-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H94wehpovJwXR6qaEg3uyIBqVPUEf0s5HdLbzNIarnizujR268RuMFXsJ76pUsqq eu4SpMcVCRYv8cZYPVQDHw== /in/edgar/work/20000913/0000899243-00-002075/0000899243-00-002075.txt : 20000922 0000899243-00-002075.hdr.sgml : 20000922 ACCESSION NUMBER: 0000899243-00-002075 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20000731 FILED AS OF DATE: 20000913 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARXA INTERNATIONAL ENERGY INC CENTRAL INDEX KEY: 0000774415 STANDARD INDUSTRIAL CLASSIFICATION: [0200 ] IRS NUMBER: 133784149 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 333-52945 FILM NUMBER: 722036 BUSINESS ADDRESS: STREET 1: 2301 14TH STREET STREET 2: SUITE 900 CITY: GULFPORT STATE: MI ZIP: 39501 BUSINESS PHONE: 2288646667 MAIL ADDRESS: STREET 1: 110 CYPRESS STATION DRIVE, SUITE 280 CITY: HOUSTON STATE: TX ZIP: 77090 FORMER COMPANY: FORMER CONFORMED NAME: MAJOR LEAGUE ENTERPRISES INC DATE OF NAME CHANGE: 19951002 10QSB 1 0001.txt FORM 10-Q FOR QUARTER ENDED JULY 31, 2000 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: JULY 31, 2000 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] COMMISSION FILE NUMBER: 2-99565 ARXA INTERNATIONAL ENERGY, INC. (Exact name of registrant as specified in its charter) Delaware 13-3784149 --------------- ----------------- (State or other jurisdiction of (IRS Employer identification No.) incorporation or organization) 2301 14th Street, Suite 900 Gulfport, Mississippi 39501 (Address of principal executive offices, including zip code) (228) 864-6667 (Registrant's telephone number, including area code) _____________ Securities registered under Section 12(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 June 14, 2000, there were 34,939,804 shares of Common Stock outstanding. ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY INDEX TO FORM 10-QSB FOR THE QUARTER ENDED JULY 31, 2000 Part I - Financial Information Page - ------------------------------ ---- Item 1. Financial Statements Consolidated Balance Sheets July 31, 2000 (unaudited) and October 31, 1999................................................. 1 Consolidated Statements of Operations - For the Three months Ended July 31, 2000 (unaudited) and July 31, 1999 (unaudited)........ 2 Consolidated Statements of Operations - For the Nine months Ended July 31, 2000 (unaudited) and July 31, 1999 (unaudited)........ 3 Consolidated Statement of Stockholders' Equity - For the Nine months Ended July 31, 2000 (unaudited)...................................... 4 Consolidated Statements of Cash Flows - For the Nine months Ended July 31, 2000 (unaudited) and July 31, 1999 (unaudited)........ 5 Notes to Unaudited Consolidated Financial Statements................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 12 Part II - Other Information - --------------------------- Item 1. Legal Proceedings............................................. 13 ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY CONSOLIDATED BALANCE SHEETS
July 31, October 31, 2000 1999 (Unaudited) ASSETS ------ CURRENT ASSETS: Cash $ 760 $ 143,493 Accounts receivable, net allowance for doubtfull accounts - - ------------ ------------ Total current assets 760 143,493 PROPERTY AND EQUIPMENT, (full cost method for oil and gas properties), net of accumulated depletion, depreciation, amortization and provision for impairment 12,084,772 11,606,872 OTHER ASSETS 50,453 51,296 ------------ ------------ Total Assets $ 12,135,985 $ 11,801,661 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Payroll Taxes $ 16,314 $ - Accounts payable - 3,860 Notes Payable 500,000 - Accrued interest on notes 47,581 - Other current liabilities 32,000 11,215 ------------ ------------ Total current liabilities 595,895 15,075 STOCKHOLDERS' EQUITY: Preferred stock, $1.00 par value; 2,000,000 shares authorized; none issued and outstanding - - Common stock, $.001 par value; 100,000,000 shares authorized; 34,939,804 and 34,939,804 shares issued and outstanding, respectfully 34,940 34,940 Additional paid-in-capital 16,097,129 16,097,129 Accumulated deficit (4,591,979) (4,345,483) ------------ ------------ Total stockholders' equity 11,540,090 11,786,586 ------------ ------------ Total liabilities and stockholders' equity $ 12,135,985 $ 11,801,661 ============ ============
See accompanying notes to these unaudited consolidated financial statements. 1 ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) For the Three Months Ended ---------------------------------- July 31, July 31, 2000 1999 ---------------------------------- OIL AND GAS REVENUES $ - $ 6,536 COST AND EXPENSES: Lease operatring expenses - 148,736 Severance taxes - 3,475 Depletion, Depreciation, amortization and provision for impairment 6,826 12,812 General and administrative 22,201 184,912 ------------ ------------ Total cost and expenses 29,027 349,935 ------------ ------------ LOSS FROM OPERATIONS (29,027) (343,399) OTHER INCOME (EXPENSES): Interest income - - Dividend income 65 - Interest expense (14,430) - Other - - ------------ ------------ (14,365) - ------------ ------------ LOSS BEFORE INCOME TAXES (43,392) (343,399) INCOME TAX BENEFIT, net - - ------------ ------------ NET LOSS $ (43,392) $ (343,399) ============ ============ NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE- $ (0.001) $ (0.012) BASIC AND DILUTED Weighted Average Common and Common Equivalent Shares 34,939,804 29,598,482 See accompanying notes to these unaudited consolidated financial statements. 2 ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) For the Nine Months Ended ----------------------------- July 31, July 31, 2000 1999 ----------------------------- OIL AND GAS REVENUES $ 12,321 $ 51,429 COST AND EXPENSES: Lease operatring expenses 8,686 209,206 Severance taxes - 7,649 Depletion, Depreciation, amortization and provision for impairment 22,942 47,778 General and administrative 183,325 1,044,780 ----------- ----------- Total cost and expenses 214,953 1,309,413 ----------- ----------- LOSS FROM OPERATIONS (202,632) (1,257,984) OTHER INCOME (EXPENSES): Interest income 1 2,030 Dividend income 3,716 - Interest expense (47,581) (3,146) Other - (34,721) ----------- ----------- (43,864) (35,837) ----------- ----------- LOSS BEFORE INCOME TAXES (246,496) (1,293,821) INCOME TAX BENEFIT, net - - ----------- ----------- NET LOSS $ (246,496) $(1,293,821) =========== =========== NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE- $ (0.007) $ (0.037) BASIC AND DILUTED Weighted Average Common and Common Equivalent Shares 34,939,804 34,839,804 See accompanying notes to these unaudited consolidated financial statements. 3 ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED JULY 31, 2000
Common Stock Additional Total Stock- --------------------------- Paid-In Unearned Accumulated Holders' Shares Amount Capital Compensation Deficit Equity ------------------------------------------------------------------------------------------ BALANCES, October 31, 1999 34,939,804 34,940 16,097,129 - (4,345,483) 11,786,586 Net Loss - - - - (246,496) (246,496) ------------------------------------------------------------------------------------------ Balances, July 31, 2000 34,939,804 34,940 16,097,129 - (4,591,979) 11,540,090
See accompanying notes to these unaudited consolidated financial statements. 4 ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended -------------------------------------- July 31, July 31, 2000 1999 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss (246,496) (1,293,821) Adjustments to reconcile net loss to net cash used in operating activities: Depletion, depreciation, amortization and provision for impairment 22,942 47,778 Bad debt expense - - Equity in loss of oil and gas venture - - Issuance of stock for compensation - 279,359 Issuance of stock for liabilities - - Changes in operating assets and liabilities: Accounts receivable - 102,610 Oil and gas property held for sale - - Other current assets - 564 Accounts payable - 146,872 Other current liabilities 33,240 - Other long-term liabilities 47,581 - Other, net - - -------------- -------------- Net cash used in operating activities (142,733) (716,638) CASH FLOWS FROM INVESTING ACTIVITIES: (Purchase) Sale of oil and gas property held for sale - - Additions to office equipment - - Additions to oil and gas property - - Purchase of oil and gas property - (9,983,532) Investment in oil and gas venture - - -------------- -------------- Net cash provided by (used in) investing activities - (9,983,532) -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from stockholder notes - - Payment of stockholder notes - - Sales of common stock - 10,806,049 -------------- -------------- Net cash divided by financing activities - 10,806,049 -------------- -------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (142,733) 105,879 CASH AND CASH EQUIVALENTS, beginning of period 143,493 167,105 -------------- -------------- CASH AND CASH EQUIVALENTS, end of period $ 760 $ 272,984 ============== ============== SUPPLEMENTAL CASH FLOW DISCLOSURES OF NONCASH TRANSACTIONS: Issuance of stock for oil and gas properties - $ 9,974,239 ============== ============== Conversion of stockholder notes and interest into common stock - - ============== ==============
See accompanying notes to these unaudited consolidated financial statements. 5 ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENT July 31, 2000 NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Organization - ARXA International Energy, Inc. ("ARXA" or "the Company"), and its wholly owned subsidiary ARXA USA, Inc., were incorporated in Delaware and have engaged in oil and gas exploration and development in Utah, Louisiana and Texas. Oil and Gas Revenues - The Company recognizes oil and gas revenues as the oil or gas is produced and sold. As a result, the Company accrues revenue relating to production for which the Company has not received payment. Oil and Gas Property Held for Sale - Oil and gas property held for sale is carried at the lower of cost or market. Oil and Gas Property - The Company follows the full-cost method of accounting for oil and gas property. Under the full-cost method, all costs associated with property acquisition, exploration, and development activities are capitalized into a "full-cost pool". Capitalized costs include lease acquisitions, geological and geophysical work, delay rentals, costs of drilling, completing and equipping successful and unsuccessful oil and gas wells and directly related costs. Gains or losses are normally not recognized on the sale or other disposition of oil and gas properties. The capitalized costs of oil and gas properties, plus estimated future development costs relating to proved reserves, are amortized on a unit-of- production method over the estimated productive life of the proved oil and gas reserves. Depletion expense per mcf equivalent was estimated to be $.64 for the nine months ended July 31, 2000. Capitalized oil and gas property costs, less accumulated amortization and related deferred income taxes, are limited to an amount (the ceiling limitation) equal to the present value of estimated future net revenues from the projected production of proved oil and gas reserves, calculated at prices in effect as of the balance sheet date (with consideration of price changes only to the extent provided by contractual arrangements) at a discount factor of 10%, less the income tax effects related to differences between the book and tax basis of the properties. Accounting Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. The actual results could differ from those estimates. Principles of Consolidation - The accompanying consolidated financial statements include the accounts of the parent company, ARXA International Energy, Inc., and its subsidiary, ARXA USA, Inc., after elimination of significant intercompany accounts and transactions. 6 ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS July 31, 2000 NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES - continued The Company's financial statements are based on a number of significant estimates including oil and gas reserve quantities which are the basis for the calculation of depreciation, depletion and impairment of oil and gas properties. The Company's reserve estimates are determined by an independent petroleum engineering firm. However, management emphasizes that reserve estimates are inherently imprecise and that estimates of more recent discoveries and reserves associated with non-producing properties are more imprecise than those for producing properties with long production histories. At October 31, 1999, approximately 83% of the Company's oil and gas reserves were attributable to non-producing properties. Accordingly, the Company's estimates are expected to change as future information becomes available. Other Property and Equipment - Depreciation of property and equipment, other than oil and gas properties, is provided generally on the straight-line basis over the estimated useful lives of the assets as follows: Furniture and office equipment 3 - 5 years Automobile 5 years Ordinary maintenance and repairs are charged to income, and expenditures which extend the physical or economic life of the assets are capitalized. Gains or losses on disposition of assets other than oil and gas properties and equipment are recognized in income, and the related assets and accumulated depreciation accounts are adjusted accordingly. Other Non-Current Assets - Other non-current assets include organization costs, which are being amortized over five years. Income Taxes - The Company provides for income taxes on the liability method. The liability method requires an asset and liability approach in the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of the Company's assets and liabilities. Cash and Cash Equivalents - For purposes of the statement of cash flows, the Company considers cash equivalents to include all cash items, such as time deposits and short-term investments that mature in three months or less. Concentrations of Credit Risk - Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of oil and gas receivables. Substantially all of the Company's receivables were due from the sale of oil and gas arising from production on properties located in Texas and Louisiana. Although the Company is directly affected by the well-being of the oil and gas production industry, management does not believe a significant credit risk existed at July 31, 2000. At times, the Company maintains deposits in banks which exceed the amount of federal deposit insurance available. Management believes the possibility of loss on these deposits is minimal. 7 ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS July 31, 2000 NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES - continued Earnings per share - The Company adopted SFAS No. 128, Earnings Per Share (EPS), which was issued in February 1997, which requires presentation of both basic and diluted EPS on the face of the income statement for all periods presented. Basic EPS is computed by dividing net income available to common shareholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period. Diluted EPS is computed using the weighted- average number of common and potential common shares outstanding during the period. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options. There were no dilutive potential common shares outstanding during the periods encompassed by these financial statements. NOTE B - GOING CONCERN The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company had a net (loss) of ($246,496) and negative cash flow from operations of ($142,733) for the nine months ended July 31, 2000 and had an accumulated (deficit) of ($4,591,979) at that date, which raises substantial doubt about its ability to continue as a going concern. The Company has targeted several acquisition opportunities and is aggressively seeking financial sources to assist with the financing. NOTE C - ACCOUNTS RECEIVABLE There were no receivables at July 31, 2000. NOTE D - PROPERTY AND EQUIPMENT Property and equipment at July 31, consisted of the following: Oil and gas properties $12,910,755 Other property and equipment 142,504 ----------- 13,053,259 Less accumulated depletion, depreciation, amortization and provision for impairment 968,487 ----------- $12,084,772 =========== 8 ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS July 31, 2000 NOTE E - OTHER ASSETS Other non-current assets at July 31, 2000 consisted primarily of an indemnification fund of $50,000. The indemnity fund, was set up for the benefit of the liquidating agent for Prospector in accordance with the Joint Venture Dispute Resolution Agreement for a period not to exceed four years. Upon expiration of the four-year period, any remaining funds will be returned to the Company. NOTE F - NOTES PAYABLE On December 31, 1999, ARXA executed a Promissory Note in the amount of $200,000 together with interest at 10% per annum on the unpaid balance to Mark Trivette and a Promissory Note of $300,000 to Kenneth A. and Lynn R. Hubbard together with interest at the rate of 10% per annum on the unpaid balance. The Notes have a maturity of September 1, 2000. Gulfport Oil & Gas, Inc. (Gulfport) in consideration of ARXA executing the above described Promissory Note has transferred to ARXA an additional one per cent (1%) working interest in certain proved undeveloped, non-producing oil and gas reserves in the Pelahatchie Field, Rankin County, State of Mississippi. The working interest transferred by Gulfport to ARXA has a value in excess of $500,000. After this transaction, ARXA owns a twenty six per cent (26%) working interest in certain proved, undeveloped, non-producing oil and gas reserves in the Pelahatchie Field, Rankin County, State of Mississippi. NOTE G - INCOME TAXES The Company has net operating loss carryforwards (NOL's) for income tax reporting purposes of approximately $2,488,871. If not utilized, these NOL's will expire in 2020. NOTE H - COMMITMENTS AND CONTINGENCIES Environmental Contingencies - The Company's activities are subject to existing federal and state laws and regulations governing environmental quality and pollution control. It is impossible to predict the impact of environmental legislation and regulations on operations in the future, although compliance may necessitate significant capital outlays, that would materially affect earning power or cause other material changes. Penalties may also be assessed to the Company for any pollution caused by the Company's operations and the Department of Interior is authorized to suspend any operation which threatens immediate or serious harm to life, property or environment, which suspension may remain in effect until the damage has ceased. This regulatory burden on the oil and gas industry increases the cost of doing business and consequently affects the Company's profitability. It may be anticipated that state and local environmental laws and regulations will have an increasing impact on oil and gas exploration and operations. The Company has never been fined or incurred liability for pollution or other environmental damage in connection with its operations. 9 ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS July 31, 2000 NOTE I - SHAREHOLDER'S EQUITY The Company issued warrants to acquire 3,297,000 (pre-split), 659,400 (post- split) shares of its common stock as part of the acquisition transaction with Energy Group, Inc. (Phoenix). The warrants are exercisable at $2.00 (pre-split) $10.00 (post-split) per share. These warrants expire on August 9, 2000 and are currently exercisable. On August 21, 1998, the Company issued 57,700 warrants to certain Arxa shareholders to purchase the Company's common stock at $1.25. These warrants expire on August 31, 2000. Prior to the merger transaction with Phoenix, the Company issued 405,000 warrants to purchase the Company's common stock at $10.00. These warrants expire on August 9, 2000. In addition, Phoenix granted options to employees and directors to acquire 147,753 shares of Phoenix's common stock and an option to an individual to acquire 6,146 shares of its common stock. The options, which expire on September 11, 2007, have an exercise price of $12.50 per share. The options issued to employees to acquire 36,959 shares of Phoenix's common stock on September 12, 2000. The options issued to directors, and to the individual mentioned above, are currently exercisable. These options have not been converted to options to acquire common stock of the Company. NOTE J - 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 July 31, 2000, no options had been granted under the Plan. With respect to incentive stock options, no option may be granted more than ten years after the effective date of the stock option plan or exercised more than ten years after the date of grant (five years if the optionee owns more than 10% of the common stock of the Company at the date of grant). Additionally, with regard to incentive stock options, the exercise price of the option may not be less than 100% of the fair market value of the common stock at the date of grant (110% if the optionee owns more than 10% of the common stock of the Company). Subject to certain limited exceptions, options may not be exercised unless, at the time of exercise, the optionee is in the service of the Company. Non-qualified options granted under the plan may not have an exercise price less than 85% of the fair market value of the Company's common stock on the date of grant. On July 27, 1998 the Company authorized the issuance of warrants to management and non-employee directors to purchase 1,000,000 shares of common stock at $.25 per share. 50% of the warrants are to be exercisable when the Company's stock price reaches $6.25 per share, 25% when the price reaches $7.50 per share, and 25% when the stock price reaches $8.75 per share. Should the Company declare a stock dividend the number of shares will go up and the prices will go down proportionately. These warrants have not been issued as of July 31, 2000. The pro forma effect of the 1,000,000 shares is shown below in this footnote. 10 ARXA INTERNATIONAL ENERGY, INC. & SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS July 31, 2000 NOTE J - STOCK OPTION PLAN - continued In October 1995, the Financial Accounting Standards Board issued a new statement titled "Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123 encourages, but does not require, companies to recognize compensation expense for grants of stock, stock options, and other equity instruments to employees based on fair value. Fair value is generally determined under an option pricing model using the criteria set forth in SFAS 123. The Company applies APB Opinion 25, Accounting of Stock Issued to Employees, and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans. Had compensation expense for the Company's stock based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method prescribed by SFAS 123, the Company's net loss and loss per common share would have been increased to the pro forma amounts indicated below: Net loss-as reported $ (246,496) Net loss-Pro forma (2,028,896) Net loss per common share-as reported (.0070) Net loss per common share-Pro forma (.0058) The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: risk-free rate of 8%; volatility of 198%, no assumed dividend yield; and expected life of one year. NOTE L - SUPPLEMENTAL CASH FLOW INFORMATION No interest or income taxes were paid during the nine months ended July 31, 2000. 11 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 July 31, 2000 were $-0-, which is a $6,536 decrease from the $6,536 for the three months ended July 31, 1999 and is primarily attributed to production held in suspense. Lease operating expense, which includes workover costs, decreased from $148,736 for the three months ended July 31, 1999 to $-0- for the three months ended July 31, 2000, a decrease of $148,736. The decrease is primarily due to properties which are no longer owned by ARXA, or properties on which the operating expenses are in dispute. General and administrative costs decreased from $184,912 for the three months ended July 31, 1999 to $22,201 for the three months ended July 31, 2000. The decrease of $162,711, comes from the down-sizing instituted by the Company beginning in May 1999. in order to maximize its available working capital. B. LIQUIDITY AND CAPITAL RESOURCES Net cash flow from operating activities was a negative $142,733 for the Nine months ended July, 31, 2000 as compared to a positive $105,879 for the Nine months ended July 31, 1999. The principle source of cash for the Nine months ended July 31, 2000 was the $143,493 on hand at the beginning of the period. At July 31, 2000, the Company's current assets of $760 was exceeded by current liabilities of $595,895, or by $595,135. The Company had a net loss of $43,342 and negative cash flow from operations of $142,733 for the nine month period ended July 31, 2000 and had an accumulated deficit of $4,591,979 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. C. MANAGEMENT'S RESPONSE AND PLAN OF OPERATIONS Under-capitalization continues to be the most serious problem facing the Company. To correct this problem the Company has acquired the rights to several high potential oil and gas development prospects which would provide the justification for the Company's planned additional Public Offering which will now proceed as rapidly as possible. It is the intent of the Company to apply for membership on the American Exchange simultaneously with the offering. The Company believes that a listing on a major stock exchange in preference to the Bulletin Board will open opportunities for acquisitions with stock and cash. The Company is confident that, with the offering completed, it will qualify for the AMEX. The Company is in negotiations with a group of private investors to fund the drilling of one or more wells in the Pelahatchie Field in Rankin County, Mississippi. 12 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS ARXA is not engaged in any pending legal proceedings nor are any of its properties subject to any legal proceedings except for the following discussion. ARXA is further not aware of any legal proceedings pending or threatened against its officers and/or directors in their capacity as corporate officers or directors of ARXA. On October 15, 1999, Radler Enterprises Texas, Inc., filed suit against ARXA and Craig Ford in the 55/th/ Judicial District for the District Court of Harris County, State of Texas. The lawsuit was on a Lease Agreement executed on August 19, 1998 by Craig Ford as President of ARXA. The Lease Agreement was not approved by the Board of Directors of ARXA. The Plaintiff Radler is suing for actual damages under the lease plus attorney fees, interest, and costs. ARXA intends to vigorously defend this lawsuit on its merits and will not be representing Mr. Ford. At this time ARXA is in the discovery phase of this lawsuit. 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: 9-12-00 Norris R. Harris /s/ Norris R. Harris --------------------- President Date: 9-12-00 Jack R. Durland, Jr. /s/ Jack R. Durland, Jr. ------------------------- Vice President and CFO THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JULY 31, 2000 FORM 10-Q FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 13 Shareholders ARXA International Energy, Inc. & Subsidiary Gulfport, Mississippi We have reviewed the accompanying balance sheet of ARXA International Energy, Inc. & Subsidiary as of July 31, 2000, and the related statements of operations, statement of shareholders' equity and cash flows for the nine months then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. All information included in these financial statements are the representation of the management of Arxa International Energy, Inc. & Subsidiary. A review consists principally of inquiries of Company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with generally accepted accounting principles. As discussed in Note B to the consolidated financial statements the Company has a net (loss) of $246,496 and negative cash flow from operations of $142,733 for the nine months ended July 31, 2000 and had an accumulated (deficit) of $4,591,979 at that date, which raises substantial doubt about its ability to continue as a going concern. The Company is currently seeking outside sources of financing to fund its development efforts. Should the Company be unable to access such financing, it will have to materially curtail its development and operating activities. These financial statements do not include any adjustments that might result from the outcome of this uncertainty. Gibbons, Gibbons & Buck, P. C. September 8, 2000 /s/ H. E. Gibbons ----------------- H. E. Gibbons -----END PRIVACY-ENHANCED MESSAGE-----