ARXA INTERNATIONAL ENERGY INC, 10KSB, 1997-05-19

ARXA INTERNATIONAL ENERGY INC
10KSB, 1997-05-19
AGRICULTURAL PROD-LIVESTOCK & ANIMAL SPECIALTIES

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-KSB
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED] FOR THE FISCAL YEAR ENDED: JANUARY 31, 1997

[ ] 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) (IRS Employer
of incorporation or organization Identification No.)

1331 Lamar, Suite 1375
Houston, Texas 77010
(Address of principal executive offices, including zip code)

(713) 652-2792
(Registrant's telephone number, including area code)
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Securities registered under Section 12(b) of the Exchange Act:

Name of Each Exchange
TITLE OF EACH CLASS ON WHICH REGISTERED

Common Stock, $.001 par value
OTC / ELECTRONIC BULLETIN BOARD

Indicate by check mark whether the registrant (I) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (ii) has been subject to such filing requirements for the
past 90 days. Yes [x ] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]

Issuer's revenues for the year ended January 31, 1997 were $31,023. The
aggregate market value of Common Stock held by non-affiliates of the registrant
at May 14, 1997, based upon the last reported sales prices on OTC Electronic
Bulletin Board, was $14,494,746. As of May 14, 1997, there were 7,481,159 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
disclosed below and elsewhere 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.

Documents Incorporated By Reference:

Items 9,10,11, and 12 of Part III from the Proxy Statement for The Annual
Meeting dated August 1997 to be filed with the SEC within 120 days of the end of
the most recent fiscal year.
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Page 1 of 35
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TABLE OF CONTENTS

TABLE OF CONTENTS.........................................................Page 2

PART I....................................................................Page 4

ITEMS 1 & 2 BUSINESS AND PROPERTIES.....................................Page 4
INTRODUCTION......................................................Page 4
CERTAIN DEFINITIONS...............................................Page 4
BACKGROUND........................................................Page 4
BUSINESS STRATEGY OF THE COMPANY..................................Page 5
DEVELOPMENT ACTIVITIES............................................Page 5
Lavaca County, Texas..............................................Page 5
Cameron Parish, Louisiana.........................................Page 6
Emery County, Utah................................................Page 6
RESERVES..........................................................Page 7
EXPLORATION ACTIVITIES............................................Page 7
Walnut Point Prospect, Michigan...................................Page 7
Whitetail Creek Prospect, North Dakota............................Page 8
Jorf Permit, Tunisia, North Africa................................Page 8
Other International Areas.........................................Page 8
Future Areas......................................................Page 8
CURRENT MARKETS FOR OIL AND GAS...................................Page 8
OTHER BUSINESS MATTERS............................................Page 8
PRICES OF OIL AND GAS QUITE UNSTABLE..............................Page 8
ENVIRONMENTAL HAZARDS AND LIABILITIES.............................Page 9
COMPETITION, MARKETS AND REGULATIONS..............................Page 9
LEASEHOLD DEFECTS.................................................Page 9
HAZARDS AND DELAYS................................................Page 9
DRILLING POLICY..................................................Page 10
ACQUISITION OF UNDEVELOPED PROSPECTS.............................Page 10
DRILLING AND COMPLETION PHASE....................................Page 10
GENERAL..........................................................Page 10
GAS PIPELINE AND TRANSMISSION....................................Page 10
SALE OF PRODUCTION...............................................Page 11
JOINT OPERATING AGREEMENTS.......................................Page 11
PRODUCTION PHASE OF OPERATIONS...................................Page 12
GENERAL..........................................................Page 12
EXPENDITURE OF PRODUCTION REVENUES...............................Page 12
INSURANCE........................................................Page 12
COMPETITION......................................................Page 12
ENVIRONMENTAL REGULATION.........................................Page 12
EMPLOYEES........................................................Page 13
FACILITIES.......................................................Page 13

ITEM 3. LEGAL PROCEEDINGS................................................Page 13

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............Page 13

PART II..................................................................Page 13

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS..........................................................Page 13
Sale by the Company of Unregistered Securities...................Page 14

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........................................Page 14
SELECTED FINANCIAL INFORMATION...................................Page 14
RESULTS OF OPERATIONS............................................Page 15
REVENUES.........................................................Page 15
COST AND EXPENSES................................................Page 15
GENERAL AND ADMINISTRATIVE EXPENSES..............................Page 15
LIQUIDITY AND CAPITAL RESOURCES..................................Page 15

ITEM 7. FINANCIAL STATEMENTS.............................................Page 16

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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.........................................Page 16

PART III.................................................................Page 16

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT................Page 16

ITEM 10. EXECUTIVE COMPENSATION..........................................Page 16

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT..................................................Page 16

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................Page 16

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K................................Page 16

INDEX TO FINANCIAL STATEMENTS.......................................(F1) Page 17

SIGNATURES...............................................................Page 34

EXHIBIT INDEX............................................................Page 35

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PART I

ITEMS 1 & 2. BUSINESS AND PROPERTIES

INTRODUCTION

ARXA International Energy, Inc. ("ARXA" or "Company") is an independent
oil and gas company engaged in the acquisition, exploration, and exploitation of
oil and gas properties located primarily in the United States. Formerly named
Major League Enterprises, Inc., the Company was organized as a Delaware
Corporation in 1995 and commenced operations during 1996, the most significant
of which occurred late in 1996. Since 1995 when the present management group
acquired control, the Company initiated a selective exploration, acquisition and
development drilling program, the most significant of which occurred after
October 1, 1996 and resulted in the acquisition of estimated proved reserves of
143,399 BOE as of January 31, 1997.

The Company's corporate headquarters are located at 1331 Lamar, Suite
1375, Houston, Texas 77010. ARXA International Energy, Inc. and its wholly-owned
subsidiary ARXA USA, Inc. are collectively described herein as the "Company" or
"ARXA".

The Company's operations have been focused in South Texas, South
Louisiana, Central Utah, Southern Michigan, and the Williston Basin of North
Dakota. Based on the estimates of independent petroleum engineers, the Company
had total proved reserves of 143,399 BOE consisting of 25,732 Bbls of crude oil
and 706 MMcf of natural gas as of January 31, 1997. The Company's present value
of estimated future net cash flows before income taxes from its total proved
reserves (the "pre-tax SEC 10 value") was $1,194,713 at January 31, 1997.
Approximately 73% of this was attributable to net proved reserves located in
Company operated South Last Chance gas field in Emery County Utah ( the "Utah
Properties").

The Company is actively engaged in drilling, developing and producing oil
and gas on its existing acreage in Texas and Louisiana. In Utah the Company is
in the initial stage of preparing a development plan for its properties. On
November 20, 1996 the Company entered into an agreement with a private company
to drill a well that will evaluate the hydrocarbon potential of the Company's
acreage in Michigan. The Company plans to farm out all or part of its interest
in its North Dakota acreage to evaluate the potential there. The Company has
identified additional oil and gas related business opportunities in North
America and continues to review international opportunities.

CERTAIN DEFINITIONS

As used herein, the following terms have the specific meanings set out:
"Bbl" means barrel. " MBbl" means thousand barrels. "MMBbl" means million
barrels. "Mcf" means thousand cubic feet. "MMcf" means million cubic feet. "Bcf"
means billion cubic feet. "BOE" means barrel of oil equivalent. "MBOE" means
thousand barrels of oil equivalent and "MMBOE" means million barrels of oil
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. "Btu" means
British Thermal unit. "Replacement cost" refers to a fraction, of which the
numerator is equal to the costs incurred by the Company for property
acquisition, exploration and development and of which the denominator is equal
to proved reserve additions from extensions, discoveries, improved recovery,
acquisitions and revisions of previous estimates. "Improved recovery," "enhanced
oil recovery" and "EOR" include all methods of supplementing natural reservoir
forces and energy, or otherwise increasing ultimate recovery from a reservoir,
such as water floods, cyclic steam, steam drive and CO2 (carbon dioxide)
injection and fireflood projects. "Heavy oil" is low gravity, high viscosity
crude oil. "Pre-tax SEC 10 Value" refers to pre-tax present value, discounted at
10%, of the estimated future net revenues based on constant prices in effect at
year-end ("Discounted Cash Flow").

BACKGROUND

The Company is engaged in the business of acquiring properties for the
exploration and development of oil and gas, including conventional lease
acquisitions, participation in ventures involving other oil and gas companies
and investors, and farmins from other producers. The Company has acquired
working interests and leases to explore for, develop and produce crude oil and
natural gas reserves in areas near where hydrocarbons have been proven to exist,
primarily in Texas, Louisiana, Utah, Michigan, and North Dakota. However, the
Company may conduct operations
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in such other locations as it shall deem advisable.

Based on management's experience and publicly available information, major
integrated oil companies continue to consolidate domestic and international
operations to reduce costs and retire debt. As a result, profitable
opportunities to acquire whole or partial interests in domestic and
international properties are being created. The Company believes it has the
management and technical expertise to take advantage of these opportunities. In
addition, increase in consumption of oil and gas products world wide, a decrease
in the number of available drilling rigs, and a decrease in exploration
investment over the last 15 years is placing upward pressure on oil and gas
prices.

In this dynamic environment, the Company believes that three trends became
evident: (i) profitable exploitation and development projects with reserves of
up to several hundred million barrels equivalent exist because major oil
companies require projects with large reserves in excess of several hundred
million barrels; (ii)several developing countries have privatized state owned
oil companies creating international opportunities for production acquisition
and joint service contract opportunities; and (iii) oil prices, while still
volatile, appear to be on an upward trend.

BUSINESS STRATEGY OF THE COMPANY

The Company's business strategies are to increase its cash flow and
hydrocarbon reserve asset base as economically as possible by:

o Developing existing reserves and exploring for additional reserves
on its Lavaca County, Texas and Cameron Parish Louisiana properties
utilizing 3D seismic data and current technology to reduce risks
associated with development and exploration drilling;

o Developing its South Last Chance gas field through completing
existing wells, technical evaluation
and additional drilling;

o Using existing proven reserves and cash flow to obtain capital to
finance oil and gas property acquisitions through agreements with
experienced and knowledgeable partners, primarily focusing on
onshore Texas and Louisiana;

o Farming out or seeking industry partners in higher risk
exploration areas including the Company's
Michigan and North Dakota properties;

o Focusing on domestic opportunities considered to have profit
potential or capable of contributing substantial cash flow, or low
risk exploitation and development opportunities in international
areas.

In May 1997 the Company engaged a group of investment bankers to advise
and assist in the financing of the Company's current and proposed activities.
The Company is continuing to conduct its business without regard to the
potential outcome of this process.

DEVELOPMENT ACTIVITIES

LAVACA COUNTY, TEXAS. In October 1996, the Company acquired from Moose Oil
and Gas, Co. a 2% interest in the West Sandy Creek Producing area, the West
Sandy Creek Limited Partnership pipeline gathering system, and the West Lavaca
River exploitation area. Hydrocarbons are produced at West Sandy Creek from
multiple pay zones at depths ranging from 1,800 feet to 5,600 feet. At the time
of the acquisition the West Sandy Creek development area produced primarily gas
with a Btu content of approximately 1,000 Btu and minor amounts of crude oil.
The Company received an average of $3.78 per Mcf of gas and $23.88 per Barrel of
crude oil produced from the properties during January 1996.

On January 31, 1997, West Sandy Creek had fourteen net productive wells
with average net production of approximately 1,452 Mcf of gas per month and 32
Bbls of oil per month. Estimated net proved reserves attributable to the
interests acquired by the Company in the West Sandy Creek properties are 54 MMcf
of natural gas and 514 Bbls of crude oil, or a total of 9,514 BOE with a pre-tax
SEC 10 value of $120,337. Engineering studies are in progress to estimate proven
undeveloped and possible reserves for the area. Since the acquisition in October
1996, the Company, in conjunction with the operator of the properties, has
drilled five wells on West Sandy Creek and expects
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to drill an additional fifteen wells in the next two years. The Company believes
production from this area can be increased from formations 5,600' deep or less.
The Company also plans to test objectives below 10,000 feet in depth estimated
to have large reserve potential. The Company has an option to acquire additional
interest in this area, and is evaluating if exercising this option is in the
best interest of the Company.

On the previously undeveloped West Lavaca River properties, the Company,
in conjunction with the operator, drilled two successful shallow wells as of
January 1, 1997. As of May 1, 1997 the Company drilled three additional
successful shallow wells on the properties. The successful drilling program in
this area, like that in the Company's West Sandy Creek area, is due largely to
the use of 3D seismic data as a primary tool for locating wells. The Company
plans to participate in the drilling of thirty additional wells over the next
two years on the West Lavaca River properties. As of May 1, 1997, the first two
wells discovered in West Lavaca River started producing gas and work is in
progress to start production from the 3 additional discoveries in the area.
Estimated net proved reserves attributable to the interests in the initial two
discovery wells in the West Lavaca River properties are 6 MMcf of natural gas,
or a total of 1,000 BOE and a pre-tax SEC 10 value of $14,508. Engineering
studies are in progress to estimate proven undeveloped reserves for the three
additional shallow discoveries. Based on the Company's current success it
estimates cash flow and pre-tax SEC 10 values for West Lavaca River will
increase significantly during the coming year.

In line with the Company's objective of acquiring properties with
significant development potential the Company acquired the interest in the West
Sandy Creek properties and the West Lavaca River properties because of the
existing cash flow and estimates of undeveloped reserve potential in the
properties. In addition to the multiple, shallow pay zones that produce oil and
gas in West Sandy Creek and now in West Lavaca River, the Company estimated
large reserves might be found in the deeper Wilcox interval at depths estimated
at 10,000 to 15,000 feet. In March 1997, the Company in conjunction with the
operator drilled the Smothers #1 well to a total depth of 13,000 feet. The
operator reports that interpretation of conventional well logs indicates
multiple pay zones were encountered. During April 1997, heavy rain and severe
flooding in the area interrupted the production testing of this zone and forced
the rig crew to be evacuated from the well site by helicopter. No injuries were
reported and testing of the well is scheduled to recommence by the end of May
1997. The Company will estimate proven reserves in the well when production
testing is complete. The Company plans to drill three more deep wells in the
West Sandy Creek and West Lavaca River properties by the end of 1997.

CAMERON PARISH, LOUISIANA. In October 1996, the Company acquired from Rio
Bravo Exploration and Production Company a 10% interest in the Northwest
Hackberry producing area and the West Hackberry Field. At the time of the
acquisition there was no production from the properties. The Company, in
conjunction with the operator re-entered and completed two previously drilled
wells. An attempt to re-complete a third well was abandoned after recovering
only minor amounts of hydrocarbons.

In 1989 a previous operator drilled the Hansen #2A well that found, cored
and tested a new 50 foot oil bearing sand that could not be completed due to
mechanical problems. In December 1996 the Company in conjunction with the
operator drilled the Hansen #3 well near the Hansen #2A location and found oil
in two separate zones. The lower of the two zones at 4,170 was initially
production tested. After producing an average of 10 Bbls of oil per day the
decision was made to seal off the lower zone and complete the well in the upper
zone. As of May 1, 1997 the upper zone is producing 13 Bbls of oil per day. The
Company and the operator attribute the poor production rates of the well to be
the result of formation damage. The operator is preparing a recommendation for
additional work to enhance production from this well.

As of January 31, 1997 the Company's daily production from these
properties from two wells (Hansen #3 was not yet producing at a stabilized rate)
increased to 58 Bbls per month. The Company's net proved reserves from the
Hackberry properties were 25,218 Bbls at January 31, 1997, with a Pre-tax SEC 10
Value of $187,210. The Company plans additional work to increase production from
existing wells and drilling additional wells over the next two years.

EMERY COUNTY, UTAH. In October and November 1996, the Company acquired
from Integrity Financial an approximate 50% interest in the South Last Chance
Gas field, located in Emery County, Utah. Estimated net proved reserves
attributable to the interest acquired by the Company in the South
Last Chance field is 644 MMcf of gas and a pre-tax SEC 10 value of $869,047.

The Company plans to complete the #12-17 Federal Well that was tested at a
rate of 1.9 MMcf per day of gas from a depth of 2,579 feet during a production
flow test. The test zone is estimated to contain 470 MMcf of gas.
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Interpretation of conventional electric logs indicates a second zone at a depth
of 2,478 feet that is estimated to contain an additional 530 MMcf of behind pipe
gas reserves. The well is currently suspended, waiting on completion. Nine wells
in the area, including additional wells on Company acreage, have tested gas or
have indications from interpretation of conventional electric logs that gas
bearing formations exist in the wells. The wells, many of which were drilled
between 1930 and 1980, were not developed because gas did not represent a
commercially viable commodity in the area. The Ramsey 1-X well drilled on the
field in the 1930's was flow tested by the United States Geological survey in
1945 at rates exceeding 30 MMcf of gas per day but was later plugged and
abandoned. The Last Chance Gas Field is potentially a large gas field that may
contain considerable gas reserves. Initial production of the #12-17 well will
allow the Company to more accurately compute reserves and develop the field with
the cash flow from production. ARXA and Integrity are studying the feasibility
of developing the #12-17 Federal well by installing portable LNG (liquified
natural gas) facilities capable of processing 50,000 gals of LNG per day or by
conventional pipeline production methods.

RESERVES

The Company's independent reserve engineers (R.A. Lenser&Associates, Inc.
of Houston, Texas) prepared the estimates of the proved reserves and the future
net cash flows (and present value thereof) attributable to such reserves.
Reserves are estimated using oil and gas prices and production and development
costs in effect January 31, 1997 of each year, without escalation, and were
otherwise prepared in accordance with Securities and Exchange Commission ("SEC")
regulations regarding disclosure of oil and gas reserve information. There are
numerous uncertainties inherent in estimating quantities of proved reserves,
including many factors beyond the control of the Company and the reserve
engineers. Reserve engineering is a subjective process of estimating underground
accumulations of oil and gas that cannot be measured in an exact manner, and the
accuracy of any reserve or cash flow estimate is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Estimates by different engineers often vary, sometimes significantly. In
addition, physical factors, such as the results of drilling, testing and
production subsequent to the date of an estimate, as well as economic factors,
such as an increase or decrease in product prices that renders production of
such reserves more or less economic, may justify revision of such estimates.
Accordingly, reserve estimates are different from the quantities of oil and gas
that are ultimately recovered. The Company has not filed any reports with other
federal agencies which contain an estimate of total proved net oil and gas
reserves.

As of January 31, 1997 the Company's estimated proved reserves totaled
25,735 barrels of oil and 706 MMcf of natural gas, with a pre-tax present value,
discounted at 10%, of the estimated future net revenues based on constant prices
in effect at year-end ("Discounted Cash Flow") of $1,194,713.

EXPLORATION ACTIVITIES

Over the last year the Company shifted the core focus of its operations
from international ventures to domestic ventures with the objective of
increasing cash flow and reserves as economically as possible. Although the
Company intends to continue screening international opportunities, it believes
the most efficient way to build shareholder value is by focusing on domestic
acquisitions, primarily in South Texas and Louisiana. The Company will manage
its economic and exploration risks by:

o Reducing exploration risks by drilling multi-pay prospects that
combine shallow low risk zones previously proven to produce in the
area with deeper potential target zones;

o Generating prospects using computer assisted exploration
technology and 3-D seismic data;

o Focusing on prospects in areas where the Company or its partners
have expertise.

The following sets forth a brief summary of each exploration project that
the Company has in progress. This discussion only includes prospects on which
the Company has acquired or attempted to acquire substantial leasehold
interests.

WALNUT POINT PROSPECT, MICHIGAN. The Company has approximately 2,073 acres
under lease in Calhoun County, Michigan as of May 1, 1997. Two unsuccessful
wells were drilled on the acreage during May 1996 after which management elected
to farm out the acreage to minimize additional financial risk. On November 19,
1996 the Board of Directors approved an agreement with Murphy Oil Corporation
whereby Murphy would be assigned alternate eighty
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acre tracts upon drilling a test well to a depth sufficient to adequately test
the Trenton/Black River formation. Murphy signed the agreement on November 20,
1996 but has yet to notify the Company of his intent to drill a well. The
Company will interpret the results of Murphy's well to evaluate the potential of
its acreage.

WHITETAIL CREEK PROSPECT, NORTH DAKOTA. The Company currently has 800
gross undeveloped leasehold acres in the Williston Basin, located in Billings
County, North Dakota. In the opinion of management, the Whitetail Creek Prospect
can be evaluated with one or two wells drilled to a depth of 12,000 feet. The
Company is offering this property to industry partners for farm out, and will
retain a working or carried interest in the properties.

JORF PERMIT, TUNISIA, NORTH AFRICA. In early 1996 the Company had an
option to acquire up to a 20% interest in the Jorf Reconnaissance Permit,
Tunisia, North Africa from Rigo Oil and Gas Ltd, Houston, subject to the
approval of ETAP, the Tunisian national oil Company. Unfortunately ETAP rejected
the participation of ARXA in favor of the participation of a major oil company.
Rigo Oil offered the Company an alternative proposal to acquire an interest in
Jorf and additional areas in lieu of the original agreement. The Company is
evaluating the proposal, but has yet to determine if it is in the best interest
of the Company to participate in the proposal.

OTHER INTERNATIONAL AREAS. During the past year the Company reviewed and
negotiated participation in international oil field development programs located
in the Neuquen Basin of Argentina and the Santa Elena Peninsula of Equador. Both
areas had existing wells that penetrated multiple shallow
pay zones and produced or were capable
of producing hydrocarbons. The proposed areas had additional exploration
potential in the existing acreage and in deeper formations. The Company
completed technical and economic appraisals of the areas and attempted to
negotiate final acquisition contracts contingent on the Company securing
financing necessary to complete the agreements. The Company was forced to
abandon its attempts to acquire an interest in the properties when it was unable
to secure the necessary financing for the projects.

FUTURE AREAS. In the opinion of management, numerous domestic and
international opportunities are available as a result of downsizing by the major
oil companies and the consolidation that has occurred in the oil industry over
the last 15 years. Management is reviewing acquisition of existing oil and gas
production and international exploration and development projects. The Company
will proceed with new ventures only after a thorough technical and economic
review of the project and the opinion of the Board of Directors that such
activities are in the best interest of the Company. The Company has identified
and negotiated such areas in the past, but has been unable to acquire the areas
because of lack of financing. In April the Company engaged an investment group
to assist in securing financing in the future. There is no guarantee the
investment group will be able to secure financing for future projects and the
Company is continuing to conduct its business without regard to the potential
outcome of this process.

Management reserves the right to conduct operations in such other
locations and/or to such other formations as it shall, in its sole and absolute
discretion, deems advisable, provided that such locations and/or formations are,
in management's opinion, of generally comparable quality and character to those
described herein.

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 effects 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.

OTHER BUSINESS MATTERS

PRICES OF OIL AND GAS QUITE UNSTABLE

Global economic conditions, political conditions, variations in weather
conditions, energy conservation, and other factors contribute to unstable
prices. Between October 1996 when the Company established hydrocarbon
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production revenue and March of 1997 the Company sold its produced gas at prices
ranging from a low of $1.67 per Mcf and a high of $3.80 per Mcf. Similarly, the
Company sold the oil it produced at prices ranging from $20.87 per barrel to
$23.72 per barrel. Oil and gas prices rose sharply in late 1996 and fell just as
sharply in early 1997. 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 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.

COMPETITION, MARKETS AND REGULATIONS

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. The Company believes that the well-defined nature of its exploration
and development programs and its experienced management may give it a
competitive advantage over other competitors.

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 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
Page 9
<PAGE>
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 interest of the Company to do so. As operator, it will be
responsible for all operational functions, including drilling, development,
testing, and completion and equipping wells, production pumping and the sale of
oil and gas production. It is anticipated the Company will conduct development
drilling on the properties it acquires to enhance production and will engage in
exploratory drilling activity.

The Company does not expect to own any drilling equipment. Drilling and
certain other activities including seismic acquisition will be conducted by
non-affiliated contractors under the Company's supervision. Activities such as
production pumping, storage, deliveries, and equipment maintenance will be
conducted by Company employees or non-affiliated contractors, depending on which
approach is more efficient.

ACQUISITION OF UNDEVELOPED PROSPECTS

Management will select undeveloped prospects which will be acquired by the
Company at the lesser of cost or fair market value. Depending on its attributes,
a prospect may be characterized as an "exploratory" or "development" site.
Generally speaking, exploratory drilling involves the conduct of drilling
operations in search of a new and yet undiscovered pool of oil and gas (or,
alternatively, drilling within a discovered pool with the goal of greatly
extending the limits of such pool), 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 one 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, farmins, and continuing
review of other prospects that may be available.

DRILLING AND COMPLETION PHASE

GENERAL

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 exploratory wells, such funds together with unexpended completion funds
will be used to drill additional development wells, acquire seismic 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.
Page 10
<PAGE>
GAS PIPELINE AND TRANSMISSION

The Company's wells will usually be drilled in the vicinity of
transmission pipelines, gathering systems, and/or end users. Management believes
that there are sufficient transmission pipelines, gathering systems, and end
users for the Company's production, subject to some seasonal curtailment. The
Company will bear the expense of hook-up and/or gathering charges between the
gas wells and the transmission pipelines.

SALE OF PRODUCTION

The Company will attempt to sell the oil and gas produced from its
prospects on a competitive basis at the best available terms and prices.
Management will not make any commitment of future production that does not
primarily benefit the Company. Generally, purchase contracts for the sale of oil
can be canceled on thirty days' notice, whereas purchase contracts for the sale
of natural gas usually have a term of a number of years and may require the
dedication of the gas from a well for the life of its reserves.

The Company will sell natural gas discovered by it at negotiated prices
based upon a number of factors, such as the quality of the gas, well pressure,
estimated reserves, prevailing supply conditions and any applicable price
regulations promulgated by the Federal Energy Regulatory Commission. The Company
expects to sell oil discovered and sold by it at free market prices.

JOINT OPERATING AGREEMENTS

The Company has entered into joint operating agreements with unaffiliated
third parties as operators. A representative form of an operating agreement, a
copy of which will be furnished upon request, provides that the operator will
conduct and direct and have full control of all operations on the Company's
prospects. The operator will have no liability as operator to the Company for
losses sustained or liabilities incurred, except as may result from the
operator's negligence or misconduct.

The Company pays a proportionate share of lease, development, and
operating costs, and is entitled to receive a proportionate share of production
subject only to royalties and overriding royalties. The Company is responsible
only for its obligations and is liable only for its proportionate share of the
costs of developing and operating the prospects.

An operator's duties will typically include testing formations during
drilling, and completing the wells by installing such surface and well
equipment, gathering pipelines, heaters, separators, etc., as are necessary and
normal in the area in which a prospect is located. The Company pays the drilling
and completion costs of the operators as incurred, except that the Company is
permitted to make advance payments to the operators where necessary to secure
tax benefits of prepaid drilling costs and there is a valid business reason. In
order to comply with conditions to securing tax benefits of prepaid drilling
costs, the operator under the terms of an operating agreement will not refund
any portion of amounts paid in the event actual costs are less than amounts paid
but will apply any such amounts solely for payment of additional drilling
services to the Company. If an operator determines that a well is not likely to
produce oil and/or gas in commercial quantities, the operator will plug and
abandon the well in accordance with applicable regulations.

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, 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
agent to market such production and authorize the operator 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 the operator are used in the delivery
Page 11
<PAGE>
of natural gas to market, the operator may charge a gathering fee not to exceed
that which would be charged by a non-affiliated third party for a similar
service.

An operating agreement will continue in force so long as any such well or
wells produce, or are capable of production. Any non-producing well will then be
plugged and abandoned consistent with the terms of the operating agreement.

PRODUCTION PHASE OF OPERATIONS

GENERAL

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 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.

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.

The above items of expenditure 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

The Company will face significant competition in its oil and gas
operations. The Company's competitors in its producing efforts will include
major oil and gas production companies and numerous independent oil and gas
companies, individuals and drilling and income programs. The Company's
competitors in its marketing efforts will include other oil and gas production
companies, major interstate pipelines and their marketing affiliates, and
national and local gas gatherers, brokers, marketers and distributors of varying
sizes, financial resources and experience. Certain competitors, such as major
oil and gas production companies, have financial and other resources
substantially in excess of those to be available to the Company.

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

Page 12
<PAGE>
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.

EMPLOYEES

The Company currently employs 1 person on a full time basis. The Company
believes its relationship with its employee is satisfactory. The Company has in
the past, and will continue in the future, to make extensive use of its outside
directors and others as consultants. The Company is not materially dependent on
any such consultants.

FACILITIES

The Company sub-leases approximately 1,200 square feet of office space in
Houston, Texas. This space is leased on a month to month basis at a rental rate
of approximately $3,000 per month, including furnishings, equipment, and support
services. The Company believes that its facilities are adequate
for its current operations.

ITEM 3. LEGAL PROCEEDINGS

On March 12, 1997 and April 25, 1997, in exchange for mutual releases for
asserted and un-asserted claims and in the context of settling those claims the
Company entered into an agreement with John O. Schofield, former Chairman of the
Board of the Company whereby common stock, Class A preferred stock and cash are
to be exchanged for a release from a binding covenant not to compete agreement,
revision of terms on a certain notes payable, and release of liens on certain
oil and gas properties. Under the terms of the agreement Mr. Schofield is to
deliver 1,070,125 shares of Company common for cancellation for which he is to
be reimbursed $100,000 derived at the rate of 7% of the Company's net proceeds
from future offerings provided the gross proceeds of such offering exceed
$50,000. On May 1, 1997 as part of the agreement Mr. Schofield delivered to the
Company 41,764 Class A preferred for cancellation and converted and retained
175,000 Class A preferred shares. As of May 14, 1997 execution of this agreement
is in progress.

As of May 14, 1997 the Company was not engaged in any legal proceedings
that are expected, individually or in the aggregate, to have a material adverse
effect on the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

The Company's Common Stock is listed on the OTC Electronic Bulletin Board
under the symbol "ARXA." Public trading of the Company Common Stock commenced on
August 8, 1995 and the market for the Common stock is limited, sporadic and
highly volatile. The following table sets forth the high and low last closing
bid of the Common Stock for the periods indicated:
Page 13
<PAGE>
Price Range
---------------------
High Low
------- -------
FISCAL YEAR
1996
Third Quarter (commencing August 8, 1995) .... 3.000 1.825
Fourth Quarter ............................... 4.750 3.000
1997
First Quarter ................................ 6.375 2.625
Second Quarter ............................... 6.250 5.000
Third Quarter ................................ 5.875 1.750
Fourth Quarter ............................... 3.500 1.625

On May 14, 1997, the closing bid price for the Common Stock was $1.9375,
and there were approximately 321 holders of record.

The Company has not paid, and the Company does not currently intend to pay
cash dividends on its Common Stock. The current policy of the Company's Board of
Directors is to retain earnings, if any, to provide funds for operation and
expansion of the Company's business. Such policy will be reviewed by the Board
of Directors of the Company from time to time in light of, among other things,
the Company's earnings and financial position.

None of the Company's warrants or preferred stock is traded in any public
trading market.

SALE BY THE COMPANY OF UNREGISTERED SECURITIES

On May 31, 1996 the Company completed a private placement offering that
commenced January 18, 1996. During the year ended January 31, 1997 the Company
sold 748,934 shares of common stock and 374,467 warrants for the purchase of
common stock. The warrants have an exercise of price of $5.00 per share and will
be extended or canceled based on whether the warrant holder agrees to a lock-up
period on their stock.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the financial
statements and notes thereto included elsewhere herein.

SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, (IN THOUSANDS)
-----------------------------------------------------
1997 1996 1995 1994 1993
------- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues .................................................. $ 31 $ -0- $ -0- $ -0- $ -0-
Operating losses .......................................... (1,051) (344) -0- -0- -0-
Losses from continuing operations ......................... (1,051) (344) -0- -0- -0-
Per share income (loss) from continuing operations ........ (.16) (.06) -0- -0- -0-
CASH FLOW DATA:
Capital expenditures ...................................... 1,268 557 -0- -0- -0-
Issuance of common and preferred stock .................... 2,257 634 -0- -0- -0-
BALANCE SHEET DATA:
Working capital ........................................... (141) (267) -0- -0- -0-
Property and equipment, net ............................... 1,616 377 -0- -0- -0-
Total assets .............................................. 1,737 592 -0- -0- -0-
Current maturities of long-term debt ...................... 19 187 -0- -0- -0-
Stockholders' equity ...................................... 1,476 291 -0- -0- -0-
</TABLE>
Page 14
<PAGE>
RESULTS OF OPERATIONS

REVENUES

For the year ended January 31, 1997, the Company's principal activities
have been the acquisition of oil and gas leases purchased for cash and equity
consideration, drilling of exploration and development wells and producing oil
and gas. For the year ended January 31, 1996, the Company's principal activities
was selling of common stock and the acquisition of undeveloped properties. For
the three years prior to January 31, 1996, the Company was inactive. There were
no operations, assets or liabilities prior to the merger during August, 1995.

REVENUES - For the period ended January 31, 1997, the Company's received
revenue of $31,023. The increase is attributable to the commencement of
production from various oil and gas wells. Oil and gas revenues for the year
totaled $19,682. The Company produced 246 Bbls of oil and 5,810 Mcf of gas. The
average unit price received for oil was $21.98 per Bbl. Average unit prices
realized for gas were $2.74 per Mcf. In 1997 the Company realized interest
income of $11,341. The Company reported no revenues for the four years ended
January 31, 1996, 1995, 1994, and 1993.

COST AND EXPENSES

For the three years ended January 31, 1996, the Company was inactive. For
the year ended, January 31, 1996, the Company's principal activities have been
the acquisition of oil and gas leases. For the year ended January 31, 1997, the
Company's increase in costs and expenses relates to the commencement of
exploration, acquisition and development of various oil and gas properties .
Costs and expenses related to these activities totaled $598,000. Of this total,
the principal expenditure of $590,000 was related to the drilling of two
non-productive exploration wells in Michigan.

GENERAL AND ADMINISTRATIVE EXPENSES

For the four years ended January 31, 1995, the Company was inactive. Costs
and expenses for the year ended January 31, 1996 totaled $344,000. The major
components of the expenses are salaries and related payroll expenses($81,000),
professional and consulting expenses($148,000), amortization and depreciation
($61,000), and office expenses($32,000). For the year ended January 31, 1997,
general and administrative expenses increased principally due to a full year of
salaries and related payroll costs. The major components of these expenses are
salaries and related payroll expenses($187,000), professional costs($63,855),
rent($36,000), office($43,000) and advertising($18,000).

LIQUIDITY AND CAPITAL RESOURCES

For the four years ended January 31, 1995, the Company was inactive. For
the year ended January 31, 1996, the Company used $43,000 in cash flow to
support its development stage activities. The principal cash flow activities
were related to the acquisition of undeveloped oil and gas leases, retirement of
debt, and the sale of common stock. During January 1996, the Company repaid the
debt with preferred stock and short term notes. In order to meet its drilling
and exploration activities, the Company commenced on January 18, 1996, the sale
of 3,300,000 shares of common stock at a $1.50 per share under a private
placement memorandum. Each two shares of stock sold pursuant to the private
placement entitles the shareholder to one stock purchase warrant for the
purchase of one additional share of common stock at $5.00. The warrants will be
extended or canceled based on whether the warrant holder agrees to a lock-up
period on their stock as requested by an investment banking group proposing
funding to the Company. The extension period is for a period of 18 months from
the date on which the investment group exercises its option to purchase shares
of the Company's common stock. As of May 1, 1997 greater then eighty percent of
the warrants had been extended. From January 31, 1996 to May 31, 1996, the
Company has sold 748,934 shares of common stock and issued 374,467 warrants
totaling $1,123,401 pursuant to this private placement memorandum. Additionally,
the Company has issued 2,000,000 stock purchase warrants for the purchase of
2,000,000 common stock shares. These $2.00 warrants have a five year term and a
$2.00 exercise price. No warrants have been exercised through January 31, 1997.

On April 21, 1997 the Company entered into a 6 month option agreement with
an investment banking group to assist the Company in the sale of 1,000,000
shares of common stock for $700,000. In consideration for granting
Page 15
<PAGE>
the option to the investment banking group the Company will receive a
non-refundable $50,000 fee for the option upon filing its January 31, 1997
financial statements with the Securities and Exchange Commission.

For the year ended January 31, 1997, the Company used $912,000 in
operations, $1,289,000 in investing activities and received $2,169,000 in
financing activities.

ITEM 7. FINANCIAL STATEMENTS

The information required hereunder is included in this report as set forth
in the "Index to Financial Statements" on page F-1.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE

There have been no changes in accountants during the Registrant's two most
recent fiscal years, nor have there been any disagreements with accountants on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

Incorporated by reference from the Company's proxy statement for the
annual meeting dated August 1997 to be filed 120 days after the January 31, 1997
fiscal year end.

ITEM 10. EXECUTIVE COMPENSATION

Incorporated by reference from the Company's proxy statement for the
annual meeting dated August 1997 to be filed 120 days after the January 31, 1997
fiscal year end.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Incorporated by reference from the Company's proxy statement for the
annual meeting dated August 1997 to be filed 120 days after the January 31, 1997
fiscal year end.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated by reference from the Company's proxy statement for the
annual meeting dated August 1997 to be filed 120 days after the January 31, 1997
fiscal year end.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS

EXHIBIT NO. IDENTIFICATION OF EXHIBIT
----------- ------------------------------
3.1(1) Certificate of Incorporation
3.2(1) Bylaws

(1) Previously filed as an exhibit to the Company's Form 8-K/A dated September
29, 1995.

(b) None
Page 16
<PAGE>
INDEX TO FINANCIAL STATEMENTS

INDEX TO FINANCIAL STATEMENTS .......................................... F1
AUDITORS REPORT ........................................................ F2
BALANCE SHEETS (Assets) ................................................ F3
BALANCE SHEETS (Liabilities and Stockholders Equity) ................... F4
STATEMENT OF OPERATIONS ................................................ F5
STATEMENT OF CASH FLOW ................................................. F6
STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY ............................ F7
NOTES TO FINANCIAL STATEMENT ........................................... F8

Page 17
F1
<PAGE>

MCMANUS & CO., P.C., CERTIFIED PUBLIC ACCOUNTANTS
188 SPEEDWELL AVENUE, MORRIS PLAINS, NJ 07950
TEL: 201-285-0012 - FAX: 201-285-0939
350 5TH AVENUE, SUITE 1423, NEW YORK, NY 10118

TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
OF ARXA INTERNATIONAL ENERGY CORP:

We have audited the accompanying consolidated balance sheet of ARXA
International Energy Inc. and subsidiary as of January 31, 1997 and 1996 and the
related statements of operations, stockholders' equity, and cash flows for each
of the three years in the period ended January 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principals 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 January 31, 1997 and 1996 and the results of
its operations, stockholder's equity and its cash flows for each of the three
years in the period ended January 31, 1997 in conformity with generally accepted
accounting principles.

/S/MCMANUS & CO., P.C.
MCMANUS & CO., P.C.
CERTIFIED PUBLIC ACCOUNTANTS
MORRIS PLAINS, NJ 07950

May 14, 1997

MEMBERS: AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS AND NEW JERSEY
SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS
Page 18
F2
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands)

ASSETS

JANUARY 31,
----------------
1997 1996
------ -----
CURRENT ASSETS:
Cash .................................................. $ 2 $ 34
Accounts Receivable (Note 3) ......................... 15 0
Prepaid Expenses ..................................... 23 0
------ ----
Total Current ..................................... 40 34
------ ----
Assets

PROPERTY AND EQUIPMENT, AT COST, SUCCESSFUL EFFORTS
METHOD: (Note 1)
Unproved Oil and Gas Properties ................... 1,253 377
Proved Oil and Gas Properties:
Leasehold Costs ................................... 156 0
Plant, Lease, and Well Equipment ................ 75 0
Intangible Development Costs ..................... 131 0
Furniture and Equipment ........................... 10 0
------ ----
Total Property and Equipment .................... 1,625 377

Less: Accumulated Depletion,
Depreciation, and Amortization .................... 9 0
------ ----
Net Property, Plant, and Equipment .............. 1,616 377
------ ----
OTHER ASSETS (Note 2) ................................... 81 181
------ ----
TOTAL ASSETS ................................... $1,737 $592
====== ====
See accompanying accountants' report and notes to the financial statements

Page 19
F3
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands)

LIABILITIES AND STOCKHOLDERS' EQUITY
JANUARY 31,
-------------------
1997 1996
------- -------
CURRENT LIABILITIES:
Short-Term Portion of Long-Term Debt (Note 9)......... $ 19 $ 187
Accounts Payable and Accrued Liabilities ............. 162 114
------- -------
Total Current Liabilities ......................... 181 301
------- -------
Long-Term Debt (Note 9) ................................. 80 0
------- -------
Commitments and Contingencies (Note 12)

Stockholders' Equity
Preferred Stock - $1.00 par value; 5% cumulative
2,000,000 shares authorized 426,943 shares issued and
outstanding at January 31, 1997 and 1996, respectively 427 427

Common Stock - $.001 par value 100,000,000
shares authorized 7,306,159 and 5,844,560
shares issued and outstanding at January
31, 1997 and 1996, respectively .................... 7 6

Additional Paid in Capital ........................ 3,435 1,179
Accumulated Deficit ................................. (2,393) (1,321)
------- -------
TOTAL STOCKHOLDERS' EQUITY ...................... 1,476 291
------- -------
Total Liabilities and Stockholders' Equity ... $ 1,737 $ 592
======= =======
See accompanying accountants' report and notes to the financial statements

Page 20
F4
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
(in thousands)
JANUARY 31,
-----------------------------
1997 1996 1995
------- ------- -------
REVENUES:
Oil and Gas Revenues ..................... $ 20 $ 0 $ 0
Interest Income ............................ 11 0 0
------- ------- -------
Total Revenues .......................... 31 0 0

Costs and Expenses:
Production Costs ........................... 7 0 0
Prospecting Costs .......................... 28 0 0
Exploration Costs .......................... 562 0 0
Depletion, Depreciation, and
Amortization ................................ 129 61 0
General and Administrative
Expenses .................................... 345 261 0
Interest Expense ........................... 11 22 0
------- ------- -------
Total Costs and Expenses .............. 1,082 344 0
------- ------- -------
NET LOSS ................................... $(1,051) $ (344) $ 0
======= ======= =======
Net Earnings Per Common Share:
Primary (Note 1) ...................... $ (0.16) $ (0.06) $ 0.00
Fully Diluted (Note 1) ............... $ (0.12) $ (0.05) $ 0.00

See accompanying accountants' report and notes to the financial statements.

Page 21
F5
<PAGE>
ARXA INTERNATIONAL ENERGY, INC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
(in thousands)
<TABLE>
<CAPTION>
JANUARY 31,
-----------------------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Cash Flow from Operating Activities:
Net Loss ............................................................. $(1,051) $ (344) $ 0
======= ======= =======
Adjustments to Reconcile Net Loss To
Net Cash Used In Operating Activities:
Depreciation, Amortization, and Depletion ....................... 129 0 0
(Increase) / Decrease in Accounts Receivable .................... (15) 0 0
(Increase) / Decrease in Prepaid Expense ........................ (23) 0 0
Increase / (Decrease) in Accounts Payable
and Accrued Liabilities ........................................ 48 114 0
------- ------- -------
Total Adjustments .................................................. 139 114 0
======= ======= =======
Net Cash Used in Operating Activities ................................. (912) (230) 0
======= ======= =======

Cash Flows From Investing Activities:
Payment of Dividends ............................................... (21) 0 0
Purchase of Property and Equipment ................................. (1,248) (376) 0
(Increase) / Decrease in Other Assets .............................. (20) (181) 0
------- ------- -------
Net Cash Used in Investing Activities ................................. (1,289) (557) 0

Cash Flows From Financing Activities:
Payment of Dividends ............................................... (21) 0 0
Purchase of Property and Equipment ................................. (1,248) (376) 0
(Increase) Decrease in Other Assets ................................ (20) (181) 0
------- ------- -------
Net Cash Used in Investing Activities ................................. (1,289) (557) 0
------- ------- -------
Cash Flows From Financing Activities:
Increase/(Decrease) in Short-Term
Portion of Long-Term Debt ....................................... (168) 187 0
Increase/(Decrease) in Long-Term Debt .............................. 80 0 0
Issuance of Common Stock ........................................... 2,257 207 0
Issuance of Preferred Stock ........................................ 0 427 0
------- ------- -------
Net Cash Provided By Financing Activities ............................. 2,169 821 0

Net Increase/(Decrease) in Cash ....................................... (32) 34 0

Cash Balance at the Beginning of the Year ............................. 34 0 0
------- ------- -------
Cash Balance at the End of the Year ................................... $ 2 $ 34 $ 0
======= ======= =======
</TABLE>
See accompanying accountants' report and notes to the financial statements.

Page 22
F6
<PAGE>
ARXA INTERNATIONAL ENERGY, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Shares of Amount of Shares of Amount of Additional Total
February 1, 1995 Common Common Preferred Preferred Paid in Retained Stockholders'
To January 31, 1997 Stock Stock Stock Stock Capital Deficit Equity
- -------------------- --------- ------- ------- --------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
February 1, 1995 ................... 3,078,900 $3,079 0 $ 0 $973,960 $ (977,039) $ (3,079)
Adjustment for Reverse
Split 1 for 10 shares ............ 306,890 307 148,622 148,929

Issuance of Common Stock for
ARXA USA,Inc. .................... 5,500,000 5,500 5,500

Issuance of Common Stock ........... 37,670 38 56,467 56,505

Cancellation of Outstanding Stock .. (544,446) (544) 544 0

Issuance of Common Stock:
Officers, Directors, and Others .. 544,446 544 (544) 0

Issuance of Preferred Stock ........ 426,943 426,943 426,943

Net Loss ........................... (343,633) (343,633)
--------- ------ ------- -------- ---------- ------------ -----------
Total Shareholders Equity
As of January 31, 1996 ............. 5,844,560 5,845 426,943 426,943 1,179,049 (1,320,672) 291,165
--------- ------ ------- -------- ---------- ------------ ----------
Issuance of Common Stock For:
Private Placement ............... 748,934 749 1,122,666 1,123,415
Services ........................ 175,000 175 17,311 17,486
Oil and Gas Properties .......... 537,665 537 1,143,462 1,143,999

Syndication Costs .................. (27,000) (27,000)
Dividends .......................... (22,336) (22,336)
Net Loss ........................... (1,051,168) (1,051,168)
--------- ------ ------- ------- ---------- ------------ ----------
Total Shareholders Equity
As of January 31, 1997 ............. 7,306,159 $7,306 426,943 $426,943 $3,435,488 $(2,394,076) $1,475,661
========= ====== ======= ======== ========== ============ ===========
</TABLE>
See accompanying accountants' report and notes to the financial statements.
Page 23
F7
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES:

ARXA International Energy, Inc., (the Company), was incorporated as a
Delaware corporation. ARXA USA, Inc., a wholly owned subsidiary, was
incorporated as a Texas corporation. Prior to August 8, 1995 the Company
was inactive. It was then considered to be a development stage company
through October 1996. During October 1996, the Company began to show
revenues and thus allowing the Company to move beyond the development
stage. The Company is engaged in the exploration, development, and
production of crude oil and natural gas.

A) Property and Equipment

Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight - line method for financial
and federal income tax reporting over their useful lives. The recovery
classifications for these assets are generally five to seven years.

Expenditures for maintenance and repairs are charged against income as
incurred and major improvements are capitalized.

B) Oil and Gas Properties

The Company accounts for its exploration and production activities under
the successful efforts method of accounting. Under this method, oil and
gas lease acquisition costs are capitalized when incurred. Unproved
properties are assessed on a property-by-property basis and any impairment
in value is recognized. If the unproved properties are determined to be
productive, the appropriate related costs are transferred to proved oil
and gas properties. Lease rentals are expensed as incurred.

Oil and gas exploration costs, other than the costs of drilling
exploratory wells, are charged to expense as incurred. The costs of
drilling exploratory wells are capitalized pending determination of
whether proved reserves are discovered. If proved reserves are not
discovered, such drilling costs are expensed. The costs of all development
well and related equipment used in the production of crude oil and natural
gas are capitalized.

The Company amortizes capitalized costs, including gas gathering systems,
using a unit-of-production method based on proved oil and gas reserves as
estimated by independent petroleum engineers.

Page 24
F8

<PAGE>
ARXA INTERNATIONAL ENERGY, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

C) Income Taxes

For the year ended January 31, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting
for Income Taxes", which requires a change from the deferral method to the
assets and liability method of accounting for income taxes.

D) Net Earnings Per Common Share

Net earnings per common share is shown as both primary and fully diluted.
Primary earnings per common share are computed by dividing net income less
any preferred stock dividends (if applicable) by the weighted average
number of shares of common stock outstanding plus any dilutive common
stock equivalents. Fully diluted earnings per common share are computed by
dividing net income less any preferred stock dividends (if applicable) by
the weighted average number of shares of common stock outstanding plus any
dilutive and anti-dilutive common stock equivalents. The components used
for the computations are shown as follows:

JANUARY 31,
---------------------------------
1997 1996 1995
-------- --------- ---------
Weighted Average Number of Common
Shares Outstanding Including:

Primary Common Stock Equivalents ........... 6,707,016 5,844,560 5,844,560
Fully Dilutive Common Stock Equivalents .... 8,739,766 6,844,560 5,844,560

NOTE 2 - OTHER ASSETS

A) Organization Costs

Organization costs are amortized on a straight line basis over sixty
months for both financial and income tax reporting purposes.

B) Covenants Not To Compete

Covenants not to compete are amortized on a straight line basis over two
years for financial reporting purposes and fifteen years for income tax
reporting purposes.
Page 25
F9
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 - ACCOUNTS RECEIVABLE:

Accounts receivable at January 31, 1997 and 1996 were comprised of the
following (amounts in thousands):

1997 1996
----- ------
Oil and Gas Sales Receivable $ 15 $- 0 -
===== ======

NOTE 4 - RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES:

The following table sets forth the Company's results of operations for oil
and gas producing activities for the years ended January 31, 1997, 1996,
and 1995 (amounts in thousands):
JANUARY 31,
------------------------
1997 1996 1995
----- ------ -----
Oil and Gas Revenues ........... $ 20 $- 0 - $- 0 -

Production Costs ............... 7 - 0 - - 0 -
Prospecting Costs .............. 28 - 0 - - 0 -
Exploration Expenses ........... 562 - 0 - - 0 -
Depreciation / Depletion ....... 8 - 0 - - 0 -
----- ------ -----
Total Costs .............. 605 - 0 - - 0 -
----- ------ -----
Loss Before Income Taxes ....... (585) - 0 - - 0 -
Income Tax Expense ............. - 0 - - 0 - - 0 -
----- ------ -----
Net Loss ....................... $(585) $- 0 - $- 0 -
===== ====== =====

The results of operations from oil and gas producing activities were
determined in accordance with Statement of Financial Accounting Standards
No. 69, "Disclosures About Oil and Gas Producing Activities" ("SFAS 69")
and, therefore, do not include corporate overhead, interest, and other
general income and expense items.

The Company's depletion, depreciation, and impairment expense for oil and
gas properties per physical unit of production measured in barrel of oil
equivalents (with six Mcf of gas equaling one barrel of oil equivalent)
was $0.01, $ - 0 -, and $ - 0 - for the years ended January 31, 1997,
1996, and 1995, respectively.
Page 26
F10
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 - OIL AND GAS PRODUCING ACTIVITIES:

Reserves

The process of estimating proved developed and proved undeveloped oil and
gas reserves is very complex, requiring significant subjective decisions
in the evaluation of available geologic, engineering, and economic data
for each reservoir. The data for a given reservoir may change over time as
a result of, among other things, additional development activity,
production history and viability of production under varying economic
conditions. Consequently, material revisions to existing reserve estimates
may occur in the future. Although every reasonable effort is made to
ensure that reserve estimates are based on the most accurate and complete
information possible, the significance of the subjective decisions
required and variances in available data for various reservoirs make these
estimates generally less precise than other estimates presented in
connection with financial statement disclosures.

The Company's oil and gas reserves, shown below, all of which are located
in the continental United States, consist of proved developed and
undeveloped reserves which, based on subjective judgments, are estimated
to be recoverable in the future under existing economic and operating
conditions.

The following table sets forth the net quantities for the years ended
January 31, 1997, 1996, and 1995. The net quantities are proved reserves
and proved developed reserves of crude oil and natural
gas:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------- ------------------- ----------------
OIL(BBL) GAS(MCF) OIL(BBL) GAS(MCF) OIL(BBL) GAS(MCF)
------- -------- ----- ----- ----- --------
<S> <C> <C> <C> <C> <C> <C>
Proved Developed
and Undeveloped:
Beginning Balance ....................... - 0 - - 0 - - 0 - - 0 - - 0 - - 0 -
Extensions Discoveries................... 22,193 6,810 - 0 - - 0 - - 0 - - 0 -
Purchases in Place ...................... 4,299 704,000 - 0 - - 0 - - 0 - - 0 -
Production .............................. (246) (5,810) - 0 - - 0 - - 0 - - 0 -
------- -------- ----- ----- ----- -----
End of Year ............................. 26,246 705,000 - 0 - - 0 - - 0 - - 0 -
======= ======== ===== ===== ===== =====
Proved Reserves:
Beginning - Jan. 31, 1996 ............... - 0 - - 0 - - 0 - - 0 - - 0 - - 0 -
Ending - Jan. 31, ....................... 10,846 705,000 - 0 - - 0 - - 0 - - 0 -
======= ======== ===== ===== ===== =====
</TABLE>
Page 27
F11
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 - CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING
ACTIVITIES:

The aggregate amounts of capitalized costs relating to the Company's oil
and gas producing activities and the related accumulated depletion,
depreciation, amortization, and impairment at January 31, 1997 and 1996
were as follows (amounts are in thousands):

JANUARY 31,
--------------
1997 1996
------ ------
Unproved Properties .......... $1,253 $ 377
Proved Properties ............ 362 - 0 -
------ ------

Total Capitalized Costs ...... $1,615 $ 377
Less - Accumulated Depletion,
Depreciation, and Amortization - 8 - - 0 -
------ ------
$1,607 $ 377
====== ======

The following table sets forth the costs incurred, both capitalized and
expensed, in the Company's oil and gas property acquisition, exploration
and development activities for the years presented (amounts in thousands):

JANUARY 31,
---------------------------
1997 1996 1995
------ -------- --------

Property Acquisition Costs
Proved $ 156 $ - 0 - $ - 0 -
Unproved 1,281 377 - 0 -
Exploration Costs 562 - 0 - - 0 -
Development Costs 206 - 0 - - 0 -
------ -------- -----
$ 2,205 $ 377 - 0 -
======= ======== =====

All of the Company's operations are in the United States.
Page 28
F12
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 - STANDARDIZED MEASURES OF DISCOUNTED FUTURE NET CASH FLOWS:

The Company's standardized measure of discounted future net cash flows,
and changes therein, related to proved oil and gas reserves are as follows
(amounts in thousands):
JANUARY 31,
------------------------------
1997 1996 1995
------ ------ ------
Future Cash Inflow .......................... $2,595 $- 0 - $- 0 -
Future Production, Development,
and Abandonment Costs .................... (884) - 0 - - 0 -
Future Cash Flows Before
Income Taxes ............................. 1,711 - 0 - - 0 -
Future Income Taxes ......................... 24 - 0 - - 0 -
Future Net Cash Flows ....................... 1,469 - 0 - - 0 -
10% Discount Factor ......................... (517 - 0 - - 0 -
------ ------- ------
Standardized Measure of Discounted
Future Net Cash Flow ..................... $ 953 $- 0 - $- 0 -
====== ======= ======
Changes in Standardized Measure
of Discounted Future Net Cash Flows:
Sales of Oil, and Gas,
(net of production .................... $- 0 - $- 0 - $- 0 -
Extension, Discoveries, and
Other Additions .................... - 0 - - 0 - - 0 -
Purchases of Reserves in Place ........ 9 - 0 - - 0 -
Development Costs Incurred ............ -- - 0 -
Net Change in Income Taxes ............ (242) - 0 - - 0 -
------ ------- ------
Net Change ................ $ 953 $- 0 - $- 0 -
====== ======= ======

Estimated future cash inflows are computed by applying year-end prices of
oil and gas to year-end quantities of proved reserves. Future price
changes are considered only to the extent provided by contractual
arrangements. Estimated future development and production costs are
determined by estimating the expenditures to be incurred in developing and
producing the proved oil and gas reserves at the end of the year, based on
year-end costs and assuming continuation of existing economic conditions.
Estimated future income tax expense is calculated by applying year-end
statutory tax rates to estimated future pretax net cash flows related to
proved oil and gas reserves, less the tax basis (including net operating
loss carry forwards projected to be usable) of the properties involved.

Page 29
F13
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

These estimates were determined in accordance with SFAS 69. Because of
unpredictable variances in expenses and capital forecasts, crude oil and
natural gas prices and the fact that the basis for such volume estimates
vary significantly, management believes the usefulness of this data is
limited. These estimates of future net cash flows do not necessarily
represent management's assessment of estimated fair market value, future
profitability or future cash flow to the Company. Management's investment
and operating decisions are based upon reserve estimates that include
proved as well as provable reserves and upon different price and cost
assumptions from those used herein.

NOTE 8 - MAJOR CUSTOMERS AND CREDIT RISK:

Substantially all of the Company's accounts receivable at January 31, 1997
result from Moose Oil and Gas; the operator of the Company's properties.
This individual customer may impact the Company's overall credit risk,
either positively or negatively, in that this entity may be affected by
industry-wide changes in economic or other conditions. No known material
credit losses have been experienced to date.

The Company considers its relationship with its customer to be
satisfactory.

NOTE 9 - NOTES PAYABLE:
JANUARY 31,
-------------------------
1997 1996
----- ------
Note to Duke Resources Corp.
due March 1999, bearing interest
at 8%; interest only payable in
quarterly installments. $ 79,770 $ 158,938

Note to B. Bippus, (a Director) bearing
interest at 8%; payable upon demand. 19,265 - 0 -
Page 30
F14
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JANUARY 31,
-------------------------
1997 1996
----- ------
Note to G. Stephens, (a Director)
due July 1996, bearing interest at 8%. - 0 - 28,347
-------- -------
Total Notes Payable $ 99,035 $ 187,285
Less: Current Portion 19,265 187,285
-------- --------
Long - Term Debt $ 79,770 $ - 0 -
======== ========

Future minimum payments are as follows:

1998 $ - 0 -
1999 - 0 -
2000 $ 79,770

NOTE 10 - INCOME TAXES:

As discussed in note 1, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income
Taxes". Implementation of SFAS 109 did not have material cumulative
effects of prior periods nor did it result in a change to the current
year's provision.

A) The effective tax rate for the Company is reconcilable to
statutory tax rates as follows:
JANUARY 31,
-----------------------------
1997 1996 1995
---- ---- ----
% % %

U.S. Federal Statutory Tax Rate ............ 34 34 34
--- --- ---
See Note 10 B .............................. (34) (34) (34)
--- --- ---
Effective Tax Rate ......................... - 0 - - 0 - - 0 -
=== === ===

Page 31
F15
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

B) For the years ended January 31, 1997, 1996, and 1995, the Company's
deferred tax asset, resulting from net operating losses, totaled $474,000,
$117,000, and $-0-, respectively. Income tax expense for the years ended
January 31, 1997, 1996, 1995 was $357,000, $117,000, and $-0-,
respectively. The resulting effect is a zero income tax expense in each
year.

NOTE 11 - WARRANTS:

On August 9, 1995, the Company issued 2,000,000 stock purchase warrants
which expire on August 9, 2000. The warrants are to purchase fully paid
and non-assessable shares of the common stock; par value $0.001 per share
at a purchase price of $2.00 per share.

On September 1, 1996, the Company issued 393,000 stock purchase warrants
as part of its private placement offering that closed May 31, 1996. The
warrants are to purchase fully paid and non-assessable shares of the
common stock; par value $0.001 per share at a purchase price of $5.00 per
share and will be extended or canceled based on whether the warrant holder
agrees to a lock-up period on their stock as requested by an investment
banking group proposing funding to the Company. The extension is for a
period of 18 months from the date on which the investment group exercises
its option to purchase shares of the Company's common stock. As of May 1,
1997, more than eighty percent of the outstanding warrants are subject to
the extension which expired March 1, 1997. To date, no warrants have been
exercised.

NOTE 12 - COMMITMENTS AND CONTINGENCIES:

The Company lease its primary office space on a month to month basis at a
rate of $3,000 per month.

Page 32
F16
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 - SUBSEQUENT EVENTS:

Subsequent to January 31, 1997, under the terms of a settlement, the
Company has converted 289,370 shares of its preferred stock to 247,606
shares of common stock; $0.001 par value.

On April 21, 1997 the Company entered into a six month agreement with an
investment banking group to assist the Company in the sale of 1,000,000
shares of common stock for $700,000. In consideration for granting the
option to the investment banking group, the Company will receive a
non-refundable $50,000 fee for the option upon filing of its January 31,
1997 financial statements with the Securities and Exchange Commission.

On March 12, 1997 and April 25, 1997, in exchange for mutual releases for
asserted and un- asserted claims and in the context of settling those
claims the Company entered into an agreement with John O. Schofield,
former Chairman of the Board of the Company whereby common stock, Class A
preferred stock, and cash are to be exchanged for a release from a binding
covenant not to compete agreement, revision of terms on a certain notes
payable, and release of liens on certain oil and gas properties. Under the
terms of the agreement, Mr. Schofield is to deliver 1,070,125 shares of
the Company's common stock for cancellation for which he is to be
reimbursed $100,000 derived at the rate of 7% of the Company's net
proceeds from future offerings provided the gross proceeds of such
offering exceed $50,000. On May 1, 1997 as part of the agreement, Mr.
Schofield delivered to the Company 41,764 Class A preferred for
cancellation and converted and retained 175,000 Class A preferred shares.
As of May 14, 1997, execution of this agreement is in progress.

As of May 14, 1997 the Company was not engaged in any legal proceedings
that are expected, individually or in the aggregate, to have a material
adverse effect on the Company.
Page 33
F17
<PAGE>
SIGNATURES

In accordance with the requirements of Section 13 or 15(d) of the
Exchange Act, the registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 14th
day of May, 1997.

ARXA INTERNATIONAL ENERGY, INC.

By /S/WILLIAM J. BIPPUS

WILLIAM J BIPPUS, President and
Chief Executive Officer

Pursuant to the requirements of the Exchange Act, this report has
been signed by the following persons on behalf of the registrant and in
the capacities and on the dates indicated:

SIGNATURE TITLE DATE

/S/WILLIAM J. BIPPUS President and Principal May 14, 1997
WILLIAM J. BIPPUS Executive Officer

/S/SAMMY FLESCHLER Secretary and Treasurer May 14, 1997
SAMMY FLESCHLER

/S/UMBERTO BROVEDANI Director May 14, 1997
UMBERTO BROVEDANI

/S/THOMAS ABATE Director May 14, 1996
THOMAS ABATE

/S/GREGORY STEPHENS Director May 14, 1996
GREGORY STEPHENS
Page 34
<PAGE>
EXHIBIT INDEX

EXHIBIT
NO. IDENTIFICATION OF EXHIBIT
------- ----------------------------------------

3.1(1) Certificate of Incorporation

3.2(1) Bylaws

4.1(2) Designation of Series A Preferred Stock

4.2(2) Warrants for the purchase of the common stock of the
Registrant.
----------------------------
(1) Previously filed as an exhibit to the Company's Form 8-K/A dated
September 29, 1995.

(2) Previously filed as an exhibit to the Company's Form 10-KSB dated
January 31, 1996.
Page 35

<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-END> JAN-31-1997
<CASH> 2
<SECURITIES> 0
<RECEIVABLES> 15
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 40
<PP&E> 1625
<DEPRECIATION> 9
<TOTAL-ASSETS> 1737
<CURRENT-LIABILITIES> 181
<BONDS> 0
0
427
<COMMON> 7
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1737
<SALES> 20
<TOTAL-REVENUES> 31
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1071
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11
<INCOME-PRETAX> (1051)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1051)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1051)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> (.12)

</TABLE>