<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_______________
FORM 10-QSB
_______________
[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, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission File Number: 2-99565
ARXA INTERNATIONAL ENERGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3784149
(State or other jurisdiction of (IRS Employer identification No.)
incorporation or organization)
530 Wells Fargo Drive, Suite 310
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 [X] No [ ]
As of March 12, 1999, there were 4,953,918 shares of Common Stock outstanding.
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JANUARY 31, 1999
<TABLE>
<CAPTION>
Part I - Financial Information Page
------------------------------ ----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets - January 31, 1999 (unaudited)
and October 31, 1998.....................................................1
Consolidated Statements of Operations - For the Three months
Ended January 31, 1999 (unaudited) and January 31, 1998 (unaudited)......2
Consolidated Statement of Stockholders' Equity - For the Three months
Ended January 31, 1999 (unaudited).......................................3
Consolidated Statements of Cash Flows - For the Three months
Ended January 31, 1999 (unaudited) and January 31, 1998 (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 1. Legal Proceedings................................................9
Item 5. Other Information ...............................................9
</TABLE>
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
Consolidated Balance Sheets
<TABLE>
<CAPTION>
January 31, October 31,
1999 1998
----------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 35,503 $ 167,105
Accounts receivable, net of allowance for doubtful accounts 8,229 119,430
--------------- -------------
Total current assets 43,732 286,535
Property and Equipment, (full cost method for oil and gas properties), net
of accumulated depletion, depreciation,
amortization and provision for impairment 1,702,947 1,708,589
Other Assets 62,907 63,189
--------------- -------------
Total assets $ 1,809,586 $ 2,058,313
=============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable to stockholders $ 157,055 $ 157,055
Accounts payable 131,840 25,904
Other current liabilities 48,750 48,750
--------------- -------------
Total current liabilities 337,645 231,709
Commitments and Contingencies -- --
Stockholders' Equity:
Preferred stock, $1.00 par value; 2,000,000 shares authorized; none
issued and outstanding -- --
Common stock, $.001 par value; 100,000,000 shares authorized; 4,954 4,654
4,953,918 and 4,653,918 shares issued and outstanding, respectively
Additional paid-in capital 5,446,025 5,296,325
Unearned stock based compensation of consultants and others -- (279,359)
Accumulated deficit (3,979,038) (3,195,016)
--------------- -------------
Total stockholders' equity 1,471,941 1,826,604
--------------- -------------
Total liabilities and stockholders' equity $ 1,809,586 $ 2,058,313
=============== =============
</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>
<CAPTION>
For the Three months Ended
---------------------------------------------
January 31, 1999 January 31, 1998
-------------------- ---------------------
<S> <C> <C>
Oil and Gas Revenues $ 23,081 $ 288,034
Cost and Expenses:
Lease operating expenses 55,479 124,956
Severance taxes 2,698 4,080
Depletion, depreciation, amortization
and provision for impairment 16,983 97,822
General and administrative 696,381 402,992
---------------- ----------------
Total cost and expenses 771,541 629,850
---------------- ----------------
Loss From Operations (748,460) (341,816)
Other Income (Expense):
Interest income 690 892
Interest expense (1,451) (4,797)
Equity in loss of oil and gas venture -- (97,790)
Other (34,801) 27,725
---------------- ----------------
(35,562) (73,970)
---------------- ----------------
Loss Before Income Taxes (784,022) (415,786)
Income Tax Benefit, net -- --
---------------- ----------------
Net Loss $ (784,022) $ (415,786)
================ ================
Net Loss Per Common and Common Equivalent
Share $ (.16) $ (.10)
================ ================
Weighted Average Common and Common Equivalent
Shares 4,953,918 4,087,500
================ ================
</TABLE>
See accompanying notes to these unaudited consolidated financial statements.
2
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
Consolidated Statement of Stockholders' Equity
For the Three months Ended January 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional Total Stock
---------------------------- Paid-In Unearned Accumulated Holders'
Shares Amount Capital Compensation Deficit Equity
------------- ------------- -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances, October 31, 1998 4,653,918 $ 4,654 $ 5,296,325 (279,359) $ (3,195,016) $ 1,826,604
Issuance of common stock for
consulting services, previously
issued and earned this quarter -- -- -- 279,359 -- 279,359
Issuance of common stock for
consulting services 300,000 300 149,700 -- -- 150,000
Net loss -- -- -- -- (784,022) (784,022)
--------- ------------ ------------ ------------ ------------ ------------
Balances, January 31, 1999 4,953,918 $ 4,954 $ 5,446,025 $ -- $ (3,979,038) $ 1,471,941
========= ============ ============ ============ ============ ============
</TABLE>
See accompanying notes to these unaudited consolidated financial statements.
3
<PAGE>
ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Three months Ended
-----------------------------------------------
January 31, January 31,
1999 1998
----------------- ---------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (784,022) $ (415,786)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depletion, depreciation, amortization and
provision for impairment 16,983 97,822
Bad debt expense 77,039 --
Equity in loss of oil and gas venture -- 97,790
Consulting services paid with common stock 429,359 --
Changes in operating assets and liabilities:
Accounts receivable 34,162 60,948
Oil and gas property held for sale -- 466,343
Other current assets -- (6,549)
Accounts payable 105,936 108,790
Other current liabilities -- (68,526)
---------------- ---------------
Net cash provided by (used in) operating
activities (120,543) 340,832
---------------- ---------------
Cash Flows From Investing Activities:
Purchase of oil and gas property held for sale -- (5,777)
Additions to office equipment -- (11,830)
Additions to oil and gas property (11,059) --
Purchase of oil and gas property -- (382,887)
Purchase of investment in oil and gas venture -- (97,790)
Proceeds from sale of oil and gas property, net -- 74,099
---------------- ---------------
Net cash used in investing activities (11,059) (424,185)
---------------- ---------------
Cash Flows From Financing Activities:
Proceeds from stockholder notes -- 134,027
Payment of stockholder notes -- (25,000)
Sales of common stock -- --
---------------- ---------------
Net cash provided by financing activities -- 109,027
---------------- ---------------
Increase (Decrease) in Cash (131,602) 25,674
Cash, beginning of period 167,105 152,883
---------------- ---------------
Cash, end of period $ 35,503 $ 178,557
================ ===============
Supplemental Cash Flow Disclosures of Noncash
Transactions:
Issuance of stock for compensation $ -- $ 87,500
================ ===============
Issuance of stock for consulting services $ 429,359 $ --
================ ===============
</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 (pre-split) shares of the Company's common stock,
representing approximately 63% of the issued and outstanding shares,
plus warrants to purchase 3,297,000 (pre-split) shares at an exercise
price of $2.00 (pre-split) per share. The business combination was
accounted for on the purchase method of accounting. No goodwill arose
from this transaction. As Phoenix obtained a controlling interest in the
Company, the transaction was accounted for as a reverse acquisition.
Therefore, for financial statement purposes, Phoenix is considered the
acquiror. The consolidated financial statements reflect the historical
operations and cost basis of Phoenix since its inception; however, its
stockholders' equity section has been restated to reflect the capital
structure of ARXA.
Phoenix Energy Group, Inc. was incorporated in Texas on March 14, 1996
and was engaged in oil and gas exploration and development in south
Texas. Phoenix was formed by issuing notes and common stock to certain
of the larger oil and gas interest owners formerly associated with
Prospector Petroleum Inc. (Prospector). Phoenix, through a private
placement, acquired approximately 93% of the available working interests
in six wells, formerly associated with Prospector, at various times
during the months of August 1996 through August 1997. Revenues and
related costs associated with these properties were recognized beginning
on the respective dates acquired. Phoenix issued 1,007,952 shares of
Phoenix common stock during 1996 and 16,573 shares of Phoenix common
stock in 1997 to effectuate the acquisition of these working interests.
Reverse Stock Split - Effective October 26, 1998, the Company declared a
one to five reverse common stock split. Under the terms of the reverse
stock split, one new, post-split share was issued for five pre-split
shares, with fractional shares rounded up to a full share. Accordingly,
the financial statements have been restated to reflect this reverse
stock split for all periods presented.
Unaudited Interim Information - The accompanying financial information
for the quarterly periods ended January 31, 1998 and 1999 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
<PAGE>
2. Going Concern:
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. The Company had a net loss
of $784,022 and negative cash flow from operations of $120,543 for the
quarterly period ended January 31, 1999 and had an accumulated deficit
of $3,979,038 at that date, which raises substantial doubt about its
ability to continue as a going concern.
The Company has targeted several acquisition opportunities and is
aggressively seeking financial sources to assist with the financing.
3. Notes Payable to Stockholders:
Notes payable to stockholders at January 31, 1999 and October 31, 1998
includes an unsecured note payable to a stockholder and his affiliates
of $77,285. The note is non-interest bearing (imputed at 8%) and is
payable at 7% of net proceeds of future offerings received through March
12, 1999. If not repaid by March 12, 1999, the note automatically
converts to the Company's common stock at the average market price for
the five days preceding March 12, 1999.
Notes payable to stockholders at January 31, 1999 and October 31, 1998
also includes an unsecured note payable to a company affiliated with a
stockholder of the Company in the amount of $79,770. The note bears
interest at 8% and is payable in quarterly installments. To the extent
that the interest is paid at each quarter end, the due date is
automatically extended until March 12, 1999.
4. Year 2000:
The Company has begun to address possible remedial efforts in connection
with computer software that could be affected by the Year 2000 problem,
which is the result of computer programs being written using two digits
rather than four to define the applicable year. Any programs that have
time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a major system failure
or miscalculations. The Year 2000 problem may impact the Company and/or
other entities with which the Company transacts business. The Company
has not determined the impact of the Year 2000 problem on their future
operations or the costs they may incur to remedial the problem.
6
<PAGE>
5. Stock Option Plan:
The Company has a stock option plan under which options to purchase a
maximum of 200,000 shares of common stock may be issued to employees,
consultants and non-employee directors of the Company. The stock option
plan provides both for the grant of options intended to qualify as
"incentive stock options" under the Internal Revenue Code of 1986, as
amended, as well as options that do not so qualify. As of January 31,
1999, 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, 1999 were
$23,081, which is a $264,953 decrease from the $288,034 for the three
months ended January 31, 1998 and is primarily attributed to the sale of
the Flowella and Colson Fields, effective June 1, 1998. Lease operating
expense, which includes workover costs, decreased from $124,956 for the
three months ended January 31, 1998 to $55,479 for the three months ended
January 31, 1999, a decrease of $69,477. The decrease is primarily due to
the Garcia #1 well, located in Brooks County, Texas, which was re-worked,
in the quarter ended January 31, 1998.
General and administrative costs increased from $402,992 for the three
months ended January 31, 1998 to $696,381 for the three months ended
January 31, 1999. The increase of $293,389, primarily consists of financial
advisory and consulting services paid for with Form S-8 registered common
stock, valued at $429,359, offset by a decrease in payroll and office
overhead expenses of $135,970.
B. Liquidity and Capital Resources
Net cash flow from operating activities was a negative $120,543 for the
three months ended January 31, 1999 as compared to a positive of $340,823
for the three months ended January 31, 1998.
The principle source of cash for the three months ended January 31, 1999
was $34,162 from accounts receivable collections and $105,936 from
increased accounts payable.
The primary source of cash for the three months ended January 31, 1998 was
from:
1. the sale of the Sayre Ranch Prospect in Oklahoma, to a third
party, for $468,700 plus commission income of $18,750
2. the sale of the West Sandy Creek property, to a third party, for
a net of $48,526
3. proceeds of shareholder notes of $134,027
Net cash was used in investing activities in the three months ended January
31, 1999 for well costs of $11,059 on the West Lavaca River property.
Net cash was used in investing activities in the three months ended
January 31, 1998 primarily on:
1. costs to drill and complete the Vesley #1 well for $200,875
2. costs to drill and complete the Taylor #1 well for $53,750
3. acquisition of the Naconiche Creek Prospect for $40,000
4. acquisition and development costs in the Michigan Basin for
$63,000
5. funding of the IPX oil and gas venture for $97,790, (the
agreement was terminated March 1, 1998).
At January 31, 1999, the Company's current liabilities of $337,645 exceed
its current assets of $43,732 by $293,913. The Company had a net loss of
$784,022 and negative cash flow from operations of $120,543 for the
quarterly period ended January 31, 1999 and had an accumulated deficit of
$3,979,038 at that date, which raises substantial doubt about the Company's
ability to continue as a going concern. The Company is continuing to target
several acquisition opportunities and is aggressively seeking financial
sources to assist with the financing.
The Company notes that there is not sufficient cash flow from operations to
continue to operate the business for the next fiscal quarter.
8
<PAGE>
C. Management's Response and Plan of Operations
During the past year, the industry experienced severe reductions in prices
for crude oil and natural gas. Capital formation in the current environment
is extremely difficult, especially for OTC, Bulletin Board companies, like
ARXA. Under-capitalization has continuously been, since its inception, the
most serious problem facing the Company. In order to cope, the Company sold
many of our low yield oil and gas assets and replaced these with new
reserves with significant upside potential.
The dilemma facing the Company now is the need to raise the capital to
develop these assets as well as some of the many opportunities emerging
from the general restructuring of the industry. The Company has targeted
several acquisition opportunities and is aggressively seeking financial
sources to assist with financing.
The Company believes that it will ultimately be successful in raising new
capital because:
1. it has no long term debt or secured debt on its balance sheet
2. has identified numerous acquisition and exploitation
opportunities with attractive risk and return on investment
profiles
3. a management team committed to execute the Company's strategic
plan.
4. it is attractive to potential merger partners...ARXA is one of
the few OTC, Bulletin Board companies that is fully reporting
to the Securities and Exchange Commission.
PART II
Item 1. Legal Proceedings
The Company, in 1998, had filed suit against a former employee, Kenneth
Koepke, who was formerly the Vice President of Corporate Communications.
On March 3, 1999, a full and complete settlement was reached, as long as
the Company makes a payment of $15,000 by March 26, 1999.
Item 5. Other Information
The Company is in default on cash payment of a note payable to a
stockholder in the amount of $77,285, due March 12, 1999. If not repaid by
March 12, 1999, the note automatically converts to the Company's common
stock at the average market price for the five days preceding March 12,
1999. Accordingly, 278,004 restricted shares of the Company's common stock,
at a price of $.278 per share, will be issued to satisfy this obligation.
The Company is in default on payment of a note payable to a stockholder in
the amount of $79,770 due March 12, 1999. Unlike the first note referred to
in the above paragraph, this second note has no provision for automatic
conversion into common stock.
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: 3-15-99 L. CRAIG FORD
/s/ L. Craig Ford
------------------
President
Date: 3-15-99 DENNIS P. McGRATH
/s/ Dennis P. McGrath
------------------------
Vice President and Controller
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM JANUARY 31, 1999 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-31-1999
<PERIOD-END> JAN-31-1999
<CASH> 35,503
<SECURITIES> 0
<RECEIVABLES> 8,229
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 43,732
<PP&E> 2,604,535
<DEPRECIATION> (901,588)
<TOTAL-ASSETS> 1,809,586
<CURRENT-LIABILITIES> 337,645
<BONDS> 0
0
0
<COMMON> 4,954
<OTHER-SE> 1,466,987
<TOTAL-LIABILITY-AND-EQUITY> 1,809,586
<SALES> 0
<TOTAL-REVENUES> 23,081
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 771,541
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,451
<INCOME-PRETAX> (784,022)
<INCOME-TAX> 0
<INCOME-CONTINUING> (784,022)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (784,022)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> (.16)
</TABLE>
