U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
Commission File No. 0-25386
FX ENERGY, INC.
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(Exact name of registrant as specified in its charter)
NEVADA 87-0504461
------------------------------ -------------------
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
3006 Highland Drive, Suite 206
Salt Lake City, Utah 84106
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(Address of principal executive offices)
(801) 486-5555
-------------------------
(Issuer's telephone number)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by section 13 of 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The number of shares of $.001 par value common stock outstanding as of August 6,
1998, was 13,031,881.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FX ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June December
30, 1998 31, 1997
ASSETS ------------ ------------
(unaudited)
Current assets:
Cash and cash equivalents $ 2,452,326 $ 4,511,919
Investment in marketable debt securities 3,957,168 3,940,582
Accounts receivable:
Accrued oil sales 113,385 200,414
Interest receivable 75,617 43,561
Joint interest owners and others 166,621 587,473
Inventory 64,939 67,382
Other current assets 42,306 87,013
---------- ----------
Total current assets 6,872,362 9,438,344
---------- ----------
Property and equipment, at cost:
Oil and gas properties (successful
efforts method):
Proved 7,450,073 7,358,552
Unproved 1,184,408 1,169,521
Other property and equipment 2,431,013 2,253,750
---------- ----------
11,065,494 10,781,823
---------- ----------
Less accumulated depreciation, depletion
and amortization (2,364,295) (2,021,175)
---------- ----------
Net property and equipment 8,701,199 8,760,648
========== ==========
Other assets:
Certificates of deposit 356,500 356,500
Other 142,852 -
---------- ----------
Total other assets 499,352 356,500
---------- ----------
TOTAL ASSETS $16,072,913 $18,555,492
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 303,863 $ 654,809
Accrued liabilities 405,168 289,139
---------- ----------
Total current liabilities 709,031 943,948
---------- ----------
Stockholders' equity:
Common stock, $.001 par value, 30,000,000
shares authorized, 13,011,881 issued and
outstanding as of June 30, 1998 and
12,661,881 shares issued and outstanding
as of December 31, 1997 13,012 12,662
Notes receivable from officers (1,021,270) --
Additional paid-in capital 31,023,577 30,377,852
Accumulated deficit (14,651,437) (12,778,970)
---------- ----------
Total stockholders' equity 15,363,882 17,611,544
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $16,072,913 $18,555,492
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
FX ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended For the six months ended
June 30, June 30,
-------------------------- ------------------------
1998 1997 1998 1997
Revenues:
Oil sales $ 272,317 $ 499,737 $ 604,145 $1,078,714
Drilling revenue -- 72,166 -- 72,466
Gain on sale of property interests -- -- 466,891 --
---------- ---------- ----------- ----------
Total revenues 272,317 571,903 1,071,036 1,151,180
---------- ---------- ----------- ----------
Operating costs and expenses:
Lease operating costs 211,414 197,804 496,876 551,321
Production taxes 20,549 40,652 41,448 77,991
Geological and geophysical costs 635,982 175,428 887,902 391,259
Exploratory dry hole costs -- 687,636 12,324 1,804,538
Leasehold impairments -- 435 -- 435
Drilling costs 9,726 118,235 21,112 133,733
Depreciation, depletion and
amortization 177,335 163,695 356,131 308,517
General and administrative 682,226 605,104 1,423,895 1,248,781
---------- ---------- ----------- ----------
Total operating costs and
expenses 1,737,232 1,988,989 3,239,688 4,516,575
---------- ---------- ----------- ----------
Operating loss (1,464,915) (1,417,086) (2,168,652) (3,365,395)
---------- ---------- ----------- ----------
Other income (expense):
Interest and other income 111,552 189,072 296,185 391,903
Interest expense -- (49,506) -- (82,739)
---------- ---------- ----------- ----------
Total other income 111,552 139,566 296,185 309,164
---------- ---------- ----------- ----------
Net loss before extraordinary gain (1,353,363) (1,277,520) (1,872,467) (3,056,231)
Extraordinary gain
Baltic Project Area -- 3,061,059 -- 3,061,059
---------- ---------- ----------- ----------
Net income (loss) $(1,353,363) $ 1,783,539 $(1,872,467) $ 4,828
Basic and diluted income (loss) per
common share:
Net loss before extraordinary gain (0.10) (0.10) (0.15) (0.24)
Extraordinary gain -- 0.24 -- 0.24
---------- ---------- ----------- ----------
Basic and diluted income (loss) per
common share $ (0.10) $ 0.14 $ (0.15) $ --
========== ========== =========== ==========
Weighted average number of common
shares outstanding 13,003,618 12,552,661 12,913,772 12,568,410
========== ========== =========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
FX ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For six months ended
June 30,
1998 1997
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,872,467) $ 4,828
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Extraordinary gain -- (3,061,059)
Depreciation, depletion and 356,131 308,517
amortization
Gain on sale of property interests (466,891)
Exploratory dry hole costs -- 210,205
Leasehold impairments -- 435
Common stock issued for services 119,375 --
Increase (decrease) from changes in:
Accounts receivable 475,825 (214,912)
Inventory 2,443 61
Other current assets 44,707 43,326
Advances from non-operators -- 239,941
Accounts payable and accrued
liabilities
(34,917) (74,145)
Net cash used in operating ---------- ----------
activities (1,375,794) (2,542,803)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties (139,517) (653,909)
Additions to other property and equipment (193,541) (242,935)
Additions to other assets (142,852) (11,866)
Proceeds from sale of property interests 500,000 --
Proceeds from sale of other property and
equipment 3,267 13,051
Advances to officers (771,270) --
Purchase of marketable debt securities (5,391,586) (2,587,589)
Proceeds from maturing marketable debt 5,375,000 5,476,574
securities
---------- ----------
Net cash provided by (used in)
investing activities (760,499) 1,993,326
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt -- 1,626,329
Proceeds from exercise of warrants and 76,700 162,052
options
---------- ----------
Net cash provided by financing
activities 76,700 1,788,381
---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,059,593) 1,238,904
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,511,919 8,345,914
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,452,326 $ 9,584,818
========== ==========
NON CASH INVESTING ACTIVITIES:
On February 17, 1998, two Company officers exercised their options to purchase
150,000 shares each of the Company's common stock at $1.50 per share. Each
officer utilized a $100,000 bonus credit and a $125,000 note payable to the
Company to exercise the options.
The accompanying notes are an integral part of the consolidated financial
statements.
FX ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1: BASIS OF PRESENTATION
The interim financial data are unaudited; however, in the opinion of the
management of FX Energy, Inc. and Subsidiaries ("FX Energy" or the "Company"),
the interim data includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results for the interim
periods. The interim financial statements should be read in conjunction with FX
Energy's quarterly report on Form 10-Q for the three months ended March 31, 1998
and the annual report on Form 10-KSB for the year ended December 31, 1997,
including the financial statements and notes thereto.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant inter-company accounts and
transactions have been eliminated in consolidation. At June 30, 1998, the
Company owned 100% of the voting stock of its subsidiaries, including FX
Producing Company, Inc. ("FX Producing").
The Company follows the successful efforts method of accounting for its oil
and gas operations. Under this method of accounting, all property acquisition
costs and costs of exploratory and development wells are capitalized when
incurred, pending determination of whether an individual well has found proved
reserves. If it is determined that an exploratory well has not found proved
reserves, the costs of drilling the well are expensed. The costs of development
wells are capitalized whether productive or nonproductive.
Certain balances in the 1997 financial statements have been reclassified to
conform to the current quarter presentation. These changes had no effect on
total assets, total liabilities, stockholders' equity or net income (loss).
NOTE 2: INCOME TAXES
The Company recognized no income tax benefit from the losses generated in
the first six months of 1998 and the first six months of 1997. Due to the
Company's net operating loss carryforwards, no tax provision was allocated to
the 1997 extraordinary gain.
NOTE 3: COMMON STOCK
During the first six months of 1998, options and warrants for 340,000
shares of the Company's common stock were exercised, resulting in cash proceeds
of $77,000, notes receivable of $250,000, and a reduction in long-term
liabilities of $200,000.
In connection with the purchase of the Company's producing oil properties
and well servicing equipment in 1994, the Company agreed to issue to the former
owners up to 400,000 shares of Company common stock in semi-annual increments of
50,000 shares each beginning October 1, 1994 on the attainment of certain levels
of oil production from the properties acquired. The oil production levels from
October 1, 1994 through April 1, 1998 were not attained. No additional shares
were issued and the Company has no further obligations under the agreement.
NOTE 4: LOANS TO OFFICERS
During February 1998, the Company advanced $50,000 to an officer, bringing
the total advances to such officer to $200,000, originally payable with interest
at 7.7% on or before December 31, 1998.
On February 17, 1998, two of the Company's officers exercised options that
were to expire on May 6, 1998, to purchase 150,000 shares each of the Company's
common stock at a price of $1.50 per share. The closing price of the Company's
common stock was $7.375 per share on February 17, 1998. The foregoing option
exercises resulted in taxable income at ordinary rates to each executive of
$881,250, the amount by which the market price of the stock as of the date of
exercise exceeded the exercise price for the 150,000 shares purchased,
notwithstanding the fact that the transaction generated no cash with which the
executives could pay such taxes. In order to assist such executives in meeting
these income tax and other obligations so that they would not be required to
raise funds through the premature sale of the Company's common stock in the
trading market before the opportunity for the Company to realize results from
currently planned exploration drilling, the disinterested directors unanimously
approved interim loans to such individuals to assist them in meeting their
short-term obligations. The officers paid for the cost of their option exercise
by utilizing a $100,000 bonus credit received by each of the officers in 1997
and signing a full recourse note payable to the Company for $125,000 each
originally due, with interest at 7.7%, by December 31, 1998.
On April 10, 1998, in consideration of the agreement of the two officers
not to sell the Company's common stock in market transactions, the Company
agreed to $1,270,000 in additional advances to such officers through April 15,
1999. Through June 30, 1998, the Company had made $571,000 of additional
advances under this agreement. Under the new arrangement, all amounts due from
such officers, including amounts for the exercise of options and prior advances
discussed above, are now repayable, with interest at 7.7% from the date of the
separate advances, in cash or by the delivery of the Company's common stock, by
December 31, 1999. The loans are evidenced by limited recourse promissory
notes. The repayment of $125,000 under each loan, the amount of the balance of
the exercise price of the options, is a full recourse obligation under the note.
To the extent of all amounts in excess of $125,000 in principal and interest,
the notes are non-recourse and are collateralized by shares of the Company's
Common Stock valued at $7.375 per share, which equals the amount of the loans.
Both of the officers agreed to not sell any of the Company's common stock until
the announcement of the results of either the first two exploratory wells in
Poland or the first commercially successful well in Poland, whichever occurs
later, or December 31, 1998. Thereafter, the Company may demand payment of the
obligations on 45 days' written notice, in which case the officers may elect to
repay the obligation by paying cash or tendering the shares of the Company's
common stock pledged as security or other shares with a current market value
equal to the amount due. The loans may be prepaid by the executives at any
time, and any payments shall be first applied against the full recourse
obligations of the loan. As of June 30, 1998, notes receivable from officers
was $1,021,000.
NOTE 5: APACHE DRILLING COMMITMENT--LUBLIN PROJECT AREA
Under terms of the Participation Agreement between Apache Corporation
("Apache") and the Company effective April 16, 1997, Apache must, at its own
expense, drill seven exploratory wells on the Company's Lublin Project Area to
earn a fifty percent interest, to be commenced according to the following
timetable: two wells by July 1, 1998, two wells by December 31, 1998 and three
by July 1, 1999. The start up of Apache's drilling operations in Poland is
expected to be approximately three months later than originally scheduled,
primarily because after the first drilling dates were set the Company and Apache
acquired substantial additional acreage which significantly expanded the area to
be evaluated for first round drilling targets. Therefore, the Company has
agreed to waive the July 1, 1998, drilling date. Apache advises that it expects
to commence drilling the two required wells on or about October 1, 1998, with
one or two drilling rigs working continuously thereafter until the original
schedule is met.
The Company expects Apache to complete its initial 2D seismic acquisition
program on the Company's Lublin Project Area during August 1998. Under terms of
the Participation Agreement, Apache is required to shoot a minimum of 1,650
kilometers of 2D seismic at its own expense, except part of the Original 8
Blocks, where the Company's share of costs will be approximately $300,000. When
the initial 2D seismic program is completed, Apache will have shot over 2,250
kilometers of seismic costing approximately $4,000,000.
NOTE 6: NET LOSS PER SHARE:
Earnings per share for all periods presented has been restated to reflect
the adoption of Statement of Financial Accounting Standards No. 128, Earnings
Per Share ("SFAS 128"). SFAS 128 requires companies to present basic earnings
per share, and if applicable, diluted earnings per share, instead of primary and
fully diluted earnings per share. Basic earnings per share excludes dilution
and is computed by dividing net earnings available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if options
and warrants to purchase common stock were exercised. Options and warrants to
purchase 3,310,694 and 3,309,361 shares of common stock were outstanding at June
30, 1997 and June 30, 1998, respectively, at prices ranging from $1.10 to $10.25
per share. The outstanding options and warrants were not included in the
computation of diluted earnings per share because the effect would have been
antidilutive.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking Information May Prove Inaccurate
This report contains certain forward-looking statements and information
relating to the Company that are based on the beliefs of management as well as
assumptions made by and information currently available to management. When
used in this document, the words "anticipate," "believe," "estimate," "expect,"
"intend" and similar expressions, as they relate to the Company or its
management, are intended to identify forward-looking statements. Such
statements reflect the current view of the Company respecting future events and
are subject to certain risks, uncertainties and assumptions, including the risks
and uncertainties noted. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those described herein as anticipated, believed,
estimated, expected, or intended.
FINANCIAL CONDITION
Working Capital
The Company's working capital was $6,163,000 at June 30, 1998, a decrease
of $2,331,000 as compared to $8,494,000 at December 31, 1997. The decrease was
primarily attributable to negative cash flows of $1,376,000 from operating
activities and $760,000 from investing activities during the first six months of
1998.
Operating Activities
Net cash used in operating activities was $1,376,000 during the first six
months of 1998, a decrease of $1,167,000 as compared to $2,543,000 for the same
period of 1997. The decrease is primarily attributable to a smaller operating
loss of $2,169,000 during the first six months of 1998, a decrease of $1,196,000
as compared to an operating loss of $3,365,000 in the same period in 1997.
Investing Activities
Net cash used in investing activities was $760,000 during the first six
months of 1998, as compared to net cash provided by investing activities of
$1,993,000 during the same period of 1997. During the first six months of 1998,
the Company spent $91,000 to upgrade its producing operations (primarily in the
Cut Bank field in northern Montana), $48,000 for additional undeveloped
leaseholds ($33,000 in the Baltic Project Area and $15,000 in the Williston
Basin), a net amount of $108,000 to upgrade its drilling and well servicing
equipment and $82,000 for additional office equipment. Also, during the first
six months of 1998, the Company received $500,000 from Apache as an up front
cash payment relating to Apache's participation in the Company's Carpathian
Project Area, advanced $771,000 to officers of the Company (see Note 4 to the
financial statements) and had a net increase in marketable debt securities of
$17,000. During the first six months of 1997, the Company spent $236,000 to
upgrade its producing operations (primarily in the Cut Bank field), $20,000 to
drill a successful exploration well in central Montana, $398,000 to acquire
additional undeveloped leaseholds in Poland and the western United States, a net
amount of $156,000 to upgrade its drilling rig and well servicing equipment and
$74,000 on additional office equipment. Also in 1997, the Company had a net
increase in marketable debt securities of $2,889,000.
The Company currently has unproved capitalized costs of $1,184,000,
including $723,000 domestically and $461,000 in Poland. In accordance with
generally accepted accounting principles, should the Company determine that
prospects' capitalized costs are not recoverable following unsuccessful
exploration drilling or otherwise, the Company would record an impairment charge
which may materially and adversely affect the Company's results of operations
for the period during which such impairment is recognized. There were no
material impairments in the first six months of 1998 or the first six months of
1997.
Financing Activities
Net cash provided by financing activities was $77,000 during the first six
months of 1998, a decrease of $1,711,000, as compared to $1,788,000 in the same
period of 1997. During the first six months of 1998, options and warrants for
340,000 shares were exercised, resulting in net proceeds of $527,000, composed
of $77,000 in cash, notes receivable of $250,000 and a reduction in accrued
liabilities of $200,000. During the first six months of 1997, the Company
received advances of $1,626,000 from RWE-DEA Aktiengesellschaft fur Mineraloel
und Chemie, Hamburg, Germany ("RWE-DEA") and $162,000 from the exercise of
options and warrants representing 91,834 shares.
Capital Requirements
Historically, the Company has relied primarily on proceeds from the sale of
equity securities to fund its operating and investing activities. During 1997,
1996 and 1995, the Company received net proceeds from the sale of securities of
it and its subsidiaries, net of redemptions, of $253,000, $20,400,000 and
$3,711,000, respectively. The Company also benefits from funds provided by its
strategic partners relating to various exploratory projects.
During 1998, the Company expects to have substantially all the cost of its
share of the initial phase of exploratory activities in Poland covered by Apache
and other industry partners. The primary focus for 1998 is expected to be in
the Lublin project area, where Apache is obligated to pay all of the cost to
drill four exploratory wells at an estimated cost of approximately $10,000,000,
and to shoot 2D seismic at an estimated cost of $4,000,000. The Company will
pay approximately $300,000 of the seismic costs and none of the drilling costs.
On May 23, 1998, the Company signed a Memorandum of Understanding ("MOU")
with POGC to jointly explore and develop POGC's Lachowice Concession, an
undeveloped gas discovery located within the Company's Carpathian project area,
with Apache as operator. Final contract negotiations are underway to re-enter
up to three existing wells, construct related pipeline and production facilities
and, if warranted, drill three or more exploratory wells. The Company now plans
to start the re-entry work during the last quarter of 1998, construct pipeline
and production facilities in the first half of 1999 and, if warranted, drill
exploratory wells during the second half of 1999. The Company's net cost in the
project is expected to be approximately $300,000 for each re-entry, $3,500,000
for pipeline and production facilities and $1,900,000 for each exploratory
well.
The Company will likely face significant demands on its capital and may
require additional capital if the three existing Lachowice wells or other
exploration drilling results in one or more discoveries that warrant
development. In addition, the Company is actively seeking development
opportunities in cooperation with both POGC and Apache, which could also create
demands on the Company's capital and perhaps require additional capital. Prior
to the end of 1998, the Company may acquire additional capital to accelerate
planned exploration and development programs in Poland. If exploration of the
Lublin, Baltic, Carpathian or Pomeranian project areas is successful in proving
commercial oil and/or gas reserves, the Company may require additional capital
to fund a multi-well development program, production facilities, pipelines or to
purchase other assets required to support large-scale production. The Company
has no arrangement for any such additional financing, but may seek required
funds from the sale of additional securities, project financing, strategic
alliances with other energy or financial partners or other arrangements, all of
which may dilute the interest of existing shareholders in the Company or the
Company's interest in the specific project financed. There can be no assurance
that additional funds could be obtained or, if obtained, would be on terms
favorable to the Company.
RESULTS OF OPERATIONS
Comparison of the second Quarter 1998 to the second Quarter 1997
Revenues
Oil sales were $272,000 for the second quarter of 1998, a decrease of
$228,000, or 45.6%, as compared to $500,000 in the same period of 1997. The
average price per bbl was $9.93 during the second quarter of 1998, a decrease of
$5.85 or 37.1%, as compared to $15.78 for the same period of 1997. Oil
production for the second quarter of 1998 was 27,417 bbls, a decrease of 4,251
bbls or 13.4%, as compared to 31,668 bbls, for the same period of 1997. The
decrease in production is attributable to a combination of the Company's effort
to shut in marginal wells due to the current level of depressed oil prices and
the natural production decline associated with the Company's producing
properties.
There were no drilling revenues during the second quarter of 1998, as
compared to $72,000 for the same period of 1997. The Company's drilling rig was
not utilized during the second quarter of 1998. During the same period of 1997,
the rig drilled a successful exploratory well in central Montana. Drilling
revenue will continue to vary due to the timing of wells being drilled, costs of
the wells and the Company's working interest.
There was no revenue recognized from gain on sale of property interests in
the second quarter of 1998 or the second quarter of 1997.
Operating Costs and Expenses
Lease operating costs were $211,000 for the second quarter of 1998, an
increase of $13,000 as compared to $198,000 for the same period of 1997. The
Company has initiated a program to substantially reduce its operating costs and
to defer workovers until the price of oil rebounds from its current depressed
level.
Production taxes were $21,000 for the second quarter of 1998, a decrease of
$20,000 as compared to $41,000 in the same period of 1997. The decrease was
attributable to a 37.1% decrease in the price of oil per bbl and an oil
production decrease of 13.4% in the second quarter of 1998 as compared to the
same period of 1997.
Geological and geophysical costs ("G&G") were $636,000 for the second
quarter of 1998, an increase of $461,000 as compared to $175,000 in the same
period of 1997. During the second quarter of 1997, the Company issued common
stock valued at $119,000 for G&G consulting services in Poland and accrued
$300,000 relating to its share of cost of the Lublin Project Area seismic
program currently underway by Apache. The Company expects its G&G expenditures
will continue at current or higher levels as it continues to focus its
exploratory efforts on Poland.
There were no exploratory dry hole costs for the second quarter of 1998, as
compared to $688,000 in the same period of 1997. The Company did not drill any
exploratory dry holes during the second quarter of 1998. During the same period
of 1997, the Company incurred additional exploratory dry hole costs of $688,000
associated with the Orneta #1, a dry hole drilled on the Company's Baltic
Project Area during the first six months of 1997.
Drilling costs were $10,000 for the second quarter of 1998, a $108,000
decrease as compared to $118,000 in the same period of 1997. The Company's
drilling rig was idle and was not used for exploratory drilling during the
second quarter of 1998. During the same period of 1997, the rig drilled a
successful exploratory well in central Montana.
Depreciation, depletion and amortization ("DD&A") was $177,000 for the
second quarter of 1998, an increase of $13,000 as compared to $164,000 in the
same period of 1997. The effective DD&A rate for the Company's producing
properties increased $0.35 per bbl to $2.42 per bbl during the second quarter of
1998, as compared to $2.07 per bbl during the second quarter of 1997, due
primarily to lower volumetric reserves at the end of 1997, as compared to the
end of 1996. The increased DD&A rate was partially offset by lower production
volumes in 1998. DD&A for the second quarter of 1998 also increased as compared
to the same period in 1997 due to equipment additions after the second quarter
of 1997.
There were no leasehold impairments for the second quarter of 1998 as
compared to $435 in the same period of 1997. Leasehold impairments will vary
from quarter to quarter and year to year based upon management's periodic
assessment to determine whether any unproved properties have been impaired.
General and administrative expenses ("G&A") were $682,000 for the second
quarter of 1998, an increase of $77,000 as compared to $605,000 in the same
period of 1997. The increase was primarily due to additional professional,
legal, travel and other G&A costs associated with the Company's expanding Polish
operations.
Interest and other income was $112,000 for the second quarter of 1998, a
decrease $77,000 as compared to $189,000 in the same period of 1997. The
decrease is primarily due to lower interest earned on the Company's cash
equivalents and marketable debt securities. The Company had $6,409,000 of cash
equivalents and marketable debt securities on hand at June 30, 1998, as compared
to $12,172,000 at June 30, 1997.
There was no interest expense for the second quarter of 1998, as compared
to $50,000 during the same period of 1997. The Company had no outstanding long-
term debt as of June 30, 1998. During the second quarter of 1997, the Company
incurred interest expense of $50,000 relating to advances received from RWE-DEA
for joint operations on the Company's Baltic project area. On June 30, 1997,
RWE-DEA elected not to earn an interest in the Company's Baltic project area and
the Company eliminated its outstanding debt associated with advances received
from RWE-DEA and recognized it as an extraordinary gain of $3,061,000.
Comparison of the first six months of 1998 to the first six months of 1997
Revenues
Oil sales were $604,000 for the first six months of 1998, a decrease of
$475,000, or 44.0%, as compared to $1,079,000 in the same period of 1997. The
average price per bbl was $10.63 during the first six months of 1998, a decrease
of $6.55 or 38.1%, as compared to $17.18 for the same period of 1997. Oil
production for the first six months of 1998 was 56,835 bbls, a decrease of 5,956
bbls or 9.5%, as compared to 62,791 bbls, for the same period of 1997. The
decrease in production is attributable to a combination of the Company's effort
to shut in marginal wells due to the current level of depressed oil prices and
the natural production decline associated with the Company's producing
properties.
There were no drilling revenues during the first six months of 1998, as
compared to $72,000 for the same period of 1997. The Company's drilling rig was
not utilized during the first six months of 1998. During the same period of
1997, the rig drilled a successful exploratory well in central Montana.
Drilling revenue will continue to vary due to the timing of wells being drilled,
costs of the wells and the Company's working interest.
The gain on sale of property interests was $467,000 during the first six
months of 1998, as compared to no gain on sale of property interests for the
same period of 1997. During the first six months of 1998, Apache paid the
Company $500,000 as up-front cash consideration relating to its participation in
the Western Carpathian Concession, which was offset by associated costs of
$33,000.
Operating Costs and Expenses
Lease operating costs were $497,000 for the first six months of 1998, a
decrease of $54,000 as compared to $551,000 for the same period of 1997. During
the first six months of 1998, the Company initiated a program to substantially
reduce its operating costs, shut in marginal wells and to defer workovers until
the price of oil rebounds from its current depressed level.
Production taxes were $41,000 for the first six months of 1998, a decrease
of $37,000 as compared to $78,000 in the same period of 1997. The decrease was
attributable to a 38.1% decrease in the price of oil per bbl and an oil
production decrease of 9.5% in the first six months of 1998 as compared to the
same period of 1997.
Geological and geophysical costs ("G&G") were $888,000 for the first six
months of 1998, an increase of $497,000 as compared to $391,000 in the same
period of 1997. During the first six months of 1997, the Company issued common
stock valued at $119,000 for G&G consulting services in Poland and accrued
$300,000 relating to its share of cost of the Lublin Project Area seismic
program currently underway by Apache. The Company expects its current G&G
expenditures will continue at current or higher levels as it continues to focus
its exploratory efforts on Poland.
Exploratory dry hole costs were $12,000 for the first six months of 1998, a
decrease of $1,793,000 as compared to $1,805,000 in the same period of 1997.
The exploratory dry hole costs recorded in the first six months of 1998 relate
to exploratory dry holes drilled by the Company during 1997. The Company did
not drill any exploratory dry holes during the first six months of 1998. During
the same period of 1997, the Company drilled the Orneta #1, an exploratory dry
hole, on the Company's Baltic project area at a cost of $1,805,000.
Drilling costs were $21,000 for the first six months of 1998, a $113,000
decrease as compared to $134,000 in the same period of 1997. The Company's
drilling rig was idle and was not used for exploratory drilling during the first
six months of 1998. During the same period of 1997, the rig drilled a
successful exploratory well in central Montana.
Depreciation, depletion and amortization ("DD&A") was $356,000 for the six
months of 1998, an increase of $47,000 as compared to $309,000 in the same
period of 1997. The effective DD&A rate for the Company's producing properties
increased $0.39 per bbl to $2.46 per bbl during the first six months of 1998, as
compared to $2.07 per bbl during the first six months of 1997, due primarily to
lower volumetric reserves at the end of 1997, as compared to the end of 1996.
The increased DD&A rate was partially offset by lower production volumes in
1998. DD&A for the first six months of 1998 also increased as compared to the
same period in 1997 due to equipment additions after the first six months of
1997.
There were no leasehold impairments for the first six months of 1998, as
compared to $435 in the same period of 1997. Leasehold impairments will vary
from period to period based upon management's periodic assessment to determine
whether any unproved properties have been impaired.
General and administrative expenses ("G&A") were $1,424,000 for the first
six months of 1998, an increase of $175,000 as compared to $1,249,000 in the
same period of 1997. The increase was primarily due to additional professional,
legal, travel and other G&A costs associated with the Company's expanding Polish
operations.
Interest and other income was $296,000 for the first six months of 1998, a
decrease of $96,000 as compared to $392,000 in the same period of 1997. The
decrease is primarily due to lower interest earned on the Company's cash
equivalents and marketable debt securities. The Company had $6,409,000 of cash
equivalents and marketable debt securities on hand at June 30, 1998, as compared
to $12,172,000 at June 30, 1997.
There was no interest expense for the first six months of 1998, as compared
to $83,000 during the same period of 1998. The Company had no outstanding long-
term debt as of June 30, 1998. During the first six months of 1997, the Company
incurred interest expense of $83,000 relating to advances received from RWE-DEA
for joint operations on the Company's Baltic Project Area. On June 30, 1997,
RWE-DEA elected not to earn an interest in the Company's Baltic Project Area and
the Company eliminated its outstanding debt associated with advances received
from RWE-DEA and recognized it as an extraordinary gain of $3,061,000.
OTHER MATTERS
The Company has reviewed all other recently issued, but not yet adopted,
accounting standards in order to determine their effects, if any, on the results
of operations or financial position of the Company. Based on that review, the
Company believes that none of these pronouncements will have a significant
effect on current or future earnings or operations.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
(c) ITEM 701--UNREGISTERED SALES
During the quarter ended June 30, 1998, the Company issued for services
provided, 10,000 shares of the Company's Common Stock to a citizen of Poland.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 4, 1998, at the annual meeting of the Company's shareholders, the
shareholders approved the following matters submitted to them for consideration:
(1) Elected Scott J. Duncan and Thomas B. Lovejoy as directors of the Company
as follows:
Scott J. Duncan For: 9,830,252
Thomas B. Lovejoy For: 9,830,252
(2) Approved the FX Energy, Inc., 1997 Stock Option and Award Plan:
For: 9,014,790 Against: 735,085 Abstain: 108,807
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are included as part of this report:
SEC
EXHIBIT REFERENCE
NUMBER NUMBER TITLE OF DOCUMENT LOCATION
- ------- --------- -------------------------------------- ------------
Item 10 Material Contracts
10.01 10 Prospect Agreement between Apache Poland Incorporated
Sp. z o.o., and FX Energy Poland Sp. by
z o.o., dated April 17, 1998. Reference(1)
10.02 10 Option Agreement between FX Energy Poland Incorporated
Sp. z o.o., and POGC dated effective May by
20, 1998, relating to Pomeranian Reference(2)
Concessions.
Item 27 Financial Data Schedule
27.01 27 Financial Data Schedule This Filing
- ---------
(1) Incorporated by reference from the report on form 8-K dated April 20,
1998.
(2) Incorporated by reference from the report on form 8-K dated June 2,
1998.
(b) REPORTS ON FORM 8-K
During the quarter ended June 30, 1998, the Company filed the
following reports on Form 8-K
DATE OF EVENT REPORTED ITEM(S) REPORTED
---------------------- ----------------------------------
April 20, 1998 Item 5. Other Events
Item 7. Financial Statements and
Exhibits
June 2, 1998 Item 5. Other Events
Item 7. Financial Statements and
Exhibits
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FX ENERGY, INC.
(Registrant)
Date: August 10, 1998 By /s/ David N. Pierce
Chief Executive Officer, President, Chief
Financial and Accounting Officer, and Director