<PAGE>
WASHINGTON, D.C. 20549
FORM 12b-25
NOTIFICATION OF LATE FILING
Commission File Number: 2-99565
(CHECK ONE): ( ) Form 10-K and Form 10-KSB ( ) Form 20-F ( ) Form 11-K
( ) Form 10-Q and Form 10-QSB ( ) Form N-SAR
For Period Ended:
(X) Transition Report on Form 10-K and Form 10-KSB
( ) Transition Report on Form 20-F
( ) Transition Report on Form 11-K
( ) Transition Report on Form 10-Q and Form 10-QSB
( ) Transition Report on Form N-SAR
( ) Money Market Fund Rule 30b3-1 Filing
For the Transition Period Ended: OCTOBER 31, 1997
Nothing in this form shall be construed to imply that the Commission has
verified any information contained herein.
If the notification relates to a portion of the filing checked above, identify
the item(s) to which the notification relates: ALL PARTS OTHER THAN THE AUDITED
FINANCIAL STATEMENTS
PART I
Registrant Information
ARXA INTERNATIONAL ENERGY, INC.
-------------------------------
Full name of registrant
Former name if applicable
110 Cypress Station Drive, Suite 280
------------------------------------
Address of principal executive office (Street and Number)
Houston, Texas 77090
--------------------
City, State and Zip Code
<PAGE>
PART II
Rules 12b-25(b) and (c)
If the subject report could not be filed without unreasonable effort or expense
and the registrant seeks relief pursuant to Rule 12B-25(b), the following should
be completed. (Check appropriate box.)
(a) The reasons described in reasonable detail in Part III of this form could
not be eliminated without unreasonable effort or expense;
(b) The subject annual report, semi-annual report, transition report on Form
10-K, 20-F, 11-K or Form N-SAR, or portion thereof will be filed on or before
the 15th calendar day following the prescribed due date; or the subject
quarterly report or transition report on Form 10-Q, or filing made bya money
market fund pursuant to Rule 30b3-1, or portion thereof will be filed on or
before the fifth calendar day following the prescribed due date; and
(c) The accountant's statement or other exhibit required by Rule 12B-25(c)
has been attached if applicable.
PART III
Narrative
State below in reasonable detail the reasons why Form 10-K and Form 10-KSB,
20-F, 11-K, 10-Q and Form 10QSB, N-SAR or the transition report or portion
thereof or filing made by a money market fund pursuant to Rule 30b3-1 could not
be filed within the prescribed time period. (Attach extra sheets if needed.)
On October 27, 1997 the Company acquired all of the assets of Phoenix Energy
Group, Inc. in a reverse acquisition, whereby the Company issued 12,786,310
shares of its Common Stock, representing approximately 63% of its 20,263,112
issued and outstanding shares. To secure the financial statements showimg the
effect of the acquisition, the Company decided to secure audited financial
statements as of and at October 31, 1997. The fiscal year of the Company was
January 31 while the fiscal year of Phoenix Energy Group, Inc. was December 31.
To resolve this difference, and to avoid the expense of an immediate further
audit, the Company's Board of Directors, on or about January 8, 1998 voted to
change the fiscal years of both the Company and Phoenix to October 31 and to
utilize the available audited financial statements as "year-end" statements.
There has been insufficient time since the decision of the Board of Directors to
permit Management and assigned personnel to complete the narrative portions of
Form 10-KSB.
<PAGE>
PART IV
Other Information
(1) Name and telephone number of person to contact in regard to this
notification.
L. Craig Ford (281) 444-1088
------------- --------------
(Name) (Area Code)(Telephone Number)
(2) Have all other periodic reports required under Section 13 or 15(d) or the
Securities Exchange Act of 1934 or Section 30 of the Investment Company Act of
1940 during the preceding 12 months or for such shorter period that the
registrant was required to file such report(s) been filed? If the answer is no,
identify report(s).
Yes X No
---
(3) Is it anticipated that any significant change in results of operations from
the corresponding period for the last fiscal year will be reflected by the
earnings statements to be included in the subject report or portion thereof?
Yes No X
--- ---
If so: attach an explanation of the anticipated change, both narratively and
quantitatively, and, if appropriate, state the reasons why a reasonable estimate
of the results cannot be made.
ARXA INTERNATIONAL ENERGY, INC.
(Name of registrant as specified in charter)
Has caused this notification to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: January 28, 1998
----------------
By: /s/ L. Craig Ford
---------------------------------------
L. Craig Ford
President/Chief Executive Officer
<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............................................... 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............................................... F-6
Notes to Consolidated Financial Statements............................ F-7
Supplemental Oil and Gas Properties and Related Reserves Data
(Unaudited)......................................................... F-20
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>
<CAPTION>
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>
<CAPTION>
For the Period
From Inception For the Ten
(March 14, 1996) Month Period
to Ended
December 31, October 31,
1996 1997
--------------- ------------
<S> <C> <C>
OIL AND GAS REVENUES $ 241,115 $ 485,552
COST AND EXPENSES:
Lease operating expenses 108,753 137,548
Severance taxes 6,880 11,590
Depletion, depreciation, amortization and
provision for impairment 121,574 608,370
General and administrative 157,139 1,174,543
---------- -----------
Total cost and expenses 394,346 1,932,051
---------- -----------
LOSS FROM OPERATIONS (153,231) (1,446,499)
OTHER INCOME (EXPENSE):
Interest income 3,086 12,930
Interest expense (11,031) (4,566)
Equity in loss of oil and gas venture -- (267,413)
Other (78,083) (8,674)
---------- -----------
(86,028) (267,723)
---------- -----------
LOSS BEFORE INCOME TAXES (239,259) (1,714,222)
INCOME TAX BENEFIT, net 107,126 399,638
---------- -----------
NET LOSS $ (132,133) $(1,314,584)
---------- -----------
---------- -----------
NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE $ (.05) $ (.14)
---------- -----------
---------- -----------
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES 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>
<CAPTION>
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 services 178,835 179 8,821 -- 9,000
Issuance of stock for compensation 305,012 305 15,045 -- 15,350
Issuance of stock for oil and gas properties,
net of offering costs 5,039,761 5,040 1,720,604 -- 1,725,644
Issuance of stock for consulting services 28,564 29 14,346 -- 14,375
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 properties 82,866 83 30,223 -- 30,306
Conversion of notes payable and accrued
interest 168,899 169 84,831 -- 85,000
Sales of common stock 3,814,139 3,814 1,236,746 -- 1,240,560
Issuance of common stock for compensation 2,214,569 2,215 376,715 -- 378,930
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 THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period For the Ten
From Inception Month Period
(March 14, 1996) Ended
to December 31, October 31,
1996 1997
---------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (132,133) $(1,314,584)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depletion, depreciation, amortization and
provision for impairment 121,574 608,370
Deferred tax benefit (170,927) (324,440)
Equity in loss of oil and venture -- 267,413
Issuance of stock for compensation 38,725 378,930
Changes in operating assets and liabilities:
Accounts receivable (326,143) 91,767
Income tax receivable -- (70,831)
Other current assets (9,929) 9,587
Accounts payable 30,493 (14,439)
Other current liabilities 42,650 (10,738)
Accrued income taxes 63,801 (63,801)
Other, net (28,990) (11,397)
---------- -----------
Net cash used in operating activities (370,879) (454,163)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of oil and gas property held for sale -- (466,343)
Additions to office equipment (54,347) (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 --
Purchase price adjustments on oil and gas
property acquisition 133,754 18,486
Purchase of other assets (58,483) (1,135)
---------- -----------
Net cash provided by (used in) investing activities 426,650 (990,075)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stockholder notes 138,150 --
Payment of stockholder notes -- (61,650)
Sales of common stock 224,290 1,240,560
---------- -----------
Net cash provided by financing activities 362,440 1,178,910
---------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 418,211 (265,328)
CASH AND CASH EQUIVALENTS, beginning of period -- 418,211
---------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 418,211 $ 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 $ 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 period ended 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 5).
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.
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:
For the Ten
For the Year Month Period
Ended Ended
December 31, October 31,
1996 1997
------------ ------------
(unaudited) (unaudited)
Oil and Gas Revenues $1,326,675 $ 529,890
Net Loss $ (216,087) $(1,808,130)
Net Loss per Share $ (.02) $ (.11)
F-11
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. BUSINESS COMBINATION: (continued)
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:
December 31, October 31,
1996 1997
------------ -----------
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
------------ -----------
------------ -----------
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 $114,212 and $103,226 in 1996 and 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 at December 31, 1996 and October 31, 1997 consisted
of the following:
December 31, October 31,
1996 1997
------------ -----------
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
------------ -----------
------------ -----------
5. OTHER ASSETS:
Other non-current assets at 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 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.
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.
F-13
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. OTHER ASSETS: (continued)
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 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 December 31, 1996 and October 31, 1997,
interest expense related to such loans amounted to $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.
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.
F-14
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
For the Period
From Inception
(March 14, 1996) For the Ten
to Month Period
December 31, Ended
1996 October 31, 1997
---------------- ----------------
Current $ (63,801) $ 75,198
Deferred 170,927 324,440
---------------- ----------------
$ 107,126 $ 399,638
---------------- ----------------
---------------- ----------------
Deferred tax assets and liabilities as of December 31, 1996 consisted of
the following:
Current Long-Term Total
-------- --------- ---------
Deferred tax assets $ -- $ -- $ --
Deferred tax liability --
Accumulated, depletion,
depreciation, amortization,
and provision for impairment -- 324,440 324,440
-------- --------- ---------
$ -- $ 324,440 $ 324,440
-------- --------- ---------
-------- --------- ---------
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:
Current Long-Term Total
-------- --------- ---------
Deferred tax assets -- net
operating loss carryforward $ -- $ 374,000 $ 374,000
Deferred tax liability --
Accumulated, depletion,
depreciation, amortization,
and provision or impairment -- (329,000) (329,000)
-------- --------- ---------
-- 45,000 45,000
Valuation allowance -- (45,000) (45,000)
-------- --------- ---------
$ -- $ -- $ --
-------- --------- ---------
-------- --------- ---------
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 Section382 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 December 31, 1996
and October 31, 1997, rent expense for office space amounted to $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 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 at December 31, 1996
and October 31, 1997 is as follows:
December 31, October 31,
1996 1997
------------ -----------
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
---------- ----------
---------- ----------
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:
Acquisition of proved and unproved properties
during the period from inception (March 14,
1996) to December 31, 1996 $2,116,246
Acquisition of proved and unproved properties
during the ten month period ended October
31, 1997 $ 787,467
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)
ESTIMATED QUANTITIES OF OIL AND GAS RESERVES (UNAUDITED): (continued)
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 (UNAUDITED):
Oil (BBLS) Gas (MMCF)
---------- ----------
PROVED RESERVES, March 14, 1996 (inception) -- --
Purchase of minerals in place 20,545 1,361
Production (1,379) (81)
Sale of minerals in place (3,838) (255)
------ -----
PROVED RESERVES, December 31, 1996 15,328 1,025
Purchase of minerals in place 25,602 2,075
Production (2,181) (157)
Revisions of period estimates 650 (9)
------ -----
PROVED RESERVES, October 31, 1997 39,399 2,934
------ -----
------ -----
Proved Developed Reserves -- December 31, 1996 15,328 1,025
------ -----
------ -----
Proved Developed Reserves -- October 31, 1997 23,999 1,057
------ -----
------ -----
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):
Standardized measure of discounted future net cash flows and changes
therein relating to proved oil and gas reserves are as follows:
December 31 October 31,
1996 1997
----------- ------------
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
----------- ------------
----------- ------------
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-22
<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:
BALANCE, March 14, 1996 (inception) $ --
Purchase of reserves 1,884,571
Sales of oil and gas produced, net of production costs (125,482)
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 production costs (336,414)
Net changes in prices and production costs (204,342)
Accretion of discount 79,615
Changes in estimated future income taxes 92,294
Other 78,610
----------
BALANCE, October 31, 1997 $1,888,222
----------
----------
F-23
