UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission file number 000-10056
ADAIR INTERNATIONAL OIL AND GAS, INC.
(Name of Small Business Issuer in Its Charter)
Texas 74-2142545
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
3000 Richmond, Suite 100
Houston, TX 77098
(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number (713) 621-8241
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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: [ X ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB [ ]
The Registrant's revenues for its fiscal year ended May 31, 1998 were $75,489.
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked prices of such common equity, as of a
specified date within the past 60 days: $1,911,060 as of August 21, 1998.
Indicate the number of shares outstanding of each of the Registrant's class of
common stock, as of the latest practicable date: 28,859,672 as of August 21,
1998.
Documents incorporated by reference: Not applicable
Transitional Small Business Disclosure Format [ ] Yes [X] No
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TABLE OF CONTENTS
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PART I
Item 1. Business 1
Item 2. Properties 7
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 10
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 7. Financial Statements 14
Item 8. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure 15
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of The Exchange Act 15
Item 10. Executive Compensation 15
Item 11. Security Ownership of Certain Beneficial Owners and Management 16
Item 12. Certain Relationships and Related Transactions 17
Item 13. Exhibits and Reports on Form 8-K 18
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FORWARD-LOOKING STATEMENT AND INFORMATION
The Company is including the following cautionary statement to make
applicable and take advantage of the safe harbor provision of the Private
Securities Litigation Reform Act of 1995 for any forward-looking statements made
by, or on behalf of, the Company. Forward-looking statements include
statements concerning plans, objectives, goals, strategies, expectations, future
events or performance and underlying assumptions and other statements which are
other than statements of historical facts. Certain statements contained herein
are forward-looking statements and, accordingly, involve risks and uncertainties
which could cause actual results or outcomes to differ materially from those
expressed in the forward-looking statements. The Company's expectations,
beliefs and projections are expressed in good faith and are believed by the
Company to have a reasonable basis, including without limitations, management's
examination of historical operating trends, data contained in the Company's
records and other data available from third parties, but there can be no
assurance that management's expectations, beliefs or projections will result or
be achieved or accomplished. In addition to other factors and matters discussed
elsewhere herein, the following are important factors that, in the view of the
Company, could cause actual results to differ materially from those discussed in
the forward-looking statements: the ability of the Company to maintain its
rights in its oil and gas interests and properties; the ability of the Company
to obtain acceptable forms and amounts of financing to fund planned prospect
acquisition, exploration, development, production, marketing and other expansion
efforts; the global market for oil and gas; the political climate in nations
where the Company may have interests and properties; the ability to engage the
services of suitable energy industry service providers. The Company has no
obligation to update or revise these forward-looking statements to reflect the
occurrence of future events or circumstances.
ITEM 1. DESCRIPTION OF BUSINESS
Adair International Oil and Gas, Inc. (the "Company") was originally
incorporated in the state of Texas on November 7, 1980, as Roberts Oil and Gas,
Inc. The name of the Company was changed to its present name pursuant to an
amendment to its articles of incorporation effective July 25, 1997. The Company
generally engages in the holding of interests in oil and gas properties. Until
1997 the Company's activities were limited to the United States.
The Company began to acquire interests in oil and gas properties in 1981.
Following a registration of its shares of common stock with the Securities and
Exchange Commission (the "SEC"), the Company began filing periodic reports with
the SEC pursuant to the Securities Exchange Act of 1934, as amended
(the"Exchange Act"). However, by the mid-1980's the oil and gas market
collapsed. The Company experienced financial difficulties and did not have
sufficient resources to continue the exploration and development of oil and gas
properties. While the Company continued to hold interests in wells, it had
become virtually inactive. As a consequence, beginning in 1989 and until 1996,
the Company filed its annual report with the SEC and omitted to include audited
financial statements. In addition during 1989 through 1996, the Company may not
have fully complied with other formalities required under the Exchange Act and
the filings due thereunder.
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Since 1997 the Company has made numerous changes in its operations and the
focus of its business. The Company's business expanded to the acquisition of
interests in contracts pertaining to oil and gas properties in Colombia, Yemen
and Paraguay. In connection with the transactions relating to those
acquisitions, the controlling interest in the Company's common stock was issued
to persons not previously affiliated with the Company and new directors and
officers were appointed. It is the Company's present intent to focus its
efforts on acquiring and developing domestic oil and gas properties.
DOMESTIC OIL AND GAS OPERATIONS
The Company does not expect that it will be able to generate any
substantial increases in revenue from its existing domestic oil and gas
interests in the future because of normal declines in oil and gas production.
The Company's future will be dependent upon its ability to benefit from the
interests which it may have in properties and contracts in foreign countries,
and to acquire other oil and gas properties in the United States. However, it
will be necessary to find a source of funds or form joint ventures in order for
the Company to develop its interests in the foreign properties, and to acquire
oil and gas properties in the United States. Further the Company is presently
negotiating financing for a new domestic drilling program. However, the
Company's ability to effect such a drilling program is subject to the Company
being able to obtain financing. There can be no assurance that financing will
become available, or if financing becomes available, that such financing will be
available on terms favorable to the Company. In 1998, the Company acquired
contiguous oil and gas leases in Cherokee County, Texas which consist of a total
of approximately 400 acres.
TRANSACTIONS PERTAINING TO OIL AND GAS PROPERTIES IN COLOMBIA
In February, 1997, the Company entered into an agreement with Geopozos,
S.A. ("Geopozos") pursuant to which it agreed to issue shares of its common
stock to Geopozos (the "Geopozos Agreement"), subject to approval of the
agreement by the Company's board of directors, in connection with the
acquisition of specified assets in the Republic of Colombia. As part of the
Geopozos Agreement the Company agreed, among other terms, to issue to Geopozos
2,000,000 shares of the Company's common stock.
In connection with the acquisition of those assets, in March, 1997, the
Company also entered into an agreement with ROGI International, a company
incorporated under the laws of Panama, (the "ROGI International Agreement")
pursuant to which the Company agreed to issue, as required by the Geopozos
Agreement, the 2,000,000 shares of its common stock to persons or entities as
directed by Geopozos and 4,000,000 shares of its common stock to persons or
entities as directed by ROGI International in exchange for the assets being
acquired. Thus, a total of 6,000,000 shares were issued in exchange for the
assets. The Geopozos Agreement also provides that Geopozos may, at its election,
nominate a person to serve on the board of directors of the Company. Geopozos
has not nominated any person to serve on the Company's board.
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The shares issued pursuant to the Geopozos and ROGI International
Agreements had been authorized but unissued shares of the Company. On behalf of
Geopozos the 2,000,000 shares were issued to two corporations and ROGI
International directed that the 4,000,000 shares be issued to seven corporations
and one individual. The Company has not been informed of, and does not know, of
any relationship or affiliation among those entities.
The assets which were transferred to the Company in exchange for the
contingency agreement of $600,000 and the issuance of shares consists of 100% of
the interest in the Chimichagua Association Contract in Colombia. The Company
received notification from Ecopetrol authorizing the assignment of the
Association Contract from Geopozos to the Company's wholly owned subsidiary,
Adair Colombia Oil & Gas, S.A., a Colombian corporation, effective June 29,
1998. The terms of all of the transactions relating to the properties in
Colombia were based on negotiations by the Company, and the Company believes the
terms to be fair and reasonable, but they were not based on independent
appraisals.
TRANSACTIONS PERTAINING TO OIL AND GAS PROPERTIES IN YEMEN AND PARAGUAY
As stated above, the Company acquired certain rights with respect to oil
and gas properties in Yemen and Paraguay. These rights were acquired from Adair
Oil International Canada, Inc. ("AOI") and consist of 5% of the net profits, if
any, related to certain underlying contracts of AOI in Yemen and Paraguay. The
Paraguay Contracts were farm-in contracts with Guarani Petroleum Exploration,
S.A. and the Yemen Contracts are with the sovereign government of the Republic
of Yemen. However, the underlying contracts of AOI in Paraguay have expired
because AOI was unable to obtain financing to fulfill the terms of the Paraguay
contracts.
In connection with the Paraguay Contracts of AOI (the "Paraguay
Contracts"), AOI may seek to negotiate a renewal of the Paraguay Contracts if
AOI can form joint ventures, farmouts or other arrangements with an oil and gas
industry participant. If AOI does not obtain a renewal of the Paraguay
Contracts or does not find an industry partner, then AOI intends to sell its
Paraguay geological and geophysical data. In any case, the Company will be
entitled to 5% of the profits, if any, from the Paraguay Contracts, including
profits from the sale of AOI's geological and geophysical data.
The activities required to be fulfilled by AOI in the underlying contracts
of AOI in Yemen have remained unfulfilled because of the civil war in Yemen. In
connection with AOI's contract with Yemen (the "Yemen Contracts") AOI has
invoked the force majeure clause because of the civil war in Yemen. AOI first
entered into the Yemen Contracts at a time when such properties were considered
extremely desirable. However, because of the past and current political
situation in Yemen and the declines in the global energy markets during 1998,
AOI does not presently intend to pursue any existing contractual rights which it
may have pursuant to the Yemen Contracts. The Company may pursue, however, the
renegotiation of the Yemen Contracts if it is able to enter into a strategic
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alliance with an industry partner on terms more favorable than the existing
Yemen Contracts. In any case, the Company will be entitled to 5% of the
profits, if any, from the Yemen Contracts of AOI.
EMPLOYEES
The Company employs seven full time employees, all of whom are in
management or administrative positions.
FACILITIES
The Company leases 4,000 square feet of office space at 3000 Richmond,
Suite 100, Houston, Texas. The lease provides for monthly rental payments of
$6,000 per month.
Y2K COMPLIANCE
The Company believes that the computers it uses are Y2K compliant.
RISK FACTORS
The prospects of the Company are subject to a number of risks. The risk
factors which management considers to be the highest are set forth hereafter.
There may exist, however, other factors which constitute additional risks but
which are not currently foreseen or fully appreciated by management.
INSUFFICIENCY OF WORKING CAPITAL. Presently, the Company lacks sufficient
working capital and is dependent on financing activities such as the sale of its
common stock to obtain working capital. There are no assurances, however, that
the Company can: (1) raise the necessary capital to enable it to continue the
execution of its revenue growth strategy; or (2) generate sufficient revenue
growth and improvements in operating margins to meet its working capital
requirements if such capital is obtained. To the extent that funds generated
from operations are insufficient, the Company will have to raise additional
working capital. No assurance can be given that funds will be available from
any source when needed by the Company or, if available upon terms and conditions
reasonably acceptable to the Company.
ABILITY TO OBTAIN ADDITIONAL CAPITAL. The realization fo the value of
the oil and gas reserves of the Company's properties in the Republic of Colombia
is contingent upon the Company obtaining financing sufficient to fund
development costs. In order to obtain financing, the Company is reviewing a
number of financing alternatives, which include the formation of a joint
venture, the issuance of debt or equity by the Company, or borrowing from a
financial institution. The Company is limited in its ability to borrow from
banks in the United States with respect to foreign properties although the
Company may seek financing from foreign financial institutions. There can be no
assurance, however, that the Company will be able to obtain any financing. Sale
of equity by the Company may dilute the interest of current stockholders. If the
Company is able to borrow funds from lenders, assets of the
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Company will probably have to be pledged as collateral and loan terms may
restrict the Company's operation. No assurance can be given that funds will be
available from any source when needed by the Company or, if available upon terms
and conditions reasonably acceptable to the Company.
GOING CONCERN RISK. The Financial Statements of the Company include a
going concern qualification by the Company's independent auditor. The Company's
operating losses and the Company's need for financing raise doubt about the
Company's ability to continue as a going concern.
RELIANCE ON EFFORTS OF OTHERS. The Company intends to form joint ventures
or sell parts of its oil and gas interests to industry participants in order
finance and facilitate oil and gas exploration, and the Company will depend on
other companies to develop and operate the wells and the properties. The
prospects of the Company will be highly dependent upon its ability to engage the
services of other parties.
FOREIGN POLITICAL CLIMATE. The Company has direct oil and gas interests in
the Republic of Colombia, and indirect oil and gas interests in the Republic of
Yemen. AOI may seek to negotiate the renewal of its Paraguay Contracts, and if
the renewal is successful, the Company would have indirect oil and gas interests
in Paraguay. Any changes in the political climate of these nations, or even a
mere unsettling in the current political climate, could have a negative impact
on the Company, up to and including the complete loss of these interests.
INTERNATIONAL OPERATIONS. The Company anticipates that a significant
portion of its future international revenues could be derived from its oil and
gas interests located in Colombia. Currency controls and fluctuations, royalty
and tax rates, import and export regulations and other foreign laws or policies
governing the operations of foreign companies in the applicable countries, as
well as the policies and regulations of the United States with respect to
companies operating in the applicable countries, could all have an adverse
impact on the operations of the Company.
The Company's interests could also be adversely affected by changes in any
contracts applicable to the Company's interests, including the renegotiation of
terms by foreign governments or the expropriation of interests. In addition, the
contracts are governed by foreign laws and subject to interpretation by foreign
courts. Foreign properties, operations and investments may also be adversely
affected by geopolitical developments.
NEW BUSINESS STRATEGY. During 1998, the Company refocused its efforts on
acquiring producing oil and gas properties in the Continental United States.
The Company is presently negotiating financing to acquire certain domestic
properties. The management of the Company has extensive oil & gas production and
finance experience which the Company believes can be redirected to the
successful implementation of the new business strategy. The implementation of
this strategy will require additional financing, and is subject to the general
risks of the oil and gas industry. No assurance can be given that funds will be
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available from any source when needed by the Company or, if available, upon
terms and conditions reasonably acceptable to the Company. The Company is also
seeking strategic alliances with global oil and gas industry participants in
connection with the Company's properties in Colombia, and in Yemen and Paraguay,
to the extent that the Company elects to pursue these properties.
OIL AND GAS PRICE VOLATILITY. The revenues generated by the Company are
highly dependent upon the prices of crude oil and natural gas. Fluctuations in
the energy market make it difficult to estimate future prices of crude oil and
natural gas. Such fluctuations are caused by a number of factors beyond the
control of the Company, including regional and international demand, energy
legislation of various countries, taxes imposed by applicable countries and the
abundance of alternative fuels. International political and economic conditions
may also have a significant impact on prices of oil and gas. There can be no
assurance of profitable operations even if there is substantial production of
oil and gas.
IMPRECISE NATURE OF RESERVE ESTIMATES. Estimates of possible reserves of
oil and gas are imprecise. While such estimations are based upon engineering and
other data, the process is a subjective one consisting of estimating underground
accumulations of oil and gas. The accuracy of an estimate is a function of the
quality of available data and of engineering and geological interpretation and
judgement. Such estimates often change as more data becomes available. There
can be no assurances that the information regarding reserves will ultimately be
shown to be correct.
ENVIRONMENTAL REGULATION. 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 drilling sites. 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.
OPERATING HAZARDS AND UNINSURED RISKS. The operation of an oil or gas well
is subject to risks such as blowouts, cratering, pollution and fires, any of
which could result in damage or destruction of the well or production facility
or persons working. The operator of the well may be unable to purchase adequate
insurance against each of these risks. The occurrence of a significant event
could have a material adverse affect on the Company.
GENERAL RISKS OF THE OIL AND GAS INDUSTRY. The Company's operations will
be subject to those risks generally associated with the oil and gas industry.
Such risks include exploration, development and production risks , title risks,
weather risks, shortages or delays in delivery of equipment and the stability of
operators and well servicing companies. The Company's prospects will also be
impacted by the proximity of its wells to pipelines for the distribution of any
oil or gas produced.
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FAILURE TO FILE REPORTS UNDER THE EXCHANGE ACT. The Company had filed a
registration statement with the Commission under the Securities Act of 1933 in
November, 1981, and therefore became subject to the requirement that it file
reports thereafter under the Securities Exchange Act of 1934 (the "Exchange
Act"). The Company filed reports under the Exchange Act, including annual
reports on Form 10-K, during a portion of the 1980's. However, the Company
experienced financial difficulties during the mid-1980's due to a downturn in
the market for oil and gas and by the late 1980's had become essentially a
dormant company. It continued to hold interests in oil and gas wells but was
generating very little revenue. Consequently, by 1989 the Company could no
longer afford the costs associated with audited financial statements. The
Company filed its Form 10-K under the Exchange Act in 1989 without including
audited financial statements and continued to make 10-K filings under the
Exchange Act without audited financial statements, until the filing of a Form
10-KSB for the fiscal year ended May 31, 1997. During the period that the
Company failed to file audited financial statements, it may also have failed to
comply with other formalities required by the Exchange Act with respect to other
required reports and proxy statements.
ITEM 2. DESCRIPTION OF PROPERTY
The Company holds interests in existing oil and gas wells in the United
States, and has interests in undeveloped properties in Colombia. The Company
intends to explore and, if appropriate, develop the Colombia properties. It
should be noted that, absent additional financing, the Company does not have the
financial resources necessary to explore or develop the Colombia properties.
NEW BUSINESS STRATEGY. During 1998, the Company refocused its efforts on
acquiring producing oil and gas properties in the Continental United States.
The Company is presently negotiating financing to acquire certain domestic
properties. The management of the Company has extensive oil & gas production
and finance experience which the Company believes can be redirected to the
successful implementation of the new business strategy. The implementation of
this strategy will require additional financing, and is subject to the general
risks of the oil and gas industry. No assurance can be given that funds will be
available from any source when needed by the Company or, if available, upon
terms and conditions reasonably acceptable to the Company. The Company is also
seeking strategic alliances with global oil and gas industry participants in
connection with the Company's properties in Colombia, and in Yemen and Paraguay,
to the extent that the Company elects to go forward on these properties.
THE UNITED STATES PROPERTIES
The Company holds working interests in oil and gas wells located throughout
the United States. The Company holds an interest in 79 oil and gas wells, with a
net interest of 1.68 oil wells and 7.91 gas wells. The Company has received a
report from a petroleum engineer which indicates that as of June 30, 1998, there
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were proved reserves of 1,351 barrels attributable to the Company's net
interest in the oil wells and proved reserves of 116.1 million cubic feet of
natural gas attributable to the Company's net interest in the gas wells. These
wells are located in Texas and Oklahoma.
For 1996, the average sales price per barrel of oil produced was $18.00,
and the average sales price per MCF of gas produced was $1.65, and the average
lifting cost per barrel of oil was $5.00, and the average lifting cost per MCF
was $0.20. For 1997, the average sales price per barrel of oil produced was
$20.00, and the average sales price per MCF of gas produced was $2.10, and the
average lifting cost per barrel of oil was $5.00, and the average lifting cost
per MCF was $0.20. For 1998, the average sales price per barrel of oil produced
was $13.00, and the average sales price per MCF of gas produced was $1.85, and
the average lifting cost per barrel of oil was $5.00, and the average lifting
cost per MCF was $0.20.
In 1998, the Company acquired an oil and gas lease known as the Cherokee
lease, which is located in Cherokee County, Texas, and it consists of
approximately 400 acres. This property in considered undeveloped acreage
because the Company has not commenced drilling activity, nor does the Company
have any producing wells on this property.
The Company has not commenced any drilling activity during the last three
years.
THE COLOMBIA PROPERTIES
In 1997, the Company acquired, subject to certain consents as hereafter
described, rights with respect to a contract relating to the exploration,
drilling and development of oil and gas properties in the Republic of Colombia.
The rights acquired consisted of the rights and obligations of Geopozos with
respect to a contract known as the Chimichagua Association Contract (the
"Association Contract"). The Company received a copy of a letter from Ecopetrol
which authorized the assignment of the Association Contract from Geopozos to the
Company effective June 29, 1998. The Association Contract grants the right to
explore, drill and extract hydrocarbons from a specified area in Colombia. The
Association Contract relates to an area of approximately 25,000 acres in the
Magdalena valley of Colombia, approximately 500 miles north of Bogota. The
Association Contract was originally acquired by Esso Colombia in 1988 and,
following an intervening assignment, was acquired by Geopozos on September 14,
1996.
The Association Contract, between Ecopetrol and the Company, provides that
the parties shall share equally the hydrocarbons produced from the relevant
properties, subject to an overriding royalty interest of 20% which is reserved
for Ecopetrol, and the expenses of development of the properties. The Company is
responsible for the exploration of the properties but has the right to receive
reimbursement of those costs with respect to fields which are commercially
developed by the parties. The effective date of the Association Contract was
January 20, 1989, and the contract terminates for all purposes 28 years
thereafter. The Association Contract provides for an exploration period of six
years, subject to certain extensions, and an exploitation period of 22 years.
Under the terms of the Association Contract, a portion of the property which has
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not been commercially developed is reduced over a period of years, beginning in
the sixth year. In a letter to the Company dated August 4, 1997, Geopozos
indicated that 50% of the original area covered by the Association Contract had
been returned to Ecopetrol and that Ecopetrol had not issued any declarations of
commercialism with respect to the remaining area.
In connection with the agreement between Geopozos and the Company, Geopozos
retained a 2% overriding royalty interest in hydrocarbons produced from the
properties developed under the Association Contract. The parties also agreed to
enter into joint operating agreement covering those operations. The agreement is
to provide, among other things, that Geopozos will be allowed to mark up
expenditures which it incurs, and which have been agreed to in advance, by 10%.
The Association Contract provides, among other things, that Geopozos was
required to perform certain exploration of the properties prior by December 18,
1996, and that the consents of Ecopetrol and the Colombian Ministry of Mines and
Energy are required in order for the assignment to the Company from Geopozos to
be effective. On August 4, 1997, the Company received a letter from Geopozos
which indicated that (i) Geopozos has fulfilled all of its obligations to
Ecopetrol, (ii) Geopozos has provided Ecopetrol with all necessary and requested
technical information and data and (iii) the Association Contract is valid.
The Company has received a report from a petroleum engineer which indicates
that the information provided to him by the Company with respect to the
properties in Colombia indicates that there are 22.150 billion cubic feet of gas
which would be classified as proved reserves, however, this property is
considered undeveloped acreage because the Company has not conducted any
drilling activity on this property.
ITEM 3. LEGAL PROCEEDINGS
The Company was named as a defendant in the matter of Mark Singleton v.
Adair International Oil and Gas, Inc., 98-2672, 215th Judicial District Court,
Harris County, Texas. The plaintiff is seeking rescission for the purchase of
195,000 shares of common stock of the Company. This litigation is presently in
the early stages of discovery. The Company intends to vigorously defend itself
in this matter.
The Company was named as a defendant in the matter of Santa Fe Natural
Resources, Inc. v. Adair International Oil and Gas, Inc., CV-42,061, 142nd
Judicial District Court, Midland County, Texas. The plaintiff is claiming that
the Company breached a contract in connection with a bid on an oil and gas
prospect in Eddy County, New Mexico. The Plaintiff is also claiming an amount
due from the Company in connection with services rendered for an oil and gas
prospect known as the Saunders prospect in New Mexico. This litigation is
presently in the early stages of discovery. The Company intends to defend
itself vigorously in this matter.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote by security holders during the fourth
quarter of the fiscal year covered by this report.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's trading symbol is "AIGI". The ranges of reported high and
low bid quotations for the Company's Common Stock for each quarterly period
within the fiscal year ended May 31, 1998 are set forth below. During fiscal
1997, the Company's stock had been traded very infrequently and, to the best of
the Company's knowledge, no broker made a market or regularly submitted
quotations for the Company's stock during that time. Quotations are as reported
by the National Quotation Bureau or members of the National Association of
Securities Dealers who maintain a market in the Company's Common Stock on the
OTC Bulletin Board. Such quotations represent prices between dealers without
retail markup, markdown or commissions and do not necessarily represent actual
transactions.
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HIGH LOW
QUARTER ENDED BID BID
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August 31, 1997 $1.75 $
November 30, 1997 $2.00 $11/16
February 28, 1998 $ 1 $
May 31, 1998 $ $
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As of August 21, 1998, there were approximately 873 record holders of the
Company's common stock.
DIVIDEND POLICY
The Company has not paid, and the Company does not currently intend to pay
cash dividends on its common stock in the foreseeable future. The current
policy of the Company's Board of Directors is to retain all earnings, if any, to
provide funds for operation and expansion of the Company's business. The
declaration of dividends, if any, will be subject to the discretion of the Board
of Directors, which may consider such factors as the Company's results of
operations, financial condition, capital needs and acquisition strategy, among
others.
RECENT SALES OF UNREGISTERED SECURITIES
During the period January, 1998 through May 1998, the Company issued 78,483
shares to each of John W. Adair, Earl K. Roberts, Jalal Alghani, and William A.
Petty as partial compensation for service as employees. The company issued
$5,000 worth of its shares to each of Messrs. Adair, Roberts, Alghani and Petty
at the end of each of those months based on the monthly closing price of the
shares. The closing price ranged from $.38 per share to $0.19 per share during
that period. These securities were issued in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933 as amended.
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Messrs. Adair, Roberts, Alghani, and Petty are employees of the Company and in
that capacity were knowledgeable about the Company's operations and financial
condition and they were able to evaluate the risks and merits of receipt of the
shares, and they each agreed to accept the shares as partial compensation.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following summary of the Company's financial position and results of
operations should be read in conjunction with the Financial Statements and the
Notes to Financial Statements, contained in this report.
Adair International Oil and Gas, Inc. is an independent oil and gas
company that is actively pursuing the acquisition of oil and gas properties
in the United States which have behind the pipe potential for future
development that will enhance shareholder value. Although the Company has
substantial assets in Colombia, this past year the Company began focusing on
acquiring property in the Mid-Continental United States, specifically Texas and
Oklahoma, because of the possibility of a more rapid payout than from properties
in foreign countries.
The Company believes that it has substantial natural gas reserves in the
Chimichagua concession in the Republic of Colombia. This asset is being
evaluated for development and for the construction of a gas fired power
generation plant. However, it is presently unknown if the Company will obtain
financing to develop the natural gas reserves or if the Company will be able to
negotiate a profitable off-take contract for a term that will make the project
economical.
During the past year, management believes that it has positioned the
Company to begin making domestic acquisitions which will bring positive cash
flow and long term appreciation to the Company. Management has also made
considerable efforts to confirm existing engineering and geological data of
potential acquisitions. In addition, the Company has started negotiations for
the financing of acquisitions. The Company uses a strict evaluation philosophy
when considering which properties to acquire, such as the Company's criteria for
a three year or less pay out.
The management guidelines which the Company uses are to operate only within
the Company's specific areas of expertise, to concentrate expansion in areas of
proven reserves, and to increase the value of new and existing projects using
state-of-the art technology.
The Company's strategy is to increase its cash flow, its oil and gas
production and its oil and gas reserves, and to minimize risk by:
Identifying and acquiring producing oil an gas properties with
undeveloped potential located in areas in which management has
experience.
Controlling production and operational risks by serving as operator of
many of the wells in which it has an interest.
Maximizing the potential of acquired oil and gas properties though the
use of improved production and operating practices and enhanced
recovery techniques.
Establishing additional production by re-completing and reworking
wells.
Drilling development wells, and to a lesser extent exploratory wells,
in established areas.
Results of Operations
Fiscal year ended May 31, 1998 compared to fiscal year ended May 31, 1997.
---------------------------------------------------------------------------
The following summarizes oil and gas revenues and operating expenses for
the years ended May 31, 1998 and 1997:
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 1998 May 31, 1997
<S> <C> <C>
Oil and Gas Sales $ 75,489 $ 205,920
Lease Operating Expenses 24,097 51,249
------------- -------------
Operating Income $ 51,392 $ 154,671
============= =============
</TABLE>
The following reflects the Company's cumulative costs in oil and gas properties:
<TABLE>
<CAPTION>
Twelve Months ended May 31,
1998 1997
<S> <C> <C>
Oil and gas properties
at Full Cost:
Unevaluated oil and gas
Properties $ 7,342,245 $ 7,258,674
Less accumulated depletion
and depreciation (4,193,902) (4,118,979)
-------------- ------------
$ 3,148,343 $ 3,139,695
============== ============
</TABLE>
Oil and Gas Sales. During fiscal 1998, the Company experienced a decline
in the Company's domestic production of oil and gas and a decrease in associated
revenues. Revenues decreased to $75,489 in 1998 from $205,920 in 1997, a
decrease in revenues of $130,431. The Company intends to focus its efforts on
the acquisition of domestic production. In addition, the Company will seek
financing to explore and develop its foreign reserves. Future revenues from the
Company's existing domestic producing oil and gas properties at May 31, 1998,
are expected to be minimal. However, in 1998, the Company leased approximately
400 acres in Cherokee County, Texas on which the Company plans to conduct
drilling activity.
Lease Operating Expenses - During fiscal 1998, the Company experienced a
decline in lease operating expenses because of declining production from
domestic properties. Lease operating expenses decreased to $24,097 in 1998 from
$51,249 in 1997, a decrease of $27,152. During fiscal 1998 the Company had no
foreign production.
General and administrative expenses increased to $1,568,350 for the year
ended May 31, 1998, compared to $213,377 for the year ended May 31, 1997. The
increase is attributable to approximately $80,000 non-recurring legal expenses
associated with reorganization of the Company in June, 1997, $117,000 of payroll
expenses attributable to personnel associated with the acquisition, and $529,091
of public relations expense and non-recurring commission expenses in connection
with the sales of common stock.
The net loss for the year ended May 31, 1998, was ($1,968,392) or $(0.07)
per share on revenues of $75,489 versus net income of $629,502 or $0.06 per
share on revenues of $205,920 in the same period of last year.
LIQUIDITY AND CAPITAL RESOURCES
Cash used by operations during the year ended May 31, 1998, was $1,631,480
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 shares to raise working capital. In the
future, cash provided from the existing oil and gas properties at May 31, 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. The Company is attempting to increase domestic
oil and gas production through the drilling of additional domestic wells and by
acquiring cash producing oil and gas properties. On September 8, 1998, the
company obtained a memorandum from a local lender to finance the acquisition of
a mid-continent company. This financing is subject to a comprehensive and
satisfactory due diligence review. The engineering reports show approximately 1
million barrels of proved reserves and 17 billion cubic feet of natural gas
reserves. The future net revenue from the reserves is projected to be
approximately $37 million as per the report and valuation, and production
consists of approximately 72% natural gas and 28% oil. Management's review of
the data meets the lenders requirements, and the acquisition of this company is
consistent with the Company's desire to remain focused on natural gas. The
company is also pursuing bank lines of credit to supplement future working
capital requirements. No assurance can be made that the company will be
successful in its efforts or raise additional capital or to increase revenues
through exploration.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company are included as part of this Form
10-KSB beginning on page F-1.
ITEM 8. CHANGES TO AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
On July 15, 1997, the Company engaged the services of Braden, Bennink,
Goldstein, Gazaway & Company, PLLC, of Houston, Texas ("Braden, Bennink"), to be
the Company's independent auditor. Braden, Bennink audited the Company's
financial statements for the fiscal years ended May 31, 1998 and 1997. Prior to
the engagement of Braden Bennink, the Company had not engaged any firm to
conduct an independent audit of the Company's financial statements from 1989
until 1997.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following persons serve as directors and/or executive officers of the
Company
<TABLE>
<CAPTION>
Name Age Title
- --------------- --- -------------------------------------------
<S> <C> <C>
John W. Adair 56 Chairman of Board, Chief Executive Officer
and Director
Earl K. Roberts 62 President and Director
Jalal Alghani 39 Chief Financial Officer and Director, since
1997, and Director
</TABLE>
11
<PAGE>
Directors of the Company are elected annually. Officers of the Company are
selected by the board of directors and serve at the pleasure of the board. No
director of the Company serves on the board of directors of any other company
which is a reporting company under the Securities Exchange Act of 1934. No
person serving as a director or executive officer of the Company is related to
any other director or executive officer of the Company.
Mr. Adair has been a Director and the CEO of the Company since 1997. Prior
to his joining the Company in 1997, he served as the president and chief
executive officer of Dresser Engineering Co., a company which specializes in oil
and gas engineering services, from 1995 to 1997. Since 1988 Mr. Adair has served
as president of Adair Oil International Canada, Inc. and Adair Oil
International, Inc.
Mr. Roberts has been a Director of the Company since 1981, and has served
as the president of the Company since its inception in 1988 and was the chief
executive officer of the Company until June, 1997.
Mr. Alghani has been a Director of the Company since 1997. Prior to his
joining the Company in 1997, he served as vice president of sales and marketing
of Dresser Engineering Co. from 1995 to 1997. Since 1990 Mr. Alghani has served
as an executive officer of Adair Oil International Canada, Inc.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
John W. Adair, Jalal Alghani and Earl K. Roberts each failed to file five
reports on Form 4 during the last fiscal year concerning five transactions each
in restricted stock received as compensation by each of them from the Company.
12
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table reflects all forms of compensation for services to the
Company for the fiscal years ended May 31 , 1998, 1997 and 1996 of the chief
executive officer and other executive officers of the Company. No other
executive officer of the Company received compensation which exceeded $100,000
during 1998.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION ALL OTHER
-------------------------------- ------------------------------------- ---------
OTHER AWARDS PAYOUTS
------------------------------ -------
NAME AND ANNUAL RESTRICTED SECURITIES
PRINCIPAL COMPEN- STOCK UNDERLYING LTIP
POSITION YEAR SALARY (1) BONUS SATION AWARDS OPTIONS/SARS PAYOUTS
- --------- ---- ---------- ----- ------- ---------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
John W.
Adair 1998 $ 85,000 -0- -0- -0- -0- -0- -0- -0-
CEO
1997 $ -0- -0- -0- -0- -0- -0- -0- -0-
1996 $ -0- -0- -0- -0- -0- -0- -0- -0-
Earl K.
Roberts 1998 $ 85,000 -0- -0- -0- -0- -0- -0- -0-
President
1997 $ -0- -0- -0- -0- -0- -0- -0- -0-
1996 $ -0- -0- -0- -0- -0- -0- -0- -0-
Jalal
Alghani 1998 $ 85,000 -0- -0- -0- -0- -0- -0- -0-
CFO
1997 $ -0- -0- -0- -0- -0- -0- -0- -0-
1996 $ -0- -0- -0- -0- -0- -0- -0- -0-
<FN>
- -----------------------------------------
(1) Includes receipt of restricted common stock of the Company as employee
compensation.
</TABLE>
On March 14, 1997, the Company issued 321,750 shares of its common stock to
Earl K. Roberts for service as a director. The Company has no employment
contracts with any of its executive officers. Beginning in June, 1997, the
Company agreed to pay John W. Adair, Earl K. Roberts and Jalal Alghani each a
salary of $5,000 per month. In January 1998, this compensation was increased to
include, for each person, per month, $5,000 worth of restricted common stock of
the Company, based on the market price of the common stock at the end of each
month.
13
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of August 21, 1998
with respect to the beneficial ownership of shares of Common Stock by (i) each
person who is known to the Company to beneficially own more than 5% of the
outstanding shares of Common Stock, (ii) each director of the Company, (iii)
each executive officer of the Company and (iv) all executive officers and
directors of the Company as a group. Unless otherwise indicated, each
stockholder has sole voting and investment power with respect to the shares
shown.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF PERCENT TITLE OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS CLASS
- ---------------------------------- --------------------- --------- ------------
<S> <C> <C> <C>
Adair International 10,200,000 35.4% Common Stock
Oil Canada, Inc.
4212 San Felipe, Suite 100
Houston, Texas 77027
Petroleum 1,600,000 5.6% Common Stock
Exploration
Services, Inc.
Carrera 14 North
87-39 Office 201
Bogota, Colombia
John W. Adair 10,278,483 (1) 35.7% Common Stock
3000 Richmond, Suite 100
Houston, Texas 77098
Earl K. Roberts 1,129,433 4.0% Common Stock
3000 Richmond, Suite 100
Houston, Texas 77098
Jalal Alghani 10,278,483 (1) 35.7% Common Stock
3000 Richmond, Suite 100
Houston, Texas 77098
William Petty 3,063,000 10.6% Common Stock
3000 Richmond, Suite 100
Houston, Texas 77098
All directors and 11,386,399 39.5% Common Stock
executive
officers as a group (3) persons)
<FN>
- -----------------------------------------
(1) Of these shares, 10,200,000 shares are owned by Messrs. Adair and Alghani
indirectly through Adair International Oil Canada, Inc. Messrs. Adair and Alghani
own an aggregate of 66.6% of the voting stock of Adair International Oil Canada,
Inc.
</TABLE>
14
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 16, 1997, the Company entered into an agreement with Adair
International Oil Canada, Inc. (the "Agreement") pursuant to which the Company
issued to Adair International Oil Canada, Inc. ("AOI") 10,200,000 shares of
common stock of the Company in exchange for a 5% interest in each of certain
assets held by AOI related to oil and gas interests in Yemen and Paraguay. In
connection with the Agreement, three members of the Company's board of directors
agreed to resign and three persons designated by AOI were elected to the
Company's board. John W. Adair and Jalal Alghani, each of whom is an executive
officer of the Company and a member of its board of directors, each own
one-third of the stock of AOI. The terms of this transaction were based on
negotiations by the Company, and the Company believes the terms to be fair and
reasonable, but they were not based on independent appraisals. The AOI oil and
gas interests in Paraguay have expired. AOI is seeking to revive-extend these
interests. AOI invoked the force majeure clause in its contracts related to the
oil and gas interests in Yemen. In connection with the Agreement, 200,000
shares of common stock of the Company which were loaned and returned to the
Company by two entities which received shares as part of the ROGI International
Agreement.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
<C> <C> <S>
3.1 * A copy of the Company's articles of incorporation, as amended
3.2 * A copy of the Company's by laws, as amended
4.1 * Articles V and VI of the Company's Articles of Incorporation
pertain to certain rights of the holders of the Company's common
stock and are included with Exhibit 3.1
4.2 * Provisions of the Company's by laws which pertain to certain rights
of the holders of the Company's common stock are included with
Exhibit 3.2
21.1 ** Subsidiaries
27.1 ** Financial Data Schedule
<FN>
- -------------------------
* Incorporated by reference to the Company's annual report on Form 10-KSB
for the fiscal year ended May 31, 1997.
** Filed herewith
</TABLE>
(b) Reports on Form 8-K
None.
15
<PAGE>
SIGNATURES
In accordance with the requirements of Section 13 of 15(d) of the Exchange
Act, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 9th day of September 1998.
ADAIR INTERNATIONAL OIL AND GAS, INC.
By /s/ John W. Adair
----------------------
John W. Adair, Chairman and Director
Pursuant to the requirements of the Exchange Act, this report has been signed
below by the following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- ---------------------- ------------------------ ------------------
<S> <C> <C>
/s/ John W. Adair Chairman of the Board, September 9, 1998
- ----------------------
John W. Adair Chief Executive Officer,
and Director
/s/ Earl K. Roberts President and Director September 9, 1998
- ----------------------
Earl K. Roberts
/s/ Jalal Alghani Chief Financial Officer September 9, 1998
- ----------------------
Jalal Alghani and Director
</TABLE>
16
<PAGE>
ADAIR INTERNATIONAL OIL AND GAS, INC.
TABLE OF CONTENTS
MAY 31, 1998 AND 1997
Independent Auditor's Report F2
Balance Sheets F3
Statements of Operations F5
Statements of Changes in Stockholders' Equity F6
Statements of Cash Flows F7
Notes to Financial Statements F9
F1
<PAGE>
BRADEN, BENNINK, GOLDSTEIN, GAZAWAY & COMPANY, PLLC
- ---------------------------------------------------------
A Company of CPA Firms
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Adair International Oil and Gas, Inc.
We have audited the accompanying balance sheets of Adair International Oil and
Gas, Inc. as of May 31, 1998 and 1997, and the related statements of operations,
changes in stockholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We have previously issued an opinion dated August 8, 1997 for 1997.
The May 31, 1997 balance sheet has been restated to report the error correction
described in Notes 2 and 3.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Adair International Oil and
Gas, Inc. as of May 31, 1998 and 1997, and the results of their operations,
changes in stockholders' equity and their cash flows for the years then ended,
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's significant operating losses and uncertainty
with regard to obtaining financing raise substantial doubt about its ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
The Company has not obtained an independent appraisal of the property described
in Note 2. We were unable to satisfy ourselves about the valuation of this
asset by means of other auditing procedures. As mentioned in our report dated
August 8, 1997, realization of the value of these reserves is contingent upon
the Company obtaining financing sufficient to fund the development costs. The
company is pursuing financing from third parties, but agreements have not yet
been fulfilled. As mentioned in Note 7, the Company is involved in litigation
with third parties. The effects of the possible results of the litigation can
not be determined.
Braden, Bennink, Goldstein, Gazaway & Company, P. L. L. C.
Houston, Texas
August 28, 1998
F2
<PAGE>
<TABLE>
<CAPTION>
ADAIR INTERNATIONAL OIL AND GAS, INC.
BALANCE SHEETS
MAY 31, 1998 AND 1997
As Restated
1998 1997
------------ -------------
<S> <C> <C>
Current assets
Cash and cash equivalents (Note 1) $ 35,630 $ 130,175
Accounts receivable (Note 1) 2,411 21,809
Note receivable (Note 1) 188,500 0
------------ -------------
Total current assets 226,541 151,984
------------ -------------
Property and equipment (Note 1, 2, and 9)
Oil and gas properties and equipment 7,342,245 7,258,674
Office furniture and equipment 7,399 4,210
------------ -------------
7,349,644 7,262,884
Less: accumulated depreciation and depletion (4,196,076) (4,119,767)
------------ -------------
Net property and equipment 3,153,568 3,143,117
------------ -------------
Other assets
Deposits 375 0
------------ -------------
Total other assets 375 0
------------ -------------
Total assets $ 3,380,484 $ 3,295,101
============ =============
</TABLE>
F3
<PAGE>
<TABLE>
<CAPTION>
ADAIR INTERNATIONAL OIL AND GAS, INC.
BALANCE SHEETS
MAY 31, 1998 AND 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
As Restated
1998 1997
------------ -------------
<S> <C> <C>
Current Liabilities
Accounts payable (Note 1) $ 112,326 $ 71,594
Accrued expenses 73,688 73,727
Payroll taxes payable 14,262 0
------------ -------------
Total liabilities 200,276 145,321
------------ -------------
Contingency (Note 3)
Stockholders' equity
Preferred stock 0 60,000
Common Stock 10,955,548 3,000,000
Additional paid in capital 0 5,896,728
Retained earnings (deficit) (7,775,340) (5,806,948)
------------ -------------
Total stockholders' equity 3,180,208 3,149,780
------------ -------------
Total liabilities and stockholders' equity $ 3,380,484 $ 3,295,101
------------ -------------
</TABLE>
F4
<PAGE>
<TABLE>
<CAPTION>
ADAIR INTERNATIONAL OIL AND GAS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDING MAY 31, 1998 AND 1997
As Restated
1998 1997
------------ -------------
<S> <C> <C>
Revenue
Oil and gas sales $ 75,489 $ 205,920
------------ -------------
Costs and expenses
Lease operating expenses 24,097 51,249
Depreciation and depletion 451,434 34,322
General and administrative 1,568,350 213,377
------------ -------------
Total costs and expenses 2,043,881 298,948
------------ -------------
Operating (loss) (1,968,392) (93,028)
Other income-forgiveness of indebtedness 0 722,530
------------ -------------
Net income (loss) before taxes $(1,968,392) $ 629,502
------------ -------------
Federal income tax expense 0 0
------------ -------------
Net income (loss) $(1,968,392) $ 629,502
============ =============
Net earnings (loss) per common share:
Basic $ (.07) $ .06
------------ -------------
Diluted $ (.07) $ .06
------------ -------------
</TABLE>
F5
<PAGE>
<TABLE>
<CAPTION>
ADAIR INTERNATIONAL OIL AND GAS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDING MAY 31, 1998 AND 1997
Shares Additional Total
Issued and Preferred Common Paid-in Retained Stockholder's
Outstanding Stock Stock Capital Earnings Equity
----------- ----------- ----------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1996 2,000,000 60,000 $ 600,000 $ 4,696,728 $(5,836,450) $ (479,722)
Stock dividend, May 1997 2,000,000 600,000 (600,000) -
Issuance of common stock
in connection with foreign acquisitions 6,000,000 1,800,000 1,200,000 3,000,000
Net income 629,502 629,502
Balance at May 31, 1997 10,000,000 60,000 3,000,000 5,896,728 (5,806,948) 3,149,780
----------- ----------- ----------- ------------ ------------ ---------------
Change common shares to no par
value - July 1997 *** 5,896,728 (5,896,728) -
Conversion of preferred stock 6,666 (60,000) 60,000
Issuance of common stock 17,933,181 1,998,820 1,998,820
Net loss (1,968,392) (1,968,392)
Balance at May 31, 1998 27,939,847 $ - $10,955,548 $ - $(7,775,340) $ 3,180,208
=========== =========== =========== ============ ============ ===============
<FN>
*** Changed number of shares authorized to 100,000,000 common shares no par value and 5,000,000 preferred shares par value
$0.01 each.
</TABLE>
F6
<PAGE>
<TABLE>
<CAPTION>
ADAIR INTERNATIONAL OIL AND GAS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDING MAY 31, 1998 AND 1997
As Restated
1998 1997
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,968,392) $ 629,502
------------ -------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Decrease in accounts receivable 19,398 152,715
(Increase) in note receivable (188,500)
(Increase) in deposits (375)
Increase (decrease) in accounts payable 40,732 (27,949)
Increase (decrease) in accrued liabilities (39) 15,136
Increase in payroll taxes payable 14,262
Forgiveness of indebtedness - (722,530)
Depreciation and depletion 451,434 81,954
------------ -------------
Total adjustments 336,912 (500,674)
------------ -------------
Net cash provided by (used in) operating activities (1,631,480) 128,828
------------ -------------
Cash flows from investing activities:
Payments for purchases of property and equipment (461,885) (4,210)
------------ -------------
Net cash (used in) investing activities (461,885) (4,210)
------------ -------------
Cash flows from financing activities:
Preferred stock conversion to common stock (60,000)
Additional shares issued 2,058,820
------------ -------------
Net cash provided by financing activities 1,998,820
------------ -------------
Net increase (decrease) in cash during the year (94,545) 124,618
Cash, beginning of year 130,175 5,557
------------ -------------
Cash, end of year $ 35,630 $ 130,175
============ =============
continued
F7
<PAGE>
As Restated
1998 1997
------------ -------------
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ 148 $ -
============ =============
Income taxes $ - $ -
============ =============
Schedule of non-cash investing and financing activities:
Issuance of common stock for foreign oil and gas property $ - $ 3,000,000
============ =============
Issuance of common stock for compensation and services $ 563,932 $ -
============ =============
Forgiveness of short-term indebtedness $ - $ 722,530
============ =============
Common stock dividend $ - $ 600,000
============ =============
</TABLE>
F8
<PAGE>
ADAIR INTERNATIONAL OIL AND GAS, INC.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
- ------------
Adair International Oil and Gas, Inc. (formerly Roberts Oil and Gas, Inc.) ("the
Company") was incorporated under the laws of the state of Texas on November 7,
1980. Since inception the Company's primary purpose has been the exploration,
development and production of oil and gas properties in the United States.
Working interests are located in Texas and Oklahoma. During the year ended May
31, 1997, as described in Note 2, the Company acquired properties located in
Colombia. On June 16, 1997, a 51% interest in the Company's outstanding common
stock was acquired by Adair Oil and Gas International of Canada, Bahama
Corporation, and the Company name was changed to Adair International Oil and
Gas, Inc.
Going concern
- --------------
As shown in the accompanying financial statements, the Company incurred a net
loss for the year ended May 31, 1998. This factor, as well as the uncertain
conditions that the Company faces regarding its financing agreements, as
discussed in Note 2, create an uncertainty about the Company's ability to
continue as a going concern. Management of the Company is developing a plan to
obtain additional financing. The ability of the Company to continue as a going
concern is dependent on their ability to obtain such financing. The financial
statements do not include any adjustments that might be necessary if the Company
is unable to continue as a going concern.
Cash and cash equivalents
- ----------------------------
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Accounts receivable
- --------------------
Accounts receivable result from revenues attributable to non-operating interests
in domestic oil and gas properties. No allowance for bad debts exists because
management deems them to be fully collectible.
Note receivable
- ----------------
The note receivable is the result of the sale of stock for a note and is due
from a financial advisory company.
Property and equipment
- ------------------------
The Company follows the full cost method of accounting for its oil and gas
properties. Accordingly, all costs associated with acquisition, exploration and
development of oil and gas reserves, including directly related overhead costs,
are capitalized.
All capitalized costs of oil and gas properties, including the estimated future
costs to develop proved reserves, are amortized on the unit-of-production method
using estimates of proved reserves. Investments in unproved properties and
major development projects are not amortized until impairment occurs. If the
results of an assessment indicate that
F9
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
the properties are impaired, the amount of the impairment is added to the
capitalized costs to be amortized.
Property and equipment (continued)
- -------------------------------------
In addition, the capitalized costs are subject to a "ceiling test," which
basically limits such costs to the aggregate of the "estimated present value,"
discounted at a 10-percent interest rate of future net revenues from proved
reserves, based on current economic and operating conditions, plus the lower of
cost or fair market value of unproved properties.
Depletion of oil and gas properties is computed using all capitalized costs and
estimated future development and abandonment costs, exclusive of oil and gas
properties not yet evaluated, on a unit of production method based on estimated
proved reserves.
Substantially all of the Company's exploration, development, and production
activities are conducted jointly with others and, accordingly, the financial
statements reflect only the Company's proportionate interest in such activities.
The cost of other categories of property and equipment are capitalized at cost
and depreciated using the "straight-line" method over their estimated useful
lives for financial statement purposes as follows:
Furniture and office equipment 7 years
Computer software and equipment 5 years
Depreciation expense for the years ending May 31, 1998 and 1997 were $1,386 and
$788, respectively.
Gains and losses on dispositions of oil and gas properties are recognized only
when there is a significant change in the relationship between costs and proved
reserves. Gains or losses on dispositions of assets other than oil and gas
properties are credited or charged to operations. Expenditures for repairs and
minor replacements are charged to expense.
Accounts payable and accrued liabilities
- --------------------------------------------
Accounts payables and accrued expenses are amounts due to vendors and
consultants. This balance includes amounts about which the company disputes the
liability. In particular, a former attorney for the company has claimed a
liability which the company believes is not due. Although this is in dispute,
that liability has been included in these financial statements.
Income taxes
- -------------
The Company accounts for income taxes pursuant to the asset and liability method
of computing deferred income taxes. Deferred tax assets and liabilities are
established for the temporary differences between the financial reporting bases
and the tax bases of the
F10
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Company's assets and liabilities at enacted tax rates expected to be in effect
when such amounts are realized or settled. When necessary, valuation allowances
are established to reduce deferred tax assets to the amount expected to be
realized.
Significant Accounting Adjustments
- ------------------------------------
The full cost pool was written down by $55,785 in 1997 and $41,388 in 1998 for
domestic properties. The write-downs primarily reflect a decrease in the
valuation of proved reserves. The costs associated with Colombia, Paraguay, and
Yemen have been expensed as explained in Note 2. Future write-downs of the full
cost pool may be required if declining prices and other unfavorable industry
trends continue, production is
not replaced by reserve additions and further impairments of unevaluated
properties or downward revisions to proved reserves are required.
Earnings Per Share
- --------------------
Earnings per share are computed by dividing earnings (loss) by the weighted
average number of common shares outstanding adjusted for conversion of common
stock equivalents, where applicable outstanding during the period. The
calculation of diluted earnings per common share additionally assumes the
conversion of the cumulative convertible preferred stock.
Use of Estimates
- ------------------
Management uses estimates and assumptions in preparing financial statements.
Those estimates and assumptions affect the amounts of assets and liabilities,
the disclosure of contingent assets and liabilities, and the reported revenues
and expenses. Actual results could differ from those estimates.
NOTE 2 - ACQUISITIONS AND RESTATEMENT OF 1997
On February 27, 1997, the Company entered into an agreement with Geopozos, S.A.
("Geopozos") pursuant to which it agreed to issue shares of its common stock to
Geopozos (the "Geopozos Agreement"), subject to approval by the Company's board
of directors and to be implemented on May 20, 1997. As part of the Geopozos
Agreement the company agreed to issue to Geopozos two million (2,000,000) shares
of its common stock and a contingency agreement for $600,000. In 1997, this was
recorded as a note payable, because the best available information at the time
indicated that a note payable was to be issued. Information obtained during
1998 clarified the status of this obligation. The 1997 financial statement have
been restated to correct this error and the asset value has been reduced
accordingly. In connection with the acquisition of those assets, on March 14,
1997, the Company was directed by ROGI International S.A., (a party to the
Geopozos Agreement and an unrelated company incorporated under the laws of
Panama), to issue the aforementioned two million (2,000,000) shares of its
common stock to two
F11
<PAGE>
NOTE 2 - ACQUISITIONS AND RESTATEMENT OF 1997 (continued)
entities and four million (4,000,000) shares of its common stock to seven
foreign corporations and one individual in exchange for the assets being
acquired. The assets which were transferred to the Company in exchange for the
contingency agreement of $600,000 and the issuance of shares consisted of 100%
of the interest in the Chimichaqua Association Contract in Colombia. The
Company received a copy of a letter from Ecopetrol which authorized the
assignment of the Association Contract from Geopozos to the Company effective
June 29, 1998. The terms of all of the transactions relating to the properties
in Colombia were based on negotiations by the Company, and the Company believes
the terms to be fair and reasonable, but they were not based on independent
appraisals.
The shares issued in connection with this acquisition were authorized but
unissued shares of the company. To date, the Company has not been informed of
the relationship or affiliation, if any, among the entities to whom these shares
were issued.
At May 31, 1997 (as restated) the property acquired contained proven
non-producing gas reserves, as described in Note 9, "Supplemental Oil and Gas
Disclosures", which has been recorded at a cost basis of $3,000,000 is adjusted
as explained above, and issued 6,000,000 common shares valued at $0.50 per
share. On March 5, 1997 the parties to this acquisition executed a joint
operating agreement which requires Geopozos to operate the property for an
initial period of twelve months.
Pursuant to the purchase agreement, Geopozos may nominate one individual to
serve on the Board of Directors and will receive a 2% overriding royalty in all
hydrocarbons produced from the properties. At May 31, 1998, the Company was in
process of determining a development plan for the acquired property.
The Company has received a report from a petroleum engineer which indicated that
the information provided to him by the Company with respect to the properties in
Colombia indicates that there are 22.150 billion cubic feet of gas which would
be classified as proved reserves, however, this property is considered
undeveloped acreage because the Company has not conducted any drilling activity
on the property.
Realization of the value of reserves is contingent upon the Company obtaining
financing sufficient to fund the development costs. As of August 28, 1998, the
Company has not obtained financing for this project.
On July 16, 1997, the Company acquired certain rights with respect to oil and
gas properties in Yemen and Paraguay. These rights were acquired from Adair Oil
International Canada, Inc. ("AOI") and consist of 5% of the net profits, if any
related to certain underlying contracts of AOI in Yemen and Paraguay. The
Paraguay contracts were foreign contracts with Guarani Petroleum Exporation, SA.
The Yemen Contracts are with the sovereign governments of the Republic of Yemen.
However, the underlying
F12
<PAGE>
NOTE 2 - ACQUISITIONS AND RESTATEMENT OF 1997 (continued)
contracts of AOI in Paraguay have expired because the Company was unable to
obtain financing to fulfill the terms of the Paraguay contracts.
In connection with the Paraguay Contracts of AOI (the "Paraguay Contracts"), AOI
may seek to negotiate a renewal of the Paraguay Contracts if AOI can form joint
ventures, farmouts, or other arrangements with an oil and gas industry
participant. If AOI does not obtain a renewal of the Paraguay Contracts or does
not find an industry partner, then AOI intends to sell its Paraguay geological
and geophysical data. In any case, the Company will be entitled to 5% of the
profits, if any, from the Paraguay Contracts, including profits from the sale of
AOI's geological and geophysical data.
The activities required to be fulfilled by AOI in the underlying contracts of
AOI in Yemen have remained unfulfilled because of the civil war in Yemen and the
Company's lack of financing to conduct drilling operations in Yemen, even if the
civil war had never occurred. In connection with the completion of the
exploration period, twenty-five percent (25%) of the area covered by each of the
Yemen Contracts is then relinquished back to the Yemen government, except any
area which has been converted into a development area. If AOI determines that
sufficient quantities of oil exist to warrant development of an area it must
apply to the Ministry of Oil and Natural Resources of Yemen for designation of
that area for development. The Ministry is to grant such designation if the
holder is in compliance with the terms of its contract. AOI has received a
report from an independent petroleum engineer which indicates that from the
information which was made available to the engineer, the proved or probable
reserves could not be quantified and the project should be considered as
strictly exploratory. AOI has not conducted any geological or geophysical data
gathering in connection with Yemen properties. All costs connected to Yemen and
Paraguay have been expensed.
NOTE 3 - CONTINGENCY AGREEMENT
The Company issued a $600,000 contingency agreement to Geopozos in connection
with the acquisition of the Colombia properties described in Note 2. The
agreement bears no interest and is due and payable in full from first funds
raised for the Chimichaqua Association Development Project, if Ecopetrol (the
Colombia National Oil Company) grants commercialization on the first well in the
project. The Company may be able to recover a like amount form recovered
expenses paid by Ecopetrol. At May 31, 1997 the contingent liability was
classified as a liability because the available information indicated a note
payable would be prepared. The company has now determined that this is a
contingency obligation and the 1997 financial statements have been restated
accordingly.
F13
<PAGE>
NOTE 3 - NOTES PAYABLE AND LONG-TERM DEBT (continued)
In October 1986, the Company renewed, rearranged and extended a revolving credit
agreement and related promissory note dated July 1, 1985 in the original
principal sum of $900,000. The note was payable on or before December 31, 1991.
As no demand for full payment of outstanding principal and interest was make
prior to the maturity date, monthly installments of principal and interest of
$19,631 were due and payable commencing January 1, 1987 through maturity. The
note was collateralized by a mortgage, deed of trust and assignment of
production on the majority of the Company's oil and gas properties. The majority
of revenues from the company's oil and gas production were received directly by
the lender. In January 1988, the lending bank was placed into receivership and
the note began to be administered by the Federal Deposit Insurance Corporation
(FDIC). In May 1989, the FDIC sold the note to a third party individual. There
were no revisions or modifications to the original note agreement after the FDIC
or the third party individual assumed administration of the note. The majority
of revenue from the Company's oil and gas production were forwarded to the new
third party and subsequently, placed in suspense. (Preferred stock dividends,
note payments, and payments of operating and general and administrative expenses
of the Company were administered by the new third party.)
On March 21, 1997 in a Houston District Court, the Company received a
declaratory judgment ruling that the holder was barred from collection by the
statute of limitations which canceled the note. Production revenues which had
been held in suspense since 1989, aggregating $252,476 were released and
deposited by the company in May 1997. The promissory note was removed from the
balance sheet and forgiveness of debt income of $722,530 was included in the
results of operations during the year ended May 31, 1997.
NOTE 4 - REDEEMABLE CUMULATIVE CONVERTIBLE PREFERRED STOCK
During the fiscal year 1986 the shareholders of the Company authorized 5,000,000
shares of redeemable cumulative convertible preferred stock (preferred stock)
for $100 per share. The preferred stock is non-voting and was convertible to
166.67 shares of common stock for each share of preferred stock at any time at
the shareholders' option within five years from the date of issuance.
The preferred stock was to accrue dividends at the rate of 12% per annum to be
funded by a sinking fund account at a bank, to the extent, and only to the
extent, that revenues from certain oil and gas properties being deposited with
the bank exceeded operation
F14
<PAGE>
NOTE 4 - REDEEMABLE CUMULATIVE CONVERTIBLE PREFERRED STOCK (continued)
expenses and agreed bank debt repayment. Dividends were accumulated and the
first quarterly dividend payment was made on January 5, 1987. Thereafter, the
amount initially paid for the preferred shares were scheduled for repayment of
$100 per share plus accrued dividends in twenty equal quarterly installments
beginning April 5, 1987. The Company was unable to make any of the scheduled
principal and interest payments on its preferred stock.
The preferred stock contained a conversion feature allowing the holders to
convert the preferred shares to common stock. At the earlier of five years from
the stock issuance date or at liquidation of related shareholder notes, if any,
the preferred shareholder could elect one on the following redemption options:
a. To convert each share of preferred stock to 166.67 share of common
stock;
b. To have the Company redeem the preferred stock at $150 per share; or
c. To redeem the preferred stock utilizing a combination of (a) and (b).
The premium over issue price of $50 per share was accreted over twenty quarters
using the interest method.
Prior to May 31, 1997 all preferred shares were converted to common stock,
except for 600 shares held by three shareholders. Legal counsel for the Company
determined that, pursuant to the preferred stock agreement, the preferred
shareholders who failed to convert no longer retained their redemption rights
because under the statute of limitations on such circumstances, the Company may
convert all remaining preferred shares to common stock at the rate of 166.67
shares of common, subject to adjustment for a 30:1 reverse stock split and the
stock dividend on May 12, 1997 described in Note 10. In August 1997, the
Company issued approximately 6,666 common shares in redemption of the remaining
preferred stock outstanding at May 31, 1997. Such shares are considered common
stock equivalents in computing fully diluted earnings per share.
NOTE 5 - INCOME TAXES
The company adopted Statement on Financial Accounting Standards Opinion No. 109,
"Accounting for Income Taxes" effective June 1, 1994. The effect of this change
did not have significant impact on the Company's financial statements.
The difference between the approximate effective rates presented for federal
income taxes and the amounts which would be determined by applying the statutory
federal rates for fiscal 1998 and fiscal 1997, to earnings before provision for
federal income taxes are presented below:
F15
<PAGE>
NOTE 5 - INCOME TAXES (continued)
<TABLE>
<CAPTION>
Years ended May 31,
--------------------------------------
1998 1997
----------------- -------------------
% of % of
Pretax Pretax
Amount Income Amount Income
-------- ------- ---------- -------
<S> <C> <C> <C> <C>
Federal income tax at statutory rate $ 0 34% $ 233,758 34%
Benefit from net operating loss (0) 34% (233,758) 34%
-------- ------- ---------- -------
Income tax expense $ 0 0% $ 0 0%
======== ======= ========== =======
</TABLE>
The sources of deferred income taxes are as follows:
<TABLE>
<CAPTION>
Years ended May 31,
--------------------
1998 1997
------ ------------
<S> <C> <C>
Difference between book and tax
depreciation, depletion and amortization, oil
and gas properties $ 0 $ (19)
Effect of net operating losses 0 4,356,433
Effect of write-down of full cost pool 0 (154,400)
Valuation allowance for ownership changes (0) (4,202,006)
------ ------------
$ 0 $ 0
====== ============
</TABLE>
Deferred taxes result primarily from the write-down of the domestic full cost
pool for book purposes which was not deductible for tax purposes. At May 31, a
valuation allowance was established to reduce the deferred tax asset resulting
from the benefit of net operating loss carryforwards. Such allowance was
established because Section 382 of the Internal Revenue Code limits the use of
operating loss carry forwards and other tax attributes in the event of a greater
than 50% change in ownership as described in Notes 2 and 11. Because of the
ownership changes explained in Notes 2, all net operating loss carryforwards at
May 31, 1997, no longer exist. Losses for 1998 may be carried forward until
2013 and effect future income. Because of the uncertainty of realization of
those losses, they have been fully reserved.
NOTE 6 - RELATED PARTY TRANSACTIONS
During the year ended May 31, 1997, the Company incurred approximately $7,692 in
legal costs paid to a Director. The amount owed at May 31, 1997 was $50,830.
As described in Note 2, the Company has not been informed of the relationship or
affiliation, if any, of the entities who obtained stock in connection with the
Colombian acquisition.
F16
<PAGE>
NOTE 6 - RELATED PARTY TRANSACTIONS (continued)
Shareholders of the Company also have interest in other companies with which the
Company has dealings. See Note 2.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
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 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 cost
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 well after the plugging or abandonment of that well.
Legal Proceedings
- ------------------
The Company was named as a defendant in the matter of Mark Singleton v. Adair
International Oil and Gas, Inc., 98-2672, 215th Judicial District Court, Harris
County, Texas. The plaintiff is seeking rescission for the purchase of 195,000
shares of common stock of the Company. This litigation is presently in the
early stages of discovery. The Company intends to defend itself in this matter.
The Company was named as a defendant in the matter of Santa Fe Natural
Resources, Inc. v. Adair International Oil and Gas, Inc., CV-42, 061, 142nd
Judicial District Court, Midland County, Texas. The plaintiff is claiming that
the Company breached a contract in connection with a bid on an oil and gas
prospect in Eddy County, New Mexico. The plaintiff is also claiming an amount
due from the Company in connection with services rendered for an oil and gas
prospect known as the Saunders prospect in New Mexico. This litigation is
presently in the early stages of discovery. The Company intends to defend
itself vigorously in this matter. In addition, the nature of the Company's
operations exposes it to numerous potential legal risks.
Failure to file reports under the Exchange Act
- -----------------------------------------------------
The Company had filed a registration statement with the Commission under the
Securities Act of 1933 in November, 1981, and therefore became subject to the
requirement that it file reports thereafter under the Securities Exchange Act of
1934 (the "Exchange Act"). The Company filed reports under the Exchange Act,
including annual
F17
<PAGE>
NOTE 7 - COMMITMENTS AND CONTINGENCIES (continued)
reports on Form 10-K, during a portion of the 1980's. However, the Company
experienced financial difficulties during the mid-1980's due to a downturn in
the market for oil and gas and by the late 1980's had become essentially a
dormant company. It continued to hold interests in oil and gas wells but was
generating very little revenue. Consequently, by 1989 the Company could no
longer afford the costs associated with audited financial statements. The
Company filed its Form 10-K under the Exchange Act in 1989 without including
audited financial statements and continued to make 10-K filings under the
Exchange Act without audited financial statements, until the filing of a Form
10-KSB for the fiscal year ended May 31, 1997. During the period that the
Company failed to file audited financial statements, it may also have failed to
comply with other formalities required by the Exchange Act with respect to other
required reports and proxy statements.
Lease Commitments
- ------------------
On August 7, 1997, the Company executed a sublease agreement for office space
which began August 11, 1997. Lease payments are $4,300 per month. This
sublease expires July 15, 1998. The Company also leases a corporate apartment
for $1,165 per month which was executed on September 15, 1997. This lease
expired March 30, 1998.
The Company leased furniture for $406 per month. This lease expired February 5,
1998. The Company also leases office furniture for $665 per month. This lease
expires August 26, 2000.
On June 27, 1997, the Company executed an equipment lease agreement for a
copier. Lease payments are $100 per month. This lease expires June 27, 2002.
The Company leased a color copier for $637 per month beginning May 19, 1998.
This lease expires May 19, 2003.
The Company leases a 1997 Mercedes for $1,340 per month. This lease expires
July 31, 2002.
As of May 31, 1998, future minimum lease payments are as follows:
1999 $ 32,904
2000 26,919
2001 24,924
2002 24,924
2003 9,787
Thereafter 0
--------
Total $119,458
========
F18
<PAGE>
NOTE 7 - COMMITMENTS AND CONTINGENCIES (continued)
Rent expense for the years ended May 31, 1998 and 1997 was $76,277 and $6,897,
respectively.
NOTE 8 - CONCENTRATIONS
Concentrations of Credit Risk Arising from Cash Deposits in Excess of Insured
- --------------------------------------------------------------------------------
Limits
- ------
The Company maintains a cash balance at a financial institution. The Federal
Deposit Insurance Corporation (FDIC) insured up to $100,000 per company. At May
31, 1998 and 1997, the Company's cash balance exceeded FDIC coverage by $0 and
$50,129, respectively.
Concentrations of Major Customers
- ------------------------------------
All the Company's revenues are the result of oil and gas working interests
operated by third parties.
NOTE 9 - SUPPLEMENTARY OIL AND GAS INFORMATION
Costs Incurred and Capitalized Costs in Oil and Gas Producing Activities Costs
incurred in oil and gas producing activities are as follows:
<TABLE>
<CAPTION>
May 31, 1998 United States Colombia Total
- ------------------------------------ --------------- ----------- ------------
<S> <C> <C> <C>
Oil and Gas Properties $ 0 $ 0 $ 0
Unevaluated oil and gas properties 4,342,245 3,000,000 7,342,245
--------------- ----------- ------------
Total capitalized costs $ 4,342,245 $3,000,000 $ 7,342,245
=============== =========== ============
Less accumulated depletion and
depreciation (4,193,902) (0) (4,193,902)
Capitalized costs, net $ 148,343 $3,000,000 $ 3,148,343
=============== =========== ============
OTHER PROPERTY AND EQUIPMENT
Plant and equipment $ 7,399 $ 0 $ 7,399
--------------- ----------- ------------
Total $ 7,399 $ 0 $ 7,399
=============== =========== ============
Less accumulated depreciation (2,174) 0 (2,174)
--------------- ----------- ------------
Net 5,225 0 5,225
--------------- ----------- ------------
Total net property and equipment $ 153,568 $3,000,000 $ 3,153,568
=============== =========== ============
</TABLE>
F19
<PAGE>
NOTE 9 - SUPPLEMENTARY OIL AND GAS INFORMATION (continued)
<TABLE>
<CAPTION>
May 31, 1997 United States Colombia Total
- ------------------------------------------- --------------- ----------- ------------
<S> <C> <C> <C>
Oil and Gas Properties $ 0 $ 0 $ 0
Unevaluated oil and gas properties 4,258,674 3,000,000 7,258,674
--------------- ----------- ------------
Total capitalized costs 4,258,674 3,000,000 7,258,674
Less accumulated depletion and depreciation
(4,118,979) 0 (4,118,979)
--------------- ----------- ------------
Capitalized costs, net $ 139,695 $3,000,000 $ 3,139,695
=============== =========== ============
OTHER PROPERTY AND EQUIPMENT
Plant and equipment $ 4,210 $ 0 $ 4,210
--------------- ----------- ------------
Total 4,210 0 4,210
Less accumulated depreciation (788) (0) (788)
--------------- ----------- ------------
Net $ 3,422 $ 0 $ 3,422
--------------- ----------- ------------
Total net property and equipment $ 143,117 $3,000,000 $ 3,143,177
=============== =========== ============
</TABLE>
Costs incurred in oil and gas property acquisition, exploration, and development
activities are as follows:
<TABLE>
<CAPTION>
United States Colombia Total
-------------- --------- ------
<S> <C> <C> <C>
1998 Exploration $ 0 $ 0 $ 0
Development 0 0 0
Acquisition of proved properties 0 0 0
-------------- --------- ------
Total cost incurred $ 0 $ 0 $ 0
============== ========= ======
</TABLE>
<TABLE>
<CAPTION>
United States Colombia Total
-------------- ---------- ----------
<S> <C> <C> <C>
1997 Exploration $ 0 $ 0 $ 0
Development 0 0 0
Acquisition of proved properties 0 3,600,000 3,600,000
-------------- ---------- ----------
Total cost incurred $ 0 $3,600,000 $3,600,000
============== ========== ==========
</TABLE>
Oil and gas depletion expense in 1998 and 1997 was $4,050,048 and $33,534,
respectively.
F20
<PAGE>
NOTE 9 - SUPPLEMENTARY OIL AND GAS INFORMATION (continued)
Presented below is a summary of proved reserves of the Company's oil and gas
properties:
<TABLE>
<CAPTION>
Year ended May 31, 1998
----------------------------------
United States Colombia Total
-------------- -------- --------
<S> <C> <C> <C>
OIL (BARRELS)
Proved reserves:
Beginning of year 778 0 778
-------------- ---------- -------------
Acquisition, exploration and
development of minerals in place 0 0 0
Revisions of previous estimates 668 0 668
Production (95) 0 (95)
Sales of minerals in place 0 0 0
-------------- ---------- -------------
End of year 1,351 0 1,351
============== ========== =============
GAS (THOUSANDS OF CUBIC FEET)
Proved reserves:
Beginning of year 124,803 22,150,000 22,274,803
-------------- ---------- -------------
Acquisition, exploration and
Development of minerals in place 0 0 0
Revisions of previous estimates 56,287 0 56,287
Production (64,988) 0 (64,988)
Sales of mineral in place 0 0 0
-------------- ---------- -------------
End of year 116,102 22,150,000 22,266,102
============== ========== =============
</TABLE>
<TABLE>
<CAPTION>
Year ended May 31, 1997
---------------------------------------
United States Colombia Total
-------------- ---------- -----------
<S> <C> <C> <C>
OIL (BARRELS)
Proved reserves:
Beginning of year 989 0 989
-------------- ---------- -----------
Acquisition, exploration and
development of minerals in place 0 0 0
Revisions of previous estimates 0 0 0
Production (211) 0 (211)
Sales of minerals in place 0 0 0
-------------- ---------- -----------
End of year 778 0 778
============== ========== ===========
GAS (THOUSANDS OF CUBIC FEET)
Proved reserves:
Beginning of year 161,960 0 161,960
-------------- ---------- -----------
Acquisition, exploration and
Development of minerals in place 0 22,150,000 22,150,000
Revisions of previous estimates 0 0 0
Production (37,157) 0 (37,157)
Sales of mineral in place 0 0 0
-------------- ---------- -----------
End of year 124,803 22,150,000 22,274,803
============== ========== ===========
</TABLE>
F21
<PAGE>
NOTE 9 - SUPPLEMENTARY OIL AND GAS INFORMATION (continued)
STANDARD MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND CHANGES THEREIN
RELATING TO PROVED OIL AND GAS RESERVES
The following information has been prepared in accordance with Statement of
Financial Accounting Standards No. 69, which requires the standardized measure
of discounted future net cash flows to be based on sales prices, costs and
statutory income tax rates in effect at the time the projections are made and a
10 percent per year discount rate. The projections should not be viewed as
estimates of future cash flows nor should the "standardized measure" be
interpreted as representing current value to the Company.
<TABLE>
<CAPTION>
1998
-------------------------------------
United States Colombia Total
--------- ------------ ------------
(In Dollars)
<S> <C> <C> <C>
Future cash inflows $250,138 $27,647,500 $27,897,638
Future production costs (90,052) (7,865,130) (7,955,182)
Future development costs 0 (7,400,000) (7,400,000)
Future income tax expenses (17,943) (4,210,006) (4,227,949)
--------- ------------ ------------
Future net cash flows 142,143 8,172,364 8,314,507
10 percent annual discount for
estimated timing of cash flows (25,717) (4,429,421) (4,455,138)
--------- ------------ ------------
Standardized measure of discounted
Future net cash flows $116,426 $ 3,742,943 $ 3,859,369
========= ============ ============
</TABLE>
<TABLE>
<CAPTION>
1997
--------------------------------------
United States Colombia Total
---------- ------------ ------------
(In Dollars)
<S> <C> <C> <C>
Future cash inflows $ 365,056 $27,647,500 $28,012,556
Future production costs (105,834) (7,865,130) (7,970,964)
Future development costs 0 (7,400,000) (7,400,000)
Future income tax expenses (38,883) (4,210,006) (4,248,889)
---------- ------------ ------------
Future net cash flows 220,339 8,172,364 8,392,703
10 percent annual discount for
estimated timing of cash flows (80,644) (4,429,421) (4,510,065)
---------- ------------ ------------
Standardized measure of discounted
Future net cash flows $ 139,695 $ 3,742,943 $ 3,882,628
========== ============ ============
</TABLE>
F22
<PAGE>
NOTE 9 - SUPPLEMENTARY OIL AND GAS INFORMATION (continued)
The following are the principal sources of changes in the standardized measure
of discounted Future net cash flows during 1998 and 1997.
<TABLE>
<CAPTION>
1998
-------------------------------------
United States Colombia Total
--------- ------------ ------------
(In Dollars)
<S> <C> <C> <C>
Balance at beginning of year $139,695 $ 6,796,500 $ 6,936,195
Acquisitions, discoveries and extension 0 0 0
Sales and transfers of oil and gas
produced, net of production costs (13,736) 0 (13,736)
Changes in estimated future
development costs 0 0 0
Net changes in prices, net of production
costs 0 0 0
Sales of reserves in place 0 0 0
Development costs incurred during the
period 0 0 0
Changes in production rates and other 0 0 0
Revisions of previous quantity estimates 111,824 0 111,824
Accretion of discount 0 0 0
Net change in income taxes (21,357) (3,053,557) (3,074,914)
--------- ------------ ------------
Balance at end of year $116,426 $ 3,742,943 $ 3,859,369
========= ============ ============
</TABLE>
<TABLE>
<CAPTION>
1997
-------------------------------------
United States Colombia Total
--------- ------------ ------------
(In Dollars)
<S> <C> <C> <C>
Balance at beginning of year $220,661 0 $ 220,661
Acquisitions, discoveries and extension 0 6,796,500 6,796,500
Sales and transfers of oil and gas
produced, net of production costs (56,278) 0 (56,278)
Changes in estimated future
development costs 0 0 0
Net changes in prices, net of production
costs 0 0 0
Sales of reserves in place 0 0 0
Development costs incurred during the
period 0 0 0
Changes in production rates and other 0 0 0
Revisions of previous quantity estimates 0 0 0
Accretion of discount 0 0 0
Net change in income taxes (24,688) (3,053,557) (3,078,245)
--------- ------------ ------------
Balance at end of year $139,695 $ 3,742,943 $ 3,882,638
========= ============ ============
</TABLE>
F23
<PAGE>
NOTE 10 - STOCK DIVIDEND
In May 1997, the Board of Directors approved a stock dividend on the basis of a
one share dividend for each share owned for all shareholders of record at May
12, 1997. In connection with this dividend 2,000,000 shares were issued.
NOTE 11 - SUBSEQUENT EVENTS
The Company is engaged in ongoing efforts to acquire directly or indirectly
other domestic oil and gas interests.
F24
<PAGE>
INDEX TO EXHIBITS
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION
- ------- --------------------------------------------------------------------
3.1 * A copy of the Company's articles of incorporation, as amended
3.2 * A copy of the Company's by laws, as amended
4.1 * Articles V and VI of the Company's Articles of Incorporation
pertain to certain rights of the holders of the Company's common
stock and are included with Exhibit 3.1
4.2 * Provisions of the Company's by laws which pertain to certain rights
of the holders of the Company's common stock are included with
Exhibit 3.2
21.1 ** Subsidiaries
27.1 ** Financial Data Schedule
* Incorporated by reference to the Company's annual report on Form 10-KSB
for the fiscal year ended May 31, 1997.
** Filed herewith
<PAGE>
Exhibit 21.1
Subsidiaries
Adair Colombia Oil & Gas, S.A., a wholly owned Panama corporation
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-31-1998
<CASH> 35630
<SECURITIES> 0
<RECEIVABLES> 190911
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 226541
<PP&E> 7349644
<DEPRECIATION> (4196076)
<TOTAL-ASSETS> 3380484
<CURRENT-LIABILITIES> 200276
<BONDS> 0
<COMMON> 10955548
0
0
<OTHER-SE> (7775340)
<TOTAL-LIABILITY-AND-EQUITY> 3380484
<SALES> 75489
<TOTAL-REVENUES> 75489
<CGS> 475531
<TOTAL-COSTS> 475531
<OTHER-EXPENSES> 1568350
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1968392)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1968392)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1968392)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
</TABLE>
