U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(AMENDMENT NO. 1)
ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER: 0-25386
FX ENERGY, INC.
(Name of registrant 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
NONE registered
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.001
PREFERRED STOCK PURCHASE RIGHTS
(Title of Class)
Indicate by check mark whether the registrant (1) has 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
--- ---
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K (S 229.405 of this chapter) is not contained herein, and
will not 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-K/A or any amendment to this Form 10-K/A.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of such common equity, as of February
15, 2000, was $94,662,394.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. As of February 15, 2000, FX
Energy had outstanding 14,849,003 shares of its common stock, par value $0.001.
FX ENERGY'S DEFINITIVE PROXY STATEMENT IN CONNECTION WITH THE 2000 ANNUAL
MEETING OF STOCKHOLDERS IS INCORPORATED BY REFERENCE IN RESPONSE TO PART III OF
THIS ANNUAL REPORT.
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SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
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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. FX Energy intends the forward-looking statements
to be covered by the safe harbor provisions for forward-looking statements
contained in Section 27A of the Securities Act and Section 21E of the Exchange
Act. 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:
o The future results of drilling individual wells and other exploration
and development activities;
o Future variations in well performance as compared to initial test
data;
o Future events that may result in the need for additional capital;
o Fluctuations in prices for oil and gas;
o Uncertainties of certain terms to be determined in the future relating
to FX Energy's oil and gas interests, including exploitation fees,
royalty rates and other matters;
o Future drilling and other exploration schedules and sequences for
various wells and other activities;
o Uncertainties regarding future political, economic, regulatory,
fiscal, taxation and other policies in Poland;
o The future ability of FX Energy to attract strategic partners to share
the costs of exploration, exploitation, development and acquisition
activities; and
o 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,
including the risk 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 to reflect
subsequent events or circumstances.
<PAGE>
PART I
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ITEMS 1. AND 2. BUSINESS AND PROPERTIES
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INTRODUCTION
FX Energy (Nasdaq: FXEN) is an independent oil and gas exploration,
development and production company, currently focused on opportunities in the
Republic of Poland. FX Energy is the largest foreign oil and gas exploration
acreage holder in Poland, in terms of both gross and net acres, with exploration
rights covering approximately 15.8 million gross acres, including 11.5 million
gross acres controlled by FX Energy and Apache Corporation ("Apache"), options
covering 3.4 million gross acres controlled by the Polish Oil and Gas Company
("POGC") and 0.9 million gross acres controlled solely by FX Energy. FX Energy
also has strategic alliances with Apache and POGC to explore for oil and gas,
capitalize on development opportunities, gain access to geological and
geophysical data, obtain project financing and to conduct other activities in
Poland.
FX Energy and Apache are currently conducting oil and gas exploration
activities on approximately 14.9 million acres in Poland for which FX Energy and
Apache jointly hold exploration rights (the "Apache Exploration Program"). To
date, five exploratory wells have been drilled under terms of the Apache
Exploration Program. The first four exploratory wells, all drilled during 1999,
were exploratory dry holes. The fifth well, the Wilga 2, which was drilled on
the northwest edge of the Lublin Basin, was announced as an exploratory success
on January 25, 2000 after initial production test results indicated a combined
initial flow rate of 16.9 Mmcf of gas per day and 570 Bbls of condensate from
three intervals in a Carboniferous horizon at a depth between 7,732 and 8,550
feet. The Wilga 2 was the first successful exploration well drilled by a foreign
operator in Poland. In accordance with the Apache Exploration Program terms,
Apache will cover all of FX Energy's 45.0% share of costs to drill and complete
the Wilga 2. Apache is committed to covering FX Energy's costs to drill five
additional exploratory wells in Poland.
Under terms of the Apache Exploration Program, Apache has either completed
or agreed to the following work commitments in Poland:
o EXPLORATORY DRILLING. Apache will cover all of FX Energy's pro-rata
share of costs to drill ten exploratory wells, including completion
costs, if any, on the first seven exploratory wells. To date, Apache
has drilled five exploratory wells and plans to drill at least three
additional exploratory wells in 2000 and the remaining exploratory
wells in 2001;
o SEISMIC ACQUISITION. Apache will cover all of FX Energy's pro-rata
share of costs to acquire approximately 2,000 kilometers of 2D
seismic. To date, Apache has acquired 1,650 kilometers of 2D seismic
and is scheduled to complete the remaining 350 kilometers of 2D
seismic during 2000;
o LEASEHOLD COSTS. Apache will cover all of FX Energy's pro-rata share
of concession, usufruct, and training fees during the first three
years of a six year exploration period related to the Lublin Basin and
Carpathian areas;
o GENERAL AND ADMINISTRATIVE ("G&A") COSTS. Apache will cover all of FX
Energy's pro-rata share of Apache's Polish G&A costs through June,
2000; and
o CASH CONSIDERATION. Apache paid FX Energy $950,000, including
$500,000 during 1998 and $450,000 during 1997.
FX Energy, along with Apache, is currently attempting to balance its high
potential exploration program in Poland by purchasing an interest in a mix of
oil and gas properties including proved producing, proved non-producing, proved
undeveloped and additional exploration acreage from POGC. The properties
included within the proposed acquisition are primarily in western Poland, where
in excess of 80% of all oil and gas in Poland is currently produced. FX Energy
plans to utilize its $100 million shelf registration statement filed during July
1999 to fund the capital requirements associated with the proposed acquisition
through a combination of debt and equity securities or it may utilize bank debt
or other financing alternatives. As of February 15, 2000, no binding agreements
had been formalized relating to the proposed transaction.
BUSINESS STRATEGY
The principal components of FX Energy's strategy are:
FOCUS ON POLAND. FX Energy intends to continue to concentrate its activities in
Poland because of its:
o significant oil and gas potential from geologically diverse
hydrocarbon provinces;
o free market economy and competitive regulatory environment;
o relatively modern industrial infrastructure, including drilling and
service companies, pipelines, refineries and railroads;
o established hydrocarbon potential and FX Energy's large exploratory
acreage position containing approximately 20% of all acreage in
Poland;
o dependence on imports for approximately 98% and 60% of its oil and gas
consumption, respectively; and
o internationally competitive fiscal regime regarding the development of
oil and gas resources, including a current 6% government royalty and
an exploitation license fee with no back-end governmental
participation.
EXPAND ON EXPLORATION SUCCESS. On January, 25, 2000, FX Energy announced the
Wilga 2 well as an exploratory success after initial production tests resulted
in a combined initial flow rate of 16.9 Mmcf of gas and 570 Bbls of condensate
per day from three intervals in a Carboniferous horizon on trend with POGC's
Stezyca field in the Lublin Basin. FX Energy and its partners plan an appraisal
well immediately, followed by additional development drilling and facilities
construction later in the year, with initial production expected to commence
during early 2001. In addition, FX Energy will promptly begin seismic
acquisition in the Wilga area to identify a target near the Wilga discovery to
be drilled later this year to test the possibility of additional reserves
outside the Wilga structure. Three additional exploratory wells elsewhere in
Poland are planned to be drilled during 2000 under the terms of the Apache
Exploration Program.
SECURE LOWER RISK APPRAISAL AND DEVELOPMENT OPPORTUNITIES TO BALANCE HIGHER RISK
EXPLORATION. FX Energy intends to secure lower risk appraisal and development
opportunities to balance against its ongoing high potential exploration program
on its large acreage position in Poland by:
o seeking acquisitions of proved reserves that are currently producing
or can be placed into production through the investment in production
infrastructure and the implementation of a long-term exploitation
program; and
o pursuing lower risk appraisal and development drilling opportunities
in Poland by acquiring interests in or near areas containing proven
reserves or in areas in which FX Energy believes modern drilling and
production techniques will result in commercially producing wells.
DEVELOP AND EXPAND STRATEGIC ALLIANCES. FX Energy will continue to develop and
expand its strategic alliances with Apache and POGC to obtain significant
financial and operational assistance and to enhance FX Energy's ability to
pursue additional opportunities in Poland. FX Energy may seek new strategic
alliances with operating or financial partners to exploit fully its recent
exploratory success as well as any new ventures it may enter into in Poland.
PRINCIPAL CURRENT ACTIVITIES
FX Energy is implementing its business strategy through the following current
activities:
o OIL AND GAS PROPERTY ACQUISITION. FX Energy and Apache are
negotiating terms to purchase a mix of proved producing, proved non-
producing, proved undeveloped and additional exploration acreage from
POGC. The properties are located primarily in western Poland, where
in excess of 80% of the oil and gas in Poland is currently produced.
o DEVELOPMENT OF THE WILGA STRUCTURE AND FURTHER EXPLORATION. On January
25, 2000, the Wilga 2, drilled on the northwestern edge of the Lublin
Basin in Poland, was announced as an exploratory success after initial
production tests indicated a combined initial flow rate of 16.9 Mmcf
of gas and 570 Bbls of condensate per day from three intervals in a
Carboniferous horizon at a depth between 7,732 and 8,550 feet. FX
Energy has a 45.0% interest in the Wilga 2. According to terms of the
Apache Exploration Program, Apache will cover FX Energy's share of
drilling and completion costs in the Wilga 2. FX Energy will pay for
45.0% of all development costs. FX Energy and its partners plan an
appraisal well immediately, followed by additional development
drilling and facilities construction later in the year, with initial
production expected to commence during early 2001. In addition, FX
Energy will promptly begin seismic acquisition in the Wilga area to
identify a target near the Wilga discovery to be drilled later this
year to test the possibility of additional reserves outside the Wilga
structure.
o ONGOING EXPLORATION PROGRAM. FX Energy and Apache are continuing the
exploration of the 14.9 million gross acres included within the Apache
Exploration Program in Poland. Apache has committed to cover FX
Energy's share of costs to drill five more exploratory wells, acquire
and analyze approximately 350 kilometers of 2D seismic data and cover
all G&A costs incurred by Apache in Poland through June 30, 2000.
During 2000 through early 2001, FX Energy and Apache have scheduled
the following planned exploratory activities:
o WILGA AREA: Acquire approximately 120 kilometers of 2D seismic
near the Wilga structure to identify a target near the Wilga
discovery to be drilled later this year to test the possibility
of additional reserves outside the Wilga structure. ;
o CARPATHIAN: Acquire approximately 350 kilometers of 2D seismic
and drill one exploratory well (all of FX Energy's seismic and
drilling costs will be carried by Apache);
o POMERANIAN: Acquire approximately 300 kilometers of 2D seismic
and drill one exploratory well; and
o WARSAW WEST: Acquire approximately 422 kilometers of 2D seismic
and drill one exploratory well.
FX Energy has deferred exploration of the 0.9 million acre Baltic
Project Area for the time being.
o POSSIBLE ADDITIONAL PROVED RESERVE OPPORTUNITIES. FX Energy and
Apache are continually reviewing data from existing POGC fields with
proved reserves that may be suitable for possible joint acquisition,
the installation of production infrastructure and the implementation
of a long-term exploitation program.
o NEW APPRAISAL, DEVELOPMENT AND EXPLORATION PROJECTS. FX Energy and
Apache regularly review appraisal, development and exploration
projects for possible joint development and production operations on
existing POGC discoveries, shut-in fields and under-developed
properties in Poland.
ASSUMPTIONS
References to FX Energy in this report include FX Energy, Inc., its
subsidiaries and the entities or enterprises organized under Polish law in which
FX Energy has an interest and through which FX Energy conducts its activities in
that country. As discussed, FX Energy has entered into arrangements with POGC
and Apache through which each company has separate rights to participate in
various activities and projects in Poland.
For the purposes of presenting information in this report, all gross and net
well and acreage positions in Poland assume the following:
o POGC does not exercise its rights to participate in the portions of
the areas controlled by FX Energy, except respecting portions in which
it has elected to participate with the interest indicated prior to the
date of this report; and,
o FX Energy and Apache each will exercise their respective options to
participate in POGC controlled acreage at 33.3% each.
All historical production and test data about Poland, excluding wells in
which FX Energy has participated, have been derived from information furnished
by either POGC or the Polish Ministry of Environmental Protection, Natural
Resources and Forestry.
THE REPUBLIC OF POLAND
The Republic of Poland, with a population of about 40 million people,
peacefully asserted its independence in 1989 and adopted a new constitution that
established a parliamentary democracy. Poland's comprehensive economic reform
programs and stabilization measures implemented since 1989 have enabled it to
move toward a free market economy that is currently one of the fastest growing
in eastern Europe, with recent annual growth rates of from 5% to 7%. Poland
recently joined NATO and is poised to join the European Union within the next
few years. Poland's international trade has also undergone significant
progress. Its economic ties have turned from the east to the west, with most of
its current international trade with the countries of the European Union. The
Polish government credits foreign investment as a forceful growth factor,
generating over one-third of the country's total investment and acting as a
powerful restraint on unemployment.
Since the 1850s, when oil was first commercially produced in Poland, in
excess of 122 MMBbls of oil and 2.6 Tcf of gas in the southeastern Carpathian
region and 24 MMBbls of oil and 2.3 Tcf of gas in the southwestern Polish
Lowlands have been produced to date. Over the last several decades, the
exploration and development of Poland's oil and gas resources have been hindered
by a combination of foreign influence, a centrally controlled economy, limited
financial resources and a lack of modern exploration technology. Poland
currently imports approximately 98% of its oil, primarily from countries of the
former Soviet Union and the Middle East, and approximately 60% of its natural
gas, primarily from countries of the former Soviet Union. Poland is about the
size of New Mexico and contains approximately 77.3 million acres, 15.8 million
of which FX Energy has exploration rights to as of December 31, 1999.
POGC is the largest holder of oil and gas exploration and exploitation
rights in Poland. According to the September 13, 1999 issue of the Oil and Gas
Journal, POGC had estimated reserves of 5.4 Tcf of gas and 103.9 MMBbls of oil
as of December 31, 1998. POGC is a state owned and fully integrated oil and gas
company with approximately 30,000 employees. The government of Poland has
announced that it intends to privatize various aspects of POGC. At this time,
no specific plans have been announced respecting the method or timing of such
privatization.
EXPLORATION AND DEVELOPMENT ACTIVITIES IN POLAND
Polish Exploration Rights
FX Energy's oil and gas exploration rights in Poland are comprised of the
following gross acreage components, rounded to the nearest 100,000 acre:
<TABLE>
<CAPTION>
FX ENERGY POGC CONTROLLED AREAS (1) TOTAL
-------------------------
CONCESSIONS (2) CONCESSIONS EXCLUSIVE ACREAGE
<S> --------------- ----------- --------- ----------
APACHE EXPLORATION PROGRAM (1) <C> <C> <C> <C>
Lublin Basin ............ 5,000,000 600,000 -- 5,600,000
Carpathian .............. 1,400,000 200,000 1,300,000 2,900,000
Pomeranian .............. 2,200,000 -- 1,300,000 3,500,000
Warsaw West.............. 2,900,000 -- -- 2,900,000
--------------- ----------- --------- ----------
Total 11,500,000 800,000 2,600,000 4,900,000
BALTIC PROJECT AREA 900,000 -- -- 900,000
--------------- ----------- --------- ----------
TOTAL 12,400,000 800,000 2,600,000 15,800,000
=============== =========== ========= ==========
</TABLE>
(1) In the Apache Exploration Program, POGC controlled areas include
approximately 0.8 million acres of existing POGC Concessions and
approximately 2.6 million acres for which POGC has been granted the
exclusive right to obtain concessions by the government of Poland. FX
Energy and Apache each have separate options to participate in the
exploration of POGC controlled areas with up to a one-third interest each.
In turn, POGC has an option to participate with up to a one-third interest,
determined on a block by block basis, in the exploration of the FX Energy
Concession portion of the respective areas.
(2) FX Energy and Apache each have a fifty-percent beneficial interest in all
FX Energy Concessions within the Apache Exploration Program. The Warsaw
West area and the Baltic Project Area are not subject to POGC options. The
Baltic Project Area is owned one-hundred percent by FX Energy.
FX Energy may relinquish all or part of its interest in any exploratory
acreage at any time if it determines the hydrocarbon potential within any given
area does not warrant additional holding or exploration costs.
Apache Exploration Program
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 Area of Mutual Interest ("AMI") Agreement covering the entire
country of Poland, except for the 0.9 million acre Baltic Project Area, for oil
and gas exploration, production, development and acquisition activities for a
period of two years. The AMI Agreement effectively consolidated the terms of
various agreements signed between FX Energy and Apache during 1997, 1998 and
1999 into one basic agreement, referred to collectively as the "Apache
Exploration Program."
Under terms of the Apache Exploration Program, Apache has either agreed to
or completed the following primary terms:
o Apache must pay FX Energy's pro-rata share of cost to drill ten
exploratory wells, including paying for drilling and completion costs
for the first seven wells (five of which have been drilled to date)
and drilling costs (excluding completion costs) for three wells (none
of which has been drilled to date);
o Apache must pay FX Energy's pro-rata share of cost to shoot 2,000
kilometers of 2D seismic; including 1,650 kilometers of 2D seismic in
the Lublin Basin completed during 1998 and 350 kilometers of 2D
seismic in the Carpathian area that is scheduled to be completed
during 2000;
o Apache must pay all of FX Energy's pro-rata share of all concession
and usufruct fees during the first three years in the Lublin Basin
(approximately $695,000) and the Carpathian area (approximately
$160,000);
o Apache must pay all of FX Energy's pro-rata share of annual training
costs during the first three years in the Lublin Basin ($80,000 per
year) and the Carpathian area ($15,000 per year);
o Apache may not charge FX Energy for any of its pro-rata share of
Polish G&A costs through June 30, 2000. Thereafter, Apache may charge
FX Energy for 25% of its Polish G&A costs, increased by 5% upon the
drilling of each of the five remaining exploratory wells; up to a
maximum of 50%; and
o Apache paid FX Energy $950,000, including $500,000 during 1998 and
$450,000 during 1997.
The AMI Agreement modified and further defined the Apache Exploration
Program by adding the following additional terms:
o FX Energy and Apache must offer each other a fifty-percent interest in
any new exploration, appraisal, development, property acquisition or
other activities conducted by either party within the AMI during all
of 1999 and 2000;
o The ten exploratory wells under the Apache Exploration Program may, at
the consent of both parties, be drilled anywhere within the AMI;
o FX Energy and Apache have equal 50% interests in the Pomeranian and
Warsaw West areas; and,
o Apache is the operator of all areas controlled by FX Energy and Apache
within the AMI.
Exploration Acreage Overview - Apache Exploration Program
Lublin Basin
The 5.6 million acre Lublin Basin is located in central southeast Poland
and comprises the Lublin Basin Concession which contains twenty-four blocks and
three partial blocks covering approximately 5.0 million acres awarded to FX
Energy during 1996 and 1997 and the Lublin Basin Option acreage which comprises
0.6 million acres that is governed by an agreement between FX Energy, Apache and
POGC dated July 18, 1997. FX Energy and Apache have an option to participate,
with up to a one-third interest each, in the exploration of the Lublin Basin
Option acreage. In turn, POGC has the option to participate in the exploration
of the Lublin Basin Concession with up to a one-third interest.
The Lublin Basin has been explored extensively by POGC in recent years
resulting in the discovery of five fields (Stezyca, Swidnik, Ciecierzyn, Melgiew
and Komarow) which established oil or gas reservoirs in Devonian reef and
Carboniferous sand traps. Additional wells drilled by POGC in the Lublin Basin
have also encountered oil or gas shows in the Cambrian, Devonian and
Carboniferous formations. Seismic data analyzed to date and correlated with
data from drilling logs and core samples from previous wells show a number of
Carboniferous, Devonian, Cambrian and Triassic leads within the area covered by
the Lublin Basin. FX Energy and Apache have acquired over 2,000 kilometers of
2D seismic and reprocessed over 5,400 kilometers of existing 2D seismic on the
Lublin Basin to date. The seismic data, along with well log and core analysis
data, was used to pick the first five exploratory well sites jointly drilled by
FX Energy, Apache and POGC to date in the Lublin Basin.
The first four exploratory wells under the Apache Exploration Program, all
drilled within the Lublin Basin during 1999, were non-productive. In accordance
with terms of the Apache Exploration Program, Apache covered all of FX Energy's
share of costs for all four wells. On January 25, 2000, the Wilga 2, the fifth
well in the Apache Exploration Program, was announced as an exploratory success
after initial production tests indicated a combined flow rate of 16.9 Mmcf of
gas and 570 Bbls of condensate per day from three intervals in a Carboniferous
horizon at a depth between 7,732 and 8,550 feet. The Wilga 2 is on trend with
POGC's Stezyca field in the Lublin Basin. The Stezyca field was discovered by
POGC during 1995 and is reported to contain 38 Bcf of estimated gas reserves.
Under the terms of the Apache Exploration Program, Apache will cover all of FX
Energy's 45.0% share of costs pertaining to drilling and completing the Wilga 2.
FX Energy and its partners plan an appraisal well immediately, followed by
additional development drilling and facilities construction later in the year,
with initial production expected to commence during early 2001. In addition, FX
Energy will promptly begin seismic acquisition in the Wilga area to identify a
target near the Wilga discovery to be drilled later this year to test the
possibility of additional reserves outside the Wilga structure.
Carpathian
The 2.9 million acre Carpathian area is located in southern Poland and
comprises the 1.4 million acre Carpathian Concession containing twelve blocks
awarded to FX Energy on October 14, 1997 and the 1.5 million acre Carpathian
Option acreage containing POGC controlled areas that are governed by an
agreement between FX Energy, Apache and POGC dated February 2, 1998. FX Energy
and Apache have an option to participate, with up to a one-third interest each,
in the exploration of the Carpathian Option acreage. In turn, POGC has the
option to participate in the exploration of the Carpathian Concession with up to
a one-third interest.
Hydrocarbons were first discovered in the Carpathian area in 1854. To
date, the Carpathian region is reported to have produced in excess of 122 MMBbls
of oil and 2.6 Tcf of gas from shallow depths. A limited number of deep wells
drilled in recent years by POGC evidence additional possible reservoir potential
within the area. Over the past few years, there have been several oil and gas
discoveries in the Carpathian region in the Carboniferous, Myocene, Jurassic and
Cretaceous formations. FX Energy and Apache plan to acquire approximately 350
kilometers of additional 2D seismic and drill one exploratory well during 2000
on the Carpathian area.
During 1999, FX Energy elected to participate with a 5.0% interest in
drilling the Andrychow 6, an exploratory well operated by POGC on POGC option
acreage in southern Poland. The well tested a Devonian formation and was
determined to be an exploratory dry hole during December 1999.
During the second quarter of 1999, FX Energy and Apache commenced testing
and recompletion operations on the Lachowice Farm-in, an undeveloped gas
discovery on a POGC Concession located within the Carpathian area. Between 1982
and 1994 POGC drilled nine wells on the Lachowice Farm-in, three of which were
shut-in gas discoveries; the Lachowice 1, Stryszawa 2K and Lachowice 7. POGC
had previously tested the three wells at a combined average rate of 5.7 Mmcf of
gas per day per well from a depth of 10,000-13,000 feet in a Devonian reef
structure, but had yet to hook up and commercially produce the wells. On
February 26, 1999, FX Energy, Apache and POGC entered into an agreement to
jointly develop the Lachowice Farm-in with Apache as operator. Under terms of
the agreement, FX Energy and Apache agreed to 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) if warranted, drill three additional wells;
and, (3) if warranted, construct gathering and processing facilities. All costs
and net revenues thereafter, including additional development drilling and lease
operating costs, were to be shared one-third each by FX Energy, Apache and POGC.
During June 1999, FX Energy and Apache commenced testing and recompletion
procedures on the Stryszawa 2K, which was subsequently plugged and abandoned
after it failed to maintain a commercial production rate. During September
1999, FX Energy and Apache tested the Lachowice 7 to determine its commercial
potential. The test results of the Lachowice 7 did not warrant constructing
gathering and processing facilities. FX Energy and Apache plan to turn the
Lachowice 7 back to POGC and terminate the Lachowice Farm-in.
Pomeranian
The 3.5 million acre Pomeranian area is located in northwestern Poland and
consists of the 2.2 million acre Pomeranian Concession containing ten
exploration blocks awarded on October 31, 1997 and the 1.3 million acre
Pomeranian Option acreage on POGC controlled areas pursuant to an agreement
between FX Energy and POGC dated May 20, 1998. FX Energy and Apache have an
option to participate, with up to a one-third interest each, in the exploration
of the Pomeranian Option acreage. In turn, POGC has the option to participate
in the exploration of the Pomeranian Concession with up to a one-third interest.
There has been no significant oil and gas production from the Pomeranian
area to date. Stratigraphic tests drilled by the Polish government have
reported oil and gas shows, primarily from the Devonian horizon. POGC's
Wierzchowa field is reported to have previously produced 14 Bcf of gas at a rate
of approximately 5.7 Mmcf per well per day from a Permian structure within the
Pomeranian Concession. POGC has made available to FX Energy and Apache the
existing seismic data and well logs and cores from the Pomeranian area for
reprocessing and analysis. FX Energy and Apache believe portions of the
Pomeranian area are geologically similar to the BMB field to the southwest on
which POGC has drilled approximately 22 commercial wells on a 3D seismic-defined
structure. POGC has estimated the BMB field has ultimate recoverable reserves
of 76 MMBbls of oil and 349 Bcf of gas. FX Energy and Apache plan to acquire
approximately 300 kilometers of additional 2D seismic and drill one exploratory
well during 2000 on the Pomeranian area.
Warsaw West
The 2.9 million acre Warsaw West area is located adjacent to the northwest
section of FX Energy's Lublin Basin in central Poland and consists of 13
exploration blocks acquired by Apache during 1997. Effective January 1, 1999,
FX Energy and Apache entered into an agreement whereby FX Energy became a fifty-
percent partner in Apache's Warsaw West area.
There has been no oil and gas production from the Warsaw West Concession.
FX Energy and Apache plan to acquire approximately 422 kilometers of additional
2D seismic and drill one exploratory well during 2000 on the Warsaw West area.
Other Polish Project Areas
Baltic Project Area
The Baltic Project Area is located onshore near the Baltic Sea and consists
of exploration rights currently covering approximately 0.9 million net acres in
northern Poland. The Baltic Project Area is part of the Baltic Platform
geological region that covers the southeastern portion of the Baltic Sea,
portions of the bordering onshore areas of northern Poland and areas to the
northeast in the Kaliningrad district of Russia, Lithuania and Latvia.
Approximately 34 onshore and offshore fields have been discovered in the Baltic
Platform. Four of the largest fields in this region reportedly have produced an
aggregate of over 150 MMBbls of high grade oil through 1994. Under terms of the
Baltic Area Usufruct Agreement, FX Energy is required to:
o drill at least two exploratory wells
o pay $33,333 per year in concession fees over six years beginning March
7, 1996; and
o spend $25,000 per year training Polish citizens.
During 1997, FX Energy drilled two wells in the Baltic Project Area to test
Cambrian horizons that produce to the north offshore in the Baltic Sea and in
the Kaliningrad district of Russia. Neither of the wells yielded commercial
quantities of hydrocarbons. FX Energy has satisfied the two well work
commitment applicable to the Baltic Project Area's six-year exploration phase
and is currently seeking an industry partner to conduct additional joint oil and
gas exploration in the Baltic Project Area.
Sudety Project Area
On July 26, 1999, Homestake Mining Company ("Homestake") completed its two-
year, $1,100,000 minimum exploration commitment and terminated its agreement
with FX Energy to jointly explore for gold on FX Energy's Sudety Project Area in
southwestern Poland. FX Energy has discontinued further gold exploration in the
Sudety Project Area.
PROPERTIES IN POLAND
Laws and Contracts Covering Poland Properties
In 1994, Poland adopted the Geological and Mining Law, which specifies the
process for obtaining domestic exploration and exploitation rights. All of FX
Energy's rights in Poland have been awarded pursuant to this law. Under the
Geological and Mining Law, the Concession Authority enters into oil, gas and
mining usufruct agreements that grant the holder the exclusive right to explore
for and exploit the designated hydrocarbons or minerals for a specified period
under prescribed terms and conditions. The holder of the mining usufruct must
also acquire an exploration concession to obtain surface access to the
exploration area by applying to the Concession Authority and providing the
opportunity for comment by local governmental authorities. If a commercially
viable discovery is made in an exploration concession area, it is necessary for
the holder of the exploration concession license to obtain an exploitation
concession license for a specific term by then applying to the Concession
Authority and negotiating with local government authorities. The holder of a
usufruct, exploration and exploitation concession licenses must also acquire
rights to use the land from the surface owner.
Oil and Gas Concessions
The Concession Authority has granted FX Energy oil and gas exploration
rights on the Lublin Basin, Carpathian, Pomeranian and Baltic areas and granted
Apache oil and gas exploration rights on the Warsaw West area. The agreements
divide these areas into blocks, generally containing approximately 250,000 acres
each. Concession licenses have been acquired for surface access to all areas
that lie within existing usufructs. The first three year exploration period
begins after the date of the last concession signed under each respective
usufruct. FX Energy believes all material concession terms have been satisfied.
Each of the oil and gas usufructs divides 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. A number of exploratory wells are required to be drilled during the
first three year and second three year exploration phases, a minimum amount of
2D seismic acquisition must be completed (except in the Baltic), and other
expenditures must be made, all as set forth in the applicable usufructs, in
order to retain an interest in each usufruct.
The dates of the last concession signed and work commitments for each of
the usufructs are set forth in the following table:
<TABLE>
<CAPTION>
WORK COMMITMENT
------------------------------------------------
FIRST THREE SECOND THREE 2D
NO. OF DATE OF LAST YEAR PHASE YEAR PHASE SEISMIC
USUFRUCT BLOCKS(1) CONCESSION DRILLING DRILLING (2) ACQUISITION
- ----------------- --------- ------------ ----------- --------------------- -----------
<S> <C> <C> <C> <C> <C>
LUBLIN BASIN:
Vistula......... 8 08/08/97 One well One well per block 500 km
Lublin Middle... 7 06/30/98 Two wells One well per block 500 km
Block 298....... 1 06/30/98 One well Two wells in usufruct 150 km
Komarow......... 11 03/04/98 Two wells One well per block 500 km
CARPATHIAN........ 12 12/31/98 One well Two wells in usufruct 350 km
POMERANIAN........ 10 12/31/98 One well Two wells in usufruct 600 km
WARSAW WEST (3)... 13 11/13/98 One well Two wells in usufruct 1,500 km
BALTIC............ 11 03/07/96 One well One well in usufruct None
</TABLE>
(1) The Baltic Project Area includes one block that is approximately half the
size of the other blocks. The Komarow usufruct includes three extra
partial blocks adjacent to the border of Poland and the Ukraine.
(2) The drilling commitments in a block or area may be terminated by
relinquishing such block or area at the end of the first three year phase.
(3) The 2D seismic acquisition requirements for the Warsaw West area include
1,000 kilometers during the first three year exploration period and 500
kilometers during the second three year exploration period. 2D seismic
acquisition requirements for all other areas apply to the first three year
exploration period only.
FX Energy may relinquish its interest in any usufruct at any time if it
determines the hydrocarbon potential does not warrant further holding or
exploration costs without having to fulfill any remaining work commitments.
As of December 31, 1999, FX Energy had completed acquiring all of the
required 2D seismic on the Lublin Basin area, drilled one exploratory well
(Wilga 2) on the Vistula usufruct, one exploratory well (Czernic 277-2) on the
Lublin Middle usufruct and two exploratory wells (Orneta 1 and Gladysze 1A) on
the Baltic usufructs. FX Energy has also participated in drilling four other
exploratory wells (Poniatowa 317-1, Siedliska 2, Witkow 1 and Andrychow 6) that
were on concessions controlled by POGC and did not count towards the above
referenced work commitments.
The annual training fees for Polish citizens and the estimated aggregate
concession and usufruct fees over the respective usufruct's six year exploration
term, including the net amounts payable by FX Energy and Apache, are set forth
in the following table:
TRAINING FEES CONCESSION NET CONCESSION/USUFRUCT FEES
----------------------------
USUFRUCT PER YEAR (1) AND USUFRUCT (2) FX ENERGY APACHE
- ------------------ ------------- ---------------- ----------- -------------
LUBLIN BASIN:
Vistula......... $ 25,000 $ 220,000 $ $ 220,000
Lublin Middle .. 25,000 224,000 -- 224,000
Block 298 ...... 5,000 51,000 -- 51,000
Komarow ........ 25,000 200,000 -- 200,000
CARPATHIAN ....... 15,000 160,000 -- 160,000
POMERANIAN ....... 25,000 250,000 125,000 125,000
WARSAW WEST ...... 25,000 390,000 97,500 292,500
BALTIC ........... 25,000 200,000 200,000 --
------------- ---------------- ------------- ------------
Total .......... $170,000 $1,695,000 $422,500 $1,272,500
============= ================ ============= ============
(1) On the Lublin Basin and the Carpathian usufructs, Apache has committed to
cover all training fees during the first three year exploration period. FX
Energy must cover its pro-rata share of training fee costs on the Lublin
and Carpathian usufructs during the second three year exploration period.
On the Carpathian, Pomeranian, and Warsaw West usufructs, FX Energy must
cover its pro-rata share of training fees for the entire exploration
period. On the Baltic Project Area, FX Energy must cover all training fees
for the entire exploration period.
(2) As of January 31, 2000, all concession and usufruct costs in the Lublin
Basin, Carpathian, Pomeranian, and Warsaw West had been fully paid for.
The Baltic usufruct includes payments of $33,333 per year over six years
beginning March 7, 1996.
Under terms of the Apache Exploration Program, Apache contracted with FX
Energy to earn a fifty-percent interest in FX Energy's Lublin Basin and
Carpathian areas by agreeing to various work commitments. Apache has committed
to cover all of FX Energy's pro-rata share of costs in the Lublin Basin area
during the first three year phase to: (1) drill and complete seven exploratory
wells; (2) acquire 1,650 kilometers of 2D seismic; (3) cover all annual training
fees; and, (4) cover all concession and usufruct fees. In the Carpathian area,
Apache has committed to pay for FX Energy's pro-rata share of cost during the
three year phase to: (1) drill three exploratory wells; (2) acquire 350
kilometers of 2D seismic; (3) cover all annual training fees; and, (4) cover all
concession and usufruct fees. At the consent of both parties, any of the
required wells in the Lublin Basin and Carpathian areas may be drilled outside
of the respective areas. Effective January 1, 1999, FX Energy and Apache share
equally in all exploratory costs pertaining to the Pomeranian and Warsaw West
areas.
During 1997 and 1998, FX Energy, Apache and POGC entered into option
agreements covering the Lublin Basin, Carpathian and Pomeranian areas whereby FX
Energy and Apache each has an independent right to participate, with up to a
one-third interest, in the exploration of POGC controlled areas within the
Lublin Basin, Carpathian and Pomeranian areas. In turn, FX Energy and Apache
granted POGC a reciprocal right to participate in the exploration of the FX
Energy and Apache controlled areas within the Lublin Basin, Carpathian and
Pomeranian areas on a block by block basis.
If a commercially viable discovery of oil were made in any of its areas,
the concession owner would be required to apply for an exploitation concession,
as provided by the usufructs, with a term of 30 years and so long thereafter as
commercial production continues. Upon the grant of the exploitation concession,
the concession owner would become obligated to pay a fee, to be negotiated
within the range of 0.01% to 0.50% of the market value of the estimated
recoverable reserves in place, payable in five equal annual installments. The
concession owner 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%. If, however, the base rate is increased to 10%, the current
statutory maximum, the royalty rate would be between 5% and 15%. 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 will receive 60%
of any royalties paid on production. The concession owner could be subject to
significant delays in obtaining the consents of local authorities or satisfying
other governmental requirements prior to obtaining an exploitation license.
Polish Joint Venture Structure
Within the framework of the Apache Exploration Program, Apache is operator
on areas controlled jointly by FX Energy and Apache. POGC is the operator on
areas controlled by POGC. Even though FX Energy, Apache and POGC will conduct
their activities jointly, they have agreed to treat their respective interests
and obligations as separate, such that each company is responsible for providing
its own funding for joint activities and is entitled to take and sell its share
of hydrocarbons independently of the other. Customary western industry standard
joint operating agreement terms govern the parties' respective actions, rights
and obligations.
FX Energy and Apache have each created Polish subsidiaries to carry out
their joint projects in Poland. FX Energy has created several wholly-owned
spolka z o. o. (a form of limited liability company) to hold all of its
interests in Poland. For example, in the Vistula area in the western portion of
the Lublin Basin area containing eight exploration blocks, FX Energy and Apache
are each fifty-percent beneficial participants in a Polish limited liability
company (the "Lublin LLC"), all of the title ownership of which has been
assigned by FX Energy to the Lublin LLC, subject to the terms of their
participation agreement. In the event of an exploratory discovery, such as the
Wilga 2, an exploitation license must be applied for. The exploitation license
will be owned by a newly created Polish entity that reflects the true ownership
interests of all parties.
In other instances, FX Energy and Apache have paired their interests in
Poland into several spolka jawnas (a form of registered joint operation) to hold
record title to the various usufructs and concessions. For example, FX Energy
and Apache are each fifty-percent participants in a Polish spolka jawna (the
"Lublin SJ") which has been awarded usufructs and exploration concessions
covering 16 exploration blocks in the Lublin area, the Carpathian Concession and
the Pomeranian Concession.
The ownership structure in Poland may be altered by FX Energy, Apache and
POGC from time to time in response to developments in the Polish legal system to
most accurately reflect their various agreements regarding jointly owned
projects in Poland.
Production, Transportation and Marketing - Poland
As of December 31, 1999, FX Energy had no oil or gas production in Poland
or an agreement or arrangement for the sale, delivery or refining of any oil or
gas that may be produced, including possible production from the recently
drilled Wilga 2. It is expected that pursuant to terms to be incorporated into
formal documents now being negotiated, POGC will purchase gas produced from FX
Energy's interests at a market price under a long-term contract pertaining to
each property for which FX Energy holds an interest. FX Energy expects that oil
and gas produced from its interests in Poland will be sold for domestic
consumption under marketing arrangements to be negotiated. FX Energy will be
required to obtain governmental approval to export any oil or gas.
Poland has crude oil pipelines traversing the country and a network of gas
pipelines serving major cities, commercial and industrial areas and many gas
production areas, including significant portions of FX Energy's exploratory
acreage. Poland has a well-developed infrastructure of hard-surfaced roads and
railways over which FX Energy believes oil produced could be transported for
sale. There are refineries in Gdansk and Plock in Poland and one in Germany near
the western Polish border which FX Energy believes could process crude oil
produced in Poland. FX Energy will most likely incur substantial expenditures
for constructing and operating facilities to gather and transport any oil and
gas produced from its properties, including the recently discovered Wilga field.
PROPERTIES IN THE UNITED STATES
Domestic Producing Properties
FX Energy currently produces oil domestically in Montana and Nevada. All of
FX Energy's producing properties, except for the Rattlers Butte field (an
exploratory discovery during 1997), were purchased during 1994. In Montana, FX
Energy operates the Cut Bank and Bears Den fields and has an interest in the
Rattlers Butte field, which is operated by an industry partner. In Nevada, FX
Energy operates the Trap Spring and Munson Ranch fields and has an interest in
the Bacon Flat field, which is operated by an industry partner. At the end of
1999, FX Energy had no producing activities outside the United States.
A summary of FX Energy's average daily production, average working interest
and net revenue interest during 1999 follows:
AVERAGE DAILY AVERAGE AVERAGE NET
PRODUCTION (BBLS) WORKING REVENUE
----------------- INTEREST INTEREST
GROSS NET -------- -----------
------- -------
Cut Bank ........... 276 237 99.5% 85.7%
Bears Den........... 35 14 48.0% 39.2%
Rattlers Butte ..... 41 2 0.7% 5.1%
Trap Spring ........ 18 4 21.6% 20.0%
Munson Ranch ....... 46 16 36.0% 34.1%
Bacon Flat ......... 44 6 16.9% 12.5%
------- -------
Total ............ 460 279
======= =======
Montana Production
Production in the Cut Bank field in northern Montana commenced with the
discovery of oil in the 1940's at an average depth of approximately 2,900 feet.
The Southwest Cut Bank Sand Unit, which is the core of FX Energy's interest in
the field, was originally formed by Phillips Petroleum Company in 1963. An
initial pilot waterflood program was started in 1964 by Phillips and eventually
encompassed the entire unit with producing wells on 40 and 80 acre spacing. FX
Energy owns an average working interest ranging from 99.5% to 100% in 101
producing oil wells, 28 active injection wells and one active water supply well.
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. FX Energy owns a 48.0% working interest in five
producing oil wells and three active water injection wells.
The Rattlers Butte field was discovered in central Montana during 1997.
The State 31-8 well was drilled utilizing FX Energy's drilling rig to a depth of
approximately 5,800 feet. The well currently produces oil from the Tyler
formation. FX Energy has a 6.25% working interest in the well.
Nevada Production
The Trap Spring field was discovered in 1976. FX Energy produces oil from
fractured volcanics at an average depth of 3,700 feet from one well with a
working interest of 21.6%.
The Munson Ranch field was discovered in 1988. FX Energy produces oil at
an average depth of 3,800 feet from five wells with an average working interest
of 36.0%.
The Bacon Flat field was discovered in 1981. FX Energy owns a 16.9%
working interest in one well, which was drilled in 1993 to a depth of
approximately 5,000 feet.
Production, Transportation and Marketing - Domestic
The following table sets forth FX Energy's average net daily oil
production, average sales price and average production costs associated with
such production during the periods indicated. FX Energy had no gas production
for any of the periods for which information is presented.
YEARS ENDED DECEMBER 31,
----------------------------
1999 1998 1997
------ ------ ------
Average daily net oil production (Bbls) .. 279 315 346
Average sales price per bbl .............. $15.35 $ 9.78 $16.06
Average production costs per bbl (1) ..... $ 9.50 $ 9.11 $ 9.82
(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 G&A costs,
depreciation, depletion, state income taxes or federal income taxes.
FX Energy sells oil at posted field prices to one of several purchasers in
each of its production areas. For the years ended December 31, 1999, 1998 and
1997, over 85% of FX Energy'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 may be terminated by
either party upon 30 days' notice.
Oil prices increased substantially during 1999 after being depressed for
most of 1998 as compared to 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 FX Energy. In addition to adverse oil price
volatility, adverse changes in the market or regulatory environment may also
have an adverse effect on FX Energy's ability to obtain funding from lending
institutions, industry participants, the sale of additional securities and other
sources.
Domestic Oil Reserves
All of FX Energy'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 the production
history and other geological, economic, ownership and engineering data provided
by FX Energy. In accordance with SEC guidelines, FX Energy's estimates of
future net revenues from FX Energy's proved reserves and the PV-10 Value are
made using a sales price of $22.37, the weighted average oil sales price as of
December 31, 1999, 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 1999.
FX Energy's estimated proved reserves by reserve category as of December
31, 1999 are detailed in the following table:
DECEMBER 31, 1999
----------------------------
OIL (BBL) PV-10 VALUE
------------ -------------
DEVELOPED PRODUCING:
Cut Bank ............. 638,443 $2,660,670
Other ................ 100,347 725,813
------------ -------------
Total .............. 738,790 3,386,483
DEVELOPED NON-PRODUCING:
Cut Bank ............. 341,162 2,073,667
Other ................ -- --
------------ -------------
Total .............. 341,162 2,073,667
------------ -------------
Total Developed .. 1,079,952 5,460,150
------------ -------------
UNDEVELOPED:
Cut Bank ............. -- --
Other ................ -- --
------------ -------------
Total .............. -- --
TOTAL PROVED RESERVES .. 1,079,952 $ 5,460,150
============ =============
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 $22.37 per barrel used in
the reserve study, which in turn may have a significant impact on FX Energy's
calculated PV-10 value. FX Energy reported PV-10 proved developed reserve
values of $5.5 million, $0.5 million and $4.0 million as of December 31, 1999,
1998 and 1997, respectively. FX Energy reported PV-10 proved undeveloped
reserves values of zero as of December 31, 1999 and 1998 versus $9.6 million of
December 31, 1997 due to its decision in the third quarter of 1998 to focus its
resources on Poland and not spend the capital necessary to further develop the
Cut Bank field. The reserve evaluations utilized prices of $22.37, $8.11 and
$13.80 per barrel as of December 31, 1999, 1998 and 1997, respectively. 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 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 FX Energy's exploration
efforts establish the existence of gas reserves, similar uncertainties will
exist in estimating quantities of such reserves. FX Energy's proved reserves as
of December 31, 1999 include only those reserves attributable to developed
properties.
Domestic Non-Producing Acreage
During 1996 and 1997, FX Energy 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. FX Energy has established
several leads over its acreage and intends to pursue a strategic alliance with
an industry partner to jointly explore the acreage.
Drilling Rig and Well Servicing Equipment
In Montana, FX Energy has a drilling rig capable of drilling to a vertical
depth of up to 6,000 feet, two well servicing rigs and other associated oilfield
equipment. Historically, prior to late 1998, FX Energy utilized its drilling
rig and well servicing equipment primarily on FX Energy's producing oil
properties in Montana. During late 1998, FX Energy shifted its emphasis away
from company-owned properties to third party contract work in an effort to
increase its domestic revenues.
DRILLING ACTIVITIES
The following table sets forth the wells drilled and completed by FX Energy
during the years ended December 31, 1999, 1998 and 1997:
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
GROSS NET GROSS NET GROSS NET
------- ------- ------- ------- ------- -------
DEVELOPMENT WELLS:
Producing .............. -- -- -- -- -- --
Non-producing ..........
-- -- -- -- -- --
------- ------- ------- ------- ------- -------
Total ................
-- -- -- -- -- --
======= ======= ======= ======= ======= =======
EXPLORATORY WELLS:
Discoveries:
Poland (1) ............ 1 .5 -- -- -- --
United States ......... -- -- -- -- 1.0 0.1
Exploratory Dry Holes:
Poland (1) ............ 5 1.6 -- -- 2.0 1.5
United States ......... -- -- -- -- 2.0 1.3
------- ------- ------- ------- ------- -------
Total ................. 6 2.1 -- -- 5.0 2.9
======= ======= ======= ======= ======= =======
(1) On December 16, 1999, the Wilga 2 reached a total vertical depth of
approximately 9,200 feet. Initial flow tests conducted during January 2000
resulted in a combined initial flow rate of 16.9 Mmcf of gas and 570 Bbls
of condensate per day from three intervals in a Carboniferous horizon at a
depth between 7,732 and 8,550 feet. There were no other exploratory or
development wells in progress as of December 31, 1999.
WELLS AND ACREAGE
As of December 31, 1999, FX Energy had 114 gross and 108 net producing oil
wells, all of which are located in Montana and Nevada.
The following table sets forth FX Energy's gross and net acres of developed
and undeveloped oil and gas leases as of December 31, 1999:
DEVELOPED ACREAGE UNDEVELOPED ACREAGE
----------------- ---------------------
GROSS NET GROSS NET
------- ------- ---------- --------
UNITED STATES:
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: (1)
APACHE EXPLORATION PROGRAM (2)
Lublin Basin ............. -- -- 5,000,000 2,500,000
Carpathian ............... -- -- 1,400,000 700,000
Pomeranian ............... -- -- 2,200,000 1,100,000
Warsaw West .............. -- -- 2,900,000 1,450,000
------- ------- ---------- ---------
Total .................. -- -- 11,500,000 5,750,000
BALTIC PROJECT AREA ........ -- -- 900,000 900,000
------- ------- ---------- ---------
Total Polish acreage ..... -- -- 12,400,000 6,650,000
TOTAL ACREAGE ................ 11,132 10,546 12,418,062 6,667,948
======= ======= ========== =========
(1) All Polish acreage is rounded to the nearest 100,000 acre
(2) Gives effect to fifty-percent beneficial ownership of Apache in the Lublin
Basin, Carpathian, Pomeranian and Warsaw West areas in FX Energy's joint
exploration arrangements with Apache under the Apache Exploration Program.
Does not give effect to options on POGC controlled areas containing
approximately 0.6 million acres in the Lublin Basin area, 1.5 million acres
in the Carpathian area and 1.3 million acres in the Pomeranian area under
the POGC option agreements.
OPERATIONAL HAZARDS AND INSURANCE
FX Energy 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.
To lessen the effects of these hazards, FX Energy maintains insurance of
various types to cover its domestic operations and maintains general liability
coverage for its activities in Poland. FX Energy has $9.0 million of general
liability insurance. Apache, as the operator of the Apache Exploration Program,
is carrying $25.0 million of general liability insurance for joint operations on
Polish areas in which FX Energy and Apache have interests. FX Energy has
elected to be included on Apache's well control insurance policy for all jointly
drilled wells to date in Poland. POGC, as operator of POGC controlled areas, is
required to carry insurance with similar coverage to that of Apache for all
partners. FX Energy's seismic and drilling contractors are required to maintain
insurance coverage for operations by them in Poland. There can be no assurance
that FX Energy, Apache or POGC will be able to continue to obtain insurance
coverage for their current or future activities 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 FX Energy, Apache
and POGC, or be on favorable terms or at premiums that are reasonable. This
insurance, however, does not cover all of the risks involved in oil and gas
exploration, drilling and production and, if coverage does exist, may not be
sufficient to pay the full amount of such liabilities. FX Energy may not be
insured against all losses or liabilities which may arise from all hazards
because such insurance may not be available at economic rates, the respective
insurance policies may have limited coverage and other factors. For example,
insurance against risks related to violations of environmental laws is not
maintained. The occurrence of a significant adverse event that is not fully
covered by insurance could have a materially adverse effect on FX Energy.
Further, FX Energy cannot assure that it will be able to maintain adequate
insurance in the future at rates it considers reasonable.
GOVERNMENT REGULATION
Poland
FX Energy'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 FX Energy 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. These 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. Agreements with the government of Poland respecting
FX Energy's areas create certain standards to be met regarding environmental
protection. Participants in oil and gas exploration, development and production
activities generally are required to (1) adhere to good international petroleum
industry practices, including practices relating to the protection of the
environment; and, (2) 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. FX
Energy intends that its operations in Poland will be designed to meet good
international petroleum industry practices and, as they develop, Polish
requirements.
United States
State and Local Regulation of Drilling and Production
Exploration and production operations of FX Energy are subject to various
types of regulation at the federal, state and local levels. Such regulation
includes requiring permits for the drilling of wells, maintaining bonding
requirements in order to drill or operate wells, regulating the location of
wells, the method of drilling and casing wells, the surface use and restoration
of properties upon which wells are drilled and the plugging and abandoning of
wells. FX Energy's operations are also subject to various conservation laws and
regulations. These include the regulation of the size of drilling and spacing
units or proration units and the density of wells which may be drilled and the
unitization or pooling of oil and gas properties. In this regard, some states
allow the forced pooling or integration of tracts to facilitate exploration
while other states rely on voluntary pooling of lands and leases. In addition,
state conservation laws establish maximum rates of production from oil and
natural gas wells, generally prohibit the venting or flaring of natural gas and
impose certain requirements regarding the ratability of production. The effect
of these regulations is to limit the amounts of oil and natural gas FX Energy
can produce from its wells and to limit the number of wells or the locations
that FX Energy can drill.
Production of any oil and gas by FX Energy is affected to some degree by
state regulations. Many states in which FX Energy operates have statutory
provisions regulating the production and sale of oil and gas, including
provisions regarding deliverability. Such statutes and related regulations are
generally intended to prevent waste of oil and gas and to protect correlative
rights to produce oil and gas between owners of a common reservoir. Certain
state regulatory authorities also regulate the amount of oil and gas produced by
assigning allowable rates of production to each well or proration unit.
Environmental Regulations
The federal government and various state and local governments have
adopted laws and regulations regarding the control of contamination of the
environment. These laws and regulations may require the acquisition of a permit
by operators before drilling commences, restrict the types, quantities and
concentration of various substances that can be released into the environment in
connection with drilling and production activities, limit or prohibit drilling
activities on certain lands lying within wilderness, wetlands and other
protected areas and impose substantial liabilities for pollution resulting from
FX Energy's operations. These laws and regulations may also increase the costs
of drilling and operation of wells. FX Energy may also be held liable for the
costs of removal and damages arising out of a pollution incident to the extent
set forth in the Federal Water Pollution Control Act, as amended by the Oil
Pollution Act of 1990 ("OPA '90"). In addition, FX Energy may be subject to
other civil claims arising out of any such incident. As with any owner of
property, FX Energy is also subject to clean-up costs and liability for
hazardous materials, asbestos, or any other toxic or hazardous substance that
may exist on or under any of its properties. FX Energy believes that it is in
compliance in all material respects with such laws, rules and regulations and
that continued compliance will not have a material adverse effect on its
operations or financial condition. Furthermore, FX Energy does not believe that
it is affected in a significantly different manner by these laws and regulations
than are its competitors in the oil and gas industry.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without regard
to fault or the legality of the original conduct, on certain classes of persons
who are considered to be responsible for the release of a "hazardous substance"
into the environment. These persons include the owner or operator of the
disposal site or sites where the release occurred and companies that disposed or
arranged for the disposal of the hazardous substances. Under CERCLA, such
persons may be subject to joint and several liability for the costs of cleaning
up the hazardous substances that have been released into the environment, for
damages to natural resources and for the costs of certain health studies.
Furthermore, it is not uncommon for neighboring landowners and other third
parties to file claims for personal injury and property damage allegedly caused
by hazardous substances or other pollutants released into the environment.
The Resource Conservation and Recovery Act ("RCRA") and regulations
promulgated thereunder govern the generation, storage, transfer and disposal of
hazardous wastes. RCRA, however, excludes from the definition of hazardous
wastes "drilling fluids, produced waters and other wastes associated with the
exploration, development, or production of crude oil, natural gas or geothermal
energy." Because of this exclusion, many of FX Energy's operations are exempt
from RCRA regulation. Nevertheless, FX Energy must comply with RCRA regulations
for any of its operations that do not fall within the RCRA exclusion.
The OPA '90 and regulations promulgated pursuant thereto imposes a variety
of regulations on responsible parties related to the prevention of oil spills
and liability for damages resulting from such spills. OPA '90 establishes
strict liability for owners of facilities that are the site of a release of oil
into "waters of the United States." While OPA liability more typically applies
to facilities near substantial bodies of water, at least one district court has
held that OPA liability can attach if the contamination could enter waters that
may flow into navigable waters.
Stricter standards in environmental legislation may be imposed on the oil
and gas industry in the future, such as proposals made in Congress and at the
state level from time to time that would reclassify certain oil and natural gas
exploration and production wastes as "hazardous wastes" and make the
reclassified wastes subject to more stringent and costly handling, disposal and
clean-up requirements. The impact of any such changes, however, would not
likely be any more burdensome to FX Energy than to any other similarly situated
company involved in oil and gas exploration and production.
Federal and Indian Leases
A substantial part of FX Energy'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. FX Energy believes it is currently
in full compliance with all material provisions of such regulations.
Safety and Health Regulations
FX Energy must also conduct its operations in accordance with various laws
and regulations concerning occupational safety and health. Currently, FX Energy
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, FX Energy is unable to predict the future
effect of these laws and regulations.
TITLE TO PROPERTIES
FX Energy relies on sovereign ownership of exploration rights and mineral
interests by the Polish government in connection with FX Energy's activities in
Poland and has not conducted and does not plan to conduct any independent title
examination. FX Energy consults with Polish legal counsel when doing business
in Poland.
Nearly all of FX Energy's United States working interests are held under
leases from third parties. FX Energy typically obtains a title opinion
concerning such properties prior to the commencement of drilling operations. FX
Energy has obtained such title opinions or other third party review on nearly
all of its producing properties and believes that it has satisfactory title to
all such properties sufficient to meet standards generally accepted in the oil
and gas industry. FX Energy's United States properties are subject to typical
burdens, including customary royalty interests and liens for current taxes, but
FX Energy has concluded that such burdens do not materially interfere with the
use of such properties. Further, FX Energy believes the economic effects of
such burdens have been appropriately reflected in FX Energy's acquisition cost
of such properties and reserve estimates. Title investigation before the
acquisition of undeveloped properties is less thorough than that conducted prior
to drilling, as is standard practice in the industry.
EMPLOYEES AND CONSULTANTS
As of December 31, 1999, FX Energy had 36 employees, consisting of eight in
Salt Lake City, Utah; 25 in Oilmont, Montana; one in Greenwich, Connecticut; and
two in Houston, Texas. None of FX Energy's employees are represented by a
collective bargaining organization, and FX Energy considers its relationship
with its employees to be satisfactory. In addition to its employees, FX Energy
regularly engages technical consultants to provide specific geological,
geophysical and other professional services.
OFFICES AND FACILITIES
FX Energy'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. FX Energy owns a 16,160 square foot
office building located at the corner of Central and Main in Oilmont, Montana.
FX Energy utilizes 4,800 square feet for its field office and rents the
remaining space to unrelated third parties for $875 per month. FX Energy rents
a small office suite for $1,400 per month in Warsaw, Poland at Al. Jana Pawla II
29, as an office of record in Poland.
RISK FACTORS
The business of FX Energy is subject to a number of material risks,
including, but not limited to, the following factors related directly and
indirectly to FX Energy and its activities in Poland:
Limited Exploratory Drilling Success in Poland and the United States to
Date
In Poland, FX Energy has participated in drilling eight exploratory wells
through December 31, 1999. Five of the exploratory wells were drilled with
Apache and POGC as partners under terms of the Apache Exploration Program, four
of which were exploratory dry holes and one was an exploratory discovery. FX
Energy has also drilled two exploratory dry holes on the Baltic Project Area and
participated in an exploratory dry hole in the Carpathian area. In addition, FX
Energy participated in testing and appraising in two shut-in gas wells in the
Lachowice area in Poland that did not result in commercial production. FX
Energy has participated in eight exploratory wells in the western United States
through December 31, 1999, only one of which has resulted in the establishment
of limited commercial production and small reserves. There can be no assurance
FX Energy can replace depleted reserves through additional exploratory
discoveries in Poland or the United States.
Future Need for Additional Capital
FX Energy may require substantial amounts of additional capital during 2000
and 2001 to fund the following activities:
o additional proposed activities on the Apache Exploration Program and
the Baltic Project Area;
o possible other exploration, appraisal, development or property
acquisition opportunities;
o development of any hydrocarbon discovery that is successful in finding
proved reserves, including the recently discovered Wilga field; and
o general corporate purposes.
The amount of capital required for the above possible purposes will depend
on the nature of the planned activities, expected results and other factors. FX
Energy has no current arrangement for any such additional financing, but may
seek required funds from the issuance of debt and equity securities under its
currently effective $100 million shelf registration statement, bank financing,
project financing, strategic alliances or other arrangements. Obtaining
additional financing may dilute the interest of existing stockholders in FX
Energy or FX Energy's interest in the specific project being financed. FX
Energy cannot assure that additional funds could be obtained or, if obtained,
would be on terms favorable to FX Energy.
In addition to planned exploration and possible development activities in
Poland, FX Energy may require funds for general corporate purposes after the end
of 2000 if it does not then have additional revenues from operations.
History of Operating Losses
From its inception in January 1989 through December 31, 1999, FX Energy
incurred cumulative net losses of $28.8 million. FX Energy expects that its
continued exploration activities will continue to result in losses and that its
accumulated deficit will increase. FX Energy reported losses before
extraordinary gains of $5.9 million, $10.1 million, and $6.7 million for the
years ended December 31, 1999, 1998 and 1997, respectively. FX Energy
anticipates that it will incur losses through 2000 and possibly beyond,
depending on whether its exploration, appraisal, development and property
acquisition activities in Poland result in sufficient production to cover
related operating expenses. Until sufficient cash flow from operations can be
obtained, it is expected that FX Energy will need additional capital from
offerings of securities and/or the sale of interests in its properties to fund
planned exploration, appraisal, development and property acquisition programs in
Poland.
Dependence on Poland
FX Energy has allocated substantially all of its financial, management and
technical resources to its activities in Poland. FX Energy's success will
depend on the results of those activities. The success of FX Energy's efforts
in Poland will depend, in addition to the risks discussed below normally
associated with the activities related to the exploration, appraisal,
development and acquisition of oil and gas properties, on:
o its ability to maintain its relationships with Apache, POGC and
agencies and enterprises of the Polish government;
o the establishment of significant oil or gas reserves through
exploration, appraisal, development and property acquisition
activities;
o the completion of production, transportation and marketing facilities
and the negotiation of sales contracts for newly discovered or
acquired reserves; and
o risks associated with conducting operations in a foreign country.
If FX Energy'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 all or a substantial portion of their investment.
Dependence on Strategic Alliances
The failure of Apache or POGC to perform its obligations under contracts
with FX Energy would most likely have a material adverse effect on FX Energy.
In particular, FX Energy has prepared its exploration budget through 2000 and
into 2001 based on the participation of Apache and, to a limited extent, POGC.
In the future, FX Energy may become even more reliant upon the expertise and
financial capabilities of its strategic partners. Apache has worldwide oil and
gas interests outside of Poland in which FX Energy does not participate. If
such separately held interests should become more promising than interests held
with FX Energy in Poland, Apache may focus its efforts, funds, expertise and
other resources elsewhere. In addition, should FX Energy's relationship with
Apache deteriorate or terminate, FX Energy's oil and gas exploratory programs in
Poland may be delayed significantly. Although FX Energy has rights to
participate in exploration and development activities on some POGC controlled
acreage, it has no right to initiate such activities. Further, FX Energy has no
interest in the underlying agreements, licenses and grants from the Polish
agencies governing the exploration, exploitation, development or production of
acreage controlled by POGC. Thus, FX Energy's program in Poland involving POGC
controlled acreage would be adversely affected if POGC should elect not to
pursue activities on such acreage, if the relationship between FX Energy, Apache
and POGC should deteriorate or terminate or if POGC or the government agencies
should fail to fulfill the requirements of or elect to terminate such
agreements, licenses or grants.
FX Energy intends to seek potential partners to participate in the
exploration of its Baltic Project Area. FX Energy cannot assure it will be
successful in obtaining the participation of any such partner, the terms of any
such arrangement would be favorable to FX Energy or such efforts will not delay
FX Energy's exploratory activities in the Baltic Project Area.
Limited Control over Interests
In each of the strategic alliances between FX Energy and Apache and POGC,
FX Energy has designated the other party as the operator or has granted it other
management or decision making powers and rights. Specifically, Apache is the
operator on areas controlled by FX Energy and Apache under the Apache
Exploration Program. POGC is the operator on areas controlled by POGC under the
Apache Exploration Program. As a result, FX Energy does not exercise sole
control over the areas subject to these alliances or operations on such areas.
Exploration Risks
The factors listed below, most of which are outside the control of FX
Energy, may prevent FX Energy from establishing commercial production or
substantial reserves as a result of its exploration, appraisal, development and
property acquisition activities in Poland:
o FX Energy cannot assure that any well will encounter hydrocarbons;
o 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 cover drilling or completion costs or to be economically
viable;
o one or more test wells are typically required to confirm the
commercial potential of any hydrocarbon discovery;
o FX Energy 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;
and
o drilling operations may be curtailed, delayed or canceled as a result
of numerous factors, including operating problems encountered during
drilling, weather conditions, compliance with governmental
requirements and shortages or delays in the delivery of equipment.
FX Energy, Apache and POGC select targets merely on interpretations of
geological and geophysical data. FX Energy cannot assure that oil or gas is in
fact present or that any oil or gas that is present can be produced in
commercial quantities. Many exploration decisions are based on scientific data
gathered by companies other than FX Energy, Apache and POGC prior to recent
significant technological advances. Data gathered by other companies and
reprocessed or otherwise enhanced may not be as reliable as data gathered either
using modern technology or under the supervision of FX Energy, Apache or POGC.
The limited availability in Poland of some western exploration, drilling
and production equipment, supplies and services may adversely effect proposed
activities. In addition, oil and gas gathering, storage, transportation and
processing facilities may not be available in Poland or have limited capacity,
which could substantially increase the cost of exploration, development and
production and reduce potential financial returns. FX Energy cannot assure its
exploration or other efforts will be successful.
Required Licenses and Rights
A number of government authorizations are required in connection with FX
Energy's activities in Poland. In order to explore, exploit, develop and
produce oil and gas in Poland, the operator is required to obtain:
o a mining usufruct agreement from the national concession authority
that grants the exclusive right to explore and exploit the
hydrocarbons on the covered area;
o an exploration concession from the national concession authority and
local authorities to obtain surface access to the covered area;
o a grant of surface rights from the surface owner; and
o an exploitation concession from the national concession authority and
local authorities to develop and produce oil and gas.
Usufruct agreements and exploration concessions have been granted for all
of FX Energy's oil and gas exploration project areas in Poland to date. In the
event of a commercial oil and/or gas discovery, it would be necessary to
negotiate with national and local government officials of Poland regarding
certain of the terms and conditions of the required exploitation concessions.
This may result in increased costs and delays. These negotiations would include
the determination of a production/exploitation fee within the range of 0.01% to
0.50% of the market value of the economically recoverable reserves estimated to
be in place, payable in five equal annual installments. In addition, the local
governments having jurisdiction over the production area must consent to the
grant of an exploitation license. All operations must comply with certain
environmental regulations and may require an environmental impact statement.
Additional governmental permits, licenses and agreements would be required
before exporting any oil or gas from Poland.
Limited Exploration and Development Infrastructure
There can be no assurance that FX Energy and its partners will be able to
conduct an effective and efficient exploration program in Poland. Further, the
limited availability of some western exploration, drilling and production
equipment, supplies and services may adversely affect proposed activities. The
Wilga 2, FX Energy's first exploratory oil and gas discovery in Poland, is
located approximately 12 miles away from the nearest gas pipeline. The limited
availability or limited capacity of oil and gas gathering, storage,
transportation and processing facilities subject FX Energy to certain risks that
could substantially increase the cost of exploration, development and production
activities and reduce potential financial returns.
Possible Requirements for Oil and Gas Gathering, Storage, Processing and
Transmission Systems
FX Energy and its partners will need to obtain required permits and design,
construct and place into operation oil and gas gathering, storage, processing
and transportation facilities for any oil and gas produced from their
properties, including the recently discovered Wilga field. FX Energy and its
partners cannot assure that any oil or gas reserves, including the Wilga 2 or
any future oil or gas discovery in Poland, will be in close proximity to any
existing crude oil pipeline or the gas transmission network in Poland. Outside
of POGC, FX Energy and Apache do not have arrangements to use any pipelines in
Poland. Therefore, wells may be temporarily shut in for lack of a market or due
to the unavailability of pipeline and/or gathering system capacity. This would
correspondingly delay cash flow. Because of the cost of production and
marketing facilities, it may not be economically feasible to begin production
even if substantial reserves are identified. Amounts that FX Energy may budget
for the construction of gathering, storage, transmission and processing
facilities may not be sufficient.
Transportation and Marketing Agreements
FX Energy and its partners will need to complete transportation, refining
or marketing arrangements relating to oil or gas that may be produced from their
exploration acreage in Poland and any oil and gas that may be produced from the
recently discovered Wilga field. Due to governmental regulations and
logistics, FX Energy and its partners may be unable to export oil or gas if they
desire to do so. The ultimate profitability of FX Energy's oil and gas
operations may well depend on the availability, proximity and capacity of
gathering systems, pipelines and processing facilities. Any discovery that
results in the commercial production of oil and/or gas will require the
negotiation of specific terms relating to the construction of processing
facilities and pipelines and the sale and transportation of oil and/or gas.
FX Energy, Apache, and POGC may need to expand or continue marketing or
transportation arrangements for oil or gas produced from properties purchased or
negotiate new contracts in an effort to obtain higher sales prices or other more
favorable terms. The actual delivery and sale of gas or oil produced will
depend on the needs of purchasers, their operating and financial capabilities
and their ability to satisfy regulatory requirements.
Depletion of Existing Reserves
FX Energy's existing limited reserves in Montana and Nevada are being
depleted by production. The Wilga 2, FX Energy's first exploratory discovery in
Poland, has yet to produce oil or gas. FX Energy's oil and gas revenues will
continue to decline unless its exploratory discovery is placed in production and
existing reserves are replaced and expanded by successful drilling or the
acquisition of additional reserves. FX Energy's success will be largely
dependent on its ability to discover new oil and gas reserves through
participation in exploration and development opportunities or acquisition of
proved reserves in Poland or the western United States, all of which involve
substantial risks. FX Energy cannot assure its program in Poland will result in
the discovery of additional reserves to replace or expand FX Energy's existing
reserves.
Dependence on Officers and Key Employees
FX Energy is dependent upon Mr. David N. Pierce, President and Chief
Executive Officer, Mr. Andrew W. Pierce, Vice-President and Chief Operating
Officer, and other key personnel for its various activities. In addition, FX
Energy is dependent on Mr. Jerzy B. Maciolek, Vice-President of International
Exploration, a Polish national who is instrumental in assisting FX Energy in its
operations in Poland. The loss of the services of any of these individuals may
materially and adversely affect FX Energy. FX Energy has entered into
employment agreements with Mr. David N. Pierce, Mr. Andrew W. Pierce, Mr. Jerzy
B. Maciolek and other key executives. FX Energy does not maintain key man
insurance on any of its employees.
Risks Associated with Growth
FX Energy has had only limited operations in Poland. If its activities in
Poland are successful, it may experience rapid growth. FX Energy's ability to
manage this growth will depend, in part, upon its ability to:
o attract and retain quality management and technical personnel;
o raise and manage the deployment of significant amounts of capital for
the development of any new discoveries or property acquisitions or the
construction of production, processing and transportation facilities;
o rely on Apache and POGC for technical and managerial resources to
develop markets for oil and gas produced and to fund their share of
capital requirements; and
o comply with governmental regulations.
Volatility of Commodity Prices and Markets
Oil and gas prices have been and are likely to continue to be volatile and
subject to wide fluctuations in response to the following factors:
o relatively minor changes in the supply of and demand for oil and gas;
o market uncertainty;
o political conditions in international oil and gas producing regions;
o the extent of production and importation of oil and gas into existing
or potential markets;
o the level of consumer demand;
o weather conditions affecting production, transportation and
consumption;
o the competitive position of oil or gas as a source of energy as
compared with coal, nuclear energy, hydroelectric power and other
energy sources;
o the availability, proximity and capacity of gathering systems,
pipelines and processing facilities;
o the refining capacity of prospective oil purchasers;
o the effect of government regulation on the production, transportation
and sale of oil and gas; and
o other factors beyond the control of FX Energy.
FX Energy cannot control or influence the above factors. Oil prices, for
example, have only recently rebounded from their lowest level in over two
decades. In addition to the direct impact on the prices at which oil or gas may
be sold, adverse changes in oil or gas prices and the related effects on the oil
and gas industry in general would likely have an adverse effect on FX Energy's
ability to obtain funding from lending institutions, industry participants, the
sale of additional securities and other sources.
Common Stock Price Volatility and Limited Trading Volume
FX Energy common stock has traded as low as $3.87 and as high as $13.37
between January 1, 1998 and February 15, 2000. Some of the factors leading to
this volatility include:
o the outcome of individual wells or the timing of exploration efforts
in Poland, as evidenced by significant price declines following the
announcement of exploratory dry holes in Poland and the significant
price and volume volatility following the announcement of an
exploratory success in Poland by FX Energy;
o the results of other operations in which FX Energy has an interest in
Poland;
o the potential sale by FX Energy of newly issued common stock to raise
capital or by existing stockholders of restricted securities;
o price and volume fluctuations in the general securities markets that
are unrelated to results of operations of FX Energy;
o the investment community's view of companies with assets and
operations outside the United States in general and in Poland in
particular;
o actions or announcements by Apache and POGC that may affect FX Energy;
o prevailing world prices for oil and gas;
o the potential of FX Energy's current and planned activities in Poland;
and
o changes in stock market analysts' recommendations respecting FX
Energy, other oil and gas companies or the oil and gas industry in
general.
FX Energy expects that it will encounter additional exploration failures in
Poland that will adversely affect the trading prices for the common stock.
The trading volume in FX Energy common stock has been relatively limited.
Therefore, it may not be possible for an investor to sell a significant number
of shares at or near quoted prices or at all if an investor were to seek to do
so.
Operating Hazards and Uninsured Risks
FX Energy's oil and gas drilling and production operations are subject to
hazards incidental 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. To lessen the effects of these hazards, FX Energy
maintains insurance of various types to cover its domestic operations. FX
Energy cannot assure that the general liability insurance of $9.0 million
carried by it or the $25.0 million carried by Apache, as the operator of the
Apache Exploration Program, can continue to be obtained on reasonable terms.
POGC, as operator of POGC controlled areas, is required to carry insurance with
similar coverage to that of Apache for all partners. The current level of
insurance does not cover all of the risks involved in oil and gas exploration,
drilling and production. Where additional insurance coverage does exist, the
amount of coverage may not be sufficient to pay the full amount of such
liabilities. FX Energy may not be insured against all losses or liabilities
that may arise from all hazards because such insurance is unavailable at
economic rates, because of limitations on existing insurance coverage or other
factors. For example, FX does not maintain insurance against risks related to
violations of environmental laws. FX Energy would be adversely affected by a
significant adverse event that is not fully covered by insurance. Further, FX
Energy cannot assure that it will be able to maintain adequate insurance in the
future at rates it considers reasonable.
Political and Regulatory Risks in Poland
FX Energy's oil and gas exploration, development and production activities
in Poland are and will be subject to ongoing uncertainties and risks, including:
o possible changes in government personnel, the development of new
administrative policies and practices and political conditions in
Poland which may affect the administration of agreements with
governmental agencies or enterprises;
o possible changes to the laws, regulations and policies applicable to
FX Energy and its partners or the oil and gas industry in Poland in
general;
o uncertainties as to whether the laws and regulations will be
applicable in any particular circumstance;
o uncertainties as to whether FX Energy will be able to enforce its
rights in Poland;
o the requirement to demonstrate, to the satisfaction of the Polish
authorities, FX Energy, Apache and POGC's compliance with governmental
requirements respecting exploration expenditures, results of
exploration, environmental protection matters and other factors;
o the inability to recover previous payments to the Polish government
made under the exploration rights or any other costs incurred
respecting those rights if FX Energy were to lose or cancel its
exploration and exploitation rights at any time;
o political instability and possible changes in government;
o export and transportation tariffs;
o local and national tax requirements; and
o expropriation or nationalization of private enterprises and other
risks arising out of foreign government sovereignty over the project
areas.
Poland has a regulatory regime governing exploration and development,
production, marketing, transportation and storage of oil and gas. These
provisions were recently promulgated and are relatively untested. Therefore,
there is little or no administrative or enforcement history or established
practice that can aid FX Energy or Apache in evaluating how the regulatory
regime will affect FX Energy's operations. It is possible that such
governmental policies will change or that new laws and regulations,
administrative practices or policies or interpretations of existing laws and
regulations will materially and adversely affect FX Energy's activities in
Poland. In certain instances, Poland's laws, policies and procedures may be
changed to conform to the minimum requirements that must be met before Poland is
admitted as a full member of the European Union. The government of Poland has
announced that it intends to privatize various segments of POGC in the near
future. Currently, no specific plans have been announced respecting the method
or timing of such privatization. FX Energy cannot predict how the possible
privatization of POGC will affect FX Energy.
Environmental Risk
Operations on FX Energy's project areas are subject to environmental laws
and regulations in Poland that 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 with oil, regulations prohibiting the flaring of
gas may inhibit oil production. In such circumstances, the absence of a gas
gathering and delivering system may restrict production or may require
significant expenditures to develop such a system prior to producing oil and
gas. FX Energy or Apache may be required to prepare and obtain approval of
environmental impact assessments by governmental authorities in Poland prior to
commencing certain oil and gas production, transportation and processing
functions.
FX Energy, Apache and POGC cannot assure that they have complied with all
applicable laws and regulations in drilling exploratory wells, acquiring seismic
data or completing other activities in Poland to date. More restrictive
regulations or administrative policies or practices may be adopted by the Polish
government. The cost of compliance with current regulations or any changes in
environmental regulations could require significant expenditures. Further,
breaches of such regulations may result in the imposition of fines and
penalties, any of which may be material. These environmental costs could have a
material adverse effect on FX Energy's financial condition or results of
operations in the future.
Foreign Currency Risk
The amounts in FX Energy's agreements with Apache and POGC and the
government of Poland relating to FX Energy's activities in Poland are expressed
in United States Dollars. Conversions between United States Dollars and Polish
Zlotys are made on the due date of amounts to be paid or received. FX Energy's
activities in Poland may be affected by fluctuations in exchange rates between
the Polish Zloty, the United States Dollar, the Euro and other currencies. The
exchange rate for the Polish Zloty was 4.14, 3.51 and 3.51 per United States
Dollar as of December 31, 1999, 1998 and 1997, respectively. FX Energy has not
hedged its foreign currency activities in the past and has no future plans to do
so. Currencies used by FX Energy may not be convertible at satisfactory rates.
In addition, 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. Further, inflation may lead to the devaluation
of the Polish Zloty.
Repatriation Risk
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 limited
liability companies such as those through which FX Energy conducts most of its
activities in Poland 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. Although FX Energy is entitled to a credit against its United States
tax obligations equal to any foreign taxes paid, FX Energy may not be able to
use this credit unless FX Energy owes taxes in the United States.
Possible Corporate Takeover
Provisions in FX Energy's articles of incorporation and bylaws could:
o discourage potential acquisition proposals;
o delay or prevent a change in control of FX Energy;
o diminish stockholders' opportunities to participate in tender offers
for common stock, including tender offers at prices above the then
current market prices; or
o inhibit increases in the market price of common stock that could
result from takeover attempts.
FX Energy's articles of incorporation authorize FX Energy to issue, without
stockholder approval, one or more classes or series of preferred stock, having
such preferences, powers and relative participating, optional or other rights
(including preferences over the common stock) as FX Energy's Board of Directors
may determine. The terms of one or more classes or series of preferred stock
could be superior to the terms of the common stock, which may adversely impact
the rights of holders of common stock or could have anti-takeover effects. In
addition, FX Energy has adopted a stockholder rights plan. This plan and the
provisions of FX Energy's articles of incorporation, bylaws and the Nevada
Domestic and Foreign Corporation Law may delay, discourage, inhibit, prevent or
render more difficult an attempt to obtain control of FX Energy, whether by a
tender offer, business combination, proxy contest or otherwise. These other
provisions include the classification of the Board of Directors, a prohibition
of stockholder action by less than unanimous written consent and Nevada Domestic
and Foreign Corporation Law restrictions on business combinations with certain
interested parties.
Capitalized Costs of Oil and Gas Properties
FX Energy follows the successful efforts method of accounting for its oil
and gas properties. Under this method of accounting, all property acquisition
costs and costs of exploratory and development wells are capitalized when
incurred, pending determination of whether the well has found proved reserves.
If an exploratory well has not found proved reserves, these costs plus 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 not to be realizable. 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 related fair value, determined on a property by property basis. During
1998, FX Energy recorded a non-cash impairment charge of $5,885,000 as a result
of writing down its domestic proved developed properties. As a result of the
foregoing, the results of operations of FX Energy for any particular period may
not be indicative of the results that could be expected over longer periods.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Risks of Adverse Weather
A significant portion of FX Energy'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, infrastructure construction and production. The
foregoing may reduce production volumes or increase production costs and could
delay FX Energy's planned exploration and development activities.
Intense Competition in Oil and Gas Industry
The oil and gas industry is highly competitive. Most of FX Energy's
current and potential competitors have greater financial resources and a greater
number of experienced and trained managerial and technical personnel than FX
Energy. There can be no assurance that FX Energy will be able to compete
effectively with such firms.
United States Governmental Regulation and Taxation
Oil and gas production and exploration are subject to comprehensive
federal, state and local laws and regulations controlling the exploration for
and production and sale of oil and gas and the possible effects of such
activities on the environment. Present and possible future legislation and
regulations could cause additional expenditures, restrictions and delays in FX
Energy's business. The impact of these uncertainties on FX Energy cannot be
predicted and may require FX Energy to limit substantially, delay or cease
operations in some circumstances. FX Energy cannot predict the ultimate effect
of such governmental energy and taxation policies, which are frequently unclear
and unpredictable.
OIL AND GAS TERMS
The following terms have the indicated meaning when used in this Report:
"BPD" means barrels of oil per day.
"BBL" means barrel of oil.
"BCF" means billion cubic feet of natural gas.
"CARRIED" refers to an agreement under which one party (carrying party)
agrees to pay for all or a specified portion of costs of another party
(carried party) on a property in which both parties own a portion of the
working interest.
"CONDENSATE" means a light hydrocarbon liquid, generally natural gasoline
(C5 to C10), that condenses to a liquid (i.e., falls out of wet gas) as the
wet gas is sent through a mechanical separator near the well.
"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.
"FIELD" means an area consisting of single reservoir or multiple reservoirs
all grouped on or related to the same individual geological structural
feature and/or stratigraphic conditions.
"GROSS" ACRES AND "GROSS" WELLS means the total number of acres or wells,
as the case may be, in which an interest is owned, either directly or
though a subsidiary or other Polish enterprise in which FX Energy has an
interest.
"HORIZON" means an underground geological formation which is the portion of
the larger formation which has sufficient porosity and permeability to
constitute a reservoir.
"MBBLS" means thousand barrels of oil.
"MMBBLS" means million barrels of oil.
"MMCF" means million cubic feet of natural gas.
"MMBOE" means million barrels of oil equivalent.
"NET" means, when referring to wells or acres, the fractional ownership
working interests held by FX Energy, either directly or through a
subsidiary or other Polish enterprise in which FX Energy has an interest,
multiplied by the gross wells or acres.
"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 G&A costs, 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.
"STEP-OUT" means a well drilled outside well locations offsetting a
producing well but within the possible or probable extent of a reservoir.
"TCF" means trillion cubic feet of natural gas.
- --------------------------------------------------------------------------------
ITEM 3. LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
FX Energy is not a party to any material legal proceedings and no material
legal proceedings have been threatened by FX Energy or, to the best of its
knowledge, against it.
- --------------------------------------------------------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------------------------
No matter was submitted to a vote of FX Energy's security holders during
the fourth quarter of the fiscal year ended December 31, 1999.
<PAGE>
PART II
- --------------------------------------------------------------------------------
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
- --------------------------------------------------------------------------------
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The following table sets forth for the periods indicated the high and low
closing prices for FX Energy's common stock as quoted under the symbol "FXEN"
on the Nasdaq National Market:
LOW HIGH
------- -------
2000:
First Quarter (through February 15, 2000)..... $ 5.13 $ 7.94
1999:
Fourth Quarter .............................. $ 4.00 $ 7.00
Third Quarter ................................ 6.31 9.43
Second Quarter ............................... 4.13 7.00
First Quarter ................................ 4.00 9.75
1998:
Fourth Quarter ............................... $ 6.50 $10.13
Third Quarter ................................ 5.63 9.50
Second Quarter ............................... 8.25 12.81
First Quarter ................................ 6.25 10.50
On February 15, 2000, the closing price per share of the common stock on
the Nasdaq National Market was $6.375.
The market price for FX Energy's common stock has been volatile in the past
and could fluctuate significantly in response to the results of specific
exploration and development activities, variations in quarterly operating
results, fluctuations in oil and gas prices 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. In
particular, securities such as the common stock of companies doing substantially
all of their business in emerging market countries such as Poland are, to
varying degrees, influenced by economic and market conditions in other emerging
market countries. Although economic conditions are different in each country,
investors' reactions to developments in one country may effect the securities of
issuers doing business in other countries, including Poland. There can be no
assurance that the trading price of FX Energy's common stock would not be
adversely affected by events elsewhere, especially in emerging market countries.
These broad fluctuations may adversely affect the market price of FX Energy's
common stock.
FX Energy has never paid cash dividends on its common stock and does not
anticipate that it will pay dividends in the foreseeable future. FX Energy
intends to reinvest any future earnings to further expand its business. FX
Energy estimates that, as of February 15, 2000, it had approximately 4,200
stockholders.
<PAGE>
- --------------------------------------------------------------------------------
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
- --------------------------------------------------------------------------------
The following selected consolidated financial data of FX Energy for the
five years ended December 31, 1999 are derived from the audited financial
statements and notes thereto of FX Energy, certain of which are included herein.
The selected consolidated financial data should be read in conjunction with FX
Energy's Consolidated Financial Statements and the Notes thereto included
elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- --------
STATEMENT OF OPERATIONS DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> ----------------------------
REVENUES: <C> <C> <C> <C> <C>
Oil sales ................................ $ 1,554 $ 1,124 $ 2,040 $ 2,346 $ 1,981
Drilling revenue ......................... 865 323 496 75 111
Gain on sale of property interests ....... -- 467 272 -- 75
--------- --------- --------- --------- --------
Total revenues ......................... 2,419 1,914 2,808 2,421 2,167
--------- --------- --------- --------- --------
OPERATING COSTS AND EXPENSES:
Lease operating costs (1) ................ 962 1,046 1,239 1,225 1,272
Exploration costs (2) .................... 3,053 2,127 5,314 3,716 862
Impairments (3) .......................... -- 5,885 -- -- --
Drilling costs ........................... 642 240 329 154 141
Depreciation, depletion and amortization . 494 672 635 558 503
General and administrative ............... 2,962 2,572 2,566 1,715 1,466
--------- --------- --------- --------- --------
Total operating costs and expenses ..... 8,113 12,542 10,083 7,368 4,244
--------- --------- --------- --------- --------
OPERATING LOSS ............................. (5,694) (10,628) (7,275) (4,947) (2,077)
--------- --------- --------- --------- --------
OTHER INCOME (EXPENSE):
Interest and other income ................ 511 506 662 370 98
Interest expense ......................... (7) -- (83) (333) (448)
Impairment of notes receivable from officers (666)
Minority interest: non-cash dividends (4) -- -- -- -- (93)
--------- --------- --------- --------- --------
Total other income (expense) ........... (162) 506 579 37 (443)
--------- --------- --------- --------- --------
NET LOSS BEFORE EXTRAORDINARY GAIN ......... (5,856) (10,122) (6,696) (4,910) (2,520)
Extraordinary gain ....................... -- -- 3,076 -- --
--------- --------- --------- --------- --------
NET LOSS ................................... $ (5,856) $(10,122) $ (3,620) $ (4,910) $(2,520)
========= ========= ========= ========= ========
BASIC AND DILUTED NET LOSS PER SHARE:
Net loss before extraordinary gain ....... $ (0.41) $ (0.78) $ (0.53) $ (0.49) $ (0.47)
Extraordinary gain ....................... -- -- .24 -- --
--------- --------- --------- --------- --------
Net loss ............................... $ (0.41) $ (0.78) $ (0.29) $ (0.49) $ (0.47)
========= ========= ========= ========= ========
BASIC AND DILUTED WEIGHTED AVERAGE SHARES
OUTSTANDING .............................. 14,199 12,979 12,597 10,018 5,389
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
<CAPTION> 1999 1998 1997 1996 1995
--------- --------- --------- --------- --------
CASH FLOW STATEMENT DATA (IN THOUSANDS)
------------------------
<S> <C> <C> <C> <C> <C>
Net cash used in operating activities ...... $ (3,745) $ (3,109) $ (5,881) $ (3,651) $(1,030)
Net cash provided by (used in) investing
activities .............................. (2,916) 1,083 368 (7,005) (1,489)
Net cash provided by (used in) financing
activities .............................. 6,469 (674) 1,679 18,259 2,974
AS OF DECEMBER 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
<CAPTION> --------- --------- --------- --------- --------
BALANCE SHEET DATA (IN THOUSANDS)
------------------
<S> <C> <C> <C> <C> <C>
Working capital (deficit) .................. $ 5,459 $ 3,965 $ 8,494 $ 13,843 $ (278)
Total assets ............................... 10,470 8,253 18,555 2,294 10,039
Long-term debt ............................. -- -- -- 1,500 3,359
Stockholders' equity ....................... 8,367 6,920 17,612 20,908 5,224
</table/>
(1) Includes lease operating expenses and production taxes.
(2) Includes geophysical and geological costs, exploratory dry hole costs and
non-producing leasehold impairments.
(3) Includes domestic proved property write down.
(4) Non-cash dividend on FX Producing convertible preferred stock.
<PAGE>
- --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The following discussion of the historical financial condition and
results of operations of FX Energy should be read in conjunction with
"Summary Consolidated Financial Data," the consolidated financial
statements and related notes contained in this report.
CORPORATE OVERVIEW
FX Energy explores for oil and gas in the Republic of Poland, where it
holds the largest exploration acreage position by a foreign company, in terms of
both gross and net acres, covering approximately 15.8 million gross acres. FX
Energy is exploring most of its Polish acreage with two strategic partners:
Apache and POGC.
To date, FX Energy has participated in drilling eight exploratory wells in
Poland. The first seven exploratory wells were exploratory dry holes. The
eighth exploratory well, the Wilga 2, which was drilled on the northwest edge of
the Lublin Basin, was announced as an exploratory success on January 25, 2000
after initial production test results indicated a combined initial flow rate of
16.9 Mmcf of gas per day and 570 Bbls of condensate from three intervals in a
Carboniferous horizon at a depth between 7,732 and 8,550 feet. Under the terms
of the Apache Exploration Program, Apache covered all of FX Energy's 45.0% share
of costs to drill and complete the Wilga 2. The Wilga 2 was the first
successful exploratory well drilled by a foreign operator in Poland. FX Energy
and its partners plan an appraisal well immediately, followed by additional
development drilling and facilities construction later in the year, with initial
production expected to commence during early 2001. In addition, FX Energy will
promptly begin seismic acquisition in the Wilga area to identify a target near
the Wilga discovery to be drilled later this year to test the possibility of
additional reserves outside the Wilga structure. Apache has committed to
covering FX Energy's share of costs to drill five additional exploration wells
in Poland.
In 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.
Since 1995, when FX Energy acquired oil and gas exploration rights to
approximately 2.1 million acres in the Baltic Project Area in Poland, FX Energy
has focused an increasing amount of resources and activities towards oil and gas
exploration in Poland. To date, FX Energy has acquired oil and gas exploration
rights, including concessions and options on POGC controlled areas, covering
approximately 15.8 million gross acres, resulting in FX Energy owning the
largest gross and net acreage position by a foreign company in Poland. During
the preceding five years, FX Energy has minimized its financial exposure in
Poland by forming strategic alliances with several industry partners such as
Apache, POGC, Homestake Mining Company and RWE-DEA (formerly Deutsche Texaco).
During the third quarter of 1996, FX Energy realized net proceeds of $17.6
million from the sale of 3,450,000 shares of common stock. The proceeds from
the stock offering were used to pay off long-term debt of $3.7 million and to
fund FX Energy's exploration activities for the remainder of 1996 through early
1999. In the second quarter of 1999, FX Energy realized net proceeds of $7.1
million from the private placement of 1,792,500 shares of common stock.
Proceeds from the private placement were allocated to fund costs incurred on the
Lachowice Farm-in during 1999, continuing exploration costs in Poland and for
general corporate purposes. As of December 31, 1999, FX Energy had $6.9 million
in cash, cash equivalents and marketable debt securities with no outstanding
long-term debt.
Since its inception in 1989 through December 31, 1999, FX Energy has
incurred cumulative net losses of $28.8 million, including net losses of $ 5.9
million, $10.1 million, and $3.6 million for the years ended December 31, 1999,
1998 and 1997, respectively. FX Energy may continue to incur net losses during
2000 and beyond, depending on results from its exploration, appraisal,
development and property acquisition activities in Poland and the western United
States.
LIQUIDITY AND CAPITAL RESOURCES
Historically, FX Energy has relied primarily on proceeds from the sale of
equity securities to fund its operating and investing activities. During 1999,
1998 and 1997, FX Energy received net proceeds from the sale of its securities,
net of redemptions, of $7,067,000, $166,000 and $253,000, respectively. FX
Energy also benefits from funds provided by other participants in drilling
groups formed by it to undertake specific drilling or other exploration
activities.
Working Capital
FX Energy had working capital of $5,459,000, $3,965,000 and $8,494,000 as
of December 31, 1999, 1998 and 1997, respectively. Working capital as of
December 31, 1999 was $1,494,000 higher as compared to the end of 1998,
primarily due to net proceeds of $7,067,000 from the private placement of
1,792,500 shares and the exercise of options to purchase 2,000 shares of common
stock, which was offset by FX Energy's $5,856,000 net loss during 1999. Working
capital as of December 31, 1998 was $4,529,000 lower as compared to the end of
1997, primarily due to cash used in operating and financing activities of
$3,783,000 and additions to properties of $441,000 during 1998.
Operating Activities
FX Energy used net cash of $3,745,000, $3,109,000, and $5,881,000 in its
operating activities during 1999, 1998 and 1997, respectively, primarily as a
result of the net losses incurred in those years. During 1999, 1998 and 1997,
FX Energy spent $4,195,000, $3,978,000, and $6,024,000, respectively, on
operating activities exclusive of working capital adjustments. Working capital
adjustments reduced cash used in operating activities by $450,000, $869,000 and
$143,000 during, 1999, 1998 and 1997, respectively.
Investing Activities
FX Energy used net cash of $2,916,000 in investing activities during 1999
and received net cash from investing activities of $1,083,000 and $368,000
during 1998 and 1997, respectively. During 1999, FX Energy spent $603,000 on
additions to properties, equipment and other assets, received $6,000 from the
sale of property interests and spent a net amount of $2,319,000 relating to
investing in marketable debt securities. During 1998, FX Energy spent $441,000
on additions to properties and equipment, received $513,000 of proceeds from the
sale of property interests and equipment and received a net amount of $1,011,000
relating to investing in marketable debt securities. During 1997, FX Energy
spent a net amount of $1,506,000 on additions to properties and other assets,
received $353,000 from the sale of property interests and equipment, advanced an
employee $15,000 in relocation costs and received a net amount of $1,536,000
relating to investing in marketable debt securities.
Financing Activities
FX Energy received net cash of $6,469,000 from its financing activities
during 1999, used net cash of $674,000 in its financing activities during 1998
and received net cash of $1,679,000 from its financing activities during 1997.
During 1999, FX Energy advanced $598,000 to two officers, received net proceeds
of $7,054,000 from a private placement of 1,792,500 shares of common stock and
$13,000 from the exercise of options on 2,000 shares of common stock. During
1998, FX Energy advanced $840,000 to officers and received $166,000 in cash and
a full recourse note receivable of $250,000 from the exercise of warrants and
options on 382,622 shares of common stock. During 1997, FX Energy advanced
$150,000 to an officer, realized $1,576,000 in advances from RWE-DEA relating to
exploration of its Baltic Project Area and $253,000 from the exercise of
warrants and options on 159,334 shares of common stock.
Strategic Alliances
FX Energy 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 FX Energy's financial exposure and risk.
During the period of 1995 through June 2000, FX Energy estimates that its
strategic partners have paid or committed to carry approximately $26,900,000 of
FX Energy's share of costs in various projects. Apache has committed to covering
all of the Apache Exploration Program's Polish G&A costs incurred from January
1999 through June 2000, a net amount of approximately $3,000,000. During 1998,
Apache committed to cover approximately $6,000,000 of FX Energy's cost relating
to exploring its Carpathian area over approximately three years in exchange for
a fifty-percent percent interest in the project. During 1997, Apache committed
to cover approximately $15,000,000 of FX Energy's cost relating to exploring its
Lublin Basin area over approximately three years in exchange for a fifty-percent
percent interest in the project. Also, during 1997, Homestake committed to
paying approximately $1,100,000 of FX Energy's cost over approximately two years
relating to gold exploration on the Sudety Project Area in Poland. RWE-DEA
committed approximately $1,600,000 to cover FX Energy's cost relating to the
Baltic Project Area during 1996 and 1997. Other industry partners committed
approximately $200,000 to cover FX Energy's costs in other projects during 1995
and 1996.
EXPLORATION, APPRAISAL, DEVELOPMENT AND PROPERTY ACQUISITION ACTIVITIES IN
POLAND
Polish Acreage
FX Energy holds oil and gas exploration rights on approximately 15.8
million gross acres in Poland as follows: (1) approximately 0.9 million gross
acres in which FX Energy holds a one-hundred percent interest; (2) approximately
2.9 million gross acres in which FX Energy and Apache each hold a fifty-percent
interest; (3) approximately 8.6 million gross acres in which FX Energy and
Apache each hold a fifty-percent interest subject to proportionate reduction by
POGC's option to participate with up to a one-third interest determined on a
block by block basis; and, (4) approximately 3.4 million gross acres held by
POGC in which FX Energy and Apache have options to participate with up to a one-
third interest each.
FX Energy may relinquish all or part of its interest in any exploratory
acreage at any time if it determines there is no hydrocarbon potential within
any given area.
Apache Exploration Program
FX Energy and Apache entered into an AMI Agreement effective January 1,
1999, which further defined and modified several earlier agreements between FX
Energy and Apache relating to their joint exploration activities in Poland. All
of these agreements together, and the operations and obligations that relate to
these agreements, are referred to as the Apache Exploration Program. The AMI
Agreement covers the entire country of Poland except for the 0.9 million acre
Baltic Project Area. Under terms of the AMI Agreement, FX Energy and Apache
must offer each other a fifty-percent interest in any new exploration,
appraisal, development, acquisition or other oil and gas activity entered into
in Poland during 1999 and 2000.
Under terms of the Apache Exploration Program, Apache has either paid or
committed to pay FX Energy's pro-rata share of the following items:
INITIAL COMPLETED REMAINING
COMMITMENT COMMITMENTS COMMITMENTS
---------------- ----------- -------------
Up-front cash .................. $950,000 $950,000 --
Drilling costs (1) ............. 10 wells 5 wells 5 wells
2D seismic (2) ................. 2,000 km 1,650 km 350 km
Concession and usufruct fees ... $855,000 $855,000 --
G&A costs incurred in Poland(3). All through 1999 All to date All through 6-00
(1) As of December 31, 1999, Apache had covered FX Energy's pro-rata share of
costs for five exploratory wells, the first four of which were exploratory
dry holes drilled during 1999. On January 25, 2000 FX Energy announced
the fifth well, the Wilga 2, was an exploratory discovery.
(2) Apache completed acquiring 1,650 kilometers of 2D seismic in the Lublin
Basin during 1998 and has committed to completing 350 kilometers of 2D
seismic in the Carpathian area of southern Poland during 2000.
(3) Beginning July 1, 2000, Apache may charge FX Energy for 25% of its Polish
G&A costs, increased by 5% upon the drilling of each of the five remaining
exploratory wells; up to a maximum of 50%.
Exploratory Activities - Apache Exploration Program
The Czernic 277-2, Poniatowa 317-1, Witkow 1 and the Siedliska 2, the first
four exploratory wells drilled under terms of the Apache Exploration Program,
were all determined to be exploratory dry holes during the first nine months of
1999. These wells tested potentially productive Carboniferous and Devonian
horizons in southeastern Poland. In accordance with terms of the Apache
Exploration Program, Apache covered all of FX Energy's share of costs for all
three wells, including 33.33% for the Czernic 277-2, 47.5% for the Poniatowa
317-1, 45.0% for the Witkow 1 and 33.3% for the Siedliska 2. On January 25,
2000, FX Energy announced the fifth well, the Wilga 2, was an exploratory oil
and gas discovery in the Carboniferous horizon on the northwest section of the
Lublin Basin. Apache has committed to cover all of FX Energy's 45.0% drilling
and completion costs for the Wilga 2. The remaining five wells are expected to
be drilled by Apache during 2000 and 2001.
During June 1999, FX Energy elected to participate in drilling the
Andrychow 6, an exploratory well operated by POGC on POGC option acreage in
southern Poland with a 5.0% interest. The well tested a Devonian formation and
was determined to be an exploratory dry hole during December 1999. The
Andrychow 6 cost a net amount of approximately $99,000.
Lachowice Farm-in Agreement
On February 26, 1999, FX Energy and Apache entered into a farm-in agreement
with POGC with respect to POGC's Lachowice area, a shut-in Devonian gas
discovery owned by POGC. Under terms of the agreement, FX Energy and Apache
each agreed to pay fifty-percent of the cost to test and recomplete up to three
shut-in gas wells. Based upon the testing and recompletion results, FX Energy
and Apache had the option to each earn a one-third interest in the Lachowice
area by each paying fifty-percent of the cost to drill three additional wells
and construct related production facilities.
During June 1999, FX Energy and Apache commenced testing and recompletion
procedures on the Stryszawa 2K. The Stryszawa 2K was subsequently plugged and
abandoned after it failed to maintain a commercial production rate. During
September 1999, FX Energy and Apache tested the Lachowice 7 to determine its
commercial potential. The test results of the Lachowice 7 did not warrant
constructing gathering and processing facilities. FX Energy and Apache plan
turn the Lachowice 7 back to POGC and terminate the Lachowice Farm-in. During
1999, FX Energy incurred costs of approximately $941,000 on this project.
CAPITAL REQUIREMENTS
General
As of December 31, 1999, FX Energy had $6.9 million of cash, cash equivalents
and marketable debt securities with no long-term debt. In view of the Apache
Exploration Program, this amount is expected to be sufficient to fund FX
Energy's present minimum exploration and operating commitments during 2000 and
part of 2001. FX Energy intends to seek additional capital to fund any
activities outside the scope of its present minimum exploration and operating
activities, including further exploration, appraisal and development costs for
the Wilga discovery and any other additional exploration, appraisal, development
or property acquisition 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, appraisal, development, property acquisition and other activities.
FX Energy may obtain funds for future capital investments from the sale of
additional securities, bank financing, project financing, sale of partial
property interests, strategic alliances with other energy or financial partners
or other arrangements, some 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.
Exploration, Appraisal and Development Capital
During the remainder of 2000, FX Energy expects to have substantially all
the cost of its share of exploration activities under the Apache Exploration
Program covered by Apache. To date, Apache has completed drilling five of the
ten required exploratory wells and advises that it expects to drill three
additional wells during 2000.
During 1999, FX Energy incurred approximately $941,000 appraising the
Lachowice Farm-in. FX Energy initially allocated $3.4 million of the net
proceeds of its $7.1 million private placement completed in May 1999 to
partially fund planned activities related to the Lachowice Farm-in. Based on
the test results from re-entering the Stryszawa 2K and the Lachowice 7, FX
Energy and Apache have concluded the Lachowice Farm-in is not economical and
plan to withdraw from the project.
FX Energy and its partners are formulating a program to commence production
and fully develop the Wilga field. Under terms of the Apache Exploration
Program, Apache must cover all of FX Energy's 45.0% share of drilling and
completion costs for the Wilga 2, the initial exploratory well drilled on the
Wilga field. FX Energy must pay for its 45.0% share of all subsequent capital
and operating costs on the Wilga field. Preliminary additional exploration,
appraisal and development plans total approximately $9.8 million net to FX
Energy and are comprised of the following:
o drill one appraisal well and one development well at a cost of
approximately $1.5 million per well;
o build production facilities (including connecting to a pipeline) at a
cost of approximately $5.0 million;
o acquire approximately 120 kilometers of 2D seismic at a cost of
approximately $300,000; and
o drill a step-out well costing approximately $1.5 million.
FX Energy may utilize the $100 million shelf registration statement it
filed during June, 1999 to fund the additional exploration, appraisal and
development costs of the Wilga field through a combination of debt and equity
securities or it may utilize bank debt or other financing alternatives.
However, there is no assurance that such funding can be obtained.
Additional exploration of the 0.9 million acre Baltic Project Area has been
deferred for the time being. Due to its increasing focus on Poland, FX Energy
expects to incur minimal exploration, appraisal and development expenditures on
its domestic operations during the remainder of 1999 and 2000.
Property Acquisition Capital
During June 1999, FX Energy filed a $100 million shelf registration
statement with the Securities and Exchange Commission ("SEC") to fund planned
expansion in Poland. FX Energy plans to utilize the $100 million shelf
registration statement to fund any capital requirements resulting from the
proposed purchase of oil and gas property interests from POGC through a
combination of debt and equity securities or may utilize bank debt or other
financing alternatives. There is no assurance any funds will be available
pursuant to the $100 million shelf registration statement.
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
FX Energy operates within two segments of the oil and gas industry;
exploration and production ("E&P") and drilling and well servicing ("Drilling");
and within the exploration segment of the mining industry. In Poland, FX Energy
explores for oil and gas, and to a limited extent, gold. In the western United
States, FX Energy has a limited amount of exploratory acreage primarily in North
Dakota, produces oil in Montana and Nevada and has a contract drilling and well
servicing company in northern Montana. Depreciation, depletion and amortization
costs ("DD&A") directly associated with the production and drilling segments are
detailed within the following discussion. G&A costs, interest income, other
income, interest expense, officer loan impairment and income taxes are not
allocated to individual operating segments for management or segment reporting
purposes and are discussed in their entirety following the segment discussion.
Mining, which consists of gold exploration on FX Energy's Sudety Project Area in
Poland, is excluded from the following discussion because it has been
discontinued and is not considered to be a material segment by management.
E&P OPERATIONS - OIL AND GAS
EXPLORATION AND PRODUCTION REVENUES
Oil Revenues
Oil revenues were $1,554,000, $1,124,000 and $2,040,000 for the years ended
December 31, 1999, 1998 and 1997, respectively. During 1999, 1998 and 1997, FX
Energy's oil revenues fluctuated primarily due to volatile oil prices. FX
Energy's oil revenues during 1999, 1998 and 1997 were also negatively affected
by lower production rates attributable to the natural production declines of FX
Energy's producing properties and the increased utilization of FX Energy's well
servicing equipment on third party properties rather than company-owned
properties during 1998 and 1999. A summary of the percentage change in oil
revenues, average oil price and oil production for 1999, 1998 and 1997 as
compared to their respective prior year are set forth on the following table:
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ----------- -----------
OIL REVENUES ....................... $1,554,000 $1,124,000 $2,040,000
Percent change versus prior year . +38.26% -44.90% -13.04%
AVERAGE OIL PRICE .................. $ 15.35 $ 9.78 $16.16
Percent change versus prior year . +56.95% -39.48% -10.42%
PRODUCTION VOLUMES (BBLS) .......... 101,275 114,909 126,271
Percent change versus prior year . -11.87% -9.00% -2.88%
Gain on Sale of Property Interests
There was no gain on sale of property interests for the year ended December
31, 1999. FX Energy recognized a gain on sale of property interests of $467,000
and $272,000 for the years ended December 31, 1998 and 1997, respectively.
During 1998, Apache paid FX Energy $500,000 in initial cash consideration
relating to its participation in the Carpathian area which was offset by $33,000
of associated costs. During 1997, FX Energy received $450,000 from Apache in
initial cash consideration relating to its participation in the Lublin Basin
area which was offset by $344,000 of associated costs and $95,000 from the
purchase of Lubex Petroleum Company, FX Energy's wholly owned Polish exploration
subsidiary which operates the Original 8 Blocks within FX Energy's Lublin Basin
area. The 1997 gain on sale of property interests also includes $71,000
relating to FX Energy's mining operations, which are excluded from the
discussion of the results of operations by business segment. The amount of gain
on sale of property interests will continue to vary from year to year, depending
on the timing of completed deals and the amount of up-front cash consideration,
if any.
EXPLORATION AND PRODUCTION COSTS
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
$962,000, $1,046,000 and $1,239,000 for the years ended December 31, 1999, 1998
and 1997, respectively, or $9.50, $9.11 and $9.82, respectively, per barrel.
LOE costs were $899,000, $966,000 and $1,094,000 for the years ended
December 31, 1999, 1998 and 1997, respectively. During 1999, 1998 and 1997 FX
Energy performed only routine maintenance on its producing properties and
deferred workovers in an effort to control operating costs. Lifting costs per
barrel (exclusive of production taxes) were relatively flat during 1999, 1998
and 1997, amounting to $8.88, $8.41 and $8.66 per barrel, respectively.
Production taxes were $63,000, $80,000 and $145,000 for the years ended
December 31, 1999, 1998 and 1997, respectively. During 1999, production taxes
decreased to an average of approximately 4.1% of annual oil revenues, as
compared to 7.0% during 1998 and 1997, primarily due to a reduction in the
production tax rate on stripper wells by the state of Montana. The decrease in
the amount of production taxes from year to year is also directly associated
with the fluctuation of oil prices and decreased oil production from year to
year. Refer to the table in Exploration and Production Revenues - Oil Revenues
for the percentage fluctuations in the average oil price and oil production for
1999, 1998 and 1997.
DD&A Expense - Producing Operations
DD&A expenses for producing properties were $51,000, $231,000 and $261,000
for the years ended December 31, 1999, 1998 and 1997, respectively. The DD&A
rate per barrel was $0.50 during 1999, a decrease of $1.51 as compared to 1998.
The decrease is directly attributable to the $5,885,000 write down of FX
Energy's domestic proved developed oil and gas properties during 1998 which
resulted in a substantially lower depreciable property basis during 1999. The
DD&A rate per barrel was relatively constant at $2.01 and $2.07 for 1998 and
1997, respectively.
Domestic Proved Property Impairment
There were no proved domestic proved property impairments for the years
ended December 31, 1999 or 1997. For the year ended December 31, 1998, FX
Energy incurred a domestic proved developed property impairment of $5,885,000
due to low oil prices and its decision to focus its resources on Poland. As of
December 31, 1998, FX Energy's PV-10 value for its domestic proved properties
was approximately $472,000, consisting solely of proved developed reserves. In
accordance with generally accepted accounting principles, FX Energy recorded
total impairment expense of $5,885,000 for the year ended December 31, 1998,
which represented the difference between the net book value of its domestic
proved developed properties and the related fair value, determined on a property
by property basis, as of December 31, 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 $3,053,000, $2,127,000 and $5,314,000 for the years ended
December 31, 1999, 1998 and 1997, respectively. G&G costs of $31,000, and
$29,000 incurred during the years ended December 31, 1999 and 1998,
respectively, relate to FX Energy's mining operations and are excluded from the
following discussion of the results of operations for this segment. A
comparative discussion of each component of exploration costs incurred during
the years ended December 31, 1999, 1998 and 1997 follows:
G&G costs were $1,928,000, $2,080,000 and $1,684,000 during the years ended
December 31, 1999, 1998 and 1997, respectively. During 1999, FX Energy spent
approximately $310,000 reprocessing seismic on the Pomeranian and Warsaw West
areas, granted stock options valued at approximately $119,000 to a Polish
consultant and spent approximately $374,000 evaluating potential property
acquisitions from POGC. During 1998, FX Energy incurred approximately $400,000
of cost relating to its share of the Lublin Basin area seismic acquisition
program with Apache and $75,000 relating to the Polish Lowlands Study. During
1997, FX Energy completed a seismic survey on Wola, a POGC Concession in the
Carpathian area, costing $210,000. From January 1, 1997 through December 31,
1999, FX Energy spent an average amount of approximately $1,402,000 annually
relating to reprocessing 2D seismic and the wages and associated expenses for
employees and consultants directly engaged in G&G activities. G&G costs are
expected to continue at current or higher levels as FX Energy increases its
exploratory efforts in Poland and continues to spend a limited amount on its
exploratory acreage in the western United States.
Exploratory dry hole costs were $1,001,000, $17,000 and $3,478,000 for the
years ended December 31, 1999, 1998 and 1997, respectively. During 1999, FX
Energy participated in drilling three exploratory dry holes, the Witkow 1,
Siedliska 2 and the Andrychow 6 in Poland. The Witkow 1 and Siedliska 2 wells
were exploratory wells under the Apache Exploration Program. As such, Apache
covered all of FX Energy's pro-rata share of costs for the Witkow 1 and
Siedliska 2. FX Energy retained and paid for a five-percent interest in the
Andrychow 6, an exploratory dry hole on the Carpathian area of southern Poland,
which cost $99,000. On the Lachowice Farm-in, FX Energy plugged the Stryszawa
2K after spending $698,000 on an unsuccessful recompletion attempt and plans to
withdraw from the Lachowice Farm-in project after spending $171,000 testing the
Lachowice 7. Also, during 1999, FX Energy spent $33,000 associated with an
exploratory dry hole drilled during 1997. During 1998, FX Energy participated
in drilling two exploratory dry holes, the Czernic 277-2 and the Poniatowa 317-
1, in Poland on the Lublin Basin area. Both wells were plugged and abandoned
during the first quarter of 1999 and counted as exploratory wells under the
Apache Exploration Program. As such, Apache covered all of FX Energy's pro-rata
share of costs for each well. All of the exploratory dry hole costs recorded
during 1998 were associated with wells drilled prior to 1998. During 1997, FX
Energy drilled four exploratory dry holes; two in Poland and two in the western
United States. In Poland, FX Energy drilled the Orneta 1, the first exploratory
oil well drilled by a western company in Poland, at a cost of $1,834,000 and
the Gladysze 1A at a cost of $1,262,000, both of which were on FX Energy's
Baltic Project Area. In the western United States, FX Energy drilled 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.
Non-producing leasehold impairments were $93,000, and $152,000 for the
years ended December 31, 1999 and 1997. There were no non-producing leasehold
impairments during the year ended December 31, 1998. During 1999, FX Energy
wrote off $72,000 relating to the Lachowice Farm-in and $21,000 pertaining to
its Holt Camp Creek prospect in Nevada. During 1997, FX Energy 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 FX Energy no longer had drilling plans.
Non-producing leasehold impairments will 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.
Extraordinary Gain - Baltic Project Area
There were no extraordinary gains during the years ended December 31, 1999
and 1998, respectively, as compared to $3,076,000 for the year ended December
31, 1997. As of December 31, 1996, FX Energy had $1,500,000 of long-term debt
associated with advances received from RWE-DEA relating to RWE-DEA's commitment
to earn a fifty-percent interest in FX Energy's Baltic Project Area. During
1997, RWE-DEA advanced FX Energy an additional $1,576,000, bringing the total
amount of such advances to $3,076,000, all of which FX Energy recorded as notes
payable prior to the Polish government approving RWE-DEA's participation in FX
Energy's Baltic Project Area. On June 30, 1997, after the Polish government had
approved RWE-DEA's participation in the Baltic Project Area, RWE-DEA elected not
to earn an interest in FX Energy's Baltic Project Area. FX Energy was not
contractually obligated to repay any funds previously advanced by RWE-DEA.
Accordingly, FX Energy eliminated its long-term debt associated with the RWE-DEA
advances and recognized an extraordinary gain of $3,076,000 for the year ended
December 31, 1997.
DRILLING AND WELL SERVICING OPERATIONS
Drilling Revenues
Drilling revenues were $865,000, $323,000 and $496,000 for the years ended
December 31, 1999, 1998 and 1997, respectively. FX Energy's contract drilling
and well servicing operations generated a gross profit before DD&A of 25.8%,
25.6% and 33.7% during 1999, 1998 and 1997, respectively. During 1999, FX
Energy focused its drilling and well servicing equipment on third party contract
services in an effort to increase its domestic revenues rather than utilizing
its drilling and well servicing equipment on company-owned properties. During
1998, FX Energy's drilling revenues consisted of $262,000 from third party
contract drilling and well servicing work conducted in the third and fourth
quarters as FX Energy began to shift the primary focus of utilizing its drilling
and well servicing equipment from company-owned properties to third party
contract services. During 1997, FX Energy drilled two wells on a day work
contract basis resulting in revenues of $496,000 and a gross profit before DD&A
of $167,000. FX Energy retained a working interest in each of the two wells
drilled; a 27.69% in the Murray 12-30, a dry hole, and, a 6.25% in the State 31-
8, an oil discovery. The $167,000 gross operating profit before DD&A helped
offset the combined working interest cost of $242,000 that FX Energy incurred on
the two wells. Drilling revenues will continue to fluctuate year to year based
on the number, timing, retained working interest of wells drilled and the degree
of emphasis on utilizing drilling and well servicing equipment on FX Energy's
company-owned properties.
Drilling Costs
Drilling costs were $642,000, $240,000 and $329,000 for the years ended
December 31, 1999, 1998 and 1997, respectively. During 1999, 1998 and 1997,
drilling costs were 74.2%, 74.4% and 66.3% of drilling revenues, respectively.
Drilling costs are directly associated with drilling revenues. As such,
drilling costs will continue to fluctuate year to year based on revenues
generated, the number of wells drilled, timing and the degree of emphasis on
utilizing drilling and well servicing equipment on FX Energy's company-owned
properties.
DD&A Expense - Drilling and Well Servicing Operations
DD&A expenses for drilling and well servicing equipment were $334,000,
$322,000 and $289,000 for the years ended December 31, 1999, 1998 and 1997,
respectively. FX Energy spent $138,000, $156,000 and $210,000 on upgrading its
drilling and well servicing equipment during 1999, 1998 and 1997, respectively.
DD&A expense was progressively higher year to year due to prior year capital
additions being depreciated in succeeding years.
NON-SEGMENTED INFORMATION
DD&A Expense - Corporate
DD&A expenses for corporate activities were $110,000, $118,000 and $85,000
for the years ended December 31, 1999, 1998 and 1997, respectively. DD&A
expenses during 1999 were $8,000 less as compared to the same period of 1998,
primarily due to less capital additions during 1999 coupled with equipment
purchased during 1996 and 1997 becoming fully depreciated during 1999. FX
Energy spent $20,000, $85,000 and $205,000 during 1999, 1998 and 1997,
respectively, on software, hardware and office equipment utilized primarily for
corporate purposes.
G&A Costs
G&A costs were $2,962,000, $2,572,000 and $2,566,000 for the years ended
December 31, 1999, 1998 and 1997, respectively. During 1999, G&A costs were
$390,000 higher as compared to the same period of 1998 due to higher payroll and
other related costs associated with FX Energy's increasing emphasis expanding
on its Polish activities. G&A costs incurred during 1998 were substantially
unchanged as compared to 1997. G&A expenses are expected to continue at current
or higher levels as FX Energy further expands its presence in Poland.
Interest and Other Income
Interest and other income were $512,000, $506,000 and $662,000 for the
years ended December 31, 1999, 1998 and 1997, respectively. FX Energy's cash,
cash equivalent and marketable debt securities balance was $6,868,000,
$4,742,000 and $8,453,000 as of December 31, 1999, 1998 and 1997, respectively.
The average cash and marketable securities balances during 1999 were relatively
unchanged as compared to the same period of 1998. Interest and other income was
lower in 1998 as compared to 1997 due to lower average cash and marketable debt
security balances during 1998 as compared to the same period of 1997. FX Energy
earned interest income of $499,000, $492,000 and $616,000 during 1999, 1998 and
1997, respectively. Interest income associated with officers' notes receivable
was $134,000 and $64,000 during 1999 and 1998, respectively.
Interest Expense
Interest expense was $8,000 and $83,000 for the years ended December 31,
1999 and 1997, respectively. FX Energy had no interest expense for the year
ended December 31, 1998. During 1999, FX Energy incurred $8,000 of interest
expense primarily relating to the settlement of an audit by the Blackfeet Tribe
pertaining to the Cut Bank Field. During 1997, FX Energy incurred interest
expense of $83,000. FX Energy 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, all of which was recorded as
long-term debt. However, upon RWE-DEA's election not to earn an interest in the
Baltic Project Area on June 30, 1997, FX Energy eliminated its long-term debt
associated with RWE-DEA and recognized an extraordinary gain of $3,076,000. As
of December 31, 1999 and 1998, FX Energy had no long-term debt.
Officer Loan Impairment
As of December 31, 1999, notes receivable and accrued interest from officers,
before impairment, totaled $2,036,000, with a due date of on or before December
31, 2000 (as extended). The notes receivable and accrued interest are
collateralized by 233,340 shares of FX Energy's common stock. In accordance
with SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," FX Energy
recorded an impairment allowance of $666,000 as of December 31, 1999, based on
the value of the underlying collateral. The impairment allowance will be
adjusted quarterly based on the market value of the collateral shares.
Income Taxes
FX Energy incurred net operating losses after extraordinary gains of
$5,856,000, $10,122,000 and $3,620,000 for the years ended December 31, 1999,
1998 and 1997, respectively, 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. FX
Energy'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 FX Energy's exploration and development activities. The market and
capital risks associated with achieving the above requirement are considerable,
resulting in FX Energy's conclusion that a full valuation allowance be provided.
Accordingly, FX Energy did not recognize any tax benefit in its consolidated
statement of operations for the years ended December 31, 1999, 1998 or 1997.
Net Loss
FX Energy incurred net losses of $5,856,000, $10,122,000 and $3,620,000 for
the years ended December 31, 1999, 1998 and 1997, respectively. The net loss in
1999 was due principally to $3,054,000 of exploration costs, an officer loan
impairment of $666,000 and $2,962,000 of G&A costs. The net loss in 1998 was
due principally to a domestic proved property impairment of $5,885,000, G&G
costs of $2,109,000 and a 44.9% decline in oil prices coupled with a 9.0%
decline in oil production. The net loss in 1997 was due principally to G&G
costs of $1,684,000, an exploratory dry hole costing $1,262,000 drilled without
an outside partner and leasehold impairments of $152,000.
CAPITALIZED COSTS FOR UNPROVED OIL AND GAS PROPERTIES
FX Energy follows the successful efforts method of accounting for its oil
and gas properties. Under this method of accounting, all property acquisition
costs and costs of exploratory and development wells are capitalized when
incurred, pending determination of whether the well has found proved reserves.
If an exploratory well has not found proved reserves, these costs plus 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 not to be realizable. As of December 31, 1999, FX Energy
had unproved property costs of $1,383,000, including $691,000 in Poland and
$692,000 in the United States. 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 related fair value, determined on a property by property basis. As of
December 31, 1999, FX Energy had net proved property costs of $494,000 as
compared to a proved reserves PV-10 value of $5,460,000. As a result of the
foregoing, the results of operations of FX Energy for any particular period may
not be indicative of the results that could be expected over longer periods.
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.
- --------------------------------------------------------------------------------
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
- --------------------------------------------------------------------------------
Market Risk
FX Energy's major market risk exposure continues to be the price it
receives for oil produced from its domestic properties. Realized pricing is
primarily driven by the prevailing worldwide price of oil applicable to the
United States, subject to gravity and other adjustments for the actual oil sold.
Historically, oil prices have been volatile and unpredictable. Price volatility
is expected to continue. See "Item 1. and 2. Business and Properties: Risk
Factors - Volatility of Commodity Prices and Markets. "
FX Energy does not engage in any hedging activities to protect itself
against market risks associated with oil and gas price fluctuations, although it
may elect to do so if it achieves significant production in Poland.
Foreign Currency Risk
FX Energy has entered into various agreements in Poland, primarily in U.S.
Dollars or the U.S. Dollar equivalent of the Polish Zloty. FX Energy conducts
its day to day business on this basis as well. The Polish Zloty is subject to
exchange rate fluctuations that are beyond the control of FX Energy. The
exchange rates for the Polish Zloty were 4.14, 3.51 and 3.51 per U.S. dollar as
of December 31, 1999, 1998 and 1997, respectively.
FX Energy does not now and does not intend in the foreseeable future to
engage in hedging transactions to protect itself against currency risks
- --------------------------------------------------------------------------------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
The financial statements of FX Energy, including the accountant's report,
are included beginning at page F-1 immediately following the signature page of
this report.
- --------------------------------------------------------------------------------
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- --------------------------------------------------------------------------------
FX Energy and its auditors have not disagreed on any items of accounting
treatment or financial disclosure.
PART III
- --------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT
- --------------------------------------------------------------------------------
The information from the definitive proxy statement for the 2000 annual
meeting of stockholders under the caption "ELECTION OF DIRECTORS: Executive
Officers, Directors and Nominees" and "Compliance with Section 16(a) of the
Exchange Act" is incorporated herein by reference.
FX Energy is dependent upon Mr. David N. Pierce, President and Chief
Executive Officer, Mr. Andrew W. Pierce, Vice President and Chief Operating
Officer, and other key personnel for its various activities. In addition, with
respect to its activities in Poland, FX Energy is dependent on Mr. Jerzy B.
Maciolek, Vice President of International Exploration, a Polish national who is
instrumental in assisting FX Energy in its operations in Poland. The loss of the
services of any of these individuals may materially and adversely affect FX
Energy. FX Energy has entered into employment agreements with Mr. David N.
Pierce, Mr. Andrew W. Pierce and Mr. Maciolek. FX Energy does not maintain key
man insurance on any of its employees.
- --------------------------------------------------------------------------------
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------------------------------------------------------
The information from the definitive proxy statement for the 2000 annual
meeting of stockholders under the caption "ELECTION OF DIRECTORS: Executive
Compensation" is incorporated herein by reference.
- --------------------------------------------------------------------------------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- --------------------------------------------------------------------------------
The information from the definitive proxy statement for the 2000 annual
meeting of stockholders under the caption "ELECTION OF DIRECTORS: Security
Ownership of Certain Beneficial Owners and Management" is incorporated herein by
reference.
As of December 31, 1999, FX Energy had issued and outstanding warrants and
options to purchase an aggregate of up to 4,167,073 shares of common stock at
exercise prices ranging from $1.50 to $10.25 per share, with a weighted average
exercise price of $5.24 per share. Of those warrants and options, 3,122,200
shares of common stock are issuable on the exercise of options held by officers
and directors of FX Energy at exercise prices ranging from $1.50 to $10.25 per
share, with a weighted average exercise price of $4.96 per share, including
options to purchase 710,063 shares that are not fully vested. The existence of
such warrants and options may prove to be a hindrance to future financing by FX
Energy, 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 FX Energy would otherwise be able
to obtain additional equity capital on terms more favorable to FX Energy.
- --------------------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------------------------------
The information from the definitive proxy statement for the 2000 annual
meeting of stockholders under the caption "ELECTION OF DIRECTORS: Certain
Relationships and Related Transactions" is incorporated herein by reference.
<PAGE>
PART IV
- --------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT OR INCORPORATED
HEREIN BY REFERENCE.
1. FINANCIAL STATEMENTS. See Consolidated Financial Statements beginning
at page F-1.
2. SUPPLEMENTAL SCHEDULE. The Financial Statement schedules are omitted
because they are not applicable or the required information is
otherwise included in the accompanying Financial Statements and the
notes thereto.
3. 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
- --------------------------------------------------------------
3.1 3 Restated and Amended Articles of Incorporated by
Incorporation Reference(11)
3.2 3 Bylaws Incorporated by
Reference(1)
ITEM 4. INSTRUMENTS DEFINING THE RIGHTS OF
SECURITY HOLDERS
- --------------------------------------------------------------
4.1 4 Specimen Stock Certificate Incorporated by
Reference(1)
4.2 4 Form of Designation of Rights, Incorporated by
Privileges, and Preferences of Series A Reference(14)
Preferred Stock
4.3 4 Form of Rights Agreement dated as of April Incorporated by
4, 1997, between FX Energy and Fidelity Reference(14)
Transfer Corp.
ITEM MATERIAL CONTRACTS
10.
- --------------------------------------------------------------
10.1 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)
10.2 10 Amendment No. 1 to Mining Usufruct Incorporated by
Agreement dated August 15, 1996 (Baltic) Reference(4)
10.3 10 Amendment No. 2 to Mining Usufruct Incorporated by
Agreement dated August 22, 1996 (Baltic) Reference (15)
10.4 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
10.5 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)
10.6 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)
10.7 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)
10.8 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 319,
320, 339, 340, 340A, 359, 360, 360A,
379, 380, and 380A (Lublin)
10.9 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)
10.10 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)
10.11 10 Option Agreement dated July 18, 1997, Incorporated by
between Polish Oil and Gas Company, FX Reference(12)
10.12 10 Energy, and Apache Overseas, Inc.
Participation Agreement dated effective Incorporated by
as of April 16, 1997, between Apache Reference(13)
Overseas, Inc., and FX Energy,
pertaining to the Lublin Concessions
10.13 10 Letter Agreement dated February 27, Incorporated by
1998, between FX Energy and Apache Reference (15)
Overseas, Inc., regarding modification
to all agreements for acreage in Poland
under established area of mutual
interest.
10.14 10 Participation Agreement dated effective Incorporated by
February 27, 1998, between FX Energy and Reference (15)
Apache Overseas, Inc., pertaining to the
Western Carpathian Concession
10.15 10 Participation Option Agreement dated Incorporated by
effective February 27, 1998, between FX Reference (15)
Energy and Apache Overseas, Inc.,
pertaining to the Pomeranian Concession
10.16 10 Prospect Agreement between Apache Poland Incorporated by
Sp. z o.o., and FX Energy Poland Sp. z Reference (18)
o.o., dated April 17, 1998.
10.17 10 Option Agreement dated effective as of Incorporated by
February 2, 1998, between POGC, FX Reference (15)
Energy, Inc., and Apache Overseas, Inc.,
pertaining to the Western Carpathian
Concessions
10.18 10 Option Agreement dated March 5, 1998, Incorporated by
effective as of April 16, 1997, between Reference (17)
FX Energy, Inc., Apache Overseas, Inc.,
and POGC, relating to FX Energy's
Carpathian Area Concessions.
10.19 10 Option Agreement between FX Energy Incorporated by
Poland Sp. z o.o., and POGC dated Reference (19)
effective May 20, 1998, relating to
Pomeranian Concessions
10.20 10 Agreement dated October 21, 1996, Incorporated by
between Sudety Mining Company Sp. z o.o. Reference (9)
and the State Treasury of the Republic
of Poland, for the establishment of the
mining usufruct for the purpose of gold
exploration in the Sudety Concessions
10.21 10 Earn-In and Exploration Letter of Intent Incorporated by
dated June 13, 1997, between FX Energy Reference (12)
and Homestake Mining Company of
California
10.22 10 Form of Mining Usufruct Agreement Incorporated by
between the State Treasury of the Reference (15)
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.
10.23 10 Earn-in, Exploration, and Joint Venture Incorporated by
Agreement between Homestake Mining Reference (15)
Company of California and FX Energy
effective December 31, 1997, regarding
exploration for precious metals in the
Republic of Poland (Sudety)
10.24 10 Agreement between Apache Overseas, Inc., Incorporated by
and FX Energy dated effective January 1, Reference (20)
1999, pertaining to oil and gas
operations in Poland
10.25 10 Agreement on Cooperation in the Incorporated by
Lachowice Area between POGC, Apache Reference (20)
Overseas, Inc., Apache Poland, Sp. Z
o.o., FX Energy, Inc., and FX Energy
Poland Sp. Z o.o., dated February 26,
1999
10.26 10 Frontier Oil Exploration Company 1995 Incorporated by
Stock Option and Award Plan* Reference(4)
10.27 10 Form of FX Energy, Inc., 1996 Stock Incorporated by
Option and Award Plan* Reference(10)
10.28 10 Form of FX Energy, Inc., 1997 Stock Incorporated by
Option and Award Plan* Reference (20)
10.29 10 Form of FX Energy, Inc., 1998 Stock Incorporated by
Option and Award Plan* Reference (20)
10.30 10 Employment Agreements between FX Energy Incorporated by
and each of David Pierce and Andrew Reference(1)
Pierce, effective January 1, 1995*
10.31 10 Amendments to Employment Agreements Incorporated by
between FX Energy and each of David Reference(8)
Pierce and Andrew Pierce, effective May
30, 1996*
10.32 10 Form of Stock Option with related Incorporated by
schedule (D. Pierce and A. Pierce) * Reference(1)
10.33 10 Form of Stock Option granted to D. Incorporated by
Pierce and A. Pierce* Reference(1)
10.34 10 Form of Non-Qualified Stock Option with Incorporated by
related schedule* Reference(4)
10.35 10 Letter Agreement dated effective August Incorporated by
3 , 1995, between Lovejoy Associates, Reference(4)
Inc., and FX Energy re: Financial
Consulting Engagement*
10.36 10 Letter Agreement dated effective August Incorporated by
3, 1995, between Lovejoy Associates, Reference(4)
Inc., and FX Energy re: Indemnification
10.37 10 Non-Qualified Stock Option granted to Incorporated by
Thomas B. Lovejoy* Reference(4)
10.38 10 Letter Agreement dated effective Incorporated by
December 31, 1997, between FX Energy and Reference (15)
Lovejoy Associates, Inc., re: Extension
of Consulting Engagement*
10.39 10 Employment Agreement between FX Energy Incorporated by
and Jerzy B. Maciolek* Reference(8)
10.40 10 Addendum to Employment Agreement between Incorporated by
FX Energy and Jerzy B. Maciolek* Reference (15)
10.41 10 Second Addendum to Employment Agreement Incorporated by
between FX Energy and Jerzy B. Maciolek* Reference (15)
10.42 10 Employment Agreement between FX Energy Incorporated by
and Scott J. Duncan* Reference (15)
10.43 10 Form of Indemnification Agreement Incorporated by
between FX Energy and certain directors, Reference(10)
with related schedule*
10.44 10 Form of Option granted to executive Incorporated by
officers and directors, with related Reference(10)
schedule*
10.45 10 Memorandum of Understanding regarding Incorporated by
officer loans (reformed June 19, 1998) Reference (16)
10.46 10 Limited Recourse Promissory Note of Incorporated by
David N. Pierce in the amount of Reference (16)
$950,954 (reformed June 19, 1998)
10.47 10 Pledge and Security Agreement between FX Incorporated by
Energy, Inc. and David N. Pierce Reference (16)
(reformed June 19, 1998)
10.48 10 Agreement to Hold Collateral between FX Incorporated by
Energy, Inc. and David N. Pierce and Reference (16)
Kruse, Landa & Maycock as agent to hold
collateral (reformed June 19, 1998)
10.49 10 Limited Recourse Promissory Note of Incorporated by
Andrew W. Pierce in the amount of Reference (16)
$769,924 (reformed June 19, 1998)
10.50 10 Pledge and Security Agreement between FX Incorporated by
Energy, Inc. and Andrew W. Pierce Reference (16)
(reformed June 19, 1998)
10.51 10 Agreement to Hold Collateral between FX Incorporated by
Energy, Inc. and Andrew W. Pierce and Reference (16)
Kruse, Landa & Maycock as agent to hold
collateral (reformed June 19, 1998)
10.52 10 Form of Indemnification Agreement between This filing
FX Energy and certain directors, with
related schedule
ITEM 21 SUBSIDIARIES OF THE REGISTRANT
- --------------------------------------------------------------
21.1 Schedule of Subsidiaries Incorporated by
Reference (15)
ITEM 23 CONSENTS OF EXPERTS AND COUNSEL
- --------------------------------------------------------------
23.1 23 Consent of PricewaterhouseCoopers LLP, This Filing
independent accountants
23.2 23 Consent of Larry D. Krause, Petroleum This Filing
Engineer
ITEM 27 FINANCIAL DATA SCHEDULE
- --------------------------------------------------------------
27.1 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-QSB 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.
(15) Incorporated by reference from the annual report on Form 10-KSB for the
year ended December 31, 1997.
(16) Incorporated by reference from the annual report on Form 10-Q for the
quarter ended March 31, 1998, as amended on Form 10-Q/A filed July 15,
1998.
(17) Incorporated by reference from the report on Form 8-K dated March 23, 1998.
(18) Incorporated by reference from the report on Form 8-K dated April 20, 1998.
(19) Incorporated by reference from the report on Form 8-K dated June 2, 1998.
(20) Incorporated by reference from the annual report on Form 10-K for the year
ended December 31, 1999.
(b) REPORTS ON FORM 8-K.
During the quarter ended December 31, 1999, FX Energy filed the following
report on Form 8-K:
DATE OF EVENT REPORTED ITEM(S) REPORTED
---------------------- --------------------
December 31, 1999 Item 5. Other Events
November 12, 1999 Item 5. Other Events
- --------------------------------------------------------------------------------
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: February 15, 2000. FX ENERGY, INC. (Registrant)
/s/ David N. Pierce
--------------------------------------
David N. Pierce, President and
Chief Executive Officer
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: February 15, 2000
/s/ David N. Pierce
- ---------------------------------
David N. Pierce, Director and
President
(Principal Executive and
Financial Officer)
/s/ Andrew W. Pierce
- ---------------------------------
Andrew W. Pierce, Director, Vice
President (Principal Operations
Officer)
/s/ Jerzy B. Maciolek
- ---------------------------------
Jerzy B. Maciolek, Vice
President International
Exploration and Director
/s/ Thomas B. Lovejoy
- ---------------------------------
Thomas B. Lovejoy, Director,
Chief Financial Officer and Vice
Chairman
/s/ Scott J. Duncan
- ---------------------------------
Scott J. Duncan, Director, Vice
President Investor Relations and
Secretary
/s/ Dennis L. Tatum
- ---------------------------------
Dennis L. Tatum, Director, Vice
President and Treasurer
(Principal Accounting Officer)
/s/ Peter L. Raven
- ---------------------------------
Peter L. Raven, Director
/s/ Jay W. Decker
- ---------------------------------
Jay W. Decker, Director
/s/ Dennis B. Goldstein
- ---------------------------------
Dennis B. Goldstein, Director
<PAGE>
PricewaterhouseCoopers
Report of Independent Accountants
To the Stockholders and Board of Directors
of FX Energy, Inc., and Subsidiaries:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, cash flows, and stockholders' equity
present fairly, in all material respects, the consolidated financial position of
FX Energy, Inc., and Subsidiaries (the "Company") as of December 31, 1999 and
1998, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States. 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 of these statements in accordance with
auditing standards generally accepted in the United States which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Salt Lake City, Utah
February 8, 2000
<PAGE>
FX ENERGY, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 1999 and 1998
1999 1998
------------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 1,619,237 $ 1,811,780
Investment in marketable debt securities 5,249,003 2,929,914
Receivables:
Accrued oil sales 243,183 95,064
Joint interest and other receivables 171,242 240,102
Interest receivable 86,723 86,258
Inventory 66,361 68,327
Other current assets 126,006 66,053
------------- -----------
Total current assets 7,561,755 5,297,498
------------- -----------
Property and equipment, at cost:
Oil and gas properties (successful efforts
method):
Proved 1,687,089 1,605,279
Unproved 1,382,880 1,178,408
Other property and equipment 2,652,102 2,494,688
------------- -----------
Gross property and equipment 5,722,071 5,278,375
Less accumulated depreciation, depletion
and amortization (3,173,493) (2,679,441)
------------- -----------
Net property and equipment 2,548,578 2,598,934
------------- -----------
Other assets:
Certificates of deposit 356,500 356,500
Deposits 2,789 --
------------- -----------
Total other assets 359,289 356,500
------------- -----------
Total assets $ 10,469,622 $ 8,252,932
============= ===========
-Continued-
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE>
FX ENERGY, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
As of December 31, 1999 and 1998
1999 1998
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 623,911 $ 420,906
Accrued liabilities 1,478,862 911,950
----------- -----------
Total current liabilities 2,102,773 1,332,856
----------- -----------
Commitments (Notes 2 and 11)
Stockholders' equity:
Preferred stock, $.001 par value, 5,000,000 shares
authorized; 1999 and 1998: no shares outstanding -- --
Common stock, $.001 par value, 30,000,000 shares
authorized;
1999: 14,849,003 shares issued and outstanding;
1998: 13,054,503 shares issued and outstanding 14,849 13,055
Notes receivable from officers (1,370,873) (1,304,527)
Additional paid-in capital 38,480,556 31,112,861
Accumulated deficit (28,757,683) (22,901,313)
----------- -----------
Total stockholders' equity 8,366,849 6,920,076
----------- -----------
Total liabilities and stockholders' equity $10,469,622 $ 8,252,932
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
FX ENERGY, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1999, 1998 and 1997
1999 1998 1997
------------ ----------- ----------
<S> <C> <C> <C>
Revenues:
Oil sales $ 1,554,474 $ 1,123,511 $2,040,233
Drilling revenue 864,689 322,769 496,158
Gain on sale of property interests -- 466,891 272,234
------------ ----------- ----------
Total revenues 2,419,163 1,913,171 2,808,625
------------ ----------- ----------
<S>
Operating costs and expenses: <C> <C> <C>
Lease operating costs 899,258 966,732 1,094,043
Production taxes 63,141 79,602 145,372
Geological and geophysical costs 1,959,422 2,109,375 1,683,753
Exploratory dry hole costs 1,001,433 17,422 3,478,456
Impairments 92,605 5,885,042 152,105
Drilling costs 641,871 240,061 328,820
Depreciation, depletion and amortization 494,052 671,277 634,559
General and administrative 2,961,878 2,572,212 2,565,690
------------ ----------- ----------
Total operating costs and expenses 8,113,660 12,541,723 10,082,798
------------ ----------- ----------
Operating loss (5,694,497) (10,628,552) (7,274,173)
------------ ----------- ----------
Other income (expense):
Interest and other income 511,636 506,209 661,665
Interest expense (7,997) -- (83,273)
Impairment of notes receivable from
officers (665,512) -- --
------------ ----------- ----------
Total other income (expense) (161,873) 506,209 578,392
------------ ----------- ----------
Net loss before extraordinary gain (5,856,370) (10,122,343) (6,695,781)
Extraordinary gain (Note 2) -- -- 3,076,242
------------ ----------- ----------
Net loss (5,856,370) (10,122,343) (3,619,539)
============ =========== ==========
Basic and diluted net loss per share:
Net loss before extraordinary gain $ (0.41) $ (0.78) $ (0.53)
Extraordinary gain -- -- 0.24
Net Loss $ (0.41) $ (0.78) $ (0.29)
Basic and diluted weighted average number of ------------ ----------- ----------
shares outstanding 14,198,724 12,978,900 12,596,977
============ =========== ==========
</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, 1999, 1998 and 1997
1999 1998 1997
<S> ------------ ------------ ------------
Cash flows from operating activities: <C> <C> <C>
Net loss $ (5,856,370) $(10,122,343) $ (3,619,539)
Adjustments to reconcile net loss to net cash
used in operating activities:
Extraordinary gain -- -- (3,076,242)
Depreciation, depletion and amortization 494,052 671,277 634,559
Impairments 92,605 5,885,042 28,515
Gain on sale of property interests -- (466,891) (272,234)
Exploratory dry hole costs 240,132 -- 210,205
Common stock and options issued for services 302,687 119,375 70,625
Accrued interest income from officer loans (134,295) (64,170) --
Impairment of notes receivable from officers 665,512 -- --
Increase (decrease) from changes in:
Receivables (100,044) 260,024 (147,678)
Inventory 1,966 (945) (47,166)
Other current assets (59,953) 20,960 (19,530)
Accounts payable and accrued liabilities 608,285 588,908 357,752
------------ ------------ ------------
Net cash used in operating activities (3,745,423) (3,108,763) (5,880,733)
------------ ------------ ------------
<S>
Cash flows from investing activities: <C> <C> <C>
Additions to oil and gas properties (463,387) (179,765) (1,136,935)
Additions to other property and equipment (137,094) (260,877) (394,291)
Net change in other assets (2,789) -- 25,000
Proceeds from sale of property interests 6,000 506,000 340,152
Proceeds from sale of equipment -- 6,928 13,051
Employee advances -- -- (15,000)
Purchase of marketable debt securities (6,617,089) (6,578,332) (3,940,582)
Proceeds from maturities of marketable debt
securities 4,298,000 7,589,000 5,476,574
------------ ------------ ------------
Net cash provided by (used) in investing
activities (2,916,359) 1,082,954 367,969
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt -- -- 1,575,992
Notes receivable from officers (597,563) (840,357) (150,000)
Proceeds from issuance of common stock,
options and warrants, net of offering
costs 7,066,802 166,027 252,777
------------ ------------ ------------
Net cash provided by (used in) financing
activities 6,469,239 (674,330) 1,678,769
------------ ------------ ------------
Increase (decrease) in cash (192,543) (2,700,139) (3,833,995)
Cash and cash equivalents at beginning of
year 1,811,780 4,511,919 8,345,914
------------ ------------ ------------
Cash and cash equivalents at end of year $ 1,619,237 $ 1,811,780 $ 4,511,919
============ ============ ============
</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, 1999, 1998 and 1997
Common Stock
------------------- Officers'
Par Paid-in Notes Accumulated
Shares Value Capital Receivable Deficit Total
<S> ---------- ------- ----------- ------------ ------------ ------------
<C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 12,492,547 $12,492 $30,054,620 $ -- $(9,159,431) $ 20,907,681
Exercise of warrants and options 159,334 160 252,617 -- -- 252,777
Common stock issued for services 10,000 10 70,615 -- -- 70,625
Net loss -- -- -- -- (3,619,539) (3,619,539)
---------- ------- ----------- ------------ ------------ ------------
Balance at December 31, 1997 12,661,881 12,662 30,377,852 -- 12,778,970) 17,611,544
Exercise of warrants and options 382,622 383 615,644 -- -- 616,027
Common stock issued for services 10,000 10 119,365 -- -- 119,375
Officers' notes - principal -- -- -- (1,240,357) -- (1,240,357)
Officers' notes - interest -- -- -- (64,170) -- (64,170)
Net loss -- -- -- -- (10,122,343) (10,122,343)
---------- ------- ----------- ------------ ------------ ------------
Balance at December 31, 1998 13,054,503 13,055 31,112,861 (1,304,527) (22,901,313) 6,920,076
Exercise of warrants and options 2,000 2 13,248 -- -- 13,250
Sale of common stock 1,792,500 1,792 7,168,208 -- -- 7,170,000
Common stock placement costs -- -- (116,448) -- -- (116,448)
Officers' notes - principal -- -- -- (597,563) -- (597,563)
Officers' notes - interest -- -- -- (134,295) -- (134,295)
Officers' notes - impairment -- -- -- 665,512 -- 665,512
Options issued for services -- -- 302,687 -- -- 302,687
Net loss -- -- -- -- (5,856,370) (5,856,370)
---------- ------- ----------- ------------ ------------ ------------
Balance at December 31, 1999 14,849,003 $14,849 $38,480,556 $(1,370,873) $(28,757,683) $ 8,366,849
========== ======= =========== ============ ============ ============
</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 Poland and the United States. In Poland, the Company is
engaged in oil and gas exploration, appraisal, development and property
acquisition activities. In the United States, the Company is engaged in
producing, exploring and developing oil and gas properties 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 and the Company's undivided interests in
Poland. All significant inter-company accounts and transactions have been
eliminated in consolidation. At December 31, 1999, 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 field-by-field basis, are not considered to be
realizable. Depletion, depreciation and amortization ("DD&A") of
capitalized costs of proved oil and gas properties is provided on a field-
by-field basis using the units-of-production method. The computation of
DD&A takes into consideration restoration, dismantlement and abandonment
costs and the anticipated proceeds from equipment salvage. The estimated
restoration, dismantlement and abandonment costs are expected to be offset
by the estimated residual value of lease and well equipment.
An impairment loss is recorded if the net capitalized costs of proved oil
and gas properties exceed the aggregate undiscounted future net revenues
determined on a field-by-field basis. The impairment loss recognized
equals the excess of net capitalized costs over the related fair value
determined on a property by property basis. (Note 14)
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 (gross) is summarized as follows:
December 31, Estimated
------------------------- Useful Life
1999 1998 (in years)
----------- ----------- -----------
Other Property and Equipment: (In thousands)
Drilling and well servicing
equipment $ 1,906 $ 1,771 6
Trucks 190 188 5
Building 80 80 40
Office Equipment 476 456 3 to 6
----------- -----------
Total $ 2,652 $ 2,495
=========== ===========
Concentration of Credit Risk
The majority of the Company's receivables are within the oil and gas
industry, primarily from the purchasers of its oil (Note 12) and its
industry partners. The receivables are not collateralized. To date, the
Company has experienced minimal bad debts. The majority of the Company's
cash and cash equivalents is held by three financial institutions in Utah,
Montana and New York.
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,
---------------------------------
1999 1998 1997
---------- --------- ---------
Non-cash transactions: (In thousands)
Bonus applied to stock option exercise $ -- $ 200 $ --
by officers
Recourse notes receivable from officers
due to stock option exercise -- 250 --
Reclassification of notes receivable -- 150 --
from officers
Additions to oil and gas properties
financed with accrued 63 -- --
iabilities
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Interest $ 8 $ -- $ 534
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 1998 and 1997 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.
Foreign Operations
The Company's investments and operations in Poland are comprised of U.S.
Dollar expenditures.
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.
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. Outstanding
options and warrants as of December 31, 1999, 1998 and 1997 were as
follows:
Options and
December 31, Warrants Price Range
------------ ----------- --------------
1999 4,167,073 $1.50 - $10.25
1998 3,684,239 $1.50 - $10.25
1997 3,707,694 $1.10 - $10.25
The Company had a net loss in 1999, 1998 and 1997. The above options or
warrants were not included in the computation of diluted earnings per share
for the years ended December 31, 1999, 1998 or 1997 because the effect
would have been antidilutive.
2. Investment in Poland:
Apache Exploration Program
Effective January 1, 1999, the Company and Apache Corporation ("Apache")
entered into an agreement which further defined the relationship between
the Company and Apache in Poland by establishing an Area of Mutual Interest
Agreement ("AMI Agreement") covering the entire country of Poland, except
for the 0.9 million acre Baltic Project Area, for oil and gas exploration,
production, development and acquisition activities for a period of two
years. The AMI Agreement effectively consolidated the terms of various
agreements signed between the Company and Apache during 1997, 1998 and 1999
into one basic agreement, referred to collectively as the Apache
Exploration Program.
Under terms of the Apache Exploration Program, Apache has either agreed to
or completed the following primary terms:
o Apache paid the Company $950,000 in up-front cash, including $450,000
during 1997 for the Lublin Basin and $500,000 during 1998 for the
Carpathian area;
o Apache must cover the Company's pro-rata share of cost to drill ten
exploratory wells, including paying for drilling and completion costs
for seven wells in the Lublin Basin and drilling costs (excluding
completion costs) for three wells in the Carpathian area;
o Apache must cover the Company's pro-rata share of cost to shoot 2,000
kilometers of 2D seismic; including 1,650 kilometers of 2D seismic in
the Lublin Basin completed during 1998 and 350 kilometers in the
Carpathian area that has yet to be completed;
o Apache must cover all of the Company's pro-rata share of all
concession and usufruct fees during the first three years in the
Lublin Basin (approximately $695,000) and the Carpathian area
(approximately $160,000);
o Apache must cover all of the Company's pro-rata share of annual
training costs during the first three years in the Lublin Basin
($80,000 per year) and the Carpathian area ($15,000 per year); and
o Apache may not charge the Company for any of its pro-rata share of
Polish G&A costs through June 30, 2000. Thereafter, Apache may charge
the Company for 25% of its Polish G&A costs, increased by 5% upon the
drilling of each of the five remaining exploratory wells; up to a
maximum of 50%.
The AMI Agreement modified and further defined the Apache Exploration
Program by adding the following additional terms:
o The Company and Apache must offer each other a fifty-percent interest
in any new exploration, appraisal, development, property acquisition
or other activities conducted by either party within the AMI during
all of 1999 and 2000.
o The ten exploratory wells under the Apache Exploration Program may, at
the consent of both parties, be drilled anywhere within the AMI.
o The Company and Apache have equal 50% working interests in the
Pomeranian and Warsaw West areas.
o Apache is the operator of all areas controlled by the Company and
Apache within the AMI.
Option Agreements between the Company, Apache and POGC
As a result of various agreements included within the Apache Exploration
Program between the Company, Apache and POGC, the Company and Apache's
working interest in the Lublin Basin, Carpathian and Pomeranian areas is
subject to being reduced by POGC's option to participate for up to a one-
third working interest on a block by block basis in each respective area.
In turn, the Company and Apache each have an independent reciprocal right
to participate in the exploration of the POGC controlled areas in each of
the respective project areas with up to a one-third working interest each.
Should POGC elect to participate in any of the Company's concessions, the
Company's and Apache's interest will be reduced in equal proportions. The
Company does not have any option agreements with POGC covering Warsaw West
or the Baltic Project Area.
Exploration Activities
The first four exploratory wells drilled under terms of the Apache
Exploration Program were all determined to be exploratory dry holes during
1999. In accordance with terms of the Apache Exploration Program, Apache
covered all of the Company's working interest share of costs for all four
wells, including 33.3% for the Czernic 277-2, 47.5% for the Poniatowa 317-
1, 45.0% for the Witkow 1 and 33.3% for the Siedliska 2. The fifth well,
the Wilga 2, was announced to be an exploratory success on January 25, 2000
after initial production test results indicated a combined flow rate of
16.9 Mmcf of gas and 570 Bbls of condensate per day from three intervals in
a Carboniferous horizon. Under terms of the Apache Exploration Program,
Apache will cover all of the Company's 45.0% drilling and completion costs
for the Wilga 2. (Note 16)
During June 1999, the Company elected to participate with a 5.0% working
interest in drilling the Andrychow 6, an exploratory well operated by POGC
on POGC option acreage in southern Poland. The well cost approximately
$99,000 net to the Company and was determined to be an exploratory dry hole
during December 1999.
Appraisal and Development Activities
On February 26, 1999, The Company, Apache and POGC entered into an
agreement to jointly develop the Lachowice Farm-in, a shut-in POGC gas
discovery with three wells in the Carpathian area, with Apache as operator.
Under terms of the agreement, The Company and Apache agreed to 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) if
warranted, drill three additional wells; and, (3) if warranted, construct
gathering and processing facilities. All costs and net revenues
thereafter, including additional development drilling and lease operating
costs, would be shared one-third each by the Company, Apache and POGC.
During June 1999, the Company and Apache commenced testing and recompletion
procedures on the Stryszawa 2K. The Stryszawa 2K was subsequently plugged
and abandoned after it failed to maintain a commercial production rate.
During September 1999, the Company and Apache tested the Lachowice 7 to
determine its commercial potential. The test results of the Lachowice 7
did not warrant constructing gathering and processing facilities. The
Company and Apache plan to turn the Lachowice 7 back to POGC and terminate
the Lachowice Farm-in.
Baltic Project Area
On May 3, 1996, the Company entered into a agreement with RWE-DEA, formerly
Deutsche Texaco, to jointly explore the Baltic Project Area. Under terms
of the Agreement, RWE-DEA had the right to earn a fifty-percent interest in
the Baltic Project Area by paying the Company $250,000 in cash, paying the
first $1,100,000 for a 2D seismic survey, the first $1,000,000 of cost
relating to the initial exploratory well to be drilled at a location to be
designated by RWE-DEA and fifty-percent of the cost relating to the second
exploratory well at a location designated by the Company. Polish
government approval was required to approve RWE-DEA's participation in the
Baltic Project Area by purchasing fifty-percent of Warmia Petroleum
Company, Sp z o.o. ("Warmia"), a wholly owned subsidiary of the Company
which holds the Baltic Project Area. The Company obtained a $2.5 million
Irrevocable Standby Letter of Credit whereby the Company agreed to refund
RWE-DEA all advanced funds should the Polish government disapprove RWE-
DEA's purchase of fifty-percent of Warmia. The Irrevocable Standby Letter
of Credit expired on January 31, 1997 and the Polish government approved
RWE-DEA's purchase of fifty-percent of Warmia in June 1997. RWE-DEA had
advanced Warmia $3,076,000 through June 30, 1997 to fund exploration
activity on the Baltic Project Area, which the Company had recorded as a
long-term note payable.
Prior to drilling the second well on the Baltic Project Area, RWE-DEA had
advanced the Company all funds required to date under the Agreement,
including funding the first $1,000,000 of costs relating to the Orneta #1,
the initial exploratory well drilled on the Baltic Project Area which was
plugged and abandoned as a dry hole in April 1997 at a gross cost of
$1,834,000. On June 30, 1997, RWE-DEA elected to not fund its fifty-
percent share of the Gladysze #1-A, the second exploratory well drilled on
the Baltic Project Area, which resulted in the termination of RWE-DEA's
right to earn a fifty-percent interest in the Baltic Project Area. The
Gladysze #1-A was drilled without RWE-DEA as a participant and was
subsequently plugged and abandoned as a dry hole in September 1997 at a
gross cost of $1,262,000. Upon termination of RWE-DEA's right to earn a
fifty-percent interest in the Baltic Project Area, the Company eliminated
its long-term notes payable relating to RWE-DEA and recognized an
extraordinary gain of $3,076,000.
During March 1999, the Company relinquished approximately 1.2 million acres
within the Baltic Project Area, leaving a total of approximately 0.9
million undeveloped acres in the Baltic Project Area. The Polish
government also consented to apply 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, the Company has
satisfied all work commitments applicable to the Baltic Project Area's six-
year exploration phase. The Company's Baltic Project Area is the only
acreage holding in Poland in which the Company has an interest that
contains mandatory acreage relinquishment provisions.
At December 31, 1999, the Company had $494,000 of capitalized leasehold
costs related to the Baltic Project Area. The Company is currently seeking
a strategic partner to participate in further exploration of the Baltic
Project Area.
Gold Exploration - Sudety Project Area
On July 26, 1999, Homestake terminated its agreement with the Company to
jointly explore for gold on the Company's Sudety Project Area in
southwestern Poland. During 1997, Homestake initially paid the Company
$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. The Company
has discontinued further gold exploration in the Sudety Project Area.
3. Performance Bond Deposits:
As of December 31, 1999, the Company had a replacement bond to a federal
agency in the amount of $463,000, which was collateralized by certificate
of deposits totaling $231,500. In addition, there are certificates of
deposits totaling $125,000 covering performance bonds in other states.
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, 1999, the
Company's held-to-maturity securities consisted of corporate bonds with
remaining contractual maturities of less than twelve months and the
carrying amount of these investments approximated market value.
5. Accrued Liabilities:
The Company's accrued liabilities as of December 31, 1999 and 1998 are
composed of the following:
As of December 31,
-------------------------
1999 1998
---------- ----------
Accrued Liabilities: (In thousands)
Compensation costs $ 1,185 $ 699
Unproved property additions 63 --
Exploratory dry hole costs 99 --
Seismic costs 28 131
Other costs 104 82
---------- ----------
Total $ 1,479 $ 912
========== ==========
6. Long-term Debt:
During 1998, the Company had a bank credit facility with a borrowing base
of $2,850,000 as of January 1, 1998. The borrowing base was subject to a
monthly basis reduction of $25,000. The Company did not utilize the credit
facility and subsequently terminated the credit facility during the year
ended December 31, 1998.
7. Income Taxes:
The Company recognized no income tax benefit from the losses generated
during the years ended December 31, 1999, 1998 and 1997.
The components of the net deferred tax asset as of December 31, 1999 and
1998 are as follows:
December 31,
-------------------------
1999 1998
----------- ----------
(In thousands)
Deferred tax liability:
Property and equipment basis
differences $ (104) $ (962)
Deferred tax asset:
Net operating loss carryforwards 11,180 9,437
Impairment of oil and gas properties 1,218 2,196
Impairment of notes receivable from
officers 248 --
Options issued for services 113 --
Other 193 14
Valuation allowance (12,848) (10,685)
----------- ----------
Net deferred tax asset $ -- $ --
=========== ==========
The change in the valuation allowance during the years ended December 31,
1999, 1998 and 1997 is as follows:
December 31,
-----------------------------------
1999 1998 1997
---------- ---------- ---------
(In thousands)
Balance, beginning of year $ (10,685) $ (6,131) $ (3,868)
Increase due to property and
equipment basis differences 4 22 24
Decrease (increase) due to
impairment of oil and gas properties -- (2,196) --
Decrease due to investment in Warmia -- -- 661
Increase due to net operating loss (1,989) (2,444) (2,876)
Other (178) 64 (72)
---------- ---------- ---------
Balance, end of year . $ (12,848) $ (10,685) $ (6,131)
========== ========== =========
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 risks associated with that growth requirement are
considerable, resulting in the Company's conclusion that a full valuation
allowance be provided at December 31, 1999 and 1998.
At December 31, 1999, the Company had net operating loss ("NOL")
carryforwards, including foreign losses, of approximately $30,000,000
available to offset future taxable income, of which approximately
$18,749,000 expires from 2008 through 2012 and $11,251,000 expires
subsequent to 2017. The utilization of these carryforwards against future
taxable income may become subject to an annual limitation if there is a
change in ownership. $6,168,000 of the NOL carryforward relates to tax
deductions resulting from the exercise of stock options during 1999, 1998
and 1997. The tax benefit from adjusting the valuation allowance related
to this portion of the NOL carryforward will be credited to additional
paid-in capital.
8. Related Party Transactions:
On February 17, 1998, two of the Company's officers exercised options to
purchase 300,000 shares of the Company's common stock at $1.50 per share
that were scheduled to expire on May 6, 1998. The officers paid for the
cost of exercising the options by utilizing a bonus credit of $100,000 each
issued to them during 1997 and signing a full recourse note payable to the
Company for $125,000 each with interest accrued at 7.7%. On April 10,
1998, in consideration of the agreement of the two officers to not sell the
Company's common stock in market transactions, the Company agreed to
advance the officers, on a non-recourse basis, additional funds to cover
their tax liabilities and other considerations. As of December 31, 1999,
the notes receivable and accrued interest totaled $2,036,385 with a due
date of on or before December 31, 2000 (as extended). The Company has no
further commitment to advance additional funds to the officers.
In consideration for extending the term from December 31, 1999 through
December 31, 2000, the officers agreed that if the average closing price of
the common stock for five consecutive trading days results in a value of
the collateral equal to or above the total principal and accrued interest
balances, the officers will repay the loans within 45 days thereafter
either in cash or by tendering to the Company such number of shares which
at the average closing price for the previous five consecutive trading days
equals the principal and accrued interest then due.
The notes receivable and accrued interest are collateralized by 233,340
shares of the Company's common stock. In accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," the Company recorded an
impairment allowance of $666,000 as of December 31, 1999, based on the
value of the underlying collateral. The impairment allowance will be
adjusted quarterly based on the market value of the collateral shares.
9. Stock Options and Warrants:
Stock Options
As of December 31, 1999, the Company's 1998 Stock Option Plan had issued
options to purchase 438,501 shares out of a maximum total of 500,000
authorized shares allowed within the 1998 Stock Option Plan. As of
December 31, 1999, all other prior year stock option plans had issued the
maximum allowed options under each respective stock option plan. The
Company has submitted the 1999 Stock Option Plan, which includes a maximum
of 500,000 options, for shareholder approval at the 2000 annual
shareholders' meeting.
All stock option plans are each administered by a committee (the
"Committee") consisting of the board of directors or a committee thereof.
At its 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 stock
option plans, the Company also issues non-qualified options outside the
stock option plans. Options granted under these stock option 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, 1999, 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
in the following table:
Years Ended December 31,
-----------------------------------
1999 1998 1997
----------- ---------- --------
(In thousands, except per share
amounts)
Net Loss:
As Reported $ (5,856) $ (10,122) $ (3,620)
Pro Forma (7,930) (11,680) (5,991)
Basic and Diluted
Net Loss Per Share:
As Reported $ (0.41) $(0.78) $ (0.29)
Pro Forma (0.56) (0.90) (0.48)
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 1999, 1998 and 1997 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: (1) expected volatility of 80.5%, 76.2% and 80.4%
for 1999, 1998 and 1997, respectively; (2) expected lives ranging from four
to seven years; (3) risk-free interest rates at the date of grant ranging
from 4.44% to 6.43%; and, (4) dividend yield of zero for each year.
The following table summarizes fixed option activity for the years ended
December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------
1999 1998 1997
------------------------ ---------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> --------- ----------- --------- ---------- --------- ---------
Fixed Options
Outstanding: <C> <C> <C> <C> <C> <C>
Beginning of year 3,413,667 $ 6.590 3,357,500 $ 4.473 2,732,834 $ 3.710
Granted 521,000 5.866 480,000 8.875 725,500 7.203
Exercised (2,000) 6.625 (303,000) 1.500 (78,334) 1.698
Canceled (36,166) 7.920 (120,833) 8.400 (22,500) 9.486
--------- ----------- --------- ---------- --------- ---------
End of year 3,896,501 $ 6.481 3,413,667 $ 6.590 3,357,500 $ 4.473
========= =========== ========= ========== ========= =========
Exercisable at
year-end 2,872,681 $ 4.656 2,329,012 $ 6.970 2,242,000 $ 3.878
========= =========== ========= ========== ========= =========
Weighted-average
fair value of
options granted
during the year $ 3.61 $ 3.930 $ 4.458
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1999:
Options Outstanding Options Exercisable
-------------------------------------- ---------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/99 Life Price at 12/31/99 Price
(in years)
------------- ----------- ----------- ---------- ----------- --------
$1.500 178,000 .668 $ 1.500 178,000 $ 1.500
3.000 1,700,000 3.082 3.000 1,700,000 3.000
5.750 - 7.250 1,011,500 5.795 6.279 351,673 6.752
7.375 - 8.875 1,001,001 4.320 8.660 639,008 8.753
10.250 6,000 5.129 10.250 4,000 10.250
----------- ----------- ---------- ----------- --------
Total 3,896,501 3.993 $ 5.641 2,872,681 $ 4.656
=========== =========== ========== =========== ========
Warrants
The following table summarizes changes in outstanding warrants during
the years ended December 31, 1999, 1998 and 1997:
Shares Price Range
------------------ ---------------
Warrants:
Outstanding at December 31, 1996 431,194 $ 1.10 - 6.90
Exercisable at December 31, 1996 281,194 1.10 - 3.00
=======
Warrants exercised during 1997 (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
=======
Warrants exercised during 1998 (79,622) 1.10 - 2.60
Outstanding at December 31, 1998 270,572 1.65 - 6.90
=======
Exercisable at December 31, 1998 270,572 1.65 - 6.90
Outstanding at December 31, 1999 270,572 ======= 1.65 - 6.90
=======
Exercisable at December 31, 1999 270,572 $ 1.65 - 6.90
=======
10. Private Placement of Common Stock:
On April 8, 1999, the Company initiated a private placement that resulted
in the sale of 1,792,500 shares of common stock for net proceeds of
$7,054,000. No placement fees were paid by the Company in connection with
the sale of the aforementioned shares.
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 initial 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 Project Area,
which commenced in late January 1997, the executive employee was entitled
to receive a $100,000 bonus that may, at the election of the officer, be
applied against the exercise of options to purchase common stock or paid in
cash upon termination of employment with the Company. The Company accrued
$200,000 at December 31, 1997 to reflect this obligation. On February 17,
1998, each officer exercised options to purchase common stock and applied
their respective bonuses awarded to him in 1997 towards the exercise price
(Note 8). 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 incentive bonuses of up to
$100,000, payable in cash, stock or options and a $100,000 bonus to be
issued annually on May 12, 1998, 1999 and 2000 to be applied against
future stock option exercises. In the event such bonuses are earned, but
not used by Mr. Maciolek and his employment with the Company is terminated,
the Company must pay the bonus to Mr. Maciolek in cash. 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
Effective August 3, 1995, the Company entered into a consulting agreement
with Lovejoy and Associates, a consulting company owned by Tom Lovejoy, a
director of the Company, under which Lovejoy and Associates would advise
the Company respecting future financing alternatives, 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, 1999 at a rate of $15,000 per month for January and
February 1998 and a subsequent rate of $17,000 per month thereafter. The
consulting agreement was terminated effective May 1, 1999 when Mr. Lovejoy
became the Company's Chief Financial Officer.
Polish Exploration Agreements
The Company is committed to the following obligations in Poland, presented
on a gross basis, to retain its exploratory concession acreage:
<TABLE>
<CAPTION>
Exploratory Wells
-----------------
Beginning First Second Concession
of Three Three Annual and
Exploration Whole Year Year 2D Seismic Training Usufruct
Period Blocks Phase Phase Acquisition Fees (5) Fees (6)
------------------ ----- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Lublin (1), (2) Various (7) 24 6 1 per block 1,650 km $ 80,000 $ 675,000
Carpathian (2) 12/31/98 12 1 2 350 km 15,000 160,000
Pomeranian (3) 12/31/98 10 1 2 600 km 25,000 250,000
Warsaw West (3) 11/13/98 13 1 2 1,500 km 25,000 390,000
Baltic (4) 03/07/96 10 1 1 None 25,000 200,000
</TABLE>
(1) The Company must drill an exploratory well in each undrilled block
during the second three year phase or relinquish the undrilled block
at the end of the exploration term. The Lublin Basin includes the
Block 298 usufruct, which includes only one exploration block, which
has a requirement to drill two exploratory wells during the second
three year phase. All other Lublin Basin usufructs require the
drilling of one well per block during the second three year phase. As
of December 31, 1999, the Company had drilled two exploratory wells to
be applied against the first three year exploration phase exploratory
well requirement, covered all concession and usufruct fees and
acquired 1,650 kilometers of 2D seismic.
(2) Apache has agreed to cover all of the Company's drilling, seismic,
annual training fees, concession, and usufruct fees during the first
three year phase to earn a fifty percent interest in the Lublin Basin
and Carpathian areas.
(3) The Company and Apache are equal partners in the Pomeranian and Warsaw
West areas. As of December 31, 1999, the Company had covered all
concession and usufruct fees.
(4) The Company has a one-hundred percent interest in the Baltic Project
Area. As of December 31, 1999, the Company had satisfied the minimum
exploratory well requirement for the entire exploration term by
drilling two exploratory wells.
(5) Annual training costs are for each year during the entire six year
exploration term.
(6) Concession and usufruct fees are payable on various terms over the
first three year exploration term, except the Baltic Project Area,
which is payable in equal installments of $33,333 per year over six
years.
(7) The Lublin Basin consists of four usufructs, the Vistula, Lublin
Middle, Block 298, and Komarow which have exploration periods
beginning August 8, 1997, June 30, 1998, June 30, 1998 and March 4,
1998, respectively.
Capital Requirements
As of December 31, 1999, the Company had $6.9 million of cash, cash
equivalents and marketable debt securities with no long-term debt. In view
of the Apache Exploration Program, this amount is expected to be sufficient
to fund the Company's present minimum exploration and operating commitments
during 2000 and part of 2001. The Company intends to seek additional
capital to fund any activities outside the scope of its present minimum
exploration and operating activities, including further exploration,
appraisal and development costs for the Wilga discovery and any other
additional exploration, appraisal, development or property acquisition
activities.
12. Business Segments:
The Company operates within two segments of the oil and gas industry:
exploration and production ("E&P") and drilling and well servicing
("Drilling") and within the exploration segment of the mining industry.
For segment and management reporting purposes the Company's mining segment
is not material and is excluded from the discussion herein.
The Company's revenues associated with its E&P activities are comprised of
oil sales from its producing properties in Montana and Nevada and gains on
the sale of partial property interests of the Company's exploratory
properties in Poland. For the years ended December 31, 1999, 1998 and
1997, over 85% of the Company's total oil sales were to one purchaser
located in Montana. The Company believes this purchaser could be replaced,
if necessary, without a loss in revenue. E&P operating costs are comprised
of: (1) exploration costs, including geological and geophysical costs,
exploratory dry holes and non-producing leasehold impairments; and, (2)
production costs which include lease operating expenses and production
taxes. Substantially all exploration costs are applied to the Company's
operations in Poland and all lease operating costs are applied to the
Company's domestic production. The Company's revenues associated with its
drilling activities are comprised of contract drilling and well servicing
fees generated by the Company's drilling rig and other well servicing
equipment in Montana. Drilling operating costs are comprised of direct
costs associated with its drilling and well servicing operations. DD&A
directly associated with a respective segment is disclosed within that
segment. The Company does not allocate current assets, corporate DD&A,
general and administrative expenses, income taxes, interest expense,
interest income, other income, other expense or officer loan impairments to
its operating segments for management and segment reporting purposes. All
material inter-company transactions between the Company's business segments
are eliminated for management and segment reporting purposes.
Information on the Company's operations by business segment for the years
ended December 31, 1999, 1998 and 1997 is summarized as follows:
Year Ended December 31, 1999
-----------------------------------
E&P Drilling Total
--------- --------- ---------
Operations Summary: (In thousands)
Revenues $ 1,554 $ 865 $ 2,419
Cash operating costs (1) 3,844 642 4,486
Non-cash operating costs (2) 140 -- 140
--------- --------- ---------
Operating income or (loss) before
DD&A (2,430) 223 (2,207)
Depreciation, depletion, &
amortization 51 334 385
--------- --------- ---------
Operating loss $ (2,481) $ (111) $ (2,592)
========= ========= =========
Identifiable net property and
equipment:
Non-producing leaseholds - Poland $ 691 $ -- $ 691
Non-producing leaseholds - United
States 692 -- 692
Producing properties 494 -- 494
Equipment and other -- 581 581
--------- ---------- --------
Total $ 1,877 $ 581 $ 2,458
========= ========== ========
Property and equipment capital
expenditures $ 526 $ 138 $ 664
========= ========== ========
(1) Excludes $31,000 of exploratory costs relating to the Company's gold
concessions.
(2) Includes stock options valued at $119,000 issued to a Polish citizen
for consulting services and $21,000 non-producing leasehold impairment
comprised of costs incurred prior to 1999.
Year Ended December 31, 1998
---------------------------------
E&P Drilling Total
-------- ---------- --------
Operations Summary: (In thousands)
Revenues (1) $ 1,590 $ 323 $ 1,913
Cash operating costs (2) 3,025 240 3,265
Non-cash operating costs (3) 119 -- 119
-------- ---------- --------
Operating income or (loss) before
DD&A (1,554) 83 (1,471)
Depreciation, depletion, &
amortization 231 322 553
-------- ---------- --------
Operating loss $(1,785) $ (239) $(2,024)
======== ========== ========
Identifiable net property and
equipment:
Non-producing leaseholds - Poland $ 461 $ -- $ 461
Non-producing leaseholds - United
States 717 -- 717
Producing properties 463 -- 463
Equipment and other -- 780 780
------- ---------- --------
Total 1,641 $ 780 $ 2,421
Property and equipment capital ======= ========== ========
expenditures $ 180 $ 156 $ 336
======= ========== ========
(1) E&P revenues include $1,123,000 generated in the United States and
$467,000 generated in Poland.
(2) Excludes $29,000 of exploratory costs relating to the Company's gold
concessions.
(3) Includes Company common stock issued for services of $119,000 and
excludes non-cash impairment charge of $5,885,000 for domestic proved
properties.
<TABLE>
<CAPTION>
Year Ended December 31, 1997
----------------------------------------
E&P Drilling Total
<S> ---------- ----------- ---------
Operations Summary: (In thousands)
<C> <C> <C>
Revenues (1) $ 2,242 $ 496 $ 2,738
Cash operating costs 6,455 329 6,784
Non-cash operating costs (2) 99 -- 99
---------- ----------- ---------
Operating income or (loss) before DD&A (4,312) 167 (4,145)
Depreciation, depletion, & amortization 261 289 550
---------- ----------- ---------
Operating loss $ (4,573) $ (122) $ (4,695)
========== =========== =========
Identifiable net property and equipment:
Non-producing leaseholds - Poland $ 461 $ -- $ 461
Non-producing leaseholds - United States 709 -- 709
Producing properties 6,447 -- 6,447
Equipment and other -- 935 935
--------- ----------- ---------
Total net assets $ 7,617 $ 935 $ 8,552
========= =========== =========
Property and equipment capital expenditures $ 860 $ 210 $ 1,070
========= =========== =========
</TABLE>
(1) E&P revenues include $2,040,000 generated in the United States and
$202,000 generated in Poland. Excludes $71,000 gain from sale of
property interest relating to the Company's gold concessions in
Poland.
(2) Includes Company common stock issued for services of $70,000
and a non-cash impairment charge of $29,000 for a lease in
Wyoming acquired prior to 1997.
A reconciliation of the segment information to the consolidated
totals for the years ended December 31, 1999, 1998 and 1997 follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1999 1998 1997
<S> ---------- ----------- ------------
Revenues: (In thousands)
<C> <C> <C>
Reportable segments $ 2,419 $ 1,913 $ 2,738
Non-reportable segments -- -- 71
---------- ----------- ------------
Total consolidated revenues $ 2,419 $ 1,913 $ 2,809
========== =========== ============
Operating Loss:
Reportable segments $ (2,592) $ (2,024) $ (4,695)
Expense or (revenue) adjustments:
Non-reportable segments 31 29 (71)
Impairment of domestic proved property -- 5,885 --
General and administrative expenses 2,962 2,572 2,566
Corporate DD&A 109 118 85
Other -- 1 (1)
---------- ----------- ------------
Consolidated net operating loss $ (5,694) $ (10,629) $ (7,274)
========== =========== ============
Net Property and Equipment:
Reportable segments $ 2,458 $ 2,421 $ 8,552
Corporate assets 91 178 209
---------- ----------- ------------
Net property and equipment $ 2,549 $ 2,599 $ 8,761
========== =========== ============
Property and Equipment Capital Expenditures:
Reportable segments $ 581 $ 336 $ 1,070
Corporate assets 19 105 461
---------- ----------- ------------
Net property and equipment capital
expenditures $ 600 $ 441 $ 1,531
========== =========== ============
</TABLE>
13. Quarterly Financial Data (Unaudited):
During the year ended ended December 31, 1999, the Company recorded
exploratory dry hole costs of $580,000 and $389,000 during the third and
fourth quarters, respectively, and an officer loan impairment of
$666,000 during the fourth quarter. During the year ended December
31, 1998, the Company incurred a domestic proved property impairment
of $5,885,000, of which $5,640,000 and $245,000 were recorded during
the third and fourth quarters, respectively.
Summary quarterly information for the years ended December 31, 1999 and
1998 is as follows:
For the Quarter Ended
---------------------------------------------------
December 31 September 30 June 30 March 31
------------ ------------ ---------- -----------
(In thousands, except per share amounts)
1999 Quarterly
Information:
Revenues $ 785 $ 862 $ 451 $ 321
Net operating loss (2,746) (1,228) (895) (825)
Net loss $ (3,272) $ (1,072) $ (789) (723)
Basic and diluted net
loss per common
share $ (.21) $ (.08) $ (.06) $ (.06)
1998 Quarterly
Information:
Revenues $ 416 $ 426 $ 272 $ 799
Operating income or
(loss) (1,949) (6,511) (1,465) (704)
Net income or $ (6,392) $ (1,353) $ (519)
(loss) $ (1,858)
Basic and diluted net
loss per Common
share $ (.15) $ (.49) $ (.10) $ (.04)
14. Disclosure about Oil and Gas Properties and Producing Activities:
Impairment of Unproved Oil and Gas Properties
In accordance with generally accepted accounting principles, the Company
must record an impairment expense to the extent that capitalized costs of
unproved properties, on a property by property basis, are considered not
realizable. During the year ended December 31, 1999, the Company recorded
an impairment expense of $21,000 relating to a prospect located in Nevada
and $72,000 relating to the Lachowice Farm-in in Poland. During the year
ended December 31, 1997, the Company recorded an impairment expense of
$152,000 relating to several prospects in Montana, Nevada and Wyoming.
Impairment of Proved Oil and Gas Properties
In accordance with generally accepted accounting principles, the Company
must record an impairment expense if the Company determines the net book
value of its proved oil and gas properties, on a property by property
basis, exceeds the aggregate future net revenues from such properties. As
of December 31, 1998, the Company's future undiscounted net revenues from
its domestic proved developed properties was $1,015,000 and its discounted
future net revenues (PV-10) of it domestic proved developed properties was
$472,000. The future net revenues at December 31, 1998 were computed
using a price of $8.11 per barrel, the average price at December 31, 1998.
Accordingly, the Company recorded an impairment expense of $5,885,000 for
the year ended December 31, 1998, which reduced the carrying value of its
domestic proved properties to $463,000, an amount which approximated the
fair value of its domestic proved developed reserves determined on a
property by property basis.
In view of the Company's increased focus on its Polish exploration and
development opportunities and the probability of continued depressed oil
prices, management has determined it is unlikely the Company will incur any
domestic development costs in the foreseeable future. Accordingly, the
Company's proved reserves as of December 31, 1999 and 1998 include only
those reserves attributable to developed properties.
Capitalized Costs
Capitalized costs relating to oil and gas producing activities as of
December 31, 1999 and 1998 are summarized as follows:
United States Poland Total
-------------- --------- ---------
(In thousands)
December 31, 1999:
Proved properties $ 1,687 $ -- $ 1,687
Unproved properties 692 691 1,383
-------------- --------- ---------
Total gross properties 2,379 691 3,070
Less accumulated, depreciation, --
depletion and amortization (1,193) (1,193)
-------------- --------- ---------
Total $ 1,186 $ 691 $ 1,877
============== ========== ==========
December 31, 1998:
Proved properties $ 1,605 $ -- $ 1,605
Unproved properties 718 461 1,179
------------- --------- ---------
Total gross properties 2,323 461 2,784
Less accumulated depreciation, --
depletion and amortization (1,142) (1,142)
------------- --------- ---------
Total $ 1,181 $ 461 $ 1,642
============= ========= =========
Acquisition, Exploration and Development Activities
Costs incurred in oil property acquisition, exploration and development
activities during the years ended December 31, 1999, 1998 and 1997, whether
capitalized or expensed, are summarized as follows:
United
States Poland Total
--------- --------- ---------
(In thousands)
December 31, 1999:
Acquisition of properties:
Proved $ -- $ -- $ --
Unproved 1 230 231
Exploration costs 38 3,016 3,054
Development costs 82 -- 82
-------- -------- ---------
Total $ 121 $ 3,246 $ 3,367
======== ======== =========
December 31, 1998:
Acquisition of properties:
Proved $ -- $ -- $ --
Unproved 15 33 48
Exploration costs 34 2,092 2,126
Development costs 132 -- 132
-------- -------- ---------
Total $ 181 $ 2,125 $ 2,306
======== ======== =========
December 31, 1997:
Acquisition of properties:
Proved $ -- $ -- $ --
Unproved 733 66 799
Exploration costs 1,419 3,895 5,314
Development costs 187 -- 187
-------- -------- ---------
Total $ 2,339 $ 3,961 $ 6,300
======== ======== =========
15. 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. 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, interest expense and income
taxes.
The determination of oil and gas reserves is based on estimates and is
highly complex and interpretive. The estimates are subject to continuing
revisions as additional information becomes available or assumptions
change. All of the Company's oil reserves are in the United States.
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, 1999, 1998 and 1997 are as follows:
For the years ended December 31,
---------------------------------
1999 1998 1997
---------- --------- --------
(In thousands bbls of oil)
Total proved reserves:
Beginning of year 1,535 4,760 5,443
Purchase of minerals in-place -- -- --
Extensions and discoveries -- -- 18
Revisions of previous estimates (354) (3,110) (575)
Production (101) (115) (126)
---------- --------- --------
End of year 1,080 1,535 4,760
---------- --------- --------
Proved developed reserves:
Beginning of year 1,535 2,282 2,829
---------- --------- --------
End of year 1,080 1,535 2,282
---------- --------- --------
The decrease in 1999 reserves as compared to 1998 reserves was principally
due to higher operating costs and a higher production decline rate utilized
in the 1999 report as compared to the 1998 report. The decrease in 1998
reserves as compared to 1997 was principally due to the elimination of
2,478,000 bbls of proved undeveloped reserves which were included as of as
of December 31, 1997 and a $5.70 per bbl decrease in oil prices at year-end
1998 as compared to year-end 1997.
Standardized Measure of Discounted Future Net Cash Flows ("SMOG") 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
$22.37, $8.11 and $13.81 for the years ended December 31, 1999, 1998 and
1997, respectively and production costs per bbl of $14.11, $7.43 and $6.86
for 1999, 1998 and 1997, respectively, to the period-end quantities of the
Company's proved reserves. The variance in price from year to year was due
to price volatility associated with world-wide oil price fluctuations. The
increase in production costs of $6.68 per barrel for 1999, as compared to
1998, is primarily due the economic lives of marginal wells being extended
due to an oil price $14.26 per bbl higher in the 1999 report, as compared
to the 1998 report.
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 rates
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.
The components of SMOG are detailed below:
As of December 31,
---------------------------------------
1999 1998 1997
------------ ---------- ----------
SMOG Components: (In thousands)
Future cash flows $ 24,229 $ 12,518 $
65,740
Future production costs (15,240) (11,408) (32,658)
Future development costs (105) (95) (6,273)
------------ ---------- ----------
Future net cash flows 8,884 1,015 26,809
Future income tax expense -- -- (125)
------------ ---------- ----------
Future net cash flows 8,884 1,015 26,684
10% annual discount for
estimated timing of cash
flows (3,424) (543) (13,109)
------------ ---------- ----------
Total $ 5,460 $ 472 $ 13,575
============ ========== ==========
The following are principal sources of changes in SMOG:
Years Ended December 31,
----------------------------------------
1999 1998 1997
----------- ----------- -----------
SMOG Sources: (In thousands)
Balance, beginning of year $ 472 $ 13,575 $ 26,284
Sales of oil produced, net
of production costs (592) (77) (801)
Net changes in prices and
production costs 5,032 (4,482) (16,707)
Purchases of minerals in
place -- -- --
Extensions and discoveries,
net of future costs -- -- 108
Changes in estimated future
development costs (6) 2,875 (79)
Development costs incurred
during the year 82 132 394
Revisions in previous
quantity estimates (1,650) (9,076) (1,969)
Accretion of discount 47 1,357 2,628
Net change in income taxes -- (952) 9,071
Changes in rates of
production and other 2,075 (2,880) (5,354)
----------- ----------- -----------
Balance, end of year $ 5,460 $ 472 $ 13,575
=========== =========== ===========
16. Subsequent Events:
On January 25, 2000, the Company announced that the Wilga 2, the fifth
exploratory well drilled under terms of the Apache Exploration Program, was
an exploratory success after initial test results indicated a combined flow
rate of 16.9 Mmcf of gas and 570 Bbls of condensate per day from three
intervals in a Carboniferous Horizon at a depth between 7,732 feet and
8,550 feet. The Wilga 2 is located approximately 25 miles southeast of
Warsaw and approximately 12 miles from an existing pipeline. In accordance
with terms of the Apache Exploration Program, Apache will cover the
Company's 45.0% share of drilling and completion costs pertaining to the
Wilga 2. The Company will pay for its 45.0% share of costs thereafter. The
Company and its partners plan an appraisal well immediately, followed by
additional development drilling and facilities construction later in the
year, with initial production expected to commence during early 2001. In
addition, the Company will promptly begin seismic acquisition in the Wilga
area to identify a target near the Wilga discovery to be drilled later this
year to test the possibility of additional reserves outside the Wilga
structure.
FORM OF
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (this "Agreement") is entered into effective
as of [ ], by and between FX ENERGY, Inc., a Nevada corporation
(the"Corporation"), and ("Indemnitee"), based on the following premises.
PREMISES
A. The articles of incorporation of the Corporation (the "Articles") and
the bylaws (the "Bylaws") provide for indemnification of the Corporation's
directors and officers in accordance with the Domestic and Foreign Corporation
laws of Nevada (the "Statute").
B. The Articles, Bylaws, and Statute contemplate that contracts and other
arrangements may be entered into with respect to indemnification of officers and
directors.
C. It is reasonable, prudent, and necessary for the Corporation to
obligate itself contractually to indemnify Indemnitee so that he will to serve
as a director and/or officer of the Corporation and will be able to serve the
Corporation free from undue concern that he will not be adequately protected.
D. Indemnitee is willing to serve the Corporation on condition that he is
indemnified on the terms and conditions of this Agreement.
E. The directors of the Corporation have duly approved this Agreement and
the indemnification provided herein with the express recognition that the
indemnification arrangements provided herein exceed that which the Corporation
would be required to provide pursuant to Section 78.751 of the Statute.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the covenants
contained herein, the Corporation and Indemnitee do hereby covenant and agree as
follows:
1. Definitions. As used in this Agreement:
(a) The term "Proceeding" shall include any threatened, pending, or
completed action, suit, or proceeding, whether brought by or in the right
of the Corporation or otherwise and whether of a civil, criminal,
administrative, or investigative nature, in which Indemnitee was, is, or
will be involved as a party, as a witness, or otherwise, by reason of the
fact that Indemnitee is or was a director, officer, agent, or advisor of
the Corporation, by reason of any action taken by him or of any inaction on
his part while acting as a director, officer, agent, or advisor of the
Corporation, or by reason of the fact that he is or was serving at the
request of the Corporation as a director, officer, employee, agent, or
advisor of another corporation, partnership, joint venture, trust, limited
liability company, or other entity or enterprise, in each case whether or
not he is acting or serving in any such capacity at the time any liability
or expense is incurred for which indemnification or reimbursement can be
provided under this Agreement; provided, that any such action which is
brought by Indemnitee to enforce his rights under this Agreement shall not
be a Proceeding without prior approval of a majority of the board of
directors of the Corporation.
(b) The term "Expenses" shall include, without limitation, any
judgments, fines, and penalties against Indemnitee in connection with a
Proceeding; amounts paid by Indemnitee in settlement of a Proceeding; and
all attorneys' fees and disbursements, accountants' fees and disbursements,
private investigation fees and disbursements, retainers, court costs,
transcript costs, fees of experts, fees and expenses of witnesses, travel
expenses, duplicating costs, printing and binding costs, telephone charges,
postage, delivery service fees, and all other disbursements or expenses
reasonably incurred by or for Indemnitee in connection with prosecuting,
defending, preparing to prosecute or defend, investigating, or being or
preparing to be a witness in a Proceeding or establishing Indemnitee's
right or entitlement to indemnification for any of the foregoing.
(c) Reference to "other enterprise" shall include employee benefit
plans; references to "fines" shall include any excise tax assessed with
respect to any employee benefit plan; references to "serving at the request
of the Corporation" shall include any service as a director, officer,
employee, agent, or advisor with respect to an employee benefit plan, its
participants or beneficiaries; and a person who acted in good faith and in
a manner he reasonably believed to be in the interests of the participants
and beneficiaries of an employee benefit plan shall be deemed to have acted
in a manner "not opposed to the best interest of the Corporation" as
referred to in this Agreement.
(d) The term "substantiating documentation" shall mean copies of
bills or invoices for costs incurred by or for Indemnitee, or copies or
court or agency orders or decrees or settlement agreements, as the case may
be, accompanied by a sworn statement from Indemnitee that such bills,
invoices, court or agency orders or decrees or settlement agreements,
represent costs or liabilities meeting the definition of "Expenses" herein.
(e) The term "he" and "his" have been used for convenience and mean
"she" and "her" if Indemnitee is female.
2. Indemnity of Director or Officer. The Corporation hereby agrees to
hold harmless and indemnify Indemnitee against any and all Expenses incurred by
reason of the fact that Indemnitee is or was a director, officer, agent, or
advisor of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee, agent or advisor of another
corporation, partnership, joint venture, trust, limited liability company, or
other entity or enterprise, but only if Indemnitee acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interest of
the Corporation and, in the case of a criminal proceeding, had no reasonable
cause to believe that his conduct was unlawful. The termination of any
Proceeding by judgment, order of the court, settlement, conviction, or upon a
plea of nolo contendere, or its equivalent, shall not, of itself, create a
presumption that Indemnitee did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interest of the
Corporation, and with respect to any criminal proceeding, shall not create a
presumption that such person believed that his conduct was unlawful. The
indemnification provided herein shall be applicable whether or not negligence or
gross negligence of the Indemnitee is alleged or proven. Notwithstanding the
foregoing, in the case of any Proceeding brought by or in the right of the
Corporation, Indemnitee shall not be entitled to indemnification for any claim,
issue, or matter as to which Indemnitee has been adjudged by a court of
competent jurisdiction, after exhaustion of all appeals therefrom, to be liable
to the Corporation or for amounts paid in settlement to the Corporation, unless
and only to the extent that, the court in which the Proceeding was brought or
another court of competent jurisdiction determines, on application, that in view
of all the circumstances, the person is fairly and reasonably entitled to
indemnity for such expenses as the court deems proper.
3. Choice of Counsel. Indemnitee shall be entitled to employ, and be
reimbursed for the fees and disbursements of, counsel separate from that chosen
by any other person or persons whom the Corporation is obligated to indemnify
with respect to the same or any related or similar Proceeding.
4. Advances of Expenses. Expenses (other than judgments, penalties,
fines, and settlements) incurred by Indemnitee shall be paid by the Corporation,
in advance of the final disposition of the Proceeding, within 10 days after
receipt of Indemnitee's written request accompanied by substantiating
documentation and Indemnitee's unsecured undertaking to repay such amount to the
extent it is ultimately determined that Indemnitee is not entitled to
indemnification.
5. Right of Indemnitee to Indemnification Upon Application; Procedure
upon Application. Any indemnification under this Agreement, other than pursuant
to Section 4 hereof, shall be made no later than 45 days after receipt by the
Corporation of the written request of Indemnitee, accompanied by substantiating
documentation, unless a determination is made within said 45-day period by (a)
the board of directors by a majority vote of a quorum consisting of directors
who are not or were not parties to such Proceeding, or (b) independent legal
counsel in a written opinion (which counsel shall be appointed if such a quorum
is not obtainable), that Indemnitee has not met the relevant standards for
indemnification set forth in Section 2 hereof.
The right to indemnification or advances as provided by this Agreement
shall be enforceable by Indemnitee in any court of competent jurisdiction. The
burden of proving that indemnification is not appropriate shall be on the
Corporation. Neither the failure of the Corporation (including its board of
directors or independent legal counsel) to have made a determination prior to
the commencement of such action that indemnification is proper in the
circumstances because Indemnitee has met the applicable standard of conduct, nor
an actual determination by the Corporation (including its board of directors or
independent legal counsel) that Indemnitee has not met such applicable standard
of conduct, shall be a defense to the action or create a presumption that
Indemnitee has not met the applicable standard of conduct.
6. Undertaking by Indemnitee. Indemnitee hereby undertakes to repay to
the Corporation any advances of Expenses pursuant to this Agreement to the
extent that it is ultimately determined that Indemnitee is not entitled to
indemnification.
7. Indemnification Hereunder Not Exclusive. The indemnification and
advancement of Expenses provided by this Agreement shall not be deemed exclusive
of any other rights to which Indemnitee may be entitled under the Articles or
Bylaws, the Statute, any policy or policies of directors' and officers'
liability insurance, any agreement, or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office. However, Indemnitee shall reimburse the Corporation for amounts paid to
him under this Agreement in an amount equal to any payments received pursuant to
such other rights to the extent such payments duplicate any payments received
pursuant to this Agreement.
8. Continuation of Indemnity. All agreements and obligations of the
Corporation contained herein shall continue during the period Indemnitee is a
director, officer, agent, or advisor of the Corporation (or is or was serving at
the request of the Corporation as a director, officer, employee, agent, or
advisor of another corporation, partnership, joint venture, trust, limited
liability company, or other enterprise) and shall continue thereafter so long as
Indemnitee shall be subject to any possible Proceeding.
9. Partial Indemnification. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Corporation for some or a
portion of Expenses, but not, however, for the total amount thereof, the
Corporation shall nevertheless indemnify Indemnitee for the portion of such
Expenses to which Indemnitee is entitled.
10. Settlement of Claims. The Corporation shall not be liable to
indemnify Indemnitee under this Agreement for any amounts paid in settlement of
any Proceeding effected without the Corporation's written consent. The
Corporation shall not settle any Proceeding in any manner which would impose any
penalty or limitation on Indemnitee's rights under this Agreement without
Indemnitee's written consent. Neither the Corporation nor Indemnitee will
unreasonably withhold their consent to any proposed settlement. The Corporation
shall not be liable to indemnify Indemnitee under this Agreement with regard go
any judicial award if the Corporation was not given a reasonable and timely
opportunity, at its expense, to participate in the defense of such action.
11. Enforcement.
(a) The Corporation expressly confirms and agreed that it has entered
into this Agreement and assumed the obligations imposed on the Corporation
hereby in order to induce Indemnitee to serve as a director or officer of
the Corporation, and acknowledges that Indemnitee is relying upon this
Agreement in continuing as a director or officer.
(b) In the event Indemnitee is required to bring any action or other
proceeding to enforce rights or to collect monies due under this Agreement
and is successful in such action, the Corporation shall reimburse
Indemnitee for all of the Indemnitee's Expenses in bringing and pursuing
such action.
12. Governing Law; Binding Effect; Amendment and Termination.
(a) This Agreement shall be interpreted and enforced in accordance
with the laws of the State of Nevada.
(b) This Agreement shall be binding upon the Corporation, its
successors and assigns, and shall inure to the benefit of Indemnitee, his
heirs, personal representatives, and assigns, and to the benefit of the
Corporation, its successors and assigns.
(c) No amendment, modification, termination, or cancellation of this
Agreement shall be effective unless in writing signed by the Corporation
and Indemnitee.
13. Severability. If any provision of this Agreement shall be held to be
invalid, illegal, or unenforceable,
(a) the validity, legality, and enforceability of the remaining
provisions of this Agreement shall not be in any way affected or impaired
thereby; and
(b) to the fullest extent possible, the provisions of this Agreement
shall be construed so as to give effect to the intent manifested by the
provision held invalid, illegal, or unenforceable.
Each section of this Agreement is a separate and independent portion of this
Agreement. If the indemnification to which Indemnitee is entitled as respects
any aspect of any claim varies between two or more sections of this Agreement,
that section providing the most comprehensive indemnification shall apply.
14. Notice. All notices, demands, requests, or other communications
required or authorized hereunder shall be deemed given sufficiently if in
writing and if personally delivered; if sent by facsimile transmission,
confirmed with a written copy thereof sent by overnight express delivery; if
sent by registered mail or certified mail, return receipt requested and postage
prepaid; or if sent by overnight express delivery:
If to the Corporation, to: FX Energy, Inc.
3006 Highland Drive, Suite 206
Salt Lake City, Utah 84106
Telecopy No.: (801) 486-5575
If to the Indemnitee, to:
or such other addresses and facsimile numbers as shall be furnished by any party
in the manner for giving notices hereunder, and any such notice, demand,
request, or other communication shall be deemed to have been given as of the
date so delivered or sent by facsimile transmission, five business days after
the date so mailed, or one day after the date so sent by overnight delivery.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement to be
effective on and as of the day and year first above written.
Corporation:
FX ENERGY, INC.
By:--------------------------
David N. Pierce, President
Indemnitee:
-----------------------------
-----------------------------
The foregoing Indemnification Agreement is entered by and between FX ENERGY,
Inc. and the following Schedule of Indemnitees:
Dennis Goldstein
Dennis Tatum
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the registration
statements on Form S-8 (SEC File Nos. 333-60563, 333-12385 and 333-11417) and
the registration statements on Form S-3 (SEC File Nos. 333-08557, 333-16439,
333-26619, 333-79595 and 333-80489) of FX Energy, Inc. and subsidiaries of our
report dated February 8, 2000 relating to the consolidated financial statements,
which appears in this Form 10-K.
PricewaterhouseCoopers LLP
/s/
Salt Lake City, Utah
February 18, 2000
CONSENT OF PETROLEUM ENGINEERING CONSULTANT
I consent to the use of my report respecting the estimated oil reserve
information as of December 31, 1999, 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-K of FX Energy, Inc. for
the year ended December 31, 1999. 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, 333-26619, 333-79595 and 333-80489 and Form S-8, SEC File Nos. 333-12385,
333-11417 and 333-60563.
/s/ Larry D. Krause
Billings, Montana
February 17, 2000
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
PricewaterhouseCoopers
Report of Independent Accountants
To the Stockholders and Board of Directors
of FX Energy, Inc., and Subsidiaries:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, cash flows, and stockholders' equity
present fairly, in all material respects, the consolidated financial position of
FX Energy, Inc., and Subsidiaries (the "Company") as of December 31, 1999 and
1998, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States. 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 of these statements in accordance with
auditing standards generally accepted in the United States which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Salt Lake City, Utah
February 8, 2000
<PAGE>
FX ENERGY, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 1999 and 1998
1999 1998
------------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 1,619,237 $ 1,811,780
Investment in marketable debt securities 5,249,003 2,929,914
Receivables:
Accrued oil sales 243,183 95,064
Joint interest and other receivables 171,242 240,102
Interest receivable 86,723 86,258
Inventory 66,361 68,327
Other current assets 126,006 66,053
------------- -----------
Total current assets 7,561,755 5,297,498
------------- -----------
Property and equipment, at cost:
Oil and gas properties (successful efforts
method):
Proved 1,687,089 1,605,279
Unproved 1,382,880 1,178,408
Other property and equipment 2,652,102 2,494,688
------------- -----------
Gross property and equipment 5,722,071 5,278,375
Less accumulated depreciation, depletion
and amortization (3,173,493) (2,679,441)
------------- -----------
Net property and equipment 2,548,578 2,598,934
------------- -----------
Other assets:
Certificates of deposit 356,500 356,500
Deposits 2,789 --
------------- -----------
Total other assets 359,289 356,500
------------- -----------
Total assets $ 10,469,622 $ 8,252,932
============= ===========
-Continued-
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE>
FX ENERGY, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
As of December 31, 1999 and 1998
1999 1998
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 623,911 $ 420,906
Accrued liabilities 1,478,862 911,950
----------- -----------
Total current liabilities 2,102,773 1,332,856
----------- -----------
Commitments (Notes 2 and 11)
Stockholders' equity:
Preferred stock, $.001 par value, 5,000,000 shares
authorized; 1999 and 1998: no shares outstanding -- --
Common stock, $.001 par value, 30,000,000 shares
authorized;
1999: 14,849,003 shares issued and outstanding;
1998: 13,054,503 shares issued and outstanding 14,849 13,055
Notes receivable from officers (1,370,873) (1,304,527)
Additional paid-in capital 38,480,556 31,112,861
Accumulated deficit (28,757,683) (22,901,313)
----------- -----------
Total stockholders' equity 8,366,849 6,920,076
----------- -----------
Total liabilities and stockholders' equity $10,469,622 $ 8,252,932
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE>
<CAPTION>
FX ENERGY, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1999, 1998 and 1997
1999 1998 1997
------------ ----------- ----------
<S> <C> <C> <C>
Revenues:
Oil sales $ 1,554,474 $ 1,123,511 $2,040,233
Drilling revenue 864,689 322,769 496,158
Gain on sale of property interests -- 466,891 272,234
------------ ----------- ----------
Total revenues 2,419,163 1,913,171 2,808,625
------------ ----------- ----------
<S>
Operating costs and expenses: <C> <C> <C>
Lease operating costs 899,258 966,732 1,094,043
Production taxes 63,141 79,602 145,372
Geological and geophysical costs 1,959,422 2,109,375 1,683,753
Exploratory dry hole costs 1,001,433 17,422 3,478,456
Impairments 92,605 5,885,042 152,105
Drilling costs 641,871 240,061 328,820
Depreciation, depletion and amortization 494,052 671,277 634,559
General and administrative 2,961,878 2,572,212 2,565,690
------------ ----------- ----------
Total operating costs and expenses 8,113,660 12,541,723 10,082,798
------------ ----------- ----------
Operating loss (5,694,497) (10,628,552) (7,274,173)
------------ ----------- ----------
Other income (expense):
Interest and other income 511,636 506,209 661,665
Interest expense (7,997) -- (83,273)
Impairment of notes receivable from
officers (665,512) -- --
------------ ----------- ----------
Total other income (expense) (161,873) 506,209 578,392
------------ ----------- ----------
Net loss before extraordinary gain (5,856,370) (10,122,343) (6,695,781)
Extraordinary gain (Note 2) -- -- 3,076,242
------------ ----------- ----------
Net loss (5,856,370) (10,122,343) (3,619,539)
============ =========== ==========
Basic and diluted net loss per share:
Net loss before extraordinary gain $ (0.41) $ (0.78) $ (0.53)
Extraordinary gain -- -- 0.24
Net Loss $ (0.41) $ (0.78) $ (0.29)
Basic and diluted weighted average number of ------------ ----------- ----------
shares outstanding 14,198,724 12,978,900 12,596,977
============ =========== ==========
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE>
<CAPTION>
FX ENERGY, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1999, 1998 and 1997
1999 1998 1997
<S> ------------ ------------ ------------
Cash flows from operating activities: <C> <C> <C>
Net loss $ (5,856,370) $(10,122,343) $ (3,619,539)
Adjustments to reconcile net loss to net cash
used in operating activities:
Extraordinary gain -- -- (3,076,242)
Depreciation, depletion and amortization 494,052 671,277 634,559
Impairments 92,605 5,885,042 28,515
Gain on sale of property interests -- (466,891) (272,234)
Exploratory dry hole costs 240,132 -- 210,205
Common stock and options issued for services 302,687 119,375 70,625
Accrued interest income from officer loans (134,295) (64,170) --
Impairment of notes receivable from officers 665,512 -- --
Increase (decrease) from changes in:
Receivables (100,044) 260,024 (147,678)
Inventory 1,966 (945) (47,166)
Other current assets (59,953) 20,960 (19,530)
Accounts payable and accrued liabilities 608,285 588,908 357,752
------------ ------------ ------------
Net cash used in operating activities (3,745,423) (3,108,763) (5,880,733)
------------ ------------ ------------
<S>
Cash flows from investing activities: <C> <C> <C>
Additions to oil and gas properties (463,387) (179,765) (1,136,935)
Additions to other property and equipment (137,094) (260,877) (394,291)
Net change in other assets (2,789) -- 25,000
Proceeds from sale of property interests 6,000 506,000 340,152
Proceeds from sale of equipment -- 6,928 13,051
Employee advances -- -- (15,000)
Purchase of marketable debt securities (6,617,089) (6,578,332) (3,940,582)
Proceeds from maturities of marketable debt
securities 4,298,000 7,589,000 5,476,574
------------ ------------ ------------
Net cash provided by (used) in investing
activities (2,916,359) 1,082,954 367,969
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt -- -- 1,575,992
Notes receivable from officers (597,563) (840,357) (150,000)
Proceeds from issuance of common stock,
options and warrants, net of offering
costs 7,066,802 166,027 252,777
------------ ------------ ------------
Net cash provided by (used in) financing
activities 6,469,239 (674,330) 1,678,769
------------ ------------ ------------
Increase (decrease) in cash (192,543) (2,700,139) (3,833,995)
Cash and cash equivalents at beginning of
year 1,811,780 4,511,919 8,345,914
------------ ------------ ------------
Cash and cash equivalents at end of year $ 1,619,237 $ 1,811,780 $ 4,511,919
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE>
<CAPTION>
FX ENERGY, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
for the years ended December 31, 1999, 1998 and 1997
Common Stock
------------------- Officers'
Par Paid-in Notes Accumulated
Shares Value Capital Receivable Deficit Total
<S> ---------- ------- ----------- ------------ ------------ ------------
<C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 12,492,547 $12,492 $30,054,620 $ -- $(9,159,431) $ 20,907,681
Exercise of warrants and options 159,334 160 252,617 -- -- 252,777
Common stock issued for services 10,000 10 70,615 -- -- 70,625
Net loss -- -- -- -- (3,619,539) (3,619,539)
---------- ------- ----------- ------------ ------------ ------------
Balance at December 31, 1997 12,661,881 12,662 30,377,852 -- 12,778,970) 17,611,544
Exercise of warrants and options 382,622 383 615,644 -- -- 616,027
Common stock issued for services 10,000 10 119,365 -- -- 119,375
Officers' notes - principal -- -- -- (1,240,357) -- (1,240,357)
Officers' notes - interest -- -- -- (64,170) -- (64,170)
Net loss -- -- -- -- (10,122,343) (10,122,343)
---------- ------- ----------- ------------ ------------ ------------
Balance at December 31, 1998 13,054,503 13,055 31,112,861 (1,304,527) (22,901,313) 6,920,076
Exercise of warrants and options 2,000 2 13,248 -- -- 13,250
Sale of common stock 1,792,500 1,792 7,168,208 -- -- 7,170,000
Common stock placement costs -- -- (116,448) -- -- (116,448)
Officers' notes - principal -- -- -- (597,563) -- (597,563)
Officers' notes - interest -- -- -- (134,295) -- (134,295)
Officers' notes - impairment -- -- -- 665,512 -- 665,512
Options issued for services -- -- 302,687 -- -- 302,687
Net loss -- -- -- -- (5,856,370) (5,856,370)
---------- ------- ----------- ------------ ------------ ------------
Balance at December 31, 1999 14,849,003 $14,849 $38,480,556 $(1,370,873) $(28,757,683) $ 8,366,849
========== ======= =========== ============ ============ ============
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 Poland and the United States. In Poland, the Company is
engaged in oil and gas exploration, appraisal, development and property
acquisition activities. In the United States, the Company is engaged in
producing, exploring and developing oil and gas properties 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 and the Company's undivided interests in
Poland. All significant inter-company accounts and transactions have been
eliminated in consolidation. At December 31, 1999, 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 field-by-field basis, are not considered to be
realizable. Depletion, depreciation and amortization ("DD&A") of
capitalized costs of proved oil and gas properties is provided on a field-
by-field basis using the units-of-production method. The computation of
DD&A takes into consideration restoration, dismantlement and abandonment
costs and the anticipated proceeds from equipment salvage. The estimated
restoration, dismantlement and abandonment costs are expected to be offset
by the estimated residual value of lease and well equipment.
An impairment loss is recorded if the net capitalized costs of proved oil
and gas properties exceed the aggregate undiscounted future net revenues
determined on a field-by-field basis. The impairment loss recognized
equals the excess of net capitalized costs over the related fair value
determined on a property by property basis. (Note 14)
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 (gross) is summarized as follows:
December 31, Estimated
------------------------- Useful Life
1999 1998 (in years)
----------- ----------- -----------
Other Property and Equipment: (In thousands)
Drilling and well servicing
equipment $ 1,906 $ 1,771 6
Trucks 190 188 5
Building 80 80 40
Office Equipment 476 456 3 to 6
----------- -----------
Total $ 2,652 $ 2,495
=========== ===========
Concentration of Credit Risk
The majority of the Company's receivables are within the oil and gas
industry, primarily from the purchasers of its oil (Note 12) and its
industry partners. The receivables are not collateralized. To date, the
Company has experienced minimal bad debts. The majority of the Company's
cash and cash equivalents is held by three financial institutions in Utah,
Montana and New York.
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,
---------------------------------
1999 1998 1997
---------- --------- ---------
Non-cash transactions: (In thousands)
Bonus applied to stock option exercise $ -- $ 200 $ --
by officers
Recourse notes receivable from officers
due to stock option exercise -- 250 --
Reclassification of notes receivable -- 150 --
from officers
Additions to oil and gas properties
financed with accrued 63 -- --
iabilities
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Interest $ 8 $ -- $ 534
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 1998 and 1997 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.
Foreign Operations
The Company's investments and operations in Poland are comprised of U.S.
Dollar expenditures.
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.
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. Outstanding
options and warrants as of December 31, 1999, 1998 and 1997 were as
follows:
Options and
December 31, Warrants Price Range
------------ ----------- --------------
1999 4,167,073 $1.50 - $10.25
1998 3,684,239 $1.50 - $10.25
1997 3,707,694 $1.10 - $10.25
The Company had a net loss in 1999, 1998 and 1997. The above options or
warrants were not included in the computation of diluted earnings per share
for the years ended December 31, 1999, 1998 or 1997 because the effect
would have been antidilutive.
2. Investment in Poland:
Apache Exploration Program
Effective January 1, 1999, the Company and Apache Corporation ("Apache")
entered into an agreement which further defined the relationship between
the Company and Apache in Poland by establishing an Area of Mutual Interest
Agreement ("AMI Agreement") covering the entire country of Poland, except
for the 0.9 million acre Baltic Project Area, for oil and gas exploration,
production, development and acquisition activities for a period of two
years. The AMI Agreement effectively consolidated the terms of various
agreements signed between the Company and Apache during 1997, 1998 and 1999
into one basic agreement, referred to collectively as the Apache
Exploration Program.
Under terms of the Apache Exploration Program, Apache has either agreed to
or completed the following primary terms:
o Apache paid the Company $950,000 in up-front cash, including $450,000
during 1997 for the Lublin Basin and $500,000 during 1998 for the
Carpathian area;
o Apache must cover the Company's pro-rata share of cost to drill ten
exploratory wells, including paying for drilling and completion costs
for seven wells in the Lublin Basin and drilling costs (excluding
completion costs) for three wells in the Carpathian area;
o Apache must cover the Company's pro-rata share of cost to shoot 2,000
kilometers of 2D seismic; including 1,650 kilometers of 2D seismic in
the Lublin Basin completed during 1998 and 350 kilometers in the
Carpathian area that has yet to be completed;
o Apache must cover all of the Company's pro-rata share of all
concession and usufruct fees during the first three years in the
Lublin Basin (approximately $695,000) and the Carpathian area
(approximately $160,000);
o Apache must cover all of the Company's pro-rata share of annual
training costs during the first three years in the Lublin Basin
($80,000 per year) and the Carpathian area ($15,000 per year); and
o Apache may not charge the Company for any of its pro-rata share of
Polish G&A costs through June 30, 2000. Thereafter, Apache may charge
the Company for 25% of its Polish G&A costs, increased by 5% upon the
drilling of each of the five remaining exploratory wells; up to a
maximum of 50%.
The AMI Agreement modified and further defined the Apache Exploration
Program by adding the following additional terms:
o The Company and Apache must offer each other a fifty-percent interest
in any new exploration, appraisal, development, property acquisition
or other activities conducted by either party within the AMI during
all of 1999 and 2000.
o The ten exploratory wells under the Apache Exploration Program may, at
the consent of both parties, be drilled anywhere within the AMI.
o The Company and Apache have equal 50% working interests in the
Pomeranian and Warsaw West areas.
o Apache is the operator of all areas controlled by the Company and
Apache within the AMI.
Option Agreements between the Company, Apache and POGC
As a result of various agreements included within the Apache Exploration
Program between the Company, Apache and POGC, the Company and Apache's
working interest in the Lublin Basin, Carpathian and Pomeranian areas is
subject to being reduced by POGC's option to participate for up to a one-
third working interest on a block by block basis in each respective area.
In turn, the Company and Apache each have an independent reciprocal right
to participate in the exploration of the POGC controlled areas in each of
the respective project areas with up to a one-third working interest each.
Should POGC elect to participate in any of the Company's concessions, the
Company's and Apache's interest will be reduced in equal proportions. The
Company does not have any option agreements with POGC covering Warsaw West
or the Baltic Project Area.
Exploration Activities
The first four exploratory wells drilled under terms of the Apache
Exploration Program were all determined to be exploratory dry holes during
1999. In accordance with terms of the Apache Exploration Program, Apache
covered all of the Company's working interest share of costs for all four
wells, including 33.3% for the Czernic 277-2, 47.5% for the Poniatowa 317-
1, 45.0% for the Witkow 1 and 33.3% for the Siedliska 2. The fifth well,
the Wilga 2, was announced to be an exploratory success on January 25, 2000
after initial production test results indicated a combined flow rate of
16.9 Mmcf of gas and 570 Bbls of condensate per day from three intervals in
a Carboniferous horizon. Under terms of the Apache Exploration Program,
Apache will cover all of the Company's 45.0% drilling and completion costs
for the Wilga 2. (Note 16)
During June 1999, the Company elected to participate with a 5.0% working
interest in drilling the Andrychow 6, an exploratory well operated by POGC
on POGC option acreage in southern Poland. The well cost approximately
$99,000 net to the Company and was determined to be an exploratory dry hole
during December 1999.
Appraisal and Development Activities
On February 26, 1999, The Company, Apache and POGC entered into an
agreement to jointly develop the Lachowice Farm-in, a shut-in POGC gas
discovery with three wells in the Carpathian area, with Apache as operator.
Under terms of the agreement, The Company and Apache agreed to 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) if
warranted, drill three additional wells; and, (3) if warranted, construct
gathering and processing facilities. All costs and net revenues
thereafter, including additional development drilling and lease operating
costs, would be shared one-third each by the Company, Apache and POGC.
During June 1999, the Company and Apache commenced testing and recompletion
procedures on the Stryszawa 2K. The Stryszawa 2K was subsequently plugged
and abandoned after it failed to maintain a commercial production rate.
During September 1999, the Company and Apache tested the Lachowice 7 to
determine its commercial potential. The test results of the Lachowice 7
did not warrant constructing gathering and processing facilities. The
Company and Apache plan to turn the Lachowice 7 back to POGC and terminate
the Lachowice Farm-in.
Baltic Project Area
On May 3, 1996, the Company entered into a agreement with RWE-DEA, formerly
Deutsche Texaco, to jointly explore the Baltic Project Area. Under terms
of the Agreement, RWE-DEA had the right to earn a fifty-percent interest in
the Baltic Project Area by paying the Company $250,000 in cash, paying the
first $1,100,000 for a 2D seismic survey, the first $1,000,000 of cost
relating to the initial exploratory well to be drilled at a location to be
designated by RWE-DEA and fifty-percent of the cost relating to the second
exploratory well at a location designated by the Company. Polish
government approval was required to approve RWE-DEA's participation in the
Baltic Project Area by purchasing fifty-percent of Warmia Petroleum
Company, Sp z o.o. ("Warmia"), a wholly owned subsidiary of the Company
which holds the Baltic Project Area. The Company obtained a $2.5 million
Irrevocable Standby Letter of Credit whereby the Company agreed to refund
RWE-DEA all advanced funds should the Polish government disapprove RWE-
DEA's purchase of fifty-percent of Warmia. The Irrevocable Standby Letter
of Credit expired on January 31, 1997 and the Polish government approved
RWE-DEA's purchase of fifty-percent of Warmia in June 1997. RWE-DEA had
advanced Warmia $3,076,000 through June 30, 1997 to fund exploration
activity on the Baltic Project Area, which the Company had recorded as a
long-term note payable.
Prior to drilling the second well on the Baltic Project Area, RWE-DEA had
advanced the Company all funds required to date under the Agreement,
including funding the first $1,000,000 of costs relating to the Orneta #1,
the initial exploratory well drilled on the Baltic Project Area which was
plugged and abandoned as a dry hole in April 1997 at a gross cost of
$1,834,000. On June 30, 1997, RWE-DEA elected to not fund its fifty-
percent share of the Gladysze #1-A, the second exploratory well drilled on
the Baltic Project Area, which resulted in the termination of RWE-DEA's
right to earn a fifty-percent interest in the Baltic Project Area. The
Gladysze #1-A was drilled without RWE-DEA as a participant and was
subsequently plugged and abandoned as a dry hole in September 1997 at a
gross cost of $1,262,000. Upon termination of RWE-DEA's right to earn a
fifty-percent interest in the Baltic Project Area, the Company eliminated
its long-term notes payable relating to RWE-DEA and recognized an
extraordinary gain of $3,076,000.
During March 1999, the Company relinquished approximately 1.2 million acres
within the Baltic Project Area, leaving a total of approximately 0.9
million undeveloped acres in the Baltic Project Area. The Polish
government also consented to apply 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, the Company has
satisfied all work commitments applicable to the Baltic Project Area's six-
year exploration phase. The Company's Baltic Project Area is the only
acreage holding in Poland in which the Company has an interest that
contains mandatory acreage relinquishment provisions.
At December 31, 1999, the Company had $494,000 of capitalized leasehold
costs related to the Baltic Project Area. The Company is currently seeking
a strategic partner to participate in further exploration of the Baltic
Project Area.
Gold Exploration - Sudety Project Area
On July 26, 1999, Homestake terminated its agreement with the Company to
jointly explore for gold on the Company's Sudety Project Area in
southwestern Poland. During 1997, Homestake initially paid the Company
$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. The Company
has discontinued further gold exploration in the Sudety Project Area.
3. Performance Bond Deposits:
As of December 31, 1999, the Company had a replacement bond to a federal
agency in the amount of $463,000, which was collateralized by certificate
of deposits totaling $231,500. In addition, there are certificates of
deposits totaling $125,000 covering performance bonds in other states.
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, 1999, the
Company's held-to-maturity securities consisted of corporate bonds with
remaining contractual maturities of less than twelve months and the
carrying amount of these investments approximated market value.
5. Accrued Liabilities:
The Company's accrued liabilities as of December 31, 1999 and 1998 are
composed of the following:
As of December 31,
-------------------------
1999 1998
---------- ----------
Accrued Liabilities: (In thousands)
Compensation costs $ 1,185 $ 699
Unproved property additions 63 --
Exploratory dry hole costs 99 --
Seismic costs 28 131
Other costs 104 82
---------- ----------
Total $ 1,479 $ 912
========== ==========
6. Long-term Debt:
During 1998, the Company had a bank credit facility with a borrowing base
of $2,850,000 as of January 1, 1998. The borrowing base was subject to a
monthly basis reduction of $25,000. The Company did not utilize the credit
facility and subsequently terminated the credit facility during the year
ended December 31, 1998.
7. Income Taxes:
The Company recognized no income tax benefit from the losses generated
during the years ended December 31, 1999, 1998 and 1997.
The components of the net deferred tax asset as of December 31, 1999 and
1998 are as follows:
December 31,
-------------------------
1999 1998
----------- ----------
(In thousands)
Deferred tax liability:
Property and equipment basis
differences $ (104) $ (962)
Deferred tax asset:
Net operating loss carryforwards 11,180 9,437
Impairment of oil and gas properties 1,218 2,196
Impairment of notes receivable from
officers 248 --
Options issued for services 113 --
Other 193 14
Valuation allowance (12,848) (10,685)
----------- ----------
Net deferred tax asset $ -- $ --
=========== ==========
The change in the valuation allowance during the years ended December 31,
1999, 1998 and 1997 is as follows:
December 31,
-----------------------------------
1999 1998 1997
---------- ---------- ---------
(In thousands)
Balance, beginning of year $ (10,685) $ (6,131) $ (3,868)
Increase due to property and
equipment basis differences 4 22 24
Decrease (increase) due to
impairment of oil and gas properties -- (2,196) --
Decrease due to investment in Warmia -- -- 661
Increase due to net operating loss (1,989) (2,444) (2,876)
Other (178) 64 (72)
---------- ---------- ---------
Balance, end of year . $ (12,848) $ (10,685) $ (6,131)
========== ========== =========
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 risks associated with that growth requirement are
considerable, resulting in the Company's conclusion that a full valuation
allowance be provided at December 31, 1999 and 1998.
At December 31, 1999, the Company had net operating loss ("NOL")
carryforwards, including foreign losses, of approximately $30,000,000
available to offset future taxable income, of which approximately
$18,749,000 expires from 2008 through 2012 and $11,251,000 expires
subsequent to 2017. The utilization of these carryforwards against future
taxable income may become subject to an annual limitation if there is a
change in ownership. $6,168,000 of the NOL carryforward relates to tax
deductions resulting from the exercise of stock options during 1999, 1998
and 1997. The tax benefit from adjusting the valuation allowance related
to this portion of the NOL carryforward will be credited to additional
paid-in capital.
8. Related Party Transactions:
On February 17, 1998, two of the Company's officers exercised options to
purchase 300,000 shares of the Company's common stock at $1.50 per share
that were scheduled to expire on May 6, 1998. The officers paid for the
cost of exercising the options by utilizing a bonus credit of $100,000 each
issued to them during 1997 and signing a full recourse note payable to the
Company for $125,000 each with interest accrued at 7.7%. On April 10,
1998, in consideration of the agreement of the two officers to not sell the
Company's common stock in market transactions, the Company agreed to
advance the officers, on a non-recourse basis, additional funds to cover
their tax liabilities and other considerations. As of December 31, 1999,
the notes receivable and accrued interest totaled $2,036,385 with a due
date of on or before December 31, 2000 (as extended). The Company has no
further commitment to advance additional funds to the officers.
In consideration for extending the term from December 31, 1999 through
December 31, 2000, the officers agreed that if the average closing price of
the common stock for five consecutive trading days results in a value of
the collateral equal to or above the total principal and accrued interest
balances, the officers will repay the loans within 45 days thereafter
either in cash or by tendering to the Company such number of shares which
at the average closing price for the previous five consecutive trading days
equals the principal and accrued interest then due.
The notes receivable and accrued interest are collateralized by 233,340
shares of the Company's common stock. In accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," the Company recorded an
impairment allowance of $666,000 as of December 31, 1999, based on the
value of the underlying collateral. The impairment allowance will be
adjusted quarterly based on the market value of the collateral shares.
9. Stock Options and Warrants:
Stock Options
As of December 31, 1999, the Company's 1998 Stock Option Plan had issued
options to purchase 438,501 shares out of a maximum total of 500,000
authorized shares allowed within the 1998 Stock Option Plan. As of
December 31, 1999, all other prior year stock option plans had issued the
maximum allowed options under each respective stock option plan. The
Company has submitted the 1999 Stock Option Plan, which includes a maximum
of 500,000 options, for shareholder approval at the 2000 annual
shareholders' meeting.
All stock option plans are each administered by a committee (the
"Committee") consisting of the board of directors or a committee thereof.
At its 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 stock
option plans, the Company also issues non-qualified options outside the
stock option plans. Options granted under these stock option 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, 1999, 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
in the following table:
Years Ended December 31,
-----------------------------------
1999 1998 1997
----------- ---------- --------
(In thousands, except per share
amounts)
Net Loss:
As Reported $ (5,856) $ (10,122) $ (3,620)
Pro Forma (7,930) (11,680) (5,991)
Basic and Diluted
Net Loss Per Share:
As Reported $ (0.41) $(0.78) $ (0.29)
Pro Forma (0.56) (0.90) (0.48)
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 1999, 1998 and 1997 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: (1) expected volatility of 80.5%, 76.2% and 80.4%
for 1999, 1998 and 1997, respectively; (2) expected lives ranging from four
to seven years; (3) risk-free interest rates at the date of grant ranging
from 4.44% to 6.43%; and, (4) dividend yield of zero for each year.
The following table summarizes fixed option activity for the years ended
December 31, 1999, 1998 and 1997:
<CAPTION>
December 31,
----------------------------------------------------------------------
1999 1998 1997
------------------------ ---------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> --------- ----------- --------- ---------- --------- ---------
Fixed Options
Outstanding: <C> <C> <C> <C> <C> <C>
Beginning of year 3,413,667 $ 6.590 3,357,500 $ 4.473 2,732,834 $ 3.710
Granted 521,000 5.866 480,000 8.875 725,500 7.203
Exercised (2,000) 6.625 (303,000) 1.500 (78,334) 1.698
Canceled (36,166) 7.920 (120,833) 8.400 (22,500) 9.486
--------- ----------- --------- ---------- --------- ---------
End of year 3,896,501 $ 6.481 3,413,667 $ 6.590 3,357,500 $ 4.473
========= =========== ========= ========== ========= =========
Exercisable at
year-end 2,872,681 $ 4.656 2,329,012 $ 6.970 2,242,000 $ 3.878
========= =========== ========= ========== ========= =========
Weighted-average
fair value of
options granted
during the year $ 3.61 $ 3.930 $ 4.458
The following table summarizes information about fixed stock options
outstanding at December 31, 1999:
Options Outstanding Options Exercisable
-------------------------------------- ---------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/99 Life Price at 12/31/99 Price
(in years)
------------- ----------- ----------- ---------- ----------- --------
$1.500 178,000 .668 $ 1.500 178,000 $ 1.500
3.000 1,700,000 3.082 3.000 1,700,000 3.000
5.750 - 7.250 1,011,500 5.795 6.279 351,673 6.752
7.375 - 8.875 1,001,001 4.320 8.660 639,008 8.753
10.250 6,000 5.129 10.250 4,000 10.250
----------- ----------- ---------- ----------- --------
Total 3,896,501 3.993 $ 5.641 2,872,681 $ 4.656
=========== =========== ========== =========== ========
Warrants
The following table summarizes changes in outstanding warrants during
the years ended December 31, 1999, 1998 and 1997:
Shares Price Range
------------------ ---------------
Warrants:
Outstanding at December 31, 1996 431,194 $ 1.10 - 6.90
Exercisable at December 31, 1996 281,194 1.10 - 3.00
=======
Warrants exercised during 1997 (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
=======
Warrants exercised during 1998 (79,622) 1.10 - 2.60
Outstanding at December 31, 1998 270,572 1.65 - 6.90
=======
Exercisable at December 31, 1998 270,572 1.65 - 6.90
Outstanding at December 31, 1999 270,572 ======= 1.65 - 6.90
=======
Exercisable at December 31, 1999 270,572 $ 1.65 - 6.90
=======
10. Private Placement of Common Stock:
On April 8, 1999, the Company initiated a private placement that resulted
in the sale of 1,792,500 shares of common stock for net proceeds of
$7,054,000. No placement fees were paid by the Company in connection with
the sale of the aforementioned shares.
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 initial 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 Project Area,
which commenced in late January 1997, the executive employee was entitled
to receive a $100,000 bonus that may, at the election of the officer, be
applied against the exercise of options to purchase common stock or paid in
cash upon termination of employment with the Company. The Company accrued
$200,000 at December 31, 1997 to reflect this obligation. On February 17,
1998, each officer exercised options to purchase common stock and applied
their respective bonuses awarded to him in 1997 towards the exercise price
(Note 8). 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 incentive bonuses of up to
$100,000, payable in cash, stock or options and a $100,000 bonus to be
issued annually on May 12, 1998, 1999 and 2000 to be applied against
future stock option exercises. In the event such bonuses are earned, but
not used by Mr. Maciolek and his employment with the Company is terminated,
the Company must pay the bonus to Mr. Maciolek in cash. 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
Effective August 3, 1995, the Company entered into a consulting agreement
with Lovejoy and Associates, a consulting company owned by Tom Lovejoy, a
director of the Company, under which Lovejoy and Associates would advise
the Company respecting future financing alternatives, 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, 1999 at a rate of $15,000 per month for January and
February 1998 and a subsequent rate of $17,000 per month thereafter. The
consulting agreement was terminated effective May 1, 1999 when Mr. Lovejoy
became the Company's Chief Financial Officer.
Polish Exploration Agreements
The Company is committed to the following obligations in Poland, presented
on a gross basis, to retain its exploratory concession acreage:
<CAPTION>
Exploratory Wells
-----------------
Beginning First Second Concession
of Three Three Annual and
Exploration Whole Year Year 2D Seismic Training Usufruct
Period Blocks Phase Phase Acquisition Fees (5) Fees (6)
------------------ ----- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Lublin (1), (2) Various (7) 24 6 1 per block 1,650 km $ 80,000 $ 675,000
Carpathian (2) 12/31/98 12 1 2 350 km 15,000 160,000
Pomeranian (3) 12/31/98 10 1 2 600 km 25,000 250,000
Warsaw West (3) 11/13/98 13 1 2 1,500 km 25,000 390,000
Baltic (4) 03/07/96 10 1 1 None 25,000 200,000
(1) The Company must drill an exploratory well in each undrilled block
during the second three year phase or relinquish the undrilled block
at the end of the exploration term. The Lublin Basin includes the
Block 298 usufruct, which includes only one exploration block, which
has a requirement to drill two exploratory wells during the second
three year phase. All other Lublin Basin usufructs require the
drilling of one well per block during the second three year phase. As
of December 31, 1999, the Company had drilled two exploratory wells to
be applied against the first three year exploration phase exploratory
well requirement, covered all concession and usufruct fees and
acquired 1,650 kilometers of 2D seismic.
(2) Apache has agreed to cover all of the Company's drilling, seismic,
annual training fees, concession, and usufruct fees during the first
three year phase to earn a fifty percent interest in the Lublin Basin
and Carpathian areas.
(3) The Company and Apache are equal partners in the Pomeranian and Warsaw
West areas. As of December 31, 1999, the Company had covered all
concession and usufruct fees.
(4) The Company has a one-hundred percent interest in the Baltic Project
Area. As of December 31, 1999, the Company had satisfied the minimum
exploratory well requirement for the entire exploration term by
drilling two exploratory wells.
(5) Annual training costs are for each year during the entire six year
exploration term.
(6) Concession and usufruct fees are payable on various terms over the
first three year exploration term, except the Baltic Project Area,
which is payable in equal installments of $33,333 per year over six
years.
(7) The Lublin Basin consists of four usufructs, the Vistula, Lublin
Middle, Block 298, and Komarow which have exploration periods
beginning August 8, 1997, June 30, 1998, June 30, 1998 and March 4,
1998, respectively.
Capital Requirements
As of December 31, 1999, the Company had $6.9 million of cash, cash
equivalents and marketable debt securities with no long-term debt. In view
of the Apache Exploration Program, this amount is expected to be sufficient
to fund the Company's present minimum exploration and operating commitments
during 2000 and part of 2001. The Company intends to seek additional
capital to fund any activities outside the scope of its present minimum
exploration and operating activities, including further exploration,
appraisal and development costs for the Wilga discovery and any other
additional exploration, appraisal, development or property acquisition
activities.
12. Business Segments:
The Company operates within two segments of the oil and gas industry:
exploration and production ("E&P") and drilling and well servicing
("Drilling") and within the exploration segment of the mining industry.
For segment and management reporting purposes the Company's mining segment
is not material and is excluded from the discussion herein.
The Company's revenues associated with its E&P activities are comprised of
oil sales from its producing properties in Montana and Nevada and gains on
the sale of partial property interests of the Company's exploratory
properties in Poland. For the years ended December 31, 1999, 1998 and
1997, over 85% of the Company's total oil sales were to one purchaser
located in Montana. The Company believes this purchaser could be replaced,
if necessary, without a loss in revenue. E&P operating costs are comprised
of: (1) exploration costs, including geological and geophysical costs,
exploratory dry holes and non-producing leasehold impairments; and, (2)
production costs which include lease operating expenses and production
taxes. Substantially all exploration costs are applied to the Company's
operations in Poland and all lease operating costs are applied to the
Company's domestic production. The Company's revenues associated with its
drilling activities are comprised of contract drilling and well servicing
fees generated by the Company's drilling rig and other well servicing
equipment in Montana. Drilling operating costs are comprised of direct
costs associated with its drilling and well servicing operations. DD&A
directly associated with a respective segment is disclosed within that
segment. The Company does not allocate current assets, corporate DD&A,
general and administrative expenses, income taxes, interest expense,
interest income, other income, other expense or officer loan impairments to
its operating segments for management and segment reporting purposes. All
material inter-company transactions between the Company's business segments
are eliminated for management and segment reporting purposes.
Information on the Company's operations by business segment for the years
ended December 31, 1999, 1998 and 1997 is summarized as follows:
Year Ended December 31, 1999
-----------------------------------
E&P Drilling Total
--------- --------- ---------
Operations Summary: (In thousands)
Revenues $ 1,554 $ 865 $ 2,419
Cash operating costs (1) 3,844 642 4,486
Non-cash operating costs (2) 140 -- 140
--------- --------- ---------
Operating income or (loss) before
DD&A (2,430) 223 (2,207)
Depreciation, depletion, &
amortization 51 334 385
--------- --------- ---------
Operating loss $ (2,481) $ (111) $ (2,592)
========= ========= =========
Identifiable net property and
equipment:
Non-producing leaseholds - Poland $ 691 $ -- $ 691
Non-producing leaseholds - United
States 692 -- 692
Producing properties 494 -- 494
Equipment and other -- 581 581
--------- ---------- --------
Total $ 1,877 $ 581 $ 2,458
========= ========== ========
Property and equipment capital
expenditures $ 526 $ 138 $ 664
========= ========== ========
(1) Excludes $31,000 of exploratory costs relating to the Company's gold
concessions.
(2) Includes stock options valued at $119,000 issued to a Polish citizen
for consulting services and $21,000 non-producing leasehold impairment
comprised of costs incurred prior to 1999.
Year Ended December 31, 1998
---------------------------------
E&P Drilling Total
-------- ---------- --------
Operations Summary: (In thousands)
Revenues (1) $ 1,590 $ 323 $ 1,913
Cash operating costs (2) 3,025 240 3,265
Non-cash operating costs (3) 119 -- 119
-------- ---------- --------
Operating income or (loss) before
DD&A (1,554) 83 (1,471)
Depreciation, depletion, &
amortization 231 322 553
-------- ---------- --------
Operating loss $(1,785) $ (239) $(2,024)
======== ========== ========
Identifiable net property and
equipment:
Non-producing leaseholds - Poland $ 461 $ -- $ 461
Non-producing leaseholds - United
States 717 -- 717
Producing properties 463 -- 463
Equipment and other -- 780 780
------- ---------- --------
Total 1,641 $ 780 $ 2,421
Property and equipment capital ======= ========== ========
expenditures $ 180 $ 156 $ 336
======= ========== ========
(1) E&P revenues include $1,123,000 generated in the United States and
$467,000 generated in Poland.
(2) Excludes $29,000 of exploratory costs relating to the Company's gold
concessions.
(3) Includes Company common stock issued for services of $119,000 and
excludes non-cash impairment charge of $5,885,000 for domestic proved
properties.
<CAPTION>
Year Ended December 31, 1997
----------------------------------------
E&P Drilling Total
<S> ---------- ----------- ---------
Operations Summary: (In thousands)
<C> <C> <C>
Revenues (1) $ 2,242 $ 496 $ 2,738
Cash operating costs 6,455 329 6,784
Non-cash operating costs (2) 99 -- 99
---------- ----------- ---------
Operating income or (loss) before DD&A (4,312) 167 (4,145)
Depreciation, depletion, & amortization 261 289 550
---------- ----------- ---------
Operating loss $ (4,573) $ (122) $ (4,695)
========== =========== =========
Identifiable net property and equipment:
Non-producing leaseholds - Poland $ 461 $ -- $ 461
Non-producing leaseholds - United States 709 -- 709
Producing properties 6,447 -- 6,447
Equipment and other -- 935 935
--------- ----------- ---------
Total net assets $ 7,617 $ 935 $ 8,552
========= =========== =========
Property and equipment capital expenditures $ 860 $ 210 $ 1,070
========= =========== =========
(1) E&P revenues include $2,040,000 generated in the United States and $202,000 generated
in Poland. Excludes $71,000 gain from sale of property interest relating to the
Company's gold concessions in Poland.
(2) Includes Company common stock issued for services of $70,000 and a non-cash
impairment charge of $29,000 for a lease in Wyoming acquired prior to 1997.
A reconciliation of the segment information to the consolidated totals for the
years ended December 31, 1999, 1998 and 1997 follows:
<CAPTION>
Year Ended December 31,
------------------------------------------
1999 1998 1997
<S> ---------- ----------- ------------
Revenues: (In thousands)
<C> <C> <C>
Reportable segments $ 2,419 $ 1,913 $ 2,738
Non-reportable segments -- -- 71
---------- ----------- ------------
Total consolidated revenues $ 2,419 $ 1,913 $ 2,809
========== =========== ============
Operating Loss:
Reportable segments $ (2,592) $ (2,024) $ (4,695)
Expense or (revenue) adjustments:
Non-reportable segments 31 29 (71)
Impairment of domestic proved property -- 5,885 --
General and administrative expenses 2,962 2,572 2,566
Corporate DD&A 109 118 85
Other -- 1 (1)
---------- ----------- ------------
Consolidated net operating loss $ (5,694) $ (10,629) $ (7,274)
========== =========== ============
Net Property and Equipment:
Reportable segments $ 2,458 $ 2,421 $ 8,552
Corporate assets 91 178 209
---------- ----------- ------------
Net property and equipment $ 2,549 $ 2,599 $ 8,761
========== =========== ============
Property and Equipment Capital Expenditures:
Reportable segments $ 581 $ 336 $ 1,070
Corporate assets 19 105 461
---------- ----------- ------------
Net property and equipment capital
expenditures $ 600 $ 441 $ 1,531
========== =========== ============
13. Quarterly Financial Data (Unaudited):
During the year ended ended December 31, 1999, the Company recorded
exploratory dry hole costs of $580,000 and $389,000 during the third and
fourth quarters, respectively, and an officer loan impairment of
$666,000 during the fourth quarter. During the year ended December
31, 1998, the Company incurred a domestic proved property impairment
of $5,885,000, of which $5,640,000 and $245,000 were recorded during
the third and fourth quarters, respectively.
Summary quarterly information for the years ended December 31, 1999 and 1998 is
as follows:
For the Quarter Ended
---------------------------------------------------
December 31 September 30 June 30 March 31
------------ ------------ ---------- -----------
(In thousands, except per share amounts)
1999 Quarterly
Information:
Revenues $ 785 $ 862 $ 451 $ 321
Net operating loss (2,746) (1,228) (895) (825)
Net loss $ (3,272) $ (1,072) $ (789) (723)
Basic and diluted net
loss per common
share $ (.21) $ (.08) $ (.06) $ (.06)
1998 Quarterly
Information:
Revenues $ 416 $ 426 $ 272 $ 799
Operating income or
(loss) (1,949) (6,511) (1,465) (704)
Net income or $ (6,392) $ (1,353) $ (519)
(loss) $ (1,858)
Basic and diluted net
loss per Common
share $ (.15) $ (.49) $ (.10) $ (.04)
14. Disclosure about Oil and Gas Properties and Producing Activities:
Impairment of Unproved Oil and Gas Properties
In accordance with generally accepted accounting principles, the Company
must record an impairment expense to the extent that capitalized costs of
unproved properties, on a property by property basis, are considered not
realizable. During the year ended December 31, 1999, the Company recorded
an impairment expense of $21,000 relating to a prospect located in Nevada
and $72,000 relating to the Lachowice Farm-in in Poland. During the year
ended December 31, 1997, the Company recorded an impairment expense of
$152,000 relating to several prospects in Montana, Nevada and Wyoming.
Impairment of Proved Oil and Gas Properties
In accordance with generally accepted accounting principles, the Company
must record an impairment expense if the Company determines the net book
value of its proved oil and gas properties, on a property by property
basis, exceeds the aggregate future net revenues from such properties. As
of December 31, 1998, the Company's future undiscounted net revenues from
its domestic proved developed properties was $1,015,000 and its discounted
future net revenues (PV-10) of it domestic proved developed properties was
$472,000. The future net revenues at December 31, 1998 were computed
using a price of $8.11 per barrel, the average price at December 31, 1998.
Accordingly, the Company recorded an impairment expense of $5,885,000 for
the year ended December 31, 1998, which reduced the carrying value of its
domestic proved properties to $463,000, an amount which approximated the
fair value of its domestic proved developed reserves determined on a
property by property basis.
In view of the Company's increased focus on its Polish exploration and
development opportunities and the probability of continued depressed oil
prices, management has determined it is unlikely the Company will incur any
domestic development costs in the foreseeable future. Accordingly, the
Company's proved reserves as of December 31, 1999 and 1998 include only
those reserves attributable to developed properties.
Capitalized Costs
Capitalized costs relating to oil and gas producing activities as of
December 31, 1999 and 1998 are summarized as follows:
United States Poland Total
-------------- --------- ---------
(In thousands)
December 31, 1999:
Proved properties $ 1,687 $ -- $ 1,687
Unproved properties 692 691 1,383
-------------- --------- ---------
Total gross properties 2,379 691 3,070
Less accumulated, depreciation, --
depletion and amortization (1,193) (1,193)
-------------- --------- ---------
Total $ 1,186 $ 691 $ 1,877
============== ========== ==========
December 31, 1998:
Proved properties $ 1,605 $ -- $ 1,605
Unproved properties 718 461 1,179
------------- --------- ---------
Total gross properties 2,323 461 2,784
Less accumulated depreciation, --
depletion and amortization (1,142) (1,142)
------------- --------- ---------
Total $ 1,181 $ 461 $ 1,642
============= ========= =========
Acquisition, Exploration and Development Activities
Costs incurred in oil property acquisition, exploration and development
activities during the years ended December 31, 1999, 1998 and 1997, whether
capitalized or expensed, are summarized as follows:
United
States Poland Total
--------- --------- ---------
(In thousands)
December 31, 1999:
Acquisition of properties:
Proved $ -- $ -- $ --
Unproved 1 230 231
Exploration costs 38 3,016 3,054
Development costs 82 -- 82
-------- -------- ---------
Total $ 121 $ 3,246 $ 3,367
======== ======== =========
December 31, 1998:
Acquisition of properties:
Proved $ -- $ -- $ --
Unproved 15 33 48
Exploration costs 34 2,092 2,126
Development costs 132 -- 132
-------- -------- ---------
Total $ 181 $ 2,125 $ 2,306
======== ======== =========
December 31, 1997:
Acquisition of properties:
Proved $ -- $ -- $ --
Unproved 733 66 799
Exploration costs 1,419 3,895 5,314
Development costs 187 -- 187
-------- -------- ---------
Total $ 2,339 $ 3,961 $ 6,300
======== ======== =========
15. 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. 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, interest expense and income
taxes.
The determination of oil and gas reserves is based on estimates and is
highly complex and interpretive. The estimates are subject to continuing
revisions as additional information becomes available or assumptions
change. All of the Company's oil reserves are in the United States.
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, 1999, 1998 and 1997 are as follows:
For the years ended December 31,
---------------------------------
1999 1998 1997
---------- --------- --------
(In thousands bbls of oil)
Total proved reserves:
Beginning of year 1,535 4,760 5,443
Purchase of minerals in-place -- -- --
Extensions and discoveries -- -- 18
Revisions of previous estimates (354) (3,110) (575)
Production (101) (115) (126)
---------- --------- --------
End of year 1,080 1,535 4,760
---------- --------- --------
Proved developed reserves:
Beginning of year 1,535 2,282 2,829
---------- --------- --------
End of year 1,080 1,535 2,282
---------- --------- --------
The decrease in 1999 reserves as compared to 1998 reserves was principally
due to higher operating costs and a higher production decline rate utilized
in the 1999 report as compared to the 1998 report. The decrease in 1998
reserves as compared to 1997 was principally due to the elimination of
2,478,000 bbls of proved undeveloped reserves which were included as of as
of December 31, 1997 and a $5.70 per bbl decrease in oil prices at year-end
1998 as compared to year-end 1997.
Standardized Measure of Discounted Future Net Cash Flows ("SMOG") 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
$22.37, $8.11 and $13.81 for the years ended December 31, 1999, 1998 and
1997, respectively and production costs per bbl of $14.11, $7.43 and $6.86
for 1999, 1998 and 1997, respectively, to the period-end quantities of the
Company's proved reserves. The variance in price from year to year was due
to price volatility associated with world-wide oil price fluctuations. The
increase in production costs of $6.68 per barrel for 1999, as compared to
1998, is primarily due the economic lives of marginal wells being extended
due to an oil price $14.26 per bbl higher in the 1999 report, as compared
to the 1998 report.
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 rates
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.
The components of SMOG are detailed below:
As of December 31,
---------------------------------------
1999 1998 1997
------------ ---------- ----------
SMOG Components: (In thousands)
Future cash flows $ 24,229 $ 12,518 $
65,740
Future production costs (15,240) (11,408) (32,658)
Future development costs (105) (95) (6,273)
------------ ---------- ----------
Future net cash flows 8,884 1,015 26,809
Future income tax expense -- -- (125)
------------ ---------- ----------
Future net cash flows 8,884 1,015 26,684
10% annual discount for
estimated timing of cash
flows (3,424) (543) (13,109)
------------ ---------- ----------
Total $ 5,460 $ 472 $ 13,575
============ ========== ==========
The following are principal sources of changes in SMOG:
Years Ended December 31,
----------------------------------------
1999 1998 1997
----------- ----------- -----------
SMOG Sources: (In thousands)
Balance, beginning of year $ 472 $ 13,575 $ 26,284
Sales of oil produced, net
of production costs (592) (77) (801)
Net changes in prices and
production costs 5,032 (4,482) (16,707)
Purchases of minerals in
place -- -- --
Extensions and discoveries,
net of future costs -- -- 108
Changes in estimated future
development costs (6) 2,875 (79)
Development costs incurred
during the year 82 132 394
Revisions in previous
quantity estimates (1,650) (9,076) (1,969)
Accretion of discount 47 1,357 2,628
Net change in income taxes -- (952) 9,071
Changes in rates of
production and other 2,075 (2,880) (5,354)
----------- ----------- -----------
Balance, end of year $ 5,460 $ 472 $ 13,575
=========== =========== ===========
16. Subsequent Events:
On January 25, 2000, the Company announced that the Wilga 2, the fifth
exploratory well drilled under terms of the Apache Exploration Program, was
an exploratory success after initial test results indicated a combined flow
rate of 16.9 Mmcf of gas and 570 Bbls of condensate per day from three
intervals in a Carboniferous Horizon at a depth between 7,732 feet and
8,550 feet. The Wilga 2 is located approximately 25 miles southeast of
Warsaw and approximately 12 miles from an existing pipeline. In accordance
with terms of the Apache Exploration Program, Apache will cover the
Company's 45.0% share of drilling and completion costs pertaining to the
Wilga 2. The Company will pay for its 45.0% share of costs thereafter. The
Company and its partners plan an appraisal well immediately, followed by
additional development drilling and facilities construction later in the
year, with initial production expected to commence during early 2001. In
addition, the Company will promptly begin seismic acquisition in the Wilga
area to identify a target near the Wilga discovery to be drilled later this
year to test the possibility of additional reserves outside the Wilga
structure.
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