10KSB 1 adiar.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB [ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000. OR [X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE SEVEN MONTHS ENDED DECEMBER 31, 2000. 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: None 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. [ ] Revenues for the fiscal year ending December 31, 2000 were $1,187,869. The aggregate market value of Common Stock held by non-affiliates of the registrant at April 2, 2001, based upon the last closing price on the OTCBB, was $17,100,876.50. As of April 2, 2001, there were 68,438,786 shares of Common Stock outstanding. Documents incorporated by reference: None Transitional Small Business Disclosure Format [ ] Yes [X] No TABLE OF CONTENTS PART I Item 1. Description of Business 3 Item 2. Description of Properties 14 Item 3. Legal Proceedings 16 Item 4. Submission of Matters to a Vote of Security Holders 16 PART II Item 5. Market for Common Equity and Related Stockholder Matters 17 Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations 19 Item 7. Financial Statements. 23 Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 24 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons 25 Item 10. Executive Compensation 26 Item 11. Security Ownership of Certain Beneficial Owners and Management 27 Item 12. Certain Relationships and Related Transactions 27 Item 13. Exhibits and Reports on Form 8-K 28 2 PART I ITEM 1. DESCRIPTION OF BUSINESS INTRODUCTION 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. 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"). The Company began to acquire interests in oil and gas properties in 1981, participating in various bid groups in the Gulf of Mexico and conducting exploration and development in that area and the mid continent of the U.S. However, by the mid-1980's as 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. In July of 1997, the Company changed its name to Adair International Oil and Gas, Inc. Immediately, the Company began the work to become fully reporting and in full compliance with the SEC. Since 1997, the Company has made changes in its operations and the focus of its business. In March of 1999, the Company sold all of its domestic oil and gas properties to limit plugging liabilities and to refocus on new projects. The Company expects to grow into a major independent energy company through drilling of internally generated oil and gas exploration projects. The Company seeks to partner with major energy companies to reduce its risk profile on each project, while maintaining upside potential. Prospects will be pursued in areas of proven success and the Company will utilize the "state of the art" in geoscience risk reductions techniques. In addition to oil and gas exploration, the Company has entered the rapidly growing Merchant Power business in the United States, playing the role of developer of unique sites for placement of environmentally friendly, natural gas fired power plants. OPERATIONS Adair International Oil and Gas, Inc. is achieving growth with a balanced portfolio of projects in three major sectors of the energy industry: power, exploration, and the acquisition of producing oil and gas properties. The Company and its subsidiaries combine to develop natural gas-fired power plants, conduct exploratory drilling ventures, and acquire producing oil and gas properties with existing cash flow and significant remaining economic life for substantial upside potential. Risk management in these projects is focused on securing financially strong partners who are generally brought into each project on a leveraged basis and who exhibit "best in class" expertise, thereby strengthening the partnership via their business experience. 3 ITEM 1. DESCRIPTION OF BUSINESS (continued) NATURAL GAS POWER PROJECTS Domestic Activities A revolution is underway in the electrical power generating industry of the United States. With the increased awareness of environmental impact, the power industry has acknowledged that in order to meet state and federal clean air requirements, any new power plants will likely be fueled with clean burning natural gas. In states that have deregulated the power industry, a new class of power plant, known as merchant power, is being developed at an astonishing rate. Merchant power is based on the concept that during periods of peak power consumption, the spot price paid for electricity may exceed the base rate by factors of 1,000. Power plants based on modular design, utilizing natural gas fired turbines, can be operated efficiently to meet these peak power needs, and the sales resulting from these plants justify their development and operation. Focusing on states where the power industry has already been deregulated or in areas of high population concentrations where near term power shortages are already predicted, Adair develops sites to house environmentally friendly, natural gas fired power plants that are utilized by this fast growing merchant power business. These unique sites are located on Indian Lands, which due to their status as a sovereign nation, offer the benefits of simplified permitting and investment incentives (in the form of accelerated depreciation) offered by the Federal government to support infrastructure investment on the reservations. During 1999 and 2000, taking full advantage of Chairman John W. Adair's heritage as a Cherokee Indian, the Company identified several key sites for building natural gas fired merchant power plants. Teawaya Energy Center Southern California In July of 1999, Adair International Oil and Gas, Inc. and Calpine Corporation of San Jose, California signed a development agreement with respect to a site located on the Torres Martinez Indian reservation near Palm Springs in southern California. During the last half of 1999 and continuing through 2000, Calpine began to secure the various required permits and to purchase right of way and critical air quality credits within the State of California. During this period, both companies were working under a strict confidentiality agreement regarding the release of information in order to maintain their competitive advantage on this very advantageous site. Located half way between the major population centers of Los Angeles and San Diego, the $275 million Teawaya Energy Center (TEC) will be sited on reservation land belonging to the Torres Martinez Desert Cahuilla Indians. The TEC will produce 600 megawatts of electricity providing power for approximately 600,000 households, which represents a significant contribution toward meeting the power reliability needs of the rapidly growing Coachella Valley and Southern California. Construction of the project is scheduled to begin in 2001 with commercial operations scheduled during 2003. The Teawaya plant will use two advanced technology 501F combustion turbines, supplied by Siemens-Westinghouse, operated in a highly efficient combined-cycle with a single steam turbine. The plant will be fueled by clean-burning natural gas utilizing an advanced emissions control system. As a result, the TEC will be an environmentally responsible source of electric power that will help address the growing electricity demand throughout all of Southern California. 4 ITEM 1. DESCRIPTION OF BUSINESS (continued) As a power project located on Native American land, the permitting process is being pursued with the federal Bureau of Indian Affairs (BIA). Activities are underway to insure that the TEC is in full compliance with the National Environmental Policy Act. The BIA further insures that the development agreement meets the cultural, environmental, and economic considerations of the Torres Martinez Indians. As such, the tribe will receive significant economic benefits resulting from a long-term lease agreement, job creation, and the sale of water. During the negotiation process Adair helped to secure investment to improve roads on the reservation and to restore several historical buildings on the reservation thereby insuring the preservation of an important part of the history of the Torres Martinez tribal culture. Additional Sites The Company has identified eighteen sites on Native American lands thoughout the United States. In January, 2000, the Company entered into a comprehensive Consulting Services Agreement with Pace Global Energy Services, LLC (PACE). PACE has been engaged to conduct feasibility studies for power project development sites. The Company is in the process of developing a number of natural gas fired power plants within the continental United States. PACE's role is now expanded to providing risk, fuel, marketing, and power management services as well as the structuring of financial relationships with potential development fund lenders. PACE is an energy consulting and management firm with expertise related to the production, purchase, sale, transportation, storage and consumption of energy. It is an independent energy management and consulting firm with over two decades of experience in global power, fuel, and financial markets. Pace has provided fuel and power procurement services to large volume end-users of energy, providing the firm with practical knowledge of energy markets and operations. This breadth of experience and market knowledge is of great value to companies seeking to enhance their competitive advantage by reducing costs, mitigating risks, and maximizing profits. The company is headquartered in Fairfax, Virginia with regional offices in Houston and London. As a recognized leader in the energy services industry, PACE has been at the forefront of deregulating energy markets in more than 35 countries on six continents. As an independent source of energy expertise, PACE serves as an objective outsourcing partner to clients, executing transactions on their behalf while protecting their energy interests. 5 ITEM 1. DESCRIPTION OF BUSINESS (continued) International Activities Aden Sugar Refinery and Cogeneration Power Plant The Company Arkel Sugar International (ARKEL) completed the final feasibility study for a Power Plant and Sugar Refinery in March 2001. A memorandum of understanding was signed with the Yemen Free Zone Public Authority to build and operate the facility. Construction will begin as soon as the final engineering is completed and will be led by a consortium of the Company and ARKEL. The Plant is projected to have a construction cost of approximately $60 million USD and is projected to be completed in eighteen months. ARKEL is a major constructor of international co-generation facilities of power plants and sugar refineries having constructed a large number of plants in Egypt, Kenya, Ivory Coast, Sudan, in addition to Texas and Florida. The project has been submitted to and reviewed by the Export-Import Bank of the United States and the International Funding Corporation (IFC), part of the World Bank Group. The feasibility study prepared by ARKEL showed the project has the capability to pay all production costs and debt service and maintain a healthy positive cash flow that increases as debt payments are made. The study shows the first full year will net cash flow of $1,628,008 after repaying the working capital loan plus interest of $3,887,897. The following year net cash flow increases from approximately $6 Million USD to $15 Million USD after retirement of debt. The Company is very positive relating to investing in Yemen, not only for oil exploration but with the Aden Free Zone offering extremely excellent terms, this opens the door for attractive business ventures. Sugar represents the single largest imported commodity in Yemen. As there are no sugar refineries currently in Yemen, over 350,000 tons of refined sugar is imported annually. The Yemen Sugar Project will build a refinery to process imported raw sugar cane into table quality packaged product for local consumption. Targeted for construction within the newly developed Aden Free Trade Zone, the factory will produce a scheduled 660 metric tons of product per day resulting in annual production of over 200,000 tons or 60% of the local market demand. The plant will additionally provide 40 megawatts per day of electricity from an efficiently designed co-generation power plant. This power will be sold to fuel industrial development within the Aden Free Trade Zone and associated deep-water port facility. The Port of Aden, located on the southwestern corner of the Arabian Peninsula is a strategically located deep-water port, operated by the Yemen Port Authority. The Aden Free Trade Zone is under development by the Yemen government as a duty free area surrounding the port. The Sugar Refinery Project will be located within the free zone to take full advantage of investment incentives being offered by the Yemen government. These incentives include certain tax holidays and reduced land pricing opportunities. In addition, as the raw cane will need to be imported via ocean transport, the duty free status of the port will lower the cost of materials to be used in the manufacture of sugar. As the free zone develops, it is anticipated that the area will be in need of additional electrical power, which will be supplied by the cogeneration capability of the sugar refinery. 6 ITEM 1. DESCRIPTION OF BUSINESS (continued) Chimichagua Power Project Colombia The Company, through its wholly owned subsidiary, Adair Colombia Oil and Gas S.A., controls 100% working interest in the Chimichagua natural gas field located in the State of Cesar in the Middle Magdalena Valley of Northern Colombia. Proven gas reserves are currently 12.8 billion cubic feet (Bcf) while an additional 41.2 Bcf is expected to be proven with the drilling of one additional well. While the combined gas reserve of 54 Bcf is significant, no natural gas pipelines are nearby, thereby preventing gas sales directly to an end user and immediate commercialization of the gas reserves. Drawing on their experiences of power plant development in the United States, the Company is currently in negotiations with Termotasajero, a major Colombian utility company, to construct a 20-megawatt natural gas fired power plant. An engineering feasibility study was completed during 1999. While terms of the deal structure are still under negotiation, general concepts provide for Adair to supply the gas to fuel the power plant providing revenues under a long-term gas purchase contract. In addition, as an incentive to provide the fuel for the plant at prices that allow competitive pricing for the power, Adair will receive equity in the power plant based on the value of their contribution under the gas purchase contract. This option would allow the Company to recover additional revenues under the Power Purchase Agreement with Termotasajero. The gas reserves would provide a twenty-year fuel supply for the power plant delivering approximately 3.3 million cubic feet of natural gas per day. All elements of the project, including development of the field with gas production facilities, construction of the power plant and the construction of a 110 kV transmission line for connection to the national grid is currently anticipated to be fully financed by Termotasajero, thereby limiting any additional capital investment in the project by Adair. 7 ITEM 1. DESCRIPTION OF BUSINESS (continued) EXPLORATION Major growth in the company is anticipated through the development of exploratory drilling ventures that are risk managed by securing partners on a promoted basis. In February of 2000, the Company greatly enhanced internal oil and gas exploration and development capabilities through an acquisition of Partners In Exploration, Inc., (PIE), a privately held geoscience consulting firm located in Dallas, Texas. This group, now known as Adair Exploration, Inc., is a wholly owned subsidiary of Adair International Oil & Gas, Inc. and is responsible for all oil and gas operations for the Company. The president of Adair Exploration, Inc. is Richard G. "Dick" Boyce. International Activities Sabatain Block 20 Republic of Yemen On September 2, 2000, the President of Yemen signed decree number 21, which passes into law the Production Sharing Agreement for Block 20. This decree establishes the effective date for the contract and is therefore an important milestone to the Company. Occidental Petroleum farmed into this project taking a 50% working interest and carrying Adair through a 3D seismic program. In February of 2000, an additional 20% working interest was conveyed to Saba Oil and Gas Company, a local Yemeni company. Adair Yemen Exploration Limited, a wholly owned subsidiary of Adair International Oil and Gas, Inc. retains a 30% working interest and will operate the exploration phase of the project, with Occidental named as development and production operator. This unique arrangement recognizes the geological and operational expertise of Dick Boyce, President of Adair Yemen, who as exploration manager for Yemen Hunt in the early 1990's, operated large 3D seismic programs and discovered over 300 million barrels of oil in this area. Block 20, located in the Marib-Shabwa basin, is situated in the heart of prolific production (currently 160,000 barrels/day) operated by Yemen Hunt Oil Company. Since its discovery in 1984, this basin's prolific Alif Petroleum System has produced over 700 million barrels of light sweet crude oil. Pipelines and facilities are available for the immediate export of any oil discovered. Utilizing an extensive grid of 2D seismic data, Adair has mapped several prospects that may contain up to 340 million barrels of recoverable oil. Prospects are located at depths of 5,000 to 8,000 feet, with exploratory wells costing approximately two million dollars to drill and complete. Wells in the prolific Alif sand typically flow at rates of 2,500 barrels of oil per day. 8 ITEM 1. DESCRIPTION OF BUSINESS (continued) The identified program includes both lower risk field offset drilling (proved undeveloped "PUD") and higher risk exploration prospects. A recent discovery announced by Vintage Petroleum Yemen, Inc., at their Annaeem #1 well tested water free at rates of 40 million cubic feet per day of gas and 1,020 barrels of condensate. This well is currently being offset by Vintage to explore for a potential oil leg that may be present down dip from the gas cap tested in the #1 well. The Annaeem wells are drilled approximately 500 meters due southeast of the boundary with Block 20 and will test a structure that the Company believes may straddle the block boundary. The initial work program will focus on acquiring a minimum of 200 square kilometers of new 3D seismic data, which has been shown on other blocks in this trend to be effective at limiting the risk of drilling dry holes. This seismic program began during the fourth quarter of 2000. The seismic program will be followed in 2001 with an aggressive drilling program to test the prospects mapped with the 3D seismic data. In September of 2000, Adair Yemen Exploration Limited opened an office in Sana'a, Yemen to begin operations. Occidental has maintained a long-standing position in Yemen, including non-operated working interests in both the prolific Masilla production (210,000 bbls/day) and in the East Shabwa block (50,000 bbls/day). Their relationship with the government of Yemen and their world wide expertise in exploration and production is a valuable addition to the partner group exploring Block 20. Saba Oil and Gas Company is a privately held Yemeni oil company that is owned by the Al-Rowaishan Group based in Sana'a, Yemen. Al-Rowaishan is a highly respected merchant group in Yemen, and also provides unique value to the Block 20 group, particularly in the areas of governmental and cultural relations. Domestic Activities GEOPHYSICAL SERVICE COMPANY In February, 2001, The Company formed Superior Geophysical, Inc. (SUPERIOR), a wholly owned subsidiary. SUPERIOR is an international/domestic oil and gas exploration service company, engaged primarily to manage, design, acquire and process 2D and 3D seismic data. SUPERIOR, with a professional management team, has assembled state-of-the-art hardware and software to accomplish its goals of becoming a leader in the managing, designing, acquisition and processing of 2D and 3D seismic data projects around the world. Superior's clientele will consist of major oil companies and large to small independent oil and gas exploration companies. JPMorgan-CHASE Bank of Houston, Texas provided the financing for SUPERIOR. SUPERIOR's professional management team is Bill Wiseman, President; Gary Toler, Executive Vice-President and David Spaulding, Vice- President/Seismic Data Processing. Mr. Wiseman, a 24-year veteran of the oil and gas exploration service industry, was formerly with JDK Incorporated where he held the title of Vice-President/Administration & Marketing. Mr. Wiseman was also an integral part of the success at Continental Seismic and Alliance Research. Mr. Toler has been involved in marketing and management for the past 23 years. Most recently, he was Director of Marketing and Sales at JDK Incorporated. Mr. Spaulding, as Vice-President/Seismic Data Processing, is a 25-year veteran in the oil and gas exploration service industry. Most notably, he was Manager of Seismic Data Processing at Universal Seismic. 9 ITEM 1. DESCRIPTION OF BUSINESS (continued) The Company has engaged in agreements to manage, design, acquire and process between 100 and 200 square mile ``Group Shoots'' in the Gulf Coast Area of the U.S.A. These agreements enable the Company to take advantage of the expanding oil and gas exploration markets. The 3D seismic 'Group Shoot' concept is not new to the industry and it gives the opportunity for larger areas to be evaluated at a much lower cost. Consequently, an exploration company can lower its funding cost while lowering its risks, resulting in better risk management for the Company. Activities are currently focused on the reprocessing of a large (approximately 130 square miles) speculative 3D seismic database that covers the identified leads. Once the advanced geophysical processing techniques have been completed, a thorough reinterpretation of that data will be undertaken to further qualify and high grade the identified leads bringing them to "drillable" status. Some of the prospects are located on open acreage that can be leased on favorable terms. Other prospects may involve securing farmouts prior to drilling. Once the drillable prospects have been leased, additional decisions regarding the leveraging of these opportunities will be made. While much work remains to be completed, it is anticipated that wells on these prospects could be drilled as early as the second quarter of 2001. ACQUISITION OF PRODUCING PROPERTIES While oil and gas prices are currently at record high levels, limiting the traditional opportunities of buying reserves at bargain prices, never the less, the Company believes that a unique window of opportunity may exist for the acquisition of producing oil and gas properties. As an unprecedented number of companies have been subjected to merger and acquisition activities over the last five years, many of the survivor companies now have recently inherited a wide range of producing assets. As companies have the opportunity to review their portfolios of properties, they continually weed out properties for sale that no longer fit their corporate guidelines. In some instances, the reasons for sale do not reflect the value of the property but rather are sold for reasons of geography or dispersion of focus outside of core areas. The Company maintains an active vigil to identify a producing property that can provide needed near term cash flow but with long lived reserves resulting in significant upside potential. 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. 10 EMPLOYEES The Company currently has 16 full-time employees, 5 of whom are in management positions. None of the Company's employees are represented by a union and the Company considers its employee relations to be good. TRANSFER AGENT AND REGISTRAR The transfer agent of the Company is Chase Mellon Shareholder Services, 499 S. Hope Street, 4th Floor, Los Angeles, CA 0071, (213) 553-9726. 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. Liquidity and Capital Resources The Company incurred net operating losses for the seven months ending December 31, 2000, and the year ending May 31, 2000 and currently has negative working capital. As a result of the Company's acquisition of interests in the Teayawa Energy Center, the Company has been actively engaged in obtaining financing to effect its plan to develop additional sites for gas-fired power plants and to proceed with its exploration projects. Additionally, the Company has the option to market a portion of its interest in the Yemen exploration project as an alternative source of funding of future operations. Revenues from site development fees, operator fees, and technical services have funded operating expenses and allowed the Company to approach a near break even in operations for the seven months ending December 31, 2000. In the previous year financial obligations had been met primarily, by the issuance of Company stock. There is no assurance that the Company will be able to secure adequate financing nor to continue to sell stock to fund operations. Insufficiency of Working Capital Presently, the Company lacks sufficient working capital and has depended on financing activities such as the sale of its common stock to obtain working capital beyond those provided by revenues. 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 In order to obtain financing, the Company is reviewing a number of financing alternatives, which include the issuance of debt by the Company secured by its interests in the existing power project. The Company is limited in its ability to borrow from banks in the United States with respect to foreign properties although the Company retains and option to sell or collateralize all or a portion of its interest in the Yemen exploration venture. There can be no assurance, however, that the Company will be able to obtain any financing. 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. 11 RISK FACTORS (continued) Reliance on Efforts of Others The Company forms joint ventures with industry participants in order to leverage, finance and facilitate its activities. In some instances 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 the ability of such other parties. As indicated by the nature of the partners with which the Company is participating in current projects, management believes the risk in relying on such partners is minimal. Foreign Political Climate The Company has direct oil and gas interests in the Republic of Yemen and the Republic of Colombia. Recently a Memorandum of Understanding was signed between the Republic of Yemen and the Kingdom of Saudi Arabia to establish a clear and well-defined border between these two countries. When completed, this will resolve a long-standing issue that has served to generate civil unrest in Yemen. Additionally, with the improvement in relations between Yemen and Saudi, the status of Yemen in the international community has noticeably improved. This is evidenced by recent visits to Canada and the USA by the President of Yemen, the first such visits since the Gulf War of 1990. Colombia remains a difficult political climate for the conduct of international business. No political changes are observed on the horizon that will improve either the security or business climate of the country. Any changes in the political climate of Colombia 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 Yemen and 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. It should be noted that the Production Sharing Agreement in Yemen enjoys the protection of having been ratified and passed into law by the Republic of Yemen, thereby preserving the sanctity of the Agreement as a law of the land, limiting the opportunities for renegotiation of terms. During the lifetime of petroleum production in Yemen, no expropriation of interests has occurred. 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. 12 RISK FACTORS (continued) Oil and Gas Price Volatility The revenues generated by the Company are highly dependent upon the prices of crude oil and natural gas. Fluctuations in the energy market make it difficult to estimate future prices of crude oil and natural gas. Such fluctuations are caused by a number of factors beyond the control of the Company, including regional and international demand, energy legislation of various countries, taxes imposed by applicable countries and the abundance of alternative fuels. International political and economic conditions may also have a significant impact on prices of oil and gas. There can be no assurance of profitable operations even if there is substantial production of oil and gas. 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 the injury or death of persons working at those facilities. The operator of the well may be unable to purchase adequate insurance against each of these risks. The occurrence of such 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, and weather risks, shortages or delay in delivery of equipment and the stability of operators and contractor companies. 13 ITEM 2. DESCRIPTION OF PROPERTIES 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. 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 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. 14 ITEM 2. DESCRIPTION OF PROPERTIES (continued) 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 obtaining financing to fund the development costs. On November 6, 1998, the Company executed a memorandum of understanding with Wartsila NSD Ecuador to develop this property. The feasibility study on this project was completed in July, 1999. Subsequent to the feasibility study, Wartsila opted to forego participation in the project. The Company then entered in a dialog with Termotasajero, a major Colombian utility company, to construct a 20-megawatt natural gas fired power plant. A preliminary proposal was received by the Company in August, 2000. The general concepts provide for Adair to supply the gas to fuel the power plant providing revenues under a long term gas purchase contract. In addition, as an incentive to provide the fuel for the plant at prices that allow competitive pricing for the power, Adair will receive equity in the power plant based on the value of their contribution under the gas purchase contract. This option would allow the Company to recover additional revenues under a power purchase agreement with Termotasajero. Realization of the value of reserves is contingent upon the Company concluding an agreement to construct a power plant utilizing gas from the field. 15 ITEM 3. LEGAL PROCEEDINGS Legal Proceedings for the Seven Months Ending December 31, 2000 ------------------------------------------------------------------------ None. Legal Proceedings for the Year Ending May 31, 2000 ---------------------------------------------------------- The Company was named as a defendant in the matter of Steven R. Hill v. Adair International Oil and Gas, Inc., 2000-10286, 129th Judicial District Court, Harris County, Texas. The plaintiff is claiming damages resulting from breach of an alleged contract between the plaintiff and the Company. The plaintiff seeks damages of $13,942, attorney's fees, pre-judgment and post-judgment interest and 692,000 shares of stock in the Company or equivalent value in cash. Little discovery has been conducted to date. The Company believes it has viable defenses to the plantiff's claims and that the likelihood of an unfavorable outcome is low. The Company intends to present a vigorous and aggressive defense to this litigation. The Company was named as a defendant in the matter of John A. Braden, Robert D. Goldstein, James L. Bennink and S. Cleve Gazaway, Individually, and as the Partners for Braden, Bennink, Goldstein, Gazaway & Company, P.L.L.C. v. John W. Adair, Individually, Jalal Alghani, Individually, Adair International Oil and Gas, Inc. and ChaseMellon Shareholder Services, L.L.C., 2000-16454, 152nd Judicial District Court, Harris County, Texas. The plaintiff's claim damages resulting from breach of an alleged contract between the plaintiffs and the Company. The lawsuit was resolved with the issuing 200,992 shares of Company stock to the plaintiff valued at $43,979. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The regular annual meeting of shareholders was held on February 22, 2000, at which time the following persons were elected directors: Name Votes for ---- ---------- John W. Adair 27,634,210 Earl K. Roberts 27,879,610 Jalal Alghani 27,879,678 16 PART II ITEM 5. MARKET FOR 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.OB." 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. COMMON STOCK PRICE RANGE HIGH BID LOW BID Fiscal Quarter Ended: August 31, 1999 $ .2031 $ .0312 November 30, 1999 $ .5938 $ .0938 February 29, 2000 $ 3.7188 $ .3750 May 31, 2000 $ 2.5625 $ .4062 August 31, 2000 $ 1.1250 $ .3906 November 30, 2000 $ .8750 $ .2500 December 31, 2000 $ .7344 $ .1875 On December 31, 2000, the closing price for the Common Stock of the Company on the OTCBB was $ .2188. On December 31, 2000, there were approximately 923 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. 17 ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (continued) RECENT SALES OF UNREGISTERED SECURITIES During the years ended May 31, 2000 and 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. The Company issued stock in lieu of cash in transactions summarized as follows for the seven months ended December 31, 2000, and the year ended May 31, 2000. The Summary Compensation Table at Item 10, Executive Compensation, details the number of shares issued for compensation to each Company officer.
Nature of transaction December 31, 2000 May 31, 2000 ----------------------- ------------------- --------------------- Shares Amount Shares Amount --------- -------- --------- ---------- Consultants and professional fees. - $ - 678,203 $ 187,150 Salaries 925,508 352,167 2,363,770 345,000 Accrued salaries - - 2,304,983 192,500 Acc'ts payable and acc'd liability 349,474 76,467 1,416,143 68,315 Other expenses 206,624 180,317 1,061,050 276,000 --------- -------- --------- ---------- 1,481,606 $608,951 7,824,149 $1,068,965 ========= ======== ========= ==========
18 Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report, including Management's Discussion and Analysis of Financial Condition and Results of Operations, includes certain forward-looking statements. The forward-looking statements reflect the Company's expectations, objectives and goals with respect to future events and financial performance, and are based on assumptions and estimates which the Company believes are reasonable. However, actual results could differ materially from anticipated results. Important factors which may affect the actual results include, but are not limited to, commodity prices, political developments, market and economic conditions, industry competition, the weather, changes in financial markets and changing legislation and regulations. The forward-looking statements contained in this report are intended to qualify for the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended. The Notes to Consolidated Financial Statements contain information that is pertinent to the following analysis. Implementation of Business Strategy The fiscal period from May 1999 through December 2000 represents major advancements in the Company's stated goal to become a substantial energy company. During this time period we have seen our internal capabilities of conducting business in the oil and gas sector greatly enhanced by our merger with Partners In Exploration, Inc., which brings well seasoned management and "state of the art" technical capacity to the company. Through this merger, the Company has also enhanced the quality and quantity of its exploration projects, specifically a major Production Sharing Agreement in the Republic of Yemen. Concurrent with our activities in oil and gas, we expanded our efforts in the power business. In 1999, we signed our first development agreement with Calpine Corporation for what is now known as the Teawaya Energy Center located on Native American lands in southern California. Eighteen additional Native American sites are currently under assessment and the Company is evolving it's site development strategy to include securing the necessary permits required to greatly enhance the value of it's sites. During the past two fiscal periods, the Company has entered into two major projects: an exploration program in Block 20, located in the Republic of Yemen and a power plant located in Southern California, more completely described in Item 1, Business. Both of these projects will provide internally generated funds to apply toward budgeted expenditures during the next fiscal year. Financial Impact - Block 20, Republic of Yemen A participation agreement between Adair Yemen Exploration Limited, Occidental Yemen Sabatain, Inc. and Saba Yemen Oil Company Limited, dated March 31, 2000 provided for the advance payment of $750,000 of cost oil to the Company by the major partner, Occidental Petroleum. The effective date established by Presidential decree number 21 was September 2, 2000, and the payment was received and reflected in the current financial statements. In addition Occidental shall pay from its sole account one hundred percent (100%) of the costs to acquire and process up to two hundred (200) square kilometers of 3D seismic, such expenditure to be capped at four million dollars ($4,000,000). 19 Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Adair Exploration, Inc., under the terms of a Technical Services Contract with the project partners, will provide interpretational services for the projected program. It is estimated that fees from this work will total $900,000 and $1,000,000, respectively, in the first and second program years. The Company, as operator, is to receive an administrative overhead fee based on varying percentages of the total work program costs. Based on the current proposed work program budget, during the same two program periods, these fees are estimated to be $235,000 and $136,000, respectively. Contractor group working interests in the block are Occidental 50%, Adair 30%, and Saba 20%. The working interests as a group are subject to a 5% carried interest held by the Yemen Company For Investments In Oil and Minerals (YICOM) in the concession area. The minimum work commitment to the Yemen government includes reprocessing of existing 2D seismic data, the acquisition of 100 square kilometers of 3D seismic and the drilling of two exploration wells within the first three year exploration period. This work program commitment is guaranteed by the partners through placement of a Letter of Credit in the amount of $8.3 million which is refunded as work commitments are completed. A second three year exploration period is optional, providing for an overall six year exploration opportunity, and if a commercial discovery is made, a twenty year production period is granted. The Production Sharing Agreement allows for recovery of investment cost made by the contractor group from the oil produced. Oil not used for cost recovery is then "split" between the contractor group and the Yemen government. For example, initially the Adair-Oxy-Saba contractor group will receive up to 66% of the first 25,000 barrels of oil produced each day from fields on Block 20. "This opportunity to recover all of our costs up front improves the project economics. We believe the production splits reflect recognition by the Yemen government of providing investment incentives while retaining a fair share for the future of Yemen", stated Dick Boyce, President of Adair Yemen Exploration Limited. A one time signature bonus of $400,000 was paid by the group to the Government of Yemen. Additionally each year, the contractor group funds $250,000 which is used exclusively for the technical training of the professional staff at the Ministry of Oil and Mineral Resources, and for various institutional and social development projects in Yemen. These costs are shared proportionally by the working interest partners. Financial Impact - Teayawa Energy Center, Southern California The Teayawa Energy Center (TEC) Site Development Agreement, dated Novemer 30, 1999, provides for the payment of a development fee of $1,000,000 payable in two installments: $500,000 at the financial closing estimated to occur in quarter three, 2001, and $500,000 upon the commercial operation date estimated to occur in quarter two, 2003. The Company receives $12,000 per month consulting fee until the commercial commissioning of the project. 20 Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Additionally, the Agreement provides for a royalty payable to the Company on the basis of a sliding scale between 3% and 4% of the earnings before interest, taxes, depreciation, and amortization for a period of 20 years. The Company also has the option, exercisable at or before financial closing, to purchase up to 20% of the output of the plant under a long-term power sales agreement. The purchase price of this power shall be negotiated at a discount to prevailing market prices and shall approximate the fuel, operations and maintenance, financing and management expenses for the project. The Company many assign its rights to the power sales agreement and is subject to a right of first refusal in favor of Calpine. While the value of this option is difficult to assess at this point in time, management believes that the impact will be substantial owing to the fact that the output of the plant will maintain both a base load sales opportunity and peak generating capacity that can be sold as Merchant power at spot market prices. Company costs during the development phase are included in budgeted general and administrative costs and the Company has no obligation for any of the direct development expenditures or capital investment in the plant. Financial Impact - Internal and External Capital Sources Subsequent to May 31, 2000, internal funding of all expenditures, has been through revenues and the sale of Company stock. As a result of the Company's acquisition of interests in the Teayawa Energy Center, the Company has been actively engaged in obtaining financing to effect its plan to develop additional sites for gas-fired power plants and to proceed with its exploration projects. Alternatively, the Company has the option to market all or a portion of its interest in the Yemen exploration project as an alternative source of funding of future operations. The Company estimates a fair market value of one-sixth of its interest to approximate $5,000,000 at the initial exploration stage. There is no assurance, however, that the Company would be successful in its efforts to sell the interest at the value estimated. Future internal revenues from site development fees, operator fees, and technical services are expected to provide partial funding of operating expenses and other financial obligations which have previously been met primarily, by the issuance of Company stock. The revenues from the Yemen exploration project and the TEC, in combination with either the acquisition of financing or the marketing of a portion of its exploration interests, are projected to take the Company to the commercial revenues of both projects. Such funding would facilitate continuing as well as the development of other projects as described in Item 1, Business. The Company is continuing its efforts to acquire major equity partners on a risk managed basis for its projects. 21 Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) RESULTS OF OPERATIONS SEVEN MONTHS ENDED DECEMBER 31, 2000 COMPARED TO THE FISCAL YEAR ENDED MAY 31, 2000. The following table reflects the Company's cumulative costs in oil and gas properties: Dec. 31, 2000 May 31, 2000 ------------- ------------- Oil and gas properties at full cost: Oil and gas properties $ 7,262,348 $ 3,000,000 Less accumulated depletion and depreciation - - ------------- ------------- $ 7,262,348 $ 3,000,000 ============= ============= Revenues. In fiscal 2000, total revenues of $62,443 were from consulting fees in the natural gas site development area ($60,000) and technical geophysical services ($2,443). Revenues in the seven month transitional period of $1,187,868 Were from a development fees and site bonus ($834,000), technical services ($351,965), and miscellaneous revenues ($1,903). Depreciation. Depreciation expense increased from $10,802 in fiscal 2000 to $34,696 in the transitional period, an increase of $23,894. This was due primarily to the fact that additional depreciable property incident to the PIE acquisition was includable in the entire transitional period. Interest Expense. During fiscal 2000, the Company had incurred interest expense on a note payable in the amount of $4,337. In the transitional period, interst expense was attributable to capitalized leases in the amount of $1,060, a decrease of $3,277. General and administrative Expenses. The Company incurred general and administrative expenses of $1,747,112 in fiscal 2000 and $1,230,535 in the transitional period for average monthly total of $145,592 and $175,790, respectively. The increased average monthly totals is attributable to the inclusion expenses of Adair Exploration, Inc. from February 1, 2000 through the balance of fiscal 2000 (four months) and the transitional period (seven months). The net loss for the year ended May 31, 2000 was ($1,699,808) or ($0.03) per share on revenues of $62,443 versus a net loss of ($74,2758) or ($0.00) per shares on revenues of $1,187,868 in the transitional period. The decrease in new operating loss was due to the commencement in September of operations in the drilling of Block 20 in the Republic of Yemen. The prospect bonus and technical services revenues, coupled with ongoing other revenues, nearly equaled all expenses for the transitional period. 22 Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) RESULTS OF OPERATIONS (continued) LIQUIDITY AND CAPITAL RESOURCES The Company expects that its existing cash reserves, cash flows from Operations, partial project farmins, and 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. Year 2000 Issues The Company did not experience any significant disruptions in its operations during the transition into the Year 2000. While the Company did not experience any significant Year 2000 disruptions during the transition into the Year 2000, it will continue to monitor its operations and systems and address any date-related problems that may arise as the year progresses. ITEM 7. FINANCIAL STATEMENTS The information required hereunder is included in this report as set forth on pages 30-53. 23 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Jackson and Rhodes, P.C. ("J&R") were engaged to audit both the fiscal year ending May 31, 2000 and the seven months ending December 31, 2000. There were no disagreements between the Company and J&R 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, 1999, and through the present, there were no reportable events requiring disclosure with respect to each auditor's period of engagement. The reports of J&R for the periods described above did not contain any adverse opinion or disclaimer of opinion. On February 28, 2000, the Company engaged J&R to audit its subsidiary, Adair Exploration, Inc. (formerly Partners In Exploration, Inc.), which was acquired effective February 1, 2000. In the course of that engagement, the Company consulted with J&R regarding the application of accounting principles and other matters as would be ordinary and necessary for J&R to render an opinion on the financial statements of the subsidiary for the years ending December 31, 1999 and 1998. The nature, extent, and result of all such consultations are best described in the reading of Combined Financial Statements of Partners In Exploration, Inc., for the years ending December 31, 1999 and 1998, which are included in Form 8-K, Amendment Number 1, dated February 1, 2000. Additionally, the Company conferred verbally with J&R with regard to the accounting for the acquisition by the Company. The result of such consultations are best described in the reading of the Notes to Pro Forma Consolidated Financial Data which are included in Form 8-K, Amendment Number 1, dated February 1, 2000. The consultations referred to in the preceding two paragraphs did not cause the Company to make any significant changes on any accounting, auditing or financial reporting issue. 24 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS The following table sets forth the directors and executive officers of the Company. Name Age Title ---- --- ----- John W. Adair 58 Chairman of Board, Chief Executive Officer and Director Jalal Alghani 41 Chief Financial Officer and Director Richard G. Boyce 46 President, Adair Exploration, Inc. 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 and Gas International of Canada, a Bahamian corporation that acquired Roberts Oil and Gas, Inc. in 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 and Gas International of Canada, a Bahamian corporation that acquired Roberts Oil and Gas, Inc. in 1997. Mr. Boyce has served as President of Adair Exploration, Inc. since its inception prior to acquisition this year. He was graduated from the Colorado School of Mines and has served in numerous positions as Chief Geophysicist implementing state-of-the-art computer technology. He has over twenty years of worldwide oil and gas exploration and development experience. He has worked for Superior Oil Company and Hunt Oil Company, the later in the area in the Republic of Yemen in which the Company is now operating. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE John W. Adair, Jalal Alghani, and Richard G. Boyce each failed to file Form 4 reports during the last fiscal year concerning receipt of restricted common stock received as compensation from the Company. 25 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. Effective with the acquisition of Adair Exploration, Inc. on February 1, 2000, it was agreed to pay Richard G. Boyce compensation as President of Adair Exploration, Inc., the amount of $10,000 per month. The following table reflects all forms of compensation for services to the Company for the seven months ended December 31, 2000 and the fiscal years ended May 31, 2000 and 1999 of the all of the executive officers of the Company.
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 --------- ---- ------------- ----- ------ ------ ------------ ------- ------ John W. 2000 $ 70,000 (1) -0- -0- -0- -0- -0- -0- Adair 2000 $ 120,000 (2) 0- -0- -0- -0- -0- -0- CEO 1999 $ 120,000 (3) -0- -0- -0- -0- -0- -0- Earl K. 2000 $ 70,000 (1) -0- -0- -0- -0- -0- -0- Roberts 2000 $ 120,000 (2) -0- -0- -0- -0- -0- -0- President 1999 $ 120,000 (3) -0- -0- -0- -0- -0- -0- Jalal 2000 $ 70,000 (1) -0- -0- -0- -0- -0- -0- Alghani 2000 $ 120,000 (2) -0- -0- -0- -0- -0- -0- CFO 1999 $ 120,000 (3) -0- -0- -0- -0- -0- -0- Richard G. 2000 $ 70,000 (1) -0- -0- -0- -0- -0- -0- Boyce 2000 $ 40,000 (4) President of Adair Exploration, Inc. ---------------------------- (1) $ 70,000 was paid in-kind with 145,487 shares of restricted stock. (2) $ 120,000 was paid in-kind with 474,090 shares of restricted stock. (3) 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. (4) $ 40,000 was paid in-kind with 48,961 shares of restricted stock.
26 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information as of April 1, 2001, 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. NAME AND ADDRESS OF BENEFICIAL TITLE OF PERCENT BENEFICIAL OWNER OWNERSHIP CLASS OF CLASS ------------------------------------------------------------------------- John W. Adair 6,655,056 Common Stock 9.7% 3000 Richmond, Suite 100 Houston, Texas 77098 Jalal Alghani 6,633,490(1) Common Stock 9.7% 3000 Richmond, Suite 100 Houston, Texas 77098 Richard G. Boyce 4,241,845 Common Stock 6.2% 1001 Hampshire Lane Richardson, Texas 75080 Earl K. Roberts 3,485,786 Common Stock 5.1% 3000 Richmond, Suite 100 Houston, Texas 77098 All directors and executive 21,016,177 Common Stock 30.7% officers as a group (4) persons) --------------------------------- (1) Includes 6,233,490 shares owned directly, and 400,000 shares owned indirectly through a trust for the benefit of the daughter of Mr. Alghani. 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 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. 27 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (continued) 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. 10.2 ** PIE Agreement. 10.20 *** Memorandum of Understanding. 10.21 *** Participation Agreement. 10.30 *** Site Development Agreement. 16.1 *** Letter from Sisk. 21.1 * Subsidiaries. ---------------------- * 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. ** Previously filed as an exhibit to the Company's Annual Report on Form 10-KSB for the fiscal year ended May 31, 1999, and incorporated by reference thereto. *** Previously filed as an exhibit to the Company's Annual Report on Form 10-KSB for the fiscal year ended May 31, 2000, and incorporated by reference thereto. (B) REPORTS ON FORM 8-K Change in Fiscal Year End, January 15, 2001. 28 SUBSIDIARIES. Adair Exploration, Inc., a Texas corporation. Adair Colombia Oil and Gas, S.A., a Panamanian corporation. Adair Yemen Exploration Limited, a Bahamian corporation. 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 April 13, 2001. 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 April 13,2001 John W. Adair Chairman of the Board and Chief Executive Officer ------------------- /s/ Jalal Alghani Director and April 13,2001 Jalal Alghani Chief Financial Officer 29 PART I. ITEM 1. FINANCIAL STATEMENTS ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES TABLE OF CONTENTS DECEMBER 31, 2000 AND MAY 31, 2000 Independent Auditors' Report 31 Consolidated Balance Sheets 32 Consolidated Statements of Operations 33 Consolidated Statements of Changes in Shareholders' Equity 34 Consolidated Statements of Cash Flows 35 Notes to Financial Statements 36-53 30 INDEPENDENT AUDITORS' REPORT Board of Directors Adair International Oil & Gas, Inc. We have audited the accompanying consolidated balance sheet of Adair International Oil & Gas, Inc. and subsidiaries as of December 31 and May 31, 2000, and the related consolidated statements of operations, shareholders' equity and cash flows for the seven month period and year then ended, respectively. 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. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Adair International Oil & Gas, Inc. and subsidiaries as of December 31 and May 31, 2000, and the results of their operations and their cash flows for seven month period and the year then ended, respectively, in conformity with generally accepted accounting principles. Jackson & Rhodes, P.C. Dallas, Texas March 30, 2001 31
ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 AND MAY 31, 2000 ASSETS DECEMBER 31, MAY 31, -------------- 2000 2000 -------------- ------------- CURRENT ASSETS: CASH AND CASH EQUIVALENTS $ 30,195 $ 14,854 ACCOUNTS RECEIVABLE 36,100 24,000 PREPAID EXPENSES 13,689 - -------------- ------------- TOTAL CURRENT ASSETS 79,984 38,854 -------------- ------------- PROPERTY AND EQUIPMENT: OIL AND GAS PROPERTIES AND EQUIPMENT UNDER THE FULL COST METHOD OF ACCOUNTING 7,262,348 3,000,000 FURNITURE AND EQUIPMENT 289,244 268,323 -------------- ------------- 7,551,592 3,268,323 LESS ACCUMULATED DEPRECIATION (123,041) (88,345) -------------- ------------- NET PROPERTY AND EQUIPMENT 7,428,551 3,179,978 -------------- ------------- OTHER ASSETS: GEOPHYSICAL DATA AND INTELLECTUAL PROPERTY 1,583,362 4,984,717 DEPOSITS AND OTHER ASSETS 7,456 18,805 -------------- ------------- TOTAL OTHER ASSETS 1,590,818 5,003,522 -------------- ------------- $ 9,099,353 $ 8,222,354 ============== ============= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: ACCOUNTS PAYABLE $ 107,042 $ 91,992 CAPITALIZED LEASES PAYABLE-CURRENT PORTION 4,868 TAXES PAYABLE 8,494 41,832 -------------- ------------- TOTAL CURRENT LIABILITIES 120,404 133,824 -------------- ------------- LONG-TERM DEBT: CAPITALIZED LEASES PAYABLE-LONG-TERM PORTION 11,332 COMMITMENTS AND CONTINGENCIES - - SHAREHOLDERS' EQUITY: COMMON STOCK, WITHOUT PAR VALUE, AUTHORIZED 100,000,000 SHARES; 68,391,460 AND 64,381,625 SHARES ISSUED AND OUTSTANDING 20,142,182 19,073,136 ACCUMULATED DEFICIT (11,174,565) (10,984,606) -------------- ------------- TOTAL SHAREHOLDEREQUITY 8,967,617 8,088,530 -------------- ------------- $ 9,099,353 $ 8,222,354 ============== ============= See accompanying notes to consolidated financial statements.
32
ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SEVEN MONTHS ENDED DECEMBER 31, 2000 AND THE YEAR ENDED MAY 31, 2000 DECEMBER 31 MAY 31 ------------- ------------ REVENUES: DEVELOPMENT FEE $ 750,000 $ - TECHNICAL SERVICES 322,680 - CONSULTING FEES 84,000 62,443 ADMINISTRATIVE FEES AND OTHER INCOME 31,189 - ------------- ------------ 1,187,869 62,443 ------------- ------------ COSTS AND EXPENSES: DEPRECIATION AND DEPLETION 34,696 10,802 INTEREST EXPENSE 1,060 4,337 GENERAL AND ADMINISTRATIVE 1,346,220 1,747,112 ------------- ------------ TOTAL COSTS AND EXPENSES 1,381,976 1,762,251 --------------------------------------- ------------- ------------ NET LOSS FROM OPERATIONS (194,107) (1,699,808) OTHER INCOME (INTEREST) 4,148 - ------------- ------------ NET LOSS BEFORE INCOME TAXES (189,959) (1,699,808) INCOME TAXES - - ------------- ------------ NET LOSS $ (189,959) $(1,699,808) ============= ============ BASIC LOSS PER COMMON SHARE: BASIC AND DILUTED $ 0.00 $ (0.03) ------------- ------------ AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING 66,435,396 63,507,341 ------------- ------------ See accompanying notes to consolidated financial statements.
33
ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE SEVEN MONTHS ENDED DECEMBER 31, 2000 AND THE YEAR ENDED MAY 31, 2000 NO. SHARES TOTAL ISSUED AND COMMON ACCUMULATED SHAREHOLDERS' OUTSTANDING STOCK DEFICIT EQUITY ------------ ------------ ------------- -------------- BALANCE AT MAY 31, 1999 45,232,148 $11,798,379 $ (9,284,798) $ 2,513,581 ISSUANCE OF COMMON STOCK FOR CASH 6,251,044 1,124,254 1,124,254 ISSUANCE OF COMMON STOCK FOR COMPANY OBLIGATIONS 7,824,149 1,068,965 1,068,965 CORRECTION OR PRIOR YEARS' OUTSTANDING 874,284 STOCK ISSUANCE OF COMMON STOCK FOR THE ACQUISITION OF ADAIR EXPLORATION, INC. 4,200,000 5,081,538 5,081,538 NET LOSS (1,699,808) (1,699,808) ------------ ------------ ------------- -------------- BALANCE AT MAY 31, 2000 64,381,625 19,073,136 (10,984,606) 8,088,530 ISSUANCE OF COMMON STOCK FOR CASH 2,528,229 344,410 344,410 ISSUANCE OF COMMON STOCK FOR COMPANY OBLIGATIONS 1,481,606 608,951 608,951 ISSUANCE OF STOCK OPTIONS FOR SERVICES 115,685 115,685 NET LOSS (189,959) (189,959) ------------ ------------ ------------- -------------- BALANCE AT DECEMBER 31, 2000 68,391,460 $20,142,182 $(11,174,565) $ 8,967,617 ============ ============ ============= ============== See accompanying notes to consolidated financial statements.
34
ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SEVEN MONTHS ENDED DECEMBER 31, 2000 AND THE YEAR ENDED MAY 31, 2000 31-DEC MAY 31 ----------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: NET LOSS $ (189,959) $(1,699,808) ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED BY OPERATING ACTIVITIES: DEPRECIATION AND DEPLETION 34,696 81,928 ISSUANCE OF STOCK FOR EXPENSES AND OPTIONS 724,636 1,068,965 CHANGES IN ASSETS AND LIABILITIES: (INCREASE) IN ACCOUNTS RECEIVABLE (12,100) (24,000) (INCREASE) IN PREPAID EXPENSES (13,689) - DECREASE (INCREASE) IN OTHER ASSETS 11,349 (12,079) INCREASE (DECREASE) IN ACCOUNTS PAYABLE 15,050 (106,924) INCREASE (DECREASE) IN ACCRUED LIABILITIES - (248,997) INCREASE IN CURRENT PORTION LEASES PAYABLE 4,868 INCREASE (DECREASE) IN TAXES PAYABLE (33,338) 4,259 ----------- ------------ NET CASH PROVIDED-OPERATING ACTIVITIES TOTAL ADJUSTMENTS 731,472 763,152 ----------- ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 541,513 (936,656) ----------- ------------ CASH FLOWS USED IN INVESTING ACTIVITIES: PURCHASE OF PROPERTY AND EQUIPMENT AND NET CASH USED IN INVESTING ACTIVITIES (881,914) (144,103) ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: (DECREASE) IN NOTE PAYABLE - (30,380) INCREASE IN LEASES PAYABLE 11,332 - COMMON SHARES ISSUED FOR CASH 344,410 1,124,254 ----------- ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 355,742 1,093,874 ----------- ------------ NET CHANGE IN CASH AND CASH EQUIVALENTS 15,341 13,115 CASH AND CASH EQUIVALENTS: BEGINNING OF THE PERIOD 14,854 1,739 ----------- ------------ END OF THE PERIOD $ 30,195 $ 14,854 =========== ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW CASH PAID DURING THE PERIOD FOR INTEREST $ 1,060 $ 4,337 =========== ============ See accompanying notes to consolidated financial statements.
35 ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS DECEMBER 31 AND MAY 31, 2000 Note 1. Summary of Significant Accounting Policies ------------------------------------------------------ Basis of Presentation -- The consolidated financial statements include the accounts of Adair International Oil and Gas, Inc. and its wholly owned subsidiaries, Adair Exploration, Inc. (formerly Partners in Exploration, Inc. - see Note 2), and Adair Yemen Exploration Limited, and 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. During the year ended May 31, 1999, the Company has changed its focus to the development of natural gas fired power generation projects. Effective February 1, 2000, the Company acquired all of the outstanding stock of Partners In Exploration, Inc. (PIE). The acquisition provided "state of the art" 3-D seismic works stations and technical support not previously available in house. With this acquisition the Company broadened its basic objectives to include exploration, evaluation of producing properties for potential acquisition, and the technical evaluation of oil and gas properties. Accounting Method for the Acquisition -- The acquisition (PIE) was accounted for under the purchase method of accounting. Adair International Oil & Gas, Inc. (the Company) is considered the acquiring company for accounting purposes under this method and its operations are considered the historical operations of the reporting entity. Under purchase accounting, the total purchase price was allocated to the tangible and intangible assets and liabilities of PIE upon their respective fair values as of the closing date based upon evaluations and other analyses (See Note 2). 36 ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS DECEMBER 31 AND MAY 31, 2000 Note 1. Summary of Significant Accounting Policies (continued) ------------------------------------------------------------------------ Financial Strategy -- The Company has responded to losses incurred in the past two years by implementing a new business strategy. With the deregulation of the natural gas industry, management has proceeded with the development of natural gas fired power generation projects. On July 8, 1999 the Company and a major power developer signed an agreement with the Torres Martinez tribe to develop what has become the Teayawa Energy Center (TEC), a 600 megawatt natural gas fired power generation project. The related revenues and long-term impact to the Company are described in more detail in Note 6, Revenues. For the fiscal year ending May 31, 2001, the Site Development Agreement provides for $644,000 in revenues to the Company. Concurrent with the development of the TEC, the Company has identified additional sites located on Native American Reservations in the Western, Midwestern, and Southeastern United States. As additional sites are developed, the Company expects to receive developer fees, carried royalty interests, and the right to invest as an equity partner. 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. As described in Note 2, Acquisition of Subsidiary, the Company subsequently acquired the joint venture Company, now Adair Exploration, Inc., to obtain enhanced in house geophysical capabilities for exploration and production and to provide technical services. The balance of what has come to be the Block 20 exploration program became 100% owned by the Company. As described in Note 9, Exploration of Block 20 in the Republic of Yemen, the Company brought a major partner in to the program which officially began on September 2, 2000. This project is generating a $750,000 prospect bonus and significant administrative fees for the Company as originator of the project and as initial operator. Adair Exploration, Inc. is further contracting with the exploration group to provide the technical services through the exploration phase. Again, as indicated in the Company's plan last year to reverse the going concern issues, partnering with companies which have the expertise and resources complimentary to those of the Company are generating near term revenues with long term revenue potential. The Company is actively seeking additional capital based on the projects described above to develop additional natural gas projects, exploration activities, and evaluate the acquisition of producing properties with exploitation potential. Management believes the revenues in the seven month period ending December 31, 2000 demonstrates its strategies are successful in reversing the experience of prior years. 37 ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS DECEMBER 31 AND MAY 31, 2000 Note 1. Summary of Significant Accounting Policies (continued) ------------------------------------------------------------------ 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. Oil and Gas Properties -- 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. 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. Property and equipment -- 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 and amortization expense for the seven months ending December 31, 2000 and the year ending May 31, 2000 were $34,696 and $10,802, respectively. 38 ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS DECEMBER 31 AND MAY 31, 2000 Note 1. Summary of Significant Accounting Policies (continued) ------------------------------------------------------------------ Geophysical data and intellectual property - The carrying value of the geophysical data and intellectual property acquired incident to the acquisition of Partners In Exploration, Inc. was determined as described in Form 8-K dated February 1, 2000, and as amended. It is the policy of the Company to carry these as other assets until such time as the Company is engaged in an exploration activity or under contract for geophysical analysis which utilizes specific proprietary data. At such time the asset would be classified as either costs as those incurred under the full cost method of accounting for oil and gas properties or costs incident to geophysical analysis contracts. As described below, the Company signed a production sharing agreement subsequent to the balance sheet date to which a significant portion of the acquired geophysical data and intellectual property will be utilized. 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. No provision is made for current or deferred income taxes because the Company has an excess net operating loss carryforward. Earnings Per Share -- Basic earnings per share are computed by dividing earnings (loss) by the weighted average number of common shares outstanding. Because the Company's potential dilutive securities are antidilutive, the accompanying presentation is only of basic net loss per share. Stock Options - The Company adopted the fair value based method of accounting for an employee stock option or similar equity instrument as prescribed in SFAS 123. Under the fair value based method, compensation cost is measured at the grant date based on the value of the award. SFAS 123 prescribes the use of the fair value method for all options issued to nonemployees. 39 ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS DECEMBER 31 AND MAY 31, 2000 NOTE 1. Summary of Significant Accounting Policies (continued) ------------------------------------------------------------------------ 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 the last two fiscal periods presented management estimated sales prices, costs, and statutory income tax rates in calculating future net cash flows of proven oil and gas reserves. Note 2. Acquisition of Subsidiary ---------------------------------------- On February 1, 2000, Adair International Oil and Gas, Inc. (the Company) acquired 100% of the outstanding common stock of Partners In Exploration, Inc. (PIE). Coincident with the acquisition of PIE, the name of Partners In Exploration, Inc. was changed to Adair Exploration, Inc. (Exploration). The terms and conditions of the stock exchange were determined by the parties through arms length negotiations. However, no appraisal was conducted. The financial results of Exploration are consolidated into the Company's financial statements effective on the date of acquisition. Exploration is a Texas corporation located in Dallas, Texas. It has the professional staff and equipment to evaluate complex geology to include state of the art 3-D seismic information. Exploration has done extensive work in the Yemen area where the Company currently has a large concession. Pursuant to this acquisition, the Company conveyed 4,200,000 shares of restricted common stock for all of the outstanding shares of Exploration which totaled 4,200,000 shares. The assets of Exploration include extensive 2D seismic, well reports, and a regional database encompassing the Company's Yemen concession; 2D seismic, gravity data, technical reports, and regional geologic data in Eritrea; and 3D seismic on other geological data encompassing part of West Texas. PIE has the software, computers, and 3-D work stations to interpret and evaluate existing data. It is the intention of Exploration and the Company to utilize these assets to interpret and evaluate future acquisitions. Exploration also had an equal interest with the Company in a signed Memorandum of Understanding (MOU) with regard to the exploration of Block 20 in the Republic of Yemen. Subsequent to the acquisition, both the Company and Exploration conveyed their interests in the MOU by assignment to Adair Yemen Exploration Limited, a wholly owned subsidiary of the Company. There were no material relationships between or among any of the companies or shareholders in this acquisition except as described in the following paragraph. On July 28, 1999, the Company signed a joint venture agreement with Partners In Exploration, LLC (LLC), an oil and gas exploration geophysical firm, for the purpose of acquiring leases and exploring for oil and gas in Yemen. In October, 1999, the principals dissolved the LLC. Richard Boyce, one of the partners in the LLC and the principal stockholder of PIE transferred the above described assets from the LLC to PIE. 40 ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS DECEMBER 31 AND MAY 31, 2000 Note 2. Acquisition of Subsidiary (continued) ----------------------------------------------------- The purchase price and preliminary adjustments to the historical book value of PIE are as follows: Purchase price based on value of common stock issued $5,081,538 Less: Book value of net assets acquired (85,813) Add: Book value of net liabilities acquired 74,756 ----------- Purchase price allocable to assets acquired $5,070,481 =========== Allocation of purchase price: Geophysical data and intellectual property $4,978,208 Software, equipment, and office furniture and fixtures 92,273 ----------- $5,070,481 =========== The acquired geophysical data and intellectual property will be amortized on a unit of production basis on exploration projects to which they pertain. Unaudited pro forma results of operations, as if Adair Exploration, Inc. had been acquired at the beginning of the year ended May 31, 2000 is as follows: Revenues $ 714,036 ------------- Net loss $ (1,940,924) ------------- Net loss per common share $ (0.03) ------------- The pro forma financial information above includes Exploration for the fiscal year ended December 31, 1999, because it was deemed impractical to bring Exploration's financial information to the Company's fiscal year basis. It was determined that the pro forma fiscal information would not be materially different had information been available from the records of Exploration and its affiliates on the same chronological basis. 41 AIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS DECEMBER 31 AND MAY 31, 2000 NOTE 3. 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. The shares issued in connection with this acquisition were authorized but unissued shares of the company. At May 31, 2000, 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, will receive a 2% overriding royalty in all hydrocarbons produced from the properties. On November 6, 1998, the Company executed a memorandum of understanding with Wartsila NSD Ecuador to develop this property. The feasibility study on this project was completed in July, 1999. Subsequent to the feasibility study, Wartsila opted to forego participation in the project. The Company then entered in a dialog with Termotasajero, a major Colombian utility company, to construct a 20-megawatt natural gas fired power plant. A preliminary proposal was received by the Company in August, 2000. The general concepts provide for Adair to supply the gas to fuel the power plant providing revenues under a long term gas purchase contract. In addition, as an incentive to provide the fuel for the plant at prices that allow competitive pricing for the power, Adair will receive equity in the power plant based on the value of their contribution under the gas purchase contract. This option would allow the Company to recover additional revenues under a power purchase agreement with Termotasajero. Realization of the value of reserves is contingent upon the Company concluding an agreement to construct a power plant utilizing gas from the field. 42 ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS DECEMBER 31 AND MAY 31, 2000 NOTE 4. Stock Options ---------------------------- On October 25, 2000, 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 a price of $0.25 per share. The second option was to purchase 220,000 shares of restricted common stock for a price of $0.25 per share. Payments of $0.01 per share or $5,000 and $2,200, respectively, were paid to the Company for these options. Neither option has been exercised to date. The Company issued no options to employees during the periods. The Company recorded $115,685 in expense for the seven months ended December 31, 2000 under SFAS 123 for the options issued to non-employees. The fair value of the awards was estimated at the grant date using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 4.5%; volatility factor of 103%; and an expected life of the awards of one year. NOTE 5. Nonmonetary Stock Transactions --------------------------------------------- The Company issued stock in lieu of cash in transactions summarized as follows for the seven months ended December 31, 2000 and the year ended May 31, 2000:
Nature of transaction December 31, 2000 May 31, 2000 ---------------------------------- -------------------- --------------------- Shares Amount Shares Amount --------- -------- --------- ----------- Consultants and professional fees. - $ - 678,203 $ 187,150 Salaries 925,508 352,167 2,363,770 345,000 Accrued salaries - - 2,304,983 192,500 Acc'ts payable and acc'd liability 349,474 76,467 1,416,143 68,315 Other expenses 206,624 180,317 1,061,050 276,000 --------- -------- --------- ----------- 1,481,606 $608,951 7,824,149 $1,068,965 ========= ======== ========= ===========
43 ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS DECEMBER 31 AND MAY 31, 2000 Note 6. Revenues --------------------- The Company receives a monthly retainer of $12,000 per month in exchange for the time of its personnel spent through the development period. The retainer is part of a Site Development Agreement signed with Calpine Corporation on November 30, 1999. The Teayawa Energy Center (TEC) Site Development Agreement provides for the payment of a development fee of $1,000,000 payable in two installments: $500,000 at the financial closing estimated to occur in quarter one, 2001, and $500,000 upon the commercial operation date estimated to occur in quarter three, 2002. The Company receives $12,000 per month consulting fee until the commercial commissioning of the project. Additionally, the Agreement provides for a royalty payable to the Company on the basis of a sliding scale between 3% and 4% of the earnings before interest, taxes, depreciation, and amortization for a period of 20 years. The Company also has the option, exercisable at or before financial closing, to purchase up to 20% of the output of the plant under a long-term power sales agreement. The purchase price of this power shall be negotiated at a discount to prevailing market prices and shall approximate the fuel, operations and maintenance, financing and management expenses for the project. The Company many assign its rights to the power sales agreement and is subject to a right of first refusal in favor of Calpine. NOTE 7. Related Party Transactions ----------------------------------------- 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 3. 44 ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS DECEMBER 31 AND MAY 31, 2000 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 the periods, to earnings before provision for federal income taxes are presented below: Seven Months Ended December 31, Fiscal Year Ended 2000 May 31, 2000 ----------------- ------------------- Federal income tax at statutory rate $(66,000) $(594,000) Valuation allowance $ 66,000 $ 594,000 -------- --------- Income tax expense $ 0 $ 0 ======== ========= The sources of deferred tax assets are as follows: Seven Months Year Ended Ended December 31, May 31, 2000 2000 ------------ ----------- Note receivable written off $ 0 $ 65,975 Effect of net operating losses 1,225,547 1,151,272 Valuation allowance (1,225,547) (1,217,247) ------------ ----------- Deferred tax assets $ 0 $ 0 ============ =========== Deferred tax assets result from net operating losses in 1998 forward. Net operating losses incurred in 1997 and prior are limited annually because of a greater than 50% ownership change in 1997. Losses for 1998, 1999 and 2000 may be carried forward for 20 years from the year of loss and affect future income. Because of the uncertainty of realization, a valuation allowance equal to the deferred tax asset was established by management. 45 ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS DECEMBER 31 AND MAY 31, 2000 Note 9. Commitments and Contingencies -------------------------------------------- Exploration of Block 20 in the Republic of Yemen -------------------------------------------------------- On April 3, 2000, Adair Yemen Exploration Limited (Adair Yemen), a wholly owned subsidiary of the Company, together with Saba Yemen Oil Company Limited (Saba), Occidental Yemen Sabatain, Inc. (Occidental), The Yemen Company For Investment In Oil and Minerals (YICOM), and the Ministry of Oil and Mineral Resources (MOMR), entered into a Production Sharing Agreement (PSA) in the Sabatain Area, Block 20, in the Marib-Shabwa Governorates, Republic of Yemen. On September 2, 2000, the President of Yemen signed decree number 21, which passes into law the Production Sharing Agreement for Block 20. This decree establishes the effective date for the Participation Agreement among Adair Yemen, Saba, and Occidental (the Parties). The Participation Agreement was signed by the parties on March 31, 2000. The agreement provides for the general financial arrangements among the parties with regard to the PSA and other joint management and operating agreements. The basic financial provisions of all the agreements are discussed below. The PSA provides for a signature bonus in the amount of $400,000 which was secured by a irrevocable letter of credit to the MOMR and to be drawn on the effective date. The Parties effected the letter of credit on May 3, 2000, through the Yemen Commercial Bank. The Company's obligation in the amount of $120,000 was secured by the personal guarantees of John W. Adair and Jalal Alghani. The PSA further provides for the annual payment of a training, institutional, and social bonus to be paid annually over the six year exploration period: the first being payable on the effective date. A $8,300,000 irrevocable letter of credit was posted with the MOMR on October 7, 2000, as required by the PSA. The parties are to provide for the instrument in proportion to their respective interests (Occidental 50%, Adair Yemen 30%, and Saba 20%) except for the first $4,000,000 cost of 3D seismic which is to be paid by Occidental. The Company is currently arranging for its portion of the total. Under the PSA, revenues derived from the commercial development of the project are in the form of royalties on a sliding percentage scale of from 3% on production under 25,000 barrels per day to 10% on production over 100,000 barrels per day. The royalties are further defined as "Cost Oil" and "Share Oil." Cost oil is up to 50% of the royalty to reimburse exploration, development, operating costs, pipeline tariffs, and general and administrative expense to the Parties. Share oil is payable to the Parties on a sliding scale of from 37% on production under 12,500 barrels per day to 18% on production over 100,000 barrels per day. The share oil is subject to a carried interest to YICOM of 5% born by the Parties in proportion to their interest. Adair Yemen, therefore, has a net revenue interest (NRI) of 28.5% under the PSA. 46 ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS DECEMBER 31 AND MAY 31, 2000 Note 9. Commitments and Contingencies (continued) --------------------------------------------------------- Exploration of Block 20 in the Republic of Yemen (continued) --------------------------------------------------------------------- Under the terms of the Participation Agreement signed by the Parties, Adair Yemen Exploration Limited received an advance payment as a prospect bonus of $750,000 from Occidental. This was a discounted advance payment of the first $1,000,000 of cost oil to Adair Yemen that is to be received by Occidental. Under the terms of the joint operating and management agreements among the Parties, Adair Yemen is to be the operator in the exploration phase. As such, Adair Yemen is to receive a general and administrative fee based on a percentage of the total work program expenditures on an annual basis. The annual percentages and amounts are 4% on the first $5,000,000, 2% on the second $5,000,000, and 1% of annual amounts in excess of $10,000,000. Adair Exploration, Inc. will provide technical services to the Parties as part of the work program while Adair Yemen is operator. This phase of the program is projected to last for a period of approximately 18 to 24 months to commerciality, at which time Occidental will become the operator. Legal Proceedings for the Seven Months Ending December 31, 2000 ------------------------------------------------------------------------ None. Legal Proceedings for the Year Ending May 31, 2000 ---------------------------------------------------------- The Company was named as a defendant in the matter of Steven R. Hill v. Adair International Oil and Gas, Inc., 2000-10286, 129th Judicial District Court, Harris County, Texas. The plaintiff is claiming damages resulting from breach of an alleged contract between the plaintiff and the Company. Little discovery has been conducted to date. The Company believes it has viable defenses to the plaintiff's claims and that the likelihood of an unfavorable outcome is low. The Company intends to present a vigorous and aggressive defense to this litigation. 47 ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS DECEMBER 31 AND MAY 31, 2000 Note 9. Commitments and Contingencies (continued) --------------------------------------------------------- Legal Proceedings for the Year Ending May 31, 2000 ---------------------------------------------------------- The Company was named as a defendant in the matter of John A. Braden, Robert D. Goldstein, James L. Bennink and S. Cleve Gazaway, Individually, and as the Partners for Braden, Bennink, Goldstein, Gazaway & Company, P.L.L.C. v. John W. Adair, Individually, Jalal Alghani, Individually, Adair International Oil and Gas, Inc. and ChaseMellon Shareholder Services, L.L.C., 2000-16454, 152nd Judicial District Court, Harris County, Texas. The plaintiffs claim damages resulting from breach of an alleged contract between the plaintiffs and the Company. The lawsuit was resolved with the issuance of 200,992 shares of Company stock to the plaintiff valued at $43,979. 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 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 two fiscal reporting periods, John W. Adair, Jalal Alghani, and Richard G. Boyce each failed to file reports on Form 4 concerning receipt of restricted stock received as compensation from the Company. During the seven months ended December 31, 2000, each of Adair, Alghani, Roberts and Boyce received 145,487 shares of stock valued at $70,000 of compensation. During the year ended May 31, 2000, each of Adair, Alghani, and Roberts received 474,090 shares of stock valued at $120,000. Also during the year ended May 31, 2000, the officers received accrued compensation in shares of stock as follows: Adair, $47,500 with 938,280 shares and each of Alghani and Roberts, $45,000 with 906,270 shares. 48 ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS DECEMBER 31 AND MAY 31, 2000 Note 9. Commitments and Contingencies (continued) --------------------------------------------------------- Lease Commitments ------------------ The Company leases property and equipment under various operating leases. Aggregate minimum lease payments under existing noncapitalized long-term leases are estimated to be $517,971, $209,824, $185,899, $123,691 and $90,809 for the years 2001-2005, respectively. These lease commitments include $408,654 in capitalized leases executed in March, 2001, which were attributable to the acquisition of software and hardware for Superior Geophysical, Inc. Concentrations -------------- The Company maintains a cash balance at a financial institution. At certain times, the Company's cash balances exceed the federally insured amounts. The Company has not experienced losses relating to its cash. Note 10. Subsequent Events -------------------------------- On January 15, 2001, the board of directors elected to change the fiscal year end of Adair International Oil & Gas, Inc. from May to December. This was done to bring the parent Company's year end to be coincident with those of the subsidiaries. In February, 2001, The Company formed Superior Geophysical, Inc. (SUPERIOR), a wholly owned subsidiary. SUPERIOR is an international/domestic oil and gas exploration service company, engaged primarily to manage, design, acquire and process 2D and 3D seismic data. SUPERIOR, with a professional management team, has assembled state-of-the-art hardware and software to accomplish its goals of becoming a leader in the managing, designing, acquisition and processing 2D and 3D seismic data projects around the world. Superior's clientele will consist of major oil companies and large to small independent oil and gas exploration companies. As indicated in Note 9 above, the SUPERIOR leases are included in the gross lease commitments. Additionally, JPMorgan Chase provided a $50,000 revolving accounts receivable line to advance 75% of invoices under 90 days. In January, 2001, the Company entered into a comprehensive Consulting Services Agreement with Pace Global Energy Services, LLC (PACE). PACE is an energy consulting and management firm with expertise related to the production, purchase, sale, transportation, storage and consumption of energy. PACE has been engaged to conduct feasibility studies for power project development sites. The Company is in the process of developing a number of natural gas fired power plants within the continental United States. PACE's role is now expanded to providing risk, fuel, marketing, and power management services as well as the structuring of financial relationships with potential development fund lenders. 49 ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS DECEMBER 31 AND MAY 31, 2000 NOTE 11 - SUPPLEMENTARY OIL AND GAS INFORMATION (UNAUDITED) ------------------------------------------------------------------- Costs Incurred and Capitalized Costs in Oil and Gas Producing Activities are as follows: ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS DECEMBER 31 AND MAY 31, 2000 NOTE 11 - SUPPLEMENTARY OIL AND GAS INFORMATION (UNAUDITED) ------------------------------------------------------------------ Costs Incurred and Capitalized Costs in Oil and Gas Producing Activities are as follows: December 31, 2000 ----------------- Yemen Colombia Total ---------- ---------- ---------- Oil and Gas Properties $ $3,000,000 $7,262,348 Investment in Oil and Gas Joint Venture 862,348 862,348 Geophysical Data And Intellectual Property 3,400,000 0 3,400,000 ---------- ---------- ---------- Capitalized costs, net $4,262,348 $3,000,000 $7,262,348 ========== ========== ========== May 31, 2000 ------------ 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 ========== ========== ========== 50 ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS DECEMBER 31 AND MAY 31, 2000 NOTE 11 - 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 reporting periods. There was no oil and gas depletion expense in either period. Presented below is a summary of proved reserves of the Company's oil and gas Properties. Seven months ended December 31, 2000 -------------------------------------- Colombia Total --------- ----------- OIL (BARRELS) Proved reserves: Beginning of year 0 0 Acquisition, exploration and development of minerals in place 0 0 Revisions of previous estimates 0 0 Production 0 0 Sales of minerals in place 0 0 --------- ----------- End of year 0 0 ========== =========== GAS (THOUSANDS OF CUBIC FEET) Proved reserves: Beginning of year 22,150,000 22,150,000 --------- ----------- Acquisition, exploration and Development of minerals in place 0 0 Revisions of previous estimates 0 0 Production 0 0 Sales of mineral in place 0 0 --------- ----------- End of year 22,150,000 22,150,000 ========== =========== Year ended May 31, 2000 ------------------------------- Colombia Total ---------- ---------- OIL (BARRELS) Proved reserves: Beginning of year 0 0 ---------- ---------- Acquisition, exploration and development of minerals in place 0 0 Revisions of previous estimates 0 0 Production 0 0 Sales of minerals in place 0 0 ---------- ---------- End of year 0 0 ========== ========== GAS (THOUSANDS OF CUBIC FEET) Proved reserves: Beginning of year 22,150,000 22,150,000 ---------- ---------- Acquisition, exploration and Development of minerals in place 0 0 Revisions of previous estimates 0 0 Production 0 0 Sales of mineral in place 0 0 ---------- ---------- End of year 22,150,000 22,150,000 ========== ========== 51 ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS DECEMBER 31 AND MAY 31, 2000 NOTE 11 - 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 December 31, 2000 ----------------- Colombia Total ------------ ----------- (US Dollars) Future cash inflows $27,647,500 $27,647,500 Future production costs (8,000,000) (8,000,000) Future development costs (7,500,000) (7,500,000) Future income tax expenses (4,008,675) (4,008,675) ------------ ----------- Future net cash flows 8,138,825 8,138,825 10 percent annual discount for estimated timing of cash flows (4,394,965) (4,394,965) ----------- ---------- Standard measure of discounted Future net cash flows $ 3,743,860 $3,743,860 =========== ========== May 31, 2000 ------------ Colombia Total ------------ ----------- (US Dollars) Future cash inflows $27,647,500 $27,647,500 Future production costs (8,101,084) (8,101,084) Future development costs (7,164,680) (7,164,680) Future income tax expenses (3,714,520) (3,714,520) ------------ ----------- Future net cash flows 8,667,216 8,667,216 10 percent annual discount for estimated timing of cash flows (4,680,296) (4,680,296) ------------ ---------- Standard measure of discounted Future net cash flows $ 3,986,920 $3,986,920 ============ ========== 52 ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS DECEMBER 31 AND MAY 31, 2000 NOTE 11 - 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 the seven months ended December 31, 2000 and the fiscal year ending May 31, 2000: December 31, 2000 United States Colombia Total ---------- ------------ ----------- (US Dollars) Balance at beginning of year $ 0 $ 3,986,920 $ 3,986,920 Acquisitions, discoveries and extension 0 0 0 Sales and transfers of oil and gas produced, net of production costs 0 0 0 Changes in estimated future development costs 0 (335,320) (335,320) 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 0 101,084 101,084 Revisions of previous sales estimates 0 0 0 Accretion of discount 0 285,331 285,331 Net change in income taxes 0 (294,155) (294,155) ---------- ------------ ----------- Balance at end of year $ 0 $ 3,743,860 $ 3,743,860 ========== ============ =========== May 31, 2000 United States Colombia Total ---------- ------------ ----------- (US Dollars) Balance at beginning of year $ 0 $ 3,963,528 $ 3,963,528 Acquisitions, discoveries and extension 0 0 0 Sales and transfers of oil and gas produced, net of production costs 0 0 0 Changes in estimated future development costs 0 0 0 Net changes in prices, net of production costs 0 (95,993) (95,993) Sales of reserves in place 0 0 0 Development costs incurred during the period 0 0 0 Changes in production rates and other 0 (108,539) (108,539) Revisions of previous estimates 0 0 0 Accretion of discount 0 0 0 Net change in income taxes 0 227,924 227,924 ---------- ------------ ----------- Balance at end of year $ 0 $ 3,986,920 $ 3,986,920 ========== ============ =========== 53