<PAGE> 1
______________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
FORM 10-QSB
-----------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the Quarterly Period Ended: February 28, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 2-73871
ADAIR INTERNATIONAL OIL AND GAS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Texas 74-2142545
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
</TABLE>
3000 Richmond, Suite 100
Houston, Texas 77098
(Address of principal executive offices, including zip code)
(713) 621-8241
(Registrant's telephone number, including area code)
_________________
Check whether the issuer (1) 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 (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
At February 28, 1998, 24,069,942 shares of common stock, no par value,
were outstanding.
Transitional Small Business Disclosure Format (check one); Yes [ ]
No [x]
<PAGE> 2
ADAIR INTERNATIONAL OIL AND GAS, INC.
CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of February 28, 1998 and February 28,
1997 (unaudited)
Condensed Statements of Operations for the three months and nine
months ended February 28, 1998 and February 28, 1997 (both
unaudited)
Condensed Statements of Cash Flows for the three months and nine
months ended February 28, 1998 and February 28, 1997 (both
unaudited)
Condensed Statement of Changes in Stockholders Equity for the three
and nine months ended February 28, 1998 and February 28, 1997
Notes to Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Adair International Oil & Gas, Inc.
Condensed Balance Sheets
As of February 28, 1998, and 1997
<TABLE>
<CAPTION>
FEBRUARY 28, 1998 FEBRUARY 28, 1997
(UNAUDITED)
----------------- -----------------
<S> <C> <C>
Current Assets
Accounts receivable $ 7,645 $ 177,919
----------------- -----------------
Total Current Assets 7,645 177,919
----------------- -----------------
Property and Equipment
Unproved oil and gas properties 394,789 0
Oil and Gas Properties and Equipment 7,888,226 4,311,923
Office and other property and equipment 9,668 2,481
----------------- -----------------
8,292,683 4,314,404
Less: accumulated depletion, depreciation and amortization (4,146,201) (4,124,403)
----------------- -----------------
Total Property and Equipment 4,146,482 190,001
----------------- -----------------
Other Assets 375 0
----------------- -----------------
Total Assets $ 4,154,502 $ 367,920
================= =================
Current Liabilities
Bank Overdrafts $ 5,616 $ 15,079
Accounts payable 70,536 110,235
Accrued liabilities 45,654 58,591
Note payable 0 722,530
----------------- -----------------
Total Current Liabilities 121,806 906,435
Long-term debt 600,000 0
----------------- -----------------
Total Liabilities 721,806 906,435
----------------- -----------------
Preferred stock 0 60,000
Commitments and Contingencies 0 0
Common Stockholder's Equity
Common stock, No Par Value 600,000
Additional paid-in capital 10,204,018 4,696,728
Retained deficit (6,771,322) (5,895,243)
----------------- -----------------
Total Common Stockholder's Equity 3,432,696 (598,515)
----------------- -----------------
Total Liabilities and Stockholder's Equity $ 4,154,502 $ 367,920
================= =================
* Condensed from audited financial statements
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE> 4
Adair International Oil & Gas, Inc.
Condensed Statements of Operations
For The Three and Nine Months Ended February 28, 1998, and 1997
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDING ENDING ENDING ENDING
FEBRUARY 28, 1998 FEBRUARY 28, 1997 FEBRUARY 28, 1998 FEBRUARY 28, 1997
(UNAUDITED) * (UNAUDITED) *
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Revenue
Oil and gas sales $ 27,150 $ 26,682 $ 68,914 $ 55,136
Other income 0 0 0 300
----------------- ----------------- ----------------- -----------------
Total Income 27,150 26,682 68,914 55,436
----------------- ----------------- ----------------- -----------------
Costs and Expenses
Lease Operating
expense 16,436 7,030 35,744 26,756
Depletion,
depreciation and
amortization 8,781 8,582 26,433 25,743
General and
administrative 237,020 19,918 971,111 61,730
----------------- ----------------- ----------------- -----------------
Total Costs and
Expenses 262,237 35,530 1,033,288 114,229
----------------- ----------------- ----------------- -----------------
Operating loss
before income taxes (235,087) (8,848) (964,374) (58,793)
Provision for income
taxes 0 0 0 0
----------------- ----------------- ----------------- -----------------
Net Loss Applicable
to Common Stock $ (235,087) $ (8,848) $ (964,374) $ (58,793)
================= ================= ================= =================
NET LOSS PER
COMMON SHARE
Primary $ (0.01) $ 0.00 $ (0.05) $ (0.03)
----------------- ----------------- ----------------- -----------------
Fully Diluted $ (0.01) $ 0.00 $ (0.05) (0.03)
----------------- ----------------- ----------------- -----------------
</TABLE>
* Condensed from
audited financial
statements
The accompanying notes are an integral part of these financial statements
4
<PAGE> 5
Adair International Oil & Gas, Inc.
Condensed Statements of Cash Flows
For the Nine Months Ended February 28, 1998, and 1997
<TABLE>
<CAPTION>
FEBRUARY 28, 1998 FEBRUARY 29, 1997
(UNAUDITED) *
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ (964,374) $ (58,793)
Adjustments to reconcile net income (loss) to net cash
provided by (used by) operating activities:
Depreciation and amortization 26,433 25,743
Stock issued for commissions and services 288,263 0
Changes in assets and liabilities (160,130) 14,438
----------------- -----------------
Net cash provided by (used in) operating activities (809,808) (18,612)
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of oil and gas property (29,552) 457
Purchase of fixed assets (5,458) (2,481)
----------------- -----------------
Net cash provided by (used in) investing activities (35,010) (2,024)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock 709,027 0
----------------- -----------------
Net cash provided by (used in) financing activities 709,027 0
----------------- -----------------
Net increase (decrease) in cash and cash equivalents $ (135,791) $ (20,636)
Cash and cash equivalents at beginning of year $ 130,175 $ 5,557
----------------- -----------------
Cash and cash equivalents at end of year $ (5,616) $ (15,079)
================= =================
SUPPLEMENTAL DISCLOSURES
Interest Paid $ 148 $ 0
----------------- -----------------
Income Taxes Paid $ 0 $ 0
----------------- -----------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
Issuance of Common Stock for services $ 288,263 $ 0
----------------- -----------------
Issuance of common stock for foreign acquisitions $ 250,000 $ 0
----------------- -----------------
</TABLE>
* Condensed from audited financial statements
The accompanying notes are an integral part of these financial statements
5
<PAGE> 6
Adair International Oil & Gas, Inc.
Condensed Statement of Changes in Stockholders' Equity
For the Nine Months Ended February 28, 1998, and 1997
(Unaudited)
<TABLE>
<CAPTION>
COMMON ADDITIONAL RETAINED
SHARES STOCK PAID IN CAPITAL DEFICIT
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Balance, May 31, 1996 2,000,000 $ 600,000 $ 4,696,728 $ (5,836,450)
Net Loss $ (22,500)
--------------- --------------- --------------- ---------------
Balance, August 31, 1996 2,000,000 $ 600,000 $ 4,696,728 $ (5,858,950)
Net loss (27,445)
--------------- --------------- --------------- ---------------
Balance, November 30, 1996 2,000,000 $ 600,000 $ 4,696,728 $ (5,886,395)
Net Loss (8,848)
--------------- --------------- --------------- ---------------
Balance, February 28, 1997 2,000,000 $ 600,000 $ 4,696,728 $ (5,895,243)
=============== =============== =============== ===============
Balance, May 31, 1997 10,000,000 $ 3,000,000 $ 5,896,728 $ (5,806,948)
Convert common stock to no par value (3,000,000) 3,000,000
Sale of common stock 1,000,000 217,000
Issuance of common stock for Paraguay
and Yemen acquisitions 10,200,000 250,000
Net Loss (235,789)
--------------- --------------- --------------- ---------------
Balance, August 31, 1997 21,200,000 -- 9,363,728 (6,042,737)
Sale of Common Stock 600,000 300,000
Conversion of Preferred Stock to Common 6,667 60,000
Issuance of common stock as commissions 250,000 267,188
Redemption of unrestricted common shares (850,000)
Issuance of restricted common shares 1,176,200
Net loss (493,498)
--------------- --------------- --------------- ---------------
Balance, November 30, 1997 22,382,867 -- 9,990,916 (6,536,235)
Sales of Common Stock 671,000 192,027
Issuance of common stock for services 21,075 21,075
Redemption of unrestricted shares (1,100,000)
Issuance of restricted common shares 2,095,000
Net Loss (235,087)
--------------- --------------- --------------- ---------------
Balance, February 28, 1998 24,069,942 $ -- $ 10,204,018 $ (6,771,322)
=============== =============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements
6
<PAGE> 7
ADAIR INTERNATIONAL OIL AND GAS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The financial information included herein is unaudited;
however, such information reflects all adjustments (consisting solely
of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair statement of results for interim
periods. The financial information for the quarter ended
February 28, 1997, is derived from audited financial statements.
The results for the three months ended February 28, 1998, are
not necessarily indicative of the results to be expected for the full
year.
NOTE 2: LOSS PER SHARE
Loss per share was computed by dividing earnings (loss) by the
weighted average number of common shares (23,139,158 for the quarter
ended February 28, 1998, and 2,006,667 for the quarter ended
February 28, 1997) 21,137,836 for the nine months ended February 28,
1998 and 2,006,667 for the nine months ended February 28, 1997
adjusted for conversion of common stock equivalents, where applicable,
during the periods.
7
<PAGE> 8
NOTE 3: COMMITMENTS AND CONTINGENCIES
The Company is subject to extensive federal, state, and local
environmental laws and regulations. These requirements, which change
frequently, regulate the discharge of materials into the environment.
The Company believes that it is in compliance with existing laws and
regulations.
ENVIRONMENTAL CONTINGENCIES
The oil and gas industry is subject to substantial regulation
with respect to the discharge of materials into the environment or
otherwise relating to the protection of the environment. The
exploration, development and production of oil and gas are regulated
by various governmental agencies with respect to the storage and
transportation of the hydrocarbons, the use of facilities for
processing, recovering and treating the hydrocarbons and the clean up
of the sites of the wells. Many of these activities require
governmental approvals before they can be undertaken. The costs
associated with compliance with the applicable laws and regulations
have increased the costs associated with the planning, designing,
drilling, installing, operating and plugging or abandoning of wells.
To the extent that the Company owns an interest in a well it may be
responsible for costs of environmental regulation compliance even
after the plugging or abandonment of that well.
NOTE 4: CHANGES IN STOCKHOLDERS EQUITY
During January 1998 the company issued 21,075 shares valued at
$21,075 to two individuals as compensation for services rendered.
During December 1997, the Company exchanged 2,100,000
unrestricted shares of common stock for 2,625,000 restricted shares of
common stock. 525,000 of additional common shares were issued as a
result of this exchange.
During the quarter, 1,141,000 common shares were issued in
private transactions.
8
<PAGE> 9
MANAGEMENTS' DISCUSSION AND ANALYSIS
OR PLAN OF OPERATIONS
The following summary of the Company's financial position and
results of operation should be read in conjunction with the Condensed
Financial Statements, Notes to Condensed Financial Statements and the
Company's audited financial statements for the year ended May 31, 1997,
included in the 10-KSB. Financial results for the quarter ended
February 28, 1997, were restated and reclassified in connection with
the year end audit.
RESULTS OF OPERATIONS - 1997 VS 1998
The following summarizes oil and gas revenues and operating
expenses for the quarter and nine months ended February 28, 1998 and
1997:
<TABLE>
<CAPTION>
Nine Months ended February 28, Quarters ended February 28,
------------------------------ ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Oil and Gas Sales $68,914 $55,136 $27,150 $26,682
Lease Operating Expenses 35,744 26,756 16,436 7,030
------- ------- ------- -------
Operating Income $33,170 $28,380 $10,714 $19,652
======= ======= ======= =======
</TABLE>
The following reflects the Company's cumulative costs in oil
and gas properties:
<TABLE>
<CAPTION>
Nine Months ended February 28,
------------------------------
1998 1997
---- ----
<S> <C> <C>
Oil and Gas Properties at Full Cost:
Unproved Oil and Gas
Properties $ 394,789 $ -0-
Proved Properties Being Amortized 7,888,226 4,311,923
Less Accumulated Depletion
and Depreciation (4,146,201) (4,124,403)
----------- -----------
$ 4,136,814 $ 187,520
=========== ===========
</TABLE>
The increase in oil and gas property costs includes $3,610,184
from the acquisition of foreign oil and gas properties in Columbia
during the quarter ended May 31, 1997. In addition, the Company
capitalized $24,163 and $154,973 of acquisition costs on other unproved
oil and gas prospects, domestic and foreign, during the quarter and
nine months ended February 28, 1998.
9
<PAGE> 10
Oil and Gas Sales - The increase from $ 55,136 to $ 68,914 reflects
additional revenues which were suspended in fiscal 1997 from wells in
the United States. During the first nine months the Company
experienced a decline in the Company's domestic production and the
Company intends to focus plans on exploring and developing foreign
reserves and the acquisition of domestic production in the future.
Future revenues from the Company's existing domestic oil and gas
properties at February 28, 1998, are expected to be minimal Revenues
during the quarter ended February 28, 1998 increased to $27,150 versus
$26,682 in the same quarter of last year because revenues in third
quarter of fiscal 1997 were suspended.
Operating Expenses - Lease operating expenses for the three months
ended February 28, 1998 increased from $7,030 to $16,436 due to the
increase in domestic revenues described above. Lease operating expenses
for the nine months increased from $26,756 to $35,744 due to lower
workover expenses. At February 28, 1998 the Company had no foreign
production.
General and administrative expenses increased to $971,111 during the
nine months ended February 28, 1998, versus $61,730 the same period of
last year. The increase is attributable to approximately $80,000 of
non-recurring legal expenses associated with reorganization of the
Company in June 1997, $85,000 of payroll expenses attributable to
personnel associated with the acquisition, and $303,295 of public
relations expense and non-recurring commission expenses in connection
with the sales of common stock. During the three months ended February
28, 1998 general and administrative expenses were $237,020 versus
$19,918 during the same period of last year. The third quarter of 1998
includes $21,075 in non-recurring consulting fees.
The net loss for the quarter ended February 28, 1998 was
($235,087) or $(.01) per share on revenues of $27,150 versus a net
loss of $(8,848) or $(.00) per share on revenues of $26,682 in the
same period of last year.
The net loss for the nine months ended February 28, 1998
was $(964,374) or ($.05) per share on revenues of $68,914 versus
a net loss of $58,793 or $(.03) per share on revenues of
$55,136 last year.
In 1997 results of the Company were insignificant because the
Company had not conducted any oil and gas exploration or development
activities since May 31, 1989.
LIQUIDITY AND CAPITAL RESOURCES
Cash used by operations during the nine months ended
February 28, 1998 was $809,808 and oil and gas revenues were not
adequate to cover expenses which included certain non-recurring
legal fees and other costs described above. Therefore, the Company
sold additional common
10
<PAGE> 11
shares to raise working capital. In the future, cash provided from the existing
oil and gas properties at February 28, 1998, will not be adequate to cover
projected operating and overhead expenses. Financing for foreign oil and gas
exploration is dependent upon the Company obtaining additional capital.
Therefore, the Company is concentrating its efforts on raising additional
capital through the private placement of $15,000,000 of preferred shares. The
Company is attempting to increase domestic oil and gas production through the
drilling of additional domestic wells and from acquiring cash producing oil and
gas properties from the proceeds of the anticipated placement. Given the present
economic conditions in the industry, no assurances can be made that the Company
will be successful in its efforts to raise additional capital or to increase
revenues through exploration.
On February 6, 1998, the Company entered into a purchase agreement with
Petrolex Energy Corporation (conditioned upon the Company obtaining the
financing) to acquire a 15% registered interest in the Maracas Association
Contract and a 70% interest in the Los Toches Association Contract in Columbia.
By terms of the purchase contract, the Company will pay $5 million comprised of
$2.5 million in cash and $2.5 million secured by way of an interest bearing
unsecured convertible redeemable debenture. The proposed purchasing of the
Maracas contract will enable the Company to combine its operational efforts with
its Chimichagua association Contract in building a pipeline and power generation
facility. It is estimated that Maracas could contain in excess of 100 BCF of
reserves and the Company is working with ENRON Corporation on pipeline
construction into the area. None of the reserves can be classified as proved
at this time.
On March 20, 1998, the Company obtained a commitment from a lender to
provide financing up to $16 million for the acquisition, drilling and
development of six prospects located in Texas. The commitment provides for a
closing which is anticipated to occur by May 31, 1998. Funding of the loan is
dependent upon satisfactory completion of due diligence by the lender. At
closing, the Company expects to receive $4,000,000 pursuant to a promissory note
for $3,000,000 and $1,000,000 under a line of credit with the remaining $12
million to be disbursed as the drilling program progresses. The promissory note
will require monthly repayments for five years with interest at LIBOR plus 350
basis points. The line of credit has a three year term with interest repayable
monthly at prime plus 2%. The remaining funding under the initial commitment is
contingent upon the successful drilling and completion of the prospects. With
the completion of drilling on all six prospects, the Company estimates that the
future net revenues could approximate be $12,000,000 annually. None of the
reserve estimates attributable to these prospects can be classified as proven at
this time.
The Company has been issued a right of first refusal and is pursuing
project financing to purchase controlling interest in a 150 mega watt power
plant in Colombia. This plant is projected to generate approximately $30 million
in net revenue with the acquisition.
The Company is presently involved in discussions with the payee for the
$600,000 long-term liability on the balance sheet at February 28, 1998. In
these discussions, the Company proposes to offset this liability against future
development expenses to be incurred on the Chimichagua concession. Negotiations
are continuing at this time.
Except for historical information contained herein the statements in this
filing are forward-looking. Forward-looking statements involve known and unknown
risks and uncertainties which may cause the Company's actual results in future
periods to differ from those forecasted. Such risks and uncertainties include,
among other things, volatility of oil prices, product demand, market
competition, risks inherent in the Company's international operations,
imprecision of reserve estimates, the availability of additional oil and gas
assets for acquisition on commercially reasonable terms, and the Company's
ability to replace and exploit its existing oil and gas reserves and to obtain
financing.
11
<PAGE> 12
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION SB
(1) Exhibit 27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ADAIR INTERNATIONAL OIL AND GAS, INC.
Date: April 9, 1998 By: /s/ John W. Adair
--------------------------------------
John W. Adair, Chairman of the Board
By: /s/ Jalal Alghani
--------------------------------------
Jalal Alghani, Chief Financial Officer
13
<PAGE> 14
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> FEB-28-1998
<CASH> (5,616)
<SECURITIES> 0
<RECEIVABLES> 7,645
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,645
<PP&E> 8,292,683
<DEPRECIATION> (4,154,502)
<TOTAL-ASSETS> 4,146,482
<CURRENT-LIABILITIES> 121,806
<BONDS> 600,000
0
0
<COMMON> 0
<OTHER-SE> 3,432,696
<TOTAL-LIABILITY-AND-EQUITY> 4,154,502
<SALES> 68,914
<TOTAL-REVENUES> 68,914
<CGS> 35,744
<TOTAL-COSTS> 35,744
<OTHER-EXPENSES> $997,544
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (964,374)
<INCOME-TAX> 0
<INCOME-CONTINUING> (964,374)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (964,374)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
