," "Private," or "Confidential" or similarly designated or
for which there is any reasonable basis to be believed is, or which appears to
be, treated by the Employer as confidential.
3.2 Protection of Goodwill. The Executive acknowledges that in the
course of carrying out, performing, and fulfilling his responsibilities to the
Employer, the Executive will be given access to and be entrusted with
Confidential Information relating to the Employer's business. The Executive
recognizes that (i) the goodwill of the Employer depends upon, among other
things, its keeping the Confidential Information confidential and that
unauthorized disclosure of the Confidential Information would irreparably damage
the Employer; and (ii) disclosure of any Confidential Information to competitors
of the Employer or to the general public would be highly detrimental to the
Employer. The Executive further acknowledges that in the course of performing
his obligations to the Employer he will be a representative of the Employer to
many clients or other persons and, in some instances, the Employer's primary
contact with such clients or other persons, and as such will be responsible for
maintaining or enhancing the business and/or goodwill of the Employer with those
clients or other persons.
3.3 Covenants Regarding Confidential Information. In further
consideration of the employment of the Executive by the Employer and in
consideration of the compensation to be paid to the Executive during his
employment, the Executive hereby agrees as follows:
(a) Nondisclosure of Confidential Information. The Executive will not,
during his employment with the Employer or at any time after termination of
his employment, irrespective of the time, manner, or cause of termination,
use, disclose, copy, or assist any other person or firm in the use,
disclosure, or copying, of any Confidential Information.
(b) Return of Confidential Information. All files, records, documents,
drawings, equipment, and similar items, whether in written or electronic
form, relating to the business of the Employer, whether prepared by the
Executive or otherwise coming into his possession, shall remain the
exclusive property of the Employer and shall not be removed from the
premises of the Employer, except where necessary in carrying out the
business of the Employer, without the prior written consent of the
Employer. Upon termination of the Executive's employment, the Executive
agrees to deliver to the Employer all Confidential Information and all
copies thereof along with any and all other property belonging to the
Employer whatsoever.
ARTICLE IV
ENFORCEMENT OF COVENANTS
4.1 Relief. The Executive agrees that a breach or threatened breach on
his part of any covenant contained in this Agreement will cause such damage to
the Employer as will be irreparable and for that reason, the Executive further
agrees that the Employer shall be entitled as a matter of right to an injunction
out of any court of competent jurisdiction restraining any further violation of
such covenants by the Executive, his employers, employees, partners, or agents.
The right to injunction shall be cumulative and in addition to whatever other
remedies the Employer may have, including, specifically, recovery of damages.
4.2 Survival of Covenants. Subject to Article V below, in the event the
Executive's employment relationship with the Employer is terminated, with or
without cause, the covenants contained in Article III above shall survive for a
period of one year after such termination.
ARTICLE V
TERM AND TERMINATION
5.1 Term. Except as provided herein, the term of this Agreement shall
be for a period of three (3) years commencing on the Effective Date and shall
automatically be extended for an additional one (1) year upon each anniversary
date of the Effective Date unless otherwise terminated pursuant to the terms
hereof.
5.2 Termination. The Executive's employment hereunder may be terminated
without any breach of this Agreement only under the following circumstances:
(a) Termination for Cause. The Employer shall have the right,
without further obligation to the Executive other than for compensation
previously accrued, to terminate this Agreement for cause ("Cause") by
showing that (i) the Executive has materially breached the terms hereof;
(ii) the Executive, in the determination of the board, has been grossly
negligent in the performance of his duties; (iii) the Executive has
substantially failed to meet written standards established by the Employer
for the performance of his duties; (iv) the Executive has engaged in
material willful or gross misconduct in the performance of his duties
hereunder; or (v) a final non-appealable conviction of or a plea of guilty
or nolo contendere by the Executive to a felony or misdemeanor involving
fraud, embezzlement, theft, or dishonesty or other criminal conduct against
the Employer. Notwithstanding the foregoing, the Executive shall not be
deemed to have been terminated for Cause, without (x) reasonable notice to
the Executive setting forth the reasons for the Employer's intention to
terminate for Cause; (y) an opportunity for the Executive, together with
his counsel, to be heard before the full board of directors of the
Employer; and (z) delivery to the Executive of written notice of
termination setting forth the finding that in the good faith opinion of the
board of directors the Executive was guilty of Cause and specifying the
particulars thereof in detail.
(b) Termination upon Death or Disability of the Executive. This
Agreement shall terminate immediately upon the Executive's death or upon
the disability of the Executive after termination of pay as set forth in
Section 2.2.
(c) Termination Upon Change of Control. Notwithstanding any
provision of this Agreement to the contrary, the Executive may terminate
this Agreement, but not the covenant not to disclose information set forth
in Article III, upon the happening of any of the following events:
(i) The sale by the Employer of substantially all of its assets
to a single purchaser or to a group of associated purchasers;
(ii) The sale, exchange, or other disposition to a single person
or group of persons under common control in one transaction or series
of related transactions resulting in such person or persons owning,
directly or indirectly, greater than twenty-five percent (25%) of the
combined voting power of the outstanding shares of the Employer's
common stock;
(iii) More than fifty percent (50%) of the members of the
board of directors of the Employer shall be persons who are neither
nominated for election by the board or an authorized committee of the
board nor elected by the board;
(iv) The decision by the Employer to terminate its business and
liquidate its assets; or
(v) The merger or consolidation of the Employer in a transaction
in which the shareholders of the Employer immediately prior to such
merger or consolidation receive less than fifty percent (50%) of the
outstanding voting shares of the new or continuing corporation.
In the event the Executive does not elect to terminate this Agreement upon
the happening of any of the events noted above, and as a result of such
event, the Employer is not the surviving entity, then the provisions of
this Agreement shall inure to the benefit of and be binding upon the
surviving or resulting entity. If as a result of the merger,
consolidation, transfer of assets, or other event listed above, the duties
of the Executive are increased, then the compensation of the Executive
provided for in Section 2.1 of this Agreement shall be reasonably adjusted
upward to compensate for the additional duties and responsibilities
assumed.
(d) Termination by Executive for Cause. The Executive shall have the
right to terminate this Agreement in the event of (i) the Employer's
intentional breach of any covenant or term of this Agreement, but only if
the Employer fails to cure such breach within twenty (20) days following
the receipt of notice by Executive setting forth the conditions giving rise
to such breach; (ii) an assignment to the Executive of any duties
inconsistent with, or a significant change in the nature or scope of, the
Executive's authorities or duties from those authorities and duties held by
the Executive as of the date hereof and as increased from time to time; or
(iii) the failure by the Executive to obtain the assumption of the
commitment to perform this Agreement by any successor corporation.
5.3 Termination Payments.
(a) Termination Other than for Cause. In the event that the
Executive's employment is terminated by the Employer during the term hereof
for reasons other than Cause as defined in Section 5.2(a) or the Executive
terminates this Agreement in accordance with Section 5.2(c) or Section
5.2(d), the Employer shall:
(i) Pay to Executive all amounts accrued through the date of
termination, any unreimbursed expenses incurred pursuant to Section
2.5 of this Agreement, and any other benefits specifically provided to
the Executive under any benefit plan.
(ii) Pay to Executive an amount equal to one and one-half times
Executive's then current annual salary.
(iii) At the election of Executive, pay to Executive an
amount equal to the number of shares subject to such holder's
unexercised options, whether or not vested, times the amount by which
the "Fair Market Value" of the Employer's common stock exceeds the
exercise price of such options. Fair Market Value shall mean the
closing price for such stock on the close of business on the trading
day last preceding the date of such termination as quoted on a
registered national securities exchange or, if not listed on such an
exchange, the Nasdaq Stock Market ("Nasdaq") of the National
Association of Securities Dealers, Inc., or, if not listed on such an
exchange or included on Nasdaq, the closing price (or, if no closing
price is available from sources deemed reliable by the Company, the
closing bid quotation) for such stock as determined by the Company
through any other reliable means of determination available on the
close of business on the trading day last preceding the date of such
termination. If the Executive elects to receive payment as provided
above for Executive's unexercised options, on payment to the Executive
of the amount due from the Employer, the rights to exercise options
with respect to which he has received payment shall terminate. If
Executive elects not to receive payment as provided above for
Executive's unexercised options, all forfeiture restrictions governing
stock or options held by the Executive shall immediately terminate
and such common stock and shall be fully vested and held free from
forfeiture by the Executive.
(iv) Maintain in full force and effect, for the continued benefit
of the Executive for the number of years (including partial years)
remaining in the term of employment hereunder, all employee benefit
plans and programs in which the Executive was entitled to participate
immediately prior to the date of termination, provided that the
Executive's continued participation is possible under the general
terms and provisions of such plans and programs. In the event that
the participation of Executive and his family in the Employer's group
health plan and/or life insurance program is barred, the Employer
shall provide the Executive and his family with benefits substantially
similar to those which the Executive would otherwise have been
entitled to receive under such plan and program from which his
continued participation is barred.
(v) Notwithstanding the foregoing, in no event shall the
aggregate amount of payments made under this Agreement on account of
any termination occurring as a result of a change in control of the
Employer exceed the aggregate present value of three times the "Base
Salary Amount" less $1.00. For purposes hereof, the term "Base Salary
Amount" shall mean the average annualized compensation income from the
Employer in the Executive's gross income for federal income tax
purposes over the five years preceding the year in which the change in
control of the Employer occurred or, in the event Executive has not
been employed by Employer for at least five years, the average of such
annualized compensation income for the number of years that Executive
has been employed by Employee. This paragraph shall be interpreted
consistent with Section 280G of the Internal Revenue Code of 1986, as
amended, and any Treasury Regulations thereunder.
(b) Termination upon Death of the Executive. If the Executive dies
during the term of this Agreement, the Employer shall pay to the estate of
the Executive the following:
(i) All amounts accrued through the date of termination, any
unreimbursed expenses incurred pursuant to Section 2.5 of this
Agreement, and any other benefits specifically provided to the
Executive under any benefit plan; and
(ii) In six equal monthly installments commencing on the first
day of the month immediately following the month in which the
Executive dies, an amount equal to one year's then current salary
provided for in Section 2.1(a) of this Agreement, and payment of the
pro rata portion of the incentive compensation which would have been
payable pursuant to Section 2.1(c), based upon the number of full
months of his employment during the year of his death.
(c) Termination for Cause or Termination by the Executive. If the
Executive terminates this Agreement for any reason other than in accordance
with the provisions of Section 5.2(d) of this Agreement, or if the Employer
terminates this Agreement on account of Cause, the Employer shall deliver
to the Executive, within ninety (90) days following the effective date of
such termination, all amounts accrued through the date of termination, any
unreimbursed expenses incurred pursuant to Section 2.5 of this Agreement,
and any other benefits specifically provided to the Executive under any
benefit plan. The Employer shall have no further obligation to Executive.
5.4 Resignation upon Termination. Upon the termination of this Agreement
for any reason, the Executive hereby agrees to resign from all positions held in
the Employer or an affiliate of the Employer, including without limitation any
position as a director, officer, agent, trustee or consultant of the Employer or
any affiliate of the Employer.
ARTICLE VI
MISCELLANEOUS
6.1 Exit Interview. To insure a clear understanding of this Agreement,
including but not limited to the protection of the Employer's business
interests, the Executive agrees, at no additional expense to the Executive, to
engage in an exit interview with the Employer at a time and place designated by
the Employer.
6.2 Severability. If any one or more of the provisions contained in
this Agreement shall for any reason be held to be invalid, illegal, or
unenforceable in any respect, such invalidity, illegality, or unenforceability
shall not affect the validity and enforceability of any other provisions hereof.
Further, should any provisions within this Agreement ever be reformed or
rewritten by a judicial body, those provisions as rewritten shall be binding
upon the Employer and the Executive.
6.3 Right of Setoff. The Employer and Executive shall each be entitled,
at its option and not in lieu of any other remedies to which it may be entitled,
to set off any amounts due from the other or any affiliate of the other against
any amount due and payable by such person or any affiliate of such person
pursuant to this Agreement or otherwise.
6.4 Representations and Warranties of the Executive. The Executive
represents and warrants to the Employer that (a) the Executive understands and
voluntarily agrees to the provisions of this Agreement; (b) the Executive is not
aware of any existing medical condition which might cause him to be or become
unable to fulfill his duties under this Agreement; and (c) the Executive is free
to enter into this Agreement and has no commitment, arrangement or understanding
to or with any third party that restrains or is in conflict with this Agreement
or that would operate to prevent the Executive from performing the services to
the Employer that the Executive has agreed to provide hereunder.
6.5 Succession. This Agreement and the rights and obligations hereunder
shall be binding upon and inure to the benefit of the parties hereto and their
respective legal representatives, and shall also bind and inure to the benefit
of any successor of the Employer by merger or consolidation or any assignee of
all or substantially all of its property.
6.6 Assignment. Except to any successor or assignee of the Employer as
provided in Section 6.5, neither this Agreement nor any rights or benefits
hereunder may be assigned by either party hereto without the prior written
consent of the other party. Neither the Executive, the Executive's spouse, the
Executive's designated contingent beneficiary, nor their estates shall have any
right to anticipate, encumber, or dispose of any payment due under this
Agreement. Such payments and other rights are expressly declared nonassignable
and nontransferable, except as specifically provided herein.
6.7 Reimbursement of Expenses. In the event that it shall be necessary
or desirable for the Executive to retain legal counsel and/or incur other costs
and expenses in connection with the enforcement of any and all of the
Executive's rights under this Agreement, the Executive shall be entitled to
recover from the Employer reasonable attorneys' fees, costs, and expenses
incurred by the Executive in connection with the enforcement of said rights.
Payment shall be made to the Executive by the Employer at the time such
attorneys' fees, costs, and expenses are incurred by the Executive. If,
however, the Executive does not prevail in such enforcement action, the
Executive shall repay any such payments to the Employer and shall reimburse the
Employer for reasonable attorneys' fees, costs and expenses incurred by the
Employer in connection with such action. Further, the Executive shall reimburse
the Employer for any attorneys' fees and all other costs and expenses incurred
by the Employer in any action brought by the Employer relating to the
enforcement of this Agreement in which the Employer is the prevailing party.
Fees payable hereunder shall be in addition to any other damages, fees, or
amounts provided for herein.
6.8 Indemnification. The Employer shall indemnify the Executive and
hold the Executive harmless from liability for acts or decisions made by the
Executive while performing services for the Employer to the greatest extent
permitted by applicable law. The Employer shall use its best efforts to obtain
coverage for the Executive under any insurance policy now in force or hereafter
obtained during the term of this Agreement insuring officers and directors of
the Employer against such liability. The Executive agrees to indemnify and to
hold the Employer harmless from any and all damages, losses, claims,
liabilities, costs, or expenses arising from the Executive's acts or omissions
in violation of his duties under this Agreement which constitute fraud, gross
negligence, or willful and knowing violations of the terms of this Agreement.
6.9 Notices. Any notices or other communications required or permitted
under this Agreement shall be sufficiently given if personally delivered, if
sent by facsimile or telecopy transmission or other electronic communication
confirmed by sending a copy thereof by United States mail, if sent by United
States mail, registered or certified, postage prepaid, or if sent by prepaid
overnight courier addressed as set forth on the signature page hereto or such
other addresses as shall be furnished in writing by any party in the manner for
giving notices hereunder, and any such notice or communication shall be deemed
to have been given as of the date so delivered or sent by facsimile or telecopy
transmission or other electronic communication, one day after the date so sent
by overnight courier, or three days after the date of deposit in the United
States mail.
6.10 Entire Agreement. This Agreement contains the entire Agreement
between the parties hereto with respect to the subject matter contained herein.
No change, addition, or amendment shall be made except by written agreement
signed by the parties hereto.
6.11 Waiver of Breach. The failure by any party to insist upon the
strict performance of any covenant, duty, agreement, or condition of this
Agreement or the failure to exercise any right or remedy consequent upon a
breach hereof shall not constitute a waiver of any such breach or of any
covenant, agreement, term, or condition and the waiver by either party hereto of
a breach of any provision of this Agreement shall not operate or be construed as
a waiver of any subsequent breach by any party.
6.12 Multiple Counterparts. This Agreement has been executed in a number
of identical counterparts, each of which for all purposes is to be deemed an
original, and all of which constitute, collectively, one agreement. In making
proof of this Agreement, it shall not be necessary to produce or account for
more than one such counterpart.
6.13 Descriptive Headings. In the event of a conflict between titles to
articles and paragraphs and the text, the text shall control.
6.14 Governing Law. The laws of the state of Utah shall govern the
validity, construction, enforcement, and interpretation of this Agreement.
Signed and delivered to be effective as of the Effective Date set forth
above.
EMPLOYER:
Address: FX ENERGY, INC.
3006 Highland Drive, Suite 206
Salt Lake City, Utah 84106 By: /s/ David N. Pierce, CEO
Name:
Title:
Address: EXECUTIVE:
/s/ Scott J. Duncan
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference into the registration statements of
FX Energy, Inc., and subsidiaries on Form S-8 (SEC File Nos. 333-12385 and 333-
11417) and the registration statements on Form S-3 (SEC File Nos. 333-08557,
333-16439 and 333-26619) of our report dated February 27, 1998, on our audits of
the consolidated financial statements of FX Energy, Inc., and subsidiaries as of
December 31, 1997 and 1996, and for the years then ended, which report is
included in the Annual Report on Form 10-KSB for the year ended December 31,
1997.
COOPERS & LYBRAND, L.L.P.
Salt Lake City, Utah
March 17, 1998
CONSENT OF PETROLEUM ENGINEERING CONSULTANT
I consent to the use of my report respecting the estimated oil reserve
information as of December 31, 1997, for the Montana and Nevada producing
properties of FX Energy, Inc. (the "Company"), and the discussion of such report
as contained in the Company's annual report on Form 10-KSB of FX Energy, Inc.
for the year ended December 31, 1997. I also consent to the incorporation by
reference of such report as it is referred to in the Company's annual report
into the Registration Statements on Form S-3, SEC File Nos. 333-08557, 333-
16439, and 333-26619 and the Registration Statements on Form S-8, SEC File Nos.
333-12385 and 333-11417.
/s/ Larry D. Krause
Billings, Montana
March 16, 1998
Schedule of Subsidiaries
Exhibit 21.01
State or County
Name of Organization
----------------------------------- ---------------
FX DRILLING COMPANY, INC. Nevada
FX PRODUCING COMPANY, INC. Nevada
FRONTIER EXPLORATION COMPANY Utah
KARPATY PRODUCTION COMPANY SP. ZO.O Poland
SUDETY MINING COMPANY SP. ZO.O Poland
WARMIA PETROLEUM COMPANY SP. ZO.O Poland
FX ENERGY POLAND SP. ZO.O Poland
GASEX PRODUCTION COMPANY SP. ZO.O Poland
ENERGEO PRODUCTION COMPANY SP. ZO.O Poland
NORTHWEST PRODUCTION COMPANY SP. ZO.O Poland
FX ENERGY NETHERLANDS PARTNERSHIP C.V. Netherlands
FX ENERGY NETHERLANDS B.V. Netherlands
