U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
COMMISSION FILE NO. 0-25386
FX ENERGY, INC.
(Exact name of registrant as specified in its charter)
NEVADA 87-0504461
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
3006 HIGHLAND DRIVE, SUITE 206
SALT LAKE CITY, UTAH 84106
(Address of principal executive offices)
<PAGE>1
(801) 486-5555
(Issuer's telephone number)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by section 13 of 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The number of shares of $.001 par value common stock outstanding as of August
10, 1999 was 14,847,003.
<PAGE>
FX ENERGY, INC. AND SUBSIDIARIES
FORM 10-Q
--------------------------------
TABLE OF CONTENTS
ITEM DESCRIPTION PAGE
-------- -------------------------------------------- ------
<PAGE>2
PART I. FINANCIAL INFORMATION
1. Consolidated Balance Sheets 3
1. Consolidated Statements of Operations 5
1. Consolidated Statements of Cash Flows 6
1. Notes to Consolidated Financial Statements 7
2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II. OTHER INFORMATION
2. Changes in Securities and Use of Proceeds 25
6. Exhibits and Reports on Form 8-K 25
-- Signatures 26
<PAGE>
PART I.
ITEM 1. FINANCIAL STATEMENTS
---------------------------------------
FX ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE DECEMBER
30, 1999 31, 1998
-----------------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ..................... $ 2,193,925 $ 1,811,780
Investment in marketable debt securities ...... 6,432,788 2,929,914
<PAGE>3
Accounts receivable:
Accrued oil sales ............................ 176,195 95,064
Interest receivable .......................... 173,858 86,258
Joint interest owners and others ............. 169,999 240,102
Advances to oil and gas ventures .............. 157,054 --
Inventory ..................................... 65,886 68,327
Other current assets .......................... 83,712 66,053
----------- -----------
Total current assets ........................ 9,453,417 5,297,498
----------- -----------
PROPERTY AND EQUIPMENT, AT COST:
Oil and gas properties (successful efforts
method):
Proved ....................................... 1,677,597 1,605,279
Unproved ..................................... 1,507,339 1,178,408
Other property and equipment .................. 2,578,447 2,494,688
----------- -----------
Gross property and equipment ................ 5,763,383 5,278,375
Less accumulated depreciation, depletion and
amortization .................................. (2,931,831) (2,679,441)
----------- -----------
Net property and equipment .................. 2,831,552 2,598,934
----------- -----------
OTHER ASSETS:
Certificates of deposit ....................... 356,500 356,500
Other ......................................... 2,789 --
----------- -----------
Total other assets .......................... 359,289 356,500
----------- -----------
TOTAL ASSETS.................................... $ 12,644,258 $ 8,252,932
=========== ===========
<PAGE>4
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .............................. $ 363,885 $ 420,906
Accrued liabilities ........................... 475,000 911,950
----------- -----------
Total current liabilities ................... 838,885 1,332,856
----------- -----------
Total liabilities ........................... 838,885 1,332,856
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value, 30,000,000
shares authorized, 14,847,003 and 13,054,503
issued and outstanding as of June 30, 1999 and
December 31, 1998, respectively .............. 14,847 13,055
Notes receivable from officers ................ (1,964,881) (1,304,527)
Additional paid-in capital .................... 38,168,472 31,112,861
Accumulated deficit ........................... (24,413,065) (22,901,313)
----------- -----------
Total stockholders' equity .................. 11,805,373 6,920,076
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...... $ 12,644,258 $ 8,252,932
=========== ===========
<PAGE>5
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
<PAGE>
FX ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------- ----------------------
<S> <C> <C> <C> <C>
1999 1998 1999 1998
--------- --------- --------- ----------
REVENUES:
Oil sales ..................... $ 360,044 $ 272,317 $ 593,752 $ 604,145
Contract drilling and well
servicing .................... 91,254 -- 178,797 --
Gain on sale of property
interests .................... -- -- -- 466,891
--------- --------- --------- ----------
Total revenues .............. 451,298 272,317 772,549 1,071,036
--------- --------- --------- ----------
OPERATING COSTS AND EXPENSES:
Lease operating expenses ...... 178,568 211,414 414,637 496,876
<PAGE>6
Production taxes .............. 24,323 20,549 38,691 41,448
Geological and geophysical
costs ......................... 160,994 635,982 340,826 887,902
Exploratory dry hole costs .... 32,859 -- 32,859 12,324
Contract drilling and well
servicing costs ............... 80,512 9,726 133,386 21,112
Depreciation, depletion and
amortization .................. 125,960 177,335 252,389 356,131
General and administrative .... 742,558 682,226 1,278,947 1,423,895
--------- --------- --------- ----------
Total operating costs and
expenses................... 1,345,774 1,737,232 2,491,735 3,239,688
--------- --------- --------- ----------
Operating loss.................. (894,476) (1,464,915) (1,719,186) (2,168,652)
--------- --------- --------- ----------
Other income (expense):
Interest and other income ..... 105,243 111,552 207,434 296,185
--------- --------- --------- ----------
Total other income .......... 105,243 111,552 207,434 296,185
--------- --------- --------- ----------
NET LOSS........................ $(789,233)$(1,353,363) $(1,511,752)$(1,872,467)
========= ========= ========= ==========
Basic and diluted net loss per
common share.................... $ (0.06) $ (0.10) $ (0.11)$ (0.15)
========= ========= ========= ==========
Basic and diluted weighted
average number of shares
outstanding.....................14,016,618 13,003,618 13,538,218 12,913,772
========== ========== ========== ==========
<PAGE>7
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
<PAGE>
FX ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED
JUNE 30,
--------------------------
1999 1998
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ...................................... $(1,511,752) $ (1,872,467)
Adjustments to reconcile net loss to net cash
used in operating activities: .................
Depreciation, depletion and amortization ..... 252,389 356,131
Gain on sale of property interests ........... -- (466,891)
Common stock issued for services ............. -- 119,375
Increase (decrease) from changes in:
Accounts receivable .......................... (181,739) 475,825
Advances to oil and gas ventures ............. (157,054) --
<PAGE>8
Inventory .................................... 2,441 2,443
Other current assets ......................... (17,659) 44,707
Accounts payable and accrued liabilities ..... (690,971) (34,917)
----------- ------------
Net cash used in operating activities ....... (2,304,345) (1,375,794)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties ........... (210,249) (139,517)
Additions to other property and equipment ..... (63,438) (193,541)
Additions to other assets ..................... (2,789) (142,852)
Proceeds from sale of property interests ...... 6,000 500,000
Proceeds from sale of other property and
equipment .................................... -- 3,267
Purchase of marketable debt securities (5,459,874) (5,391,586)
Proceeds from maturing marketable debt
securities 1,957,000 5,375,000
----------- ------------
Net cash provided by (used in) investing
activities (3,773,350) 10,771
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances to officers .......................... (597,563) (771,270)
Proceeds from sale of common stock (net of
offering costs) .............................. 7,057,403 --
Proceeds from exercise of warrants and options -- 76,700
----------- ------------
Net cash provided by (used in) financing
activities................................. 6,459,840 (694,570)
----------- ------------
INCREASE OR (DECREASE) IN CASH AND CASH 382,145 (2,059,593)
EQUIVALENTS ....................................
Cash and cash equivalents at beginning of period 1,811,780 4,511,919
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD...... $ 2,193,925 $ 2,452,326
=========== ============
<PAGE>9
<PAGE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
FX ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The interim financial data are unaudited; however, in the opinion of the
management of FX Energy, Inc. and Subsidiaries ("FX Energy" or the "Company"),
the interim data includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results for the interim
periods. The interim financial statements should be read in conjunction with FX
Energy's quarterly report on Form 10-Q for the three months ended March 31, 1999
and the annual report on Form 10-K for the year ended December 31, 1998,
including the financial statements and notes thereto.
The consolidated financial statements include the accounts of FX Energy,
its wholly-owned subsidiaries and FX Energy's undivided interests in Poland.
All significant inter-company accounts and transactions have been eliminated in
consolidation. At June 30, 1999, FX Energy owned 100% of the voting stock of
all of its subsidiaries.
<PAGE>10
FX Energy follows the successful efforts method of accounting for its oil
and gas operations. Under this method of accounting, all property acquisition
costs and costs of exploratory and development wells are capitalized when
incurred, pending determination of whether an individual well has found proved
reserves. If it is determined that an exploratory well has not found proved
reserves, the costs of drilling the well are expensed. The costs of development
wells are capitalized whether productive or nonproductive.
Certain balances in the 1998 financial statements have been reclassified to
conform to the current quarter presentation. These changes had no effect on
total assets, total liabilities, stockholders' equity or net loss.
NOTE 2: INCOME TAXES
FX Energy recognized no income tax benefit from the losses generated in the
first six months of 1999 and the first six months of 1998.
NOTE 3: BUSINESS SEGMENTS
FX Energy operates within two segments of the oil and gas industry: the
exploration and production segment ("E&P") and the contract drilling and well
servicing segment ("contract services") and, within one segment of the mining
industry. Mining, which consists of gold exploration on FX Energy's Sudety
Project Area in Poland, is immaterial to FX Energy and is not considered a
reportable business segment by FX Energy. Identifiable net property and
equipment are reported by business segment for management reporting and
reportable business segment disclosure purposes. Current assets, current
liabilities and other assets are not allocated to business segments for
management reporting or business segment disclosure purposes.
<PAGE>11
Reportable business segment information for the three months ended June 30,
1999, six months ended June 30, 1999 and as of June 30, 1999 follows:
[CAPTION]
<TABLE>
REPORTABLE SEGMENTS
------------------- NON- NON-
CONTRACT REPORTABLE SEGMENTED
E&P SERVICES SEGMENTS ITEMS TOTAL
-------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, 1999:
Revenues ........... $ 360,044 $ 91,254 $ -- -- $ 451,298
Net Loss (1) ....... (35,750) (70,193) (14,682) (668,608) (789,233)
SIX MONTHS ENDED JUNE 30, 1999:
Revenues ........... 593,752 178,797 -- -- 772,549
Net Loss (2) ....... (241,652) (116,458) (19,784) (1,133,858) (1,511,752)
AS OF JUNE 30, 1999:
Identifiable net
property and
equipment (3). ..... 2,014,387 623,405 -- 193,760 2,831,552
</TABLE>
(1) Non-segmented items include $742,558 of general and administrative
expenses, $105,243 of other income and $31,293 of corporate DD&A.
(2) Non-segmented items include $1,278,947 of general and administrative
expenses, $207,434 of other income and $62,345 of corporate DD&A.
(3) Non-segmented items include $193,760 of corporate office equipment,
hardware and software.
Reportable business segment information for the three months ended June 30,
1998, six months ended June 30, 1998 and as of June 30, 1998 follows:
<PAGE>12
<TABLE>
<CAPTION>
REPORTABLE SEGMENTS
------------------- NON- NON-
CONTRACT REPORTABLE SEGMENTED
E&P SERVICES SEGMENTS ITEMS TOTAL
-------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, 1998:
Revenues ........... $ 272,317 $ -- $ -- $ -- $ 272,317
Net Loss (1) ....... (646,460) (87,744) (15,445) (603,714) (1,353,363)
SIX MONTHS ENDED JUNE 30, 1998:
Revenues ........... 1,071,036 -- -- -- 1,071,036
Net Loss (2) ....... (486,846) (177,148) (20,547) (1,187,926) (1,872,467)
AS OF JUNE 30, 1998:
Identifiable net
property and
equipment (3) ...... 7,582,940 811,136 -- 307,123 8,701,199
</TABLE>
(1) Non-segmented items include $682,226 of general and administrative
expenses, $111,552 of other income and $33,040 of corporate DD&A.
(2) Non-segmented items include $1,423,895 of general and administrative
expenses, $296,185 of other income and $60,216 of corporate DD&A.
(3) Non-segmented items include $307,123 of corporate office equipment,
hardware and software.
NOTE 4: SUPPLEMENTAL NON-CASH ACTIVITY DISCLOSURE
Non-Cash Investing Activities
During the six months ended June 30, 1999, additions to oil and gas
properties included $197,000 of unproved property additions financed by accrued
liabilities as of June 30, 1999.
<PAGE>13
Non-Cash Financing Activities
During the three months ended March 31, 1998, two of FX Energy's officers
exercised their options to purchase 150,000 shares each of FX Energy's common
stock at $1.50 per share. Each officer utilized a $100,000 bonus earned during
1997 and a $125,000 note payable to FX Energy to pay for the cost of exercising
their respective options.
NOTE 5: NET LOSS PER SHARE
Basic earnings per share is computed by dividing the net loss by the
weighted average number of common shares outstanding. Diluted earnings per
share is 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
3,678,240 shares of common stock at prices ranging from $1.50 to $10.25 per
share were outstanding at June 30, 1999. Options and warrants to purchase
3,310,694 shares of common stock at prices ranging from $1.10 to $10.25 per
share were outstanding at June 30, 1998. No options or warrants were included
in the computation of diluted earnings per share for the periods ended June 30,
1999 and 1998 because the effect would have been antidilutive.
NOTE 6: ADVANCES TO OFFICERS
On April 8, 1999, FX Energy made final advances totaling $500,000 to two
officers in accordance with the April 10, 1998 agreements with such officers.
FX Energy now has no further commitment to advance additional funds to the
officers. As of June 30, 1999, advances to officers was $1,964,881, including
principal and accrued interest at 7.7% from the date of each advance. The
advances are payable to FX Energy on or before December 31, 1999.
<PAGE>14
NOTE 7: PRIVATE PLACEMENT OF SECURITIES
During May 1999, FX Energy completed a private placement that resulted in
the sale of 1,792,500 shares of common stock resulting in gross proceeds of $7.2
million ($7.1 million net). The proceeds from this placement are to be used to
partially fund activities on the Lachowice Farm-in and for other general
corporate purposes. No placement fees were paid by FX Energy in connection with
the sale of the aforementioned shares.
NOTE 8: SUBSEQUENT EVENTS
Continuation of Drilling Operations in Poland
Drilling operations on the Siedliska #2, located on POGC option acreage in
the northern portion of the Lublin Project Area, commenced on July 18, 1999 with
POGC as operator. Under terms of the Apache Exploration Program, the Siedliska
#2 counts as an earning well. Accordingly, Apache will cover all of FX Energy's
33.3% drilling and completion costs in the well.
Drilling operations on the Witkow #1, located on POGC option acreage in
the southeastern portion of the Lublin Project Area, commenced on July 19, 1999
with Apache as operator. Under terms of the Apache Exploration Program, the
Witkow #1 counts as an earning well. Accordingly, Apache will cover all of FX
Energy's 45% drilling and completion costs in the well.
Drilling operations on the Andrychow #6, located on POGC option acreage in
the Carpathian Project Area near Lachowice, commenced during the first week of
July 1999 with POGC as operator. FX Energy has elected to retain and pay for a
5% working interest in the well.
<PAGE>15
Homestake Terminates Gold Exploration on the Sudety Project Area
On July 26, 1999, Homestake terminated its agreement with FX Energy to
jointly explore for gold on FX Energy's Sudety Project Area in southwestern
Poland. During 1997, Homestake initially paid FX Energy $212,000 and agreed to
spend a minimum of $1,100,000 over two years exploring the Sudety Project Area.
Homestake completed its minimum exploration commitments during the first six
months of 1999.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------
FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE
This report contains statements about the future, sometimes referred to as
"forward-looking" statements. Forward-looking statements are typically
identified by the use of the words "believe," "may," "will," "should," "expect,"
"anticipate," "estimate," "project," "propose," "plan," "intend" and similar
words and expressions. Statements that describe FX Energy's future strategic
plans, goals or objectives are also forward-looking statements.
Readers of this report are cautioned that any forward-looking statements,
including those regarding FX Energy or its management's current beliefs,
expectations, anticipations, estimations, projections, proposals, plans or
intentions, are not guarantees of future performance or results of events and
involve risks and uncertainties, such as
-The future results of drilling individual wells and other exploration and
development activities;
-Future events that may result in the need for additional capital;
-Fluctuations in prices for oil and gas;
<PAGE>16
-Uncertainties of certain terms to be determined in the future relating to FX
-Energy's oil, gas and mining interests, including exploitation fees, royalty
rates and other matters;
-Future drilling and other exploration schedules and sequences for various
wells and other activities;
-Uncertainties regarding future political, economic, regulatory, fiscal,
taxation and other policies in Poland;
-The future ability of FX Energy to attract strategic partners to share the
costs of exploration, exploitation, development and acquisition activities;
and
-Future plans and the financial and technical resources of strategic partners.
The forward-looking information is based on present circumstances and on FX
Energy's predictions respecting events that have not occurred, which may not
occur or which may occur with different consequences from those now assumed or
anticipated. Actual events or results may differ materially from those
discussed in the forward-looking statements as a result of various factors
detailed in this report. The forward-looking statements included in this report
are made only as of the date of this report. FX Energy is not obligated to
update such forward-looking statements or to update reasons that actual results
differ materially from those anticipated in such forward looking statements.
CORPORATE OVERVIEW
FX Energy explores for oil, gas and gold in the Republic of Poland where it
recently signed, jointly with Apache, the first ever oil and gas development
agreement between western companies and POGC, covering a POGC shut-in gas
discovery. FX Energy holds the largest oil and gas exploration acreage position
in Poland by a foreign company, in terms of both gross and net acres, covering
five separate project areas containing approximately 15.8 million gross acres
and also has gold concessions covering approximately 166,000 gross acres. In
<PAGE>17
the western United States, FX Energy produces oil from fields in Montana and
Nevada, has a contract drilling and well servicing company in northern Montana
and oil and gas exploration prospects in several western states.
FINANCIAL CONDITION
Working Capital
FX Energy's working capital was $8,615,000 as of June 30, 1999, an increase
of $4,650,000 as compared to $3,965,000 million at December 31, 1998. The
increase was principally due to gross proceeds of $7,170,000 from a private
placement of 1,792,500 shares of common stock during the second quarter of 1999.
Operating Activities
Net cash used in operating activities was $2,304,000 during the first six
months of 1999, an increase of $928,000 as compared to $1,376,000 for the same
period of 1998. During the first six months of 1999, FX Energy had a net loss
before DD&A of $1,260,000 and incurred negative net working capital changes of
$1,044,000. During the first six months of 1998, FX Energy had a net loss
before DD&A and gain on sale of property interests of $1,983,000, issued
$119,000 of common stock for services and incurred positive net working capital
changes of $488,000.
Investing Activities
Net cash used in investing activities was $3,773,000 during the first six
months of 1999, as compared to net cash provided by investing activities of
$11,000 for the same period of 1998. During the first six months of 1999, FX
Energy spent $73,000 on upgrading its producing properties, a net amount of
$131,000 on unproved properties, $56,000 on upgrading its drilling well
servicing equipment, $10,000 on other assets and a net amount of $3,503,000 on
<PAGE>18
investing in marketable debt securities. During the first six months of 1998,
the Company spent $91,000 to upgrade its producing operations (primarily in the
Cut Bank field in northern Montana), $48,000 for undeveloped leaseholds ($33,000
in the Baltic Project Area and $15,000 in the Williston Basin), a net amount of
$108,000 to upgrade its drilling and well servicing equipment, $82,000 for
additional office equipment and $143,000 on other assets. Also, during the
first six months of 1998, the Company received $500,000 from Apache as an up
front cash payment relating to Apache's participation in the Company's
Carpathian Project Area and had a net increase in marketable debt securities of
$17,000.
Financing Activities
Net cash provided by financing activities was $6,460,000 during the first
six months of 1999 as compared to $695,000 used in financing activities in the
same period of 1998. During the first six months of 1999, FX Energy advanced
two of its officers a total of $597,000 and realized net proceeds after offering
costs of $7,057,000 from the sale of 1,792,500 shares of FX Energy's common
stock. During the first six months of 1998, FX Energy advanced two officers
$771,000 and options and warrants for 340,000 shares were exercised resulting in
net proceeds of $527,000, including $77,000 in cash, notes receivable of
$250,000 and a reduction in accrued liabilities of $200,000.
POLISH PROJECT AREAS
FX Energy and Apache AMI
Effective January 1, 1999, FX Energy and Apache entered into an agreement
which further defined the relationship between FX Energy and Apache in Poland by
establishing an AMI covering the entire country of Poland, except for the Baltic
Project Area in which Apache does not have an interest, for oil and gas
exploration, production, development and acquisition activities for a period of
two years.
<PAGE>19
Under agreements between FX Energy and Apache signed during 1997, 1998 and
early 1999, Apache has agreed to perform certain earning requirements to earn a
fifty-percent interest in FX Energy's Lublin and Carpathian project areas (the
"Apache Exploration Program"). A summary of the items included in the Apache
Exploration Program for which Apache must pay all of FX Energy's pro rata share
of costs during the first three years of a six year exploration period follows:
PROJECT AREA
---------------------------
LUBLIN CARPATHIAN TOTAL
--------- ---------- --------
Drilling costs (1)........ 7 wells 3 wells 10 wells
Completion costs (2)...... 7 wells -- 7 wells
2D seismic (1)............ 1,650 km 350 km 2,000 km
Concession and usufruct fees $ 695,000 $ 160,000 $ 855,000
Annual training costs (3). $ 80,000 $ 15,000 $ 95,000
G&A costs incurred in Poland All through All through All through
(4) ..................... 1999 1999 1999
(1) Apache drilled two exploratory wells on the Lublin Project Area and
completed its 1,650 km seismic acquisition requirement for the Lublin
Project Area during 1998.
(2) Should an exploratory well discover commercial reserves, Apache will be
required to pay FX Energy's pro rata share of completion costs for
exploratory wells drilled on the Lublin Project Area. FX Energy must pay for
its pro rata share of any completion costs for exploratory wells drilled on
the Carpathian Project Area.
(3) Annual training cost amounts reflect expenditures required to be spent each
year.
(4) FX Energy will not incur any of its pro rata share of Apache's Polish G&A
costs on the Lublin or Carpathian project areas until after Apache fulfills
its exploratory well drilling requirements on each of the respective project
areas or the end of 1999, whichever is later.
<PAGE>20
The first two wells under the Apache Exploration Program, the Czernic 277-2
and the Poniatowa 317-1, were both exploratory dry holes drilled on the Lublin
Project Area during 1998. The Siedliska #2, the third earning well, was
commenced during July 1999 with POGC as operator. The fourth well, the Witkow
#1 was also commenced during July 1999 with Apache as operator. FX Energy has a
33.3% working interest in the Siedliska #2 and a 45% working interest in the
Witkow #1. Under terms of the Apache Exploration Program, Apache must cover all
of FX Energy's pro-rata share of cost for all earning wells. Apache plans to
complete its Lublin Project Area drilling requirements by drilling five wells
during 1999 and its Carpathian Project Area drilling requirements by drilling
three wells during 2000 and 2001.
Under other terms of the FX Energy and Apache AMI, FX Energy and Apache are
equal fifty-fifty partners in the Pomeranian and Warsaw West project areas,
Apache is the operator of all project areas covered by the FX Energy and Apache
AMI and the remaining earning exploratory wells may be selected anywhere within
the AMI at the consent of both parties.
Option Agreements with FX Energy, Apache and POGC
FX Energy and Apache entered into agreements (the "Option Agreements") with
POGC during 1997 and 1998 whereby each has an independent reciprocal right to
participate, with up to a one-third interest, in hydrocarbon exploration of POGC
controlled areas adjacent to and near the Lublin, Carpathian and Pomeranian
project areas. In turn, POGC has the reciprocal right to participate in
hydrocarbon exploration, with up to a one-third interest determined on a block
by block basis, on the Lublin, Carpathian and Pomeranian project areas. The
Warsaw West and Baltic project areas are not subject to any option agreements
between FX Energy, Apache or POGC.
<PAGE>21
During June 1999, FX Energy elected to participate in drilling the
Andrychow #6, an exploratory well operated by POGC located on POGC option
acreage within the Carpathian Project Area. FX Energy has a 5% working interest
in the well. POGC commenced drilling the Andrychow #6 during the first week of
July 1999.
Lachowice Farm-in Agreement with Apache and POGC
On February 26, 1999, FX Energy and Apache entered into a farm-in agreement
with POGC whereby FX Energy and Apache will each earn a one-third interest in
POGC's Lachowice Field, which is located within the Carpathian Project Area.
The Lachowice Field contains three shut-in gas wells that have yet to be
commercially produced. The wells previously tested at an average production
rate of 5.7 MMcf of gas per day per well by POGC. Under terms of the agreement,
FX Energy and Apache will pay all of the following costs in order to earn a one-
third interest each in the project: (1) test and recomplete up to three shut-in
gas wells; (2) drill three additional wells, if warranted; and (3) construct
gathering and processing facilities, if warranted. All costs and net revenues
thereafter, including additional development drilling and lease operating costs,
will be shared one-third each by FX Energy, Apache and POGC. Field work on the
Lachowice Farm-in commenced during late June with Apache as the operator. Due
to extensive testing planned on the wells, definitive testing results may not be
available for several months.
Baltic Project Area
Under terms of the Baltic Usufruct signed in March 1996, FX Energy was
required to relinquish at least fifty-percent of the Baltic Project Area's
undeveloped acreage on or before the end of the first three year exploration
period. During March 1999, FX Energy relinquished approximately 1.2 million
acres, leaving a total of approximately 0.9 million undeveloped acres in the
<PAGE>22
Baltic Project Area. The Polish government also consented to applying the
Gladysze #1-A, the second well drilled on the Baltic Project Area during 1997,
to the work commitment for the second three year exploration phase. As such, FX
Energy has satisfied all work commitments applicable to the Baltic Project
Area's six year exploration phase and is currently seeking an industry partner
to conduct additional joint exploration in the Baltic Project Area. None of FX
Energy's other Project Areas in Poland have mandatory acreage relinquishment
provisions during their respective exploration periods.
CAPITAL REQUIREMENTS
General
FX Energy had $8.6 million of cash equivalents and marketable debt
securities with no long-term debt as of June 30, 1999. This amount is expected
to be sufficient to fund FX Energy's minimal exploration and operating
requirements during the remainder of 1999 and most of 2000. FX Energy does
intend to seek additional capital to fund any activities outside the scope of
its minimum exploration and operating activities.
The allocation of FX Energy'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, development and other activities. FX Energy has no current
financing arrangement for its anticipated future capital needs. FX Energy may
obtain funds for future capital investments from the sale of additional
securities, project financing, sale of partial property interests, strategic
alliances with other energy or financial partners or other arrangements, all of
which may dilute the interest of existing shareholders in FX Energy or FX
Energy'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 FX Energy.
<PAGE>23
Exploration Capital Requirements
During the remainder of 1999, FX Energy expects to have substantially all
the cost of its share of exploration activities covered by Apache. The primary
focus for the remainder of 1999 is expected to be in the Lublin Project Area,
where Apache has agreed to complete its requirement to drill the remaining five
exploratory wells, all at no cost to FX Energy, to earn a fifty-percent interest
in the Lublin Project Area. In the Carpathian Project Area, Apache is expected
to acquire new seismic data this year and commence drilling the first of three
exploratory wells in 2000, at no cost to FX Energy, to earn a fifty-percent
interest in the Carpathian Project Area. During July 1999, FX Energy elected to
participate in drilling the Andrychow #6 with a five-percent interest, an
exploratory well operated by POGC located on POGC option acreage within the
Carpathian Project Area near Lachowice. FX Energy's pro-rata share of costs for
the Andrychow #6 is expected to be approximately $110,000. Initial exploratory
efforts, which include new 2D seismic acquisition and the first exploratory
well, are expected to occur in 2000 on the Pomeranian Project Area and in 2001
on the Warsaw West Project Area, where FX Energy and Apache are equal partners.
Additional exploration of the Baltic Project Area has been deferred until FX
Energy attracts an industry partner.
Due to recent volatile oil prices coupled with its increasing focus on
Poland, FX Energy expects to incur minimal exploration expenditures on its
domestic operations during the remainder of 1999.
Development Capital Requirements
Development activity on the Lachowice Farm-in commenced during the second
quarter of 1999. FX Energy expects to spend up to $300,000 per well for its pro
rata share of costs to re-enter and recomplete up to three shut-in gas wells
during 1999, $2.5 million per well to drill three additional development wells
<PAGE>24
during 2000, if warranted, and $1.5 million for production facilities during
2000, if warranted. During May 1999, FX Energy raised $7.2 million through a
private placement of securities, of which $3.4 million was allocated to
partially fund its initial capital requirements for the Lachowice Farm-in. FX
Energy intends to seek additional capital to fully fund the Lachowice Farm-in as
development activities warrant. Under the AMI agreement with Apache, FX Energy
and Apache are now aggressively pursuing additional production development and
production enhancement opportunities with POGC. FX Energy plans to seek
additional capital, as required, to fund its participation costs in any
additional Polish appraisal/development projects it may enter into with Apache
and POGC.
Due to recent volatile oil prices coupled with its increasing focus on
Poland, FX Energy expects to incur minimal developmental expenditures on its
domestic operations during the remainder of 1999.
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
FX Energy operates within two segments of the oil and gas industry: the E&P
segment and the contract services segment, and within one segment of the mining
industry. Mining, which consists of gold exploration on FX Energy's Sudety
Project Area in Poland, is not a material segment and is excluded from the
following discussion. Depreciation, depletion and amortization costs ("DD&A")
directly associated with their respective segments are detailed within the
following discussion. General and administrative costs ("G&A"), interest income
and other income are not allocated to individual operating segments for
management or segment reporting purposes and are discussed in their entirety
following the segment discussion.
<PAGE>25
COMPARISON OF THE SECOND QUARTER OF 1999 TO THE SECOND QUARTER OF 1998
E&P - OIL AND GAS SEGMENT
Oil Revenues
Oil revenues were $360,000 during the second quarter of 1999, an increase
of $88,000 as compared to $272,000 during the same period of 1998. During the
second quarter of 1999, FX Energy's oil revenues were positively affected by
increased oil prices, which were partially offset by lower production rates
attributable to the natural production declines of FX Energy's producing
properties. During the second quarter of 1998, FX Energy's oil revenues were
negatively affected by decreased oil prices and lower production rates
attributable to the natural production declines of FX Energy's producing
properties.
A summary of the percentage change in oil revenues, average oil price and
oil production for second quarter of 1999 and 1998 as compared to their
respective prior year's period are set forth in the following table:
QUARTER ENDED JUNE 30,
----------------------
1999 1998
-------- --------
OIL REVENUES............................. $360,000 $272,000
Percent change versus prior year's
quarter +32% -46%
AVERAGE OIL PRICE........................ $ 14.22 $ 9.93
Percent change versus prior year's
quarter +43% -37%
PRODUCTION VOLUMES (BBLS)................ 25,323 27,417
Percent change versus prior year's
quarter -8% -13%
<PAGE>26
Gain on Sale of Property Interests
FX Energy recognized no gain on sale of property interests during the
second quarter of 1999 and the second quarter of 1998. The amount of gain on
sale of property interests will continue to vary from period to period,
depending on the timing of completed deals and the amount of up-front cash
consideration, if any.
Lease Operating Costs
FX Energy's lease operating costs are composed of normal recurring lease
operating expenses ("LOE") and production taxes. Lease operating costs were
$203,000 during the second quarter of 1999, a decrease of $29,000 as compared to
$232,000 during the same period of 1998. A comparative discussion of each
component of lease operating costs incurred during the second quarter of 1999
and 1998 follows:
LOE costs were $179,000 during the second quarter of 1999, a decrease of
$32,000 as compared to $211,000 during the same period of 1998. During the
second quarter of 1999, FX Energy deferred workovers and further reduced its LOE
costs by re-designing the pattern of injecting fluids into the Cut Bank Sand
Unit, its principal producing property. As a result, electrical, maintenance,
labor and other costs were reduced and the lifting cost per barrel declined to
$7.05 during the second quarter of 1999, a decrease of $0.66 as compared to
$7.71 for the second quarter of 1998. During the second quarter of 1998, FX
Energy deferred workovers and performed only routine maintenance on its
producing properties due to depressed and volatile oil prices.
Production taxes were $24,000 during the second quarter of 1999, an
increase of $3,000 as compared to $21,000 during the same period of 1998. The
increase in production taxes during the second quarter of 1999 was attributable
<PAGE>27
to higher oil prices which were partially offset by lower production volumes
during the second quarter of 1999 as compared to the same period of 1998. Refer
to the table in E&P - Oil and Gas Segment Oil Revenues for the percentage
fluctuations in the average oil price and oil production for the second quarter
of 1999 and 1998 as compared to their respective prior year periods.
DD&A Expense - E&P
DD&A expense for producing properties was $14,000 for the second quarter of
1999, a decrease of $52,000 as compared to $66,000 during the same period of
1998. The decrease during the second quarter of 1999 was directly attributable
to the $5,885,000 write down of proved producing properties by FX Energy during
the third and fourth quarters of 1998. As a result of the write down, the DD&A
rate per barrel for the second quarter of 1999 was $0.54, a decrease of $1.55 as
compared to $2.09 during the same period of 1998.
Exploration Costs
FX Energy's exploration costs consist of geological and geophysical costs
("G&G"), exploratory dry holes and non-producing leasehold impairments.
Exploration costs were $194,000 during the second quarter of 1999, a decrease of
$442,000 as compared to $636,000 during the same period of 1998. Exploration
costs include $20,000 and $15,000 during the second quarter of 1999 and 1998,
respectively, of G&G costs relating to FX Energy's mining operations, which are
excluded from the discussion of the results of operations for this segment. A
comparative discussion of each component of exploration costs incurred during
the second quarter of 1999 and 1998 follows:
G&G costs were $174,000 during the second quarter of 1999, a decrease of
$447,000 as compared to $621,000 during the same period of 1998. During the
second quarter of 1999, FX Energy's G&G costs were primarily covered by Apache
in accordance with the Apache Exploration Program terms. Apache now incurs
<PAGE>28
substantially all G&G costs relating to the Lublin and Carpathian project areas.
During the second quarter of 1998, FX Energy incurred $300,000 of G&G costs in
the Lublin Project Area for its share of a 2D seismic acquired jointly with
Apache and issued stock valued at $119,000 to a Polish citizen for consulting
services. G&G costs will continue to fluctuate from period to period, based on
FX Energy's level of exploratory activity in Poland and the respective cost
participation percentage of FX Energy's industry partners.
Exploratory dry hole costs were $33,000 during the second quarter of 1999,
as compared to no exploratory dry hole costs during the second quarter of 1998.
All of the exploratory dry hole costs incurred during the second quarter of 1999
were associated with exploratory dry holes drilled during 1997.
There were no non-producing leasehold impairments during the second quarter of
1999 and 1998. As of June 30, 1999, FX Energy had capitalized unproved property
costs of $1,507,000, including $712,000 domestically and $795,000 in Poland. In
accordance with generally accepted accounting principles, an impairment charge
will be recognized, determined on a property by property basis, in the event FX
Energy determines any capitalized unproved property costs are not recoverable
following unsuccessful exploration drilling or other factors. Non-producing
leasehold impairments will continue to vary from period to period based on FX
Energy's determination that capitalized costs of unproved properties, on a
property by property basis, are not realizable.
CONTRACT SERVICES - OIL AND GAS SEGMENT
Contract Servicing Revenues
FX Energy had contract servicing revenues of $91,000 during the second
quarter of 1999, as compared to no contract servicing revenues during the second
quarter of 1998. During the second quarter of 1999, FX Energy's drilling rig
<PAGE>29
and well servicing equipment generated $91,000 of revenue from contract work on
third party properties. During the second quarter of 1998, FX Energy's drilling
rig was idle and all of its well servicing equipment was used solely on Company
owned properties, resulting in no contract servicing revenues from third party
sources. Contract servicing revenues will continue to fluctuate period to
period based on the degree of emphasis on utilizing equipment on Company owned
properties, the number of wells drilled, the amount of retained working
interest, if any, and other factors.
Contract Servicing Costs
Contract servicing costs were $81,000 during the second quarter of 1999, an
increase of $71,000 as compared to $10,000 for the same period of 1998. During
the second quarter of 1999, all contract servicing costs were directly
associated with contract third party work performed by FX Energy's well
servicing equipment, which generated a gross profit of approximately 12% during
the period. During the second quarter of 1998, FX Energy's drilling rig was
idle and all well servicing equipment was used solely on Company owned
properties, resulting in incurring only downtime maintenance costs associated
with the drilling rig. Contract servicing costs will continue to fluctuate
period to period based on the degree of emphasis on utilizing equipment on
Company owned properties, the number of wells drilled, the amount of retained
working interest, if any, and other factors.
DD&A Expense - Contract Servicing
DD&A expense for contract servicing was $81,000 during the second quarter
of 1999, an increase of $6,000 as compared to $75,000 during the same period of
1998. During the last six months of 1998 and the first six months of 1999, FX
Energy spent $151,000 to upgrade its drilling and well servicing equipment,
which in turn resulted in a higher DD&A expense during the second quarter of
1999 as compared to the same period of 1998. DD&A expense for contract
<PAGE>30
servicing may continue to be progressively higher in succeeding periods due to
capital additions in prior periods being depreciated in succeeding periods.
NON-SEGMENTED INFORMATION
G&A Costs
G&A costs were $743,000 during the second quarter of 1999, an increase of
$61,000 as compared to $682,000 for the same period of 1998. Primarily as a
result of its level of activities in Poland during the second quarter of 1999,
FX Energy incurred substantially more legal, travel and other associated G&A
costs during the second quarter of 1999 as compared to the same period of 1998.
G&A costs are expected to continue at current or higher levels with fluctuations
from period to period due to the level of FX Energy's activities in Poland and
the respective cost participation percentage of FX Energy's industry partners.
DD&A Expense - Corporate
DD&A expense for corporate activities was $31,000 during the second quarter
of 1999, a decrease of $5,000 as compared to $36,000 during the same period of
1998. The decrease during the second quarter of 1999 as compared to the same
period of 1998 is primarily the a result of office equipment with a depreciable
life of three years becoming fully depreciated prior to the second quarter of
1999. DD&A expense for corporate activities may continue to fluctuate in
succeeding periods due to equipment becoming fully depreciated and capital
additions in prior periods being depreciated in succeeding periods.
Interest and Other Income
Interest and other income was $105,000 during the second quarter of 1999,
relatively flat as compared to $112,000 during the same period of 1998. FX
Energy's cash and marketable debt securities average balances during the second
<PAGE>31
quarter of 1999 were comparable to the same period of 1998. Interest and other
income will fluctuate from period to period primarily due to the average cash
and marketable debt securities balances.
COMPARISON OF THE FIRST SIX MONTHS OF 1999 TO THE FIRST SIX MONTHS OF 1998
E&P - OIL AND GAS SEGMENT
Oil Revenues
Oil revenues were $594,000 during the first six months of 1999, a decrease
of $10,000 as compared to $604,000 during the same period of 1998. During the
first six months of 1999 and 1998, FX Energy's oil revenues were subject to
price volatility and lower production rates attributable to the natural
production declines of FX Energy's producing properties. A summary of the
percentage change in oil revenues, average oil price and oil production for
first six months of 1999 and 1998 as compared to their respective prior year's
period are set forth in the following table:
SIX MONTHS ENDED JUNE 30,
-------------------------
1999 1998
-------- --------
OIL REVENUES $594,000 $604,000
Percent change versus prior year's
quarter -2% -44%
AVERAGE OIL PRICE $11.44 $10.63
Percent change versus prior year's
quarter +8% -38%
PRODUCTION VOLUMES (BBLS) 51,895 56,835
Percent change versus prior year's
quarter -9% -9%
<PAGE>32
Gain on Sale of Property Interests
FX Energy recognized no gain on sale of property interests during the first
six months of 1999, as compared to $467,000 during the first six months of 1998.
During the first six months of 1998, Apache paid FX Energy $500,000 of up-front
cash consideration relating to its participation in FX Energy's Western
Carpathian Concession, which was partially offset by associated costs of
$33,000. The amount of gain on sale of property interests will continue to vary
from period to period, depending on the timing of completed deals and the amount
of up-front cash consideration, if any.
Lease Operating Costs
Lease operating costs were $454,000 during the first six months of 1999, a
decrease of $84,000 as compared to $538,000 during the same period of 1998. A
comparative discussion of each component of lease operating costs incurred
during the first six months of 1999 and 1998 follows:
LOE costs were $415,000 during the first six months of 1999, a decrease of
$82,000 as compared to $497,000 during the same period of 1998. During the
first six months of 1999, FX Energy deferred workovers and further reduced its
LOE costs by re-designing the pattern of injecting fluids into the Cut Bank Sand
Unit, its principal producing property. As a result, electrical, maintenance,
labor and other costs were reduced and the lifting cost per barrel declined to
$7.99 during the first six months of 1999, a decrease of $0.75 as compared to
$8.74 for the first six months of 1998. During the first six months of 1998, FX
Energy deferred workovers and performed only routine maintenance on its
producing properties due to depressed and volatile oil prices.
<PAGE>33
Production taxes were $39,000 during the first six months of 1999, a
decrease of $2,000 as compared to $41,000 during the same period of 1998.
During the first six months of 1999 and 1998 production taxes averaged
approximately 6.7% of oil revenues. The fluctuation in production taxes from
period to period is directly associated with oil price volatility and changes in
oil production rates from period to period. Refer to the table in E&P - Oil and
Gas Segment Oil Revenues for the percentage fluctuations in the average oil
price and oil production for the first six months of 1999 and 1998 as compared
to their respective prior year periods.
DD&A Expense - E&P
DD&A expense for producing properties was $28,000 for the first six months
of 1999, a decrease of $112,000 as compared to $140,000 during the same period
of 1998. The decrease during the first six months of 1999 was directly
attributable to the $5,885,000 write down of proved producing properties by FX
Energy during the third and fourth quarters of 1998. As a result of the write
down, the DD&A rate per barrel for the first six months of 1999 was $0.54, a
decrease of $1.92 as compared to $2.46 during the same period of 1998.
Exploration Costs
Exploration costs were $374,000 during the first six months of 1999, a
decrease of $526,000 as compared to $900,000 during the same period of 1998.
Exploration costs include $20,000 and $21,000 during the six months ended June
30, 1999 and 1998, respectively, of G&G costs relating to FX Energy's mining
operations, which are excluded from the discussion of the results of operations
for this segment. A comparative discussion of each component of exploration
costs incurred during the first six months of 1999 and 1998 follows:
G&G costs were $354,000 during the first six months of 1999, a decrease of
$525,000 as compared to $879,000 during the same period of 1998. During the
first six months of 1999, FX Energy's G&G costs were primarily covered by Apache
<PAGE>34
in accordance with the Apache Exploration Program terms. Apache now incurs
substantially all G&G costs relating to the Lublin and Carpathian project areas.
During the first six months of 1998, FX Energy incurred $300,000 of G&G costs in
the Lublin Project Area for its share of 2D seismic acquired jointly with Apache
and issued stock valued at $119,000 to a Polish citizen for consulting services.
G&G costs will continue to fluctuate from period to period, based on FX Energy's
level of exploratory activity in Poland and the respective cost participation
percentage of FX Energy's industry partners.
Exploratory dry hole costs were $33,000 during the first six months of
1999, an increase of $21,000 as compared to $12,000 during the first six months
of 1998. All of the exploratory dry hole costs incurred during the first six
months of 1999 and 1998 were associated with exploratory dry holes drilled
during 1997.
There were no non-producing leasehold impairments during the first six
months of 1999 and 1998. As of June 30, 1999, FX Energy had capitalized
unproved property costs of $1,507,000, including $712,000 domestically and
$712,000 in Poland. In accordance with generally accepted accounting
principles, an impairment charge will be recognized, determined on a property by
property basis, in the event FX Energy determines any capitalized unproved
property costs are not recoverable following unsuccessful exploration drilling
or other factors. Non-producing leasehold impairments will continue to vary
from period to period based on FX Energy's determination that capitalized costs
of unproved properties, on a property by property basis, are not realizable.
CONTRACT SERVICES - OIL AND GAS SEGMENT
Contract Servicing Revenues
FX Energy had contract servicing revenues of $179,000 during the first six
months of 1999, as compared to no contract servicing revenues during the first
<PAGE>35
six months of 1998. During the first six months of 1999, FX Energy's drilling
rig and well servicing equipment generated $179,000 of revenue from contract
work on third party properties. During the first six months of 1998, FX
Energy's drilling rig was idle and all of its well servicing equipment was used
solely on Company owned properties, resulting in no contract servicing revenues
from third party sources. Contract servicing revenues will continue to
fluctuate period to period based on the degree of emphasis on utilizing
equipment on Company owned properties, the number of wells drilled, the amount
of retained working interest, if any, and other factors.
Contract Servicing Costs
Contract servicing costs were $133,000 during the first six months of 1999,
an increase of $112,000 as compared to $21,000 for the same period of 1998.
During the first six months of 1999, all contract servicing costs were directly
associated with contract third party work performed by FX Energy's well
servicing equipment, which generated a gross profit of approximately 25% during
the period. During the first six months of 1998, FX Energy's drilling rig was
idle and all well servicing equipment was used solely on Company owned
properties, resulting in incurring only downtime maintenance costs associated
with the drilling rig. Contract servicing costs will continue to fluctuate
period to period based on the degree of emphasis on utilizing equipment on
Company owned properties, the number of wells drilled, the amount of retained
working interest, if any, and other factors.
DD&A Expense - Contract Servicing
DD&A expense for contract servicing was $162,000 during the first six
months of 1999, an increase of $6,000 as compared to $156,000 during the same
period of 1998. During the last six months of 1998 and the first six months of
1999, FX Energy spent $151,000 to upgrade its drilling and well servicing
equipment, which in turn resulted in a higher DD&A expense during the second
<PAGE>36
quarter of 1999 as compared to the same period of 1998. DD&A expense for
contract servicing may continue to be progressively higher in succeeding periods
due to capital additions in prior periods being depreciated in succeeding
periods.
NON-SEGMENTED INFORMATION
G&A Costs
G&A costs were $1,279,000 during the first six months of 1999, a decrease
of $145,000 as compared to $1,424,000 for the same period of 1998. Primarily as
a result of its level of activities in Poland during the first six months of
1999, FX Energy incurred substantially less legal, travel and other associated
G&A costs during the first six months of 1999 as compared to the same period of
1998. G&A costs are expected to continue at current or higher levels with
fluctuations from period to period due to the level of FX Energy's activities in
Poland and the respective cost participation percentage of FX Energy's industry
partners.
DD&A Expense - Corporate
DD&A expense for corporate activities was $62,000 during the first six
months of 1999, a decrease of $57,000 as compared to $119,000 during the same
period of 1998. The decrease during the first six months of 1999 as compared to
the same period of 1998 is primarily the result of office equipment with a
depreciable life of three years becoming fully depreciated prior to 1999. DD&A
expense for corporate activities may continue to fluctuate in succeeding periods
due to equipment becoming fully depreciated and capital additions in prior
periods being depreciated in succeeding periods.
<PAGE>37
Interest and Other Income
Interest and other income was $207,000 during the first six months of 1999,
a decrease of $89,000 as compared to $296,000 during the same period of 1998. FX
Energy's average cash and marketable debt securities balances were lower during
the first six months of 1999 as compared to the same period of 1998. As a
result, FX Energy earned $206,000 of interest income during the first six months
of 1999, a decrease of $77,000 as compared to $283,000 for the same period of
1998.
YEAR 2000
FX Energy uses computers principally for administrative functions such as
word processing, accounting, management reporting and financial forecasting. FX
Energy also uses computers for scientific functions such as map making,
geological interpretations and geophysical analysis. Substantially all of FX
Energy's principal computer systems have been purchased since 1996. FX Energy's
core software systems (accounting, internet, word processing and spreadsheet)
and vendors are certified as year 2000 compliant.
An ongoing program has been implemented by FX Energy to ensure that its
operational and financial systems will not be adversely affected by year 2000
software failures. In addition to its own computer systems, in connection with
its activities in the United States and in Poland, FX Energy interacts with
suppliers, customers, creditors and financial service organizations domestically
and globally which use computer systems. FX Energy is surveying all of the
major businesses FX Energy interacts with during the normal course of business
and is requesting a certification of year 2000 compliance from each of them.
Substantially all of FX Energy's core vendors (banking, insurance, stock market-
makers, strategic partners, oil purchasers, communications, etc.) have either
already certified that they are year 2000 compliant or indicated they have a
program underway to become year 2000 compliant before the year 2000.
<PAGE>38
FX Energy intends to modify or replace those systems, if any, which are not
year 2000 compliant. It is impossible for FX Energy 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 FX
Energy's business and operations. FX Energy estimates that the cost to
redevelop, replace or repair its technology will not be material and has not
expended any significant costs to date.
OTHER MATTERS
FX Energy has reviewed all 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 FX Energy. Based on that review, FX Energy
believes that none of these pronouncements will have a significant effect on
current or future earnings or operations.
PART II.
OTHER INFORMATION
--------------------------------------------------
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
PRIVATE PLACEMENT OF SECURITIES
On April 8, 1999, FX Energy initiated a private placement that resulted in
the sale during May 1999 of 1,792,500 shares of FX Energy's common stock,
resulting in gross proceeds of $7.2 million ($7.1 million net), without
registration under the Securities Act of 1933, These securities were issued in
reliance on the exemptions from the registration and prospectus delivery
requirements of the Securities Act provided in Section 4(2) thereof and Rule 506
under Regulation D promulgated by thereunder. On June 11, 1999, FX Energy
registered the resale aforementioned securities with the Securities and Exchange
Commission.
<PAGE>39
ITEM 5. OTHER INFORMATION
APPOINTMENT OF ADDITIONAL DIRECTORS
During the second quarter of 1999, the Board of Directors appointed Dennis
B. Goldstein and Dennis L. Tatum as directors of FX Energy effective August 9,
1999. Mr. Goldstein is currently employed as Corporate Counsel and Assistant
Secretary of Homestake Mining Company. Mr. Tatum has served as the Controller
of FX Energy since 1997 and was appointed to the position of Vice President and
Treasurer in 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are included as part of this report:
EXHIBIT SEC REFERENCE
NUMBER NUMBER TITLE OF DOCUMENT LOCATION
- ------- ------------- ------------------------------- -------------
27.01 27 Financial Data Schedule This
Filing
(b) REPORTS ON FORM 8-K
During the quarter ended June 30, 1999, FX Energy filed the following
reports on Form 8-K:
DATE OF EVENT REPORTED ITEM(S) REPORTED
---------------------- --------------------
May 18, 1999 Item 5. Other Events
June 10, 1999 Item 5. Other Events
<PAGE>40
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FX ENERGY, INC.
(Registrant)
Date: August 10, 1999 By /s/ David N. Pierce
President, Director , Chief Executive
Officer
Date: August 10, 1999 By /s/ Dennis L. Tatum
Vice-President, Treasurer and Chief
Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET AS OF JUNE 30, 1999, AND STATEMENTS OF OPERATIONS FOR THE SIX
MONTHS THEN ENDED, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,193,925
<SECURITIES> 6,432,788
<RECEIVABLES> 520,052
<ALLOWANCES> 0
<INVENTORY> 65,886
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0
0
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</TABLE>
