<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-KSB
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the Fiscal Year Ended October 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER: 2-99565
ARXA INTERNATIONAL ENERGY, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3784149
(State or other jurisdiction of (IRS Employer identification No.)
incorporation or organization)
530 Wells Fargo Drive, Suite 310
Houston, Texas 77090
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(Address of principal executive offices, including zip code)
(281) 444-1088
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(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
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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 [ ]
<PAGE>
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. [ ]
Registrant's revenues for the fiscal year ended October 31, 1998 were $463,875.
The aggregate market value of Common Stock held by non-affiliates of the
registrant at February 8, 1998, based upon the last reported sales price on OTC
Electronic Bulletin Board, was $692,135. As of February 8, 1998, there were
4,953,918 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 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]
<PAGE>
ARXA INTERNATIONAL ENERGY, INC.
TABLE OF CONTENTS
Page
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PART I
ITEM 1. BUSINESS....................................................... 1
ITEM 2. PROPERTIES..................................................... 3
ITEM 3. LEGAL PROCEEDINGS.............................................. 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................ 12
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND PLAN OF OPERATION.......................................... 15
ITEM 7. FINANCIAL STATEMENTS (See below).............................. 17
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE....................................... 17
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.............. 18
ITEM 10. EXECUTIVE COMPENSATION......................................... 19
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
<PAGE>
PART I
ITEM 1. BUSINESS
INTRODUCTION
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. The Company's corporate headquarters are located at 530
Wells Fargo Drive, Suite 310, Houston, TX 77090.
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 pre-split shares of ARXA's Common
Stock, which, following the transaction, represented approximately 63% of the
then total issued and outstanding pre-split 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, now reflect
Phoenix's historical operations and cost basis since its inception and the net
acquisition value of ARXA on October 27, 1997, accounted for under the purchase
method of accounting.
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, had established Phoenix to take over the management
and ownership of two producing gas fields in Brooks County, Texas.
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.
REVERSE STOCK SPLIT
Effective October 26, 1998, five days before our fiscal year end, we declared a
reverse stock split of 1 for 5. Fractional shares were rounded up. Prior to
the split we had 28,342,501 shares issued and outstanding. Following the split
we had 5,668,518 shares issued and outstanding. Included in the shares of
October 26, 1998, were 5,073,000 pre-split or 1,014,600 post-split shares held
in escrow, to be used with a pending transaction. Between October 26, 1998 and
the end of the fiscal year, the pending transaction was not consummated and the
shares were cancelled, reducing the total shares issued and outstanding to
4,653,918, post split.
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.
2
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ITEM 2. PROPERTIES
SALE OF PROPERTIES
In June 1998, the Company sold its entire interest in the three well producing
Flowella Field to a third party for net sale proceeds of $760,693. Also, in
June 1998, the Company sold its entire interest in the three well producing
W.E.Colson Field to a third party for net sale proceeds of $40,036. In
January 1998, the Company sold its entire interest in the 11 well producing
West Sandy Creek property to a third party for net sale proceeds of $48,526.
OIL & GAS PROPERTIES - A BRIEF DESCRIPTION
West Lavaca River - The Company has a 2-3% interest in approximately 17,500
acres in Lavaca County, Texas. The Company, during 1998, participated in the
drilling of (20) successful wells and (5) 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.
Hackberry - The Company has a 10% interest in two leases comprising
approximately 152 acres in Cameron Parish, Louisiana. During 1998 the Company
participated in the drilling of the Taylor #1 well and recompletion of the
Poole #4. The wells are currently shut-in, waiting on gas pipeline hook-up.
The Hansen #1 well and the Poole #3 produced oil but are currently shut-in.
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 - The Company has a 50% interest in this field located in
Lavaca County, Texas. The Vesley #1 well was drilled to a total depth of
8,100 feet in January 1998 and encountered two separate Miocene gas sands as
identified from well log analysis. The lower of the two zones is currently
producing gas, and the second Miocene sand will be completed when the current
producing zone is depleted.
OPMI Operating Purchases - In July 1998, the Company purchased a 100% working
interest in the C. N. Cooke #1 well in Nueces County, Texas and the Lewis #4
and #5 wells in Matagorda County, Texas, from OPMI Operating for $150,000 and
100,000 shares of the Company's pre-split common stock. The C. N. Cooke #1 has
cumulatively produced 948,000 barrels of oil and is currently producing 8
barrels of oil a day. The Lewis #5 well has cumulatively produced over 1 Bcf
of gas and is intermittently producing 100 - 300 mcfd. In addition to the
existing producing zone, electric log analysis has identified a shallower sand
estimated to be gas bearing. The shallower sand will be produced when the
existing zone is abandoned. The Lewis #4 well, currently shut-in, has produced
3.5 Bcf of gas. Plans to return this well to production are being evaluated.
3
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The following tables set 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 October 31, 1997 and 1998. The reserve data and the
present values were prepared by Ultra Engineering and Consulting, 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.
<TABLE>
<CAPTION>
Proved Reserves
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(Dollars in thousands)
October 31, 1997
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Developed Undeveloped Total
----------------------- ----------------- -------------------
<S> <C> <C> <C>
Oil and condensate (MBbls) 24 15 39
Gas (MMcf) 1,057 1,877 2,934
Present value of estimated future
net revenues before income taxes $1,379 $ 854 $2,233
</TABLE>
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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
<TABLE>
<CAPTION>
Proved Reserves
-----------------------------------------------------------------
(Dollars in thousands)
October 31, 1998
-----------------------------------------------------------------
Developed Undeveloped Total
----------------------- ----------------- --------------------
<S> <C> <C> <C>
Oil and condensate (MBbls) 21 -- 21
Gas (MMcf) 1,598 1,007 2,605
Present value of estimated future
net revenues before income taxes $1,562 $ 607 $2,169
</TABLE>
_____________________
The present value of estimated future pretax net cash flows were determined by
using current average prices of $11.50 per Bbl of oil and $1.73 per Mcf of gas
as of October 31, 1998
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
and Ultra Engineering and Consulting, Inc. 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.
4
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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.
<TABLE>
<CAPTION>
Ten Months Ended Year Ended
October 31, 1997 October 31, 1998
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<S> <C> <C>
Production:
Oil and condensate (Bbls) 2,000 2,490
Gas (Mcf) 172,000 157,379
Total Mcfe 184,000 172,321
Average Sales Price:
Oil and condensate ($ per Bbl) $23.33 $12.86
Gas ($ per Mcf) $ 2.50 $ 2.74
Average oil & gas operating expense ($ per Mcfe)(1) $ .80 $ 1.22
</TABLE>
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(1) 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 owned an interest as of October 31, 1997 and 1998.
<TABLE>
<CAPTION>
October 31, 1997 October 31, 1998
---------------------------------- ------------------------------------
Gross Wells Net Wells Gross Wells Net Wells
------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Flowella Field 3 1.28 - -
W.E. Colson Field 3 0.49 - -
West Sandy Creek 11 0.22
West Lavaca River 6 0.12 20 .32
Lewis Ranch 2 2
London Gin 1 1
Hackberry 4 .40
South Hope 1 .50
---- ---- ---- ----
Total 23 2.11 28 4.22
</TABLE>
Employees
The Company currently employs three full time and one part-time salaried
persons. Mr. Ford and Mr. McGrath (described in Item 9) work full-time, while
Mr. Bippus (described in Item 9), works part-time for the Company. There is
also one full-time staff person in corporate administration and support.
Office Facilities
The Company leases approximately 5,825 square feet of office space in Houston,
Texas. The lease is for a term of 60 months beginning on September 9, 1998 and
ending on September 30, 2003, with an initial monthly lease rate of
approximately $7,524.
5
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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.
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. 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.
6
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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.
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.
7
<PAGE>
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.
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.
8
<PAGE>
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.
9
<PAGE>
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.
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.
10
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Except as discussed below, we are not engaged in any pending legal proceedings
nor is any of our property subject to any legal proceedings. We are not aware
of any proceedings pending or threatened against our officers and directors in
their capacities as such.
On June 10, 1998 we filed suit against a former employee, Kenneth Koepke. Mr.
Koepke was formerly our Vice President of Corporate Communications. He
allegedly misused his office in an effort to supplant Mr. Ford (President and
CEO of our company since October 27, 1997) by attempting to discredit Mr. Ford
with the Board of Directors. His employment was then terminated. Following the
termination, Mr. Koepke continued his efforts by contacting shareholders. The
case, ARXA International Energy, Inc. v. Kenneth Koepke, is docketed as Case No.
98-27105 in the 152nd District Court in Harris County, Texas. Among other
relief, we seek to enjoin Mr. Koepke from contacting shareholders. Upon filing
of the suit, by consent of counsel, the Court entered a temporary restraining
order against Mr. Koepke for the period ending September 15, 1998. Since
September 15, 1998 we are not aware of any further efforts by Mr. Koepke to
contact our shareholders so we have not sought a continuation of the order. In
addition to the injunction, we seek both a return of our shareholders list and
various corporate documents removed by Mr. Koepke, together with damages of
$25,000,000 and legal fees and costs. Mr. Koepke has filed a counter claim
against us, seeking damages for defamation of character and wrongful
termination. In addition, Mr. Koepke has filed a third party complaint against
Mr. Ford personally, seeking damages for defamation of character. We and Mr.
Ford are vigorously pursuing and contesting this litigation. The case is
currently in discovery.
On October 20, 1998 Duke Resources Corporation, a company owned by John O.
Schofield, our founder and former Chairman, filed suit seeking acceleration of
the promissory note we issued in settlement of our prior litigation discussed in
Form 10-K for the fiscal period ended October 31, 1997. The case was brought in
the Vanderburgh Superior Court, Evansville, Indiana and docketed to No. 82D03-
9810-CP-3476. We filed a response seeking to dismiss the case on the grounds
that the acceleration sought is pursuant to documents other than the promissory
note, and those documents require arbitration in the event of a dispute. Both
sides have filed briefs and the Court has taken the matter under advisement. We
expect a favorable result. However, the note is due, in any event, on March 12,
1999.
On February 1, 1999 we filed a claim against OPMI Operating Company in the 55th
District Court for Harris County, Texas docketed as No. 99-02636. We allege
OPMI misrepresented the status, condition and ownership of certain oil and gas
leases and misapplied funds paid by us to the acquisition of other properties.
We seek recovery of $60,000 plus recovery of attorneys' fees and costs. No
answer has yet been filed by OPMI. We intend to vigorously pursue the
litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fiscal year
ended October 31, 1998, through the solicitation of proxies or otherwise.
11
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
REVERSE STOCK SPLIT
Effective October 26, 1998, five days before our fiscal year end, we declared a
reverse stock split of 1 for 5. Fractional shares were rounded up. Prior to the
split we had 28,342,501 shares issued and outstanding. Following the split we
had 5,668,518 shares issued and outstanding. Included in the shares of October
26, 1998, were 5,073,000 pre-split or 1,014,600 post-split shares held in
escrow, to be used with a pending transaction. Between October 26, 1998 and the
end of the fiscal year, the pending transaction was not consummated and the
shares were cancelled, reducing the total shares issued and outstanding to
4,653,918, post split.
MARKET PRICES
Our Common Stock is listed on the OTC Electronic Bulletin Board under the symbol
"ARXA." Public trading of our Common Stock began on August 8, 1995. The market
for the Common stock has been 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>
<CAPTION>
Price Range
--------------------------
Fiscal Year/Period High Low
- ------------------ ----------- ------------
<S> <C> <C>
February 1, 1995 to January 31, 1996
Third Quarter (commencing August 8, 1995) $ 3.00 $ 1.825
Fourth Quarter 4.75 3.00
February 1, 1996 to January 31, 1997
First Quarter 6.375 2.625
Second Quarter 6.50 5.00
Third Quarter 5.875 1.50
Fourth Quarter 3.50 1.50
February 1, 1997 to October 31, 1997(1)
First Quarter 2.25 1.5625
Second Quarter 4.375 1.50
Third Quarter 2.375 1.1875
November 1, 1997 to October 31, 1998(1)
First Quarter 1.50 .50
Second Quarter .58 .27
Third Quarter 1.38 .27
Fourth Quarter(2) .67 .12
Fourth Quarter(3) .8125 .25
</TABLE>
- -----------
(1) Fiscal year end, changed by the Board of Directors from January 31, 1998
to October 31, 1997.
(2) These prices are before the 1 for 5 reverse stock split.
(3) These prices are after the 1 for 5 reverse stock split.
On February 8, 1998, the closing price for our Common Stock was $.39, and there
were approximately 1,235 holders of record.
12
<PAGE>
WARRANTS
None of our warrants are traded in any public trading market.
DIVIDENDS
We have not had any earnings, have not paid, and do not currently intend to pay,
cash dividends on our Common Stock. The current policy of our Board of Directors
is to retain earnings, if any, to provide funds for the operation and expansion
of our business. The Board of Directors will review that policy from time to
time in light of, among other things, our earnings and financial position.
SALE BY THE COMPANY OF UNREGISTERED SECURITIES
During the fiscal year ending October 31, 1998, we issued the following
securities without registration under the Securities Act of 1933, as amended:
1. During the fiscal year ended October 31, 1997 we had issued shares of our
Common Stock as compensation for services. Then, during July and August, 1997 a
dispute arose as to the number of shares which should have been issued. As a
part of the closing of the reverse acquisition by Phoenix Energy Group, Inc. we
settled the disputes and re-issued a reduced number of shares:
<TABLE>
<CAPTION>
Original New issue (Pre-split)
------------------------ -----------------------------
<S> <C> <C>
Richard R. Royall 144,541 100,000
Sammy Fleschler 144,541 100,000
James R. Elston 100,823 69,754
Umberto Brovedani 144,541 100,000
</TABLE>
Such conversion issuances were considered exempt under Section 3(a)(9) of the
Securities Act.
2. On December 4, 1997 we issued shares of our Common Stock to persons,
including a director, for services rendered during the fiscal period ended
October 31, 1997:
Gregory Stephens (director) 50,000
John Catricola 50,000
Thomas Abate 50,000
Mega Holdings, Inc. 50,000
These issuances which were previously reported in Part III, Item 12 of Form
10-KSB for the transition period ended October 31, 1997. These issuances
were considered exempt under Section 4 (2) of the Securities Act.
3. On July 10, 1998 we issued 100,000 shares to OPMI Operating Company and
2,000 shares to John Newton. These pre-split issuances were in partial
consideration for our acquisition of an interest in certain oil and gas leases.
(See Part I, Item 3 "Legal proceedings".) These issuances were considered exempt
under Section 4(2) of the Securities Act.
13
<PAGE>
4. On July 14, 1998 the four holders of our promissory notes including two
directors converted such notes, having a principal of $134,027, to Common Stock
at a conversion price of $.14 per share, based on the conversion price provided
in the notes:
Principal Shares
------------- -----------
Larry Keeler (director) $ 50,000 360,000
Robert Farris (director) 50,000 360,000
Errol Cook 33,333 240,000
Paul Wigoda 694 5,000
-------- -------
Totals $134,027 965,000
The conversion issuance of 965,000 pre-split shares was considered exempt
under Section 3 (a) (9) of the Securities Act.
5. On July 28, 1998 we issued 300,000 pre-split shares to Norman Olshansky as
compensation for financial/consulting and corporate advisory services. This
issuance was considered exempt under Section 4 (2) of the Securities Act.
14
<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 October
31, 1998 and the related consolidated statements of operations for the for the
year ended October 31, 1998. "The Company had a net loss of $1,748,299 and
negative cash flow from operations of $742,455 for the year ended October 31,
1998 and had an accumulated deficit of $3,195,016 at that date, which raises
substantial doubt about its ability to continue as a going concern."
Oil and gas revenues for the year ended October 31, 1998 were $463,875, which is
a $21,677 decrease from $485,552 for the ten months ended October 31, 1997 and
is primarily attributed to normal production decline, lower product prices in
1998 and the sale of the Flowella and W.E. Colson Fields effective June 1, 1998.
Lease operating expense for the year ended October 31, 1998 were $199,715, which
is a $62,167 increase from the $137,548 from the ten months ended October 31,
1997. The increase is primarily due to the Garcia #1 well located in Brooks
County, Texas, which was re-worked so as to bring it back on production after
having been shut-in since December 1996.
General and administrative costs for year ended October 31, 1998 were
$1,763,050, which is a $588,507 increase from the $1,174,543 for the ten month
ended October 31, 1997. The increase is solely attributable to the Company's
efforts to expand its capacity to evaluate numerous and larger oil and gas
acquisitions to present to equity and debt financing sources, so as to grow the
Company.
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 October
31, 1998 and for the year 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."
Net cash flow from operations for the year ended October 31, 1998 was a deficit
of $742,455 as compared to a deficit of $454,163 for the ten months ended
October 31, 1997.
The primary source of cash for the year ended October 31, 1998 was from 1) the
sale of the Sayre Ranch Prospect in Oklahoma to a third party for $468,700 plus
commission income of $18,750, 2) the sale of the Flowella and W.E. Colson Fields
to two separate third parties for a net of $801,000 3) the sale of the West
Sandy Creek property for a net of $48,526, 4) the sale of certain undeveloped
acreage in West Lavaca River for $9,205 and 5) proceeds of stockholders notes of
$134,028.
Net cash was used in investing activities for the year ended October 31, 1998
primarily on costs to drill and complete the Vesley #1 well for $270,000, to
drill and complete the Taylor #1 well for $73,350 and the Poole #4 well for
$28,825, and to drill and complete numerous wells in West Lavaca River for a
total of $53,777. Additionally, the Company spent $154,000 on the acquisition of
the Lewis Ranch and London Gin properties.
The Company notes that there is not sufficient monthly cash flows from
operations to continue to operate the business for the next year, or for that
matter, the next fiscal quarter.
15
<PAGE>
C. Management's Response and Plan of Operation
Strategy
Management continues to emphasis the building of strong fundamentals at a
minimum of risk given the nature of the business. To meet this objective the
company continues to seek producing reserve acquisitions and reduced risk
exploitation opportunities which will enhance the company's cash flow and
reserve base.
During the past year, the industry experienced severe reductions in prices for
crude oil and natural gas. One of the manifestations of reduction is
significantly more difficulty in capital formation. In order to cope, the
company sold many of our low yield oil and gas assets and replaced these with
new reserves with significant upside potential. These new assets include
exploitation potential where development cost is low, cash flow potential is
high, and risk is reduced. The dilemma facing the company now is the need to
raise the capital to develop these assets.
On the producing reserve acquisition front, the company continues to seek
capital to acquire some of the many opportunities emerging from the general
restructure of the industry. The restructuring is a result of the reduction in
crude oil and natural gas prices and concern for the uncertainty of prices in
the future. The company has targeted several acquisition opportunities and is
aggressively seeking financial sources to assist with financing.
Capitalization
Under-capitalization is, and has been since inception, the most serious problem
facing the company. Among the assets the company brings to the table to discuss
capital formation is a) no long term or secured debt, b) acquisition and
exploitation opportunities with attractive risk and ROI profiles, and c) a
management team committed to execute the company's strategic plan. The company
is pursuing a number of capital access sources.
D. Year 2000 Compliance
The Year 2000 problem is the result of computer programs being written using two
digits rather than four to define the applicable year. Any programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculation. As a result, many companies may be forced to upgrade or
completely replace existing hardware and software in order to be Year 2000
compliant.
The Company has utilized only internal resources in assessing the Year 2000
issue and has not employed outside consultants to assist. There have been no
material expenditures related to identifying, assessing or remediating Year 2000
compliance issues, nor does the Company expect to incur any material
expenditures related to this issue. Accordingly, the Company is unable to
estimate the impact of any Year 2000 compliance issues that may arise if any of
its vendors and suppliers were not Year 2000 compliant.
The Company has not developed a contingency plan related to Year 2000 compliance
since no significant issues have been specifically identified. Once the Company
has completed its assessment with respect to its vendors and suppliers, if
necessary, the Company will develop a contingency plan to address any
significant non-compliance issues identified. The Company expects to complete
such assessment not later than June 30, 1999.
16
<PAGE>
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
October 31, 1998 was Hein + Associates L.L.P.
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.
17
<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 51, 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.
Mr. William J. Bippus, age 45, 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 39, 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 50, 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.
Robert G. Farris, age 68, serves as a director of the Company. Mr. Farris is
the President of Valley Transit Co., Inc., Harlingen, Texas, with which he has
been associated since 1955. Mr. Farris was graduated from The New Mexico
Military Institute in June, 1948 and then received a Bachelors of Business
Administration Degree from the University of Texas in June, 1952. He was then
commissioned in the United States Army and served with the 3rd Infantry Division
in Korea. He served until June, 1954. Mr. Farris has served in a variety of
community and public service organizations and has been a trustee of the Marine
Military Academy since 1977.
Larry Keeler, age 58, serves as a director of the Company. In addition, Mr.
Keeler provides business, tax, and financial consulting services under a
consulting agreement. (See Part III, Item 12 "Certain Relationships and Related
Transactions") Mr. Keeler, a CPA, has been engaged in the private practice of
accounting under the name Larry Keeler P.C. for over seven years. Mr. Keeler
was authorized to practice in California in 1969 and in Texas in 1989. He is a
member of the American Institute of CPAs and the Texas Society of CPAs.
18
<PAGE>
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 fiscal year ended October 31, 1998 the executives previously
compensated by Phoenix Energy Group, Inc. became employees of the Company and
were compensated by the Company. Executive compensation paid for the year was
as follows:
<TABLE>
<CAPTION>
Summary Compensation Table
- ------------------------------------------------------------------------------------------------------------------
Long-Term
Compensation Compensation
-------------------------------- ------------------------------
Name and Principal Fiscal Other Stock Stock
Position Period Salary Compensation Issuances Options 3
- ------------------------------ ------------- ----------- ------------------ ------------- --------------
<S> <C> <C> <C> <C> <C>
L. Craig Ford 10/31/98 64,890 3,915/1/ 0 290,000/2/
Chief Executive Officer
Kenneth Koepke 10/31/98 20,340 0 0 0
VP-Corp. Relations
Dennis P. McGrath 10/31/98 56,478 0 0 180,000/2/
VP, Controller
Mitchell Veh, Jr. 10/31/98 14,890 0 0 0
VP-Acquisition
Robert G. Farris 10/31/98 0 0 0 46,667/2/
Director
Larry Keeler 10/31/98 0 17,014 0 46,667/2/
Director
Gregory A. Stephens 10/31/98 0 0 0 46,667/2/
Director
William J. Bippus 10/31/98 35,809 0 0 200,000/2/
Director
</TABLE>
__________________________________
/1/ Mr. Ford receives the use of a Company-owned 1997 Toyota Avalon.
/2/ These options were issued under the Executive and Director Stock Option
Incentive Plan which is discussed below.
/3/ The stock options reflected herein are presented on a post-split basis.
Compensation of Directors
Directors are not compensated for their services as such and there is no current
plan to compensate them, beyond the Executive and Director Stock Options granted
July 27, 1998, discussed below. Directors may be reimbursed expenses incurred
in attendance at meetings.
19
<PAGE>
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.
That amount remains unpaid. There is no retirement, pension or profit sharing
plan.
Stock Options
Incentive Stock Option Plan
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 8, 1998 no options have been granted under the Plan.
Executive and Director Stock Option Incentive Plan
On July 27, 1998 our Board of Directors authorized an Executive and Director
Stock Option Incentive Plan, with options to be issued as follows:
L. Craig Ford 1,450,000
William L. Bippus 1,000,000
Dennis McGrath 900,000
Richard Ruppert 450,000
Gregory Stephens 233,333
Robert Farris 233,333
Larry Keeler 233,333
The options are exercisable only in the event that the market price of our
Common Stock achieves certain levels. Fifty percent are exercisable when the
price is $1.25 or higher, twenty-five percent are exercisable when the price is
$1.50 or higher, and the final twenty-five percent are exercisable when the
price is $1.75 or higher.
As adjusted for the 1 for 5 reverse stock split, the shares subject to option
would be as follows and the required price levels for exercise would be $6.25,
$7.50 and $8.75 respectively:
L. Craig Ford 290,000
William L. Bippus 200,000
Dennis McGrath 180,000
Richard Ruppert 90,000
Gregory Stephens 46,667
Robert Farris 46,667
Larry Keeler 46,667
To date, no options have been exercised.
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 8, 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>
<CAPTION>
Amount and Nature
Name and Address of Beneficial Percent of
of Beneficial Owner Ownership/1/ Class/2/
- --------------------------------- -------------------------------- --------------------
<S> <C> <C>
Phoenix Energy Group, Inc. 2,557,262/3/ 51.6%
530 Wells Fargo Drive, Suite 310
Houston, TX 77090
William J. Bippus 322,419/4/ 6.5%
10 Stone Spring Circle
The Woodlands, TX 77381
Gregory A. Stephens 146,202/5/ 2.95%
411 Pebble Ct.
Russiaville, IN 46979
L. Craig Ford 0/6/ 0.0%
25111 London Town Drive
Spring, TX 77389
Robert G. Farris 72,000/6/ 1.45%
2204 Riverside Dr.
Harlingen, TX 78550
Larry Keeler 81,331/6/ 1.64%
634 Hickory Ridge
Shenandoah, TX 77381
Dennis P. McGrath 0/6/ 0.0%
714 Lodgehill
Houston, TX 77090
All officers and directors
as a group (5 persons) 621,952 12.55%
</TABLE>
- --------------
/1/ Unless otherwise indicated below, all shares are owned legally (of record)
and beneficially.
/2/ Based upon 4,953,918 shares issued and outstanding on February 8, 1998.
/3/ Does not include Warrants exercisable at $10.00 per share to purchase
659,400 shares of the Company's Common Stock (adjusted for the stock
split), issued in connection with the "reverse acquisition" on October 27,
1997.
/4/ Does not include 105,469 $10.00 Warrants (adjusted for the stock split)
held by Mr. Bippus nor 24,750 shares of common stock and 6,750 of $10.00
Warrants (adjusted for the stock split) held by a trust for the Bippus
Children.
/5/ Does not include 30,000 $10.00 Warrants (adjusted for the stock split) held
by Mr. Stephens.
/6/ Does not include allocation or attribution of shares owned by Phoenix
Energy Group, Inc.; see Table (C) below.
/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 8, 1998 by all
persons who were previously Directors or Executive Officers of the Company
during the fiscal year ended October 31, 1998:
<TABLE>
<CAPTION>
Amount and Nature
Name and address of of Beneficial Percent of
Beneficial Owner Ownership/1/ Class/2/
- -------------------- --------------------- --------------
<S> <C> <C>
John L. Moran 0 0.0%
22702 Moonlit Lake Ct.
Katy, TX 77450
</TABLE>
- --------------
/1/ Unless otherwise indicated below, all shares are owned legally (of record)
and beneficially.
/2/ Based upon 4,953,918 shares issued and outstanding on February 8, 1998.
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 8, 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>
<CAPTION>
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 Riverside Dr.
Harlingen, TX 78550
Larry Keeler 305,131/5/ 4.7%
634 Hickory Ridge
Shenandoah, TX 77381
Dennis P. McGrath 0/6/ 0.0%
714 Lodgehill
Houston, TX 77090
All officers and directors
As a group (5 persons) 1,418,552 22.0%
</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 8, 1998.
/3/ Does not include options to purchase 190,132 shares of Common Stock at an
exercise price of $2.50 per share.
/4/ Does not include options to purchase 40,731 shares of Common Stock at an
exercise price of $2.50 per share.
/5/ Does not include options to purchase 80,731 shares of Common Stock at an
exercise price of $2.50 per share.
/6/ 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 recognition of services rendered during the fiscal period ended October 31,
1997 the Company authorized issuance of shares of its Common Stock to certain
persons, including Gregory A. Stephens, a Director and the former Treasurer.
See Part II, Item 5 "Market for Registrant's Common Equity and Related
Stockholders Matters - Sale by the Company of Unregistered Securities - 2"
On July 14, 1998 two of our directors, Larry Keeler and Robert Farris, each
converted their promissory notes of $50,000 to 360,000 shares of our Common
Stock at a conversion price of $.14 per share. See Part II, Item 5 "Market for
Registrant's Common Equity and Related Stockholders Matters - Sale by the
Company of Unregistered Securities - 4"
On July 28, 1998 we entered into a Business, Accounting, and Financial
Consulting Agreement with Larry Keeler, a director. On that same date, as
partial compensation under the Agreement, we issued 80,000 shares to Mr. Keeler,
pursuant to a registration on Form S-8.
On July 27, 1998 our Board of Directors authorized an Executive and Director
Stock Option Incentive Plan, with options to be issued as follows:
<TABLE>
<S> <C>
L. Craig Ford 1,450,000
William L. Bippus 1,000,000
Dennis McGrath 900,000
Richard Ruppert 450,000
Gregory Stephens 233,333
Robert Farris 233,333
Larry Keeler 233,333
</TABLE>
The options are exercisable only in the event that the market price of our
Common Stock achieves certain levels. Fifty percent are exercisable when the
price is $1.25 or higher, twenty-five percent are exercisable when the price is
$1.50 or higher, and the final twenty-five percent are exercisable when the
price is $1.75 or higher.
As adjusted for the 1 for 5 reverse stock split, the shares subject to option
would be as follows and the required price levels for exercise would be $6.25,
$7.50 and $8.75 respectively: To date, no options have been exercised.
<TABLE>
<S> <C>
L. Craig Ford 290,000
William L. Bippus 200,000
Dennis McGrath 180,000
Richard Ruppert 90,000
Gregory Stephens 46,667
Robert Farris 46,667
Larry Keeler 46,667
</TABLE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 27 -- Financial Data Schedule
(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.
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: /s/ L. Craig Ford
____________________________________
L. Craig Ford, President and
Chief Executive Officer
Dated: February 19, 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>
<CAPTION>
Signatures Title Date
- ----------- -------- ------
<S> <C> <C>
/s/ L. Craig Ford President/Chief Executive Officer February 19, 1999
- ------------------------------------------------- and Director
L. Craig Ford
/s/ Dennis P. McGrath VP & Controller February 19, 1999
- -------------------------------------------------
Dennis P. McGrath
/s/ William J. Bippus Director February 19, 1999
- -------------------------------------------------
William J. Bippus
/s/ Gregory A. Stephens Director February 19, 1999
- -------------------------------------------------
Gregory A. Stephens
/s/ Larry Keeler Director February 19, 1999
- -------------------------------------------------
Larry Keeler
/s/ Robert G. Farris Director February 19, 1999
- -------------------------------------------------
Robert G. Farris
</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 Sheet - October 31, 1998....................... F-3
Consolidated Statements of Operations:
(1) for the Period From Inception (March 14, 1996) to
December 31, 1996
(2) for the period from inception (March 14,1996) to
October 31, 1996 (unaudited)
(3) for the Ten Month Period Ended October 31, 1997 and
(4) for the Year Ended October 31, 1998.......................... F-4
Consolidated Statement of Stockholders' Equity:
(1) for the Period From Inception (March 14, 1996) to
December 31, 1996
(2) for the Ten Month Period Ended October 31, 1997 and
(3) for the Year Ended October 31, 1998.......................... F-5
Consolidated Statements of Cash Flows:
(1) for the Period From Inception (March 14, 1996) to
December 31, 1996
(2) for the period from inception (March 14,1996) to
October 31, 1996 (unaudited)
(3) for the Ten Month Period Ended October 31, 1997 and
(4) for the Year Ended October 31, 1998.......................... F-6
Notes to Consolidated Financial Statements.......................... F-7
Supplemental Oil and Gas Properties and Related Reserves Data
(Unaudited)........................................................ F-17
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 sheet of ARXA
International Energy, Inc. and subsidiary as of October 31, 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the period from inception (March 14, 1996) to December 31, 1996 , for
the ten month period ended October 31, 1997 and for the year ended October 31,
1998. 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 October 31, 1998, and the results of their
operations and their cash flows for the period from inception (March 14, 1996)
to December 31, 1996, for the ten month period ended October 31, 1997, and for
the year ended October 31, 1998 in conformity with generally accepted accounting
principles.
As discussed in Note 2 to the consolidated financial statements, the Company had
a net loss of $1,748,299 and negative cash flow from operations of $742,455 for
the year ended October 31, 1998 and had an accumulated deficit of $3,195,016 at
that date, which raises substantial doubt about its ability to continue as a
going concern. 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 financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Hein + Associates LLP
Houston, Texas
December 7, 1998
F-2
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
Consolidated Balance Sheet
OCTOBER 31, 1998
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
CURRENT ASSETS:
Cash $ 167,105
Accounts receivable, net of allowance for doubtful accounts 119,430
-----------
Total current assets 286,535
PROPERTY AND EQUIPMENT, (full cost method for oil and gas
properties), net of accumulated depletion, depreciation,
amortization and provision for impairment 1,708,589
OTHER ASSETS 63,189
-----------
Total assets $ 2,058,313
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Notes payable to stockholders $ 157,055
Accounts payable 25,904
Other current liabilities 48,750
-----------
Total current liabilities 231,709
COMMITMENTS AND CONTINGENCIES (Note 8 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; 4,653,918 shares issued and outstanding 4,654
Additional paid-in capital 5,296,325
Unearned stock based compensation of consultants and others (279,359)
Accumulated deficit (3,195,016)
-----------
Total stockholders' equity 1,826,604
-----------
Total liabilities and stockholders' equity $ 2,058,313
===========
</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 For the Period From
Inception (March Inception (March 14, For the Ten
14, 1996) to 1996) to Month Period Ended For the Year Ended
December 31, October 31, October 31, October 31,
1996 1996 1997 1998
---------------------- ------------------- ------------------ -----------------
(unaudited)
<S> <C> <C> <C> <C>
OIL AND GAS REVENUES $ 241,115 $ 103,068 $ 485,552 $ 463,875
COST AND EXPENSES:
Lease operating expenses 108,753 50,956 137,548 199,715
Severance taxes 6,880 2,650 11,590 10,984
Depletion, depreciation,
amortization and provision for
impairment 121,574 60,014 608,370 157,762
General and administrative 157,139 89,278 1,174,543 1,763,050
--------- --------- ----------- -----------
Total cost and expenses 394,346 202,898 1,932,051 2,131,511
--------- --------- ----------- -----------
LOSS FROM OPERATIONS (153,231) (99,830) (1,446,499) (1,667,636)
OTHER INCOME (EXPENSE):
Interest income 3,086 2,108 12,930 6,010
Interest expense (11,031) - (4,566) (6,020)
Equity in loss of oil and
gas venture - - (267,413) (93,296)
Other (78,083) (78,083) (8,674) 12,643
--------- --------- ----------- -----------
(86,028) (75,975) (267,723) (80,663)
--------- --------- ----------- -----------
LOSS BEFORE INCOME TAXES (239,259) (175,805) (1,714,222) (1,748,299)
INCOME TAX BENEFIT, net 107,126 61,794 399,638 -
--------- --------- ----------- -----------
NET LOSS $(132,133) $(114,011) $(1,314,584) $(1,748,299)
========= ========= =========== ===========
NET LOSS PER COMMON
AND COMMON EQUIVALENT SHARE - $(.23) $(.20) $(.69) $ (.41)
BASIC AND DILUTED ========= ========= =========== ===========
Weighted Average Common and Common
Equivalent Shares 581,501 581,501 1,911,346 4,219,770
========= ========= =========== ===========
</TABLE>
See accompanying notes to these consolidated financial statements.
F-4
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM MARCH 14, 1996 (INCEPTION) TO OCTOBER 31, 1998
<TABLE>
<CAPTION>
Common Stock Additional Total Stock-
-------------------------- Paid-In Unearned Accumulated Holders'
Shares Amount Capital Compensation Deficit Equity
-------------------------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, March 14, 1996 (inception) - $ - $ - $ - $ - $ -
Issuance of stock for consulting
services 35,767 36 8,964 - - 9,000
Issuance of stock for compensation 61,002 61 15,289 - - 15,350
Issuance of stock for oil and gas
properties, net of offering costs 1,007,952 1,008 1,724,636 - - 1,725,644
Issuance of stock for consulting
services 5,713 6 14,369 - - 14,375
Sales of common stock 190,733 191 224,099 - - 224,290
Net loss - - - - (132,133) (132,133)
--------- ------ ---------- ------------ ------------ -----------
BALANCES, December 31, 1996 1,301,167 1,302 1,987,357 - (132,133) 1,856,526
Issuance of stock for oil and gas
properties 16,573 16 30,290 - - 30,306
Conversion of notes payable and
accrued interest 33,780 33 84,967 - - 85,000
Sales of common stock 762,828 763 1,239,797 - - 1,240,560
Issuance of common stock for
compensation 442,914 443 378,487 - - 378,930
Acquisition of ARXA 1,518,138 1,518 232,479 - - 233,997
Net loss - - - - (1,314,584) (1,314,584)
---------- ------ ---------- ------------ ------------ -----------
BALANCES, October 31, 1997 4,075,400 4,075 3,953,377 - (1,446,717) 2,510,735
Cancellation of stock per agreement (5,000) (5) - - - (5)
Net Cancellation of stock to officer
and consultants (32,938) (33) 33 - - -
Issuance of stock for oil and gas
properties 20,400 20 220,980 - - 221,000
Conversion of notes payable 193,000 193 133,835 - - 134,028
Issuance of common stock in lieu of
current liability 50,000 50 87,450 - 87,500
Issuance of common stock for
consulting services 353,000 353 900,647 (279,359) - 621,641
Rounding 56 1 3 - - 4
Net loss - - - - (1,748,299) (1,748,299)
---------- ------ ---------- ------------ ------------ -----------
BALANCES, October 31, 1998 4,653,918 $4,654 $5,296,325 $(279,359) $(3,195,016) $ 1,826,604
========== ====== ========== ============ ============ ===========
</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 Period
From Inception From Inception
(March 14, 1996) (March 14, 1996) For the Ten
to to Month Period For the Year
December 31, October 31, Ended October Ended October
1996 1996 31, 1997 31, 1998
----------------- --------------- --------------- ------------
(unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (132,133) $ (114,011) $(1,314,584) $(1,748,299)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depletion, depreciation, amortization and provision for
impairment 121,574 60,014 608,370 157,762
Deferred tax benefit (170,927) (125,595) (324,440) -
Equity in loss of oil and gas venture - - 267,413 93,296
Issuance of stock for compensation 38,725 29,725 378,930 621,641
Changes in operating assets and liabilities:
Accounts receivable (326,143) (265,312) 91,767 131,903
Income tax receivable - - (70,831) 70,831
Other current assets (9,929) (12,828) 9,587 342
Accounts payable 30,493 8,826 (14,439) 97,350
Other current liabilities 42,650 277 (10,738) (161,925)
Accrued income taxes 63,801 63,801 (63,801) -
Other, net (28,990) (28,705) (11,397) (5,356)
---------- ---------- ----------- -----------
Net cash used in operating activities (370,879) (383,808) (454,163) (742,455)
---------- ---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchase) Sale of oil and gas property held for sale - - (466,343) 466,343
Additions to office equipment (54,347) (16,700) (95,778) (22,895)
Additions to oil and gas property - - (196,250) (427,045)
Purchase of oil and gas property - - - (153,600)
Investment in oil and gas venture - - (267,413) (93,296)
Cash acquired in acquisition of ARXA - - 18,358 -
Proceeds from sale of oil and gas property, net 405,726 468,352 - 878,142
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) 647,649
---------- ---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stockholder notes 138,150 138,150 - 134,028
Payment of stockholder notes - - (61,650) (25,000)
Sales of common stock 224,290 194,290 1,240,560 -
---------- ---------- ----------- -----------
Net cash provided by financing activities 362,440 332,440 1,178,910 109,028
---------- ---------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 418,211 472,480 (265,328) 14,222
CASH AND CASH EQUIVALENTS, beginning of period - - 418,211 152,883
---------- ---------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 418,211 $ 472,480 $ 152,883 $ 167,105
========== ========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ - $ - $ 70,831 $ -
========== ========== =========== ===========
Interest paid $ - $ - $ 6,885 $ 6,020
========== ========== =========== ===========
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 $ 221,000
Conversion of stockholder notes and accrued interest into ========== ========== =========== ==========
common stock $ - $ - $ 85,000 $ 134,028
========== ========== =========== ==========
Issuance of stock in lieu of current liability $ - $ - $ - $ 87,500
========== ========== =========== ==========
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 (pre-split) shares of the
Company's common stock, representing approximately 63% of the issued and
outstanding shares, plus warrants to purchase 3,297,000 (pre-split) shares
at an exercise price of $2.00 (pre-split) 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 in six wells, 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 Phoenix common stock during 1996 and
82,866 shares of Phoenix common stock in 1997 to effectuate the acquisition
of these working interests (See Note 11).
REVERSE STOCK SPLIT - Effective October 26, 1998, the Company declared a
one to five reverse common stock split. Under the terms of the reverse
stock split, one new, post-split share was issued for five pre-split shares,
with factional shares rounded up to a full share. Accordingly, the financial
statements have been restated to reflect this reverse stock split for all
periods presented.
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.
F-7
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Oil and Gas Property Held for Sale - Oil and gas property held for sale is
carried at the lower of cost or market. In December 1997, a property was
sold to a third party for cash equal to the carrying value of the property
at October 31, 1997 plus commission.
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 1998, the Company sold an oil and gas lease for $930,508, less direct
expenses of the sale of $52,366. 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 mcf equivalent was $1.31 for the
periods ended October 31 and December 31, 1996, $1.19 for the ten-month
period ended October 31, 1997, and $.66 for the year ended October 31, 1998.
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
F-8
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
producing properties with long production histories. At October 31, 1998,
approximately 83% 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.
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 Texas and Louisiana. 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, 1998.
At times, 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.
Earnings per share - The Company adopted SFAS No. 128, Earnings Per Share
(EPS), which was issued in February 1997, which requires presentation of
both basic and diluted EPS
F-9
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
on the face of the income statement for all periods presented. Basic EPS is
computed by dividing net income available to common shareholders (numerator)
by the weighted average number of common shares outstanding (denominator)
during the period. Diluted EPS is computed using the weighted-average number
of common and potential common shares outstanding during the period. In
computing diluted EPS, the average stock price for the period is used in
determining the number of shares assumed to be purchased from the exercise
of stock options. There were no dilutive potential common shares outstanding
during the periods emcompassed by these financial statements. All prior
years' data in this report have been restated to reflect the requirements of
SFAS No. 128.
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. GOING CONCERN:
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company had a net loss of
$1,748,299 and negative cash flow from operations of $742,455 for the year
ended October 31, 1998 and had an accumulated deficit of $3,195,016 at that
date, which raises substantial doubt about its ability to continue as a
going concern.
The Company has targeted several acquisition opportunities and is
aggressively seeking financial sources to assist with the financing.
3. ACCOUNTS RECEIVABLE:
Accounts receivable consisted of oil and gas receivables of $26,306 and
amounts due primarily from operators of oil and gas properties of $143,124
offset by an allowance for doubtful accounts of $50,000.
F-10
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. PROPERTY AND EQUIPMENT:
Property and equipment at October 31, 1998, consisted of the following:
Oil and gas properties $2,420,456
Other property and equipment 173,020
----------
2,593,476
Less accumulated depletion,
depreciation, amortization and
provision for impairment (884,887)
----------
$1,708,589
==========
5. OTHER ASSETS:
Other non-current assets at October 31 1998 consisted primarily of an
indemnification fund of $50,000. The indemnity fund, was set up for the
benefit of the liquidating agent for Prospector (see Note 1) in accordance
with the Joint Venture Dispute Resolution 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.
6. NOTES PAYABLE TO STOCKHOLDERS:
Notes payable to stockholders at October 31, 1998 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.
Notes payable to stockholders at October 31, 1998 also includes an unsecured
note payable to a company affiliated with a stockholder of the Company in
the amount of $79,770. 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.
The stockholder of the above two notes has sued the Company, claiming that
the due dates of both notes should be accelerated. The Company feels that
the claim is completely without merit and, accordingly, has retained an
attorney to defend itself.
During the year ended October 31, 1998, four stockholders loaned the Company
$134,027. These loans were converted into 193,000 shares of common stock on
June 17, 1998.
F-11
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INCOME TAXES:
Deferred tax assets and liabilities as of October 31, 1998 consisted of the
following:
<TABLE>
<CAPTION>
Current Long-Term Total
----------------- ----------------- -----------------
<S> <C> <C> <C>
Deferred tax asset - net operating loss
carryforward $ - $ 503,000 $ 503,000
-------------- --------- ---------
Deferred tax liability -Accumulated,
depletion, depreciation, amortization,
and provision for impairment - - -
-------------- --------- ---------
- 503,000 503,000
Valuation allowance - (503,000) (503,000)
-------------- --------- ---------
$ - $ - $ -
============== ========= =========
</TABLE>
The Company had net operating loss carryforwards (NOL's) for income tax
reporting purposes of approximately $1,341,000 at October 31, 1998. If not
utilized, these NOL's will expire in twenty years.
8. COMMITMENTS AND CONTINGENCIES:
Commitments - In August 1998, the Company signed a non-cancelable operating
lease agreement that provides for monthly payments ranging from $7,524 to
$8,495 for 60 months. For the year ended October 31, 1998, rent expense for
office space amounted to $54,267.
The Company has agreements with various consultants to provide legal,
accounting, and financial advisory services to the Company. The agreements
expire between March 1999 and June 1999 and require the Company to pay a
maximum of $7,160 and a minimum of $4,160 per month.
On June 10, 1998 the Company filed suit against a former employee, Kenneth
Koepke. Mr. Koepke was formerly Vice President of Corporate Communications.
He allegedly misused his office in an effort to supplant Mr. Ford (President
and CEO) by attempting to discredit Mr. Ford with the Board of Directors.
His employment was then terminated. Following the termination, Mr. Koepke
continued his efforts by contacting shareholders. Among other relief, the
Company seeks to enjoin Mr. Koepke from contacting shareholders. Mr. Koepke
has filed a counter claim, seeking damages for defamation of character and
wrongful termination. In addition, Mr. Koepke has filed a third party
complaint against Mr. Ford personally, seeking damages for defamation of
character. The Company and Mr. Ford are vigorously pursuing and contesting
this litigation. The case is currently in discovery.
F-12
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
9. YEAR 2000:
The Company has begun to address possible remedial efforts in connection
with computer software that could be affected by the Year 2000 problem,
which is the result of computer programs being written using two digits
rather than four to define the applicable year. Any programs that have
time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a major system failure or
miscalculations. The Year 2000 problem may impact the Company and/or
other entities with which the Company transacts business. The
Company has not determined the impact of the Year 2000 problem on their
future operations or the costs they may incur to remediate the problem.
10. RELATED PARTY TRANSACTION:
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.
F-13
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 102,482 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 $.25 to $2.50 per share.
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
1,007,952 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 190,733 shares of common
stock. The shares were sold at prices ranging from $1.25 to $2.50 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 16,573 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 33,780 shares of common stock.
During the period from February through October 1997, the Company received
cash of $1,240,560 in exchange for 762,828 shares of common stock. The
shares were sold at prices ranging from $2.50 per share at the beginning of
the period to $.85 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 442,914 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 $.85 per
share.
As discussed in Note 1, the Company issued warrants to acquire 3,297,000
(pre-split), 659,400 (post-split) shares of its common stock as part of the
acquisition transaction with Phoenix.
F-14
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The warrants are exercisable at $2.00 (pre-split) $10.00 (post-split) per
share. These warrants expire on August 9, 2000 and are currently
exercisable.
On August 21, 1998, the Company issued 57,700 warrants to certain Arxa
shareholders to purchase the Company's common stock at $1.25. These
warrants expire on August 31, 2000.
Prior to the merger transaction with Phoenix, the Company issued 405,000
warrants to purchase the Company's common stock at $10.00. These warrants
expire on August 9, 2000.
In addition, Phoenix granted options to employees and directors to acquire
147,753 shares of Phoenix's common stock and an option to an individual to
acquire 6,146 shares of its common stock. The options, which expire on
September 11, 2007, have an exercise price of $12.50 per share. The options
issued to employees to acquire 110,877 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 have not been converted to options to
acquire common stock of the Company.
In July 1998, the Company purchased a 100% working interest in the C.N.
Cooke #1 well in Nueces County, Texas and the Lewis #4 and #5 wells in
Matagorda County, Texas, from OPMI Operating for $153,600 and 20,400 shares
of the Company's common stock. The working interests were recorded at their
estimated fair value of $374,600, as determined by management by reference
to an independent engineering report.
During the year ended October 31, 1998, four stockholders loaned the Company
$134,028. These loans were converted into 193,000 shares of common stock on
June 17, 1998.
12. STOCK OPTION PLAN:
The Company has a stock option plan under which options to purchase a
maximum of 200,000 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, 1998,
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.
F-15
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
On July 27, 1998 the Company authorized the issuance of warrants to
management and non-employee directors to purchase 1,000,000 shares of common
stock at $.25 per share. 50% of the warrants are to be exercisable when the
Company's stock price reaches $6.25 per share, 25% when the price reaches
$7.50 per share, and 25% when the stock price reaches $8.75 per share.
Should the Company declare a stock dividend the number of shares will go up
and the prices will go down proportionately. These warrants have not been
issued as of October 31, 1998. The pro forma effect of the 1,000,000 shares
is shown below in this footnote.
In October 1995, the Financial Accounting Standards Board issued a new
statement titled "Accounting for Stock-Based Compensation" (SFAS 123). SFAS
123 encourages, but does not require, companies to recognize compensation
expense for grants of stock, stock options, and other equity instruments to
employees based on fair value. Fair value is generally determined under an
option pricing model using the criteria set forth in SFAS 123.
The Company applies APB Opinion 25, Accounting of Stock Issued to Employees,
and related interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its fixed stock option plans.
Had compensation expense for the Company's stock based compensation plans
been determined based on the fair value at the grant dates for awards under
those plans consistent with the method prescribed by SFAS 123, the
Company's net loss and loss per common share would have been increased to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
For the Ten
Month Period For the Year
Ended Ended
October 31, October 31,
1997 1998
------------------ ------------------
<S> <C> <C> <C>
Net loss As reported $(1,314,584) $(1,748,299)
Pro forma (1,314,584) (3,530,700)
Net loss per common share As reported (.69) (.41)
Pro forma (.69) (.84)
</TABLE>
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions: risk-
free rate of 8%; volatility of 198%, no assumed dividend yield; and expected
life of one year.
F-16
<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:
October 31, 1997 October 31, 1998
---------------- ----------------
Unproved oil and gas properties $ 62,500 $ -
Proved oil and gas properties 2,435,487 2,420,456
---------- ----------
2,497,987 2,420,456
Less accumulated depletion,
depreciation, amortization and
provision for impairment (701,697) (815,697)
---------- ----------
Net capitalized costs $1,796,290 $1,604,759
========== ==========
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 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
Acquisition of proved and unproved properties during the year ended
October 31, 1998 $ 374,600
Exploration or development costs during the year ended
October 31, 1998 $ 427,044
</TABLE>
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.
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
Revisions of previous estimates 650 (9)
Purchase of Minerals in place 25,602 2,075
Production (2,181) (157)
------- -------
PROVED RESERVES, October 31, 1997 39,399 2,934
Revisions of previous estimates (23,000) (1,808)
Purchase of Minerals in place 21,533 746
Extensions and discoveries 235 1,827
Production (2,490) (157)
Sale of minerals in place (14,313) (937)
------- -------
PROVED RESERVES, October 31, 1998 21,364 2,605
======= =======
PROVED DEVELOPED RESERVES, December 31, 1996 15,328 1,025
======= =======
PROVED DEVELOPED RESERVES, October 31, 1997 23,999 1,057
======= =======
PROVED DEVELOPED RESERVES, October 31, 1998 21,364 1,598
======= =======
F-17
<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>
<CAPTION>
October 31, 1997 October 31, 1998
------------------ ------------------
<S> <C> <C>
Future cash inflows $ 6,312,496 $ 4,747,284
Future production costs (1,455,890) (1,273,024)
Future development costs (1,669,920) (354,000)
Future income taxes (493,074) -
----------- -----------
2,693,612 3,120,260
Less 10% annual discount for estimated
timing of cash flows 805,390 950,743
----------- -----------
Standardized measure of discounted future net
cash flows $ 1,888,222 $ 2,169,517
=========== ===========
</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-18
<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, October 31, 1997 1,888,222
Purchase of reserves 716,208
Sales of oil and gas produced, net of production costs (253,176)
Sale of oil and gas properties (1,201,483)
Extensions, discoveries less related costs 1,450,752
Revisions of previous quantity estimates (962,840)
Changes in estimated future income taxes 342,834
Accretion of discount 189,000
-----------
BALANCE, October 31, 1998 $ 2,169,517
===========
F-19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE OCTOBER 31, 1998, FORM 10-KSB FINANCIAL STATEMENTS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<CASH> 167,105
<SECURITIES> 0
<RECEIVABLES> 159,430
<ALLOWANCES> (50,000)
<INVENTORY> 0
<CURRENT-ASSETS> 286,535
<PP&E> 2,593,476
<DEPRECIATION> (884,887)
<TOTAL-ASSETS> 2,058,313
<CURRENT-LIABILITIES> 231,709
<BONDS> 0
0
0
<COMMON> 4,654
<OTHER-SE> 1,821,950
<TOTAL-LIABILITY-AND-EQUITY> 2,058,313
<SALES> 0
<TOTAL-REVENUES> 463,875
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,131,511
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,020
<INCOME-PRETAX> (1,748,299)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,748,299)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,748,299)
<EPS-PRIMARY> (.41)
<EPS-DILUTED> (.41)
</TABLE>
