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 MARCH 31, 2002. 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 May 10, 2002, based upon the last closing price on the OTCBB, was $2,677,883. As of May 10, 2002, there were 133,894,131 shares of Common Stock outstanding. Transitional Small Business Disclosure Format: [ ] Yes [X] No ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES TABLE OF CONTENTS MARCH 31, 2002 PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements. Consolidated Balance Sheets March 31, 2002 (unaudited) and December 31, 2001 . . . . . 2 Consolidated Statements of Operations (unaudited) Three months ended March 31, 2002 and 2001 . . . . . . . . 3 Consolidated Statement of Changes in Shareholders' Equity Three months ended March 31, 2002 (unaudited). . . . . . . 4 Consolidated Statements of Cash Flows (unaudited) Three months ended March 31, 2002 and 2001 . . . . . . . . 5 Notes to Consolidated Financial Statements (unaudited) . . 6 - 11 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . 12 to 15 PART II - OTHER INFORMATION ITEM 1. through ITEM 6 . . . . . . . . . . . . . . . . . . . . . . 15 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 1
PART I - FINANCIAL INFORMATION Adair International Oil & Gas, Inc. and Subsidiaries Consolidated Balance Sheets March 31, 2002 and December 31, 2001 2002 2001 ------------- ------------- ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 12,960 $ 5,103 Accounts receivable 2,000,000 2,000,000 Other current assets 175,000 25,000 ------------- ------------- Total currents assets 2,187,960 2,030,103 Investment - letter of credit deposit 858,849 855,786 Property and equipment: Oil and gas properties and equipment 7,794,444 7,794,444 Furniture and equipment 997,981 997,981 ------------- ------------- 8,792,425 8,792,425 Less accumulated depreciation (309,147) (269,147) ------------- ------------- Net property and equipment 8,483,278 8,523,278 Geophysical data & intellectual property 1,578,208 1,578,208 ------------- ------------- $ 13,108,295 $ 12,987,375 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 427,286 $ 522,256 Current portion of notes payable 55,000 55,000 Current portion of capital leases 200,000 203,429 Unearned revenue 2,000,000 2,000,000 Taxes payable 168,610 80,539 ------------- ------------- Current liabilities 2,850,896 2,861,224 Notes payable 377,211 394,608 Shareholders' equity: Common stock, without par 24,306,840 23,548,859 Accumulated deficit (14,426,652) (13,817,316) ------------- ------------- Total shareholders' equity 9,880,188 9,731,543 ------------- ------------- $ 13,108,295 $ 12,987,375 ============= =============
See accompanying notes to consolidated financial statements. 2
Adair International Oil & Gas, Inc. and Subsidiaries Consolidated Statements of Operations Three Months Ended March 31, 2002 and 2001 (Unaudited) 2002 2001 ----------- ----------- Revenues: Technical services $ - $ 174,125 Consulting fees and other revenue - 62,194 ----------- ----------- - 236,319 Costs and expenses: General and administrative - General and administrative 353,436 540,024 Salaries and wages paid in stock 187,667 - Other expenses paid in stock 27,923 - Depreciation and depletion 40,000 25,577 Interest expense 8,392 6,326 ----------- ----------- 617,418 571,927 Interest and other income 8,082 - ------------ ----------- Net loss $ (609,336) $ (335,608) ------------ ----------- Net loss per share: Basic and diluted $ ( 0.01) $ ( 0.00) See accompanying notes to consolidated financial statements. 3
Adair International Oil & Gas, Inc. and Subsidiaries Consolidated Statement of Changes in Shareholders' Equity Three months ended March 31, 2002 (Unaudited) Common Stock Accumulated Shares Amount Deficit Total ----------- ----------- -------------- ------------- December 31, 2001 97,080,295 $23,548,859 $ (13,817,316) $ 9,731,543 Issuances of shares: For cash 16,222,707 542,391 - 542,391 For salaries 5,553,594 187,667 - 187,667 Other Company obligations 558,086 27,923 - 27,923 Net loss - - (609,336) (609,336) ----------- ----------- -------------- ------------ March 31, 2002 119,414,682 $24,306,840 $ (14,426,652) $ 9,880,188
See accompanying notes to consolidated financial statements. 4
Adair International Oil & Gas, Inc. and Subsidiaries Consolidated Statements of Cash Flows Three Months ended March 31, 2002 and 2001 (Unaudited) 2002 2001 ------------ ---------- Cash flows from operating activities: Net loss $ (609,336) $(335,608) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and depletion 40,000 25,577 Issuance of stock for expenses 215,590 175,701 Changes in working capital accounts: Accounts payable (94,970) - Taxes payable 88,071 - Other (153,063) 309,516 ------------ ---------- Total adjustments 95,628 510,794 ------------ ---------- Net cash (used in) provided by operating activities (513,708) 175,186 Cash flows from investing activities: Purchase of oil and gas property - (251,711) Cash flows from financing activities: Common shares issued for cash 538,962 - Borrowings under note and credit agreements (17,397) 46,330 ------------ ---------- Net cash provided by financing activities 521,565 46,330 ------------ ---------- Net change in cash and cash equivalents 7,857 (30,195) Cash and cash equivalents: Beginning of the period 5,103 30,195 ------------ ---------- End of period $ 12,960 $ - ------------ ----------
See accompanying notes to consolidated financial statements. 5 ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements March 31, 2002 Note 1. Summary of Significant Accounting Policies ---------------------------------------------------- Basis of Presentation -- Adair International Oil and Gas, Inc., ("the Company") was incorporated under the laws of the state of Texas on November 7, 1980. The consolidated financial statements include the accounts of Adair International Oil and Gas, Inc. and its wholly owned subsidiaries, Adair Exploration, Inc., Adair Yemen Exploration Limited, Superior Geophysical Inc, and Adair Colombia Oil and Gas, S.A. ("The Company"). All intercompany balances and transactions have been eliminated, as necessary, in consolidation. 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 deducted from the capitalized costs to be amortized, and recorded in an impairment expense In addition, capitalized costs are subject to a "ceiling test" which 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 / office equipment - 7 years; Computer software / equipment 5 - years. Depreciation and amortization expense for the quarter ended March 31, 2002 and 2001 was $40,000 and $25,577, respectively. 6 ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements March 31, 2002 Note 1. Summary of Significant Accounting Policies (continued): Geophysical data and intellectual property - The carrying value of the geophysical data and intellectual property acquired in the acquisition of Partners In Exploration, as described in Note 2 below. 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 carry-forward. Earnings Per Share -- Basic earnings per share are computed by dividing earnings (loss) by the weighted average number of common shares outstanding adjusted for conversion of common stock equivalents, where applicable, outstanding during the period. The Company had no stock options or other common stock equivalents outstanding as of March 31, 2002 or for the period then ended. 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 estimates. NOTE 2. Oil and Gas Properties ---------------------------------- Yemen - The Company's interest in the Republic of Yemen consist of an interest in Sabatain Block 20. Adair Yemen was designated as the original operator for the contractor group. The initial work program will focus on acquiring the 3D seismic data. This new technology has greatly improved the probability of success for drilling and reservoir mapping. Existing pipelines and production infrastructure will be utilized to allow for early production exports and timely cash flow. Columbia - At March 31, 2002, the Company's Chimichagua gas field contained proven non-producing gas reserves as described in the Note titled, "Supplemental Oil and Gas Disclosures." This prospect has a cost basis of $3,000,000 and was purchased in fiscal 1997 by issuing 6,000,000 common shares valued at $0.50 per share. 7 ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements March 31, 2002 NOTE 2. Oil and Gas Properties (continued): The Company has identified several options for the Columbia investment. One option involves Adair supplying gas to fuel a power plant providing revenues under a long-term gas purchase contract. Realization of the value of reserves is contingent upon the Company concluding an agreement to construct a power plant utilizing gas from the field. Another option involves selling the Company's interest in Columbia for cash, trade or other consideration. NOTE 3. Non-monetary Stock Transactions ------------------------------------------- Included in the Company's consolidated statement of operations for the periods ended March 31, 2002 and 2001, were expenses that were paid with Company stock. Stock issued in lieu of cash is summarized as follows for the periods ended March 31, 2002 and 2001: Nature of transaction 2002 2001 ---------------------- --------------------- Shares Amount Shares Amount ---------- ---------- ---------- --------- Salaries 5,553,594 $ 187,667 925,508 $ 352,167 Other costs and expenses 558,086 27,923 - - ----------- ----------- ---------- ------- 6,111,680 $ 215,590 925,508 $ 175,701 =========== =========== ========== ========= NOTE 4. 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. 8 ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements March 31, 2002 NOTE 4. Commitments and Contingencies (continued): 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. The PSA requires a basic work program in the amount of $8,300,000 to be secured by an irrevocable letter of credit with the MOMR within 30 days of the effective date. 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 in the process of arranging for its portion of the total work program commitment and the officers Adair and Alghani have pledged shares of stock as partial collateral to date. 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 100,000barrels 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. Under the terms of the Participation Agreement signed by the Parties, Adair Yemen is to receive a prospect bonus of $750,000 from Occidental within ten days of the effective date. 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: ------------------ The Company is a party to various claims and litigation. Although no assurances can be given, the Company believes, based on its experience to date, that the ultimate resolution of such items, individually or in the aggregate, will not have a material adverse impact on the Company's financial position or results of operations. 9 ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements March 31, 2002 NOTE 4. Commitments and Contingencies (continued): Steven R. Hill V. Adair International Oil and Gas, Inc - The Company was named as a defendant in the matter of Steven R. Hill v. Adair International Oil and Gas, Inc., 200-12086. 129th Judicial District Court, Harris County, Texas. This lawsuit has been settled on confidential terms. Pace Global Energy Services, LLC v. Adair International Oil & Gas, Inc., Cause No. 02-133-A, United States District Court, Eastern District of Virginia, Alexandria, Virginia. In February 2002, Pace Global sued Adair International Oil & Gas, Inc. in Federal District Court in the Eastern District of Virginia. Adair International Oil and Gas has settled its contractual dispute with Pace Global, LLC by agreeing to pay Place Global, LLC for services previously rendered on the basis of a monthly payment plan. As part of the resolution of their dispute, Pace Global has agreed to assist Adair International in any negotiations with Calpine regarding the Teayawa project. Adair Exploration, Inc. and Adair Yemen Exploration, Ltd. v. Occidental Oil and Gas Corporation, Richard G. Boyce, Gene L. Ackerman, and David C. Crandall. Adair's wholly owned subsidiaries, Adair Exploration, Inc. (``AEI'') and Adair Yemen Exploration, Limited (``AYEL'') filed a lawsuit in a Texas State District Court in Houston, Texas against Occidental Oil and Gas Corporation (``Occidental''), and several former employees: Richard G. Boyce, Gene L. Ackerman, and David C. Crandall. The lawsuit alleges that breaches of fiduciary duties and usurpation of corporate opportunities as well as other civil wrongs were committed by the former employees. Additionally, Occidental allegedly conspired with them to harm AEI and AYEL. The former employees were involved in AYEL's participation in an extremely valuable oil and gas concession known as Block 20 in the Republic of Yemen, consisting of the right and obligation to explore and develop oil and gas in some 500,000 acres. The concession has the potential for discovery and production of hundreds of millions of barrels of oil. A different Occidental subsidiary has initiated an arbitration in Paris, France regarding Block 20. The lawsuit alleges that the former employees attempted to take advantage of opportunities for their own benefit in Yemen instead of for the benefit of the Company as they should have been doing. Additionally, the lawsuit alleges that Occidental and some of the former employees interfered with AYEL's and AEI's business relationships with its contractors and employees. The lawsuit claims damages in the hundreds of millions of dollars. This lawsuit was removed to Federal Court in the Southern District of Texas by defendants and has been stayed pending the outcome of the arbitration proceedings discussed below. 10 ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements March 31, 2002 NOTE 4. Commitments and Contingencies (continued): 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 responded to the Request for Arbitration and presented a vigorous defense and presented counter-claims against OXY and SABA for their breaches of the agreements in 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 defenses 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. Briar Patch Partners, Ltd. v. Adair International Oil & Gas, Inc., Adair Exploration, Inc., Partners In Exploration, Inc., Partners In Exploration, L.L.C., and Richard G. Boyce The Company was named as a defendant in the matter of Briar Patch Partners, Ltd. v. Adair International Oil & Gas, Inc., Adair Exploration, Inc., Partners In Exploration, Inc., Partners In Exploration, L.L.C., and Richard G. Boyce, CAUSE NO. 01-06351, 95th Judicial District Court, Dallas County, Texas. The landlord holding the lease on the property where Adair Exploration, Inc. was formerly located has filed a lawsuit against the Company regarding the failure of the lessee, PIE and Mr. Boyce, to pay the rent as well as other related claims. The Company is not the lessee and never agreed to assume the lease and is not liable for any rentals now due. The Company is vigorously defending this lawsuit and anticipates that its defenses to this lawsuit shall ultimately prevail. Adair International Oil & Gas, Inc. v. Richard G. Boyce and Larry Swift. The Company filed a lawsuit against Messrs. Boyce and Swift in the 55th Judicial District Court in Harris County, Texas, Cause No. 2001-63909. The Company sued Messrs. Boyce and Swift for defamation, tortious interference, conversion, breach of fiduciary duty and conspiracy. Messrs. Boyce and Swift have filed answers denying the Company's allegations. Mr. Boyce filed a counterclaim claiming defamation by the Company against Mr. Boyce. The Company believes that these individuals have improperly damaged the Company in its relationships with its shareholders, its customers, its business partners, and with the public generally. Although the lawsuit is in a preliminary stage, the Company believes that the likelihood of an unfavorable outcome is low and that it may obtain damages from Messrs. Boyce and Swift. 3000 Richmond Limited Partnership v. Superior Geophysical, Inc. - Adair International Oil & Gas, Inc., John W. Adair, Jalal Alghani, Bill Wiseman, and Gary Tolar, Cause No. 2002-15641, in the 333rd Judicial District Court in Harris County, Texas. Superior's landlord, 3000 Richmond Limited Partnership sued Superior and AIGI as co-tenants for breach of the lease agreement and for back rent owed on Superior's leasehold. The amount owed in back rent is currently less than $50,000.00. AIGI is optimistic that it will be able to reach an amicable settlement of this dispute. The Company's operations expose it to various potential legal risks. 11 ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES March 31, 2002 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. They are based on assumptions and estimates, which the Company believes are Reasonable. However, actual results could differ materially from anticipated results. Important factors that may impact 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. Adair International Oil & Gas, Inc. and its affiliated companies ("the Company") are a dynamic and growing energy company. The Company's business plan strategy is to participate in three sectors of the energy industry: 1) Oil and gas exploration and production, 2) power plant development, acquisition, ownership, operation of power generation facilities, and 3) sale of electricity. GENERAL The Company and Calpine Corporation of San Jose, California signed a development agreement in July 1999. The development agreement was with respect to a site located on the Torres Martinez Indian reservation near Palm Springs, California. 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 anticipated to begin in 2003 with commercial operations projected to start in 2004. 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. 12 ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES March 31, 2002 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS (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. The 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 quarter one, 2003, and $500,000 upon the commercial operation date estimated to occur in quarter three, 2003. 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. Current economic models project annual royalties of from $1,100,000 to $1,800,000 per year from commercial operation. These models are based on assumptions and estimates, which the Company believes are reasonable. However, actual results could differ materially from anticipated results. 13 ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES March 31, 2002 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS (continued): 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. In addition, the Company has identified eighteen other sites on Native American lands throughout the United States for potential development agreements. RESULTS OF OPERATIONS The following summary of the Company's financial position and results of operations should be read in conjunction with the interim consolidated financial statements included herein and the Company's audited financial statements for the period ended December 31, 2001, included in the Company's 2001 annual report on Form 10-KSB. COMPARISION OF THREE MONTHS ENDED MARCH 31, 2002 and 2001: For the three months ended March 31, 2002, no revenue was recorded. This compares to revenue of $236,319 for the quarter ended March 31, 2001, an decrease of $236,569. This decrease is primarily the result non-recurring revenues in 2001 for technical fees earned by the Company's geophysical subsidiary as well as revenues from the Company's equipment sales division. For the three months ended March 31, 2002, general and administrative expenses were $353,436 compared to $540,024 for the quarter ended March 31, 2001, a decrease of $186,588. This decrease is primarily the result of closing the Company's Dallas office in June 2001, closing the Company's Superior Geophysical operations in September 2001. These decreases were offset by an increase in legal expenses incurred by the Company in 2002 versus 2001. 14 ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES March 31, 2002 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS (continued): LIQUIDITY AND CAPITAL RESOURCES The Company expects that its existing cash reserves, cash flows from operations, partial project farm-ins, 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. At March 31, 2002 and December 31, 2001, the Company had a working capital deficit and has depended on investing activities involving the sale of its common stock to obtain working capital. There are no assurances, however, that the Company can raise the necessary capital to enable it to continue the execution of its growth strategy or generate sufficient revenue growth and improvements in working capital. 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. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Reference is made to the footnotes to Company's financial statements included in Part I of this report on Form 10-QSB. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K None. 15 ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES FORM 10-QSB MARCH 31, 2002 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 May 15, 2002. ADAIR INTERNATIONAL OIL AND GAS, INC. /s/ John W. Adair ------------------------------ John W. Adair Chief Executive Officer 16