<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-QSB
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE QUARTERLY PERIOD ENDED: JANUARY 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER: 2-99565
ARXA INTERNATIONAL ENERGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3784149
(State or other jurisdiction) (IRS Employer
of incorporation or organization Identification No.)
110 Cypress Station Drive, Suite 280
HOUSTON, TEXAS 77090
(Address of principal executive offices, including zip code)
(281) 444-1088
(Registrant's telephone number, including area code)
-------------
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 [ ] No [x ]
As of March 16, 1998, there were 20,437,502 shares of Common Stock outstanding.
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
INDEX TO FORM 10-Q
FOR THE THREE MONTHS ENDED JANUARY 31, 1998
<TABLE>
PAGE
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<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets - January 31, 1998 (unaudited)
and October 31, 1997 1
Consolidated Statements of Operations - For the Three Months
Ended January 31, 1998 (unaudited) and January 31, 1997 (unaudited) 2
Consolidated Statement of Stockholders' Equity - For the Three Months
Ended January 31, 1998 (unaudited) 3
Consolidated Statements of Cash Flows- For the Three Months
Ended January 31, 1998 (unaudited) and January 31, 1997 (unaudited) 4
Notes to Unaudited Consolidated Financial Statements 5
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II - OTHER INFORMATION
ITEM 5. Other Information 9
</TABLE>
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ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
January 31, 1998 October 31, 1997
---------------- ----------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash, including interest-bearing balances of $140,675
and $80,350, respectively $ 178,557 $ 152,883
Accounts receivable, no allowance for doubtful accounts 180,199 251,333
Income tax receivable 70,831 70,831
Oil and gas property held for sale - 466,343
Other current assets 9,203 342
----------- -----------
Total current assets 438,790 941,732
PROPERTY AND EQUIPMENT, (full cost method for oil and gas
properties), net of accumulated depletion, depreciation,
amortization and provision for impairment 2,156,682 1,919,954
OTHER ASSETS 57,552 57,833
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Total assets $ 2,653,024 $ 2,919,519
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to stockholders $ 211,312 $ 102,285
Accounts payable 124,843 16,054
Other current liabilities 54,649 210,675
----------- -----------
Total current liabilities 390,804 329,014
LONG-TERM DEBT 79,770 79,770
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value; 100,000,000 shares
authorized; 20,437,502 and 6,505,837 shares issued
and outstanding, respectively 20,437 20,377
Additional paid-in capital 4,024,516 3,937,075
Accumulated deficit (1,862,503) (1,446,717)
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Total stockholders' equity 2,182,450 2,510,735
----------- -----------
Total liabilities and stockholders' equity $ 2,653,024 $ 2,919,519
----------- -----------
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</TABLE>
SEE ACCOMPANYING NOTES TO THESE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
1
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ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
For the Three Months Ended
----------------------------------
January 31, 1998 January 31, 1997
---------------- ----------------
<S> <C> <C>
OIL AND GAS REVENUES $ 288,034 $ 227,757
COST AND EXPENSES:
Lease operating expenses 124,956 52,422
Severance taxes 4,080 7,564
Depletion, depreciation, amortization
and provision for impairment 97,822 80,154
General and administrative 402,992 103,787
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Total cost and expenses 629,850 243,927
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LOSS FROM OPERATIONS (341,816) (16,170)
OTHER INCOME (EXPENSE):
Interest income 892 2,180
Interest expense (4,797) (11,031)
Equity in loss of oil and gas venture (97,790) (5,000)
Other 27,725 8,223
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(73,970) (5,628)
---------- ----------
LOSS BEFORE INCOME TAXES (415,786) (21,798)
INCOME TAX BENEFIT, net - 4,899
---------- ----------
NET LOSS $ (415,786) $ (16,899)
---------- ----------
---------- ----------
NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE $ (.02) $ (.002)
---------- ----------
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WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES 20,437,502 6,505,837
---------- ----------
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</TABLE>
SEE ACCOMPANYING NOTES TO THESE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
2
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ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED JANUARY 31, 1998
(UNAUDITED)
<TABLE>
Common Stock Additional Total Stock-
------------------------- Paid-in Accumulated -holders'
Shares Amount Capital deficit Equity
---------- --------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
BALANCES, October 31, 1997 20,377,000 $ 20,377 $ 3,937,075 $ (1,446,717) $ 2,510,735
Net Cancellation of shares (164,692) (166) 166 - -
Issuance of stock for compensation 250,000 250 87,250 - 87,500
J. Schofield agreement cancellation (25,000) (25) 25 - -
Rounding 194 1 - - 1
Net loss - - - (415,786) (415,786)
---------- --------- ------------ ------------- ------------
BALANCES, January 31, 1998 20,437,502 $ 20,437 $ 4,024,516 $ (1,862,503) $ 2,182,450
---------- --------- ------------ ------------- ------------
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</TABLE>
SEE ACCOMPANYING NOTES TO THESE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
For the Three Months Ended
----------------------------------
January 31, 1998 January 31, 1997
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (415,786) $ (16,899)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depletion, depreciation, amortization and
provision for impairment 97,822 80,154
Deferred tax benefit - (4,117)
Equity in loss of oil and gas venture 97,790 5,000
Changes in operating assets and liabilities:
Accounts receivable 60,948 (43,570)
Oil and gas property for sale 466,343 -
Other current assets (6,549) 10,791
Accounts payable 108,790 79,682
Other current liabilities (68,526) 11,098
Accrued income taxes - (782)
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Net cash provided by operating activities 340,832 121,357
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of oil and gas property held for sale (5,777) -
Additions to office equipment (11,830) (37,647)
Purchase of oil and gas property (382,887) (62,626)
Purchase of investment in oil and gas venture (97,790) (5,000)
Proceeds from sale of oil and gas property, net 74,099 -
Purchase price adjustments on oil and gas property
acquisition - 3,687
Purchase of other assets - (1,736)
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Net cash used in investing activities (424,185) (103,322)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stockholder notes 134,027 -
Payment of stockholder notes (25,000) -
Sales of common stock - 29,703
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Net cash provided by financing activities 109,027 29,703
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INCREASE IN CASH AND CASH EQUIVALENTS 25,674 47,738
CASH AND CASH EQUIVALENTS, beginning of period 152,883 472,480
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CASH AND CASH EQUIVALENTS, end of period $ 178,557 $ 520,218
---------- ----------
---------- ----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ - $ -
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---------- ----------
Interest paid $ - $ -
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---------- ----------
SUPPLEMENTAL CASH FLOW DISCLOSURES OF NONCASH
TRANSACTIONS:
Issuance of stock for compensation $ 87,500 $ 9,000
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</TABLE>
SEE ACCOMPANYING NOTES TO THESE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
4
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ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION -- ARXA International Energy, Inc. ("ARXA" or "the Company"),
was incorporated in Delaware and is engaged in oil and gas exploration and
development in Utah, Louisiana and Texas. ARXA USA, Inc., a wholly owned
subsidiary, was incorporated in Delaware. All significant intercompany
accounts and transactions have been eliminated in consolidation. On October
27, 1997, the Company acquired substantially all of the assets and
liabilities of Phoenix Energy Group, Inc. (Phoenix). To consummate the
transaction, the Company exchanged 12,786,310 shares of the Company's
common stock, representing approximately 63% of the issued and outstanding
shares, plus warrants to purchase 3,297,000 shares at an exercise price of
$2.00 per share. The business combination was accounted for on the purchase
method of accounting. No goodwill arose from this transaction. As Phoenix
obtained a controlling interest in the Company, the transaction was
accounted for as a reverse acquisition. Therefore, for financial statement
purposes, Phoenix is considered the acquiror. The consolidated financial
statements reflect the historical operations and cost basis of Phoenix
since its inception; however, its stockholders' equity section has been
restated to reflect the capital structure of ARXA.
Phoenix Energy Group, Inc. was incorporated in Texas on March 14, 1996 and
was engaged in oil and gas exploration and development in south Texas.
Phoenix was formed by issuing notes and common stock to certain of the
larger oil and gas interest owners formerly associated with Prospector
Petroleum Inc. (Prospector). Phoenix, through a private placement, acquired
approximately 93% of the available working interests formerly associated
with Prospector at various times during the months of August 1996 through
August 1997. Revenues and related costs associated with these properties
were recognized beginning on the respective dates acquired. Phoenix issued
5,039,761 shares of common stock during 1996 and 82,866 shares of common
stock in 1997 to effectuate the acquisition of these working interests.
UNAUDITED INTERIM INFORMATION -- The accompanying financial information for
the periods ended January 31, 1998 and 1997 has been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. The financial statements reflect all
adjustments, consisting of normal recurring accruals, which are, in the
opinion of management, necessary to fairly present such information in
accordance with generally accepted accounting principles.
5
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ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
2. BUSINESS COMBINATION:
The Company acquired various oil and gas interests during 1996 and 1997
from certain oil and gas interest owners formerly associated with
Prospector. In addition on October 27, 1997, the Company acquired
substantially all of the assets and liabilities of Phoenix in exchange for
12,786,310 shares of the Company's common stock, representing 63% of the
issued and outstanding shares, plus warrants to purchase 3,297,000 shares
at an exercise price of $2.00 per share. The business combination was
accounted for under the purchase method of accounting. ARXA's oil and gas
revenues, net loss applicable to common stockholders, and net loss per
share on an unaudited pro forma basis, assuming the ARXA transaction had
occurred on November 1, 1996 and January 1, 1997, respectively, and the oil
and gas interests acquired during 1996 from the interest owners formerly
associated with Prospector had been acquired on November 1, 1996, would be
as follows:
<TABLE>
For the Three
Month Period
Ended
January 31,
1997
(unaudited)
--------------
<S> <C>
Oil and Gas Revenues $ 125,913
Net Income (Loss) $(225,651)
Net Income (Loss) per Share $ (.03)
</TABLE>
These pro forma amounts were prepared using assumptions which are based on
estimates and are subject to revision. The pro forma combined results are
not necessarily indicative of actual results that would have been achieved
had the acquisition occurred on the dates indicated, or of future results.
3. OTHER ASSETS:
The investment in an oil and gas venture at January 31, 1998 consisted of
cash advances of $365,203, reduced by losses of $365,203 ($97,790 for the
current quarter). The venture was formed in 1997 by officers of the
Company. The Company owns a 3% interest in the venture. The agreement was
terminated on March 1, 1998, by both parties.
6
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4. NOTES PAYABLE TO STOCKHOLDERS:
Notes payable to stockholders at October 31, 1997 includes an unsecured
note payable to a stockholder of $25,000, due December 30, 1997. The note
is non-interest bearing and interest is imputed at 8%. The note provided
for repayment in cash or common stock of the Company at a value of $1.00
per share, upon the option of the lender. On December 29, 1997, the Company
paid the note off in full, in cash.
Notes payable to stockholders at January 31, 1998 and October 31, 1997 also
includes an unsecured note payable to a stockholder and his affiliates of
$77,285. The note is non-interest bearing (imputed at 8%) and is payable at
7% of net proceeds of future offerings received through March 1999. If not
repaid by March 1999, the note automatically converts to the Company's
common stock at the average market price for the five days preceding March
13, 1999.
Notes payable to stockholders at January 31, 1998 additionally includes
unsecured notes payable to certain stockholders of $134,027. The terms and
conditions are currently being negotiated.
5. LONG-TERM DEBT:
Long-term debt at January 31, 1998 and October 31, 1997 consisted of an
unsecured note payable to a company affiliated with a stockholder of the
Company. The note bears interest at 8% and is payable in quarterly
installments. To the extent that the interest is paid at each quarter end,
the due date is automatically extended until March 12, 1999.
6. STOCK OPTION PLAN:
The Company has a stock option plan under which options to purchase a
maximum of 1,000,000 shares of common stock may be issued to employees,
consultants and non-employee directors of the Company. The stock option
plan provides both for the grant of options intended to qualify as
"incentive stock options" under the Internal Revenue Code of 1986, as
amended, as well as options that do not so qualify. As of January 31,
1998, no options have been granted under the Plan.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
A. RESULTS OF OPERATIONS
Oil and gas revenues for the three months ended January 31, 1998 were
$288,034, which is a $60,277 increase over the $227,757 for the three months
ended January 31, 1997. Lease operating expense, which includes workover
costs, increased from $52,422 for the three months ended January 31, 1997 to
$124,956 for the three months ended January 31, 1998, an increase of $72,534.
Both increases are primarily due to the Garcia #1 well, located in Brooks
County, Texas, which was re-worked so as to bring it back on production after
having been shut-in since December 1996.
General and administrative costs increased from $103,787 for the three months
ended January 31, 1997 to $402,992 for the three months ended January 31,
1998. The increase is solely attributable to the Company's efforts to expand
its capacity to evaluate numerous and larger oil and gas acquisitions to
present to equity and debt financing sources, so as to grow the Company.
(See Part II, Item 6-C, "Management's Discussion and Analysis of Financial
Condition and Plan of Action", in the Company's 10-KSB for the period ended
October 31, 1997, filed with the Securities and Exchange Commission on March
12, 1998).
B. LIQUIDITY AND CAPITAL RESOURCES
Net cash flow provided by operating activities was $340,832 for the three
months ended January 31, 1998 as compared to net cash flow provided by
operating activities of $121,357 for the three months ended January 31, 1997.
The primary source of cash for the Company for the three months ended January
31, 1998 was from the sale of the Company's Sayre Ranch Prospect in Oklahoma
to a third party for $468,700 plus a commission of $18,750, whereas, the
source of cash for the three months ended January 31, 1997 was solely from
operations.
Net cash was used in investing activities in the three months ended January
31, 1998 by 1) costs to drill and complete the Vesley #1 well for $200,875
and the Taylor #1 well for $53,750, 2) acquisition of the Naconiche Creek
Prospect for $40,000, 3) acquisition and project development costs in the
Michigan Basin of $63,000 and 4) continued funding of the IPX oil and gas
venture for $97,790, (the agreement has been terminated March 1, 1998). Net
cash was used in investing activities in the three months ended January 31,
1997 primarily on acquiring additional joint venture working interests
formerly associated with Prospector Petroleum and in outfitting the Company's
offices and equipment for newly hired employees.
The Company's cash flow from financing activities during the three months
ended January 31, 1998 included proceeds from notes from three stockholders
of $134,027 (see Note 4 in the "Notes to Unaudited Consolidated Financial
Statements"). The Company sold $29,703 of common stock for cash during the
three months ended January 31, 1997.
At January 31, 1998, the Company's current assets of $438,790 exceed its
current liabilities of $390,804 by $47,986. In order to alleviate the
Company's marginal working capital position, management, has already
instituted personnel terminations, effective March 1, 1998, trimmed its
corporate overhead, eliminated non-essential oil and gas property
expenditures and has terminated its agreement in an oil and gas venture with
IPX, effective March 1, 1998. The Company anticipates future increases in
net cash flow from the Vesley #1 and Taylor #1 completions and from
increased production from the Garcia #1.
The Company is currently seeking additional sources of both equity and debt
financing to fund current and future acquisitions. (See Part II, Item 6-C,
"Management's Discussion and Analysis of Financial Condition and Plan of
Action", in the Company's 10-KSB for the period ended October 31, 1997, filed
with the Securities and Exchange Commission on March 12, 1998).
8
<PAGE>
PART II
ITEM 5. OTHER INFORMATION
CHANGES IN BOARD OF DIRECTORS
JOHN L. MORAN, a Director and Vice President of Exploration for the Company
since the "reverse acquisition" with Phoenix Energy Group, Inc. on October
27, 1997 and President of Integrated Petroleum Exploration, Inc. ("IPX")
resigned both of his positions in ARXA effective March 1, 1998, to pursue
other business interests.
ROBERT G. FARRIS, age 68, was appointed by the Board as a Director, on March
4, 1998, to fill the John Moran vacancy. Mr. Farris is a significant
stockholder and a director of Phoenix Energy Group, Inc. since its inception
on March 14, 1996. He is the President of Valley Transit Co., Inc. of
Harlingen, Texas. Mr. Farris was a founding director of the Harlingen State
Bank and is currently a director of its successor, Texas Regional Bancshares
(TRBS, Nasdaq) He is actively involved in the development of oil and gas and
real estate ventures for his own account.
LARRY R. KEELER, age 58, was also appointed by the Board as a new Director,
on March 4, 1998. Mr. Keeler is a significant stockholder and a director of
Phoenix Energy Group, Inc. since its inception on March 14, 1996. He is the
owner of a large CPA practice in The Woodlands, Texas. He is actively
involved in oil and gas and real estate ventures for his own account.
IPX AGREEMENT TERMINATION
In conjunction with his resignation as a Director of ARXA, Mr. Moran and the
Company, mutually agreed that due to the Company's current working capital
position, it was in both parties best interests to terminate the IPX
agreement, effective March 1, 1998 (see Note 3 in the "Notes to Unaudited
Consolidated Financial Statements")
9
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ARXA INTERNATIONAL ENERGY, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to signed on its behalf by the
undersigned thereunto duly authorized.
ARXA INTERNATIONAL ENERGY, INC.
(Registrant)
Date: 3-21-98 L. CRAIG FORD
------------------------------------
President
Date: 3-21-98 DENNIS P. McGRATH
------------------------------------
Vice President and Controller
10
<TABLE> <S> <C>
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<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM JANUARY 31, 1998 FORM 10-Q FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> JAN-31-1998
<CASH> 178,557
<SECURITIES> 0
<RECEIVABLES> 251,031
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 438,790
<PP&E> 2,617,573
<DEPRECIATION> (460,891)
<TOTAL-ASSETS> 2,653,024
<CURRENT-LIABILITIES> 390,804
<BONDS> 0
0
0
<COMMON> 20,437
<OTHER-SE> 2,162,013
<TOTAL-LIABILITY-AND-EQUITY> 2,653,024
<SALES> 288,034
<TOTAL-REVENUES> 288,034
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 629,850
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,797
<INCOME-PRETAX> (415,786)
<INCOME-TAX> 0
<INCOME-CONTINUING> (415,786)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (415,786)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
