10QSB 1 doc1.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 2001. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 000-10056 ADAIR INTERNATIONAL OIL AND GAS, INC. (Exact name of registrant as specified in its charter) Texas 74-2142545 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 3000 Richmond, Suite 100, Houston, TX 77098 (Address of principal executive offices, including zip code) (713) 621-8241 (Registrant's telephone number, including area code) Securities registered under Section 12(b) of the Exchange Act: None Securities registered pursuant to 12(g) of the Exchange Act: Common Stock, no par value The aggregate market value of Common Stock held by non-affiliates of the registrant at August 13, 2001, based upon the last closing price on the OTCBB, was $11,098,877. As of August 13, 2001 there were 85,314,435 shares of Common Stock outstanding. Transitional Small Business Disclosure Format [ ] Yes [X] TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Item 1. Financial Statements. Consolidated Balance Sheets June 30, 2001 and December 31, 2000 . . . . . . . . . . . 3 Consolidated Statements of Operations Six Months Ended June 30, 2001 and May 31, 2000 . . . . . . . 4 Consolidated Statements of Cash Flows Three and Six Months Ended June 30, 2001 and May 31, 2000 . . . 5 Notes to Consolidated Financial Statements . . . . . . . . . 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . 7 PART II - OTHER INFORMATION Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 8 Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . 8 Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . 8 Item 4. Submission of Matters to a Vote of Security Holders . . 8 Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . 8 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 8 SIGNATURES 2
ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 2001 and December 31, 2000 Assets June 30 December 31 2001 2000 ------------- ------------- Current assets: Cash and cash equivalents $ 1,481 $ 30,195 Accounts receivable 35,307 36,100 Prepaid expenses - 13,689 ------------- ------------- Total current assets 36,788 79,984 ------------- ------------- Investments: Securities account - pledged 844,286 ------------- ------------- Property and equipment: Oil and gas properties and equipment under the full cost method of accounting 7,618,908 7,262,348 Furniture and equipment 832,643 289,244 ------------- ------------- 8,451,551 7,551,592 Less accumulated depreciation (178,868) (123,041) ------------- ------------- Net property and equipment 8,272,683 7,428,551 ------------- ------------- Other assets: Geophysical data and intellectual property 1,583,362 1,583,362 Deposits and other assets 13,034 7,456 ------------- ------------- Total other assets 1,596,396 1,590,818 ------------- ------------- $ 10,750,153 $ 9,099,353 ============= ============= Liabilities and Shareholders' Equity Current liabilities: Capitalized leases - current portion $ 34,245 $ 4,868 Accounts payable 733,103 107,042 Accrued expenses 161,000 - Deposits 70,000 - Taxes payable 27,853 8,494 ------------- ------------- Total current liabilities 1,026,201 120,404 ------------- ------------- Long-term debt and capitalized leases -- Less current maturities 341,363 11,332 Commitments and contingencies - - Shareholders' equity: Common stock, without par value 21,670,975 20,142,182 Accumulated deficit (12,288,386) (11,174,565) ------------- ------------- Total shareholder's equity 9,382,589 8,967,617 ------------- ------------- $ 10,750,153 $ 9,099,353 ============= =============
See accompanying notes to consolidated financial statements. 3
ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the three and six months ended June 30, 2001 and May 31, 2000 Three Months Three Months Six Months Six Months Ending Ending Ending Ending June 30, 2001 May 31 2000 June 30, 2001 May 31, 2000 --------------- -------------- --------------- -------------- Revenues: Technical services $ 179,872 $ - $ 353,997 $ - Consulting fees 36,000 62,443 96,000 62,443 Administrative and other fees 1,757 - 3,951 - --------------- -------------- --------------- -------------- 217,629 62,443 453,948 62,443 --------------- -------------- --------------- -------------- Costs and expenses: Depreciation and depletion 30,250 (176) 55,827 8,680 Interest expense 13,783 - 20,109 2,950 General and Administrative 955,194 619,131 1,495,218 1,076,978 --------------- -------------- --------------- -------------- Total costs and expenses 999,227 618,955 1,571,154 1,088,608 -------------------------------- --------------- -------------- --------------- -------------- Net loss from operations (781,598) (556,512) (1,117,206) (1,026,165) Other income (interest) 3,386 - 3,386 - --------------- -------------- --------------- -------------- Net loss before income taxes (778,212) (556,512) (1,113,820) (1,026,165) --------------- Income taxes - - - - --------------- -------------- --------------- -------------- Net income (loss) $ (778,212) $ (556,512) $ (1,113,820) $ (1,026,165) =============== ============== =============== ============== Net loss per common share: Basic and diluted $ (0.01) $ (0.01) $ (0.01) $ (0.02) --------------- -------------- --------------- --------------
See accompanying notes to financial statements. 4
ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the six months ended June 30, 2001 and May 31, 2000 2001 2000 ------------------- ------------------- Cash flows from operating activities: Net income (loss) $ (1,113,820) $ (1,026,165) Adjustments to reconcile net income to net cash used by operating activities: Depreciation 55,827 8,680 Issuance of stock for expenses 177,751 474,859 Changes in assets and liabilities: (Increase) decrease in accounts receivable 793 (24,000) Decrease in prepaid expenses 13,689 - (Increase) in deposits (12,079) Increase in deposits (5,578) Increase in current portion capitalized leases 29,377 Increase in accounts payable 626,061 - Increase in accrued expenses 161,000 Increase in customer deposits 70,000 Increase in payroll taxes payable 19,359 - ------------------- ------------------- Net cash provided-operating activities 1,148,279 447,460 ------------------- ------------------- Net cash used in operating activities 34,459 (578,705) ------------------- ------------------- Cash flows used in investing activities: Investment in oil and gas properties (356,560) Purchase of furniture and equipment (543,400) (304,153) ------------------- ------------------- Net cash provided (used) by investing activities (899,960) (304,153) ------------------- ------------------- Cash flows from financing activities: Purchase of pledged investment account (844,286) Increase in long term debt 330,031 (Decrease) in note payable - (31,767) Common shares issued for cash 1,351,042 902,230 ------------------- ------------------- Net cash provided by financing activities 836,787 870,463 ------------------- ------------------- Net change in cash equivalents (28,714) (12,395) Cash and cash equivalents: Beginning of the period 30,195 27,249 ------------------- ------------------- End of the period $ 1,481 $ 14,854 =================== =================== Supplemental disclosures of cash flow Cash paid during the period for interest $ 13,783 $ 2,950 =================== ===================
See accompanying notes to consolidated financial statements. 5 ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 AND MAY 31, 2000 Note 1. Organization and Business ---------------------------------------- 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 work 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. Note 2. Basis of Presentation ---------------------------------- Basis of Presentation - The accompanying unaudited consolidated financial statements of the Company and its wholly-owned subsidiaries have been prepared in accordance with the instructions and requirements of Form 10-QSB and, therefore, do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. In the opinion of management, such financial statements reflect all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of operations and financial position for the interim periods presented. Operating results and cash flows for the interim periods are not necessarily indicative of the results that may be expected for the full year. These consolidated financial statements should be read in conjunction with the Company's annual report on Form 10-KSB. ITEM 2. 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. 6 ADAIR International Oil & Gas, Inc. and its affiliated companies are a dynamic and growing Energy Company. The Company's business plan strategy is to participate in three sectors of the energy industry, oil and gas exploration and production, power plant development, acquisition, ownership, operation of power generation facilities and sale of electricity. Major power projects and major oil and gas exploration and productions require long term planning and implementation process. The Teayawa Energy Center located on Native American Lands in Southern California is progressing in a timely manner. The major remaining issues are pending final approval by government agencies in Southern California. The final permit approval is scheduled to be around the first (1st) quarter of 2002. The Teayawa Energy Center (TEC) Site Development Agreement, dated November 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 first (1st) quarter, 2002 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. Additionally, the Agreement provides for a royalty payable to the Company on the basis of a sliding scale between three (3%) percent and four (4%) percent 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 twenty (20%) percent 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 may 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. Eighteen (18) additional Native American sites have been identified and have been under assessment and the company is evolving it's site development strategy to include securing the necessary permits required to greatly enhance the valve of it's sites. Adair Power, LLC. is a wholly owned subsidiary of Adair International Oil & Gas, Inc. (AIGI) and is currently reviewing a development Loan Agreement to fund the development of the eighteen (18) natural gas fired powered plant sites located within the Continental United States which will lead to a potential growth of the company in the energy sector of the US market. Adair Yemen Exploration, Ltd. a wholly owned subsidiary of AIGI owns a 30% working interest in Block 20, Republic of Yemen. We have designed an aggressive exploration work program, which currently is the largest 3D seismic program in Yemen (approximately 545 square kilometers), and drilling of six (6) exploratory wells. Fifty (50%) percent of the 3D seismic program have been completed by Western Geco and we are targeting our first well to be drilled in the first (1st) quarter of 2002. The contractor group working interests in the block are ADAIR thirty (30%) percent, OCCIDENTAL fifty (50%) percent and SABA twenty (20%) percent. The working interests as a group are subject to a five (5%) percent-carried interest held by YEMEN Company for Investments in Oil and Minerals (YICOM) in the concession area. On February 13, 2001 we announced the formation of SUPERIOR GEOPHYSICAL, INC. SUPERIOR is an international and domestic oil and gas exploration service company, engaged primarily to manage, design, acquire and process 2D and 3D seismic data. Superior Geophysical, 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, acquiring and processing of 2D and 3D seismic data projects around the world. Superior's clientele consist of major oil companies and large to small independent oil and gas exploration companies. CHASE Bank of Texas, provided the financing to ADAIR for SUPERIOR. For the third (3rd) quarter of 2002 SUPERIOR Geophysical is projected to show positive revenue. On June 22, 2001 we announced the appointment of Mr. Peter H. Wilkinson to ADAIR'S advisory board. Mr. Wilkinson will be instrumental in the Company's growth while acting as a Consulting Geologist and Project Leader both domestically and internationally. He will be especially instrumental in ADAIR'S Block 20, Republic of Yemen Operations in which ADAIR currently owns a thirty (30%) percent working interest. Mr. Wilkinson graduated with a Masters Degree in Geology in 1983 from the University of Georgia after receiving a Bachelors Degree in Geology in 1980 from the State University of New York (SUNY). Mr. Wilkinson has eighteen (18) years experience with TEXACO as a Petroleum Geologist in varied exploration and production assignments in the world and Yemen. On July 2, 2001, we announced the formation of ADAIR Engineering and Construction, Inc. (a wholly owned subsidiary of ADAIR International Oil & Gas, Inc.). ADAIR is in a joint venture with ARKEL Sugar, Inc. to develop a co-generation/sugar refinery in the Aden Free Port Zone, Republic of Yemen. ADAIR/ARKEL are scheduled to construct the plant as well as other co-generation sites currently under development with ARKEL allowing ADAIR to expand and form the engineering and construction subsidiary. In addition, Mr. Richard E. Heien has joined ADAIR as President of Adair Power, LLC. Mr. Heien, is an engineer by education with over 30 years of Senior Management experience. He previously served as the Chief Executive Officer of Northern Engineering and Vice President of ENRON Engineering and Construction. He has participated in the development and construction of 5,500 Megawatt (MW) of independent power projects. He brings tremendous expertise and experience as ADAIR goes forward in developing its power projects. He has also developed approximately $800 million of oil and gas third party contracts. ADAIR also utilizes PACE Energy Services as a Consultant for natural gas fired power development. 7 On July 10, 2001, ADAIR announced the establishment of the YEMEN Sugar Company (YSC) which will construct and own a sugar refinery/co-generation plant in Yemen. ADAIR signed a memorandum of understanding with ARKEL and FAHEM & Company which provides that ADAIR will own 50%, ARKEL will own 10%, and FAHEM & CO will own 40% of YSC. The agreement states that ADAIR & ARKEL will provide project loan financing through the International Financing Corporation (IFC) which is part of the World Bank. Overseas Private Investment Bank Corporation (OPIC), Arab Trade Bank, UAE and JP Morgan Chase have the Loan Investment proposal which is under review by all parties. The local partners will provide equity financing for the project. Additionally, YSC will award the EPC contract to Adair/Arkel Construction & Management Company to perform Engineering, Procurement and Construction of the project. YSC will also award the Operations and Management Contract to Adair/Arkel Construction & Management Company to provide operations management services to YSC after completion of the EPC. To expedite the successful completion of the project, the Aden Free Zone has agreed to provide local engineering assistance at no cost so that Adair/Arkel can have their expert engineers on the project site by September 1, 2001. The Plant is now projected to have a construction cost of approximately $71 Million USD and to be completed in eighteen months from the start of construction. ARKEL is an internationally known and world-renown engineering and construction company that has built co-generation facilities combining power generation with sugar refineries. ARKEL has constructed a large number of plants in Egypt, Kenya, Ivory Coast, and Sudan as well as in Texas, Florida and elsewhere within the United States. The project has been submitted to and reviewed by the Export-Import Bank of the United States in addition to the IFC, OPIC, Arab Trade Bank, UAE and JP Morgan Chase. The feasibility study prepared by ARKEL for ADAIR, shows that 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 $1,628,008 USD after repaying the working capital loan plus interest of $3,887,897 USD. The following year net cash flow increases from approximately $6 Million USD to $15 Million USD after retirement of debt. Power projects and major exploration programs are, by nature, long term, and require time and capital to develop in the same manner that projects and major industry partners were brought to the Company in the year 2000. Management has been vigorously positioning itself to acquire the financing to execute the total business plan. We are confident that the rest of the year 2001 and 2002 will see the acquisition of all elements to attain the company's goals, including the acquisition of domestic cash producing oil and gas properties with upside infield drilling potential. RESULTS OF OPERATIONS The following summary of the Company's financial position and results of operations should be read in conjunction with the condensed consolidated financial statements, the notes to condensed consolidated financial statements, and the Company's audited financial statements for the period ended December 31, 2000, included in the 10-KSB. Comparison of the six months ending June 30, 2001 and May 31, 2000 Revenues. In the current six month period, revenues increased $453,948 over the same period in the comparable period during the previous year. 8 Depreciation. Depreciation expense increased from $8,680 in the prior year six month period to $55,827 in the same period of 2001. The increase was attributable to the acquisition of additional assets of two subsidiaries and their related asset carrying values. Interest Expense. The Company incurred $20,109 in interest expense in the current reporting period compared with $2,950 in the comparable period of the prior year. The increase, totaling $17,159, is a result of the capitalization of leases and other financing relating to the newly formed Superior Geophysical, Inc. which incurred $14,327 of current year interest expense. General and administrative Expenses. The Company experienced an increase in general and administrative expenses during the comparable six-month periods from $1,076,978 to $1,495,218, an increase of $418,240. This increase is largely attributable to the addition of Superior Geophysical, Inc. which had $244,070 in start up cost, general and administrative expenses, exclusive of interest and depreciation. The balance of the increase was due to the addition of personnel developing existing and new projects. The net loss of $1,113,820 or $0.01 per share on revenues of $453,948 for the six months ended June 30, 2001 was approximately the same as the $1,026,653 or $0.02 per shares on $62,443 in revenues in the comparable period in 2000. 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 the next year. However, there can be no assurance that these sources of cash will cover those requirements. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Steven R. Hill v. Adair International Oil & Gas, Inc. The Company was named as a defendant in the matter of Steven R. Hill v. Adair International Oil & 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 $13,942.00 attorney's fees, pre-judgement and post-judgement 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 plaintiff's claims and that the likelihood of an unfavorable outcome is low. The Company intends to present a vigourous and aggressive defense to this litigation. Occidental Yemen Sabtain, Inc. and Saba Yemen Oil Company v. Adair Yemen Exploration, Ltd. Adair Yemen Exploration, Ltd. (a wholly owned subsidiary of the company), was named as the Respondent in the matter of Occidental Yemen Sabatain, Inc. ('OXY") and Saba Yemen Oil Company Ltd. ("SABA") v. Adair Yemen Exploration, Ltd. ("AYEL") in a Request for Arbitration filed with the International Chamber of Commerce in Paris, France on July 10, 2001. The Claimants, OXY and SABA, are claiming that AYEL breached various agreements to which OXY, SABA and AYEL are parties. AYEL's Response is due September 24, 2001. When it files its Response, AYEL and the Company intend to present a vigorous defense and present counter-claims against OXY and SABA for their breaches of the agreements in 9 dispute. Additionally, the Company and AYEL anticipate raising cross-claims against the Ministry of Oil and Mineral Resources ("MOMR") for its various violations of Yemen Law and agreements between AYEL and The Ministry. Although the arbitration is in a preliminary stage, the Company believes that AYEL has viable defense to the Claimants's claims, that the likelihood of an unfavorable outcome is low and that AYEL may obtain damages for Claimant's and the Ministry's violations of AYEL's legal and contractual rights. ITEM 2. CHANGES IN SECURITIES During the current quarter 205,273 shares were issued in lieu of cash for salaries and other expenses totaling $49,250. In addition, 3,967,454 shares were issued for cash totaling $848,040. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The regular annual meeting of shareholders was held on June 15, 2001, at which time the following persons were elected directors: Mr. Richard G. Boyce resigned at the shareholder's meeting of June 15, 2001. Name Votes for ---- ---------- ------ John W. Adair 56,879,519 96.71% Jalal Alghani 56,786,685 96.55% Richard G. Boyce 46,615,198 79.25% At the same annual meeting a proposal to amend the Company's restated Certificate of Incorporation to increase the authorized number of shares of common Stock to 50,000,000 shares was approved. The vote was 51,308,220 for the proposal with the shares representing 87.23% of the total affirmative vote of the majority shares of Common stock, present in person or represented by proxy, entitled to vote. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K None. (B) REPORTS ON FORM 8-K None. 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 August 20, 2001. ADAIR INTERNATIONAL OIL AND GAS, INC. /s/ Jalal Alghani ------------------------------ Jalal Alghani Chief Financial Officer 10