Memorandum
To: Board of Directors
Date: Reformed June 19, 1998
Re: Memorandum of Understanding
Expiring options and related matters
On February 17, 1998, at the conclusion of the quarterly board meeting of FX
Energy (the "company") two of the company's officers and directors, David Pierce
and Andy Pierce, each elected to exercise certain stock options that were
nearing expiration. In anticipation of the need for funds to pay the exercise
price, to pay the income taxes associated with the exercise, and to pay other
income taxes and personal liabilities, David and Andy advised the board that
they would need to sell company common stock in the near future. These matters
and related issues were discussed at length during the two days of board
meetings.
The central point of the discussions was the need to balance two conflicting
interests: on the one hand is the company's need to access the equity capital
markets this year, and on the other hand is David and Andy's need to sell a
portion of their equity holdings. The company plans to raise $15 million (plus
or minus $5 million) in April or May (prior to the first round of drilling by
Apache) and may do a much larger public offering late in 1998. David and Andy
need approximately $1.7 million in the aggregate to cover taxes and other
liabilities, an amount which they believe could be realized through the sale of
their common shares into the market.
The conflict arises because sales by insiders are interpreted by the market as a
lack of confidence in the company's future value, thereby eroding investor
confidence and diminishing the perceived value and market price of the company's
common stock. Sales made by insiders in January 1997 were seen by the board of
directors to have precisely this adverse effect. Insider sales can be expected
to cost the company a considerable amount of money (or stock) to the extent the
company raises funds at a lower price than would be possible absent insider
sales.
The problem is expected to be less severe in the future, once the company has
made hydrocarbon discoveries in Poland. At that point, the perceived value of
the company and its shares is expected to be tied to estimates of reserves and
future production. Until then, much of the company's value will be based on
intangibles, and will remain more or less vulnerable to adverse market reaction
to insider sales.
After much discussion among the board members and the company's legal and
accounting advisors, a compromise proposal seemed to interest most board
members, subject to review and comment by the company's advisors and final
review and approval by the members of the board. The essence of the compromise
is this: David and Andy will agree not to sell any equity securities into the
market until after results are released on the two Apache wells to be spudded by
June 30, or until the first commercially successful well, whichever occurs first
(the "Lockup Period", which shall in no event extend beyond Dec. 31, 1998); in
exchange, the company will provide funds (the "Accommodation Loan") in the
amounts and at the times shown below, which David and Andy will use to pay the
taxes shown.
DAVID ANDY
-------- --------
Existing $200,000 $0 Already outstanding
Loan
Exercise 125,000 $125,000 17-Feb-98 $225,000 exercise price less
Price $100,000 "credit"
FICA 3,255 3,255 15-Mar-98 6.2% of first $65,400 income
Medicare 14,500 14,500 15-Mar-98 1.45% of $100,000 credit plus
$900,000 "gain"
Fed Tax 131,626 143,776 15-Apr-98
State Tax 33,140 35,833 15-Apr-98
Est. Pymt 49,160 48,650 15-Apr-98 safe haven 110% of prior year tax
Est. Pymt 49,160 48,650 15-Jun-98 safe haven 110% of prior year tax
Est. Pymt 49,160 48,650 15-Sep-98 safe haven 110% of prior year tax
Est. Pymt 49,160 48,650 15-Jan-99 safe haven 110% of prior year tax
State Tax 51,258 53,013 15-Apr-99 Est. remaining tax liability due
to option exercise
Fed Tax 195,535 199,947 15-Apr-99 Est. remaining tax liability due
to option exercise
$950,954 $769,924 $1,720,878
Except to the extent of the exercise price of $125,000 for option exercise
payments for each of David and Andy, which shall be a full recourse obligation,
repayment of principal and interest (at the current rate for home mortgages) of
the Accommodation Loan will be without recourse except against that number of
shares (the "Collateral Shares") which, at $7.375 per share, would be required
to cover all of the principal (not interest) amounts actually drawn (a maximum
of 128,943 for David; 104,397 for Andy). The appropriate number of Collateral
Shares will be placed with the company's counsel, Kruse, Landa & Maycock, LLC,
as custodian for the Company prior to any draw date.
The company will have the right at any time on 45 days' notice after the Lockup
Period to demand payment in full of the principal and interest on the
Accommodation Loan. Within such 45 day period or at maturity on December 31,
1999, David and Andy shall either (i) repay in cash the principal and interest
of the Accommodation Loan, (ii) tender that number of shares (including
Collateral Shares) which, at the average bid price for the five trading days
preceding tender, would satisfy the principal and interest in full, (iii) or
tender a number of shares equal to the number of Collateral Shares (not
necessarily the actual Collateral Shares) as full satisfaction of such
obligation. In any event, all principal and interest on the Accommodation Loan
will be due on December 31, 1999.
David and Andy will have the right at any time to satisfy the Loan by tendering
to the Company that number of shares, including Collateral Shares, which, at the
average bid price for the five trading days preceding such tender, would satisfy
the principal and interest in full.
After the Lockup Period, proceeds from any stock sales by David or Andy will be
applied first to repayment of the Loan to the extent it has not already been
paid. If such sales include Collateral Shares, such sales will be effected by
delivering the certificates representing such shares held in custody on behalf
of the Company to the selling broker under irrevocable instructions from the
selling executive and the Company that first net sales proceeds be disbursed
directly to the Company for credit against the Loan.
Unless the Loan has already been satisfied, the company will have the right at
any time to include the Collateral Shares (or substitute shares provided by
David or Andy) in a public or private offering and to retain so much of the sale
proceeds as may be required to satisfy the Accommodation Loan. If the amount due
under such loan is greater than the sale proceeds then the Accommodation Loan
will nevertheless be deemed paid in full.
The Accommodation Loan facility is intended to provide the funds to be drawn, at
David's and Andy's election, as set forth above. Subsequent draws may be made
even though earlier draws have been repaid. The Accommodation Loan facility
will terminate on, and no further draws can be made after, April 15, 1999.
After the Lockup Period, David and Andy will discuss with the board any plans
they may make from time to time to sell shares. To the extent the company plans
to do an offering in the same time frame, all parties will give serious
consideration to including management shares therein.
The foregoing is intended as a memorandum of understanding between the Company
and each of David and Andy. In addition to this memorandum, the transactions
contemplated hereby shall be evidenced by a separate promissory note, pledge
agreement, and letter instructions to the custodian of the shares between the
Company and each of David and Andy, substantially in the forms attached. The
Company and David and Andy shall take such further action and execute such
further instruments as may be appropriate to effectuate the purpose and intent
of this memorandum and the additional documents entered into in connection
herewith.
The foregoing is accepted and agreed to this 19th day of June, 1998.
FX Energy, Inc.
By: /s/ Thomas B. Lovejoy, Chairman
/s/ David N. Pierce
/s/ Andrew W. Pierce