U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(AMENDMENT NO. 2)
(Restated to show cumulative amendments)
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
COMMISSION FILE NO. 0-25386
FX ENERGY, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
NEVADA 87-0504461
------------------------------ -------------------
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
3006 HIGHLAND DRIVE, SUITE 206
SALT LAKE CITY, UTAH 84106
--------------------------------------
(Address of principal executive offices)
(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 May 17,
1999, was 14,847,003.
- -------------------------------------------------------------------------------
NOTE: The only change effected by this Amendment No. 2 is to correct the
number of shares shown on the cover page as outstanding as of May 17,
1999.
- -------------------------------------------------------------------------------
FX ENERGY, INC., AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
ITEM DESCRIPTION PAGE
----- ------------------------------------------------- ----
PART I. FINANCIAL INFORMATION
1. Consolidated Balance Sheets 2
1. Consolidated Statements of Operations 3
1. Consolidated Statements of Cash Flows 5
1. Notes to Consolidated Financial Statements 6
2. Management's Discussion and Analysis of
FinancialCondition and Results of Operations 10
PART II. OTHER INFORMATION
2. Changes in Securities and Use of Proceeds 19
4. Submission of Matters to a Vote of Security
Holders 19
6. Exhibits and Reports on Form 8-K 20
-- Signatures. 20
1
PART I.
ITEM 1. FINANCIAL STATEMENTS
FX ENERGY, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH DECEMBER
31, 1999 31, 1998
---------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 940,041 $ 1,811,780
Investment in marketable debt securities 2,906,829 2,929,914
Accounts receivable:
Accrued oil sales 142,527 95,064
Interest receivable 63,465 86,258
Joint interest owners and others 184,412 240,102
Inventory 66,706 68,327
Other current assets 70,267 66,053
---------- ----------
Total current assets 4,374,247 5,297,498
---------- ----------
PROPERTY AND EQUIPMENT, AT COST:
Oil and gas properties (successful
efforts method):
Proved 1,636,285 1,605,279
Unproved 1,478,485 1,178,408
Other property and equipment 2,527,391 2,494,688
---------- ----------
Gross property and equipment 5,642,161 5,278,375
Less accumulated depreciation, depletion
and amortization (2,805,871) (2,679,441)
---------- ----------
Net property and equipment 2,836,290 2,598,934
---------- ----------
OTHER ASSETS:
Certificates of deposit 356,500 356,500
Other 2,789 --
---------- ----------
Total other assets 359,289 356,500
---------- ----------
TOTAL ASSETS $ 7,569,826 $ 8,252,932
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 385,414 $ 420,906
Accrued liabilities 1,113,005 911,950
---------- ----------
Total current liabilities 1,498,419 1,332,856
---------- ----------
Total liabilities 1,498,419 1,332,856
---------- ----------
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value, 30,000,000
shares authorized, 13,054,503 issued and
outstanding as of March 31, 1999 and December
31, 1998 13,055 13,055
Notes receivable from officers (1,430,677) (1,304,527)
Additional paid-in capital. 31,112,861 31,112,861
Accumulated deficit (23,623,832) (22,901,313)
---------- ----------
Total stockholders' equity 6,071,407 6,920,076
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,569,826 $ 8,252,932
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
2
FX ENERGY, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 1998
---------- -----------
REVENUES:
Oil sales $ 233,708 $ 331,828
Drilling revenue 87,543 --
Gain on sale of property
interests -- 466,891
---------- ----------
Total revenues 321,251 798,719
---------- ----------
OPERATING COSTS AND EXPENSES:
Lease operating expenses 236,069 285,462
Production taxes 14,368 20,899
Geological and geophysical 179,832 251,920
costs
Exploratory dry hole costs -- 12,324
Drilling costs 52,874 11,386
Depreciation, depletion and 126,429 178,796
amortization
General and administrative 536,389 741,669
---------- ----------
Total operating costs
and expenses 1,145,961 1,502,456
Operating loss (824,710) (703,737)
---------- ----------
Other income (expense):
Interest and other income 102,191 184,633
---------- ----------
Total other income. 102,191 184,633
---------- ----------
NET LOSS $ (722,519) $ (519,104)
========== ==========
Basic and diluted net loss per
common share $ (.06) $ (.04)
========== ==========
Basic and diluted weighted average
number of shares outstanding 13,054,503 12,822,704
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
3
FX ENERGY, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THREE MONTHS ENDED
MARCH 31,
----------------------
1999 1998
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (722,519) $ (519,104)
Adjustments to reconcile net loss to net
cash used in
operating activities:
Depreciation, depletion and
amortization 126,429 178,796
Gain on sale of property interests -- (466,891)
Increase (decrease) from changes in:
Accounts receivable (17,640) 414,929
Inventory 1,621 2,611
Other current assets (4,214) 17,914
Accounts payable and accrued liabilities (103,484) (299,679)
---------- ----------
Net cash used in operating
activities (719,807) (671,424)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties (65,036) (89,284)
Additions to other property and equipment (12,382) (123,117)
Additions to other assets (2,789) --
Proceeds from sale of property interests 3,000 500,000
Proceeds from sale of other property and
equipment -- 3,267
Purchase of marketable debt securities (1,041,915) (4,038,710)
Proceeds from maturing marketable debt
securities 1,065,000 3,785,000
---------- ----------
Net cash provided by (used in) investing
activities (54,122) 37,156
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances to officers (97,810) (331,275)
Proceeds from exercise of warrants and
options -- 64,900
---------- ----------
Net cash used in financing activities (97,810) (266,375)
---------- ----------
Decrease in cash and cash equivalents (871,739) (900,643)
Cash and cash equivalents at beginning of period 1,811,780 4,511,919
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 940,041 $ 3,611,276
========== ==========
SUPPLEMENTAL NON-CASH ACTIVITY DISCLOSURE:
Non-cash investing activities:
Additions to oil and gas properties for the three months ended March 31,
1999 included $269,047 of additions financed with accounts payable and accrued
liabilities.
Non-cash financing activities:
During the three months ended March 31, 1998, two of FX Energy's officers
exercised their options to purchase 150,000 shares each of FX Energy's common
stock at $1.50 per share. Each officer utilized a $100,000 bonus and a $125,000
note payable to FX Energy to exercise the options.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
4
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 statement of the results for the interim
periods. The interim financial statements should be read in conjunction with FX
Energy's annual report on Form 10-K for the year ended December 31, 1998,
including the financial statements and notes thereto.
The consolidated financial statements include the accounts of FX Energy and
its wholly-owned subsidiaries and FX Energy's undivided interests in Poland.
All significant inter-company accounts and transactions have been eliminated in
consolidation. At March 31, 1999, FX Energy owned 100% of the voting stock of
all of its subsidiaries.
FX Energy follows the successful efforts method of accounting for its oil
and gas operations. Under this method of accounting, all property acquisition
costs and costs of exploratory and development wells are capitalized when
incurred, pending determination of whether an individual well has found proved
reserves. If it is determined that an exploratory well has not found proved
reserves, the costs of drilling the well are expensed. The costs of development
wells are capitalized whether productive or nonproductive.
Certain balances in the 1998 financial statements have been reclassified to
conform to the current quarter presentation. These changes had no effect on
total assets, total liabilities, stockholders' equity or net loss.
NOTE 2: INCOME TAXES
FX Energy recognized no income tax benefit from the losses generated in the
first quarter of 1999 and the first quarter of 1998.
5
NOTE 3: BUSINESS SEGMENT INFORMATION
FX Energy operates within two segments of the oil and gas industry: the
exploration and production segment and the contract drilling and well servicing
segment; and, within the exploration segment of the mining industry. Mining,
which consists of gold exploration on FX Energy's Sudety Project Area in Poland,
is immaterial to FX Energy and is not considered a reportable business segment
by FX Energy.
Reportable business segment information as of March 31, 1999 and for the
three months ended March 31, 1999 follows:
Reportable Segments
----------------------
Exploration Drilling Non- Other
and and Well Reportable Reconciling
Production Servicing Segments Items (1) Total
----------- --------- ---------- ----------- ---------
Revenues $ 233,708 $ 87,543 -- -- $321,251
Net loss (211,004) (46,266) -- (465,249) (722,519)
Identifiable net
property and
equipment (2) 1,957,953 655,963 -- 222,374 2,836,290
(1) Net loss reconciling items include $536,389 of general and
administrative expenses, $102,191 of other income and $31,051 of
corporate DD&A. Identifiable net property and equipment includes
$222,374 of corporate office equipment, hardware and software.
(2) Identifiable net property and equipment are reported by business segment
for management reporting and reportable business segment disclosure
purposes. Current assets and other assets are not allocated to business
segments for management reporting or business segment disclosure
purposes.
Reportable business segment information as of March 31, 1998 and for the
three months ended March 31, 1998 follows:
Reportable Segments
---------------------
Exploration Drilling Non- Other
and and Well Reportable Reconciling
Production Servicing Segments Items (1) Total
---------- --------- ---------- ----------- -------
Revenues 798,719 -- -- -- 798,719
Net income or 159,614 (88,827) (5,102) (584,789) (519,104)
(loss)
Identifiable net
property and
equipment (2) 7,598,984 867,315 -- 291,578 8,757,877
(1) Net loss reconciling items include $741,669 of general and
administrative expenses, $184,633 of other income and $27,753 of
corporate DD&A. Identifiable net property and equipment includes
$291,578 of corporate office equipment, hardware and software.
(2) Identifiable net property and equipment are reported by business segment
for management reporting and reportable business segment disclosure
purposes. Current assets and other assets are not allocated to business
segments for management reporting or business segment disclosure
purposes.
6
NOTE 4: SUBSEQUENT EVENTS
Advances to Officers
On April 8, 1999, FX Energy made final advances totaling $500,000 to two
officers in accordance with the April 10, 1998 agreements with such officers.
FX Energy now has no further commitment to advance additional funds to the
officers. As of March 31, 1999, notes receivable from officers was $1.4
million, including interest, which, along with the $500,000 advanced on April 8,
1999, is due on or before December 31, 1999.
Private Placement of Securities
On April 8, 1999, FX Energy initiated a private placement that resulted
in the sale during May 1999 of 1,792,500 shares of common stock resulting in
gross proceeds of $7.2 million. The proceeds from this placement are to be used
to partially fund activities on the Lachowice Farm-in and for other general
corporate purposes. No placement fees were paid by FX Energy in connection
with the sale of the aforementioned shares.
7
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE
This report contains statements about the future, sometimes referred to
as "forward-looking" statements. Forward-looking statements are typically
identified by the use of the words "believe," "may," "will," "should," "expect,"
"anticipate," "estimate," "project," "propose," "plan," "intend" and similar
words and expressions. Statements that describe FX Energy's future strategic
plans, goals or objectives are also forward-looking statements.
Readers of this report are cautioned that any forward-looking statements,
including those regarding FX Energy or its management's current beliefs,
expectations, anticipations, estimations, projections, proposals, plans or
intentions, are not guarantees of future performance or results of events and
involve risks and uncertainties, such as
- The future results of drilling individual wells and other exploration
and development activities;
- Future events that may result in the need for additional capital;
- Fluctuations in prices for oil and gas;
- Uncertainties of certain terms to be determined in the future relating
to FX Energy's oil, gas and mining interests, including exploitation
fees, royalty rates and other matters;
- Future drilling and other exploration schedules and sequences for
various wells and other activities;
- Uncertainties regarding future political, economic, regulatory, fiscal,
taxation and other policies in Poland;
- The future ability of FX Energy to attract strategic partners to share
the costs of exploration, exploitation, development and acquisition
activities; and
- Future plans and the financial and technical resources of strategic
partners.
The forward-looking information is based on present circumstances and on FX
Energy's predictions respecting events that have not occurred, which may not
occur or which may occur with different consequences from those now assumed or
anticipated. Actual events or results may differ materially from those
discussed in the forward-looking statements as a result of various factors
detailed in this report. The forward-looking statements included in this report
are made only as of the date of this report. FX Energy is not obligated to
update such forward-looking statements or to update reasons that actual results
differ materially from those anticipated in such forward looking statements.
8
GENERAL
FX Energy explores for oil, gas and gold in the Republic of Poland where it
recently signed a farm-in agreement, jointly with Apache, the first ever oil and
gas development agreement between western companies and POGC, covering a POGC
shut-in gas discovery. FX Energy holds the largest oil and gas exploration
acreage position in Poland by a foreign company, in terms of both gross and net
acres, covering five separate project areas containing approximately 15.8
million gross acres, and also has gold concessions covering approximately
166,000 gross acres. In the western United States, FX Energy produces oil from
fields in Montana and Nevada, has a drilling and well servicing company in
northern Montana and oil and gas exploration prospects in several western
states.
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. Depreciation,
depletion and amortization costs ("DD&A") directly associated with the E&P and
Drilling segments are detailed within the following discussion. General and
administrative costs ("G&A"), interest income and other income are not allocated
to individual operating segments for management or segment reporting purposes
and are discussed in their entirety following the segment discussion. Mining,
which consists of gold exploration on FX Energy's Sudety Project Area in Poland,
is not currently considered by management to be a material segment, as there
were no expenditures during the first quarter of 1999 and only $5,000 during the
first quarter of 1998.
E&P OPERATIONS - OIL AND GAS
EXPLORATION AND PRODUCTION REVENUES
Oil Revenues
Oil revenues were $234,000 during the first quarter of 1999, a decrease of
$98,000 as compared to $332,000 during the same period of 1998. During the
first quarter of 1999 and 1998, FX Energy's oil revenues were adversely affected
by depressed oil prices and lower production rates attributable to the natural
production declines of FX Energy's producing properties. A summary of the
percentage change in oil revenues, average oil price and oil production for
first quarter of 1999 and 1998 as compared to their respective prior year's
period are set forth below:
QUARTER ENDED MARCH 31,
--------- ---------
1999 1998
--------- ---------
OIL REVENUES $234,000 $ 332,000
Percent change versus prior year's -30% -43%
quarter
AVERAGE OIL PRICE $ 8.80 $11.28
Percent change versus prior year's -22% -39%
quarter
PRODUCTION VOLUMES (BBLS) 26,572 29,418
Percent change versus prior year's
quarter -10% -5%
9
Gain on Sale of Property Interests
FX Energy recognized no gain on sale of property interests during the first
quarter of 1999 as compared to $467,000 during the first quarter of 1998.
During the first quarter of 1998, Apache paid FX Energy $500,000 in initial cash
consideration relating to its participation in the Carpathian Project Area,
which was offset by $33,000 of associated costs. The amount of gain on sale of
property interests will continue to vary from period to period, depending on the
timing of completed deals and the amount of up-front cash consideration, if any.
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
$250,000 during the first quarter of 1999, a decrease of $56,000 as compared to
$306,000 during the same period of 1998. A comparative discussion of each
component of lease operating costs incurred during the first quarter of 1999 and
1998 follows:
LOE costs were $236,000 during the first quarter of 1999, a decrease of
$49,000 as compared to $285,000 during the same period of 1998. During the
first quarter of 1999, FX Energy deferred workovers and further reduced its LOE
costs by re-designing the pattern of injecting fluids into the Cut Bank Sand
Unit, its principal producing property. As a result, electrical, maintenance,
labor and other costs were reduced and the lifting cost per barrel declined to
$8.80 during the first quarter of 1999, a decrease of $0.90 as compared to $9.70
for the first quarter of 1998. During the first quarter of 1998, FX Energy
deferred workovers and performed only routine maintenance on its producing
properties due to depressed oil prices.
Production taxes were $14,000 during the first quarter of 1999, a decrease
of $7,000 as compared to $21,000 during the same period of 1998. During the
first quarter of 1999 and 1998 production taxes averaged approximately 6.0% of
oil revenues. The decrease in the amount of production taxes from period to
period is directly associated with decreased oil prices and decreased oil
production from period to period. Refer to the table in Exploration and
Production Revenues - Oil Revenues for the percentage fluctuations in the
average oil price and oil production for the first quarter of 1999 and 1998 as
compared to their respective prior year periods.
DD&A Expense - Producing Operations
DD&A expense for producing properties was $14,000 for the first quarter of
1999, a decrease of $60,000 as compared to $74,000 during the same period of
1998. The decrease during the first quarter of 1999 was directly attributable
to the $5,885,000 write down of proved producing properties by FX Energy during
the third and fourth quarters of 1998. As a result of the write down, the DD&A
rate per barrel for the first quarter of 1999 was $0.54, a decrease of $1.96 as
compared to $2.50 during the same period of 1998.
10
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 $180,000 during the first quarter of 1999, a decrease of
$84,000 as compared to $264,000 during the same period of 1999. Exploration
costs of $264,000 during the first quarter of 1998 include $5,000 of G&G costs
relating to FX Energy's mining operations, which are excluded from the
discussion of the results of operations for this segment. A comparative
discussion of each component of exploration costs incurred during the first
quarter of 1999 and 1998 follows:
G&G costs were $180,000 during the first quarter of 1999, a decrease of
$67,000 as compared to $247,000 during the same period of 1998. During the
first quarter of 1999, FX Energy spent $10,000 relating to the Carpathian
Project Area, as compared to $69,000 during the same period of 1998. Apache now
incurs substantially all G&G costs relating to the Carpathian Project Area in
accordance with the Carpathian Participation Agreement signed between FX Energy
and Apache on February 27, 1998. G&G costs will continue to fluctuate from
period to period, based on FX Energy's level of exploratory activity in Poland
and the respective cost participation percentage of FX Energy's industry
partners.
FX Energy had no exploratory dry hole costs during the first quarter of
1999 as compared to $12,000 during the first quarter of 1998. During late 1998,
FX Energy participated in drilling two exploratory dry holes, the Czernic 277-2
and the Poniatowa 317-1, on the Lublin Project Area in Poland, both of which
were subsequently determined to be exploratory dry holes during February 1999.
The Czernic 277-2 and the Poniatowa 317-1 were each counted as exploratory wells
under FX Energy's agreements with Apache. As such, Apache covered all of FX
Energy's pro-rata share of costs for each well. All of the exploratory dry hole
costs incurred during 1998 were associated with exploratory dry holes drilled
during 1997.
There were no non-producing leasehold impairments during the first quarter
of 1999 and 1998. As of March 31, 1999, FX Energy had capitalized unproved
property costs of $1,478,000, including $715,000 domestically and $763,000 in
Poland. In accordance with generally accepted accounting principles, an
impairment charge will be recognized, determined on a property by property
basis, in the event FX Energy determines any capitalized unproved property costs
are not recoverable following unsuccessful exploration drilling or other
factors. Non-producing leasehold impairments will continue to vary from period
to period based on FX Energy's determination that capitalized costs of unproved
properties, on a property by property basis, are not realizable.
DRILLING AND WELL SERVICING OPERATIONS
DRILLING AND WELL SERVICING REVENUES
Drilling Revenues
FX Energy had drilling revenues of $88,000 during the first quarter of
1999, as compared to no drilling revenues during the first quarter of 1998.
During the first quarter of 1999, FX Energy's drilling rig was idle, but its
well servicing equipment generated $88,000 of revenue from contract work on
third party properties. During the first quarter of 1998, FX Energy's drilling
rig was idle and all of its well servicing equipment was used solely on Company
owned properties, resulting in no drilling revenues from third party sources.
Drilling revenues will continue to fluctuate period to period based on the
degree of emphasis on utilizing equipment on Company owned properties, the
number of wells drilled, the amount of retained working interest, if any, and
other factors.
11
DRILLING AND WELL SERVICING COSTS
Drilling Costs
Drilling costs were $53,000 during the first quarter of 1999, an increase
of $42,000 as compared to $11,000 for the same period of 1998. During the
first quarter of 1999, all drilling costs were directly associated with
contract third party work performed by FX Energy's well servicing equipment,
which generated a gross profit of approximately 39.6% during the period.
During the first quarter of 1998, FX Energy's drilling rig was idle and all well
servicing equipment was used solely on Company owned properties, resulting in
incurring only downtime maintenance costs associated with the drilling rig.
Drilling costs will continue to fluctuate period to period based on the degree
of emphasis on utilizing equipment on Company owned properties, the number of
wells drilled, the amount of retained working interest, if any, and other
factors.
DD&A Expense - Drilling and Well Servicing Operations
DD&A expense for drilling and well servicing equipment was $81,000 during
the first quarter of 1999, an increase of $4,000 as compared to $77,000 during
the same period of 1998. During 1998, FX Energy spent $170,000 to upgrade its
drilling and well servicing equipment, which in turn resulted in a higher DD&A
expense during the first quarter of 1999. DD&A expense for drilling and well
servicing operations may continue to be progressively higher in succeeding
periods due to capital additions in prior periods being depreciated in
succeeding periods.
RESULTS OF OPERATIONS - NON-SEGMENTED INFORMATION
G&A Costs
G&A costs were $536,000 during the first quarter of 1999, a decrease of
$206,000 as compared to $742,000 for the same period of 1998. During the first
quarter of 1999, FX Energy incurred substantially less legal, travel and other
associated costs as compared to the same period of 1998. G&A costs are
expected to continue at current or higher levels with fluctuations from period
to period due to the level of FX Energy's activities in Poland and the
respective cost participation percentage of FX Energy's industry partners.
DD&A Expense - Corporate
DD&A expense for corporate activities was $31,000 during the first quarter
of 1999, an increase of $3,000 as compared to $28,000 during the same period of
1998. During 1998, FX Energy spent $91,000 to upgrade its computer hardware and
software systems, which in turn resulted in a higher DD&A expense for the first
quarter of 1999. DD&A expense for corporate activities may continue to be
progressively higher in succeeding periods due to capital additions in prior
periods being depreciated in succeeding periods.
12
Interest and Other Income
Interest and other income was $102,000 during the first quarter of 1999, a
decrease of $83,000 as compared to $185,000 during the same period of 1998. FX
Energy's cash and marketable debt securities balance was $3.8 million as of
March 31, 1999, $4.0 million less than the balance of $7.8 million as of March
31, 1998. As a result of lower average cash and marketable debt securities
balances during the first quarter of 1999, FX Energy earned $92,000 of interest
income, a decrease of $80,000 as compared to $172,000 for the same period of
1998.
FINANCIAL CONDITION
Working Capital
FX Energy's working capital was $2.9 million as of March 31, 1999, a
decrease of $1.1 million as compared to $4.0 million at December 31, 1998. The
decrease was due principally to a net loss before DD&A of $596,000, additions to
property and equipment of $364,000 and $100,000 advanced to officers during the
first quarter of 1999.
Operating Activities
Net cash used in operating activities was $720,000 during the first quarter
of 1999, an increase of $49,000 as compared to $671,000 for the same period of
1998. During the first quarter of 1999, FX Energy had a net loss before DD&A
of $17,000 from its producing operations, a net profit before DD&A of $35,000
from its drilling and well servicing operations, spent $180,000 on
exploration and $536,000 for G&A costs. During the first quarter of 1998, FX
Energy had a net profit before DD&A of $25,000 from its producing operations,
a net loss before DD&A of $11,000 from its drilling and well servicing
operations, spent $264,000 on exploration and $742,000 for G&A costs. Changes
in receivables, payables and other accounted for cash used in operating
activities during the first quarter of 1999 of $22,000 and cash provided by
operating activities during the first quarter of 1998 of $321,000.
Investing Activities
Net cash used in investing activities was $54,000 during the first quarter
of 1999, as compared to net cash provided by operations of $37,000 for the same
period of 1998. During the first quarter of 1999, FX Energy spent $31,000 on
upgrading its producing properties, $33,000 on annual Concession fees relating
to the Baltic Project Area in Poland, received $3,000 for the sale of a partial
property interest in the Williston Basin of North Dakota, spent $8,000 to
upgrade its drilling well servicing equipment, $5,000 to upgrade its corporate
office equipment, $3,000 on other assets and realized a net amount of $23,000
from investing in marketable debt securities. During the first quarter of 1998,
FX Energy spent $41,000 to upgrade its producing operations, $48,000 for
additional undeveloped leaseholds ($33,000 in the Baltic Project Area and
$15,000 in the Williston Basin), a net amount of $83,000 to upgrade its drilling
and well servicing equipment and $37,000 for additional office equipment,
received $500,000 from Apache as an up front cash payment relating to Apache's
participation in FX Energy's Western Carpathian Concession and had a net
increase in marketable debt securities of $254,000.
13
Financing Activities
Net cash used in financing activities was $98,000 during the first quarter
of 1999, a decrease of $168,000, as compared to $266,000 in the same period of
1998. During the first quarter of 1999, FX Energy advanced two of its officers
a total of $98,000. During the first quarter of 1998, options and warrants for
330,000 shares were exercised, resulting in net proceeds of $65,000 in cash and
a total of $331,000 was advanced two officers. See Note 4 to the financial
statements for further details regarding the officer advances noted above.
POLISH PROJECT AREAS
FX Energy and Apache AMI
Effective January 1, 1999, FX Energy and Apache entered into an agreement
which further defined the relationship between FX Energy and Apache in Poland by
establishing an AMI covering the entire country of Poland, except for the Baltic
Project Area in which Apache does not have an interest, for oil and gas
exploration, production, development and acquisition activities for a period of
two years.
Under agreements between FX Energy and Apache signed during 1997, 1998 and
early 1999, Apache has agreed to perform certain earning requirements, including
paying for FX Energy's pro rata share of cost2 to drill ten exploratory wells
and acquiring 2,000 kilometers of 2D seismic, in order to earn a fifty-percent
interest in FX Energy's Lublin and Carpathian project areas. On the Lublin
Project Area during late 1998, Apache commenced drilling the first two
exploratory wells, both of which were subsequently determined to be exploratory
dry holes during February 1999, and completed shooting over 1,650 kilometers of
2D seismic. Apache has agreed to drill five exploratory wells on the Lublin
Project Area by the end of 1999, acquire 350 kilometers of 2D seismic on the
Carpathian Project Area during 1999 and 2000 and drill three exploratory wells
by mid-2001 on the Carpathian Project Area.
A summary of the items for which Apache must pay all of FX Energy's pro
rata share of costs during the first three years of a six year exploration
period to earn a fifty-percent interest in the Lublin and Carpathian project
areas is as follows:
PROJECT AREA
-----------------------------------------
LUBLIN CARPATHIAN TOTAL
Drilling costs 7 wells 3 wells 10 wells
Completion costs (1) 7 wells -- 7 wells
2D seismic 1,650 km 350 km 2,000 km
Concession and usufruct
fees $ 695,000 $ 160,000 $ 855,000
Annual training costs (2) $ 80,000 $ 15,000 $ 95,000
G&A costs incurred in All through All through All through
Poland (3) 1999 1999 1999
(1) Should an exploratory well discover commercial reserves, Apache will be
required to pay FX Energy's pro rata share of completion costs for
exploratory wells drilled on the Lublin Project Area. FX Energy must pay
for its pro rata share of any completion costs for exploratory wells
drilled on the Carpathian Project Area.
(2) Annual training cost amounts reflect expenditures required to be spent each
year.
(3) FX Energy will not incur any of its pro rata share of Apache's Polish G&A
costs on the Lublin or Carpathian project areas until after Apache fulfills
its exploratory well drilling requirements on each of the respective project
areas or the end of 1999, whichever is later.
14
Under other terms of the FX Energy and Apache AMI, FX Energy and Apache are
equal fifty-fifty partners in the Pomeranian and Warsaw West project areas, the
eight remaining earning exploratory wells may be selected anywhere within the
AMI at the consent of both parties and Apache is the operator of all project
areas covered by the FX Energy and Apache AMI.
Option Agreements with FX Energy, Apache and POGC
FX Energy and Apache entered into agreements (the "Option Agreements") with
POGC during 1997 and 1998 whereby each has an independent reciprocal right to
participate, with up to a one-third interest, in hydrocarbon exploration of POGC
controlled areas adjacent to and near the Lublin, Carpathian and Pomeranian
project areas. In turn, POGC has the reciprocal right to participate in
hydrocarbon exploration, with up to a one-third interest determined on a block
by block basis, on the Lublin, Carpathian and Pomeranian project areas. The
Option Agreements cover approximately 3.4 million acres of POGC controlled
areas, including 0.6 million acres on the Lublin Project Area, 1.5 million acres
on the Carpathian Project Area, 1.3 million acres on the Pomeranian Project Area
and approximately 8.6 million acres of FX/Apache controlled areas, including 5.0
million acres on the Lublin Project Area, 1.4 million acres on the Carpathian
Project Area and 2.2 million acres on the Pomeranian Project Area. The Warsaw
West and Baltic project areas, containing approximately 2.9 million and 0.9
million acres, respectively, are not subject to any option agreements between FX
Energy, Apache or POGC.
Lachowice Farm-in Agreement with Apache and POGC
On February 26, 1999, FX Energy and Apache entered into a farm-in agreement
with POGC whereby FX Energy and Apache will each earn a one-third interest in
POGC's Lachowice Field, which is located within the Carpathian Project Area.
The Lachowice Field contains three shut-in gas wells which POGC previously
tested at an average production rate of 5.7 MMcf of gas per day per well that
have yet to be commercially produced. Under terms of the agreement, FX Energy
and Apache will pay all of the following costs in order to earn a one-third
interest each in the project: (1) test and recomplete up to three shut-in gas
wells; (2) drill three additional wells, if warranted; and (3) construct
gathering and processing facilities, if warranted. All costs and net revenues
thereafter, including additional development drilling and lease operating costs,
will be shared one-third each by FX Energy, Apache and POGC. Apache will be the
operator of the Lachowice Farm-in.
Baltic Project Area
Under terms of the Baltic Usufruct signed in March 1996, FX Energy was
required to relinquish at least fifty-percent of the Baltic Project Area's
undeveloped acreage on or before the end of the first three year exploration
period. During March 1999, FX Energy relinquished approximately 1.2 million
acres, leaving a total of approximately 0.9 million undeveloped acres in the
Baltic Project Area. The Polish government also consented to applying the
Gladysze #1-A, the second well drilled on the Baltic Project Area during 1997,
to the work commitment for the second three year exploration phase. As such, FX
Energy has satisfied all work commitments applicable to the Baltic Project
Area's six year exploration phase and is currently seeking an industry partner
to further jointly explore the Baltic Project Area. None of FX Energy's other
Project Areas in Poland have mandatory acreage relinquishment provisions during
their respective exploration periods.
15
Sudety Project Area
Homestake Mining Company ("Homestake") and FX Energy entered into an
agreement during 1997 to jointly explore for gold on FX Energy's Sudety Project
Area with Homestake as operator. Under terms of the agreement, Homestake paid
FX Energy $212,000 and agreed to fund all Concession costs, usufruct costs and
future exploration costs, including spending a minimum of $1,100,000 during 1998
and 1999 exploring the Sudety Project Area. Accordingly, FX Energy expects to
spend minimal amounts on gold exploration in the Sudety Project Area during
1999. Should Homestake propose to construct a mine, FX Energy may elect (on a
mine by mine basis) to convert its interest into a net smelter return royalty or
a seven and one half percent net proceeds interest, both at no cost to FX
Energy, or into a twenty-five percent working interest by paying back costs
according to a predetermined formula.
CAPITAL REQUIREMENTS
General
FX Energy had $3.8 million of cash and marketable securities with no long-
term debt as of March 31, 1999, an amount which, along with $7.2 million of
additional capital raised through a private placement of common stock during the
second quarter of 1999, is expected to be sufficient to fund FX Energy's minimal
exploration and operating requirements during the remainder of 1999 and most of
2000. FX Energy does intend to seek additional capital, if warranted, to fund
additional activities on the Lachowice Farm-in, possible appraisal/development
activities with Apache on additional POGC project areas and development of any
discoveries resulting from the Apache funded exploration program. See Note 4:
Subsequent Events.
The allocation of FX Energy's capital among the categories of anticipated
expenditures is discretionary and will depend upon future events that cannot be
predicted. Such events include the actual results and costs of future
exploration, development and other activities. FX Energy has no current
financing arrangement for its anticipated future capital needs. FX Energy may
obtain funds for future capital investments from the sale of additional
securities, project financing, sale of partial property interests, strategic
alliances with other energy or financial partners or other arrangements, all of
which may dilute the interest of existing shareholders in FX Energy or FX
Energy's interest in the specific project financed. There can be no assurance
that additional funds could be obtained or, if obtained, would be on terms
favorable to FX Energy.
Exploration Capital Requirements
During the remainder of 1999, FX Energy expects to have substantially all
the cost of its share of exploration activities covered by Apache and other
industry partners. The primary focus for the remainder of 1999 is expected to
be in the Lublin Project Area, where Apache has agreed to complete its
requirement to drill five exploratory wells, all at no cost to FX Energy, to
earn a fifty-percent interest in the Lublin Project Area. In the Carpathian
Project Area, Apache is expected to acquire new seismic data this year and
commence drilling the first of three exploratory wells in 2000, at no cost to FX
Energy, to earn a fifty-percent interest in the Carpathian Project Area.
Initial exploratory efforts, which include new 2D seismic acquisition and the
first exploratory well, are expected to occur in 2000 on the Pomeranian Project
Area and in 2001 on the Warsaw West Project Area, where FX Energy and Apache are
equal partners. Additional exploration of the Baltic Project Area has been
deferred until FX Energy attracts an industry partner. In the Sudety Project
Area, Homestake is paying for all gold exploration costs during 1999 in
accordance with its 1997 agreement with FX Energy.
16
Due to recent depressed and volatile oil prices coupled with its increasing
focus on Poland, FX Energy expects to incur minimal exploration expenditures on
its domestic operations during the remainder of 1999 and 2000.
Development Capital Requirements
Development activity on the Lachowice Farm-in is expected to commence
during the second quarter of 1999. FX Energy expects to spend up to $300,000
per well for its pro rata share of costs to re-enter and recomplete up to three
shut-in gas wells during 1999, $2.5 million per well to drill three additional
development wells during 2000, if warranted and $1.5 million for production
facilities during 2000, if warranted. During May 1999, FX Energy raised $7.2
million through a private placement of securities to partially fund its
initial capital requirements for the Lachowice Farm-in. FX Energy intends
to seek additional capital to fully fund the Lachowice Farm-in as development
activities warrant. The Lachowice Farm-in, the first farm-in agreement signed
by western companies with POGC, established a legal framework for similar oil
and gas development deals with POGC. Under the AMI agreement with Apache, FX
Energy and Apache are now aggressively pursuing additional production
development and production enhancement opportunities with POGC. FX Energy plans
to seek additional capital, as required, to fund its participation costs in any
additional Polish appraisal/development projects it may enter into with Apache
and POGC. See Note 4: Subsequent Events.
Due to recent depressed and volatile oil prices coupled with its increasing
focus on Poland, FX Energy expects to incur minimal developmental expenditures
on its domestic operations during the remainder of 1999 and 2000.
YEAR 2000
FX Energy uses computers principally for administrative functions such as
word processing, accounting, management reporting and financial forecasting. FX
Energy also uses computers for scientific functions such as map making,
geological interpretations and geophysical analysis. Substantially all of FX
Energy's principal computer systems have been purchased since 1996. FX Energy's
core software systems (accounting, internet, word processing and spreadsheet)
and vendors are certified as year 2000 compliant.
An ongoing program has been implemented by FX Energy to ensure that its
operational and financial systems will not be adversely affected by year 2000
software failures. In addition to its own computer systems, in connection with
its activities in the United States and in Poland, FX Energy interacts with
suppliers, customers, creditors and financial service organizations domestically
and globally which use computer systems. FX Energy is surveying all of the
major businesses FX Energy interacts with during the normal course of business
and is requesting a certification of year 2000 compliance from each of them.
Substantially all of FX Energy's core vendors (banking, insurance, stock market-
makers, strategic partners, oil purchasers, communications, etc.) have either
already certified that they are year 2000 compliant or indicated they have a
program underway to become year 2000 compliant before the year 2000.
17
FX Energy intends to modify or replace those systems, if any, which are not
year 2000 compliant. It is impossible for FX Energy to monitor all such
systems, particularly those of parties in another country. There can be no
assurance that such systems will not have material adverse impacts on FX
Energy's business and operations. FX Energy estimates that the cost to
redevelop, replace or repair its technology will not be material and has not
expended any significant costs to date.
OTHER MATTERS
FX Energy has reviewed all recently issued, but not yet adopted, accounting
standards in order to determine their effects, if any, on the results of
operations or financial position of FX Energy. Based on that review, FX Energy
believes that none of these pronouncements will have a significant effect on
current or future earnings or operations.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
SALE OF SECURITIES NOT REGISTERED UNDER THE SECURITIES ACT.
On April 8, 1999, FX Energy initiated a private placement that resulted
in the sale during May 1999 of 1,792,500 shares of common stock resulting in
gross proceeds of $7.2 million, without registration under the Securities Act of
1933. The proceeds from this placement are to be used to partially fund
activities on the Lachowice Farm-in and for other general corporate purposes.
No placement fees were paid by FX Energy in connection with the sale of the
aforementioned shares.
Each of the persons purchasing such securities from FX Energy acknowledged
in writing that the purchaser was obtaining "restricted securities" as defined
in Rule 144 under the Securities Act; that such securities could not be
transferred without registration or an available exemption therefrom; that such
person must bear the economic risk of the investment for an indefinite period,
and that FX Energy would restrict the transfer of the securities in accordance
with such representations. The purchasers also agreed that any certificates
representing such securities would be stamped with a restrictive legend covering
the restricted transfer of such shares. The certificates representing the
foregoing shares bear an appropriate restrictive legend conspicuously on their
face, and stop transfer instructions are noted on FX Energy's stock transfer
records.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 4, 1999, at the annual meeting of the Company's shareholders, the
shareholders approved the following matters submitted to them for consideration:
(1) Elected David N. Pierce and Peter L. Raven as directors of the Company as
follows:
David N. Pierce For:10,399,524
Peter L. Raven For:10,399,524
(2) Approved the FX Energy, Inc., 1998 Stock Option and Award Plan:
For 9,663,120 Against 784,609 Abstain 38,350
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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
- -----------------------------------
10.1 10 Agreement between Apache Overseas, Inc., Incorporated
and FX Energy dated effective January 1, by
1999, pertaining to oil and gas operations Reference*
in Poland
10.2 10 Agreement on Cooperation in the Lachowice Incorporated
Area between POGC, Apache Overseas, Inc., by
Apache Poland, Sp. Z o.o., FX Energy, Reference*
Inc., and FX Energy Poland Sp. Z o.o.,
dated February 26, 1999
10.3 10 Form of FX Energy, Inc., 1998 Stock Option Incorporated
and Award Plan by
Reference*
27.01 27 Financial Data Schedule This Filing
* Incorporated by reference from the annual report on Form 10-K for the year
ended December 31, 1998, dated March 3, 1999.
(b) REPORTS ON FORM 8-K
During the quarter ended March 31, 1999, FX Energy filed the
following reports on Form 8-K:
DATE OF EVENT REPORTED ITEM(S) REPORTED
---------------------- ---------------------
February 16, 1999 Item 5. Other Events
March 1, 1999 Item 5. Other Events
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FX ENERGY, INC.
(Registrant)
Date: May 27 1999 By /s/ Dennis L. Tatum
Vice-President, Treasurer and Chief
Accounting Officer
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