FX Energy DEF 14A 2009
FX ENERGY, INC.
3006 Highland Drive, #206
Salt Lake City, Utah 84106 USA
Telephone: (801) 486-5555
Facsimile: (801) 486-5575
April 20, 2009
Dear FX Energy Stockholder:
Our Proxy Statement for the 2009 Annual Stockholders’ Meeting of FX Energy, Inc., and our 2008 Annual Report are enclosed. At this meeting, we will seek your support for the election of directors and the ratification of PricewaterhouseCoopers LLP as our independent registered public accounting firm for 2009.
These are important considerations for all stockholders. Therefore, the Board of Directors urges you to review each of these proposals carefully. The enclosed proxy statement discusses the intended benefits as well as possible disadvantages of these proposals.
Your Board of Directors believes that the adoption of each of the proposals is in the best interests of all stockholders.
FX ENERGY, INC.
David N. Pierce
FX ENERGY, INC.
3006 Highland Drive, Suite 206
Salt Lake City, Utah 84106
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 10, 2009
To the Stockholders of FX Energy, Inc.:
The 2008 Annual Stockholders’ Meeting (the “Annual Meeting”) of FX Energy, Inc. (the “Company”) will be held June 10, 2009, in the Sussex Room, Grand America Hotel, 555 South Main Street, Salt Lake City, Utah. The Annual Meeting will convene at 10:00 a.m., local time, to consider and take action on the following proposals:
Only owners of record of the Company’s common stock outstanding as of the close of business April 15, 2009 (the “Record Date”), will be entitled to notice of and to vote at the Annual Meeting. Each share of common stock is entitled to one vote.
Holders of at least a majority of the shares of common stock outstanding on the Record Date must be represented at the meeting to constitute a quorum for conducting business.
The attendance at and/or vote of each stockholder at the Annual Meeting is important, and each stockholder is encouraged to attend.
Regardless of whether you plan to attend the meeting in person, please fill in, sign, date, and return the
enclosed proxy promptly in the self-addressed, stamped envelope provided. No postage is required if
mailed in the United States. If you prefer, you may send the Company your proxy by facsimile
transmission at 1-801-486-5575.
If your shares are held in the name of a brokerage firm, nominee, or other institution, only it can vote your shares. Please contact promptlythe person responsible for your account and
give instructionsfor your shares to be voted.
FX ENERGY, INC.
3006 Highland Drive, Suite 206
Salt Lake City, Utah 84106
This proxy statement is furnished in connection with the solicitation of proxies, on behalf of FX Energy, Inc., to be voted at the Annual Meeting to be held in the Sussex Room, Grand America Hotel, 555 South Main Street, Salt Lake City, Utah, on June 10, 2009, at 10:00 a.m., local time, or at any adjournment thereof. The enclosed proxy, when properly executed and returned in a timely manner, will be voted at the Annual Meeting in accordance with the directions set forth thereon. If no instructions are indicated on the enclosed proxy, the proxy will be voted as follows at the Annual Meeting:
The enclosed proxy, even though executed and returned to the Company, may be revoked at any time before it is voted, either by giving a written notice, mailed or delivered to the Secretary of the Company or sent by facsimile transmission to 1-801-486-5575, by submitting a new proxy bearing a later date, or by voting in person at the Annual Meeting. If the proxy is returned to the Company without specific direction, the proxy will be voted in accordance with the Company’s recommendations as set forth above.
The Company will bear the entire expense of this proxy solicitation. In addition to this solicitation, officers, directors, and regular employees of the Company, who will not receive extra compensation for such services, may solicit proxies by mail, by telephone, or in person. This proxy statement and form of proxy were first mailed to stockholders on or about April 30, 2009.
Only holders of the Company’s 42,451,978shares of common stock, par value $0.001, outstanding as of the close of business on April 15, 2009 (the “Record Date”), will be entitled to vote at the Annual Meeting. Each share of common stock is entitled to one vote. Holders of at least a majority of the shares of common stock outstanding on the Record Date must be represented at the Annual Meeting to constitute a quorum for conducting business.
All properly executed and returned proxies, as well as shares represented in person at the meeting, will be counted for purposes of determining if a quorum is present, whether the proxies are instructed to abstain from voting or consist of broker nonvotes. Under Nevada corporate law and the Company’s Articles of Incorporation and Bylaws, the election of directors requires the vote of a plurality of the votes cast at the Annual Meeting. Abstentions and broker nonvotes will not be counted for the election of directors. Routine matters are considered approved by the stockholders if the number of votes cast in favor of the action exceeds the number of votes cast in opposition to the action. Therefore, abstentions and broker nonvotes are not counted and will have the same legal effect as a vote in favor of matters other than the election of directors.
Officers and directors holding an aggregate of 1,623,529 shares of common stock, or approximately 3.8% of the outstanding shares, have indicated their intent to vote in favor of all proposals.
The Company’s policy is that each member of the Board of Directors is encouraged, but not required, to attend the Annual Meeting. All but one of the Company’s directors attended the Company’s 2008 annual meeting.
Executive Officers, Directors
The following sets forth the name, age, term of directorship, and principal business experience of each executive officer and director of the Company:
The Board of Directors has determined that Dennis B. Goldstein, Arnold S. Grundvig, Jr., Richard Hardman, and H. Allen Turner are “independent directors” as that term is defined in Rule 4200(a)(15) of NASDAQ.
Board of Directors’ Meetings and Committees
Board of Directors
The Board of Directors held four meetings during 2008 and one meeting to date in 2009. The directors also discussed the Company’s business and affairs informally on numerous occasions throughout the year and took several actions through unanimous written consents in lieu of meetings.
The Company’s Audit Committee Charter was included as an appendix to the proxy statement for its 2004 annual meeting of stockholders and is available on the Company’s website, www.fxenergy.com. The Audit Committee of the Board of Directors is currently composed of three independent directors: H. Allen Turner, its Chairman, and Arnold S. Grundvig, Jr., each of whom the Board of Directors has determined to be an audit committee financial expert, and Dennis B. Goldstein. The Board of Directors has determined all Audit Committee members to be independent as required by Rule 10A-3(b)(1) promulgated under the Securities Exchange Act of 1934.
The Audit Committee selects the Company’s independent accountants, approves the scope of audit and related fees, and reviews financial reports, audit results, internal accounting procedures, related-party transactions, when appropriate, and programs to comply with applicable requirements relating to financial accountability. The Audit Committee’s responsibilities also include the development of policies and procedures for compliance by the Company and its officers and directors with applicable laws and regulations. The Audit Committee met nine times during 2008 and has met twice to date in 2009, including meetings in early 2009 to review the results of the audit of the Company’s 2008 financial statements by its independent accountants and other related matters, as reported below.
The Company’s Compensation Committee Charter is available on the Company’s website, www.fxenergy.com. The Compensation Committee is responsible for reviewing performance of senior management, recommending compensation, and developing compensation strategies and alternatives throughout the Company. The Compensation Committee met five times during 2008 and has met once to date during 2009, in addition to several informal telephone meetings throughout 2008. The Compensation Committee of the Board of Directors is composed of four independent directors: Arnold S. Grundvig, Jr., its Chairman, Richard Hardman, Dennis B. Goldstein, and H. Allen Turner.
Nomination and Governance Committee
The Company’s Nomination and Governance Committee Charter is available on the Company’s website, www.fxenergy.com. The Nomination and Governance Committee is responsible for recommendations to the Board of Directors respecting corporate governance principles; prospective nominees for director; Board member performance and composition; function, composition, and performance of Board committees; succession planning; director and officer liability insurance coverage; and directors’ responsibilities. The Nomination and Governance Committee met four times during 2008 and has met once to date during 2009. The Nomination and Governance Committee of the Board of Directors is composed of four independent directors: Dennis B. Goldstein, its Chairman, Richard Hardman, H. Allen Turner, and Arnold S. Grundvig, Jr.
When considering candidates for directors, the Nomination and Governance Committee takes into account a number of factors, including the individual’s reputation for judgment, skill, integrity, and other relevant qualities; relevant business experience; level of professional accomplishments; independence from management under both NASDAQ and Securities and Exchange Commission definitions; existing commitments to other businesses; potential conflicts of interest with other pursuits; corporate governance background and experience; financial and accounting background for Audit Committee candidates; and the size, composition, and experience of the existing Board of Directors.
The committee will also consider candidates for directors suggested by stockholders using the above factors. Stockholders wishing to suggest a candidate for director should write to Scott J. Duncan, Secretary of the Company, and include a statement that the writer is a stockholder of record and is proposing a candidate for consideration by the committee; the name of and contact information for the candidate; a statement that the candidate is willing to be considered and would serve as a director if elected; a statement of the candidate’s business and educational experience, preferably in the form of a resume or curriculum vitae; information regarding each of the factors identified above, other than facts regarding the existing Board of Directors, that would enable the committee to evaluate the candidate; a statement detailing any relationship between the candidate and any customer, supplier, or competitor of the Company; and detailed information about any relationship or understanding between the stockholder and the proposed candidate.
Before nominating a sitting director for reelection at an annual meeting, the committee considers the director’s performance on the Board of Directors and attendance at Board of Directors’ meetings, and whether the director’s reelection would be consistent with the Company’s governance guidelines and ability to meet all applicable corporate governance requirements.
When seeking candidates for director, the committee may solicit suggestions from incumbent directors, active stockholders, management, or others. After conducting an initial evaluation of the candidates, the committee will interview candidates that the committee believes might be suitable for a position on the Board of Directors. The committee may also ask the candidate to meet with management. If the committee believes the candidate would be a valuable addition to the Board of Directors, it will recommend to the full Board of Directors that candidate’s nomination.
Rights Redemption Committee
In connection with the adoption of a stockholder Rights Agreement, the Board of Directors formed a Rights Redemption Committee during 2007 to perform certain functions in accordance with such agreement. The Rights Redemption Committee must consist of at least three continuing directors, a majority of whom may not be Company employees, and may consist of the entire Board of Directors. All current directors are members of the Rights Redemption Committee. The Rights Redemption Committee did not meet during 2008.
Policy on Stockholder Communications with Directors
Company stockholders that want to communicate with the Board, any of its committees, or with any individual director can write to the Company at 3006 Highland Drive, Suite 206, Salt Lake City, Utah 84106. Such letter should indicate that it is from a Company stockholder. Depending upon the subject matter, management will:
At each Board of Directors’ meeting, a member of management will present a summary of all communications received since the last meeting that were not forwarded to the directors and make those communications available to the directors on request.
Code of Ethics
The Company has adopted a Code of Ethics that applies to all of its employees, including its principal executive officer, principal financial officer, and its principal accounting officer. The Code of Ethics is available on the Company’s website, www.fxenergy.com.
Corporate Governance Guidelines
The Company has adopted Corporate Governance Guidelines to assist its directors in promoting the best interests of the stockholders in terms of corporate governance, fiduciary responsibilities, compliance with applicable law and regulations, and maintenance of accounting, financial, or other controls. The Corporate Governance Guidelines are available on the Company’s website, www.fxenergy.com.
No proposals have been submitted by the Company’s stockholders for consideration at the Annual Meeting. It is anticipated that the next annual meeting of stockholders will be held during June 2010. Stockholders may present proposals for inclusion in the proxy statement to be mailed in connection with the 2010 annual meeting of stockholders, provided such proposals are received by the Company no later than December 31, 2009, and are otherwise in compliance with applicable laws and regulations and the governing provisions of the Company’s Articles of Incorporation and Bylaws.
The Company’s Articles of Incorporation provide that the Board of Directors shall be divided into three classes, with each class as equal in number as practicable. One class is to be elected each year for a three-year term. At the Annual Meeting, three directors will be elected to serve three-year terms.
The Board of Directors has nominated Richard B. Hardman, Jerzy B. Maciolek, and H. Allen Turner for election as directors of the Company at the Annual Meeting, each to serve for a term of three years expiring at the 2012 annual meeting and until his successor is elected and qualified. The Company’s Nomination and Governance Committee and the Board of Directors unanimously approved the nominations.
Votes will be cast, pursuant to authority granted by the enclosed proxy when properly executed and returned to the Company, for the election of the named nominees as directors of the Company, except as otherwise specified in the proxy. In the event a nominee shall be unable to serve, votes will be cast, pursuant to authority granted by the enclosed proxy, for such person as may be designated by the Board of Directors. The Company’s officers are elected at the annual meeting of the Board of Directors to hold office until their respective successors are elected and qualified. The information concerning the nominees and directors and their security holdings has been furnished by them to the Company. Biographical information and business experience of each person nominated and for each director whose term of office will continue after the Annual Meeting are discussed above. (See “Corporate Governance: Executive Officers, Directors.”)
Recommendation of the Board of Directors
The Board of Directors recommends a vote “FOR” the election of nominees Richard B. Hardman, Jerzy B. Maciolek, and H. Allen Turner, to serve in such capacities until the expiration of their term at the 2012 annual meeting of stockholders and until their successors are elected and qualified.
Directors are elected by the affirmative vote of the holders of a plurality of the shares of common stock voted at the Annual Meeting. Abstentions and broker nonvotes will not be counted in the election of directors.
The firm of PricewaterhouseCoopers LLP (PwC) has served as the Company’s independent registered public accounting firm since 1995. The Audit Committee has appointed PwC to act in that capacity for the year ending December 31, 2009.
Although the Company is not required to submit this appointment to a vote of the stockholders, the Audit Committee believes it is appropriate as a matter of policy and a desirable corporate governance practice to request that the stockholders ratify the appointment of PwC as the Company’s independent registered public accounting firm. If the stockholders do not ratify this appointment, the Audit Committee will investigate the reasons for that nonratification and determine whether to retain PwC or appoint another independent registered public accounting firm. Even if the appointment is ratified, the Audit Committee may determine to engage a different independent registered public accounting firm at any time if it determines that such a change would be in the best interests of the Company and its stockholders.
It is anticipated that representatives of PwC will be present at the Annual Meeting and will be provided the opportunity to make a statement, if they desire to do so, and respond to appropriate questions.
Recommendation of the Board of Directors
The Board of Directors recommends voting “FOR” the ratification of the appointment by the Audit Committee of PwC as the Company’s independent registered public accounting firm.
The ratification of PwC as the Company’s independent registered public accounting firm requires the affirmative vote of more shares than vote against such ratification. Abstentions and broker nonvotes will not be counted on this matter.
The following table sets forth, as of March 31, 2009, the name and shareholdings of each person that owns of record, or was known by the Company to own beneficially, 5% or more of the common stock currently outstanding; the name and shareholdings of each director; and the shareholdings of all executive officers and directors as a group. Unless indicated otherwise in the footnotes, each person named below has, to the best of the Company’s knowledge, sole voting and investment power with respect to all shares of common stock shown as beneficially owned by each person:
Equity Compensation Plans
Since inception, the Company has issued options pursuant to stock option and award plans that have been adopted by the Board of Directors and approved by the stockholders. As of December 31, 2008, the Company had outstanding options and unvested restricted stock awards of 2,694,862 shares under plans that have been approved by the stockholders. The Company will not grant any compensatory options to officers, directors, or employees outside of stockholder-approved plans.
In addition to the specific provisions noted below, all such outstanding options and restricted stock awards provide for antidilution adjustments to the number of shares issuable and the exercise or conversion price in the event of any stock split, stock dividend, or recapitalization of the Company’s common stock; restrict transfer; require the Company to reserve for issuance that number of shares issuable on exercise or conversion; require notice to the holder prior to certain extraordinary corporate events; require payment of the exercise price of options and warrants in cash or in such other type of consideration as specifically noted; are fully vested and exercisable unless otherwise indicated; and contain other similar miscellaneous items.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s directors, executive officers, and persons that own more than 10% of a registered class of the Company’s equity securities to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of equity securities of the Company. Officers, directors, and greater than 10% stockholders are required to furnish the Company with copies of all Section 16(a) forms they file.
Based solely upon a review of Forms 3, 4, and 5 and amendments thereto filed with the Securities and Exchange Commission during or respecting the last fiscal year ended December 31, 2008, no person that, at any time during the most recent fiscal year, was a director, officer, beneficial owner of more than 10% of any class of equity securities of the Company, or any other person known to be subject to Section 16 of the Exchange Act failed to file, on a timely basis, reports required by Section 16(a) of the Securities Exchange Act.
CERTAIN RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS
The Board of Directors has adopted a written Related Party Transactions Policy for the review, approval, or ratification of related-party transactions and has given the Audit Committee the responsibility for overseeing the policy. Related-party transactions consist of all current or proposed transactions, regardless of dollar value, in which the Company is a participant and any director, executive officer, or immediate family member of any director or executive officer has a direct or indirect material interest. The policy requires all related-party transactions to be approved by the Audit Committee, which takes into account, among other things, whether the transaction is on terms that are no less favorable to the Company than terms generally available to an unaffiliated third party under similar circumstances and the materiality of the related person’s interest in the transaction. The Company is not aware of any related-party transactions that would require disclosure.
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee, which is composed solely of independent members of the Board of Directors, assists the Board of Directors in fulfilling its responsibilities relating to executive compensation. The Compensation Committee is responsible for overseeing the Company’s compensation programs. The Compensation Committee, on behalf of and in certain instances subject to the approval of the Board of Directors, reviews and approves compensation programs for certain executive officer positions. In this context, the Compensation Committee reviewed and discussed with management the Company’s compensation discussion and analysis required by Section 402(b) of Regulation S-K. Following the reviews and discussions referred to below, the Compensation Committee recommended to the Board of Directors that the compensation discussion and analysis be included in the Company’s annual report on Form 10-K and this proxy statement.
Compensation Discussion and Analysis
In this section, the Company discusses certain aspects of its compensation program as they pertain to its principal executive officer, principal financial officer, and three other most highly compensated executive officers in 2008. The Company refers to these five persons throughout as the “Named Executive Officers.” The Company’s discussion focuses on compensation and practices relating to its most recently completed fiscal year.
The Company believes that the performance of each of the Named Executive Officers has the potential to directly impact both its short- and long-term results of operations. The Company places considerable importance on the design and administration of the executive compensation program.
Executive Compensation Philosophy
FX Energy is a unique independent oil and gas company. As the only US-based company whose focus is on early-stage exploration in Poland and one of only a few of its size that operates outside the United States, the Company faces many challenges that go beyond the typical risks associated with an established oil and gas company operating domestically. These challenges include working with Poland’s governmental agencies as new energy policies and practices evolve, enhancing the knowledge base of the local industry, and working through a frequently changing political climate. In addition, the Company faces the risk of doing business in a former communist country, whose exploration and environmental laws are continuing to evolve, and having a national oil company as the partner and operator of many of the Company’s significant exploration projects, which means the Company often cannot control the timing and nature of its operations.
In addition, while the Company has recently been successful in its drilling operations and has begun to establish reserves and production, it continues to face significant exploration risk as it moves forward. The Company recognizes its risk profile and considers this and its unique operating circumstances when it evaluates and sets executive compensation.
The Company’s philosophy is that compensation paid to Named Executive Officers should generally be correlated to the trends and levels of the Company’s peers and should be designed to align the employees’ interests with the performance of the Company on both a short- and long-term basis. Accordingly, a significant portion of total compensation is directly related to Company performance. In order to build a direct link between stockholder interests and executive compensation, the Company has equity and cash incentive compensation programs that may account for a majority of an officer’s compensation. This practice parallels the compensation practices of its peer group. In order to attract and retain the best talent, the Company must compensate at a level that reflects the demand for talented executives, especially in a cyclical industry environment. In view of these circumstances, the Compensation Committee must balance pay for performance with the compelling need to attract, retain, and incentivize senior executives. The Compensation Committee has the discretion to reward executives for superior performance or to decrease compensation for inferior performance.
The Company’s executive compensation program, which is administered by the Compensation Committee, consists of five key elements: base salary, annual cash incentives, long-term incentives, retirement compensation, and other employee benefits. The benefit plans are designed to encourage retention and reward long-term employment. In addition, the Compensation Committee believes perquisites for senior executives should be extremely limited in scope and value and should also be restricted to those types of perquisites that are available to all employees.
The Company’s compensation philosophy for Named Executive Officers distinguishes between the compensation opportunities made available to the Named Executive Officers and the compensation actually paid to them. The actual amount ultimately realized by individual Named Executive Officers from their total compensation opportunities (other than base salary), if any, is dependent upon the Company’s actual operational, financial, and/or stock price performance as well as individual performance. Accordingly, if overall results fail to meet the goals established for the compensation opportunities, then earned compensation is likely to fall below the peer group’s mean compensation depending upon the performance of the companies within that group.
Benchmarking Against Peer Companies
The Company uses both survey data and public information as a framework in structuring the total compensation opportunities provided to Named Executive Officers such that the average total compensation of the peer group can serve as an input. Actual compensation paid will be higher or lower than peer group averages depending on a number of factors, including Company and individual performance, performance of the peer group, accomplishment of Company goals, Company financial condition, and industry and economic conditions generally.
The Compensation Committee annually reviews competitive executive compensation based on public company data compiled by Equilar, Inc. The public company data is further benchmarked, for comparative purposes, with the annual Mercer Human Resource Consulting Energy Compensation Survey, which contains data on both public and private companies, segregated by size and geographical location. The Company does not engage an independent compensation consultant.
In analyzing and determining 2008 compensation levels, the Company reviewed comparative compensation data for certain US-traded public companies engaged in the oil and gas business that were similar to the Company in the areas of market capitalization, annual revenues, and enterprise value. The Company believes that these criteria were effective in yielding an appropriate peer group of comparable companies. The benchmarking results provided background and context for Compensation Committee decisions; the information regarding peer companies and pay practices of the peer group assisted in its analysis but did not govern the Compensation Committee’s award determination for any particular Named Executive Officer. The peer group, which is the same group used in analyzing 2007 compensation, included the following companies:
As part of the total compensation review process, the Compensation Committee reviews each element and the mix of compensation that comprises the total executive compensation package. This process includes comparing historical data for the executives in the peer group to similar data for the Company’s executives as a group, or individually in the case of the Chief Executive Officer. With the assistance of the Chief Executive Officer, the Compensation Committee also makes an assessment of skills, experience, and achievements of the Named Executive Officers as a group and individually. To support its compensation objectives, the Compensation Committee may adjust elements of compensation for the Company’s executives to align them with the various elements of the peer group executives. In addition to adjusting the allocation among elements of compensation for the executive group or Chief Executive Officer, as the case may be, individual pay may differ for any executive based on individual performance, tenure, and a subjective assessment of future potential. The Company may also adjust base salary or long-term equity pay based on internal equity among the executive group.
In executive session, the Compensation Committee determines compensation for the Chief Executive Officer based on his performance, using the benchmarked data as a reference point. The Compensation Committee then determines the amount of each executive’s compensation. The Compensation Committee considers each of the factors comprising performance results in determining the amount of each executive’s compensation.
To remain competitive with compensation levels of executives at comparable companies, the Company targets the base pay of its Named Executive Officers at about the average of the peer group of companies identified above. The Company believes that targeting base pay at a competitive level helps fulfill its compensation program objective of attracting and retaining high-quality executives. Each Named Executive Officer’s salary relative to this competitive framework varies based on the level of his responsibility, experience, time in position, internal equity considerations, and individual performance and is reviewed by the Compensation Committee on an annual basis. Specific salary adjustments take into account these factors and the current market for management talent.
Analysis of 2008 Salaries
As a result of its review of peer group and other compensation data available, including current compensation trends and talent demand in the oil and gas industry, and consideration of the Company’s financial condition, the Compensation Committee increased the base salary of four Named Executive Officers, including the Chief Executive Officer, during 2008 by 5% from 2007 levels. The remaining Named Executive Officer received a salary increase of 14% to bring him more in line with peer group averages for his position. In late 2008, the Company determined to freeze all then-current salaries for 2009. The Compensation Committee also considered the impact of inflation in reviewing compensation levels. In total, the Compensation Committee anticipated that the executive group’s combined base salaries would be at or slightly higher than the average of its peer group.
Annual Cash Incentives
As part of each Named Executive Officer’s performance-based compensation, the Company maintains the FX Energy Cash Bonus Plan (the “Plan”). The purpose of the Plan is to take a significant portion of the Named Executive Officer’s total compensation and vary the amount actually paid based on the performance of the Company and the individual officer with respect to goals that are set to enhance shareholder value over the long term.
The Plan calls for the Compensation Committee to review certain corporate performance criteria as it relates to its peers and leaves the Compensation Committee the discretion to consider the achievement of other specific corporate objectives, individual contributions, general economic conditions, and other factors when making incentive awards for each year. The Compensation Committee uses this information to determine an annual incentive award. The Plan provides for an interim award at year-end, followed by a final payment later in the year, which may be zero, once all peer group prior year performance data becomes available.
The Compensation Committee sets target awards as a percentage of base salary at about the estimated average of peer group award percentages. The Company’s success in meeting its corporate objectives, reviewed at year-end, and each particular Named Executive Officer’s role in meeting those objectives are used to determine whether the actual award should be above, below, or at the anticipated peer group average.
For 2008, the Compensation Committee reviewed corporate performance relative to its peer group in the areas of oil and gas reserve growth per share, revenue growth per share, share price growth, and finding costs. The Compensation Committee believes that success in these four areas enhances shareholder value in both the short and long terms. Success in the areas of reserve additions and revenue growth, in particular, reflect the Company’s positive achievements in implementing its business model of translating early-stage exploration efforts into tangible assets and cash flow. Lower than industry-average finding costs demonstrate the Company’s ability to find and drill exploration targets that contribute meaningfully to increases in reserve volumes and values. Relative changes in share price reflect the market’s recognition of the Company’s progress in implementing its business model.
At year-end 2008, the Company made an estimate of its relative success for each of the four measures. For the stock price measure, the Company used actual data. For revenue growth, reserve growth and finding costs, the Company’s interim calculation was made with reference to the peer group’s three-year (2005-2007) trailing averages.
Analysis of 2008 Incentive Awards
In evaluating 2008 corporate accomplishments, the Compensation Committee noted the following with respect to corporate performance components:
Reserve Growth per Share
At year-end 2008, the Company estimated its reserve volumes per share would increase 30% from 2007 levels. From 2005 to 2007, the average annual increase in reserve volumes per share from the Company’s peer group was (12%). For interim award purposes, the Compensation Committee determined that the Company outperformed the peer group for this metric.
Revenue Growth per Share
At year-end 2008, the Company estimated its revenue per share would decrease by 12% from 2007 levels. From 2005 to 2007, the average annual increase in revenue per share from the Company’s Peer group was 2%. For interim award purposes, the Compensation Committee determined that the Company underperformed the peer group for this metric.
At year-end 2008, the Company estimated its 2008 finding costs would be approximately $2.50 per Mcfe. From 2005 to 2007, the average finding cost per Mcfe for the Company’s peer group was $3.36. For interim award purposes, the Compensation Committee determined that the Company outperformed the peer group for this metric.
During the calendar year 2008, the Company’s share price declined by 51% from its closing price on December 31, 2007, compared to an average decline of 62% experienced by the Company’s peer group. For interim award purposes, the Compensation Committee determined that the Company outperformed the peer group for this metric.
In determining 2008 compensation, particularly with regard to incentive and equity awards, the Compensation Committee recognized that the Company significantly exceeded several of its 2008 objectives and accomplished its most important goals, although it did not accomplish every objective. Taken as a whole, the Compensation Committee felt that overall corporate performance exceeded that of its peer group. However, because of the world-wide economic crisis, the Compensation Committee elected to use its discretion in determining an incentive award for 2008 without regard to the provisions of the bonus plan as follows:
The Compensation Committee anticipates reviewing the 2008 award later in the year to determine whether or not increases for 2008 are appropriate in view of the global economic situation and the Company’s liquidity position.
The Company maintains several equity compensation plans under which it makes an annual grant of stock awards to eligible Named Executive Officers. Equity incentives represent a significant element of the Company’s total compensation program. As with other elements, the value received through various stock-based awards is included in the Company’s annual total compensation review process. Each year, the Company collects and reviews competitive data from the peer group specifically on the use of and value received through equity incentives. From this data, management develops and recommends annual awards. The Company’s philosophy is that the award opportunity should match the range of awards made by its peers. Individual awards are then further modified, based on a subjective assessment of individual performance, contribution, and future potential.
Over the past few years, significant accounting rule changes have led the Company to review its previous stock option award programs and focus more closely on stock utilization, including the consideration of overhang and annual run rates. As a result, the Company has discontinued certain stock option awards under its equity compensation plans. In 2005, the Company began issuing restricted stock awards to the majority of eligible senior management as its primary long-term equity incentive. Restricted stock awards provide value in the form of Company stock while resulting in lower share usage and lower dilution than the use of certain other types of equity awards. In addition, the vesting conditions (discussed below) and opportunity for long-term capital appreciation, which are characteristic of restricted stock awards, help the Company achieve its objectives of management retention and linking pay to the Company’s long-term shareholder value. Restricted stock awards do not offer dividend or voting rights until they vest and shares are subsequently released to the grantee.
Analysis of 2008 Equity Awards
The Compensation Committee believes that the Company’s equity component of compensation for senior executives was low compared to the average of the peer group; however, in view of the remaining number of shares available for future issuance, the award remained unchanged for 2008.
Vesting and Other Restrictions
Annual equity awards granted under the Company’s equity compensation plans typically vest 33% on each of the first three anniversaries of their grant date, contingent on continued employment with the Company. With respect to supplemental awards, the Company may use a shorter or longer vesting period depending upon the Company’s retention objectives for the individual recipient. The Company believes that these provisions serve its objectives of retention and connecting the executives’ long-term interests to those of the Company and its shareholders.
Grant Timing and Pricing
The Company grants annual stock awards generally at or near its regularly scheduled, fourth quarter Board meeting each year. Notwithstanding its grant schedule, the Company does not grant stock awards prior to the release of material, nonpublic information that is likely to result in change in the Company’s stock price. The Company may change the date upon which equity awards are granted if there is unreleased material, nonpublic information.
The Company does not offer a traditional pension plan. The Company does have a 401(k) Stock Bonus Plan under which it makes annual contributions, in the form of FX Energy stock, to the retirement account of each of its Named Executive Officers. Each Named Executive Officer is encouraged to retain the contributed stock, and as of the date of this report, no Named Executive Officer has sold any of the shares so contributed. The Compensation Committee believes that offering this plan to executives is critical to achieve the objectives of attracting and retaining talent, particularly because the Company does not offer a defined benefit pension plan or any employee stock purchase, employee stock ownership, deferred compensation, or supplemental early retirement plans.
The Company offers limited other perquisites and benefits to its Named Executive Officers, which are reflected in the relevant tables and narratives that follow. The executives participate in basic Company-wide plans and programs such as group medical, dental, and life insurance in accordance with the terms of the programs and on the same terms as all other domestic administrative employees. The Company does not offer disability insurance, automobile allowances, Company-provided automobiles, club memberships/dues, financial planning allowances, security services, first class air travel, or sign-on or retention bonuses.
Internal Pay Equity
The Company’s core compensation philosophy is to pay its Named Executive Officers competitive levels of compensation that reflect their individual responsibilities and contributions to the Company, while providing incentives to achieve its business objectives. While comparisons to compensation levels of similarly situated executives at companies in its peer group is beneficial in assessing the competitiveness of its various programs, the Company recognizes that its compensation programs must also be internally consistent and equitable. The Compensation Committee evaluated the mix of the individual elements of compensation paid to the Company’s Named Executive Officers, as well as the overall composition and responsibilities of the executive team. The Company does not have a formal policy that addresses Chief Executive Officer compensation multiples as they relate to other Named Executive Officers; however, the Chief Executive Officer’s total compensation has historically been less than 135% of the average total compensation of the other Named Executive Officers.
FX Energy was originally founded by three individuals, David N. Pierce (currently the Chief Executive Officer), Andrew W. Pierce, and Jerzy B. Maciolek. In recognition of their initial vision and ongoing contribution to the Company’s success, the Company has determined that the salaries of Mr. Andrew W. Pierce and Mr. Maciolek be set at the same level.
As discussed previously, in determining 2008 compensation, particularly with regard to incentive and equity awards, the Compensation Committee recognized that the Company significantly exceeded several of its 2008 objectives and accomplished its most important goals, although it did not accomplish every objective. Taken as a whole, the Compensation Committee felt that overall corporate performance exceeded that of its peer group. However, because of the world-wide economic crisis, the Compensation Committee, with supporting input from the Executive Officers, elected to keep bonuses low and hold 2009 salaries flat. The Company believes that total compensation delivered to the Executive Officers as a group for each of the last three years is below the average total compensation of its peers.
Impact of Internal Revenue Code Section 162(m)
Under the Omnibus Budget Reconciliation Act of 1993, provisions were added to the Internal Revenue Code under Section 162(m) that limit the Company’s federal income tax deductions for compensation expense in excess of $1 million paid to Named Executive Officers. However, performance-based compensation can be excluded from the limit so long as it meets certain requirements.
No Named Executive Officer of FX Energy, including its Chief Executive Officer, has received compensation in any given year in excess of $1 million.
2008 Summary Compensation Table
The following table summarizes the compensation of the Company’s Chief Executive Officer and its four highest paid executive officers other than its Chief Executive Officer for the fiscal year ended December 31, 2008.
Narrative to Summary Compensation Table and Grants of Plan-Based Awards Table
The Company includes further details regarding these programs, including information on performance criteria and vesting provisions, in the “Compensation Discussion and Analysis—Executive Compensation Philosophy” section on page 9.
Outstanding Equity Awards at 2008 Year-End
The following table reflects outstanding stock option awards classified as exercisable and unexercisable as of December 31, 2008, for each of the named executives. The table also reflects unvested and unearned stock awards:
Option Exercises and Stock Vested During 2008
Other Potential Post-Employment Compensation
As discussed previously, the Company faces many risks that are not shared by the majority of its peer group companies. In addition to these risks, the Company’s executive officers are required to spend a considerable amount of time out of the country as the Company pursues its business objectives. Further, the Company’s analysis of the accumulated wealth of its Named Executive Officers shows that a significant portion of their individual net worth is tied to the performance of FX Energy common stock.
In view of the foregoing and as part of its program to retain its key employees, the Company has extended employment and change in control agreements to all of its Named Executive Officers. These are separate agreements, with the employment agreement covering only the terms of employment, and the change in control agreements covering only a change in company control. The following summaries describe potential payments payable to the Company’s Named Executive Officers upon termination of employment or a change in control. The actual payments to executives are contingent upon many factors as of the time benefits would be paid, including elections by the executive and tax rates, as well as the discretion of the Compensation Committee.
The Company has entered into agreements with each of its Named Executive Officers providing for the terms of employment. Each of the agreements has an initial term of two and one-half years; provided, however, that such agreements will automatically be renewed each year for successive two and one-half year terms unless the Company delivers to the applicable Named Executive Officer written notice of nonrenewal at least 40 days before the expiration date. All of the agreements were entered into on January 1, 2007. Notwithstanding the foregoing, these agreements automatically terminate upon the earlier of a change in corporate control (as defined in the change in corporate control agreements described below) or such time as the applicable Named Executive Officer ceases to be employed by the Company for any reason.
Change in Control Agreements
The Company also has agreements with its Named Executive Officers providing for certain enhanced severance benefits in the event of the severance of the employment of such Named Executive Officers following a change in corporate control. Each of the agreements has an initial term of one year, and the expiration date will automatically be extended for one additional year unless in the 60-day period immediately preceding any anniversary date of the agreement, either the Company or the applicable Named Executive Officer rejects such automatic extension. These agreements were entered into on January 1, 2007.
David N. Pierce
If the Company terminates Mr. Pierce’s employment other than for cause (as defined in the agreement) or Mr. Pierce resigns for cause (as defined in the agreement), Mr. Pierce will be entitled to severance pay and up to 24 months of continued health care coverage. The severance pay is payable in a lump sum six months after his termination, and is equal to two times the greater of (a) his then current annual salary, or (b) his salary plus bonus compensation for the year most recently ended. In addition, all unvested options, restricted shares, and other equity-based awards will be immediately vested. Under Mr. Pierce’s change in control agreement, Mr. Pierce will be entitled to receive similar severance payments and benefits as those described above if the Company terminates his employment other than for cause within two years after a change in control (as defined in the agreement), or Mr. Pierce’s employment is terminated by death or disability.
Assuming Mr. Pierce’s employment was terminated under the circumstances noted in the table below as of December 31, 2008, payments and benefits to him would have an estimated potential value as follows:
Named Executive Officers (Other Than David N. Pierce)
Assuming the employment of the Named Executive Officers noted in the tables below was terminated under the circumstances noted in the table on December 31, 2008, payments and benefits to each Named Executive Officer would have estimated potential values as follows:
2008 Director Compensation
The following table sets forth certain information regarding the compensation earned by or awarded to each non-employee director who served on the Company’s Board of Directors in 2008. Directors who are employees of FX Energy are not compensated for their services:
The amounts included in the “Stock Awards” column represent the compensation cost recognized by the Company during the year ended December 31, 2008, related to stock awards to directors, computed in accordance with SFAS 123R. For a discussion of valuation assumptions, see Note 1 to the Company’s consolidated financial statements included in its annual report on Form 10-K for the year ended December 31, 2008.
AUDIT COMMITTEE REPORT
The Audit Committee oversees the financial reporting process for the Company on behalf of the Board of Directors. In fulfilling its oversight responsibilities, the Audit Committee reviewed the annual financial statements included in the Annual Report and filed with the Securities and Exchange Commission. The Audit Committee also reviewed the unaudited financial statements filed with the Company’s quarterly reports on Form 10-Q.
The Audit Committee discussed with management and the independent registered public accountants the acceptability and the quality of the accounting principles used in the financial statements. These discussions included the clarity of the disclosures made therein, the underlying estimates and assumptions used in the financial reporting, the reasonableness of the significant judgments and management decisions made in developing the financial statements, and the independent registered public accountants’ evaluation of the Company’s internal controls.
The Audit Committee met privately with the independent registered public accounting firm and discussed issues deemed significant by the accounting firm, including those required by PCAOB AU 380, Communication with Audit Committees. In addition, the Audit Committee discussed with the independent registered public accounting firm its independence from the Company and its management, including the matters in the written disclosures required by Public Company Accounting Oversight Board Rule 3526; received the written disclosures and the letter required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant’s communications with the audit committee concerning independence; and considered whether the provision of nonaudit services was compatible with maintaining the accounting firm’s independence.
The Audit Committee has also discussed issues related to the overall scope and objectives of the audits conducted, the internal controls used by the Company, and the selection of the Company’s independent registered public accountants with the Company management and its independent registered public accountants.
The Audit Committee also discussed with management the Company’s disclosure controls and procedures and the certifications by the Company’s Chief Executive Officer and Principal Financial Officer, which are required by the Securities and Exchange Commission under the Sarbanes-Oxley Act of 2002 for certain of the Company’s filings with the Securities and Exchange Commission. During 2008, the Company did not engage PricewaterhouseCoopers LLP to perform any management or financial information systems design consulting services.
Pursuant to the reviews and discussions described above, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2008, for filing with the Securities and Exchange Commission.
RELATIONSHIP WITH INDEPENDENT AUDITORS
Independent Registered Public Accountants
The aggregate fees billed by PricewaterhouseCoopers LLP for professional services rendered for the audit of the Company’s annual financial statements for the fiscal year ended December 31, 2008, for the reviews of the financial statements included in the Company’s quarterly reports on Form 10-Q for that fiscal year, and for reviews of registration statements were $312,000. The aggregate fees billed by PricewaterhouseCoopers LLP for professional services rendered for the audit of the Company’s annual financial statements for the fiscal year ended December 31, 2007, for the reviews of the financial statements included in the Company’s quarterly reports on Form 10-Q for that fiscal year, and for reviews of registration statements and for assistance with the Securities and Exchange Commission’s review of the Company’s prior year financial statements were $269,000.
Audit Related Fees
PricewaterhouseCoopers LLP did not bill the Company for any professional services that were reasonably related to the performance of the audit or review of financial statements for either the fiscal years ended December 31, 2008 and 2007, that are not included under Audit Fees above.
The aggregate fees billed by PricewaterhouseCoopers LLP for professional services rendered for domestic and international tax compliance, tax advice, and tax planning for the fiscal years ended December 31, 2008 and 2007, were $0 and $2,300 respectively.
All Other Fees
The aggregate fees billed by PricewaterhouseCoopers LLP for other services for the fiscal years ended December 31, 2008 and 2007, were $1,500 and $1,500 respectively.
The engagements of PricewaterhouseCoopers LLP to perform all of the above-described services were approved by the Audit Committee before the Company entered into the engagements, and the policy of the Audit Committee is to require that all services performed by the independent registered public accountants be preapproved by the Audit Committee before the services are performed.
Management does not know of any business other than that referred to herein that may be considered at the Annual Meeting. If any other matters should properly come before the Annual Meeting, it is the intention of the persons named in the accompanying form of proxy to vote the proxies held by them in accordance with their best judgment.
In order to assure the presence of the necessary quorum and to vote on the matters to come before the Annual Meeting, please indicate your choices on the enclosed proxy and date, sign, and return it promptly in the envelope provided. The signing of a proxy by no means prevents your attending the meeting.
FX ENERGY, INC.
The undersigned hereby appoints David N. Pierce and Scott J. Duncan proxies, and each of them, with full power of substitution, to vote all shares of common stock of FX ENERGY, INC. (the “Company”), that the undersigned is entitled to vote at the Annual Meeting of Stockholders of the Company (“Annual Meeting”) to be held in the Sussex Room at Grand America Hotel, 555 South Main Street, Salt Lake City, Utah, on June 10, 2009, at 10:00 a.m., local time, or any adjournment(s) thereof, such proxies being directed to vote as specified below. If no instructions are specified, such proxy will be voted “FOR” each proposal.
To vote in accordance with the Board of Directors’ recommendations, sign below. The “FOR” boxes may, but need not, be checked. To vote against any of the recommendations, check the appropriate box marked “AGAINST” below. To withhold authority for the proxies to vote for any of the recommendations, check the appropriate box(es) marked “WITHHOLD AUTHORITY” below.
The Board of Directors recommends votes “FOR” the following proposals, each of which has been proposed by the Board of Directors:
Please print your name and sign exactly as your name appears in the records of the Company. When shares are held by joint tenants, both should sign.