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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-KSB
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[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE FISCAL PERIOD ENDED
OCTOBER 31, 1997
COMMISSION FILE NUMBER: 2-99565
ARXA INTERNATIONAL ENERGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3784149
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
110 CYPRESS STATION DRIVE, SUITE 280
HOUSTON, TEXAS 77090
(Address of principal executive offices, including zip code)
(281) 444-1088
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK, $.001 PAR VALUE
Title of Class
Indicate by check mark whether the registrant (i) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (ii) has been subject to such filing requirements for the past 90
days. Yes [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Issuer's revenues for the fiscal period ended October 31, 1997 including ten
months for Phoenix Energy Group, Inc. were $485,552. The aggregate market
value of Common Stock held by non-affiliates of the registrant at February 10,
1998, based upon the last reported sales price on OTC Electronic Bulletin Board,
was $2,952,739. As of February 10, 1998, there were 20,437,502 shares of Common
Stock outstanding.
This report includes "forward-looking statements" within the meaning of Section
21E of the Securities Exchange Act of 1934. All statements other than statements
of historical fact included in this report regarding the Company's financial
position, estimated quantities and net present values of reserves, business
strategy, plans and objectives for future operations and covenant compliance,
are forward-looking statements. Although the Company believes that the
assumptions upon which such forward-looking statements are based are reasonable,
it can give no
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assurances that such assumptions will prove to have been correct.
Important factors that could cause actual results to differ materially from the
Company's expectations ("Cautionary Statements") are discussed in this report.
All subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified by the
Cautionary Statements.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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ARXA INTERNATIONAL ENERGY, INC.
TABLE OF CONTENTS
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PAGE
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PART I
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ITEMS 1, 2. BUSINESS AND PROPERTIES . . . . . . . . . . . . . . . . . . . . . . .1
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . .9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . 10
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . 11
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND PLAN OF OPERATION . . . . . . . . . . . . . . . . . . . . . . . 13
ITEM 7. FINANCIAL STATEMENTS (See below) . . . . . . . . . . . . . . . . . 16
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE. . . . . . . . . . . . . . . . . . . . . . 16
PART III
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ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT . . . . . . . . . 17
ITEM 10. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . . . . 18
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . . . . 24
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . . . . . 24
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . .F-1
</TABLE>
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PART I
ITEMS 1 & 2. BUSINESS AND PROPERTIES
INTRODUCTION
TRANSACTION BETWEEN ARXA AND PHOENIX
On October 27, 1997, ARXA International Energy, Inc. ("ARXA", the "Company"
or "Registrant") purchased substantially all of the assets of Phoenix Energy
Group, Inc. ("Phoenix") in exchange for 12,786,310 shares of ARXA's Common
Stock, which, following the transaction, represented approximately 63% of the
then total issued and outstanding shares of ARXA's Common Stock of
20,377,194, which resulted in a change in control of ARXA.
Because Phoenix obtained a controlling interest in ARXA, the transaction was
accounted for as a "reverse acquisition.". Therefore, for financial statement
purposes, Phoenix is considered the acquiror and ARXA the acquiree.
Accordingly, the consolidated financial statements of ARXA, as of October 31,
1997, reflect 1) Phoenix's historical operations and cost basis since its
inception and 2) the net acquisition value of ARXA on October 27, 1997,
accounted for under the purchase method of accounting.
L. Craig Ford, Phoenix's President and CEO, replaced William J. Bippus,
ARXA's former President and CEO and its sole employee. Additionally, two
members of ARXA's Board of Directors, Thomas A. Abate and Umberto Brovedani
resigned; William J. Bippus and Gregory A. Stephens continued to serve as
directors; the two vacancies were filled by L. Craig Ford and John Moran, who
are both directors of Phoenix. Mr. Bippus was appointed as Vice President of
Development, while all four of Phoenix's existing Vice Presidents were
appointed as Vice Presidents of ARXA fulfilling similar functions as they
did in Phoenix. (See Part III, Item 9, "Directors, Executive Officers,
Promoters and Control Persons; Compliance with Section 16(a) of the Exchange
Act").
The assets that ARXA acquired in the transaction with Phoenix consisted of
leasehold rights to properties associated with the oil and gas rights
acquired, ownership of oil and gas reserves, the working and net revenue
mineral interests in oil and gas properties, and the proportionate interests
in the plant and equipment associated with such properties. Additionally,
the assets consisted of all accounts receivable, all bank accounts, credits
due and debts owed, Phoenix's corporate offices and all related fixtures,
office space, furniture, automobiles, computers, and leasehold improvements.
As of October 31, 1997, the audited, combined asset values of the two
companies was approximately $2.5 million. The value of the Company's proved
reserves are $2.2 million and possible reserves are $1.4 million as
determined by R. A. Lenser & Associates.
At the time of the "reverse acquisition" the Company had a fiscal year ending
January 31 while Phoenix Energy Group, Inc. had a fiscal year ending December
31. On January 8, 1998, to resolve the discrepancy on a cost effective
basis, the Board of Directors voted to change ARXA's fiscal year end from
January 31 to October 31, effective as of October 31, 1997.
BACKGROUND
ARXA International Energy, Inc. is an independent oil and gas company engaged
in the acquisition, exploration, development and production of oil and gas
properties in the United States. Formerly named Major League Enterprises,
Inc., the Company was redomiciled as a Delaware Corporation in 1995 and
commenced operations during 1996. After October 27, 1997, the Company's
corporate headquarters have been located at 110 Cypress Station Drive, Suite
280, Houston, TX 77090.
Phoenix Energy Group, Inc. was incorporated as a Texas corporation on March
14, 1996. Mr. L. Craig Ford, then President and CEO of Phoenix and now also
President and CEO of ARXA, established Phoenix to take over the management
and ownership of two producing gas fields in Brooks County, Texas.
1
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CERTAIN DEFINITIONS
As used herein, the following terms have the specific meanings set out:
Bbl = barrel of oil
MBbl = thousand barrels of oil
Mcf = thousand cubic feet of gas
MMcf = million cubic feet of gas
Mcfe = thousand cubic feet of gas equivalent
MMcfe = million cubic feet of gas equivalent
Natural gas volumes are converted to barrels of oil equivalent using the
ratio of 6.0 Mcf of natural gas to 1 barrel of crude oil. Unless otherwise
indicated, natural gas volumes are stated at the official temperature and
pressure basis of the area in which the reserves are located.
OIL & GAS PROPERTIES -- A BRIEF DESCRIPTION
FLOWELLA FIELD -- This field is located in Brooks County, Texas, and is the
Company's largest producing area. The Company has a 41-45% interest in
three (3) completions in this field which produce from the Vicksburg
Formation.
W. E. COLSEN FIELD -- This field is located in Brooks County, Texas, and
produces gas from multiple sands in the Vicksburg Formation. The Company
has an interest in three (3) producing wells in this field and a 21-22%
interest in approximately 317 net acres under lease in the field area.
WEST LAVACA RIVER -- The Company has a 2-3% interest in approximately 17,500
acres in Lavaca County, Texas. The Company, during 1997, participated in
the drilling of 6 successful wells and 3 unsuccessful wells. The area is
being developed by Moose Oil and Gas, the operator, using 3D seismic data.
The productive formations are the Miocene and Frio, and the prospective
formations include the Yegua, Cook Mountain and Wilcox.
WEST SANDY CREEK -- The Company has a 2% interest in approximately 10,000 acres
in the West Sandy Creek area of Lavaca County, Texas, operated by Moose Oil
and Gas. At October, 1997, 11 wells were producing oil and gas from the
Miocene, Frio, and Yegua formations. In January 1998, the Company sold its
entire interest to Colt Resources for $48,526.
HACKBERRY -- The Company has a 10% interest in two leases comprising
approximately 152 acres in Cameron Parish, Louisiana. Two (2) wells which
produced oil from the Camerina Sands at 4,000 feet in depth are currently
shut-in due to mechanical problems. Remedial action to return the wells to
production is being evaluated.
LAST CHANCE -- The Company has a 50% interest in the Last Chance Gas Field in
Emery County, Utah. The area includes six (6) wells that tested gas. The
field is currently shut-in, waiting on development. The Company is
formulating a development plan for the field.
SOUTH HOPE FIELD - In October, 1997, the Company acquired a 50% working interest
from Union Gas Corporation in approximately 461 acres located in Lavaca
County, Texas.
SUBSEQUENT EVENTS
VESLEY #1 -- The Company has a 50% interest in this well located in The South
Hope Field in Lavaca County, Texas, which was drilled to a total depth of
8,100 feet in January, 1998. The well encountered two separate Miocene gas
sands from well log analysis. The well is scheduled to be completed in the
lower of the two sands in late February, 1998.
GARCIA RUPP #1 -- In October, 1997, the Company participated in a re-completion
of this well, located in the Flowella Field, Brooks County, Texas. The
well was perforated and completed in the Vicksburg sand at a depth of
10,118-10,127 feet. The well initially flowed at a rate of 1 MMcf Gas per
day. As of January 25, 1998 the well was flowing at a rate of 0.466 MMcf
Gas per day. The Company has a 45% interest in the well which, is operated
by Coastal Oil Company.
2
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OIL AND GAS RESERVES
The following table sets forth estimated net proved oil and gas reserves of the
Company and the present value of estimated future pretax net cash flows related
to such reserves as of December 31, 1996 and October 31, 1997. The reserve
data and the present values were prepared by R. A. Lenser & Associates, Inc.
The present value of estimated future net revenues before income taxes was
prepared using constant prices as of the calculation date, discounted at 10% per
annum on a pretax basis, and is not intended to represent the current market
value of the estimated oil and gas reserves owned by the Company.
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PROVED RESERVES
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(DOLLARS IN THOUSANDS)
OCTOBER 31, 1997 (1) DECEMBER 31, 1996 (2)
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DEVELOPED UNDEVELOPED TOTAL DEVELOPED UNDEVELOPED TOTAL
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Oil and condensate (MBbls) 24 15 39 15 - 15
Gas (MMcf) 1,057 1,877 2,934 1,025 - 1,025
Present value of estimated future
net revenues before income taxes (3) $1,379 $854 $2,233 $1,458 - $1,458
</TABLE>
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(1) ARXA and Phoenix combined, (See "Part I, Items 1 & 2, "Transaction between
ARXA and Phoenix")
(2) Phoenix only, (See "Part I, Items 1 & 2, "Transaction between ARXA and
Phoenix")
(3) The present value of estimated future pretax net cash flows were determined
by using current average prices of $19.66 per Bbl of oil and $1.91 per Mcf
of gas as of October 31, 1997 and $22.00 per Bbl of oil and $2.70 per Mcf
of gas as of December 31, 1996.
There are numerous uncertainties inherent in estimating quantities of proved
oil and gas reserves and in projecting future rates of production and timing
of development expenditures, including many factors beyond the control of the
producer. The reserve data set forth herein represents estimates only.
Reserve engineering is a subjective process of estimating underground
accumulations of oil and gas that cannot be measured in an exact way, and the
accuracy of any reserve estimate is a function of the quality of available
data and of engineering and geological interpretation and judgment. As a
result, estimates made by different engineers often vary from one another.
In addition, results of drilling, testing, and production subsequent to the
date of an estimate may justify revision of such estimates, and such
revisions may be material. Accordingly, reserve estimates are generally
different from the quantities of oil and gas that are ultimately recovered.
Furthermore, the estimated future net revenues from proved reserves and the
present value thereof are based upon certain assumptions, including future
prices, production levels and costs, that may not prove correct.
No estimates of proved reserves comparable to those which we have included
herein have been included in reports to any federal agency other than the
Securities and Exchange Commission.
In accordance with Securities and Exchange Commission regulations, the Lenser
Report used oil and gas prices in effect as of the report dates. The prices
used in calculating the estimated future net revenue attributable to proved
reserves do not necessarily reflect market prices for oil and gas production
subsequent to those dates. There can be no assurance that all of the proved
reserves will be produced and sold within the periods indicated, that the
assumed prices will actually be realized for such production or that existing
contracts will be honored or judicially enforced.
3
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VOLUMES, PRICES AND OIL AND GAS OPERATING EXPENSE
The following table sets forth certain information regarding the production
volumes of, average sales prices received for and average production costs
associated with the Company's sales of oil and gas for the periods indicated.
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FROM
INCEPTION
JANUARY 1 MARCH 14
THROUGH THROUGH
OCTOBER 31 DECEMBER
1997 (1) 1996 (2)
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PRODUCTION:
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Oil and condensate (MBbls) 2 1
Gas (MMcf) 172 81
Total Mmcfe 84 89
AVERAGE SALES PRICE:
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Oil and condensate ($ per Bbl) $23.33 $22.57
Gas ($ per Mcf) $2.50 $2.59
Average oil & gas operating expense ($ per Mcfe)(3) $.80 $1.29
</TABLE>
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(1) ARXA and Phoenix combined, (See "Part I, Items 1 & 2, "Transaction between
ARXA and Phoenix")
(2) Phoenix only, (See "Part I, Items 1 & 2, "Transaction between ARXA and
Phoenix")
(3) Includes direct lifting costs (labor, repairs and maintenance, materials
and supplies), work over costs, insurance and property and severance taxes.
PRODUCTIVE WELLS
The following table sets forth the number of productive wells in which the
Company (ARXA and Phoenix combined, See "Part I, Items 1 & 2, "Transaction
between ARXA and Phoenix") owned an interest as of October 31, 1997.
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GROSS NET
WELLS WELLS
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Flowella Field 3 1.28
W. E. Colson Field 3 0.49
West Lavaca River 6 0.12
West Sandy Creek 11 0.22
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Total 23 2.11
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4
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ACREAGE DATA
The following table sets forth certain information regarding the Company's
developed and undeveloped lease acreage as of October 31, 1997 (ARXA and
Phoenix combined, See "Part I, Items 1 & 2, "Transaction between ARXA and
Phoenix"). Developed acres refers to acreage within producing units and
undeveloped acres refers to acreage that has not been placed in producing
units.
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DEVELOPED ACRES UNDEVELOPED ACRES
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GROSS NET GROSS NET
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Flowella Field(1) 0 0 0 0
W. E. Colson Field 1,155 205 0 0
West Lavaca River 1,584 33 15,916 318
West Sandy Creek 2,444 52 7,556 151
Hackberry 0 0 152 15
South Hope 0 0 423 212
Naconiche 0 0 750 375
North Dakota 0 0 800 500
Michigan 0 0 708 443
South Last Chance 0 0 8,792 4,396
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Total 5,183 290 35,097 6,410
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(1) The Company owns well bore interests only.
EMPLOYEES
The Company currently employs 8 full time salaried persons. In addition to
the four executives described in Item 9 (Ford, Bippus, McGrath and Veh), the
Company has the following personnel: a staff of two in corporate
administration and support, one accounting staff, one landman.
OFFICE FACILITIES
The Company leases approximately 4,155 square feet of office space in
Houston, Texas. The lease is for a term of 60 months beginning on January 1,
1997 and ending on December 31, 2001, with a monthly lease rate of
approximately $3,948.
DESCRIPTION OF THE BUSINESS
ENVIRONMENTAL HAZARDS AND LIABILITIES
There are numerous natural hazards involved in the drilling of wells,
including unexpected or unusual formations, pressures, blowouts involving
possible damages to property and third parties, surface damages, bodily
injuries, damage to and loss of equipment, reservoir damage and loss of
reserves. Uninsured liabilities would reduce the funds available to the
Company, may result in the loss of the Company's properties and may create
liability for the Company. The Company may be subject to liability for
pollution, abuses of the environment and other similar damages. Although the
Company will maintain insurance coverage in amounts management deems
appropriate, it is possible that insurance coverage may be insufficient. In
that event, Company assets would be utilized to pay personal injury and
property damage claims and the costs of controlling blowouts or replacing
destroyed equipment rather than for additional drilling activities.
LEASEHOLD DEFECTS
The Company attempts to obtain its interests in producing properties with a
general warranty of title. In many instances, title opinions may not be
obtained if in management's discretion it would be uneconomical or
impractical to do so. This increases the possible risk of loss and could
result in total loss of properties purchased. Furthermore, in certain
instances management may determine to purchase properties even though certain
technical title defects exist, if it believes it to be in the best interests
of the Company.
5
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HAZARDS AND DELAYS
Hazards such as unusual or unexpected formations, pressures, down-hole fires,
blow-outs and loss of circulation of drilling fluids are risks involved in
drilling and operating oil and gas wells. The Company may not be insured
against all losses or liabilities that may arise from such hazards, because
such insurance is unavailable, because management has elected not to purchase
such insurance due to the high premium cost, or for other reasons. In the
event the Company incurs uninsured losses or liabilities, the Company's
available funds would be reduced and interests in producing properties might
be lost. Even though a well is completed and is found to be productive, or
even if it has produced oil and gas for a significant period of time, water
or other deleterious substances may be encountered that may impair or curtail
production or marketing of oil or gas from such well. The cost of producing
oil and gas reserves can vary depending upon unpredictable performance by a
well or group of wells, and is subject to all of the hazards of operating
wells. If it is necessary to deepen, rework or recomplete certain wells in
order to maximize production, there can be no assurance that money spent for
such activities will be recoverable, that the intended result will be
achieved, or that any of the other high risks of drilling activity will not
adversely affect the Company.
DRILLING POLICY
The Company operates wells in areas where management is of the opinion it is
in the best interests of the Company to do so. As operator, it will be
responsible for all operational functions, including drilling, development,
testing, and completion and equipping wells, production pumping and the sale
of oil and gas production. It is anticipated the Company will conduct
development drilling on the properties it acquires to enhance production and
will engage in exploratory drilling activity.
The Company does not expect to own any drilling equipment. Drilling and
certain other activities including seismic acquisition will be conducted by
non-affiliated contractors under the Company's supervision. A portion of the
Company's seismic acquisitions may be conducted by IPX, LLC, a corporation
owned by John Moran, a Director of the Company. Activities such as production
pumping, storage, deliveries, and equipment maintenance will be conducted by
Company employees or non-affiliated contractors, depending on which approach
is more efficient.
ACQUISITION OF UNDEVELOPED PROSPECTS
Management will select undeveloped prospects which will be acquired by the
Company at the lesser of cost or fair market value. Depending on its
attributes, a prospect may be characterized as an "exploratory" or
"development" site. Generally speaking, exploratory drilling involves the
conduct of drilling operations in search of a new and yet undiscovered pool
of oil and gas, whereas development drilling involves drilling to a known
producing formation in a previously discovered field.
The prospects will be acquired pursuant to arrangements whereby the Company
will purchase between 1 percent and 100 percent of the working interests,
subject to landowners' royalty interests and other royalty interests payable
to unaffiliated third parties. The Company will generally acquire less than
100 percent of the working interests in each prospect in which it will
participate.
The actual number, identity and percentage of working interests and leases or
other interests in prospects to be acquired by the Company will depend upon,
among other things, the total amount of money raised by the Company and the
borrowing of funds, the latest geological and geophysical data, potential
title or spacing problems, availability and price of drilling services,
tubular goods and services, approvals by federal and state departments or
agencies, agreements with other working interests owners in the prospects,
farm-ins, and continuing review of other prospects that may be available.
DRILLING AND COMPLETION PHASE
It is anticipated that most wells will be drilled to the depth determined
appropriate to target oil or gas production. Some shallower or deeper
development prospects may be drilled. Thereafter, the Company will complete
each well deemed by the Company to be capable of production of oil or gas in
commercial quantities.
In the event the funds allocated for exploratory wells are not used to drill
such wells, such funds together with unexpended completion funds will be used
to drill additional development wells, acquire seismic date to identify
future well locations, or lease relevant exploration or development areas.
6
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The Company will determine the depth to which a particular well is drilled
based on geologic and other information available to it. No representations
are given herein as to the depths and formations to be encountered in the
Company's wells. Management may substitute another operator or operators, on
terms and conditions substantially the same as those discussed herein.
Management will monitor the operations of the operators and non-affiliated
drilling contractors and subcontractors. The cost of drilling to the Company
will be the actual cost of third-party drilling.
Management will represent the Company in all operations matters, including
the drilling, testing, completion and equipping of wells and the sale of the
Company's oil and gas production.
PRODUCTION PHASE OF OPERATIONS
Once the Company's wells are "completed" (i.e., all surface equipment
necessary to control the flow of, or to shut down, a well has been installed,
including the gathering pipeline), production operations will commence. The
Company intends to sell gas production from its wells to industrial users,
gas brokers, interstate pipelines or local utilities. Management will
negotiate with various parties to obtain gas purchase contracts. Due to
rapidly changing market conditions and normal contracting procedures, final
terms and contracts will not be completed until after the wells have been
drilled. As a result of the effects of weather on costs, the Company's
results may be affected by seasonal factors. In addition, both sales volumes
and prices tend to be affected by demand factors with a significant seasonal
component.
GAS PIPELINE AND TRANSMISSION
The Company's wells will usually be drilled in the vicinity of transmission
pipelines, gathering systems, and/or end users. Management believes that
there are sufficient transmission pipelines, gathering systems, and end users
for the Company's production, subject to some seasonal curtailment. The
Company will bear the expense of hook-up and/or gathering charges between the
gas wells and the transmission pipelines.
SALE OF PRODUCTION
The Company will attempt to sell the oil and gas produced from its prospects
on a competitive basis at the best available terms and prices. Management
will not make any commitment of future production that does not primarily
benefit the Company. Generally, purchase contracts for the sale of oil can be
canceled on thirty days' notice, whereas purchase contracts for the sale of
natural gas usually have a term of a number of years and may require the
dedication of the gas from a well for the life of its reserves.
The Company will sell natural gas discovered by it at negotiated prices based
upon a number of factors, such as the quality of the gas, well pressure,
estimated reserves, prevailing supply conditions and any applicable price
regulations promulgated by the Federal Energy Regulatory Commission. The
Company expects to sell oil discovered and sold by it at free market prices.
JOINT OPERATING AGREEMENTS
The Company has entered into joint operating agreements with unaffiliated
third parties as operators. A representative form of an operating agreement,
a copy of which will be furnished upon request, provides that the operator
will conduct and direct and have full control of all operations on the
Company's prospects. The operator will have no liability as operator to the
Company for losses sustained or liabilities incurred, except as may result
from the operator's negligence or misconduct.
The Company pays a proportionate share of lease, development, and operating
costs, and is entitled to receive a proportionate share of production subject
only to royalties and overriding royalties. The Company is responsible only
for its obligations and is liable only for its proportionate share of the
costs of developing and operating the prospects.
An operator's duties will typically include testing formations during
drilling, and completing the wells by installing such surface and well
equipment, gathering pipelines, heaters, separators, etc., as are necessary
and normal in the area in which a prospect is located. The Company pays the
drilling and completion costs of the operators as incurred, except that the
Company is permitted to make advance payments to the operators where
necessary to secure tax benefits of prepaid drilling costs and there is a
valid business reason. In order to comply with conditions to securing tax
benefits of prepaid drilling costs, the operator under the terms of an
operating agreement will not refund any portion of amounts paid in the event
actual costs are less than amounts paid but will apply any such amounts
solely for payment of additional drilling services to the Company. If an
operator determines that a well is not likely to produce oil and/or gas in
commercial quantities, the operator will plug and abandon the well in
accordance with applicable regulations.
7
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The Company bears its proportionate share of the cost of drilling and
completing or drilling and abandoning each of the Company's wells. To the
extent that the Company acquires less than 100 percent of a prospect, its
drilling and completion costs of that prospect will be proportionately
decreased. The operating agreement will provide that the Company will pay the
operator the prospect cost and the dry hole cost for each planned well prior
to the spud date (commencement of actual drilling), and the balance of the
completed well costs when the well is completed and ready for production, in
the case of a completed well.
The operator will provide all necessary labor, vehicles, supervision,
management, accounting, and overhead services for normal production
operations, and will assess the Company on a per well basis as described in
the operating agreement for operations, field supervision, accounting,
engineering, management, and general and administrative expenses. Non-routine
operations will be billed to the Company at their cost.
The Company will have the right to take in-kind and separately dispose of its
share of all oil and gas produced from its prospects, excluding its
proportionate share of production required for lease operations and
production unavoidably lost. Initially, the Company will designate the
operators as its agents to market such production and authorize the operators
to enter into and bind the Company in such agreements as they deem in the
best interest of the Company for the sale of such oil and/or gas. If
pipelines which have been built by an operator are used in the delivery of
natural gas to market, the operator may charge a gathering fee not to exceed
that which would be charged by a non-affiliated third party for a similar
service.
An operating agreement will continue in force so long as any such well or
wells produce, or are capable of production. Any non-producing well will then
be plugged and abandoned consistent with the terms of the operating agreement.
EXPENDITURE OF PRODUCTION REVENUES
The Company's share of production revenue from a given well will be burdened
by and/or subject to royalties and overriding royalties, monthly operating
charges, and other operating costs. Such expenditures involve amounts
payable solely out of, or expenses incurred by reason of, production
operations. Inasmuch as the Company's primary source of income will be
production revenues, the Company will be required to borrow any funds it may
require to meet operation expenditures prior to production.
INSURANCE
The Company will obtain insurance and maintain such policies subject to its
analysis of premium costs, coverage and other factors. Management may, in its
sole discretion, increase or decrease the policy limits and types of
insurance from time to time as it deems appropriate under the circumstances,
which may vary materially.
The costs of insurance will be allocated based primarily upon the level of
oil and gas operations. The costs of insurance have increased significantly
in recent years but have currently stabilized. However, insurance premiums
may materially increase in the future. The primary effect of increasing
premiums cost is to reduce funds otherwise available for Company drilling
operations.
COMPETITION, MARKETS AND REGULATIONS
COMPETITION
The Company is expected to encounter strong competition from many other
potential producers of oil and gas, including many which possess larger
staffs and greater financial resources in acquiring economically desirable
properties. Many external factors beyond the Company's control will determine
the prices obtainable for the Company's oil and gas production. Oil and gas
production is subject to significant governmental regulation, including
regulations fixing rates of production and the maximum sales price of some
categories of natural gas, and it is possible that these regulations
pertaining to pricing and rates of production could become more pervasive and
stringent in the future. The Company faces competition in all aspects of its
business, including, but not limited to, acquiring reserves, leases, licenses
and concessions; obtaining goods, services and labor needed to conduct its
operations and manage the Company; and marketing its oil and gas. The
Company's competitors include multinational energy companies,
government-owned oil and gas companies, other independent producers and
individual producers and operators. The Company believes that its
competitive position is affected by price, its technical capabilities, and
ready access to markets for production. Many competitors have greater
financial and other resources than the Company, more favorable exploration
prospects and ready access to more favorable markets for their production.
8
<PAGE>
CURRENT MARKETS FOR OIL AND GAS
The future revenues generated by the Company's operations are highly
dependent upon the prices of, and demand for, oil and gas. For the last
several years, prices of these products have reflected a worldwide surplus of
supply over demand. The price received by the Company for its crude oil and
natural gas will depend upon numerous factors, the majority of which are
beyond the Company's control, including economic conditions in the United
States and elsewhere, the world political situation as it affects OPEC, the
Middle East (including the current embargo of Iraqi crude oil from worldwide
markets and other producing countries), the actions of OPEC and governmental
regulation. The fluctuation in world oil prices continues to reflect market
uncertainty regarding OPEC's ability to control member country production and
underlying concern about the balance of world demand for and supply of oil
and gas. Decreases in the prices of oil and gas have had, and could have in
the future, an adverse effect on the Company's development and exploration
programs, proved reserves, revenues, profitability and cash flow.
INSTABILITY OF PRICES OF OIL AND GAS
Global economic conditions, political conditions, variations in weather
conditions, energy conservation, and other factors contribute to unstable
prices. It is not possible to predict if prices will increase or decrease in
the future. An increase in crude prices would have a beneficial effect on the
Company while a decrease in crude prices would adversely affect the Company
and the stockholders. Prices for both oil and gas are likely to remain
volatile.
ENVIRONMENTAL REGULATION
The federal government and various state and local governments have adopted
laws and regulations regarding the control of contamination of the
environment, including, without limitation, the Comprehensive Environmental
Response, Compensation and Liability Act, as amended, the Solid Waste
Disposal Act, as amended, the Clean Air Act, as amended, the Oil Pollution
Act and the Clean Water Act and their state and local counterparts. Although
many of these laws and regulations contain at least partial exemptions for
oil and gas exploration and production activities, they may require the
acquisition of a permit by operators before drilling commences, prohibit
drilling activities on certain lands lying within wilderness areas, require
the reduction of the emissions of wastes or pollutants from such properties
or require the remediation of, and/or impose substantial penalties for,
pollution resulting from drilling operations, particularly operations in
offshore waters or on submerged lands. It is always possible that one or more
of the exemptions for oil and gas exploration and production activities will
be eliminated, thereby possibly subjecting the Company and others in the
industry to significantly costlier petroleum and waste handling and disposal
practices.
The Company will own or lease numerous properties which have been used for
the production of oil and gas for many years, and which were previously
developed and operated by persons over whose petroleum and other waste
handling and disposal activities the Company had no control. These handling
and disposal practices may have resulted in contamination of these properties
which may someday require remediation in order to comply with applicable
environmental laws and regulations. Environmental laws and regulations may
also increase the costs of routine drilling and operation of wells. Because
these laws and regulations change frequently, the costs to the Company of
compliance with existing and future environmental regulations cannot be
predicted.
ITEM 3. LEGAL PROCEEDINGS
No legal proceedings are pending to which the Company or any of its property
is subject, nor to the knowledge of the Company are any such legal
proceedings threatened.
The Company filed a suit in the 113th Judicial District, Harris County,
Texas, docketed to No. 97-06946, on February 10, 1997 against John O.
Schofield and Duke Resources Corporation. Mr. Schofield is the former
Chairman of the Board of the Company and is the owner of Duke Resources
Corporation. The complaint alleged breach of fiduciary duty, breach of
contract and wrongful foreclosure relating to certain assets pledged by the
Company as collateral for a Promissory Note. The Company sought a declaratory
judgment as to the status of the assets, damages, and attorneys fees. No
response was filed, the litigation was settled by agreements dated March 12,
1997, and April 25, 1997 and the suit was dismissed, with prejudice, by
agreement of the parties on March 18, 1997.
9
<PAGE>
Under the terms of the settlement:
1. The collateralized Promissory Note from the Company to Duke Resources
Corporation was restructured. Accrued interest on the indebtedness of
$79,770 was paid to the date of the restructuring. Under the terms of
the restructured Promissory Note, interest at the rate of eight
percent (8%) per annum is payable quarterly, on or before the 12th day
of the third month following execution and each three months
thereafter. The maturity date was extended to September 12, 1997 with
provisions for further successive six month extensions to March 12,
1999 provided that interest payments are current as of each extension
date.
2. Duke Resources Corporation released the various oil and gas leases
held as collateral for the original Promissory Note and reassigned
those to the Company. These were the assets underlying the
litigation.
3. Mr. Schofield agreed to transfer to the Company for cancellation
1,070,125 shares of the Company's Common Stock and 41,764 shares of
the Company's Class A Preferred Stock. The Company agreed to pay Mr.
Schofield $110,000 to be paid at the rate of seven percent (7%) of the
net proceeds to the Company of future offerings of the Company's
equity securities when the primary purpose of the offering is the
raising of capital. (See "Certain Relationships and Related
Transactions"). To the extent that there is any unpaid balance on
March 12, 1999, Mr. Schofield will convert such balance to Common
Stock based on the average market price for the five days preceding
maturity.
4. Mr. Schofield agreed to convert his remaining 175,000 shares of Class
A Preferred Stock to 175,000 shares of Common Stock. (See "Certain
Relationships and Related Transactions").
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the nine month
fiscal period covered by this transition report, through the solicitation of
proxies or otherwise.
10
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the OTC Electronic Bulletin Board under
the symbol "ARXA." Public trading of the Company Common Stock commenced on
August 8, 1995 and the market for the Common stock is limited, sporadic and
highly volatile. The following table sets forth the high and low closing bid
price of the Common Stock for the periods indicated. The information was
obtained from Trading and Market Services of the NASDAQ Stock Market, Inc. The
quotations represent inter-dealer prices without retail mark-ups, mark-downs or
commissions and do not represent actual transactions.
<TABLE>
PRICE RANGE(1)
-----------------
FISCAL YEAR/PERIOD HIGH LOW
------------------ ---- ---
<S> <C> <C>
FEBRUARY 1, 1995 TO JANUARY 31, 1996
Third Quarter (commencing August 8, 1995) $ 3.000 $ 1.825
Fourth Quarter . . . . . . . . . . . . . . 4.750 3.000
FEBRUARY 1, 1996 TO JANUARY 31, 1997
First Quarter. . . . . . . . . . . . . . . 6.375 2.625
Second Quarter . . . . . . . . . . . . . . 6.50 5.000
Third Quarter. . . . . . . . . . . . . . . 5.875 1.50
Fourth Quarter . . . . . . . . . . . . . . 3.5 1.50
FEBRUARY 1, 1997 TO OCTOBER 31, 1997 (2)
First Quarter. . . . . . . . . . . . . . . 2.25 1.5625
Second Quarter . . . . . . . . . . . . . . 4.375 1.50
Third Quarter. . . . . . . . . . . . . . . 2.375 1.1875
</TABLE>
(1) ARXA only, (See "Part I, Items 1 & 2, "Transaction between ARXA and
Phoenix")
(2) Fiscal year end, changed by the Board of Directors from January 31,
1998 to October 31, 1997, (See "Part I, Items 1 & 2, "Transaction
between ARXA and Phoenix")
On February 10, 1998, the closing bid price for the Common Stock was $.57, and
there were approximately 1,215 holders of record.
The Company which has not had any earnings, has not paid, and the Company does
not currently intend to pay, cash dividends on its Common Stock. The current
policy of the Company's Board of Directors is to retain earnings, if any, to
provide funds for operation and expansion of the Company's business. Such policy
will be reviewed by the Board of Directors of the Company from time to time in
light of, among other things, the Company's earnings and financial position.
At the beginning of the transition period ended October 31, 1997 there were
426,943 shares of the Company's Class A Preferred Stock issued and outstanding,
of which 216,764 shares were held by Mr. John O. Schofield. Mr. Schofield
transferred 41,764 shares to the Company in partial settlement of litigation
(see "Legal Proceedings"), leaving 385,179 shares issued and outstanding. By
the close of the transition period the holders of all such 385,179 shares had
converted them to 385,179 shares of Common Stock.
None of the Company's warrants are traded in any public trading market.
11
<PAGE>
SALE BY THE COMPANY OF UNREGISTERED SECURITIES
During the nine month period covered by this transition report ending October
31, 1997, the Company issued the following securities without registration under
the Securities Act of 1933, as amended:
1. The Company issued 385,179 shares of its Common Stock to the holders
of its issued and outstanding Class A Preferred Stock upon conversion
of such shares, as follows:
<TABLE>
NUMBER OF
DATE COMMON SHARES
-------- -------------
<S> <C>
04/25/97 175,000
05/16/97 72,606
06/24/97 6,563
10/27/97 131,010
</TABLE>
Such conversion issuances were considered exempt under Section 3(a)(9) of
the Securities Act.
2. On October 27, 1997 the Company issued 12,786,310 shares of its Common
Stock to Phoenix Energy Group, Inc. for acquisition of substantially
all of the assets of Phoenix. Such issuance was deemed exempt under
Section 4(2) of the Securities Act.
3. On December 4, 1997, pursuant to resolutions of the Company's Board of
Directors, as amended and ratified by subsequent resolutions on
October 27, 1997, the Company issued shares of its Common Stock to
various persons as recognition of services rendered:
<TABLE>
NUMBER OF
NAME COMMON SHARES
---- -------------
<S> <C>
Gregory Stephens* 50,000
John Catricola 50,000
Thomas Abate* 50,000
Mega Holdings, Inc.* 50,000
</TABLE>
Such issuances were considered exempt under Section 4(2) of the Securities
Act.
-------------------------
*See "Certain Relationships and Related Transactions"
12
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND PLAN OF OPERATION
A. RESULTS OF OPERATIONS
The Company's independent auditors have included an explanatory paragraph in
their report on the Company's consolidated financial statements as of
December 31, 1996 and October 31, 1997 and for the periods then ended which
states that "the Company had a net loss of $1,314,584 for the ten month
period ended October 31, 1997 and had an accumulated deficit of $1,446,717 at
that date.
This accumulated deficit for the 19-1/2 month period from March 14, 1996
(inception), to October 31, 1997 is comprised of the following:
<TABLE>
<S> <C>
Write-down of properties due to ceiling test $ 364,808
Issuance of stock for compensation 378,930
Equity in loss of an oil and gas venture 267,413
Cost to purchase a public shell corporation, charged to expense 93,083
Cost paid to external financial consultants for fund raising
activities 49,573
Cost to acquire joint venture interests, charged to expense 70,000
Other operating activities 222,910
-----------
Accumulated Deficit $ 1,446,717
</TABLE>
B. LIQUIDITY AND CAPITAL RESOURCES
The Company's independent auditors have included an explanatory paragraph in
their report on the Company's consolidated financial statements as of December
31, 1996 and October 31, 1997 and for the periods then ended which states that
"The Company is currently seeking outside sources of financing to fund its
development efforts. Should the Company be unable to access such financing, it
will have to materially curtail its development and operating activities."
The Company notes that there currently is sufficient monthly cash flows from
operations to operate the business for the next year, especially when
considering 1) the estimated additional monthly net cash flows from the
re-completion of the Garcia #1 of $7,000 and the newly drilled and completed
Vesley #1 of $9,000 and 2) decreases in the Company's administrative and
investment costs, which have been implemented.
The Company's plan for providing the necessary capital resources to grow its
asset base is explained below in "Actions being Taken".
C. MANAGEMENT'S RESPONSE AND PLAN OF OPERATION
BACKGROUND
Phoenix Energy Group, Inc., ("Phoenix") was incorporated in Texas on March 14,
1996. Mr. L. Craig Ford, then President and CEO of Phoenix and now President
and CEO of ARXA International Energy, Inc. ("ARXA"), formed Phoenix at the
direction of a group of working interest owners (the 'original' working interest
owners) with significant personal investments in two producing gas fields in
Brooks County, Texas.
These working interest owners were part of a much larger group which invested
over $12 million in several joint venture oil and gas drilling projects.
Collectively, the working interest owners were facing losses of up to 80% on
their original investment. Mr. Ford recognized that despite the horrendous loss
of investment the residual value of the assets constituted a sufficient reserve
and cash flow basis upon which to initiate a turnaround plan. The plan was
presented to the original working interest owners who immediately agreed to
support the plan with seed capital.
13
<PAGE>
FOUR-PHASED TURNAROUND PLAN
1. Form a new company
2. Negotiate a change in management of the various joint ventures
3. Consolidate the reserves of the joint ventures into the new company
4. Initiate a plan to take the company public
Mr. Ford and the Board of Directors of Phoenix caused an audit to be performed
on the managing joint venturer and negotiated a settlement between the joint
venturers and the managing joint venturer. These negotiations led to
liquidation of certain assets of the former manager and the disbursing of
residual proceeds to the individual joint ventures after settling trade and
other obligations. Mr. Ford completed Phases 1 and 2 of the turnaround plan by
September, 1996.
Phase 3 of the turnaround plan, was completed in late January, 1997. The
consolidation was accomplished through an exchange of individual investor
reserves in each producing well for Phoenix restricted common stock.
Approximately 93% of the reserves were consolidated. The acquired reserves were
valued at $2.1 million by Phoenix's independent reservoir engineering firm, R.
A. Lenser and Associates and in early 1997 were generating approximately $75,000
per month in net operating cash flow.
With Phase 3 completed, Phoenix Energy Group, Inc. became as a full-fledged
energy company. Between January and October, 1997, Mr. Ford positioned Phoenix
to begin evaluating oil and gas properties for acquisition and to search for a
publicly traded, business combination candidate by 1) hiring experienced oil and
gas executives in key management roles, 2) negotiating a strategic relationship
with a 3-D seismic prospect development company, and 3) developing relationships
with energy banks and mezzanine financial sources. Phase 4 of Phoenix's
turnaround plan was achieved on October 27, when Mr. Ford closed the "reverse
acquisition" of ARXA International Energy, Inc., a fully reporting, publicly
traded company (OTC Electronic Bulletin Board under the symbol "ARXA.").
DIRECTION
Both Phoenix and ARXA have always been seriously undercapitalized. With Phase 4
completed, management has turned its attention to positioning the company with
the forecasted (see below) working capital necessary to initiate the strategic
plan of the company. Provided below is management's discussion of the Company's
strategy, a summary of the Company's assets, significant issues facing the
Company and the action steps being taken now.
STRATEGY
Management believes that in this initial stage the company should emphasize
building strong fundamentals at minimum risk given the nature of the business.
That is, the focus should be on building cash flow and reserves through the
acquisition of low risk producing oil and gas opportunities. Exploration,
however, is an integral part of the growth of any energy company and must be
part of the asset growth plan for ARXA. The challenge, therefore, is to build
the asset base of the company through careful risk-reward analysis given our
scare corporate resources.
OIL AND GAS PRODUCTION ACQUISITIONS Asset growth comes from a) acquiring
producing reserves, or b) exploring for, then developing, newly discovered
reserves. Acquiring reserves is capital intensive with very low risk and
investment returns in the 8% to 15% range (mean of 10%). For an emerging energy
company, like ARXA, an investment growth plan of 70% production acquisitions and
30% exploration would be ideal, however, because of price competition for proved
reserve acquisitions in the current environment (a "feeding frenzy"), it is
difficult to maintain a 70/30 ratio.
Despite the pricing issue, however, ARXA is committed to aggressively building
strong fundamentals through production acquisitions. The larger ARXA's reserve
and cash flow base becomes, the greater ARXA's ability to internally finance, or
leverage through commercial energy banking and secondary capital market sources,
growth capital. The Company's strategy for financing acquisitions of producing
oil and gas reserves is to use ARXA's energy banking and project financing
sources for interim capital funding, then equitize any underlying debt with a
public offering of securities.
HEDGING THE COST AND RISK OF EXPLORATION Because of the risk associated with
oil and gas, the corporate level return on investment ("ROI") should be in the
25% to 30% range. With production acquisitions currently yielding 8% to 15%
energy companies must have an exploration solution to cover the shortfall in
ROI. Exploration, however, is capital intensive with increasing levels of risk.
The amount of risk is determined by the type of project and the technology
employed in developing the 'OIL OR GAS POTENTIAL' hypothesis--proving the
hypothesis requires drilling. ARXA will limit capital intensive, risky ventures,
yet "adding new reserves through the drill bit" is necessary for two reasons.
First, a company cannot depend indefinitely on a continuous supply of properly
priced producing well acquisitions. Second, the return on new reserves is
measured in multiples of total investment, rather than on a negotiated discount
off projected future net revenues which is the structure for producing well
acquisitions.
14
<PAGE>
From an exploration positioning perspective, until the company is positioned
through a public offering of securities to raise exploration risk capital,
ARXA's niche lies in controlling the technical information and strategic acreage
within a prospect, then 'flipping' the prospect to a large exploration company
with the risk dollars to invest in exploratory drilling. ARXA's exploration
solution lies in the company's strategic relationship with Integrated Petroleum
Exploration ("IPX"). IPX is a 2-D and 3-D seismic prospect development company
headed by John Moran, an ARXA Director and Vice President of Exploration. (See
"Certain Relationships and Related Transactions")
The IPX arrangement provides that whenever ARXA funds development of an IPX
prospect, ARXA earns 50% of the "promoted" interest in the well. In addition to
the demand for fundamentally sound exploration prospects developed by reputable
geologists and geophysicists, exploration prospect 'deals' almost always include
reimbursement of 100% of all prospect development costs. The first ARXA/IPX
prospect, 'Sayre Ranch' in the Anadarko Basin of Oklahoma, was sold to a large
independent exploration company. By the terms of the sale, ARXA recovered 100%
of $470,000 in leasehold acquisitions and other prospect development costs and
shares an equity interest in future prospect wells with IPX. This strategy
optimizes new reserve growth while moderating the cost and risk of exploration.
In the Sayre Ranch prospect any newly discovered reserves accruing to ARXA's
interest will be at "zero" cost to ARXA.
FOCUS AREAS AND FUTURE GROWTH ARXA's prime geographical focus will be
California and the Michigan basin. The Company's secondary focus will be in the
"Texas, Oklahoma, New Mexico and Louisiana" region where opportunities still
exist, however, because of the acquisition costs and competitive barriers in
these states, management concludes that there are few appropriate opportunities
for a company with ARXA's capital resources.
ASSETS
1. ARXA'S MANAGEMENT TEAM This is ARXA's most important asset. It is the
management team and deal flow which has attracted the energy banks and
industry specific finance sources at such an early stage.
2. ARXA'S FINANCIAL MARKET POSITIONING ARXA's second most important asset
is access to energy banking, industry specific financial sources, and now,
with the reverse acquisition complete, access to the primary capital
market. Management's rapid growth strategy calls for the company to
acquire oil and gas producing reserves using energy banking and industry
specific finance source debt, then equitize the underlying debt with a
public offering of stock.
3. ARXA'S "DEAL FLOW" Energy companies grow through deal flow. ARXA has
successfully identified good acquisition targets and at prices up to 50%
below market. This strategic advantage is attractive to energy banks and
industry specific finance sources.
4. ARXA'S ACCESS TO FUNDAMENTALLY SOUND EXPLORATION PROSPECTS An exploration
solution is essential to overcoming the shortfall between return on
acquired reserves and minimum return on investment criteria given the risk
associated with oil and gas investment. ARXA has ground floor access to
3-D seismic controlled exploration prospects, therefore the ability to
promote prospect development to risk oriented, appropriately financed
exploratory drilling companies.
ISSUES
CAPITALIZATION Acquisitions of oil and gas producing assets tend to be large.
In order to grow the asset base through acquisitions the company needs to be
positioned with the liquidity, in the form of cash or a large, unencumbered
reserve base, to cover the spread between acquisition price and energy bank
advance rates. Without the ability to capitalize on large acquisition
opportunities growing the company asset base is relegated to higher risk proved
undeveloped drilling opportunities, and the occasional small acquisition with
limited return potential. The inability to finance the spread between energy
bank advance rates and acquisition price is the greatest barrier to short term
growth facing the company. Phase I in "Actions Being Taken" below addresses the
strategy being pursued by the company in order to provide the initial liquidity
necessary to grow the asset base through producing oil and gas acquisitions.
15
<PAGE>
PUBLIC SECURITIES MARKET ACCESS The rapid growth strategy of the company
provides for acquisition of producing oil and gas assets using energy banking
and industry specific project financing debt, then equitizing this debt in a
public offering of securities. On the exploration side, the company is
committed to an exploration solution, however, because of the risk profile for
exploration ventures it is the strategy of the company to use equity rather than
debt to capitalize exploration. ARXA is a fully reporting, publicly traded
company. In order to capitalize on this public market opportunity, the company
must become NASDAQ qualified. Phase I in "Actions Being Taken" will provide the
additional assets necessary to file for NASDAQ listing. Phase II is the plan
for capitalizing on the NASDAQ qualification by equitizing the underlying debt
on producing oil and gas acquisitions acquired in Phase I and funding the
company's exploration efforts.
ACTIONS BEING TAKEN
PHASE I: INITIAL CAPITALIZATION, POSITION FOR A PUBLIC OFFERING OF SECURITIES
1. Fund a $6 million working capital budget.
a) Convert non-yield and low yield oil and gas reserves to cash and
commit these proceeds to the working capital budget. Management
believes the value of these reserves to be in the $1.5 million to $3
million range.
b) Sell a private placement of securities to fund the shortfall between
$6 million dollars and the proceeds from the sale of converted oil and
gas reserves.
c) Combine $4 million from the private placement/asset conversion with a
like amount from ARXA's energy banking or other debt financing sources
to fund a minimum $8 million acquisition budget. Use the remaining $2
million to fund acquisition of the Enhanced Oil Recovery projects, for
start-up costs associated with the IPX exploration prospect
development opportunity in California, and for other corporate
purposes.
PHASE II: PUBIC OFFERING OF SECURITIES
Identify an appropriate underwriter who will successfully place a public
offering of stock to retire the underlying debt on phase I acquisitions,
develop the EOR projects, and complete the funding of the IPX exploration
prospect development opportunity in California.
ITEM 7. FINANCIAL STATEMENTS
The information required hereunder is included in this report as set forth in
the "Index to Financial Statements" on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The auditor for ARXA International Energy, Inc. for the fiscal year ended
January 31, 1997 was McManus & Co., P.C., CPA's. The auditor for Phoenix Energy
Group, Inc. ("Phoenix") was Hein + Associates L.L.P. As a result of the
"reverse acquisition" of the Company by Phoenix on October 27, 1997, the
auditors of Phoenix, Hein + Associates, L.L.P., assumed responsibility for the
consolidated audit as of October 31, 1997. There were no disagreements with
respect to accounting principles or practices, financial statement disclosure,
or auditing scope or procedure with the Company's former auditors, McManus &
Co., P.C., CPA's, nor for either of the past two fiscal years was there an
adverse opinion, disclaimer of opinion or modification.
16
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
L. CRAIG FORD, age 50, serves as a Director and as President and Chief Executive
Officer of the Company. He has been the President and Chief Executive Officer
of Phoenix Energy Group, Inc. since its inception in March, 1996. In that
capacity he managed Phoenix's acquisition of 93% of the available working
interests formerly managed by Prospector Petroleum, Inc. for which he had been
Vice President of Finance from December 1994 through June 1995. During the
period from July 1995 through February of 1996 he was working with the owners of
the working interests to form Phoenix. From 1992 through 1994, Mr. Ford was a
financial consultant to two California venture capital projects, Systematic
Irrigation Controls, Inc. and Criminal Justice Communications, Inc., to which he
provided corporate and strategic product advice. During the period from 1980 to
1991 Mr. Ford was an internal audit executive for a large independent and two
Fortune 500 oil and gas companies, where he was responsible for extensive
operational and financial audits in exploration, production, refining, coal,
chemical and gas processing activities around the world.
JOHN L. MORAN, age 51, serves as a Director and as Vice President of Exploration
for the Company. He has served as a Director of Phoenix Energy Group, Inc. since
January, 1997 and he has been Phoenix's Vice President of Exploration since
March, 1997. Mr. Moran is the President of Integrated Petroleum Exploration,
Inc. ("IPX") a 2-D and 3-D geological and geophysical prospect development
company in which Phoenix has made a sizable investment. Prior to forming IPX in
1995, Mr. Moran formed and operated TeTra Exploration, Inc., which developed
large 3-D seismic projects for sale to the oil & gas industry. From 1991 to 1995
Mr. Moran served as Chief Geologist, Vice President of Business Development, and
Vice President of Exploration Services for Apache Corporation. In those
capacities he managed the Corporate Reservoir Engineering, Corporate Land
Administration, Corporate Environmental Health and Safety, and Corporate Land
and Analysis (technical computing) Departments. Mr. Moran also served on the
Board of Directors of Apache International, Inc. From 1984 to 1991, he served
as Apache's Midcontinent Exploration Manager and was responsible for planning
and directing the exploration activities for Apache's Midcontinent Regional
Office.
MR. WILLIAM J. BIPPUS, age 44, a Director of the Company since August, 1995 also
serves as Vice President of Development. He served as ARXA's President and
Chief Executive Officer from August 1995 until October 27, 1997 when he resigned
and was replaced by Mr. Ford as a result of the Phoenix transaction. Mr. Bippus
was employed by Marathon Petroleum Corporation from 1988 to July 1995, where he
was responsible for the world-wide business development unit which evaluated
acquisitions and entry opportunities in new areas. From 1992 to 1993, Mr. Bippus
was responsible for Marathon's international non-operated areas. From 1988 to
1992, Mr. Bippus worked for Marathon in Aberdeen, Scotland and London, England
as a senior geophysicist, reservoir development. From 1983 to 1987, Mr. Bippus
was a senior geophysicist with Occidental Petroleum Corp. in London. Mr. Bippus
worked in the International Group of Cities Services Petroleum Corp. from 1979
to 1983. Mr. Bippus is a Wyoming Board Registered Professional Geologist and a
member of the Society of Exploration Geophysicists and the American Association
of Petroleum Geologists.
MR. GREGORY A. STEPHENS, age 38, a Director of the Company since August, 1995
also served as Treasurer until October 27, 1997 when he resigned and was
replaced by Mr. Ford as a result of the Phoenix transaction. Mr. Stephens has
been the President of Stephens Machine, Inc., a machine shop based in Kokomo,
Indiana since 1984. He is also President, since 1993, of Stephens Fabrication,
Inc., a structural steel fabricator also in Kokomo. Mr. Stephens is a
partner/owner of various real estate development entities and since 1994 has
been a director of Refinery Associates.
MR. DENNIS P. MCGRATH, age 49, serves as Vice President and Controller of the
Company. A Certified Public Accountant since 1976, Mr. McGrath was a sole
practitioner from January, 1995 to March, 1997 when he joined Phoenix Energy
Group, Inc. as Vice President and Controller. From June, 1996 through February,
1997 Mr. McGrath was engaged by Phoenix to conduct an audit of the Prospector
Petroleum, Inc. joint ventures for the four year period prior to Phoenix
becoming the Joint Venture Manager. From 1986 to 1994 Mr. McGrath was a partner
in the Houston office of the regional public accounting firm of Simonton, Kutac
and Barnidge, L.L.P. where he was the firm's partner-in-charge of small business
consulting and out-sourcing services. A large portion of his clients were
engaged in oil & gas exploration and development. From 1972 to 1986 Mr. McGrath
held financial management positions with various oil and gas companies.
17
<PAGE>
MR. MITCHELL F. VEH, JR., age 48, was elected as the Vice President of
Acquisitions and Engineering. A Registered Professional Engineer in Texas and
Louisiana since 1981, Mr. Veh has served as Vice President of Acquisitions and
Engineering of Phoenix Energy Group, Inc. since June, 1997. From 1993 to May,
1997 Mr. Veh was a Senior Petroleum Engineer with Torch Energy Advisors with
responsibilities for evaluating oil and gas reserves as well as the further
exploitation and/or development of the properties. From 1991 to 1992, he was
Vice President of Acquisitions and Development with Ultramar Oil and Gas Ltd.
where he was responsible for the evaluation and acquisition of oil and gas
reserves and the subsequent management and development of the properties.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The Company believes that all persons required to report have filed reports for
the period covered by this transition report. However, the Company believes
that all of such reports for Messrs. Bippus (Form 4) and Ford, Moran, McGrath,
Veh and Phoenix Energy Group, Inc. (Form 3) were not timely filed.
ITEM 10. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
During the period from February 1, 1997 to October 27, 1997 the only employee of
the Company was William J. Bippus, its President/CEO. On October 27, 1997 the
Company acquired substantially all of the assets of Phoenix Energy Group, Inc.
in a "reverse acquisition". In connection with the change in control which
occurred, Mr. Bippus became Vice President of Development. Mr. L. Craig Ford,
the President/CEO of Phoenix, became President/CEO of the Company. In addition,
Mr. Gregory A. Stephens, a Director and Treasurer, resigned as Treasurer and was
replaced by Mr. Ford. Various persons associated with Phoenix also became
executives of the Company (See Item 9, "Directors, Executive Officers, Promoters
and Control Persons")
During the nine month period covered by this transition report, Mr. Bippus was
to be compensated at the rate of $180,000 per annum pursuant to a five year
employment agreement entered into in August, 1995. As of February 1, 1997 Mr.
Bippus had accrued approximately $97,500 of previously unpaid compensation.
During the transition period, Mr. Bippus was paid $60,000. His prior accruals
plus the accruals for the nine month period were reduced to an agreed $48,750 as
part of the "reverse acquisition" transaction. Also, his annual compensation
was reduced to $84,000, equivalent to Mr. Ford's. No executive officer, of
either ARXA or Phoenix, received total annual salary and bonus for the nine
month transition period ended October 31, 1997 in excess of $100,000.
18
<PAGE>
COMPENSATION OF ARXA EXECUTIVES
SUMMARY COMPENSATION TABLE
<TABLE>
LONG-TERM
COMPENSATION COMPENSATION
---------------------- -------------------
NAME AND PRINCIPAL FISCAL OTHER STOCK STOCK
POSITION PERIOD SALARY* COMPENSATION ISSUANCES OPTIONS
- ------------------ ------ ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
William J. Bippus 01/31/96 $ 15,000 0 0 0
Chief Executive Officer 01/31/97 $142,500 0 0 0
(Resigned 10/27/97) 10/31/97 $ 60,000 0 0 0
L. Craig Ford **
Chief Executive Officer
(Commenced 10/27/97)
</TABLE>
- -------------
* Actual cash compensation received; excludes portion unpaid and accrued
** Mr. Ford's compensation for the transition period is presented in the
Compensation of Phoenix Executives below.
COMPENSATION OF DIRECTORS
Directors are not compensated for their services as such and there is no current
plan to compensate them. Directors may be reimbursed expenses incurred in
attendance at meetings.
For the nine month transition period, certain directors were issued shares of
Common Stock as compensation for services other than as a Director as follows:
<TABLE>
Number of
Name Common Shares
---- -------------
<S> <C>
Gregory Stephens 50,000
Thomas Abate 50,000
Mega Holdings, Inc. 50,000
</TABLE>
OTHER COMPENSATION
There are no Stock Appreciation Rights (SARs) held by any executive officer or
any other person. There is no Long-Term Incentive Plan. There is no Deferred
Compensation owing to any executive officer; however as of October 31, 1997 Mr.
Bippus was owed $48,750 (as adjusted) for previously accrued and unpaid salary.
There is no retirement, pension or profit sharing plan.
19
<PAGE>
COMPENSATION OF PHOENIX EXECUTIVES
During the period from January 1, 1997 to October 31, 1997 Phoenix Energy Group,
Inc. paid the following compensation to its executives:
SUMMARY COMPENSATION TABLE
<TABLE>
LONG-TERM
COMPENSATION COMPENSATION
----------------------- --------------------
NAME AND PRINCIPAL FISCAL OTHER STOCK STOCK
POSITION PERIOD SALARY COMPENSATION ISSUANCES OPTIONS
- ------------------ ------ ------ ------------ --------- -------
<S> <C> <C> <C> <C> <C>
L. Craig Ford 10/31/97 $68,000 $4,268(2) 195,038(1) 0
Chief Executive Officer
John Moran 10/31/97 0 0 153,244(1) 0
VP-Exploration $71,876(4)
Kenneth Koepke (5) 10/31/97 $46,667 $8,750(3) 83,588(1) 0
VP-Corp. Relations
Dennis P. McGrath 10/31/97 $46,667 $34,422(3) 83,588(1) 0
VP, Controller
Mitchell Veh, Jr. 10/31/97 $44,000 0 83,588(1) 0
VP-Acquisition
Robert G. Farris 10/31/97 0 0 69,656(1) 0
Director
Paul Wigoda 10/31/97 0 0 0 0
Director
Larry Keeler 10/31/97 0 0 69,656(1) 0
Director
</TABLE>
(1) The shares issued as compensation stock to the listed executives are
subject to rescission.
(2) Car allowance.
(3) These amounts were paid under contractual arrangements pre-existing
employment.
(4) This amount was paid by IPX to Mr. Moran. See "Certain Relationships and
Related Transactions"
(5) No longer an employee of the Company.
STOCK OPTIONS
The shareholders of the Company approved an Incentive Stock Option Plan at the
Annual Meeting held on August 13, 1996. Such Plan authorized the issuance of
options to purchase up to 1,000,000 shares. The exercise price is not to be
less than 100% of the fair market value of a share of Common Stock on the date
the option is granted and the option may not have a term of more than ten years
from the date of grant; except that for owners of 10% or more of the total
combined voting power of the Company and its subsidiaries, the exercise price is
to be at least 110% of the fair market value of a share on the date the option
is granted and the option may not have a term of more than five years from the
date of grant.
As of February 10, 1998 no options have been granted under the Plan.
20
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(A) The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of February 10, 1998 by all
persons known by the Company to be beneficial owners of more than five
percent (5%) of its Common Stock, each director of the Company, each
executive officer of the Company, and all directors and executive officers
as a group:
<TABLE>
Amount and Nature
Name and Address of Beneficial Percent of
of Beneficial Owner Ownership(1) Class(2)
------------------- ------------ --------
<S> <C> <C>
Phoenix Energy Group, Inc. 12,786,310(6) 62.6%
110 Cypress Station Drive, Suite 280
Houston, TX 77090
William J. Bippus 1,612,094(3) 7.9%
10 Stone Spring Circle
The Woodlands, TX 77381
Gregory A. Stephens 731,010(4) 3.6%
411 Pebble Ct.
Russiaville, IN 46979
L. Craig Ford 0(5) 0.0%
25111 London Town Drive
Spring, TX 77389
John L. Moran 0(5) 0.0%
22702 Moonlit Lake Ct.
Katy, TX 77450
Dennis P. McGrath 0(5) 0.0%
714 Lodgehill
Houston, TX 77090
Mitchell F. Veh, Jr. 0(5) 0.0%
3 Rutgers Place
Houston, TX 77005
All officers and directors
as a group (6 persons) 2,343,104(7) 11.5%
</TABLE>
(1) Unless otherwise indicated below, all shares are owned legally (of record)
and beneficially.
(2) Based upon 20,437,502 shares issued and outstanding on February 10, 1998.
(3) Does not include 527,344 $2.00 Warrants held by Mr. Bippus nor 123,750
shares of common stock and 33,750 of $2.00 Warrants held by a trust for the
Bippus Children.
(4) Does not include 150,000 $2.00 Warrants held by Mr. Stephens.
(5) Does not include allocation or attribution of shares owned by Phoenix
Energy Group, Inc.; see table (C) below.
(6) Does not include Warrants exercisable at $2.00 per share to purchase
3,297,000 shares of the Company's Common Stock, issued in connection with
the "reverse acquisition" on October 27, 1997.
(7) Does not include Warrants held by Mr. Bippus or Mr. Stephens, nor the
shares or any Warrants owned by Phoenix Energy Group, Inc.
21
<PAGE>
(B) The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of February 10, 1998 by all
persons who were previously Directors or executive officers of the Company
during the nine month transition period:
<TABLE>
Amount and Nature
Name of of Beneficial Percent of
Beneficial Owner Ownership(1) Class(2)
---------------- ------------ --------
<S> <C> <C>
Sammy Fleschler 150,000(3) .73%
Umberto Brovedani 100,000(4) .49%
Thomas Abate 145,000(5) .71%
</TABLE>
(1) Unless otherwise indicated below, all shares are owned legally (of record)
and beneficially.
(2) Based upon 20,437,502 shares issued and outstanding on February 10, 1998.
(3) During the transition period, Mr. Fleschler agreed to cancellation of
44,541 shares previously issued, which was physically done on November 13,
1997. A business partner of Mr. Fleschler's, Mr. Richard Royall, also
previously associated with the Company, also agreed during the transition
period to cancellation of 44,541 shares previously issued, which was
physically done on November 13, 1997. Does not include 100,000 $2.00
Warrants held by Mr. Fleschler nor 100,000 $2.00 Warrants held by Mr.
Royall.
(4) During the transition period, Mr. Brovedani agreed to cancellation of
44,541 shares previously issued, which was physically done on December 4,
1997. Does not include 40,000 $2.00 Warrants held by Mr. Brovedani.
(5) Includes 65,000 shares owned by Mega Holdings, Inc., a corporation
controlled by Mr. Abate. Does not include 13,800 $2.00 Warrants nor 10,000
$5.00 Warrants held by Mr. Abate, nor 13,800 $2.00 Warrants nor 5,000 $5.00
Warrants held by Mega Holdings Corporation, a corporation controlled by Mr.
Abate.
(C) As a result of the "reverse acquisition" on October 27, 1997 control of the
Company passed from Mr. Bippus to Phoenix Energy Group, Inc. by virtue of
the issuance of 12,786,310 shares of the Company's Common Stock,
representing approximately 63% of the issued and outstanding Common Stock
of the Company.
22
<PAGE>
(C) PHOENIX ENERGY GROUP, INC.
The following table sets forth certain information regarding the beneficial
ownership of Phoenix Energy Group, Inc.'s Common Stock as of February 10,
1998 by all persons known to Phoenix to be beneficial owners of more than
five percent (5%) of its Common Stock, each executive officer of Phoenix,
and all directors and executive officers of Phoenix as a group:
<TABLE>
Amount and Nature
Name and Address of Beneficial Percent of
of Beneficial Owner Ownership(1) Class(2)
------------------- ------------ --------
<S> <C> <C>
L. Craig Ford 515,165(3) 8.0%
25111 London Town Drive
Spring, TX 77389
Paul Wigoda 420,713 6.5%
3883 Turtle Creek, #1009
Dallas, TX 75219
Robert G. Farris 177,543(4) 2.7%
2204 Rierside Dr.
Harlingen, TX 78550
Larry Keeler 305,131(5) 4.7%
634 Hickory Ridge
Shenandoah, TX 77381
John L. Moran 153,244(6) 2.4%
22702 Moonlit Lake Ct.
Katy, TX 77450
Dennis P. McGrath 88,588(7) 1.4%
714 Lodgehill
Houston, TX 77090
Mitchell F. Veh, Jr. 83,588(8) 1.3%
3 Rutgers Place
Houston, TX 77005
All officers and directors
as a group (7 persons) 1,743,972 27.0%
</TABLE>
(1) Unless otherwise indicated below, all shares are owned legally (of record)
and beneficially.
(2) Based upon 6,434,817 shares issued and outstanding as of February 10, 1998.
(3) Includes 195,038 shares of Common Stock issued as compensation, which are
subject to potential rescission. Does not include options to purchase
190,132 shares of Common Stock at an exercise price of $2.50 per share.
(4) Includes 69,656 shares of Common Stock issued as compensation, which are
subject to potential rescission. Does not include options to purchase
40,731 shares of Common Stock at an exercise price of $2.50 per share.
(5) Includes 69,656 shares of Common Stock issued as compensation, which are
subject to potential rescission. Does not include options to purchase
80,731 shares of Common Stock at an exercise price of $2.50 per share.
(6) Includes 153,244 shares of Common Stock issued as compensation, which are
subject to potential rescission. Does not include options to purchase
126,611 shares of Common Stock at an exercise price of $2.50 per share.
(7) Includes 83,588 shares of Common Stock issued as compensation, which are
subject to potential rescission. Does not include options to purchase
95,880 shares of Common Stock at an exercise price of $2.50 per share.
(8) Includes 83,588 shares of Common Stock issued as compensation, which are
subject to potential rescission. Does not include options to purchase
95,880 shares of Common Stock at an exercise price of $2.50 per share.
23
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On October 27, 1997 the Company entered into a Sale and Purchase Agreement
for the acquisition of substantially all of the assets of Phoenix Energy
Group, Inc. As a result of the acquisition, in which the Company issued
12,786,310 shares of its Common Stock, representing approximately 63% of the
issued and outstanding Common Stock, Phoenix gained control of the Company.
As a result of certain litigation by the Company against John O. Schofield,
former Chairman of the Board of the Company, and Duke Resources Corporation,
a corporation controlled by Mr. Schofield, there were various adjustments in
the stockholder and creditor relationships of Mr. Schofield with the Company.
See "Legal Proceedings". Prior to the settlement of the litigation on March
12, 1997 and the restructuring of the Promissory Note, Mr. Schofield received
a principal payment of $10,000. Thereafter, pursuant to the terms of the
settlement, Mr. Schofield has received $22,715 in principal repayments and
$5,249.21 in interest payments.
During the nine month period covered by this transition report, the holders
of all of the Company's Class A Preferred Stock, including Mr. Schofield (see
"Legal Proceedings") and Mr. Gregory A. Stephens, a Director and formerly
Treasurer of the Company, converted their holdings of Preferred Stock to
Common Stock. (See "Sale by the Company of Unregistered Securities" under
Part I and Item 5 "Market for Registrant's Common Equity and Related
Stockholder Matters").
Mr. Bippus the Company's President/CEO prior to the "reverse acquisition",
had loaned the Company funds for operations. At February 1, 1997 the balance
owing to Mr. Bippus was $26,765 which was repaid on June 12, 1997. Interest
on such balance of $1,171 was paid.
Royall and Fleschler, an accounting firm in which Sammy Fleschler, the
Company's former Secretary and Treasurer, is a partner, leased the Company
office space and received payments of $26,053 representing rent ($24,153)
together with reimbursed costs ($1,245) as well as $655 for accounting
services.
As recognition of services rendered, the Company authorized issuance of
shares of its Common Stock to certain persons, including Gregory A. Stephens,
a Director and the former Treasurer, and Thomas Abate, a former Director.
Mr. Stephens was issued 50,000 shares. Mr. Abate was issued 50,000 shares
and Mega Holdings, Inc., a corporation controlled by Mr. Abate, was issued
50,000 shares. The issuances were completed after October 31, 1997.
The Company owns a portion of a joint venture, IPX, that is also
substantially owned by John L. Moran, a Director and the Vice President of
Exploration. At October 31, 1997, the Company owned a 3% interest in the
venture, however, the Company recorded 100% of the venture's operating loss
up to the value of the Company's investment (cash advances of $267,413), as
the venture was entirely dependent on the Company to fund its operating
needs. Subsequent to October 31, 1997, the Company has acquired additional
units in the venture for cash as funding is needed for its operations.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
16.1 Letter of McManus & Co., P.C., CPAs
(b) REPORTS ON FORM 8-K
On November 7, 1997 the Company filed Form 8-K to report the acquisition of
assets from Phoenix Energy Group, Inc. On December 20, 1997 the Company filed
Form 10-QSB for the three months and nine months ended October 31, 1997. On
January 8, 1998 the Company determined to change the fiscal years of both the
Company (formerly January 31) and Phoenix (formerly December 31) to October 31
so as to utilize the consolidated financial statements otherwise being prepared
by Hein + Associates LLP.
24
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ARXA INTERNATIONAL ENERGY, INC.
By:
------------------------------------
L. Craig Ford, President and
Chief Executive Officer
Dated: March 11, 1998
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
<TABLE>
SIGNATURES TITLE DATE
- ---------- ----- ----
<S> <C> <C>
- ------------------------------- President/Chief Executive
L. Craig Ford Officer and Director March 11, 1998
- ------------------------------- Controller March 11, 1998
Dennis P. McGrath
- ------------------------------- Director March 11, 1998
John Moran
- ------------------------------- Director March 11, 1998
William J. Bippus
- ------------------------------- Director March 11, 1998
Gregory A. Stephens
</TABLE>
25
<PAGE>
ARXA INTERNATIONAL ENERGY, INC & SUBSIDIARY.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
ARXA INTERNATIONAL ENERGY, INC.
Financial Statements:
Independent Auditor's Report . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets - December 31, 1996 and October 31, 1997 F-3
Consolidated Statements of Operations - For the Period From Inception
(March 14, 1996) to December 31, 1996 and for the Ten Month Period
Ended October 31, 1997 and for the period from inception (March 31,
1996 to October 31, 1996 (unaudited). . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity - For the Period From
Inception (March 14, 1996) to October 31, 1997. . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows - For the Period From Inception
(March 14, 1996) to December 31, 1996 and for the Ten Month Period
Ended October 31, 1997 and for the period from inception (March 31,
1996 to October 31, 1996 (unaudited). . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . F-7
Supplemental Oil and Gas Properties and Related Reserves Data
(Unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-20
PREDECESSOR BUSINESS
Financial Statements:
Independent Auditor's Report . . . . . . . . . . . . . . . . . . . . . . F-23
Statement of Combined Revenues and Direct Operating Expenses -
For the Nine Months Ended September 30, 1996. . . . . . . . . . . . . F-24
Note to Financial Statement. . . . . . . . . . . . . . . . . . . . . . . F-25
Supplemental Oil and Gas Properties and Related Reserves Data
(Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-27
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
ARXA International Energy, Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheets of ARXA
International Energy, Inc. and subsidiary as of December 31, 1996 and October
31, 1997 and the related consolidated statements of operations, stockholders'
equity, and cash flows for the period from inception (March 14, 1996) to
December 31, 1996 and for the ten month period ended October 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ARXA
International Energy, Inc. and subsidiary as of December 31, 1996 and October
31, 1997, and the results of their operations and their cash flows for the
period from inception (March 14, 1996) to December 31, 1996 and for the ten
month period ended October 31, 1997, in conformity with generally accepted
accounting principles.
As discussed in Note 2 to the consolidated financial statements, the Company
had a net loss of $1,314,584 for the ten month period ended October 31, 1997
and had an accumulated deficit of $1,446,717 at that date. The Company is
currently seeking outside sources of financing to fund its development
efforts. Should the Company be unable to access such financing, it will have
to materially curtail its development and operating activities.
HEIN + ASSOCIATES LLP
Houston, Texas
December 23, 1997
F-2
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
DECEMBER 31, OCTOBER 31,
1996 1997
------------ -----------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash, including interest-bearing balances of $297,684
and $80,351, respectively $ 418,211 $ 152,883
Accounts receivable, no allowance for doubtful accounts 326,143 251,333
Income tax receivable - 70,831
Oil and gas property held for sale - 466,343
Other current assets 9,929 342
---------- -----------
Total current assets 754,283 941,732
PROPERTY AND EQUIPMENT, (full cost method for oil and gas
properties), net of accumulated depletion, depreciation,
amortization and provision for impairment 1,644,139 1,919,954
OTHER ASSETS 57,638 57,833
---------- -----------
Total assets $2,456,060 $ 2,919,519
---------- -----------
---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to stockholders $ 138,150 $ 102,285
Accounts payable 30,493 16,054
Accrued income taxes 63,801 -
Other current liabilities 42,650 210,675
---------- -----------
Total current liabilities 275,094 329,014
LONG-TERM DEBT - 79,770
DEFERRED INCOME TAXES 324,440 -
COMMITMENTS AND CONTINGENCIES (Notes 5 and 9)
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 2,000,000 shares
authorized; none issued and outstanding - -
Common stock, $.001 par value; 100,000,000 shares
authorized; 6,505,837 (subscribed at December 31,
1996) and 20,377,000 shares issued and outstanding,
respectively 6,506 20,377
Additional paid-in capital 1,982,153 3,937,075
Accumulated deficit (132,133) (1,446,717)
---------- -----------
Total stockholders' equity 1,856,526 2,510,735
---------- -----------
Total liabilities and stockholders' equity $2,456,060 $ 2,919,519
---------- -----------
---------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
FOR THE PERIOD FOR THE PERIOD
FROM INCEPTION FROM INCEPTION FOR THE TEN
(MARCH 14, 1996) (MARCH 14, 1996) MONTH PERIOD
TO TO ENDED
DECEMBER 31, OCTOBER 31, OCTOBER 31,
1996 1996 1997
---------------- ---------------- ------------
(unaudited)
<S> <C> <C> <C>
OIL AND GAS REVENUES $ 241,115 $ 103,068 $ 485,552
COST AND EXPENSES:
Lease operating expenses 108,753 50,956 137,548
Severance taxes 6,880 2,650 11,590
Depletion, depreciation, amortization 121,574 60,014 608,370
and provision for impairment
General and administrative 157,139 89,278 1,174,543
---------- ---------- -----------
Total cost and expenses 394,346 202,898 1,932,051
---------- ---------- -----------
LOSS FROM OPERATIONS (153,231) (99,830) (1,446,499)
OTHER INCOME (EXPENSE):
Interest income 3,086 2,108 12,930
Interest expense (11,031) - (4,566)
Equity in loss of oil and gas venture - - (267,413)
Other (78,083) (78,083) (8,674)
---------- ---------- -----------
(86,028) (75,975) (267,723)
---------- ---------- -----------
LOSS BEFORE INCOME TAXES (239,259) (175,805) (1,714,222)
INCOME TAX BENEFIT, net 107,126 61,794 399,638
---------- ---------- -----------
NET LOSS $ (132,133) $ (114,011) $(1,314,584)
---------- ---------- -----------
---------- ---------- -----------
NET LOSS PER COMMON AND COMMON
EQUIVALENT SHARE $ (.05) $ (.04) $ (.14)
---------- ---------- -----------
---------- ---------- -----------
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES 2,907,509 2,907,509 9,556,732
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM MARCH 14, 1996 (INCEPTION) TO OCTOBER 31, 1997
<TABLE>
COMMON STOCK ADDITIONAL TOTAL STOCK-
-------------------- PAID-IN ACCUMULATED HOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
--------- ------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
BALANCES, March 14, 1996 (inception) - $ - $ - $ - $ -
Issuance of stock for consulting 178,835 179 8,821 - 9,000
services
Issuance of stock for compensation 305,012 305 15,045 - 15,350
Issuance of stock for oil and gas 5,039,761 5,040 1,720,604 - 1,725,644
properties, net of offering costs
Issuance of stock for consulting 28,564 29 14,346 - 14,375
services
Sales of common stock 953,665 953 223,337 - 224,290
Net loss - - - (132,133) (132,133)
---------- ------- ---------- ----------- -----------
BALANCES, December 31, 1996 6,505,837 6,506 1,982,153 (132,133) 1,856,526
Issuance of stock for oil and gas 82,866 83 30,223 - 30,306
properties
Conversion of notes payable and accrued 168,899 169 84,831 - 85,000
interest
Sales of common stock 3,814,139 3,814 1,236,746 - 1,240,560
Issuance of common stock for 2,214,569 2,215 376,715 - 378,930
compensation
Acquisition of ARXA 7,590,690 7,590 226,407 - 233,997
Net loss - - - (1,314,584) (1,314,584)
---------- ------- ---------- ----------- -----------
BALANCES, October 31, 1997 20,377,000 $20,377 $3,937,075 $(1,446,717) $ 2,510,735
---------- ------- ---------- ----------- -----------
---------- ------- ---------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
FOR THE PERIOD FOR THE PERIOD
FROM INCEPTION FROM INCEPTION
(MARCH 14, 1996) (MARCH 14, 1996) FOR THE TEN MONTH
TO TO PERIOD ENDED
DECEMBER 31, OCTOBER 31, OCTOBER 31,
1996 1996 1997
-------------- ---------------- -----------------
(unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (132,133) $ (114,011) $(1,314,584)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depletion, depreciation, amortization and provision
for impairment 121,574 60,014 608,370
Deferred tax benefit (170,927) (125,595) (324,440)
Equity in loss of oil and venture -- -- 267,413
Issuance of stock for compensation 38,725 29,725 378,930
Changes in operating assets and liabilities:
Accounts receivable (326,143) (265,312) 91,767
Income tax receivable -- -- (70,831)
Other current assets (9,929) (12,828) 9,587
Accounts payable 30,493 8,826 (14,439)
Other current liabilities 42,650 277 (10,738)
Accrued income taxes 63,801 63,801 (63,801)
Other, net (28,990) (28,705) (11,397)
---------- ---------- -----------
Net cash used in operating activities (370,879) (383,808) (454,163)
---------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of oil and gas property held for sale -- -- (466,343)
Additions to office equipment (54,347) (16,700) (95,778)
Purchase of oil and gas property -- -- (196,250)
Purchase of investment in oil and gas venture -- -- (267,413)
Cash acquired in acquisition of ARXA -- -- 18,358
Proceeds from sale of oil and gas property, net 405,726 468,352 --
Purchase price adjustments on oil and gas property
acquisition 133,754 130,079 18,486
Purchase of other assets (58,483) (57,883) (1,135)
---------- ---------- -----------
Net cash provided by (used in) investing activities 426,650 523,848 (990,075)
---------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stockholder notes 138,150 138,150 --
Payment of stockholder notes -- -- (61,650)
Sales of common stock 224,290 194,290 1,240,560
---------- ---------- -----------
Net cash provided by financing activities 362,440 332,440 1,178,910
---------- ---------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 418,211 472,480 (265,328)
CASH AND CASH EQUIVALENTS, beginning of period -- -- 418,211
---------- ---------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 418,211 $ 472,480 $ 152,883
---------- ---------- -----------
---------- ---------- -----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ -- $ -- $ 70,831
---------- ---------- -----------
---------- ---------- -----------
Interest paid $ -- $ -- $ 6,885
---------- ---------- -----------
---------- ---------- -----------
SUPPLEMENTAL CASH FLOW DISCLOSURES OF NONCASH TRANSACTIONS:
Issuance of stock for oil and gas properties, net of
deferred taxes $1,725,644 $1,725,941 $ 30,306
---------- ---------- -----------
---------- ---------- -----------
Conversion of stockholder notes and accrued interest
into common stock $ -- $ -- $ 85,000
---------- ---------- -----------
---------- ---------- -----------
Issuance of stock in business combination $ -- $ -- $ 233,997
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION - ARXA International Energy, Inc. ("ARXA" or "the Company"),
was incorporated in Delaware and is engaged in oil and gas exploration and
development in Utah, Louisiana and Texas. ARXA USA, Inc., a wholly owned
subsidiary, was incorporated in Delaware. All significant intercompany
accounts and transactions have been eliminated in consolidation. On October
27, 1997, the Company acquired substantially all of the assets and
liabilities of Phoenix Energy Group, Inc. (Phoenix). To consummate the
transaction, the Company exchanged 12,786,310 shares of the Company's
common stock, representing approximately 63% of the issued and outstanding
shares, plus warrants to purchase 3,297,000 shares at an exercise price of
$2.00 per share. The business combination was accounted for on the purchase
method of accounting. No goodwill arose from this transaction. As Phoenix
obtained a controlling interest in the Company, the transaction was
accounted for as a reverse acquisition. Therefore, for financial statement
purposes, Phoenix is considered the acquiror. The consolidated financial
statements reflect the historical operations and cost basis of Phoenix
since its inception; however, its stockholders' equity section has been
restated to reflect the capital structure of ARXA.
Phoenix Energy Group, Inc. was incorporated in Texas on March 14, 1996 and
was engaged in oil and gas exploration and development in south Texas.
Phoenix was formed by issuing notes and common stock to certain of the
larger oil and gas interest owners formerly associated with Prospector
Petroleum Inc. (Prospector). Phoenix, through a private placement, acquired
approximately 93% of the available working interests formerly associated
with Prospector at various times during the months of August 1996 through
August 1997. Revenues and related costs associated with these properties
were recognized beginning on the respective dates acquired. Phoenix issued
5,039,761 shares of common stock during 1996 and 82,866 shares of common
stock in 1997 to effectuate the acquisition of these working interests (See
Note 11).
OIL AND GAS REVENUES - The Company recognizes oil and gas revenues as the
oil or gas is produced and sold. As a result, the Company accrues revenue
relating to production for which the Company has not received payment.
OIL AND GAS PROPERTY HELD FOR SALE - Oil and gas property held for sale
consists of oil and gas leases which the Company intends to sell within the
near term. Oil and gas property held for sale is carried at the lower of
cost or market. In December 1997, the property was sold to a third party
for cash equal to the carrying value of the property at October 31, 1997
plus commission.
F-7
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES: (continued)
OIL AND GAS PROPERTY - The Company follows the full-cost method of
accounting for oil and gas property. Under the full-cost method, all costs
associated with property acquisition, exploration, and development
activities are capitalized into a "full-cost pool". Capitalized costs
include lease acquisitions, geological and geophysical work, delay rentals,
costs of drilling, completing and equipping successful and unsuccessful oil
and gas wells and directly related costs. Gains or losses are normally not
recognized on the sale or other disposition of oil and gas properties.
During 1996, the Company sold an oil and gas lease for $482,400, less
direct expenses of the sale of $76,674. The net proceeds from this sale
were recorded as a reduction of the full-cost pool.
The capitalized costs of oil and gas properties, plus estimated future
development costs relating to proved reserves, are amortized on a
unit-of-production method over the estimated productive life of the proved
oil and gas reserves. Depletion expense per barrel of oil equivalent was
$7.84 for the periods ended October 31 and December 31, 1996 and $7.11 for
the ten-month period ended October 31, 1997.
Capitalized oil and gas property costs, less accumulated amortization and
related deferred income taxes, are limited to an amount (the ceiling
limitation) equal to the present value of estimated future net revenues
from the projected production of proved oil and gas reserves, calculated at
prices in effect as of the balance sheet date (with consideration of price
changes only to the extent provided by contractual arrangements) at a
discount factor of 10%, less the income tax effects related to differences
between the book and tax basis of the properties.
During the ten months ended October 31, 1997, the Company reduced the
full-cost pool by $365,000 as a result of impairment as determined by the
ceiling limitation calculation.
ACCOUNTING ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and the accompanying notes. The actual
results could differ from those estimates.
The Company's financial statements are based on a number of significant
estimates including oil and gas reserve quantities which are the basis for
the calculation of depreciation, depletion and impairment of oil and gas
properties. The Company's reserve estimates are determined by an
independent petroleum engineering firm. However, management emphasizes that
reserve estimates are inherently imprecise and that estimates of more
recent discoveries and reserves associated with non-producing properties
are more imprecise than those for producing properties with long production
histories. At
F-8
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES: (continued)
October 31, 1997, approximately 62% of the Company's oil and gas reserves
were attributable to non-producing properties. Accordingly, the Company's
estimates are expected to change as future information becomes available.
OTHER PROPERTY AND EQUIPMENT - Depreciation of property and equipment,
other than oil and gas properties, is provided generally on the
straight-line basis over the estimated useful lives of the assets as
follows:
Furniture and office equipment 3-5 years
Automobile 5 years
Ordinary maintenance and repairs are charged to income, and expenditures
which extend the physical or economic life of the assets are capitalized.
Gains or losses on disposition of assets other than oil and gas properties
and equipment are recognized in income, and the related assets and
accumulated depreciation accounts are adjusted accordingly.
OTHER NON-CURRENT ASSETS - Other non-current assets include organization
costs, which are being amortized over five years and an investment in an
oil and gas venture (See Note 4).
INCOME TAXES - The Company provides for income taxes on the liability
method. The liability method requires an asset and liability approach in
the recognition of deferred tax liabilities and assets for the expected
future tax consequences of temporary differences between the carrying
amounts and the tax bases of the Company's assets and liabilities.
CASH AND CASH EQUIVALENTS - For purposes of the statement of cash flows,
the Company considers cash equivalents to include all cash items, such as
time deposits and short-term investments that mature in three months or
less.
CONCENTRATIONS OF CREDIT RISK - Financial instruments which potentially
expose the Company to concentrations of credit risk consist primarily of
oil and gas receivables. Substantially all of the Company's receivables
were due from the sale of oil and gas arising from production on properties
located in Brooks County, Texas. Although the Company is directly affected
by the well-being of the oil and gas production industry, management does
not believe a significant credit risk existed at October 31, 1997.
The Company maintains deposits in banks which exceed the amount of federal
deposit insurance available. Management believes the possibility of loss on
these deposits is minimal.
F-9
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES: (continued)
NET LOSS PER COMMON SHARE - Net loss per common share was computed by
dividing net loss applicable to common stockholders by the weighted average
common and common equivalent shares outstanding. All share and per share
amounts in the accompanying consolidated financial statements have been
adjusted to reflect the reverse acquisition discussed previously.
RECENT ACCOUNTING PRONOUNCEMENTS: - The Financial Accounting Standards
Board (FASB) issued SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, which is
effective for fiscal years beginning after December 15, 1995. SFAS No. 121
specifies certain events and circumstances which indicate the cost of an
asset or assets may be impaired, the method by which the evaluation should
be performed, and the method by which writedowns, if any, of the asset or
assets are to be determined and recognized. The adoption of this
pronouncement in 1996 did not have a material impact on the Company's
financial condition or operating results.
The FASB issued SFAS No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION,
effective for fiscal years beginning after December 15, 1995. This
statement allows companies to choose to adopt the statement's new rules for
accounting for employee stock-based compensation plans. For those companies
who choose not to adopt the new rules, the statement requires disclosures
as to what earnings per share would have been if the new rules had been
adopted. The Company chose not to adopt the statement's new rules for
accounting for stock-based compensation.
The FASB issued Statement of Financial Accounting Standards No. 128,
EARNINGS PER SHARE, during February 1997. The new statement which is
effective for financial statements issued after December 31, 1997,
including interim periods, establishes standards for computing and
presenting earnings per share. The new statement requires retroactive
restatement of all prior-period earnings per share data presented.
The FASB issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME and SFAS No.
131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION.
SFAS No. 130 establishes standards for reporting and display of
comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except
those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS No. 130 requires that all items that are
required to be recognized under current accounting standards as components
of comprehensive income be reported in a financial statement that displays
these items with the same prominence as other financial statements. SFAS
No. 131 supersedes SFAS No. 14, FINANCIAL REPORTING FOR SEGMENTS OF A
BUSINESS ENTERPRISE. SFAS No. 131 establishes standards on the way
F-10
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES: (continued)
that public companies report financial information about operating segments
in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements issued
to the public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. SFAS No. 131
defines operating segments as components of a company in which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance.
SFAS Nos. 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Because of the recent issuance of these
standards, management has been unable to fully evaluate the impact, if any,
the standards may have on the future financial statement disclosures.
Results of operations and financial position, however, will be unaffected
by implementation of these standards.
UNAUDITED INTERIM INFORMATION - The accompanying financial information for
the period from inception (March 14, 1996) to October 31, 1996 has been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. The financial
statements reflect all adjustments, consisting of normal recurring
accruals, which are, in the opinion of management, necessary to fairly
present such information in accordance with generally accepted accounting
principles.
2. BUSINESS COMBINATION:
The Company acquired various oil and gas interests during 1996 and 1997
from certain oil and gas interest owners formerly associated with
Prospector. In addition on October 27, 1997, the Company acquired
substantially all of the assets and liabilities of Phoenix in exchange for
12,786,310 shares of the Company's common stock, representing 63% of the
issued and outstanding shares, plus warrants to purchase 3,297,000 shares
at an exercise price of $2.00 per share. The business combination was
accounted for under the purchase method of accounting. ARXA's oil and gas
revenues, net loss applicable to common stockholders, and net loss per
share on an unaudited pro forma basis, assuming the ARXA transaction had
occurred on January 1, 1996 and January 1, 1997, respectively, and the oil
and gas interests acquired during 1996 from the interest owners formerly
associated with Prospector had been acquired on January 1, 1996, would be
as follows:
F-11
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. BUSINESS COMBINATION: (continued)
<TABLE>
FOR THE TEN
FOR THE YEAR MONTH PERIOD
ENDED ENDED
DECEMBER 31, OCTOBER 31,
1996 1997
-------------- ------------
(unaudited) (unaudited)
<S> <C> <C>
Oil and Gas Revenues $ 1,326,675 $ 529,890
Net Income (Loss) $ (216,087) $ (1,808,130)
Net Income (Loss) per Share $ (.07) $ (.19)
</TABLE>
These pro forma amounts were prepared using assumptions which are based on
estimates and are subject to revision. The pro forma combined results are
not necessarily indicative of actual results that would have been achieved
had the acquisition occurred on January 1, 1996 and January 1, 1997,
respectively, or of future results.
3. ACCOUNTS RECEIVABLE:
Accounts receivable consisted of the following:
<TABLE>
DECEMBER 31, OCTOBER 31,
1996 1997
-------------- ------------
<S> <C> <C>
Oil and gas receivables $ 159,910 $ 63,938
Amount due from former manager 114,212 -
Amount due from a stockholder 10,000 -
Amount primarily due from operators
of oil and gas properties 42,021 187,395
------------ -----------
$ 326,143 $ 251,333
------------ -----------
------------ -----------
</TABLE>
AMOUNT DUE FROM FORMER MANAGER - In connection with an agreement to manage
the operations of the joint ventures, which previously owned the properties
ultimately acquired by the Company (the JVDRA Agreement), the Company
incurred administrative costs of managing the joint ventures. These costs
totaled $96,611, $114,212 and $103,226 as of October 31 and December 31,
1996 and October 31, 1997 respectively, and were fully reimbursable from
Prospector. These amounts were collected in 1997.
F-12
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
DECEMBER 31, OCTOBER 31,
1996 1997
----------- -----------
<S> <C> <C>
Oil and gas properties $1,710,520 $2,497,987
Other property and equipment 54,347 150,125
---------- ----------
1,764,867 2,648,112
Less accumulated depletion, depreciation,
amortization and provision for impairment (120,728) (728,158)
---------- ----------
$1,644,139 $1,919,954
---------- ----------
---------- ----------
</TABLE>
5. OTHER ASSETS:
Other non-current assets at October 31 and December 31, 1996 consisted of
deposits, organization costs and an indemnity fund. At October 31, 1997,
other non-current assets also consisted of an investment in an oil and gas
venture. The indemnity fund, amounting to $50,000 at October 31 and
December 31, 1996 and 1997, was set up for the benefit of the liquidating
agent for Prospector in accordance with the JVDRA Agreement for a period
not to exceed four years. Upon expiration of the four-year period, any
remaining funds will be returned to the Company.
The investment in an oil and gas venture at October 31, 1997 consisted of
cash advances of $267,413, reduced by losses recognized of $267,413. The
venture was formed in 1997 by officers of the Company. At October 31, 1997,
the cash contributions represented 40 Class B units and 176 Class A units.
Class A units have participating and voting rights and Class B units have
no such rights. Class B units have liquidation preferences and are entitled
to 125% of their return on capital.
F-13
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. OTHER ASSETS: (continued)
Under the venture agreement, the Company is obligated to purchase 360
additional Class B units and 2,395 Class A units by March 1998. The total
cash outlay for these additional units, which will increase the Company's
ownership interest to 40%, will be $2,832,587. The remaining 60% interest
would consist of 6,000 Class A units owned by the president of the venture,
who is also an officer of the Company. During 1997, the Company and the
venture management verbally agreed to temporarily suspend the scheduled
unit purchases. Subsequent to October 31, 1997, the Company has acquired
units in the venture for cash as funding is needed for the operations of
the venture.
At October 31, 1997, the Company owned a 3% interest in the venture.
However, the Company recorded 100% of the venture's operating loss up to
the value of the Company's investment, as the venture is entirely dependent
on the Company to fund its operating needs.
6. NOTES PAYABLE TO STOCKHOLDERS:
Notes payable to stockholders of $138,150 at October 31 and
December 31, 1996 were unsecured and due March 15, 1997. Interest was
payable at maturity at a rate of 15.5%. For the period ended October 31,
1996, December 31, 1996 and October 31, 1997, interest expense related to
such loans amounted to none, $11,031 and $4,566, respectively. At maturity,
the Company offered payment of the outstanding principal and accrued
interest in the form of cash or the Company's common stock. Principal
outstanding of $76,500 and accrued interest payable of $8,500 was converted
to 168,899 shares of the Company's common stock. The remainder was paid in
cash.
Notes payable to stockholders at October 31, 1997 includes an unsecured
note payable to a stockholder of $25,000, due December 30, 1997. The note
is non-interest bearing and interest is imputed at 8%. The note provided
for repayment in cash or common stock of the Company at a value of $1.00
per share, upon the option of the lender. On December 29, 1997, the Company
paid the note off in full, in cash.
Notes payable to stockholders at October 31, 1997 also includes an
unsecured note payable to a stockholder and his affiliates of $77,285. The
note is non-interest bearing (imputed at 8%) and is payable at 7% of net
proceeds of future offerings received through March 1999. If not repaid by
March 1999, the note automatically converts to the Company's common stock
at the average market price for the five days preceding March 13, 1999.
F-14
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM DEBT:
Long-term debt at October 31, 1997 consisted of an unsecured note payable
to a company affiliated with a stockholder of the Company. The note bears
interest at 8% and is payable in quarterly installments. To the extent that
the interest is paid at each quarter end, the due date is automatically
extended until March 12, 1999.
8. INCOME TAXES:
The components of the Company's income tax benefit for the periods ended
December 31, 1996 and October 31, 1997 were as follows:
<TABLE>
FOR THE PERIOD FOR THE PERIOD
FROM INCEPTION FROM INCEPTION FOR THE TEN
(MARCH 14, 1996) (MARCH 14, 1996) MONTH PERIOD
TO TO ENDED
DECEMBER 31, OCTOBER 31, OCTOBER 31,
1996 1996 1997
---------------- ---------------- ------------
(unaudited)
<S> <C> <C> <C>
Current $(63,801) $(63,801) $ 75,198
Deferred 170,927 125,595 324,440
-------- -------- --------
$107,126 $ 61,794 $399,638
-------- -------- --------
-------- -------- --------
</TABLE>
Deferred tax assets and liabilities as of December 31, 1996 consisted of
the following:
<TABLE>
CURRENT LONG-TERM TOTAL
------- --------- --------
<S> <C> <C> <C>
Deferred tax assets $ -- $ -- $ --
------- -------- --------
Deferred tax liability --
Accumulated, depletion,
depreciation, amortization,
and provision for impairment -- 324,440 324,440
------- -------- --------
$ -- $324,440 $324,440
------- -------- --------
------- -------- --------
</TABLE>
F-15
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES: (continued)
Deferred tax assets and liabilities as of October 31, 1997 consisted of the
following:
<TABLE>
CURRENT LONG-TERM TOTAL
------- --------- --------
<S> <C> <C> <C>
Deferred tax assets -- net
operating loss carryforward $ -- $ 374,000 $ 374,000
------- --------- ---------
Deferred tax liability --
Accumulated, depletion,
depreciation,
amortization, and
provision for impairment -- (329,000) (329,000)
------- --------- ---------
-- 45,000 45,000
Valuation allowance -- (45,000) (45,000)
------- --------- ---------
$ -- $ -- $ --
------- --------- ---------
------- --------- ---------
</TABLE>
The Company had net operating loss carryforwards (NOL's) for income tax
reporting purposes of approximately $1,000,000 at October 31, 1997, net of
the estimated limitation under Section 382 of the Internal Revenue Code
arising from the business combination discussed in Note 2. If not utilized,
these NOL's will expire in fifteen years.
9. COMMITMENTS AND CONTINGENCIES:
COMMITMENTS -- During 1996, the Company leased office space under a month-
to-month lease. In January 1997, the Company signed a non-cancelable
operating lease agreement that provides for monthly payments ranging from
$1,592 to $1,686 for 36 months. For the periods ended October 31, 1996,
December 31, 1996 and October 31, 1997, rent expense for office space
amounted to $6,300, $8,100 and $20,438, respectively.
F-16
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. COMMITMENTS AND CONTINGENCIES: (continued)
ENVIRONMENTAL CONTINGENCIES - The Company's activities are subject to
existing federal and state laws and regulations governing environmental
quality and pollution control. It is impossible to predict the impact of
environmental legislation and regulations on operations in the future,
although compliance may necessitate significant capital outlays, that would
materially affect earning power or cause other material changes. Penalties
may also be assessed to the Company for any pollution caused by the
Company's operations and the Department of Interior is authorized to
suspend any operation which threatens immediate or serious harm to life,
property or environment, which suspension may remain in effect until the
damage has ceased. This regulatory burden on the oil and gas industry
increases the cost of doing business and consequently affects the Company's
profitability. It may be anticipated that state and local environmental
laws and regulations will have an increasing impact on oil and gas
exploration and operations.
The Company has never been fined or incurred liability for pollution or
other environmental damage in connection with its operations.
The Company has an agreement with a company to provide financial advisory
services to the Company. The agreement expires on May 1, 1998 and requires
the Company to pay a minimum fee of $1,000 per week over the term of the
agreement.
10. RELATED PARTY:
During the period from inception (March 14, 1996) to October 31, 1996 and
December 31, 1996, the Company paid the liquidating agent for Prospector
$19,702 in the form of cash in the amount of $5,327 and common stock with
an estimated fair value of $14,375 in exchange for advisory director
services performed.
11. STOCKHOLDERS' EQUITY:
During the period from inception (March 14, 1996) to December 31, 1996, the
Company compensated its president, a director and certain
Prospector-sponsored joint ventures for services rendered to the Company by
the issuance of 512,411 shares of its common stock. Compensation of $38,725
was recorded for these services, based on the estimated fair value of the
shares at the times of issuance, which ranged from $.05 to $.50 per share.
F-17
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. STOCKHOLDERS' EQUITY: (continued)
Effective August 1, 1996, the Company acquired working interests in the
Flowella and Se Loma Blanca prospects in Brooks County, Texas from
Prospector-sponsored joint ventures in exchange for the issuance of
5,039,761 shares of common stock. The working interests were recorded at
their estimated fair value of $2,116,246, as determined by management by
reference to an independent engineering report. Direct costs associated
with the exchange totaled $28,996 and were recorded as a reduction of
additional paid-in capital.
During the period from inception (March 14, 1996) to December 31, 1996, the
Company received cash of $224,290 in exchange for 953,665 shares of common
stock. The shares were sold at prices ranging from $.25 to $.50 per share.
During 1997, the Company continued to acquire working interests in the
Flowella and Se Loma Blanca prospects in Brooks County, Texas from
Prospector-sponsored joint ventures in exchange for the issuance of common
stock. The Company exchanged 82,866 shares of common stock. The working
interests were recorded at their estimated fair value of $30,306, as
determined by management.
In March 1997, the Company converted notes payable due to stockholders with
an outstanding principal balance of $76,500 and related accrued interest
payable of $8,500 to 168,899 shares of common stock.
During the period from February through October 1997, the Company received
cash of $1,240,560 in exchange for 3,814,139 shares of common stock. The
shares were sold at prices ranging from $.50 per share at the beginning of
the period to $.17 per share towards the end of the period.
During September 1997, the Company compensated its officers and directors
for services rendered by the issuance of 2,214,569 shares of its common
stock. Compensation of $378,930 was recorded for these services, based on
the estimated fair value of the shares at the time of issuance of $.17 per
share.
As discussed in Note 1, the Company issued warrants to acquire 3,297,000
shares of its common stock as part of the acquisition transaction with
Phoenix. The warrants are exercisable at $2.00 per share. These warrants
expire on August 9, 2000 and are currently exercisable. The Company has
additional warrants outstanding which were granted prior to the merger
transaction with Phoenix. The following is a schedule of such warrants.
F-18
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. STOCKHOLDERS' EQUITY: (continued)
EXERCISE PRICE EXPIRATION DATE NUMBER OF SHARES
-------------- --------------- ----------------
$2.00 August 9, 2000 2,025,000
$5.00 February 28, 1998 356,458
In addition, Phoenix granted options to employees and directors to acquire
738,769 shares of Phoenix's common stock and an option to an individual to
acquire 30,731 shares of its common stock. The options, which expire on
September 11, 2007, have an exercise price of $2.50 per share. The options
issued to employees to acquire 554,383 shares of Phoenix's common stock are
exercisable in equal amounts on September 12, 1998, 1999 and 2000. The
options issued to directors, and to the individual mentioned above, are
currently exercisable. These options to acquire 738,769 shares of Phoenix
common stock have not been converted to options to acquire common stock
of the Company.
12. STOCK OPTION PLAN:
The Company has a stock option plan under which options to purchase a
maximum of 1,000,000 shares of common stock may be issued to employees,
consultants and non-employee directors of the Company. The stock option
plan provides both for the grant of options intended to qualify as
"incentive stock options" under the Internal Revenue Code of 1986, as
amended, as well as options that do not so qualify. As of October 31, 1997,
no options have been granted under the Plan.
With respect to incentive stock options, no option may be granted more than
ten years after the effective date of the stock option plan or exercised
more than ten years after the date of grant (five years if the optionee
owns more than 10% of the common stock of the Company at the date of
grant). Additionally, with regard to incentive stock options, the exercise
price of the option may not be less than 100% of the fair market value of
the common stock at the date of grant (110% if the optionee owns more than
10% of the common stock of the Company). Subject to certain limited
exceptions, options may not be exercised unless, at the time of exercise,
the optionee is in the service of the Company.
Non-qualified options granted under the plan may not have an exercise price
of less than 85% of the fair market value of the Company's common stock on
the date of grant.
F-19
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
SUPPLEMENTAL OIL AND GAS PROPERTIES
AND RELATED RESERVES DATA
(UNAUDITED)
CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED):
An analysis of the capitalized oil and gas property costs and related
accumulated depletion, depreciation and amortization is as follows:
<TABLE>
DECEMBER 31, OCTOBER 31,
1996 1997
----------- ----------
<S> <C> <C>
Unproved oil and gas properties $ 364,808 $ 62,500
Proved oil and gas properties 1,345,712 2,435,487
----------- ----------
1,710,520 2,497,987
Less accumulated depletion,
depreciation, amortization and
provision for impairment (116,692) (701,697)
----------- ----------
Net capitalized costs $ 1,593,828 $1,796,290
----------- ----------
----------- ----------
</TABLE>
COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION, EXPLORATION AND
DEVELOPMENT ACTIVITIES (UNAUDITED):
The following costs were incurred in oil and gas activities as follows:
<TABLE>
<S> <C>
Acquisition of proved and unproved $2,116,246
properties during the period
from inception (March 14,
1996) to December 31, 1996
Acquisition of proved and unproved $ 787,467
properties during the ten
month period ended October
31, 1997
</TABLE>
The Company incurred no exploration or development costs during either
period.
ESTIMATED QUANTITIES OF OIL AND GAS RESERVES (UNAUDITED):
The following table summarizes the Company's net interest in estimated
proved oil and gas reserve quantities, all of which are located within the
United States. Proved reserves are estimated reserves that geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating
conditions. Proved developed reserves are those expected to be recovered
through existing wells, equipment and operating methods.
F-20
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
SUPPLEMENTAL OIL AND GAS PROPERTIES
AND RELATED RESERVES DATA
(UNAUDITED)
DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES
(UNAUDITED):
Standardized measure of discounted future net cash flows and changes
therein relating to proved oil and gas reserves are as follows:
<TABLE>
DECEMBER 31 OCTOBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Future cash inflows $ 3,105,255 $ 6,312,496
Future production costs (1,047,833) (1,455,890)
Future development costs (91,461) (1,669,920)
Future income taxes (624,735) (493,074)
------------ ------------
1,341,226 2,693,612
Less 10% annual discount for estimated
timing of cash flows 346,036 805,390
------------ ------------
Standardized measure of discounted future
net cash flows $ 995,190 $ 1,888,222
------------ ------------
------------ ------------
</TABLE>
In accordance with regulations prescribed by the Securities and Exchange
Commission, future cash flows are computed using year-end costs and prices
adjusted for contractual increases and other fixed and determinable
escalations discounted at 10%. The standardized measure of discounted
future cash flows does not purport to represent the fair market value of
the Company's oil and gas properties. Future income tax expenses are
computed using year-end statutory tax rates (adjusted for permanent
differences that relate to existing proved oil and gas reserves in which
the Company has mineral interests).
F-21
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
SUPPLEMENTAL OIL AND GAS PROPERTIES
AND RELATED RESERVES DATA
(UNAUDITED)
DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES
(UNAUDITED): (continued)
The principal changes in the standardized measure of discounted future net
cash flows are as follows:
<TABLE>
<S> <C>
BALANCE, March 14, 1996 (inception) $ -
Purchase of reserves 1,884,571
Sales of oil and gas produced, net of (125,482)
production costs
Sales of oil and gas properties (301,049)
Changes in estimated future income taxes (463,553)
Other 703
----------
BALANCE, December 31, 1996 995,190
Purchase of reserves 1,183,269
Sales of oil and gas produced, net of (336,414)
production costs
Net changes in prices and production (204,342)
costs
Accretion of discount 79,615
Changes in estimated future income taxes 92,294
Other 78,610
----------
BALANCE, October 31, 1997 $1,888,222
----------
----------
</TABLE>
F-22
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
ARXA International Energy, Inc.
Houston, Texas
We have audited the accompanying statement of combined revenues and direct
operating expenses of certain working interests for properties acquired by
ARXA International Energy, Inc. (the Company) for the nine month period ended
September 30, 1996. This financial statement is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
The accompanying statement of combined revenues and direct operating expenses
of certain working interests for properties acquired by the Company were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission (for inclusion in the Form 8-K of ARXA
International Energy, Inc.) and is not intended to be a complete presentation
of the Company's operations.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the combined revenues and direct operating expenses of
certain working interests for properties acquired by ARXA International
Energy, Inc. for the nine month period ended September 30, 1996, in
conformity with generally accepted accounting principles.
HEIN + ASSOCIATES LLP
Houston, Texas
August 6, 1997
F-23
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
STATEMENT OF COMBINED REVENUES AND
DIRECT OPERATING EXPENSES
<TABLE>
NINE MONTHS
ENDED
SEPTEMBER 30,
1996
-------------
<S> <C>
REVENUES:
Gas sales $ 929,374
Oil sales 140,773
----------
Total revenues 1,070,147
DIRECT OPERATING EXPENSES:
Lease operating expenses 59,130
Severance taxes 33,291
----------
Total direct operating expenses 92,421
----------
REVENUES IN EXCESS OF DIRECT OPERATING EXPENSES $ 977,726
----------
----------
</TABLE>
SEE ACCOMPANY NOTE TO THIS FINANCIAL STATEMENT
F-24
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
NOTE TO FINANCIAL STATEMENT
1. BASIS OF PRESENTATION:
ORGANIZATION - ARXA International Energy, Inc. ("ARXA" or "the Company"),
was incorporated in Delaware and is engaged in oil and gas exploration and
development in Utah, Louisiana and Texas. ARXA USA, Inc., a wholly owned
subsidiary, was incorporated in Delaware. All significant intercompany
accounts and transactions have been eliminated in consolidation. On October
27, 1997, the Company acquired substantially all of the assets of Phoenix
Energy Group, Inc. (Phoenix). To consummate the transaction, the Company
exchanged 12,786,310 shares of the Company's common stock, representing
approximately 63% of the issued and outstanding shares, plus warrants to
purchase 3,297,000 shares at an exercise price of $2.00 per share. As the
former stockholders of Phoenix obtained a controlling interest in the
Company, the transaction was accounted for as a reverse acquisition.
Therefore, for financial statement purposes, Phoenix is considered the
acquirer. The consolidated financial statements reflect the historical
operations and cost basis of Phoenix since its inception.
Phoenix was incorporated in Texas on March 14, 1996 and is engaged in oil
and gas exploration and development in south Texas. Phoenix was formed by
issuing notes and common stock to certain of the larger oil and gas
interest owners formerly associated with Prospector Petroleum Inc.
(Prospector). Phoenix, through a private placement, acquired approximately
93% of the available working interests formerly associated with Prospector
at various times during the months of August 1996 through August 1997.
Revenues and related costs associated with each of these properties were
recognized beginning on the date acquired. Phoenix issued 5,039,761 shares
of common stock during 1996 and 82,866 shares of common stock in 1997 to
effectuate the acquisition of these working interests.
The statement of combined revenues and direct operating expenses consists
of the aforementioned oil and gas working interests Phoenix acquired. The
accompanying financial statement includes revenues and direct operating
expenses for the nine months ended September 30, 1996. Oil and gas revenues
are recognized as production is sold, which approximates the working
interests owner's entitled share of production. Direct lease operating
expenses include the costs of maintaining the producing properties and
their production. This statement does not include general and
administrative expenses of the separate working interest owners,
exploration and development costs, interest expense or income, certain
other indirect costs and provisions for depreciation, depletion,
amortization or federal or state income taxes of the separate working
interest owners. Therefore, the reported expenses are not indicative of the
level of expenses required to support the working interests.
This financial statement was prepared for purposes of complying with the
rules and regulations of the Securities and Exchange Commission (for
inclusion in the Form 8-K of ARXA) and is not intended to be a complete
presentation of the Company's operations.
F-25
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
NOTE TO FINANCIAL STATEMENT
1. BASIS OF PRESENTATION: (continued)
OIL AND GAS REVENUES - The Company recognizes oil and gas revenues as oil
or gas is produced and sold. As a result, the Company accrues revenue
relating to production from which the Company has not received payment.
F-26
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
SUPPLEMENTAL OIL AND GAS PROPERTIES
AND RELATED RESERVES DATA
(UNAUDITED)
ESTIMATED QUANTITIES OF OIL AND GAS RESERVES:
The following table summarizes the Company's net interest in estimated
proved oil and gas reserve quantities, all of which are located within the
United States. Proved reserves are estimated reserves that geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating
conditions. Proved developed reserves are those expected to be recovered
through existing wells, equipment and operating methods.
The estimate of proved reserves as shown in the table, while based on
engineering, geological and geophysical data and techniques which are
believed to be sound, is nevertheless not subject to precise determination.
Accordingly, the estimates will change as future pricing, development,
production and reservoir information becomes available. Such changes could
be significant.
PROVED DEVELOPED AND UNDEVELOPED RESERVES:
<TABLE>
OIL (BBLS) GAS (MMCF)
---------- ----------
<S> <C> <C>
BALANCES, December 31, 1995 31,492 1,997
Production (7,109) (381)
Sale of oil and gas properties (3,838) (255)
-------- -------
BALANCES, September 30, 1996 20,545 1,361
-------- -------
-------- -------
Proved Developed Reserves -
September 30, 1996 20,545 1,361
-------- -------
-------- -------
</TABLE>
F-27
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
SUPPLEMENTAL OIL AND GAS PROPERTIES
AND RELATED RESERVES DATA
(UNAUDITED)
DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES:
Standardized measure of discounted future net cash flows and changes
therein relating to proved oil and gas reserves is as follows:
<TABLE>
SEPTEMBER 30,
1996
-------------
<S> <C>
Future cash inflows $ 3,286,987
Future production costs (1,065,965)
Future development costs (91,461)
Future income taxes (685,986)
-------------
1,443,575
Less 10% annual discount for estimated timing
of cash flows (372,441)
-------------
Standardized measure of discounted future net
cash flows $ 1,071,134
-------------
-------------
</TABLE>
In accordance with regulations prescribed by the Securities and Exchange
Commission, future cash flows are computed using year-end costs and prices
adjusted for contractual increases and other fixed and determinable
escalations discounted at 10%. The standardized measure of discounted
future cash flows does not purport to represent the fair market value of
the Company's oil and gas properties. Future income tax expenses are
computed using year-end statutory tax rates (adjusted for permanent
differences that relate to existing proved oil and gas reserves in which
the Company has mineral interests).
The following are the principal changes in the standardized measure of
discounted future net cash flows for the nine months ended
September 30, 1996:
<TABLE>
<S> <C>
BALANCE, December 31, 1995 1,631,360
Sales of oil and gas produced, net of production costs (977,726)
Changes in estimated future income taxes 336,483
Sale of oil and gas properties (301,049)
Accretion of discount 122,352
Other 259,714
----------
BALANCE, September 30, 1996 $1,071,134
----------
----------
</TABLE>
F-28
<PAGE>
Exhibit 16.1
MCMANUS & CO., P.C. LETTERHEAD
To the Board of Directors
Arxa International Energy, Inc.
This will confirm that (a) during the period that we served
as the auditor for ARXA International Energy, Inc., there
were no disagreements with respect to accounting and
financial disclosure and (b) we agree with the Company's
response to Item 8, Part II of Form 10KSB for the period
ended October 31, 1997
/s/ McManus & Co., P.C.
-----------------------
McManus & Co. P.C.
Certified Public Accountants
Morris Plains, New Jersey
January 29, 1998
