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, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-10056
ADAIR INTERNATIONAL OIL AND GAS, INC.
(Exact name of registrant as specified in its charter)
Texas 74-2142545
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
3000 Richmond, Suite 100, Houston, TX 77098
(Address of principal executive offices, including zip code)
(713) 621-8241
(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: N.A.
Securities registered pursuant to 12(g) of the Exchange Act: Common Stock,
no par value
Indicate by check mark whether the registrant (i) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (ii) has been subject to such filing requirements for the past 90
days. [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 aggregate market value of Common Stock held by non-affiliates of the
registrant at September 1, 1999, based upon the last closing price on the OTCBB,
was $3,950,542. As of September 1, 1999, there were 50,938,038 shares of Common
Stock outstanding.
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 6
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 9
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
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. 16
Item 10. Executive Compensation 17
Item 11. Security Ownership of Certain Beneficial Owners and
Management 18
Item 12. Certain Relationships and Related Transactions 19
Item 13. Exhibits and Reports on Form 8-K 20
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PART I
ITEM 1. 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. In July, 1997, the Company changed its name to Adair International Oil and
Gas, Inc.
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 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.
Since 1997, the Company has made changes in its operations and the focus of
its business. The Company is involved in activities related to its:
(a) Present interests in contracts pertaining to oil and gas properties in
Colombia.
(b) Preliminary activities related to a natural gas powered electrical
generation project in the United States on Native American land.
(c) Preliminary activities related to natural gas powered electrical
generation project in the Republic of Colombia.
(d) Preliminary activities related to a co-generation project in Yemen.
(e) Preliminary activities begun in 1999 related to the acquisition of oil
exploration blocks in the Republic of Yemen (the "New Blocks"). Prior
to 1999, the Company had interests in oil exploration blocks in
Yemen (the "Former Blocks"). However, the Company had been unable to
proceed with exploration in a timely manner because of civil unrest
in Yemen, and the Company's lack of financing to proceed with
exploration. The Company invoked the force majeure clause of agreements
with the government of Yemen in connection with the Former Blocks, and
the status of the Company's rights to the Former Blocks is uncertain.
The New Blocks are in different areas than the Old Blocks.
In March, 1999, the Company sold all of its domestic oil and gas
properties.
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NATURAL GAS POWERED ELECTRICAL GENERATION PROJECTS
In 1999, the Company entered into an agreement with the Torres Martinez
Indian Tribe to conduct a feasibility study for the construction of a
540-megawatt Gas Powered Electrical Generation plant. If the feasibility study
proves positive the Company has the right to construct and operate the facility.
In conjunction with a major power industry participant, the feasibility study
was begun, and the Tribe was paid a $15,000 option on 40 acres, which secured a
one year period which commenced on July 8, 1999, during which to complete the
feasibility study.
In November, 1998, the Company entered into a memorandum of understanding
with WARTSILA NSD Ecuador to develop a 20-megawatt power plant in the Republic
of Colombia whereby the Company and WARTSILA would utilize the natural gas from
the Company's Chimichagua Concession (See, Properties-- Republic of Colombia Oil
and Gas Properties). WARTSILA. A feasibility study has been completed.
GOVERNMENTAL REGULATIONS
The Company's current and contemplated activities are in the areas of oil
and gas drilling and production, and electric power generation. Federal, state
and local laws and regulations have been enacted regulating these activities.
Moreover, so-called "toxic tort" litigation has increased markedly in recent
years as persons allegedly injured by chemical contamination seek recovery for
personal injuries or property damage. These legal developments present a risk
of liability should the Company be deemed to be responsible for contamination or
pollution. There can be no assurance that the Company's policy of establishing
and implementing proper procedures for complying with environmental regulations
will be effective at preventing the Company from incurring a substantial
environmental liability. If the Company were to incur a substantial uninsured
liability for environmental damage, its financial condition could be materially
adversely affected. The government can, however, impose new standards. If new
regulations were to be imposed, the Company may not be able to comply.
EMPLOYEES
The Company currently has 5 full-time employees, all of whom are in
management positions, including corporate and administrative operations. None
of the Company's employees are represented by a union and the Company considers
its employee relations to be good.
The prospects of the Company are subject to a number of risks. There may
exist, however, other factors which constitute additional risks but which are
not currently foreseen or fully appreciated by management.
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TRANSFER AGENT AND REGISTRAR
The transfer agent of the Company is Chase Mellon Shareholder Services, 499
S. Hope Street, 4th Floor, Los Angeles, CA 90071, (213) 553-9726.
OTHER CORPORATE MATTERS
The Company has not paid its current franchise tax to the State of Texas.
The Company is in the process of becoming current in its franchise tax payments
and filing for reinstatement in Texas.
RISK FACTORS
The prospects of the Company are subject to a number of risks. There may
exist, however, other factors which constitute additional risks but which are
not currently foreseen or fully appreciated by management.
Going Concern Risk
The Company incurred net operating losses for the two years ending May 31,
1999 and 1998 and currently has negative working capital. The Company has been
unable to obtain financing to develop the property described in Note 2 of the
financial statements. Operating expenses and other financial obligations have
been met, primarily, by the issuance of Company stock. There is no assurance
that the Company will be able to continue to sell stock to fund operations.
These factors create substantial doubt about the Company's ability to continue
as a going concern.
New Business Strategy
The Company has responded to losses incurred in the past two years by
adopting a new business strategy. With the decline in the oil and gas market in
the past two years and the deregulation of the natural gas industry, management
has proceeded with the development of natural gas fired power generation
projects. 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.
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
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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 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.
Reliance on Efforts of Others
The Company intends to form joint ventures with industry participants in
order finance and facilitate its activities. The Company will depend on other
companies to develop and operate its properties and projects. 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.
Any changes in the political climate of Colombia, 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 renegotiating 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.
Oil and Gas Price Volatility
4
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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.
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.
ITEM 2. PROPERTIES
5
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The Company's principal executive offices are located in leased facilities
at 3000 Richmond, Suite 100, Houston, Texas 77098, which consist of a total of
approximately 4,763 square feet. The current monthly rental for these executive
offices is $6,351. The lease for the executive offices will expire in August,
2001. The Company believes that its offices are adequate for its present needs
and that suitable space will be available to accommodate its future needs.
Domestic Oil and Gas Properties
The Company has not commenced any drilling activity during the last three
years. In 1999, the Company sold all of its domestic oil and gas production.
In March, 1999 the company sold 25 wells located in the continental U.S. due to
the fact the wells were essentially depleted or the interest was such a minor
portion that it was not economically feasible to maintain ownership. Also taken
into consideration was the plugging liability that the company could possibly
face.
For 1999, the average sales price per barrel of oil produced was $20.31,
and the average sales price per MCF of gas produced was $2.23, 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. 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.
Republic of Colombia Oil and Gas Properties
In 1997, the Company acquired, subject to certain consents, rights with
respect to a contract relating to the exploration, drilling and development of
oil and gas properties in the Republic of Colombia (the "Chimichagua
Concession"). The rights acquired consisted of the rights and obligations of
Geopozos (a Colombian company) 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. Ecopetrol is a
government organization of Colombia which regulates oil and gas activity.
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
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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 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. The current
size of the area in which the Company may explore is approximately 25,000 acres.
See below, Petroleum Reserves in the Chimichagua Concession.
-----------------------------------------------------
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 Geopozos Agreement also provides that Geopozos may 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.
In November, 1998, the Company entered into a memorandum of understanding
with WARTSILA NSD Ecuador to develop a 20-megawatt power plant in the Republic
of Colombia whereby the Company and WARTSILA would utilize the natural gas from
the Company's Chimichagua Concession (See, Properties-- Republic of Colombia Oil
and Gas Properties). WARTSILA. A feasibility study has been completed.
Petroleum Reserves in the Chimichagua Concession. In a report dated
-----------------------------------------------------
September 13, 1999, L.A. Martin & Associates, Inc., a petroleum engineering
firm, reported on its review of Geopozos' and Ecopetrol's well logs and tests in
the Chimichagua Concession. L.A. Martin & Associates, Inc. stated that the
estimated reserves were 22.15 BCF of proved reserves of natural gas.
Realization of the value of these reserves is contingent upon the Company or
WARTSILA obtaining financing to fund the development costs.
The Company previously owned a 5% interest in each of certain oil and gas
properties held by Adair International Oil Canada, Inc. ("AOI") in Yemen (the
Former Blocks as describe in Business) and in Paraguay. The Company and AOI had
been unable to proceed with exploration in Yemen in a timely manner because of
civil unrest in Yemen, and the Company's lack of financing to proceed with
exploration. The Company invoked the force majeure clause of agreements with
the government of Yemen in connection with the Former Blocks, and the status of
the Company's rights to the Former Blocks is uncertain. The Company and AOI
were unable to proceed with exploration in Paraguay in a timely manner because
of lack of financing, and the rights to the Paraguay properties expired. See,
Certain Relationships and Related Transactions.
ITEM 3. LEGAL PROCEEDINGS
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In June, 1998, the Company was named as a defendant in the matter of Mark
Singleton v. Adair International Oil and Gas, Inc., No. 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 discovery stage. The Company intends to defend itself
vigorously in this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The regular annual meeting of shareholders was held on January 25, 1999, at
which time the following persons were elected directors:
Name Votes for
- ---- ----------
John W. Adair 30,869,418
Earl K. Roberts 30,869,418
Jalal Alghani 30,869,418
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is currently traded on the over the counter
bulletin board ("OTCBB") symbol "AIGI". The following table sets forth, for the
periods indicated, the high and low closing bid prices for the Common Stock of
the Company as reported on the OTCBB. The bid prices reflect inter-dealer
quotations, do not include retail mark ups, markdowns or commissions and do not
necessarily reflect actual transactions.
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COMMON STOCK PRICE RANGE
HIGH BID LOW BID
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Fiscal Quarter Ended:
August 31, 1997 $ 1.75 $ .375
November 30, 1997 $ 2.00 $ .6875
February 28, 1998 $ 1.75 $ .25
May 31, 1998 $ .375 $ .25
August 31, 1998 $ .375 $ .0781
November 30, 1998 $ .0938 $ .0469
February 28, 1999 $ .0938 $ .0312
May 31, 1999 $ .0625 $ .0312
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On September 1, 1999, the closing price for the Common Stock of the Company
on the OTCBB was $.10. On September 1, 1999, there were approximately 895
stockholders of record of the Common Stock, including broker-dealers holding
shares beneficially owned by their customers.
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 for the Company 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 quarter ended May 31, 1999, the following transactions were
effected by the Company in reliance upon exemptions from registration under the
Securities Act of 1933 as amended (the "Act") as provided in Section 4(2)
thereof. Each certificate issued for unregistered securities contained a legend
stating that the securities have not been registered under the Act and setting
forth the restrictions on the transferability and the sale of the securities.
No underwriter participated in, nor did the Company pay any commissions or fees
to any underwriter in connection with any of these transactions. None of the
transactions involved a public offering. The Company believes that each of the
persons had knowledge and experience in financial and business matters which
allowed them to evaluate the merits and risk of the purchase or receipt of these
securities of the Company. The Company believes that each of the persons were
knowledgeable about the Company's operations and financial condition.
In April, 1999, the Company issued a total of 900,000 shares of common
stock to its three Directors and Executive Officers as compensation.
During March, April and May 1999, the Company issued a total of 727,000
shares of common stock to four consultants to the Company as compensation.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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The following discussion should be read in conjunction with the Company's
consolidated financial statements and related notes included elsewhere in this
Report. See, Financial Statements.
Information Regarding and Factors Affecting Forward-looking Statements
The Company is including the following cautionary statement in this Form
10-KSB 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, future
events or performance and underlying assumptions and other statements which are
other than statements of historical facts. Certain statements in this Form
10-KSB are forward-looking statements. Words such as "expects", "anticipates",
"estimates" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to risks and uncertainties that could
cause actual results to differ materially from those projected. Such risks and
uncertainties are set forth below. 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 limitation, 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 expectation, beliefs or projections will result, be achieved, or be
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 material adverse affects on the Company's financial condition and
results of operations: 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
market for electrical power under de-regulation; 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; competitive factors; and the effect of business interruption
due to political unrest. The Company has no obligation to update or revise
these forward-looking statements to reflect the occurrence of future events or
circumstances.
Going Concern Qualification by the Company's Independent Auditor
The Company incurred net operating losses for the two years ending May 31,
1999 and 1998 and currently has negative working capital. The Company has been
unable to obtain financing to develop the property described in Note 2 of the
financial statements. Operating expenses and other financial obligations have
been met, primarily, by the issuance of Company stock. There is no assurance
that the Company will be able to continue to sell stock to fund operations.
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These factors create substantial doubt about the Company's ability to continue
as a going concern. Management of the Company has a plan to reverse these
conditions. The ability of the Company to continue as a going concern is
dependent upon its ability to carry out the plan described below.
New Business Strategy
The Company has responded to losses incurred in the past two years by
adopting a new business strategy. With the decline in the oil and gas market in
the past two years and the deregulation of the natural gas industry, management
has proceeded with the development of natural gas fired power generation
projects.
The Company looks for the availability of land, power grid, accessibility
of water and natural gas when analyzing potential sites. The Company has
identified four sites located on Native American Reservations in the Western
United States. If successful in developing sites, the Company expects to
receive developer fees, carried royalty interests, and the right to invest as an
equity partner.
On July 8, 1999, the Company and a major power developer signed an
agreement with the Torres Martinez tribe for one of the sites mentioned above
for an exclusive option to develop a 540 megawatt facility. The agreement calls
for the option to lease property and to conduct a due diligence and feasibility
study on the project. The Company will seek financing for this project however
no financing has been obtained.
On July 28, 1999, the Company signed a joint venture agreement with
Partners In Exploration, LLC ("PIE"), an oil and gas exploration and geophysical
firm, for the purpose of acquiring leases and exploring for oil and gas in
Yemen. Management believes that this alliance, coupled with appropriate
financing, will provide additional cash flows for the Company. No leases have
been acquired and no exploration has been conducted. The Company will seek
financing for this project however no financing has been obtained.
The Company plans to continue its efforts to acquire equity partners, to
make private placements, and to seek both private and government funding for its
projects.
The Company believes that the aforementioned strategies will reverse the
experience of the past two fiscal years. By capitalizing on the deregulation in
the oil and gas market and by partnering with companies which have the expertise
and resources complimentary to those of the Company, the Company plans to
realize the economic benefits of its resources and experience, particularly in
the Native American and Yemen markets.
Our efforts in Colombia with WARTSILA NSD Ecuador, a supplier of power
systems, to build a power plant on our Chimichagua concession continues to move
ahead. The recent conclusion of a feasibility study by WARTSILA has shown the
Colombia project to be very positive and several Colombian companies have
indicated a desire to participate. This will be a smaller, 20 MW power plant,
but could be profitable for the Company. The plant will buy natural gas from
the Company that would be produced on the Company's Chimichagua Concession. The
Company will seek financing for this project however no financing has been
obtained.
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Concurrent with the development of the Power Projects, the Company is
continuing to pursue the acquisition of cash flowing oil and gas properties with
upside potential. The Company thoroughly evaluates such opportunities and takes
a very professional approach in analyzing the potential of such properties. It
is the intention of the Company to evolve with an active drilling program in the
near futures in that it is the opinion of management that through the
utilization of 3-D prospects, drilling of the low risk areas is the fastest and
most effective way to build oil and gas reserves. The Company continues to
evaluate certain prospects in Yemen where seismic data is available.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED MAY 31, 1999 COMPARED TO FISCAL YEAR ENDED MAY 31, 1998.
The following summarizes oil and gas revenues and operating expenses for
the years ended May 31, 1999 and 1998:
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 1999 May 31, 1998
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<S> <C> <C>
Oil and Gas Sales $ 33,008 $ 75,489
Lease Operating Expenses 13,966 24,097
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Operating Income $ 19,042 $ 51,392
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The following table reflects the Company's cumulative costs in oil and gas
properties:
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<TABLE>
<CAPTION>
Twelve Months Ended May 31,
1999 1998
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<S> <C> <C>
Oil and gas properties at full cost:
Oil and gas properties $3,000,000 $ 7,342,245
Less accumulated depletion and
depreciation 0 $(4,193,902)
---------- ------------
3,000,000 3,148,343
========== ============
</TABLE>
Oil and Gas Sales. During fiscal 1999, the Company experienced a decline
-------------------
in domestic production of oil and gas, and a decrease in associated revenues.
Revenues decrease to $33,008 in 1999 from $75,489 in 1998, a decrease in
revenues of $42,481. The Company intends to focus its efforts on the
development of its foreign reserves. The Company sold its domestic properties
on March 31, 1999.
Lease Operating Expenses. During fiscal 1999, the Company experienced a
--------------------------
decline in lease operating expenses because of declining production from
domestic properties. Lease operating expenses decreased to $13,966 in 1999 from
$24,097 in 1998, a decrease of $ 10,131. During fiscal 1999, the Company had no
foreign production.
Depreciation and Depletion. During fiscal 1999, the Company experienced a
---------------------------
decline in depreciation and depletion due to the sale of its domestic
properties. Depreciation and depletion expense decreased to $60,435 in fiscal
1999 from $451,434 in fiscal 1998, a decrease of $445,391.
Interest Expense. During fiscal 1999, the Company had incurred interest
-----------------
expense on a note payable in the amount of $2,268, which represented an increase
of $2,120 over fiscal 1998.
General and administrative Expenses. During fiscal 1999, the Company
--------------------------------------
experienced a decline in general and administrative expenses. General and
administrative expenses deceased to $1,396,887 in fiscal 1999 from $1,568,202 in
fiscal 1998, a decrease of $171,315. Officer salaries increased $143,095 and
rent increased $37,088. Administrative salaries decreased $143,279,
entertainment decreased $88,833, public relations decreased $64,180, and
professional fees decreased $50,152. These decreases coupled with others
resulted in the decrease of $171,315.
The net loss for the year ended May 31, 1999 was ($1,509,458) or ($0.04)
per share on revenues of $33,008 versus a net loss of ($1,968,392) or ($0.09)
per shares on revenues of $75,489 in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The company has no bank debt at this time. The functional currency of
the Company is the U.S. dollar because.
13
<PAGE>
The Company expects that its existing cash reserves, cash flows from
operations and available financing, if available, will be sufficient to cover
the Company's cash requirements for fiscal 2000. However, there can be no
assurance that these sources of cash will cover the Company's requirements for
fiscal 2000.
IMPACT OF YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculation causing disruption of business activities.
Based on ongoing assessments, the Company believes that no significant
modifications of existing computer software will be required. The Company
believes that its computer systems will function properly with respect to dates
in the year 2000 and thereafter. The Company also believes that costs related to
the Year 2000 issue have not and will not be significant and will not exceed
$10,000.
The Company has assessed its relationships with significant suppliers and
major customers to determine the extent to which the Company is vulnerable to
any third party's failure to remedy their own Year 2000 issues. Based on these
assessments, management believes that significant exposure does not exist with
respect to third parties. Management has developed a contingency plan to address
potential Year 2000 problems that could arise. This plan includes identification
of alternative supplies for critical parts and components needed to mitigate the
possibility of interruptions in business operations.
ITEM 7. FINANCIAL STATEMENTS
The information required hereunder is included in this report as set forth
beginning on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Braden, Bennink, Goldstein, Gazaway & Company, P.L.L.C. ("Braden") audited
the financial statements of the Company for the years ended May 31, 1998 and
1997, and resigned on July 2, 1999. The Company engaged Jack Sisk & Co.
("Sisk") as its new independent auditor on July 26, 1999.
There were no disagreements between the Company and Braden whether resolved
or not resolved, on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which, if not resolved,
would have caused them to make reference to the subject matter of the
disagreement in connection with their report. Since June 1, 1996, and through
the present, there were no reportable events requiring disclosure.
14
<PAGE>
The report of Braden for the previous two fiscal years did not contain any
adverse opinion or disclaimer of opinion but was qualified as to uncertainty and
audit scope, and contained a going concern modification.
The decision to change principal accountants was recommended and approved
by the Company's Board of Directors and made at their request.
During the Company's previous two fiscal years, and since then, Braden has
not advised the Company that any of the following exist or are applicable:
(1) That the internal controls necessary for the Company to develop reliable
financial statements do not exist, that information has come to their
attention that has lead them to no longer be able to rely on
management's representations, or that has made them unwilling to be
associated with the financial statements prepared by management;
(2) That the Company needs to expand significantly the scope of its audit,
or that information has come to their attention that if further
investigated may materially impact the fairness or reliability of
a previously issued audit report or the underlying financial statements
or any other financial presentation, or cause them to be unwilling
to rely on management's representations or be associated with the
Company's financial statements for the foregoing reasons or any other
reason; or
(3) That they have advised the Company that information has come to their
attention that they have concluded materially impacts the fairness
or reliability of either a previously issued audit report or the
underlying financial statements for the foregoing reasons or any
other reason.
Prior to the engagement of Sisk as independent auditors, the Company had
not consulted Sisk regarding the application of accounting principles to a
specified transaction, either completed or proposed; or the type of audit
opinion that might be rendered on the Company's financial statements or any
other financial presentation whatsoever.
Braden has provided a letter addressed to the Securities and Exchange
Commission pursuant to Regulation S-B Item 304.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT
15
<PAGE>
The following table sets forth the directors and executive officers of the
Company.
Name Age Title
- ---- --- -----
John W. Adair 57 Chairman of Board, Chief Executive Officer
and Director
Earl K. Roberts 63 President and Director
Jalal Alghani 40 Chief Financial Officer and Director
Directors are elected annually and hold office until the next annual
meeting of the stockholders of the Company or until their successors are elected
and qualified. Officers serve at the discretion of the Board of Directors. There
is no family relationship between or among any of the directors and executive
officers of the Company.
BIOGRAPHIES
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.
CERTAIN SECURITIES FILINGS
John W. Adair, Jalal Alghani and Earl K. Roberts each failed to file four
reports on Form 4 during the last fiscal year concerning receipt of restricted
common stock received as compensation from the Company.
INFORMATION CONCERNING THE BOARD OF DIRECTORS AND ITS COMMITTEES
All of the Company's Directors are also executive officers of the Company.
The Board has no committees. The Company held nine meetings of the Board of
Directors during the period covered by the fiscal year ended May 31, 1999. Each
Director was present for 75% or more of the Board meetings.
16
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
The Company does not currently pay any cash director's fees, but it pays
the expenses, if any, of its directors in attending board meetings. The three
Directors of the Company are also Executive Officers of the Company. These
persons receive restricted stock as compensation. See, Executive Compensation.
EXECUTIVE COMPENSATION
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, when funds are
available. 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.
The following table reflects all forms of compensation for services to the
Company for the fiscal years ended May 31 , 1999, 1998 and 1997 of the all of
the executive officers of the Company.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
--------------------------
ANNUAL COMPENSATION LONG TERM COMPENSATION
---------------------------- ----------------------
AWARDS PAYOUTS
------ -------
OTHER ALL
NAME AND ANNUAL RESTRICTED SECURITIES OTHER
PRINCIPAL COMPEN- STOCK UNDERLYING LTIP COMPEN-
POSITION YEAR SALARY BONUS SATION AWARDS OPTIONS/SARS PAYOUTS SATION
- --------- ---- ------------- ----- ------ ------ ------------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John W. 1999 $ 120,000 (1) -0- -0- -0- -0- -0- -0-
Adair 1998 $ 85,000 0- -0- -0- -0- -0- -0-
CEO 1997 $ -0- -0- -0- -0- -0- -0- -0-
Earl K. 1999 $ 120,000 (2) -0- -0- -0- -0- -0- -0-
Roberts 1998 $ 85,000 -0- -0- -0- -0- -0- -0-
President 1997 $ -0- -0- -0- -0- -0- -0- -0-
Jalal 1999 $ 120,000 (2) -0- -0- -0- -0- -0- -0-
Alghani 1998 $ 85,000 -0- -0- -0- -0- -0- -0-
CFO 1997 $ -0- -0- -0- -0- -0- -0- -0-
- ----------------------------
<FN>
(1) Of which $15,000 was paid in cash, $45,000 was accrued to be paid in cash,
$50,000 was paid in-kind with 827,014 shares of restricted common stock of the
Company, and $10,000 was accrued to be paid in-kind in common stock.
(2) Of which $12,500 was paid in cash, $47,500 was accrued to be paid in cash,
$50,000 was paid in-kind with 827,014 shares of restricted common stock of the
Company, and $10,000 was accrued to be paid in-kind in common stock.
</TABLE>
17
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of September 2, 1999,
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 BENEFICIAL TITLE OF PERCENT
BENEFICIAL OWNER OWNERSHIP CLASS OF CLASS
- ---------------------------------
<S> <C> <C> <C>
John W. Adair 4,454,263 Common Stock 8.8%
3000 Richmond, Suite 100
Houston, Texas 77098
Earl K. Roberts 2,207,933 Common Stock 4.4%
3000 Richmond, Suite 100
Houston, Texas 77098
Jalal Alghani 4,770,415(1) Common Stock 9.4%
3000 Richmond, Suite 100
Houston, Texas 77098
All directors and executive 11,432,611 Common Stock 22.5%
officers as a group (3) persons)
- ---------------------------------
<FN>
(1) Includes 721,794 shares owned directly, and 4,048,621 shares owned
indirectly through AIG, Inc., Libra Standard and the daughter of Mr. Alghani.
</TABLE>
The Company knows of no arrangement or understanding, the operation of
which may at a subsequent date result in a change of control of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
18
<PAGE>
The Board of Directors of the Company has adopted a policy that Company
affairs will be conducted in all respects by standards applicable to
publicly-held corporations and that the Company will not enter into any
transactions and/or loans between the Company and its officers, directors and 5%
stockholders unless the terms are no less favorable than could be obtained from
independent, third parties and will be approved by a majority of the
independent, disinterested directors of the Company.
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 no independent appraisal was conducted. In 1999, AOI
transferred 3,400,000 of these shares to AIG, Inc, an investment firm controlled
by Mr. Alghani, and 3,400,000 of these shares to Mr. Adair.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ----------- ---------------
3.1 * Certificate of Incorporation of the Registrant, as amended.
3.2 * Bylaws of the Registrant, as amended.
4.1 * See Exhibits 3.1 and 3.2. for provisions of the Articles of
Incorporation and Bylaws of the Registrant defining rights of
holders of common stock of the Registrant.
4.2 * Common Stock specimen.
10.1 ** Wartsila Agreement
19
<PAGE>
10.2 ** PIE Agreement
16.1 *** Letter from Braden
21.1 * Subsidiaries
27.1 ** Financial Data Schedule.
- ----------------------
* Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB for the fiscal year ended May 31, 1997, and incorporated by
reference thereto.
** Filed herewith
*** Previously filed as an exhibit to the Company's Report on Form 8-K
Amendment No. 1 dated July 2, 1999 and filed August 31, 1999, and
incorporated by reference thereto.
(B) REPORTS ON FORM 8-K
Not applicable.
20
<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 September 16, 1999.
ADAIR INTERNATIONAL OIL AND GAS, INC.
------------------------------
By /s/ John W. Adair
John W. Adair
Chairman of the Board, Director and
Chief Executive Officer
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:
Signature Title Date
- --------- ----- ----
- -------------------
/s/ John W. Adair Director September 16, 1999
John W. Adair Chairman of the Board and
Chief Executive Officer
- -------------------
/s/ Earl K. Roberts Director and President September 16, 1999
Earl K. Roberts
- -------------------
/s/ Jalal Alghani Director and September 16, 1999
Jalal Alghani Chief Financial Officer
21
<PAGE>
ADAIR INTERNATIONAL OIL AND GAS, INC.
TABLE OF CONTENTS
MAY 31, 1999 AND 1998
Accountant's Report F2
Consolidated Balance Sheets F3
Consolidated Statements of Operations F5
Consolidated Statements of Changes in Stockholders' Equity F6
Consolidated Statements of Cash Flows F7
Notes to Financial Statements F8
F1
<PAGE>
JACK SISK & CO.
A Professional Corporation of Certified Public Accountants
INDEPENDENT AUDITOR'S REPORT
To The Board of Directors
Adair International Oil and Gas, Inc.
Houston, Texas
We have audited the consolidated balance sheet of Adair International Oil and
Gas, Inc. (a Texas corporation) as of May 31, 1999, and the related consolidated
Statement of income, retained earnings, and cash flows for the year 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 audit. The financial statements of Adair International Oil and Gas, Inc.
as of May 31, 1998, were audited by other auditors. Their report, dated August
28, 1998, on those statements included explanatory paragraphs describing
conditions that raised substantial doubt about the Company's ability to continue
as a going concern, their inability to satisfy themselves of the valuation of
the property described in Note 2 and an emphasis on the litigation described in
note 9.
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 has incurred significant losses for the past
two years and continues to have negative working capital. These conditions
raise substantial doubt about its ability to continue as a going concern.
Management's plans regarding those matters also are described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit 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 audit provides 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, 1999, and the results of their operations, changes in
stockholders' equity and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
JACK SISK & CO.
/s/ JACK SISK
Houston, Texas
September 13, 1999
F2
<PAGE>
<TABLE>
<CAPTION>
ADAIR INTERNATIONAL OIL AND GAS, INC.
CONSOLIDATED BALANCE SHEETS
MAY 31, 1999 AND 1998
Assets
------
1999 1998
------------ -------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 1,739 $ 35,630
Accounts receivable - 2,411
Note receivable, net - 188,500
------------ -------------
Total current assets 1,739 226,541
------------ -------------
Property and equipment
Oil and gas properties and equipment
under the full cost method of accounting 3,000,000 7,342,245
Office furniture and equipment 27,399 7,399
------------ -------------
3,027,399 7,349,644
Less: accumulated depreciation
and depletion (6,417) (4,196,076)
Net property and equipment 3,020,982 3,153,568
------------ -------------
Other assets
Deposits 6,726 375
------------ -------------
Total other assets 6,726 375
------------ -------------
Total assets $ 3,029,447 $ 3,380,484
============ =============
See accompanying notes to financial statements.
</TABLE>
F3
<PAGE>
<TABLE>
<CAPTION>
ADAIR INTERNATIONAL OIL AND GAS, INC.
CONSOLIDATED BALANCE SHEETS
MAY 31, 1999 AND 1998
Liabilities & Stockholders' Equity
----------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Current Liabilities
Note payable $ 30,380 $ -
Accounts payable 198,916 112,326
Accrued expenses 248,997 73,688
Taxes payable 37,573 14,262
------------ ------------
Total liabilities 515,866 200,276
------------ ------------
Contingency (Note 3)
Stockholders' equity
Common Stock, without par value, at stated
capital: Authorized 100,000,000 shares,
issued and outstanding 45,232,148 11,798,379 10,955,548
Retained deficit (9,284,798) (7,775,340)
------------ ------------
Total stockholders' equity 2,513,581 3,180,208
------------ ------------
Total liabilities and stockholders'
equity $ 3,029,447 $ 3,380,484
============ ============
See accompanying notes to financial statements.
</TABLE>
F4
<PAGE>
<TABLE>
<CAPTION>
ADAIR INTERNATIONAL OIL AND GAS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDING MAY 31, 1999 AND 1998
1999 1998
------------ ------------
<S> <C> <C>
Revenue
Oil and gas sales $ 33,008 $ 75,489
------------ ------------
Costs and expenses
Lease operating expenses 13,966 24,097
Depreciation and depletion 60,435 451,434
Interest expense 2,268 148
General and administrative 1,396,887 1,568,202
------------ ------------
Total costs and expenses 1,473,556 2,043,881
------------ ------------
Operating loss (1,440,548) (1,968,392)
Loss on sale of assets (68,910) -
------------ ------------
Net loss before taxes $(1,509,458) $(1,968,392)
------------ ------------
Federal income tax expense - -
------------ ------------
Net loss $(1,509,458) $ 1,968,392)
============ ============
Net loss per common share:
Basic and diluted $ (.04) $ (.09)
------------ ------------
Average number of shares of
common stock outstanding 36,621,599 21,118,531
============ ============
See accompanying notes to financial statements.
</TABLE>
F5
<PAGE>
<TABLE>
<CAPTION>
ADAIR INTERNATIONAL OIL AND GAS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDING MAY 31, 1999 AND 1998
Shares Additional Total
Issued and Preferred Common Paid-in Retained Stockholders'
Outstanding Stock Stock Capital Earnings Equity
----------- -------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
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
Issuance of common stock
for cash 9,470,500 456,697 456,697
Issuance of common stock
for company obligations 7,821,801 386,134 386,134
Net loss (1,509,458) (1,509,458)
----------- -------- ----------- ------------ ------------ ------------
Balance at May 31, 1999 45,232,148 $11,798,379 $ - $(9,284,798) $ 2,513,581
=========== ======== =========== ============ ============ ============
<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.
See accompanying notes to financial statements.
</TABLE>
F6
<PAGE>
<TABLE>
<CAPTION>
ADAIR INTERNATIONAL OIL AND GAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDING MAY 31, 1999 AND 1998
1999 1998
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,509,458) $(1,968,392)
------------- ------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Decrease in accounts receivable 2,411 19,398
(Increase) in note receivable - (188,500)
(Increase) in deposits (6,351) (375)
Cost of oil and gas properties sold 68,910
Increase in accounts payable 86,590 40,732
Increase (decrease) in accrued liabilities 175,309 (39)
Increase in payroll taxes payable 23,311 14,262
Depreciation and depletion 60,435 451,434
Preferred stock conversion to common stock - (60,000)
Issuance of stock for expenses and obligation 366,134 563,932
Allowance for note receivable 188,500 -
------------- ------------
Total adjustments 965,249 840,844
------------- ------------
Net cash (used in) operating activities (544,209) (1,127,548)
------------- ------------
Cash flows from investing activities:
Payments for purchases of property and equipment - (461,885)
Proceeds from disposition of oil and gas properties 23,241 -
------------- ------------
Net cash from (used in) investing activities 23,241 (461,885)
------------- ------------
Cash flows from financing activities:
Increase in note payable 30,380 -
Additional shares issued 456,697 1,494,888
------------- ------------
Net cash provided by financing activities 487,077 1,494,888
------------- ------------
Net (decrease) in cash during the year (33,891) (94,545)
Cash, beginning of year 35,630 130,175
------------- ------------
Cash, end of year $ 1,739 $ 35,630
============= ============
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ 2,268 $ 148
============= ============
Income taxes $ 0 $ 0
============= ============
See accompanying notes to financial statements.
</TABLE>
F7
<PAGE>
ADAIR INTERNATIONAL OIL AND GAS, INC.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Adair
International Oil and Gas, Inc. and its wholly owned subsidiary, Adair Colombia
Oil and Gas, S.A. All material intercompany balances and transactions have been
eliminated in consolidation.
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. On June 16, 1997, a 51% interest in the Company's outstanding common
stock was acquired by Adair Oil and Gas International of Canada, a
Bahamian Corporation, and the Company name was changed to Adair
International Oil and Gas, Inc. The 51% common stock of Adair Oil and Gas
International of Canada was subsequently reissued to the individual
shareholders. Since inception the Company's primary purpose has been the
exploration, development and production of oil and gas properties in the
United States. During the year ended May 31, 1997, as described in Note 2, the
Company acquired properties located in Colombia. With that acquisition, the
primary focus of the Company has shifted to the development of natural gas fired
power generation projects.
Going concern
- --------------
The Company incurred net operating losses for the years ending May 31, 1999
and 1998 and currently has negative working capital. The Company has been
unable to obtain financing to develop the property described in Note 2.
Operating expenses and other financial obligations have been met, primarily, by
the issuance of Company stock. There is no assurance that the Company will be
able to continue to sell stock to fund operations. These factors create
substantial doubt about the Company's ability to continue as a going concern.
Management of the Company has a plan to reverse these conditions. The ability
of the Company to continue as a going concern is dependent upon their ability to
carry out the plan described below.
The Company has responded to losses incurred in the past two years by adopting a
new business strategy. With the decline in the oil and gas market in the past
two years and the deregulation of the natural gas industry, management has
proceeded with the development of natural gas fired power generation projects.
The Company looks for the availability of land, power grid, accessibility of
water and natural gas when analyzing potential sites. The Company has
identified four sites located on Native American Reservations in the Western
United States. If successful in developing sites, the Company expects to
receive developer fees, carried royalty interests, and the right to invest as an
equity partner.
On July 8, 1999 the Company and a major power developer signed an agreement with
the Torres Martinez tribe for one of the sites mentioned above for an exclusive
option to develop a 540 megawatt facility. The agreement calls for the option
to lease property and to conduct a due diligence and feasibility study on the
project.
F8
<PAGE>
ADAIR INTERNATIONAL OIL AND GAS, INC.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
- -----------------------------------------------------------------------
Going concern
- --------------
On July 28, 1999, the Company signed a joint venture agreement with an
exploration and geophysical company for the purpose of acquiring and exploring
for oil and gas in the Republic of Yemen. Management believes this alliance,
coupled with appropriate financing, will provide additional cash flows for the
Company.
The company plans to continue its efforts to acquire equity partners, to make
private placements, and to seek both private and government funding for its
projects.
The Company believes that the aforementioned strategies will reverse the
experience of the past two fiscal years. By capitalizing on the deregulation in
the gas market and by partnering with companies which have the expertise and
resources complimentary to those of the Company, it is the plan of the Company
to realize the economic benefits of its resources and experience, particularly
in the Native American and Yemen markets.
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 resulted from revenues attributable to non-operating
interests in domestic oil and gas properties in the year ending May 31, 1998.
These receivables were realized incident to the sale of domestic oil and gas
properties during the most recent year.
Note receivable
- ----------------
The note receivable is the result of the sale of stock for a note and is due
from a financial advisory company. The note is in default and has been
placed with a collection agency. Management had elected to write off the note
in the current year.
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 the properties are impaired, the
amount of the impairment is added to the capitalized costs to be amortized.
F9
<PAGE>
ADAIR INTERNATIONAL OIL AND GAS, INC.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
- -----------------------------------------------------------------------
Property and Equipment
- ------------------------
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, 1999 and 1998 were $4,243
and $1,386, 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 payable and accrued liabilities are amounts due vendors and consultants
and include accrued salaries and expenses.
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 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. The Company has not filed federal
income tax nor state franchise tax returns for the two most recent years. No
provision is made for current or deferred income taxes because the Company has
an excess net operating loss carryforward.
F10
<PAGE>
ADAIR INTERNATIONAL OIL AND GAS, INC.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
- ------------------------------------------------------------------------
Significant Accounting Adjustments
- ------------------------------------
The full cost pool was written down by $41,388 in 1998 for domestic
properties. The write-down primarily reflects a decrease in the valuation
of proved reserves in 1998.
Earnings Per Share
- --------------------
Basic 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.
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. In 1999
and 1998 the management estimated sales prices, costs, and statutory income tax
rates in calculating future net cash flows of proven oil and gas reserves.
NOTE 2 - OIL AND GAS PROPERTIES
- -------------------------------------
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 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
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 Chimichagua 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. Ecopetrol is a government organization of Colombia
which regulates oil and gas activity. 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.
F11
<PAGE>
ADAIR INTERNATIONAL OIL AND GAS, INC.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1999 AND 1998
NOTE 2 - OIL AND GAS PROPERTIES (continued)
- --------------------------------------------------
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.
On November 6, 1998, the Company executed a memorandum of understanding with
Wartsila NSD Ecuador to develop this property. Wartsila wishes to design,
obtain financing, construct, own, operate and maintain a power plant with a
first stage of 19.3 megawatts with future potential expansion to 50 megawatts.
The gas will be supplied by the Company from the Chimichagua gas field. The
feasibility study on this project was completed in July, 1999.
At May 31, 1999 the Chimichagua gas field 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. The gas field was
purchased by issuing 6,000,000 common shares valued at $0.50 per share.
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.
Realization of the value of reserves is contingent upon the Company and its
partner, Wartsila, obtaining financing sufficient to fund the development costs.
As of September 13, 1999, the financing for the development phase had not
been obtained.
NOTE 3 - REDEEMABLE CUMULATIVE CONVERTIBLE PREFERRED STOCK
- -----------------------------------------------------------------
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. In August, 1997, the Company issued
approximately 6,666 common shares in redemption of the remaining preferred stock
outstanding at May 31, 1997.
NOTE 4 - STOCK OPTION
- -------------------------
On October 30, 1998, a consultant was extended two options for the purchase of
restricted (shares not be sold within twelve months) common stock of the Company
as compensation for services rendered. The two options may be exercised at any
time within twenty-four months of their extension. The first option was to
purchase 500,000 shares of restricted stock for par value of $0.01 each. The
first option was exercised concurrently with the offer when the open trading
value was $0.0625 per share. It was agreed that this first option was in
exchange for consulting services valued at $15,000. The second option was to
purchase 500,000 shares of restricted common stock for a price of $0.25 per
share.
F12
<PAGE>
ADAIR INTERNATIONAL OIL AND GAS, INC.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1999 AND 1998
NOTE 5 - NONMONETARY STOCK TRANSACTIONS
- --------------------------------------------
The Company issued stock in lieu of cash in transactions summarized as follows:
Number Amount of
Nature of transaction of shares transaction
---------------------- --------- ------------
Consultants 3,801,848 $154,767
Officer's salary to John W. Adair 827,014 50,000
Officer's salary to Jalal Alghani 827,014 50,000
Officer's salary to Earl K. Roberts 827,014 50,000
Administrative salary to William Petty 405,220 30,000
Furniture and fixtures 500,000 20,000
Professional fees 385,568 18,341
Expenses 248,123 13,026
--------- ------------
Totals 7,821,801 $386,134
========= ============
The Company has continued to issue stock in nonmonetary transactions as
described above subsequent to the end of the fiscal year.
NOTE 6 - SALE OF DOMESTIC OIL AND GAS PRODUCTION
- ---------------------------------------------------------
On March 31, 1999, the Company sold all of its domestic oil and gas interests to
Fountain Energy Company for $30,000. This action was consistent with the
Company's emphasis on the development of natural gas fired power generation
projects as described in its plan to continue.
NOTE 7 - RELATED PARTY TRANSACTIONS
- ----------------------------------------
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.
Shareholders of the Company also have interest in Adair Oil and Gas
International of Canada with which the Company has had dealings as described
more fully in Note 2.
F13
<PAGE>
ADAIR INTERNATIONAL OIL AND GAS, INC.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1999 AND 1998
NOTE 8 - INCOME TAXES
- -------------------------
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 1999 and fiscal 1998, to earnings before provision for
federal income taxes are presented below:
Years ended May 31,
--------------------------------------
1999 1998
----------------- -------------------
% of % of
Pretax Pretax
Amount Income Amount Income
---------- ------ ----------- ------
Federal income tax at statutory rate $(528,310) 35% $(688,937) 35%
Valuation allowance 528,310 (35%) 688,937 (35%)
---------- ------ ----------- ------
Income tax expense $ 0 0% 0 0%
========== ====== =========== ======
The sources of deferred tax assets are as follows:
Years ended May 31,
-------------------------
1999 1998
------------ -----------
Difference between book and tax
depreciation, depletion and amortization, oil
and gas properties $ 0 $ (51,159)
Note receivable written off 65,975 0
Effect of net operating losses 1,151,272 688,937
Valuation allowance (1,217,247) (637,778)
------------ -----------
Deferred tax assets $ 0 $ 0
============ ===========
Deferred tax assets result from net operating losses in 1998 forward. Net
operating losses incurred in 1997 and prior no longer exist because of a greater
than 50% ownership change in 1997. Losses for 1998 and 1999 may be carried
forward until 2015 and 2019 respectively, from the year incurred and affect
future income. Because of the uncertainty of realization (see Note 1, Going
concern) a valuation allowance equal to the deferred tax asset was established
by management.
F14
<PAGE>
ADAIR INTERNATIONAL OIL AND GAS, INC.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1999 AND 1998
NOTE 9 - 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.
Management believes that the effect of any environmental contingency will not
have a material impact on the Company's financial position.
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 vigorously 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 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
F15
<PAGE>
ADAIR INTERNATIONAL OIL AND GAS, INC.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1999 AND 1998
NOTE 9 - COMMITMENTS AND CONTINGENCIES (continued)
- --------------------------------------------------------
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 has also failed to comply with other reporting requirements of
the Exchange Act with respect to other required reports and proxy statements.
During the past fiscal year John W. Adair, Jalal Alghani, and Earl K. Roberts
each failed to file four reports on Form 4 concerning receipt of restricted
stock received as compensation from the Company. Each of the three officers
received 827,014 share of stock valued at $50,000 as compensation.
Lease Commitments
- ------------------
On August 10, 1998, the Company executed a lease agreement for office space
which began August 1, 1998. Lease payments are $6,351 per month and the
lease expires August 31, 2001. On September 15, 1997, the Company leased an
apartment for $1,165 per month. This lease expired March 30, 1998 and
continues on a month-to-month basis. On August 27, 1997, the Company leased
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. On July 31, 1997, the Company leased
an automobile for $1,340 per month. This lease expires July 31, 2002.
As of May 31, 1999, future minimum lease payments are as follows:
2000 $ 123,096
2001 117,111
2002 57,957
2003 24,404
2004 24,624
---------
Total $ 347,192
=========
Rent expenses for the years ended May 31, 1999 and 1998 were $108,638 and
$76,277, respectively.
NOTE 10 - 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, 1999 and 1998, 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.
F16
<PAGE>
ADAIR INTERNATIONAL OIL AND GAS, INC.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1999 AND 1998
NOTE 11 - SUBSEQUENT EVENTS
- -------------------------------
Option to Lease and Develop Concession
- -------------------------------------------
On July 8, 1999 the Company and a major power developer signed an agreement with
the Torres Martinez tribe for one of the sites mentioned above for an exclusive
option to develop a 540 megawatt facility. The agreement calls for the option
to lease property and to conduct a due diligence and feasibility study on the
project.
Agreement with Partners in Exploration
- -------------------------------------------
On July 28, 1999, the Company entered into an agreement with Partners in
Exploration, L.L.C. to explore certain prospects in Yemen. The parties agreed
to equal ownership in the venture.
Feasibility Study of Chimichagua Gas Field
- -----------------------------------------------
In July, 1999, the feasibility study of the construction of an initial 20
megawatt power plant utilizing the reserves in the Company's Chimichagua gas
field was completed. This completed phase 1 of the objectives outlined in the
memorandum of understanding between the Company and Wartsila NSD.
F17
<PAGE>
ADAIR INTERNATIONAL OIL AND GAS, INC.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1999 AND 1998
NOTE 12 - SUPPLEMENTARY OIL AND GAS INFORMATION (UNAUDITED)
- ------------------------------------------------------------------
Costs Incurred and Capitalized Costs in Oil and Gas Producing Activities are
as follows:
May 31, 1999 United
- ------------ States Colombia Total
---------- ---------- ----------
Oil and Gas Properties $ 0 $3,000,000 $3,000,000
Less accumulated depletion
And depreciation 0 0 0
---------- ---------- ----------
Capitalized costs, net $ 0 $3,000,000 $3,000,000
========== ========== ==========
Property and equipment $ 27,399 $ 0 $ 27,399
Less accumulated depreciation 6,417 0 6,417
---------- ---------- ----------
Total net property and equipment $ 20,982 $ 0 $ 20,982
========== ========== ==========
Total net property and equipment $ 20,982 $3,000,000 $3,020,982
========== ========== ==========
May 31, 1998 United
- ------------ States Colombia Total
---------- ---------- ----------
Oil and Gas Properties $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
========== ========== ==========
Property and equipment $ 7,399 $ 0 $ 7,399
Less accumulated depreciation (2,174) 0 (2,174)
---------- ---------- ----------
Total net property and equipment $ 5,225 $ 0 $ 5,225
========== ========== ==========
Total net property and equipment $ 153,568 $3,000,000 $3,153,568
========== ========== ==========
F18
<PAGE>
ADAIR INTERNATIONAL OIL AND GAS, INC.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1999 AND 1998
NOTE 12 - SUPPLEMENTARY OIL AND GAS INFORMATION (UNAUDITED) (continued)
- --------------------------------------------------------------------------------
The Company incurred no costs in oil and gas property acquisitions, exploration,
nor development during the past two fiscal years. Oil and gas depletion
expense in 1999 and 1998 was $56,192 and $451,434, respectively.
Presented below is a summary of proved reserves of the Company's oil and gas
Properties.
Year ended May 31, 1999
--------------------------------------
United
States Colombia Total
-------- -------- -----------
OIL (BARRELS)
Proved reserves:
Beginning of year 1,351 0 1,351
Acquisition, exploration and
development of minerals in place 0 0 0
Revisions of previous estimates (42) 0 (42)
Production 0 0 0
Sales of minerals in place (1,309) 0 (1,309)
-------- -------- -----------
End of year 0 0 0
======== ========= ===========
GAS (THOUSANDS OF CUBIC FEET)
Proved reserves:
Beginning of year 116,102 22,150,000 22,266,102
-------- -------- -----------
Acquisition, exploration and
Development of minerals in place 0 0 0
Revisions of previous estimates 0 0 0
Production (28,595) 0 (28,595)
Sales of mineral in place (87,507) 0 (87,507)
-------- -------- -----------
End of year 0 22,150,000 22,150,000
======== ========= ===========
Year ended May 31, 1998
-------------------------------------
United
States Colombia Total
-------- ---------- ------------
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
======== ========== ============
F19
<PAGE>
ADAIR INTERNATIONAL OIL AND GAS, INC.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1999 AND 1998
NOTE 12 - SUPPLEMENTARY OIL AND GAS INFORMATION (UNAUDITED) (continued)
- -----------------------------------------------------------------------
STANDARD MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND CHANGES THEREIN
RELATING TO PROVED OIL AND GAS RESERVES
1999
----
United
States Colombia Total
--------- ------------ -----------
(US Dollars)
Future cash inflows $ 0 $27,647,500 $27,647,500
Future production costs 0 (7,865,130) (7,865,130)
Future development costs 0 (6,956,000) (6,956,000)
Future income tax expenses 0 (4,210,006) (4,210,006)
--------- ------------ -----------
Future net cash flows 0 8,616,364 8,616,364
10 percent annual discount for
estimated timing of cash flows 0 (4,652,836) (4,652,836)
--------- ------------ ----------
Standard measure of discounted
Future net cash flows $ 0 $ 3,963,528 $3,963,528
========= ============ ==========
1998
----
United
States Colombia Total
--------- ------------ -----------
(US Dollars)
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
========= ============ ==========
F20
<PAGE>
ADAIR INTERNATIONAL OIL AND GAS, INC.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1999 AND 1998
NOTE 12 - SUPPLEMENTARY OIL AND GAS INFORMATION (UNAUDITED) (continued)
The following are the principal sources of changes in the measure of
discounted future net cash flows during 1999 and 1998:
1999
United
States Colombia Total
---------- ------------ -----------
(US Dollars)
Balance at beginning of year $ 216,426 $ 6,796,500 $ 7,012,926
Acquisitions, discoveries and extension 0 0 0
Sales and transfers of oil and gas
produced, net of production costs (19,042) 0 (19,042)
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 (23,290) 0 (23,290)
Development costs incurred during the
period 0 0 0
Changes in production rates and other 0 0 0
Revisions of previous estimates (174,094) 0 (174,094)
Accretion of discount 0 0 0
Net change in income taxes 0 (2,832,972) (2,832,972)
---------- ------------ -----------
Balance at end of year $ 0 $ 3,963,528 $ 3,963,528
========== ============ ===========
1998
United
States Colombia Total
----------- -------------- ------------
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 $ 216,426 $ 3,742,943 $ 3,959,369
=========== ============== ============
F21
<PAGE>
Wartsila NSD Latin America
WARTSILA NSD CORPORATION
CONF1DENT1ALITY AGREEMENT NON CIRCUMVENTION
AGREEMENT AND MEMORANDUM OF UNDERSTANDING
This Confidentiality Agreement, Non Circumvention and Memorandum of
Understanding ("Agreement"), effective as of November 6th, 1998, is made by and
between Wartsila NSD Ecuador ("Wartsila") and Adair International ("Adair"),
each singularly referred to as the Party and jointly referred to as the Parties.
Whereas:
(A) Wartsila wishes to design, obtain financing, construct, own, operate and
maintain the Arjona Power Plant project which will be a minimum of 2OMWe
with future potential expansion up to 50 MWe ("Project"), using natural gas
from the Adair International Arjona (Chimichagua) gas field ("Arjona gas").
(B) Adair whishes to further develop and sell natural gas to the Project under
a long term fuel supply agreement.
Now, therefore, inconsideration of the mutual benefits to he derived and the
representations, warranties, covenants and conditions herein contained, and
intending to be legally bound hereby, Wartsila and Adair hereby agree as
follows:
1. This Agreement is made in order for Wartsila and Adair to disclose
information required to develop the Project during the term of this
Agreement. Such information -- may consist of technical, legal, financial
and business information which may he required for the purpose of
evaluating and running models for the economical feasibility of the Project
and obtaining permits, contracts and financial closing.
2. As used herein, "Confidential Information" shall mean .any and all
technical, legal, financial and or business information. including third
party information furnished or disclosed, in whatever tangible form or
medium, by Wartsila or Adair including, but riot limited to,
product/services specifications, project structure, computer programs
models, drawings, acquisition plans, financing plans, market plans and
financial data, subject to the qualifications in Section 6.
3. In handling the Confidential information, Adair and Wartsila agree (a) to
use the confidential information solely for the purposes stated above; (b)
not to make disclosure of any such Confidential Information to anyone
except those employees consultants and professional advisors of the Parties
to whom disclosure 5 necessary for the purposes stated above; and (c) to
appropriately notify such employees, consultants and advisors that the
disclosure is made in confidence and to require them to keep the same in
confidence in accordance with the terms and conditions of this Agreement.
The obligations set forth herein shall be satisfied by the Parties through
the exercise of at least the same degree of care used to strict disclosure
of its own information of like importance.
Page 1 of 5
<PAGE>
4. The Parties agree that each copy made of Confidential Information shall
contain and state the same confidential or proprietary notices or legends,
if any, which appear on the original. Nothing herein shall be construed as
granting to Adair any right or license under any copyrights, inventions, or
patents now or hereafter owned or controlled by Wartsila.
5. This Agreement shall automatically expire after two (2) years after the
date first mentioned above. Upon the expiration or termination of this
Agreement or upon request of each Party, all Confidential information,
together with any copies of same as may be authorized herein, shall be
returned to the owner of such information or certified destroyed by each
Party, except for documents the Parties may be required to retain to comply
with applicable law, in which case the Party agrees the information shall
so notify the owner of such information. Each Party agrees to treat the
confidential information received as confidential for a period of five
years from the date of receipt of same unless otherwise agreed to in
writing by both parties; arid the requirements of use and confidentiality
set forth herein shall survive after expiration or earlier termination of
this Agreement.
6. The obligations imposed by this Agreement shall not apply to any
information that (a) is already in the possession of, is known to, or is
independently developed by each Party; or (b) is or becomes publicly
available through no fault of each Party; or (c) is obtained by each Party
from a third person without breach by such third person of an obligation of
confidence with respect to the Confidential Information disclosed; or (d)
is disclosed without restriction by one Party to the other; or (e) is
required to he disclosed pursuant to the lawful order of a government
agency or disclosure is required by operation of law, but in such event,
only to extent of such inquired disclosure.
7. Adair agrees that for the duration of this Agreement it will not enter into
any agreement, partnership or discussions with other power plant
manufacturers, developers on other potential gas consumers of the Arjona
gas.
8. Any claim, controversy or dispute between the parties, their agents,
employees, officers, directors or affiliated agents ("Disputes") shall be
resolved by arbitration conducted under the current Rules of Conciliation
and Arbitration of the International Chamber of Commerce. The arbitrator
shall have authority to award compensatory damages only. The arbitrator's
award shall be final and binding and may be entered in any court having
jurisdiction hereof. The prevailing party, as determined by the arbitrary,
shall he entitled to an award of reasonable attorney's fees and costs. The
arbitration shall be conducted in Washington D.C Notwithstanding the
foregoing, it is expressly agreed that either Party may seek injunctive
relief or specific performance of the obligations hereunder in an
appropriate court of law or equity.
9. This Agreement, together with any and all exhibits incorporated herein,
constitutes the entire Agreement between the parties with respect to the
subject matter of this Agreement. No provision of this agreement shall be
deemed waived, amended or modified by either party, unless such waiver,
amendment or modification is made in writing and signed by both Parties.
This Agreement supersedes all previous agreements between the Parties
relating to the subject matter hereof.
Page 2 of 5
<PAGE>
10. Any notice to be given hereunder by either party to the other, shall be in
writing and shall be deemed given upon delivery, if sent by facsimile or by
overnight courier, or five (5) days after such notice is sent if sent by
certified mail, return receipt requested.
A. Notices to Wartsila shall be addressed to:
WARTS ILA NSD Ecuador
Attn. Mr. Ben van den Berg
Av. l2 de October 2000, Piso 8
Quito, Ecuador
Phone: 593-2-235130
Fax: 593-2-235110
B. Notices to Adair shall be addressed to:
ADAIR INTERNATIONAL
Attn. Mr. John W. Adair
3000 Richmond Avenue, Suite 100
Houston, Texas 77098
Tel:+1-713-6218241
Fax:+1-713-6218240
11. Both Wartsila and Adair expressly consent to jurisdiction in the state of
New York for the purposes of any dispute which may arise under or be
related to this Agreement.
IN WITNESS WHEREOF, the parties have caused their duly authorized
representatives to sign this Agreement as of the date first stated above.
WARTSILA NSD ADAIR
By: /s/ Ben Van den Berg By: /s/ John W. Adair
------------------------ -------------------
Name: Mr. Ben Van den Berg Name: Mr. John W. Adair
Title: Vice President Wartsila NSD LA Title: CEO
Page 3 of 5
<PAGE>
With regards to the development of the Project both Parties hereby agree as
following:
Whereas:
A. Wartsila wishes to design, obtain financing, construct, own, operate and
maintain the Arjona Power Plant project which will be a minimum of 2OMWe
with future potential expansion up to 50 Mew ("Project"), using natural gas
from the Adair International Arjona (Chimichagua) gas field ("Arjona gas").
B. Adair whishes to further develop it's Chimichagua gas field and sell
natural gas to the Project under a long term fuel supply agreement.
1. Objective
Both Parties hereby agree to jointly develop above mentioned Project, the
development of the Project will consist of the following phases:
Phase1: Feasibility study and due diligence of both Arjona gas field as well as
the Project.
Phase 2: Project execution
2. Tasks and duties
Tasks and duties of the Parties during above mentioned phases:
Phase 1
a) Adair will perform and present all required studies and evaluations related
to availability and quality of the Arjona gas to present to potential
investors and lenders of the Project.
b) Wartsila will perform and present all required studies and evaluations
related to the Project to present to potential investors and lenders of the
Project. Such studies will consist of technical, legal, economical and
commercial evaluation of the Project.
c) Both Parties wilt submit legal and or financial information regarding their
company and activities if so requested by potential lenders and or
investors.
Phase 2
a) Adair will own the Arjona gas field and produce and supply Arjona gas in
quantities and quality agreed upon with the Project for the duration of the
fuel supply agreement to be negotiated. The price of this Arjona gas will
be market driven, both Parties nevertheless agree to exercise best efforts
to bring such price up to price levels valid today at well site in that
geographic area of the country.
b) Wartsila will engineer, arrange financing, construct, own and operate and
maintain the Project using Arjona gas. The Project cost will be market
driven, for the Project to be feasible the Project pricing nevertheless has
be meet minimum investment criteria of Wartsila.
c) Both Parties will excise best efforts to obtain 100% financing for the
Project, in such case Wartsila will own 60% of the Project and Adair 40%.
Should 100% financing not be feasible than each Party will bring in equity
equal to its share in The Project, being 60% Wartsila and 40% Adair. Both
Parties may bring in other investors to the Project subject to the other
Party's approval, such approval may not be unreasonable withheld.
Page 4 of 5
<PAGE>
d) Adair will assume all risk and obligations of gas supply and Wartsila will
assume all construction and operation risk of the Project.
3. Time frame
Both Parties agree that latest by the end of May 1999 all due diligence
specified in Phase 1 has be completed. Upon that that, time both Parties will
make a decision as to whether they will enter into Phase 2. conditions precedent
for Phase 2 are:
a) Approval from all competent authorities, and having in place all required
licenses and permits regarding the production, supply and commercialization
of Arjona gas to the Project.
b) Signing long term fuel supply agreement between Adair and Project.
c) Approval from all competent authorities, and having in place all required
licenses and permits regarding the installation, operation of the Project.
d) Obtaining all required licenses and permits for commercialization of the
power.
e) Signing up tong term economically feasible Power Purchase Agreement between
the Project and industrial customer(s).
f) Board approval within both Adair and Wartsila to proceed with the project.
g) Having assessed to the full satisfaction of both Parties and tenders the
security of the Project given the risk factor involved due to the location
of the Project.
h) Obtaining financing for the Project.
4. Development costs
Development costs of Arjona gas field and Project:
a) Adair will assume full responsibility and costs related to the development
to the Arjona gas field and of the studies and evaluations mentioned in
paragraph A above.
b) Wartsila will assume full responsibility and costs related to the
development of the Project arid of the studies and evaluations mentioned in
paragraphs B above
c) Both Parties hereby agree that costs related to the development of the
Project will be reimbursed to Wartsila upon financial closing of the
Project.
IN WITNESS WHEREOF, the parties have caused their duly authorized
representatives to sign this Agreement as of the date first stated above.
WARTSILA NSD ADAIR
By: /s/ Ben Van den Berg By: /s/ John W. Adair
------------------------ -------------------
Name: Mr. Ben Van den Berg Name: Mr. John W. Adair
Title: Vice President Wartsila NSD LA Title: CEO
Page 5 of 5
<PAGE>
From: John W. Adair
To: Mr. Richard G Boyce
Vice President
Partners in Exploration, L.L.C
1001 Hampshire Lane
Date: July 28, 1999
Subject: Agreement letter relating to exploration in blocks 20 & 42 and
other areas of Mutual Interest in the Republic of Yemen.
Reference: PARTNERS IN EXPLORATION, L.L.C./ADAIR INTERNATIONAL OIL & GAS,
INC. Confidentially Agreement date July 20, 1999.
AGREEMENT
Whereas, PARTNERS IN EXPLORATION, L.L.C. hereafter referred to as PIE and party
of the first part and ADAIR INTERNATIONAL OIL & GAS, INC. hereafter referred to
as ADAIR and party of the second part desire to form an alliance whereby PIE and
ADAIR will pursue an exploration program for Block 20 & Block 42 located in the
Republic of Yemen.
Whereas, PIE and ADAIR both bring certain critical expertise to the alliance
that is required for such an exploration venture to be successful. For the
contribution of each party which is identified as Technical Expertise /
Geophysical Data / Prospects / Yemen relationships from PIE and Financial / Data
/ Yemen relationships from ADAIR both parties agree the venture will be an equal
(50/50) ownership for each party.
Whereas, it is agreed ADAIR will provide or cause to be provided the finances
for the subject exploration venture and PIE will provide the technical data that
is presently in its possession related to the exploration program.
Whereas, it is agreed the PIE/ADAIR consortium will operate the exploration
program and will be known as OPERATORS of the subject exploration concession.
In addition, it is further agreed that upon the successful funding of the
subject exploration program that PIE and ADAIR will mutually develop other
exploration concessions in the Republic of Yemen within the consortium subject
to both agreeing to proceed. If one party does not desire to proceed the other
party will have the right to proceed independently of the other in pursuance of
any such hypothetical exploration concessions.
1
<PAGE>
In addition, once the funding for the subject exploration concessions is
committed a definitive agreement between the parties will be excuted subject to
terms and conditions being agreeable to all parties.
Agreed To: Agreed To:
/S/ John W. Adair /S/ Richard G. Boyce
- ----------------------------------- -------------------------------------
John W. Adair, CEO, Chairman Richard G. Boyce, Vice President
Adair International Oil & Gas, Inc. Partners in Exploration, LLC
July 29, 1999 July 29, 1999
- ----------------------------------- -------------------------------------
Date Date
/S/ Jalal Alghani /S/ L. Douglas Robinson
- ----------------------------------- -------------------------------------
Jalal Alghani, CFO L. Douglas Robinson President
Adair International Oil & Gas, Inc. Partners in Exploration, LLC
July 29, 1999 July 29, 1999
- ----------------------------------- -------------------------------------
Date Date
2
<PAGE>
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