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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
[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, 1999
[ ] 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.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3784149
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
2301 14th STREET, SUITE 404
GULFPORT, MISSISSIPPI 39501
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(228) 864-6667
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK, $.001 PAR VALUE
TITLE OF CLASS
Indicate by check mark whether the registrant (i) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (ii) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Registrant's revenues for the fiscal year ended October 31, 1999 were $137,788.
The aggregate market value of Common Stock held by non-affiliates of the
registrant at February 4, 2000, based upon the last reported sales price on OTC
Electronic Bulletin Board, was $33,542,211. As of February 8, 2000, there were
34,939,804 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]
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ARXA INTERNATIONAL ENERGY, INC.
TABLE OF CONTENTS
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PAGE
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PART I
ITEM 1. BUSINESS........................................................ 1
ITEM 2. PROPERTIES...................................................... 3
ITEM 3. LEGAL PROCEEDINGS............................................... 10
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........................................... 14
ITEM 7. FINANCIAL STATEMENTS (SEE BELOW)............................... 16
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE........................................ 16
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT............... 17
ITEM 10. EXECUTIVE COMPENSATION.......................................... 19
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.................................................. 20
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................. 22
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K................................ 22
SIGNATURES............................................................... 23
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS............................... F-2
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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
2301 14th Street, Suite 404, Gulfport, Mississippi 39501.
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 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.
Organization - ARXA is a Delaware corporation with its principal place of
business in Gulfport, MS. ARXA is engaged in oil and gas exploration,
development, and operations in Louisiana, Mississippi, Texas, and Utah. ARXA
USA, Inc., is a Delaware corporation and wholly owned subsidiary of ARXA. All
significant interconnecting accounts and transactions have been eliminated in
consolidation. On October 27, 1997, ARXA acquired substantially all of the
assets and certain limited liabilities of Phoenix Energy Group, Inc., a Texas
Corporation ("Phoenix"). Phoenix from the sale of its assets acquired
approximately sixty-three (63%) of the issued and outstanding common stock of
ARXA. Phoenix was the controlling stockholder in ARXA during the period October
27, 1997 to May 7, 1999. Phoenix is a separate corporation controlled by its
stockholders, and is not controlled by ARXA.
On May 7, 1999, ARXA sold 6,000,000 shares of its Common Stock to Gulfport Oil &
Gas Inc. ("Gulfport"), a Delaware Corporation. Gulfport is a private company,
and on May 7, 1999, was the owner of approximately fifty-three and four tenths
percent (53.4%) of the outstanding 11,241,322 shares of ARXA and was controlling
shareholder of ARXA. Norris R. Harris is Chairman and CEO of Gulfport Oil & Gas,
Inc. Phoenix granted to Norris R. Harris, President of Gulfport, an irrevocable
stock proxy on 2,557,262 shares of common stock of ARXA owned by Phoenix. The
stock proxy is for a period of one year from May 5, 1999. On May 5, 1999,
Phoenix owned approximately twenty-three percent (23%) of the common stock of
ARXA.
On May 25, 1999, ARXA acquired from Gulfport a twenty-five percent (25%) working
interest in certain proved undeveloped, non-producing oil and gas reserves in
the Pelahatchie field, Rankin County, State of Mississippi. The acquisition of
the oil and gas properties by ARXA was based upon a petroleum engineer's
appraisal report on the Pelahatchie field which estimated proved undeveloped oil
and gas reserves for three development wells. The acquisition by ARXA from
Gulfport was based upon proved undeveloped non-producing oil and gas reserves
discounted at twenty-five percent. The total dollar value agreed to by ARXA and
Gulfport as to a twenty-five percent working interest in three development wells
in the Pelahatchie field was $13,576,532. Under the agreement between ARXA and
Gulfport, ARXA
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paid for the acquisition of the working interest in the Pelahatchie field as
follows: (1) Assigned to Gulfport the Promissory note of Gulfport payable to
ARXA in the amount of $600,000.00 principal and accrued interest of $2,292.15
for a total of $602,292.15; (2) Assigned to Gulfport 15,000,000 shares of common
stock in ARXA at $.20 per share or a total of $3,000,000.00 as agreed to in
Agreement with Gulfport dated April 28, 1999; and (3) Assigned to Gulfport
8,598,482 shares of ARXA based upon $1.16 per share which was the closing stock
price of ARXA on May 25, 1999, or a total of $9,974,239.85.
ARXA, after completing the acquisition of the twenty-five percent working
interest in the Pelahatchie field, has issued and outstanding stock of
34,839,804 shares. After the acquisition, Gulfport and its investors, own
approximately 29,598,482 shares of common stock in ARXA, which represents eighty
five percent (85%) of the issued and outstanding common stock of ARXA.
On November 1, 1999, ARXA announced that the Hawkins No. 1 Well in Matagorda
County, Texas tested 1.423 million cubic feet of gas per day with a flowing
tubing pressure of 1885 pounds through a 11/64" choke through perforations 6543
feet to 6553 feet. Calculated absolute open flow was 3.538 million cubic feet of
gas per day. The well will be produced through a 10/64" choke. This is the
second well on this Miocene structure, which is located in Matagorda County,
Texas. At least three additional wells are planned. ARXA has a carried 25%
interest in this project after pay out.
REVERSE STOCK SPLIT
Effective October 26, 1998, ARXA 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 fractional shares rounded up to a full
share. Accordingly, the financial statements have been restated to reflect this
reverse stock split for all periods presented.
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.
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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. Moose Oil and Gas, the operator, using 3D
seismic data are developing the area. The productive formations are the Miocene
and Frio. The prospective formations include Yegua, Cook Mountain and Wilcox.
The Company's interest is currently for sale.
West Hackberry - The Company has a 10% interest in two leases totaling 152 acres
in Cameron Parish, Louisiana. Two wells are completed, shut-in and waiting on
gas pipeline connections. Two other wells are being evaluated for remedial
work. The estimated date of completion of the gas gathering pipeline and
installation of surface equipment is February 1, 2000. At that date the wells
will be put on production.
Pelahatchie - On May 25, 1999, ARXA acquired a twenty-five percent (25%) working
interest from Gulfport in certain proved undeveloped, non-producing oil and gas
reserves in the Pelahatchie Field, Rankin County, State of Mississippi. The
acquisition of the oil and gas properties by ARXA was based on a petroleum
engineer's appraisal report on the Pelahatchie Field, which estimated proved
undeveloped, non-producing oil and gas reserves for three development wells. As
of October 31, 1999, the estimated reserves for the three development wells is
12.5 Million barrels of oil and 25 BCF of gas to 100%. The acquisition price
was based on proved undeveloped, non-producing oil and gas reserves discounted
at twenty-five percent. The total dollar value agreed to by ARXA and Gulfport
as to a twenty-five working interest in three development wells in the
Pelahatchie Field was $13,576,532. Under the agreement between ARXA and
Gulfport, ARXA paid for the acquisition of the working interest in the
Pelahatchie Field as follows: (1) Assigned to Gulfport the Promissory note of
Gulfport payable to ARXA in the amount of $600,000.00 principal and accrued
interest of $2,292.12, for a total of $602,292.12; (2) Assigned to Gulfport
15,000,000 shares of common stock in ARXA at $0.20 per share, or a total of
$3,000,000.00 as agreed to in Agreement with Gulfport dated April 28, 1999; and
(3) Assigned to Gulfport 8,598,482 shares of ARXA based on $1.16 per share,
which was the closing stock price of ARXA on May 25, 1999, or a total of
$9,974,239.85.
ARXA, after completing the acquisition of the twenty-five percent working
interest in the Pelahatchie Field, has issued outstanding stock of 34,839,804
shares. After the acquisition, Gulfport and its investors, own approximately
29,598,482 shares of common stock of ARXA, which represents eighty-five percent
(85%) of the issued and outstanding common stock of ARXA.
Lewis Ranch - During January 1999, the Lewis No. 5, located in Matagorda County,
Texas, ceased to produce gas in paying quantities from the 6,600-Foot Miocene
Sand due to large amounts of water and sand production. As a result of the non-
production, the landowner, through its attorney proceeded to cancel the oil and
gas lease. All proved producing reserves were written off. During June 1999,
Gulfport leased the Lewis Ranch (now known as the Hawkins Ranch), plugged-off
the 6,600-Foot formation and completed in Miocene Sands from 6,000 to 6,200 Feet
in the Lewis No. 5. The well is currently producing 983 MCF of gas per day.
Hawkins Ranch - On November 1, 1999, ARXA announced that a newly drilled well,
the Hawkins Ranch No. 1, in Matagorda County, Texas, tested at a daily rate of
1,423 MCF of gas with a flowing tubing pressure of 1,885 psig through a
11/64-inch choke from perforations 6,543 to 6,553 feet. At least three
additional wells are planned to be drilled on the Lewis / Hawkins Ranch in 2000.
ARXA has a twenty-five percent working interest back in after payout of the
Lewis / Hawkins Ranch Project costs.
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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, 1998 and 1999. Hensley Consultants,
Inc. prepared the reserve data and the present values for the Pelahatchie Field
project only. Additional production history and engineering studies are
required to appraise ARXA's interests in other projects. 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.
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Proved Reserves
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(Dollars in thousands)
October 31, 1997
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Developed Undeveloped Total
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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
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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
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Proved Reserves
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(Dollars in thousands)
October 31, 1998
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Developed Undeveloped Total
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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 $11.50 per Bbl of oil and $1.73 per Mcf of gas
as of October 31, 1998
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Proved Reserves
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(Dollars in thousands)
October 31, 1999
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Developed Undeveloped Total
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Oil and condensate (MBbls) - 2,415,015 2,415,015
Gas (MMcf) - 4,830,030 4,830,030
Present value of estimated future
net revenues before income taxes
discounted at 10% $ - $26,259,601 $26,259,601
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The present value of estimated future pretax net cash flows were determined by
using current average prices of $20.41 per Bbl of oil and $2.90 per Mcf of gas
as of October 31, 1999. 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.
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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 Hensley
Consultants, 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.
Volumes, Prices and Oil and Gas Operating Expense
The following table sets forth certain information regarding the production
volumes of, average sales prices received for and average production costs
associated with the Company's sales of oil and gas for the periods indicated.
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Ten Months Ended Year Ended Year Ended
October 31, 1997 October 31, 1998 October 31, 1999
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Production:
Oil and Condensate (Bbls) 2,000 2,490 768
Gas (Mcf) 172,000 157,379 47
Total Mcfe 184,000 172,321 4,655
Average Sales Price:
Oil and condensate ($ per Bbl) $ 23.33 $ 12.86 $20.00
Gas ($ per Mcf) $ 2.50 $ 2.74 $ 2.67
Average oil and gas operating expense ($ per Mcfe) (1) $ 0.80 $ 1.22 $ 1.22
</TABLE>
(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.
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October 31, 1997 October 31, 1998 October 31, 1999
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Gross Wells Net Wells Gross Wells Net Wells Gross Wells Net Wells
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Flowella Field 3 1.28 0 0 0 0
W.E. Colson Field 3 0.49 0 0 0 0
West Sandy Creek 11 0.22 0 0 0 0
West Lavaca River 6 0.12 20 0.32 20 0.32
Lewis Ranch 0 0 2 2 2 2
London Gin 0 0 1 1 0 0
Hackberry 0 0 4 0.4 4 0.4
South Hope 0 0 1 0.5 0 0
Total 23 2.11 28 4.22 26 2.72
</TABLE>
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Employees
The Company currently employs four full time salaried persons. Mr. Norris R.
Harris, Mr. Jack R. Durland Jr. and Mr. Jonathan G. Harris work full-time.
There is also one full-time staff person in corporate administration and
support.
Office Facilities
The Company currently offices with Gulfport Oil & Gas, Inc. The Company has no
other office facilities at this time.
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
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production pumping, storage, deliveries, and equipment maintenance will be
conducted by Company employees or non-affiliated contractors, depending on which
approach is more efficient.
Acquisition of Undeveloped Prospects
Management will select undeveloped prospects which will be acquired by the
Company at the lesser of cost or fair market value. Depending on its
attributes, a prospect may be characterized as an "exploratory" or "development"
site. Generally speaking, exploratory drilling involves the conduct of drilling
operations in search of a new and yet undiscovered pool of oil and gas, whereas
development drilling involves drilling to a known producing formation in a
previously discovered field.
The prospects will be acquired pursuant to arrangements whereby the Company will
purchase between 1 percent and 100 percent of the working interests, subject to
landowners' royalty interests and other royalty interests payable to
unaffiliated third parties. The Company will generally acquire less than 100
percent of the working interests in each prospect in which it will participate.
The actual number, identity and percentage of working interests and leases or
other interests in prospects to be acquired by the Company will depend upon,
among other things, the total amount of money raised by the Company and the
borrowing of funds, the latest geological and geophysical data, potential title
or spacing problems, availability and price of drilling services, tubular goods
and services, approvals by federal and state departments or agencies, agreements
with other working interests owners in the prospects, farm-ins, and continuing
review of other prospects that may be available.
Drilling and Completion Phase
It is anticipated that most wells will be drilled to the depth determined
appropriate to target oil or gas production. Some shallower or deeper
development prospects may be drilled. Thereafter, the Company will complete
each well deemed by the Company to be capable of production of oil or gas in
commercial quantities.
In the event the funds allocated for exploratory wells are not used to drill
such wells, such funds together with unexpended completion funds will be used to
drill additional development wells, acquire seismic date to identify future well
locations, or lease relevant exploration or development areas.
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.
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Sale of Production
The Company will attempt to sell the oil and gas produced from its prospects on
a competitive basis at the best available terms and prices. Management will not
make any commitment of future production that does not primarily benefit the
Company. Generally, purchase contracts for the sale of oil can be canceled on
thirty days' notice, whereas purchase contracts for the sale of natural gas
usually have a term of a number of years and may require the dedication of the
gas from a well for the life of its reserves.
The Company will sell natural gas discovered by it at negotiated prices based
upon a number of factors, such as the quality of the gas, well pressure,
estimated reserves, prevailing supply conditions and any applicable price
regulations promulgated by the Federal Energy Regulatory Commission. The
Company expects to sell oil discovered and sold by it at free market prices.
Joint Operating Agreements
The Company has entered into joint operating agreements with unaffiliated third
parties as operators. A representative form of an operating agreement, a copy
of which will be furnished upon request, provides that the operator will conduct
and direct and have full control of all operations on the Company's prospects.
The operator will have no liability as operator to the Company for losses
sustained or liabilities incurred, except as may result from the operator's
negligence or misconduct.
The Company pays a proportionate share of lease, development, and operating
costs, and is entitled to receive a proportionate share of production subject
only to royalties and overriding royalties. The Company is responsible only for
its obligations and is liable only for its proportionate share of the costs of
developing and operating the prospects.
An operator's duties will typically include testing formations during drilling,
and completing the wells by installing such surface and well equipment,
gathering pipelines, heaters, separators, etc., as are necessary and normal in
the area in which a prospect is located. The Company pays the drilling and
completion costs of the operators as incurred, except that the Company is
permitted to make advance payments to the operators where necessary to secure
tax benefits of prepaid drilling costs and there is a valid business reason. In
order to comply with conditions to securing tax benefits of prepaid drilling
costs, the operator under the terms of an operating agreement will not refund
any portion of amounts paid in the event actual costs are less than amounts
paid, but will apply any such amounts solely for payment of additional drilling
services to the Company. If an operator determines that a well is not likely to
produce oil and/or gas in commercial quantities, the operator will plug and
abandon the well in accordance with applicable regulations.
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.
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.
9
<PAGE>
Instability of Prices of Oil and Gas
Global economic conditions, political conditions, variations in weather
conditions, energy conservation, and other factors contribute to unstable
prices. It is not possible to predict if prices will increase or decrease in
the future. An increase in crude prices would have a beneficial effect on the
Company while a decrease in crude prices would adversely affect the Company and
the stockholders. Prices for both oil and gas are likely to remain volatile.
Environmental Regulation
The federal government and various state and local governments have adopted laws
and regulations regarding the control of contamination of the environment,
including, without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act, as amended, the Solid Waste Disposal Act, as
amended, the Clean Air Act, as amended, the Oil Pollution Act and the Clean
Water Act and their state and local counterparts. Although many of these laws
and regulations contain at least partial exemptions for oil and gas exploration
and production activities, they may require the acquisition of a permit by
operators before drilling commences, prohibit drilling activities on certain
lands lying within wilderness areas, require the reduction of the emissions of
wastes or pollutants from such properties or require the remediation of, and/or
impose substantial penalties for, pollution resulting from drilling operations,
particularly operations in offshore waters or on submerged lands. It is always
possible that one or more of the exemptions for oil and gas exploration and
production activities will be eliminated, thereby possibly subjecting the
Company and others in the industry to significantly costlier petroleum and waste
handling and disposal practices.
The Company will own or lease numerous properties which have been used for the
production of oil and gas for many years, and which were previously developed
and operated by persons over whose petroleum and other waste handling and
disposal activities the Company had no control. These handling and disposal
practices may have resulted in contamination of these properties which may
someday require remediation in order to comply with applicable environmental
laws and regulations. Environmental laws and regulations may also increase the
costs of routine drilling and operation of wells. Because these laws and
regulations change frequently, the costs to the Company of compliance with
existing and future environmental regulations cannot be predicted.
ITEM 3. LEGAL PROCEEDINGS
ARXA is not engaged in any pending legal proceedings nor are any of its
properties subject to any legal proceedings except for the following discussion.
ARXA is further not aware of any legal proceedings pending or threatened against
its officers and/or directors in their capacity as corporate officers or
directors of ARXA.
On March 18, 1999, Duke Resources Corporation a company owned by John O.
Schofield, founder and former chairman of ARXA filed suit on a promissory note
ARXA issued in settlement of prior litigation as previously discussed in the
Form 10-K for the fiscal period ending October 31, 1997. The lawsuit was filed
in the Superior Court of Vanderburgh County, State of Indiana. Duke Resources
Corporation later obtained a judgment against ARXA on June 2, 1999 for
$79,770.00, prejudgment interest of $2,972.25 plus post judgment interest at the
rate of 8% per diem plus attorney fees in the amount $2,725.00 in costs. ARXA on
or about October 6, 1999, negotiated a settlement of this judgment with Duke
Resources Corporation by payment of $54,800.00 plus issuance of 100,000 shares
of common stock in ARXA which were restricted and unregistered. Release and
satisfaction of judgment was filed in the Vanderburgh Superior Court State of
Indiana, on October 11, 1999. ARXA has no further liability to Duke Resources
Corporation.
On October 15, 1999, Radler Enterprises Texas, Inc., filed suit against ARXA and
Craig Ford in the 55th Judicial District for the District Court of Harris
County, State of Texas. The lawsuit was on a Lease Agreement executed on August
19, 1998 by Craig Ford as President of ARXA. The Lease Agreement was not
approved by the Board of Directors of ARXA. The Plaintiff Radler is suing for
actual damages under the lease plus attorney fees, interest, and costs. ARXA
intends to vigorously defend this lawsuit on its merits and will not be
representing Mr. Ford. At this time ARXA is in the discovery phase of this
lawsuit. The answer date for ARXA in this case would be November 22, 1999.
On February 1, 1999, ARXA filed a lawsuit against OPMI Operating Company in the
55th Judicial District for the District Court for Harris County, State of Texas.
ARXA alleged that OPMI misrepresented the status, condition, and ownership of
certain oil and gas leases and misapplied funds paid by ARXA to the acquisition
of other properties. ARXA is seeking
10
<PAGE>
recovery of $60,000.00 plus attorney fees and court cost. At this time, ARXA is
finalizing settlement of this case with OPMI Operating Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the first fiscal
year ended October 31, 1999, 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, 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 0.50
Second Quarter 0.58 0.27
Third Quarter 1.38 0.27
Fourth Quarter (2) 0.67 0.12
Fourth Quarter (3) 0.8125 0.25
November 1, 1998 to October 31, 1999
First Quarter 0.69 0.20
Second Quarter 0.38 0.27
Third Quarter 1.47 1.16
Fourth Quarter 1.20 0.95
</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 January 18, 2000 there were approximately 1,192 holders of record.
WARRANTS
None of the warrant of ARXA are traded in any public trading market.
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<PAGE>
DIVIDENDS
ARXA has not had any earnings and does not intend to pay cash dividends on its
common stock. The current policy of the board of directions of ARXA is to
retain earnings, if any, to provide funds for its operations and expansion of
its business. The board of directors will review this policy from time to time
in light of the earnings and financial position of ARXA.
SALE BY THE COMPANY OF UNREGISTERED SECURITIES
During the period ending October 31, 1999, ARXA 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
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
</TABLE>
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.
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:
<TABLE>
<CAPTION>
Principal Shares
--------- -------
<S> <C> <C>
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
</TABLE>
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<PAGE>
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.
6. On May 7, 1999, ARXA sold 6,000,000 shares of its Common Stock to Gulfport
Oil & Gas Inc. ("Gulfport"), a Delaware Corporation. Gulfport is a private
company, and on May 7, 1999, was the owner of approximately fifty-three and four
tenths percent (53.4%) of the outstanding 11,241,322 shares of ARXA and was
controlling shareholder of ARXA. Norris R. Harris is Chairman and CEO of
Gulfport Oil & Gas, Inc. Phoenix granted to Norris R. Harris, President of
Gulfport, an irrevocable stock proxy on 2,557,262 shares of common stock of ARXA
owned by Phoenix. The stock proxy is for a period of one year from May 5, 1999.
On May 5, 1999, Phoenix owned approximately twenty-three percent (23%) of the
common stock of ARXA.
7. On May 25, 1999, ARXA acquired from Gulfport Oil & Gas, Inc. a twenty-five
percent (25%) working interest in certain proved undeveloped, non-producing oil
and gas reserves in the Pelahatchie Field, Rankin County, State of Mississippi.
The acquisition of the oil and gas properties by ARXA was based upon a petroleum
engineers appraisal report on the Pelahatchie Field which estimated proved
undeveloped oil and gas reserves for three development wells. The acquisition
by ARXA from Gulfport was based upon proved undeveloped non-producing oil and
gas reserves discounted at twenty-five percent (25%). The total dollar value
agreed to by ARXA and Gulfport as to a twenty-five percent (25%) working
interest in three development wells in the Pelahatchie Field was $13,576,532.
Under the agreement between ARXA and Gulfport, ARXA paid for the acquisition of
the working interest in the Pelahatchie Field to Gulfport as follows: (1)
Assigned to Gulfport the Promissory Note of Gulfport payable to ARXA in the
amount of $600,000.00 principal and accrued interest of $2,292.15 for a total of
$602,292.15; (2) Assigned to Gulfport 15,000,000 shares of common stock in ARXA
at $.20 per share or a total of $3,000,000.00 as agreed to in Agreement with
Gulfport dated April 28, 1999; and (3) Assigned to Gulfport 8,598,482 shares of
ARXA based upon $1.16 per share which was the closing stock price of ARXA on May
25, 1999, or a total of $9,974,239.85.
The issuance by ARXA to Gulfport of the above described common stock shares is
considered by ARXA to be exempt under Section 4(2) of the Securities Act.
8. Between May 25, 1999 and October 31, 1999 transferred 5,216,625 shares of its
ARXA common stock for the benefit of others, none of which retain more than five
percent (5%) of ARXA's Common stock. As of October 31, 1999, Gulfport Oil &
Gas, Inc. owned 24,381,857 shares of ARXA's Common stock or sixty-eight percent
(68%).
9. On June 2, 1999, Duke Resources Corporation, in a lawsuit filed against ARXA
in the Superior Court of Vanderburg County, State of Indiana, obtained a
judgment against ARXA for $79,770.00, prejudgment interest in the amount of
2972.25, postjudgment interest at eight percent (8%) per annum, attorney fees of
2725.00, and court costs. ARXA on or about October 6, 1999, settled this
lawsuit by payment of $54,800.00 plus issuance of 100,000 shares of common stock
in ARXA which were unregistered. Duke Resources Corporation executed Release
and Satisfaction of Judgment of the above described judgment which was filed on
October 11, 1999.
The issuance of the common stock in ARXA is considered by ARXA to be exempt
under Section 4(2) of the Securities Act.
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, 1999 and the related consolidated statements of operations for
14
<PAGE>
the year ended October 31, 1999. "The Company had a net loss of $1,150,467 and
negative cash flow from operations of $672,277 for the year ended October 31,
1999 and had an accumulated deficit of $4,345,483 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, 1999 were $137,788, which is
a $326,087 decrease from $463,875 for the year ended October 31, 1998 and is
primarily attributed to normal production decline and the write-off of
unprofitable oil and gas leases.
Lease operating expense for the year ended October 31, 1999 was $155,096, which
is a $44,619 decrease from the $199,715 from the year ended October 31, 1998.
The decrease is primarily due to the write-off of unproductive property.
General and administrative costs for year ended October 31, 1999 were
$1,094,725, which is a $668,325 decrease from the $1,763,050 for the year ended
October 31, 1998. The decrease is solely attributable to the Company's efforts
to reduce overhead, cut staff, and write-off unproductive properties.
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, 1999 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, 1999 was a deficit
of $672,277 as compared to a deficit of $742,455 for the year ended October 31,
1998.
The primary source of cash equivalents for the year ended October 31, 1999 was
from issuance of common stock for oil and gas 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.
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 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.
15
<PAGE>
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 remediation 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.
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-2.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The auditor for ARXA International Energy, Inc. for the fiscal year ended
January 31, 1997 was McManus & Co., P.C., CPA's. The auditor for Phoenix Energy
Group, Inc. ("Phoenix") was Hein + Associates L.L.P. As a result of the
"reverse acquisition" of the Company by Phoenix on October 27, 1997, the
auditors of Phoenix, Hein + Associates, L.L.P., assumed responsibility for the
consolidated audit as of October 31, 1997. There were no disagreements with
respect to accounting principles or practices, financial statement disclosure,
or auditing scope or procedure with the Company's former auditors, McManus &
Co., P.C., CPA's, nor for either of the past two fiscal years was there an
adverse opinion, disclaimer of opinion or modification.
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
October 31, 1999 was Gibbons, Gibbons & Buck, P.C.
16
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Norris R. Harris, age 66, has been the President , CEO and a Director of
Gulfport Oil & Gas Inc., a private oil and gas company that he formed in
January, 1999. He had been an independent oil and gas operator and consultant
to various independent oil and gas companies from 1993 to January 1999. Mr.
Harris was Founder and President of Centex Oil and Gas Inc., (Name changed to
Cenergy) which was listed on the NYSE and was Founder and President of Basin
Exploration Inc., a subsidiary of Basin Petroleum Corp., (American Stock
Exchange). Mr. Harris previously worked with Mobil Oil Corp., in the
international division and worked in the North Sea, Libya, Turkey, the Hague,
Austria, Nigeria and in Mobil Exploration's headquarters in Dallas, Texas where
he worked on Africa, Southeast Asia and Latin America exploration projects. He
is the father of Jonathan G. Harris.
Jack R. Durland, Jr., age 61, has been a Director and Vice-President- Chief
Financial Officer of Gulfport Oil & Gas Inc. since January 1999. He was a
partner in the law firm of Durland & Durland in Oklahoma City, Oklahoma from
1990 to 1998. From 1962 to 1989, Mr. Durland was a partner, officer and
director in the law firm of Crowe & Dunlevy, a professional corporation, in
Oklahoma City, Oklahoma. He has been admitted to practice before several Courts
in the United States including the United States Supreme Court and Federal
Courts in California, Oklahoma, and Texas. Mr. Durland is a graduate of the
University of Oklahoma with a BBA degree in 1960, and a LLB degree in 1962.
Jonathan G. Harris, age 29, has been a Director and Vice-President-Geology of
Gulfport Oil & Gas Inc. since January 1999. He had been an independent oil and
gas geological consultant to various energy and environmental companies from
July 1996 to 1998. Mr. Harris was a consulting geologist for Basin Industries
Inc. and a field engineer for Sperry-Sun Drilling Services in the period from
1988 to June 1996. Over his career he has accumulated specific geological
experience in the following areas: Florida, Louisiana, Mississippi, Texas,
Puerto Rico, the Bahamas, and Turkey. He was graduated from Mississippi State
University with a BSc degree in 1992 and a MSc degree in 1995. Mr. Harris is a
Registered Professional Geologist in Mississippi and a member of the American
Association of Petroleum Geologists and National Speleological Society. He is
the son of Norris R. Harris.
James David Risk, age 50, has worked as a developer, owning and operating a
family construction company and is President of Risk Construction Company Inc.
of Boone, North Carolina since 1968. From 1995 to present, Mr. Risk has been
engaged as a working investor in numerous business ventures and as a
construction consultant on several real estate development projects in the
southeastern United States and abroad. In the years from 1981 to 1995, Mr.
Risk's company developed several large single and multi-family projects and
several large commercial business parks. He is the father of James Jeffery
Risk.
James Jeffrey Risk, age 30, has been President of RDI (Risk Design
International), an international marketing, advertising and design firm, since
1992. Mr. Risk has also been CFO of Wolf Laural Resort since 1998 and works as a
marketing and financial consultant for several corporations. From 1997 to the
present, he has been engaged as a working investor in numerous business ventures
and as a financial advisor on several real estate development projects in the
southeastern United States and abroad. He is a graduate of Appalachian State
University with a BS degree in 1992. He is the son of James David Risk.
All of the following Officers and Directors resigned effective May 7, 1999 when
a majority of the company's outstanding shares of common stock was acquired by
Gulfport Oil & Gas, Inc.
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
17
<PAGE>
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.
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.
18
<PAGE>
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 10/31/99 35,000 0 0 0
Chief Executive Officer
Dennis P. McGrath 10/31/99 41,050 0 0 0
VP, Controller
Larry Keeler 10/31/99 29,120 0 0 0
Director
William J. Bippus 10/31/99 35,000 0 0 0
Director
Norris R. Harris 10/31/99 0 0 0 0
Chairman - Chief Executive Officer(1)
Jack R. Durland, Jr. 10/31/99 80,000 0 0 0
Director - Vice President and CFO
Jonathan Harris
Director - Vice President Geology 10/31/99 41,465 0 0 0
James David Risk 10/31/99 0 0 0 0
Director
James Jeffrey Risk 10/31/99 0 0 0 0
Director
</TABLE>
__________________________
(1) Mr. Harris replaced Mr. Ford on May 5, 1999.
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.
Other Compensation
There are no Stock Appreciation Rights (SARs) held by any executive officer or
any other person. There is no Deferred Compensation owing to any executive
officer.
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
19
<PAGE>
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, 2000 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.
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, 2000 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>
Gulfport Oil & Gas, Inc. 24,381,857 0.70%
2301 14th Street, Suite 404
Gulfport, MS 39501
Phoenix Energy Group, Inc. -0-(3)(4) 0.00%
530 Wells Fargo Drive, Suite 310
Houston, TX 77090
All officers and directors
as a group (5 persons) -0- 0.00%
</TABLE>
20
<PAGE>
(1) Unless otherwise indicated below, all shares are owned legally (of record)
and beneficially.
(2) Based upon 35,939,804 shares issued and outstanding on January 18, 2000.
(3) On May 7, 1999, ARXA sold 6,000,000 shares of its Common Stock to Gulfport
Oil & Gas Inc. ("Gulfport"), a Delaware Corporation. Gulfport is a private
company, and on May 7, 1999, was the owner of approximately fifty-three and four
tenths percent (53.4%) of the outstanding 11,241,322 shares of ARXA and was
controlling shareholder of ARXA. Norris R. Harris is Chairman and CEO of
Gulfport Oil & Gas, Inc. Phoenix granted to Norris R. Harris, President of
Gulfport, an irrevocable stock proxy on 2,557,262 shares of common stock of ARXA
owned by Phoenix. The stock proxy is for a period of one year from May 5, 1999.
On May 5, 1999, Phoenix owned approximately twenty-three percent (23%) of the
common stock of ARXA.
(4) After this acquisition, Phoenix Energy Group, Inc., distributed its shares
of ARXA to its shareholders in exchange for phoenix stock. None of the
beneficial owners hold more than five percent (5%) of ARXA's Common stock.
(B) The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of January 18, 2000 by all persons
who were previously Directors or Executive Officers of the Company during the
fiscal year ended October 31, 1999:
<TABLE>
<CAPTION>
Amount and Nature
Name and address of of Beneficial Percent
Beneficial Owner Ownership(1) Class(2)
- ----------------------- ------------------- -------------
<S> <C> <C>
William J. Bippus 322,419(4) 0.0089%
10 Stone Spring Circle
The Woodlands, TX 77381
Gregory A. Stephens 146,202(5) 0.0040%
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) 0.0020%
2204 Riverside Dr.
Harlingen, TX 78550
Larry Keeler 81,331(6) 0.0022%
634 Hickory Ridge
Shenandoah, TX 77381
Dennis P. McGrath 0(6) 0.0%
714 Lodgehill
Houston, TX 77090
</TABLE>
(1) Unless otherwise indicated below, all shares are owned legally (of record)
and beneficially.
(2) Based upon 35,939,804 shares issued and outstanding on January 18, 2000.
(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>
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 27, 1998 the 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: To date, no options have been exercised.
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
On July 28, 1998 the Company entered into a Business, Accounting, and Financial
Consulting Agreement with Larry Keeler, a director. On that same date, as
partial compensation under the Agreement, the Company issued 80,000 shares to
Mr. Keeler, pursuant to a registration on Form S-8.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 27 -- Financial Data Schedule
(b) REPORTS ON FORM 8-K
22
<PAGE>
On November 7, 1997 the Company filed Form 8-K to report the acquisition of
assets from Phoenix Energy Group, Inc.
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/ Norris R. Harris
____________________________________
Norris R. Harris, President and
Chief Executive Officer
Dated: February 8, 2000
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/ Norris R. Harris President/Chief Executive Officer February 8, 2000
- -------------------------- and Director
Norris R. Harris
/s/ Jack R. Durland, Jr. VP & Chief Financial Officer February 8, 2000
- -------------------------- and Director
Jack R. Durland, Jr.
/s/ Jonathan G. Harris VP & Director February 8, 2000
- --------------------------
Jonathan G. Harris
</TABLE>
23
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
FINANCIAL STATEMENT AND SUPPLEMENTARY INFORMATION
YEAR ENDED OCTOBER 31, 1999 AND 1998
F-1
<PAGE>
ARXA INTERNATIONAL ENERGY, INC & SUBSIDIARY.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARXA INTERNATIONAL ENERGY, INC.
FINANCIAL STATEMENTS:
Independent Auditor's Report................................................ F-3
Consolidated Balance Sheet for the Years Ended October 31, 1998 and 1999.... F-4
Consolidated Statements of Operations:
(1) for the Ten Month Period Ended October 31, 1997 and
(2) for the Years Ended October 31, 1998 and 1999....................... F-6
Consolidated Statement of Stockholders' Equity:
(1) for the Ten Month Period Ended October 31, 1997 and
(2) for the Years Ended October 31, 1998 and 1999....................... F-7
Consolidated Statements of Cash Flows:
(1) for the Ten Month Period Ended October 31, 1997 and
(2) for the Years Ended October 31, 1998 and 1999....................... F-8
Notes to Consolidated Financial Statements.................................. F-9
Independent Auditors Report on Supplemental Information..................... R-2
Supplemental Oil and Gas Properties and Related Reserves Data (unaudited)... R-3
</TABLE>
F-2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
and Stockholders
ARXA International Energy, Inc.
Gulfport, Mississippi
We have audited the accompanying consolidated balance sheet of ARXA
International Energy, Inc. and subsidiary as of October 31, 1999, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year ended October 31, 1999. 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 audit. The October 31, 1998 financial statements were audited by other
auditors whose report dated December 7, 1998, on those statements included an
explanatory paragraph describing conditions that raised substantial doubt about
the Company's ability to continue as a going concern.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
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, 1999, and the results of their
operations and their cash flows for the year ended October 31, 1999 in
conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements the Company had
a net loss of $1,150,467 and negative cash flows from operations of $672,277 for
the year ended October 31, 1999 and had an accumulated deficit of $4,345,483 at
that date. 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 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.
Gibbons, Gibbons & Buck, P. C.
February 5, 2000
/s/ H. E. Gibbons
- ------------------------------------
H. E. Gibbons
F-3
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
CONSOLIDATED BALANCE SHEET
OCTOBER 31, 1999
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 143,493 $ 167,105
Accounts receivable, net of allowance for doubtful accounts - 119,430
----------- ----------
Total current assets 143,493 286,535
PROPERTY AND EQUIPMENT, (full cost method for oil and gas
properties), net of accumulated depletion, depreciation,
amortization and provision for impairment 11,606,872 1,708,589
OTHER ASSETS 51,296 63,189
----------- ----------
$11,801,661 $2,058,313
=========== ==========
</TABLE>
See accompanying notes to these consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
CURRENT LIABILITIES
Notes payable to stockholders - $ 157,055
Accounts payable $ 3,860 25,904
Other current liabilities 11,215 48,750
----------- -----------
Total current liabilities 15,075 231,709
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; 34,939,804 shares issued and outstanding 34,940 4,654
Additional paid-in capital 16,097,129 5,296,325
Unearned stock based compensation of consultants
and others - (279,359)
Accumulated deficit (4,345,483) (3,195,016)
----------- -----------
Total stockholders' equity 11,786,586 1,826,604
----------- -----------
$11,801,661 $ 2,058,313
=========== ===========
</TABLE>
Approved by the Directors:
/s/ Norris R. Harris
________________________________________ 2-8-00 Director
Norris R. Harris
/s/ Jack R. Durland, Jr.
________________________________________ 2-8-00 Director
Jack R. Durland, Jr.
/s/ Jonathan G. Harris
________________________________________ 2-8-00 Director
Jonathan G. Harris
See accompanying notes to these consolidated financial statements.
F-5
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Ten
Month Period Ended For the Year Ended For the Year Ended
October 31, October 31, October 31,
1997 1998 1999
-------------------- ------------------- -------------------
<S> <C> <C> <C>
OIL AND GAS REVENUES $ 485,552 $ 463,875 $ 137,788
COST AND EXPENSES:
Lease operatring expenses 137,548 199,715 155,096
Severance taxes 11,590 10,984 6,172
Depletion, Depreciation,
amortization and provision for
impairment 808,370 157,762 74,719
General and administrative 1,174,543 1,763,050 1,094,725
----------- ----------- -----------
Total cost and expenses 1,932,051 2,131,511 1,330,712
----------- ----------- -----------
LOSS FROM OPERATIONS (1,446,499) (1,667,636) (1,192,924)
OTHER INCOME (EXPENSES):
Interest income 12,930 6,010 2,002
Interest expense (4,566) (6,020) 281
Equity and loss of oil and
gas venture (267,413) (93,296) (3,146)
Other (8,674) 12,643 43,320
----------- ----------- -----------
(267,723) (80,663) 42,457
----------- ----------- -----------
LOSS BEFORE INCOME TAXES (1,714,222) (1,748,299) (1,150,467)
INCOME TAX BENEFIT, net 399,638 - -
----------- ----------- -----------
NET LOSS $(1,314,584) $(1,748,299) $(1,150,467)
=========== =========== ===========
NET LOSS PER COMMON
AND COMMON EQUIVALENT SHARE- $(0.69) $(0.41) $(0.06)
BASIC AND DILUTED
Weighted Average Common and Common
Equivalent Shares 1,911,346 4,219,770 19,461,492
</TABLE>
See accompanying notes to these consolidated financial statements.
F-6
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM DECEMBER 31, 1996 TO OCTOBER 31, 1999
<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, 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 conultants (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 4,854 5,296,325 (279,359) (3,195,016) 1,826,604
Issuance of common stock
for consulting services
previously earned - - - 279,359 - 279,359
Issuance of common stock
for consulting services 300,000 300 149,700 - - 150,000
Conversion of note payable
into common stock 278,004 278 77,077 - - 77,355
Issuance of common stock
for consulting services 9,400 9 4,515 - - 4,524
Issuance of common stock
to Gulfport Oil & Gas 6,000,000 6,000 594,000 - - 600,000
Issuance of common stock
for oil and gas properties 15,000,000 15,000 2,985,000 - - 3,000,000
Issuance of common stock
for oil and gas properties 8,598,482 8,598 6,965,642 - - 6,974,239
Issuance of common stock
in lieu of current liability 100,000 100 24,870 - - 24,970
Rounding - 1 - - - 2
Net loss - - - - (1,150,467) (1,150,467)
---------- ------ ---------- --------- ---------- ----------
BALANCES, October 31, 1999 34,939,804 34,940 16,097,129 - (4,345,483) 11,786,586
</TABLE>
See accompanying notes to these consolidated financial statements.
F-7
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
For the Ten
Month Period Ended For the Year Ended For the Year Ended
October 31, October 31, October 31,
1997 1998 1999
------------------ ----------------- -------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (1,314,584) (1,748,299) (1,150,467)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depletion, depreciation, amortization and provision
for impairment 608,370 157,762 74,719
Deferred tax benefit (324,440) - -
Equity in loss of oil and gas venture 267,413 93,296 -
Issuance of stock for compensation 378,930 621,641 433,883
Issuance of stock for suit settlement (102,325)
Changes in operating assets and liabilities:
Accounts receivable 91,767 131,903 119,430
Income tax receivable (70,831) 70,831 -
Other current assets 9,587 342 -
Accounts payable (14,439) 97,350 (22,044)
Other current liabilities (10,738) (161,925) (37,535)
Accrued income taxas (63,801) - -
Other, net (11,397) (5,356) 12,062
---------- ---------- ----------
Net cash used in operating activites (454,163) (742,455) (672,277)
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchase) Sale of oil and gas property held for sale (466,343) 466,343 -
Additions to office equipment (95,778) (22,895) (16,797)
Additions to oil and gas property (196,250) (427,045) -
Purchase of oil and gas property - (153,600) (9,983,532)
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 - 878,142 -
Purchase price adjustments on oil and gas property
acquisition 18,486 - -
Purchase of other assets (1,135) - -
---------- ---------- ----------
Net cash provided by (used in) investing activities (990,075) 647,649 (10,000,329)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stockholder notes - 134,028 -
Payment of stockholder notes (61,650) (25,000) (157,055)
Sales of common stock 1,240,560 - 10,806,049
---------- ---------- ----------
Net cash devided by financing activites 1,178,910 109,028 10,648,994
---------- ---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (265,328) 14,222 (23,612)
CASH AND CASH EQUIVALENTS, beginning of period 418,211 152,883 167,105
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of period 152,883 167,105 143,493
========== ========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid 70,831 - -
========== ========== ==========
Interest paid 6,885 6,020 -
========== ========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURES OF NON CASH
TRANSACTION:
Issuance of stock for oil and gas properties, net of
deferred taxes 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-8
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1999 and 1998
NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization - ARXA International Energy, Inc. ("ARXA" or "the Company"), was
incorporated in Delaware and has 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.
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 fractional
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.
Oil and Gas Property Held for Sale - Oil and gas property held for sale is
carried at the lower of cost or market.
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 $.66 for the year ended
October 31, 1998 and $.64 for the year ended October 31, 1999.
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.
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.
F-9
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
October 31, 1999 and 1998
NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
The Company's financial statements are based on a number of significant
estimates including oil and gas reserve quantities which are the basis for the
calculation of depreciation, depletion and impairment of oil and gas properties.
The Company's reserve estimates are determined by an independent petroleum
engineering firm. However, management emphasizes that reserve estimates are
inherently imprecise and that estimates of more recent discoveries and reserves
associated with non-producing properties are more imprecise than those for
producing properties with long production histories. At 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, 1999.
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.
F-10
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
October 31, 1999 and 1998
NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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 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 encompassed by these financial statements.
NOTE B - 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
$1,150,467 and negative cash flow from operations of $672,277 for the year ended
October 31, 1999 and had an accumulated deficit of $4,345,483 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.
NOTE C - ACCOUNTS RECEIVABLE
Accounts receivable at October 31, 1998 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. There were no
receivables at October 31, 1999.
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment at October 31, consisted of the following:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Oil and gas properties $12,410,755 $2,420,456
Other property and equipment 142,504 173,020
----------- ----------
12,553,259 2,593,476
Less accumulated depletion, depreciation, amortization
and provision for impairment (946,387) (884,887)
----------- ----------
$11,606,872 $1,708,589
=========== ==========
</TABLE>
F-11
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1999 and 1998
NOTE - E OTHER ASSETS
Other non-current assets at October 31, 1999 consisted primarily of an
indemnification fund of $50,000. The indemnity fund, was set up for the benefit
of the liquidating agent for Prospector 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.
NOTE F - 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. The note automatically converted into
Arxa's common stock during the year ended October 31, 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 was automatically extended until March 12, 1999. The note was settled
by ARXA by payment of $54,800 and issuance of 100,000 shares of restricted stock
to Duke Resources Corporation.
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.
NOTE G - INCOME TAXES
The Company had net operating loss carryforwards (NOL's) for income tax
reporting purposes of approximately $2,488,871 at October 31, 1999. If not
utilized, these NOL's will expire in twenty years.
NOTE H - 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 canceled the lease during the year ended
October 31, 1999 and has retained an attorney to represent the Company.
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 required the Company to pay a
maximum of $7,160 and a minimum of $4,160 per month.
F-12
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
October 31, 1999 and 1998
NOTE H - COMMITMENTS AND CONTINGENCIES - CONTINUED
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 sought
to enjoin Mr. Koepke from contacting shareholders. Mr. Koepke 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 case was settled
during the year ended October 31, 1999.
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.
NOTE I - YEAR 2000
The Company addressed 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.
NOTE J - STOCKHOLDERS' EQUITY
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.
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.
F-13
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1999 and 1998
NOTE J - STOCKHOLDERS' EQUITY - CONTINUED
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.
The Company issued stock to consultants during the year ended October 31, 1999
in exchange for their consulting services. The value of their services was
$154,524. They were issued 309,400 shares of Company common stock.
Gulfport Oil and Gas, Inc. received 23,598,482 shares of common stock in
exchange for oil and gas leases in Pelahatchie valued at $9,974,240 based on an
independent appraisers report.
NOTE K - 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, 1999, no options had been granted under the Plan.
F-14
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1999 and 1998
NOTE K - STOCK OPTION PLAN - CONTINUED
With respect to incentive stock options, no option may be granted more than ten
years after the effective date of the stock option plan or exercised more than
ten years after the date of grant (five years if the optionee owns more than 10%
of the common stock of the Company at the date of grant). Additionally, with
regard to incentive stock options, the exercise price of the option may not be
less than 100% of the fair market value of the common stock at the date of grant
(110% if the optionee owns more than 10% of the common stock of the Company).
Subject to certain limited exceptions, options may not be exercised unless, at
the time of exercise, the optionee is in the service of the Company.
Non-qualified options granted under the plan may not have an exercise price 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, 1999.
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>
1999 1998
----------------- -----------------
<S> <C> <C>
Net loss-as reported $(1,150,467) $(1,748,299)
Net loss-Pro forma (2,932,867) (3,530,700)
----------- -----------
Net loss per common share-as reported (.03) (.41)
Net loss per common share-Pro forma (.08) (.84)
</TABLE>
F-15
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1999 and 1998
NOTE K - STOCK OPTION PLAN - CONTINUED
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.
NOTE L - SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash paid during the year for:
Interest paid $ 3,146 $ 6,020
========== ========
Non-cash investing and financing activities:
Issuance of stock for oil and gas properties, net of deferred
taxes $9,974,240 $221,000
========== ========
Conversion of stockholder notes and accrued interest into
common stock $ 157,055 $134,028
========== ========
Issuance of stock in lieu of current liability - $ 87,500
========== ========
Issuance of stock for suit settlement $ (102,325) -
========== ========
</TABLE>
F-16
<PAGE>
SUPPLEMENTARY
INFORMATION
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY INFORMATION
Board of Directors
and Stockholders
ARXA International Energy, Inc.
Gulfport, Mississippi
Our report on our audits of the basic financial statements of ARXA
International, Inc. and subsidiary for October 31, 1999 appears on page F-3.
These audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The statements on R-3 through R-5 are
presented for purpose of additional analysis and is not a required part of the
basic financial statements. Such information has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, is fairly stated in all material respects in relation to the
basic financial statements taken as a whole.
/s/ H. E. Gibbons
- -----------------------------------------------
H. E. Gibbons
GIBBONS, GIBBONS & BUCK, P.C.
S-2
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
SUPPLEMENTAL OIL AND GAS PROPERTIES AND
RELATED RESERVES DATA (UNAUDITED)
October 31, 1999 and 1998
CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED):
An analysis of the capitalized oil and gas property costs and related
accumulated depletion, depreciation and amortization is as follows:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Proved oil and gas properties $12,410,755 $2,420,456
Less accumulated depletion, depreciation, amortization and
provision for impairment (848,629) (815,697)
----------- ----------
Net capitalized costs $11,562,126 $1,604,759
=========== ==========
</TABLE>
COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION, EXPLORATION AND
DEVELOPMENT ACTIVITIES (UNAUDITED):
The following costs were incurred in oil and gas activities as follows:
<TABLE>
<CAPTION>
<S> <C>
Acquisition of proved and unproved properties
during the year ended October 31, 1999 $9,974,240
==========
Exploration or development costs during the
year ended October 31, 1999 $ 221,888
==========
</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.
S-3
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
SUPPLEMENTAL OIL AND GAS PROPERTIES AND
RELATED RESERVES DATA (UNAUDITED)
October 31, 1999 and 1998
PROVED DEVELOPED AND UNDEVELOPED RESERVES (UNAUDITED):
<TABLE>
<CAPTION>
Oil (BBLS) Gas (MMCF)
---------- ----------
<S> <C> <C>
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
Production from wells owned at October 31, 1998 (768) (47)
Purchase of Minerals in place (matches Reserve Report prepared
November 1, 1999) 2,415,015 4,830
--------- ------
PROVED RESERVES, October 31, 1999 2,435,611 7,388
========= ======
</TABLE>
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>
1999 1998
----------------- -----------------
<S> <C> <C>
Future cash inflows $63,297,548 $ 4,747,284
Future production costs (6,640,909) (1,273,024)
Future development costs (4,946,300) (354,000)
Future income taxes (4,273,011) -
----------- -----------
47,437,328 3,120,260
Less 10% annual discount for estimated
timing of cash flows 25,450,738 950,743
----------- -----------
Standardized measure of discounted future net
cash flows $21,986,590 $ 2,169,517
=========== ===========
</TABLE>
The Reserve Report was prepared for Pelahatchie property only.
S-4
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
SUPPLEMENTAL OIL AND GAS PROPERTIES AND
RELATED RESERVES DATA (UNAUDITED)
October 31, 1999 and 1998
DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES
(UNAUDITED): continued
In accordance with regulations prescribed by the Securities and Exchange
Commission, future cash flows are computed using year-end costs and prices
adjusted for contractual increases and other fixed and determinable escalations
discounted at 10%. The standardized measure of discounted future cash flows does
not purport to represent the fair market value of the Company's oil and gas
properties. Future income tax expenses are computed using year-end statutory tax
rates (adjusted for permanent differences that relate to existing proved oil and
gas reserves in which the Company has mineral interests).
The principal changes in the standardized measure of discounted future net cash
flows are as follows:
<TABLE>
<S> <C>
BALANCE, October 31, 1997 $ 1,888,222
Purchase of reserve 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
Purchase of reserve 24,010,922
Sales of oil and gas produced, net of production costs (137,788)
Accretion of discount 216,950
Changes in estimated future income taxes (4,273,011)
-----------
BALANCE, October 31, 1999 $21,986,590
===========
</TABLE>
S-5
