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, 2003.

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 of incorporation or organization)
(IRS Employer Identification No.


2425 Fountainview, Suite 215, Houston, TX 77057
(Address of principal executive offices, including zip code)

(713) 977-4662
(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 June 30, 2003, based upon the last closing price on the OTCBB on June 30, 2003, was $1,500,000. As of June 30, 2003, there were 150,000,000 shares of Common stock and 1,571,282 shares of Preferred stock outstanding. The total number of Common shares authorized for the Corporation is 150,000,000. The total number of Preferred shares authorized for the Corporation is 5,000,000.
Transitional Small Business Disclosure Format: [ ] Yes [X] No


ADAIR INTERNATIONAL OIL AND GAS, INC.
AND SUBSIDIARIES

TABLE OF CONTENTS
JUNE 30, 2003

PART I - FINANCIAL INFORMATION  

ITEM 1. Financial Statements.

Consolidated Balance Sheets - June 30, 2003 (Unaudited) and December 31, 2002 (Restated)

2

 

Consolidated Statements of Operations (Unaudited) - Three and Six Months Ended June 30, 2003 and 2002

3

 

Consolidated Statement of Changes in Shareholders' Equity (Unaudited) - Six Months Ended June 30, 2003

4

 

Consolidated Statements of Cash Flows (Unaudited) - Six Months Ended June 30, 2003 and 2002

5

 

Notes to Consolidated Financial Statements (Unaudited)

6 - 11
 
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
12 - 15

ITEM 3. Controls and Procedures

 

15
PART II - OTHER INFORMATION

ITEM 1 through ITEM 6

16 - 19
 
CERTIFICATIONS & SIGNATURES
20 - 22
 
 
 
 

 

1


PART I - FINANCIAL INFORMATION

Adair International Oil & Gas, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, 2003 Compared to December 31, 2002

 
06/30/2003
12/31/2002
ASSETS (Unaudited)
RESTATED
Current Assets

Cash and Cash Equivalents

$ 48
$ 251

Accounts Receivable

527,080
527,080

Other Current Assets

25,000
25,000
Prepaid Expenses
1,648,285
1,628,215
Total Current Assets
2,200,413
2,180,546
Investments

Letter of Credit Deposit

870,466
867,094
Property and Equipment

Oil and Gas Properties and Equipment

-
4,368,377

Furniture and Equipment

-
-
Total Property and Equipment
-
4,368,377

Less Accumulated Depreciation

-
-
Net Property and Equipment
-
4,368,377
Total Assets
$3,070,879
$7,416,017
 
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities

Accounts Payable

$ 2,071,681
$ 2,592,494
Joint Venture Cash Calls Payable
-
2,321,441
Yemen Block 20 Judgment
4,455,653
-

Current Portion of Notes Payable

425,886
425,886

Current Portion of Capital Leases

-
-

Unearned Revenue

2,000,000
2,000,000
Accrued Expenses
460,281
64,262

Taxes Payable

160,501
160,501
Total Current Liabilities
9,574,002
7,564,584
Shareholders Equity

Common Stock No Par Value: 150,000,000 shares authorized

150,000,000 shares outstanding at June 30, 2003
33,228,461
33,228,461
Preferred Stock: 5,000,000 shares authorized,
   
1,571,282 shares outstanding at June 30, 2003
1,571,282
-

Accumulated Deficit

(41,302,866)
(33,377,029)
Total Shareholder's Equity
(6,503,123)
(148,568)
Total Liablilities and Shareholder's Equity
$ 3,070,879
$ 7,416,017

See accompanying notes to consolidated financial statements.

2


Adair International Oil & Gas, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Three and Six Months Ended June 30, 2003 and 2002.
(Unaudited)


 
Three Months
Three Months
Six Months
Six Months
 
Ending
Ending
Ending
Ending
 

06/30/2003

06/30/2002
06/30/2003
06/30/2002
Revenues  
Oil & Gas Royalties
 
-
$ 499
-

Technical Services

 
-
-
-

Consulting Fees and Other

$ 20,000
-
40,000
-

Administrative and Other Fees

 
-
-
-
Total Revenues
20,000
-
40,499
-
   
Costs and Expenses  

General and Administrative

44,296
$ 440,409
91,631
$ 793,845

Salaries and Wages Paid in Stock

22,500
-
45,000
187,667

Other Expenses Paid in Stock

 
-
-
27,923
Yemen Block 20 Judgment (Exp Portion)
2,134,212
-
2,134,212
 
Impairment Loss on Assets
4,368,377
-
4,368,377
 

Depreciation and Depletion

 
40,000
-
80,000

Interest Expense

369,080
4,218
396,019
12,610

Other

 
-
-
-
Total Costs and Expenses
6,919,004
484,627
6,990,239
1,102,045
Other Income and Expenses  
Interest and Other Income
1,536
2,977
3,372
11,059
Other Expense (Preferred Shares Issued)
(956,969)
-
(934,469)
-
Net Income (Loss)
$ (7,869,437)
$ (481,650)
$ (7,925,837)
$ (1,090,985)
Net Loss Per Common Share:  

Basic and Diluted

$ (0.05)
$ (0.0032)
$ (0.05)
$ (0.01)
   
   
   

See accompanying notes to consolidated financial statements.

3


Adair International Oil & Gas, Inc. and Subsidiaries
Consolidated Statement of Changes in Shareholders' Equity
Six Months Ended June 30, 2003
(Unaudited)


  Preferred Shares Stock $ Amount
Common Shares
Stock $ Amount
Accumulated Deficit
Total
Issuances of Shares    

March 31, 2003

   
150,000,000
$33,228,461
$ (33,425,928)
$ (197,467)

Preferred Shares Issued Pursuant to

   
-
-
-
-
Previous Approval by the Board of Directors;
   
-
-
-
-
Authorization Received June 2003.
1,571,282
$ 1,571,282
-
-
-
1,571,282
Net Loss    
(11,637,676)
(11,637,676)
June 30, 2003
1,571,282
$ 1,571,282
150,000,000
$33,228,461
$ (45,063,604)
$ (10,263,861)

See accompanying notes to consolidated financial statements.

4


Adair International Oil & Gas, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2003 and 2002
(Unaudited)

Cash Fows from Operating Activity
06/30/2003
06/30/2002
Net Income (Loss)
$ (7,925,837)
$ (1,090,985)
Adjustments to Reconcile Net Loss to Net Cash

Depreciation and Depletion

-
80,000
Issuance of Stock for Salaries
 

Issuance of Stock for Expenses

1,488,782
215,590

Impairment Loss on Assets

4,368,377
-
Yemen Block 20 Judgment
4,455,653
 
Changes in Working Capital Accounts
82,500

Decrease in Accounts Receivable

-

Prepaid Expenses

(20,070)

Decrease in Current Portion of Capitalized Leases

-
Accounts Payable
(520,813)
77,707
Joint Venture Cash Calls
(2,321,441)
 
Accrued Expenses
396,018
 

Taxes Payable

-
106,616

Other

-
(173,157)

Total Adjustments

7,929,006
306,756

Net Cash Provided (Used) by Operating Account

3,169
(784,229)
     
Cash Flows Used in Investing Activities

Investment in Oil and Gas Properties

-

Purchase of Furniture and Equipment

-
-

Net Cas Provided (Used) by Investing Activities

-
-
Cash Flows from Financing Activities

Pledged Investment Account

(3,372)
-

Common Shares Issued for Cash

-
776,462

Accelerated Leases

-
-

Borrowings under Note and Credit Agreement

-
(17,397)
Net Cash Used by Financing Activities
(3,372)
759,065
Net Change in Cash and Cash Equivalents
(203)
(25,164)
Cash and Cash Equivalents

Beginning of the Period

(251)
12,960

End of the Period

48
(12,204)


See accompanying notes to consolidated financial statements.

5


ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements June 30, 2003


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 Stock Transfer, Inc., and Adair Colombia Oil and Gas, S.A. ("The Company") All material inter-Company 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, the 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.

No depreciation and amortization was expensed for the year ending December 31, 2002 due to a loss incurred from the abandonment of property and equipment during the year.

Long-Lived Assets -- Statement of Financial Accounting Standards No. 121 "Accounting for Impairment of Long-Lived Assets to be "Disposed Of " requires, among other things, impairment loss of assets to be held and gains or losses from assets that are expected to be disposed of be included as a component of income from continuing operations before taxes on income.

An impairment loss was recognized on its holdings of oil and gas properties in the amount $4,368,377.

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 December 31, 2002 or for the year 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 those estimates.

6


ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements June 30, 2003


NOTE 1. Summary of Significant Accounting Policies (cont.)

Impairment of Long-Lived Assets -- The Company follows SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets" for the fiscal year ended December 31, 2002. The Statement requires that an impairment loss be recognized when the carrying value of long lived assets (asset group) exceeds its fair value for long-lived assets, liabilities and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events of changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Under SFAS No 144, the Company considered long-lived assets consisting primarily of oil and gas leases and geophysical data. The assets not covered by SFAS 144 that are included in an asset group are adjusted in accordance with other applicable accounting standards prior to testing the asset group for recoverability. The recoverability of long-lived assets is evaluated at the operating unit level by an analysis of operating results and consideration of other significant events or changes in the business environment. If an operating unit has indications of impairment, such as current operating losses, the Company will evaluate whether impairment exists on the basis of undiscounted expected future cash flows from operations before interest for the remaining amortization period. If impairment exists, the carrying amount of the long-lived assets is reduced to its estimated fair value.

In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of", and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations for a Disposal of a Segment of a Business". The Company was required to adopt SFAS 144 in the first quarter of 2002 and the Company does not expect the adoption of SFAS 144 to have a material effect on the Company's financial statements. The asset groups not covered by SFAS 144 that are included in an asset group are adjusted in accordance with other applicable accounting standards prior to testing the asset group for recoverability. The Company has categorized all of its long-lived assets as being held and used and not to be sold. During the year ended December 31, 2002, the Company recognized an impairment loss of $4,368,377 relating to Yemen Block 20.

Recent Accounting Pronouncements -- In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Company does not expect that there will be a material impact from the adoption of SFAS No. 143 on its financial position, results of operations, or cash flows.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. It supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of", and the accounting and reporting provisions of Accounting Principles Board Statement ("APB") 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for the disposal of a segment of a business. The Company is required to adopt SFAS No. 144 on October 1, 2002. The Company does not expect that the adoption of SFAS No. 144 will have a material effect on its financial position, results of operations or cash flows.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections". SFAS No. 145 requires the classification of gains and losses from extinguishments of debt as extraordinary items only if they meet certain criteria for such classification in APB No. 30, "Reporting the Results of Operations, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring Events and Transactions". Any gain or loss on extinguishments of debt classified as an extraordinary item in prior periods that does not meet the criteria must be reclassified to other income or expense. These provisions are effective for fiscal years beginning after May 15, 2002. Additionally, SFAS No. 145 requires sale-leaseback accounting for certain lease modifications that have economic effects similar to sale-leaseback transactions. These lease provisions are effective for transactions occurring after May 15, 2002. The Company does not expect the adoption of SFAS No. 145 to have a material effect on its financial position, results of operations or cash flows.

In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 replaces Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company does not expect the adoption of SFAS No. 146 to have a material effect on its financial position, results of operations or cash flows.

7


ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements June 30, 2003

NOTE 2. Oil and Gas Properties

Colombia - At December 31, 2001, the Company's Chimichagua gas field contained proven non-producing gas reserves as described in the Note titled, "Supplemental Oil and Gas Disclosures" and filed with the SEC on Form 10K/SB of that year. 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.

The Company has investigated several options for the Columbia investment. One option involved Adair supplying gas to fuel a power plant providing revenues under a long-term gas purchase contract. Realization of the value of reserves would have been contingent upon the Company concluding an agreement to construct a power plant utilizing gas from the field. Another option involved selling the Company's interest in Columbia for cash, trade or other consideration.

It is the assessment of the executive management of the Company that none of these options can be realized considering the political climate in Columbia. Therefore an impairment loss in the amount of $3,000,000 has already been recognized for this asset during the year ended December 31, 2002.

Yemen - The Company's interest in the Republic of Yemen consisted of a 30% working interest in Sabatain Block 20. The project was exploratory in nature with no proved reserves or production established. Adair Yemen was designated as the original exploration operator for the contractor group. In the event of a commercial discovery, existing pipelines and production infrastructure were planned to be utilized to allow for early production exports and timely cash flow. As of the balance sheet date, the Company has received an unfavorable final judgment and notice of award from the International Court of Arbitration relating to the Company's default of the Joint Operating Agreement. This unfavorable ruling will result in the Company losing an asset valued in the hundreds of million of dollars and may result in the Company having to pay $4,455,653 in unpaid cash calls, interest, actual damages, Court costs and Claimant's legal expenses. Consequently, as a result of the unfavorable ruling, the Company's managment is currently reviewing its legal options and is continuing its settlement negotiation efforts with Occidental.

NOTE 3 - Industrial Free Trade Zone (IFTZ), Republic of Congo

The Company signed a contract with the Republic of Congo in 2001 to develop an Industrial Free Trade Zone ("IFTZ"). The original premis of the concept for development of the IFTZ would be fueled by utilizing "associated" natural gas that is currently being flared offshore of the Republic of Congo. The natural gas could be converted to electrical power, which is the first step to industrial development. West African countries desperately need industrial products to support economic development. Most have been importing these products from Europe and the United States. It is envisioned that many of these products, including cement, fertilizers, plastics, manufactured steel and wood products and other industrial products could be produced in the IFTZ.

Feasibility Study for Gas Utilization for the IFTZ - Republic of Congo

The Industrial Free Trade Zone contract for $5 million USD provided for initial funding of $2 million USD to conduct a feasibility study of gas utilization for the IFTZ. An additional amount payable under the contract, of up to $3 million USD is scheduled to be received by the Company upon the signed commitment of each new industrial partner that commits to develop an industrial sector in the IFTZ. Payments are to be made to the Company by the Republic of Congo at the rate of $500,000 per industrial sector commitment if and when the Company successfully receives a signed commitment from a new industrial partner. The contract was signed by President Denis Sassou-Nguesso of the Republic of Congo and confirmed by the U.S. Ambassador to the Congo. During 2002, the Company received initial funding in the amount of $1,472,920 and entered into a contract with a consulting services company to provide the technical and administrative employees and equipment necessary to perform the aforementioned study for a turnkey lump sum amount of $1,750,000. The Company has paid the consulting services company an amount of $1,492,920 to date.

8


ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements June 30, 2003

 

NOTE 4. Non-monetary Stock Transactions

Included in the Company's consolidated statement of operations for the six month periods ended June 30, 2003 and 2002, were expenses that were paid with Company stock. Stock issued in lieu of cash is summarized as follows for the six month periods ended June 30, 2003 and 2002:

 
2003
2002
Nature of Transaction
Pref Shares
Amount
Shares
Amount
Salaries
45,000
$ 45,000
5,553,594
$187,667
Other Costs and Expenses
-
-
558,086
27,923
Previously Incurred Costs & Expenses
1,526,282
1,526,282
-
-
Total
1,571,282
$ 1,571,282
6,111,680
$ 215,590

NOTE 5. Revenues

During the first six months of 2003 the Company received consulting fees of $40,000 and royalty income of $499.

NOTE 6. Commitments and Contingencies

Legal Proceedings for the Period Ending June 30, 2003

Occidental Yemen Sabtain, Inc. and Saba Yemen Oil Company Ltd. v. Adair Yemen Exploration, Ltd. - Adair Yemen Exploration, Ltd. is a wholly owned subsidiary of the Company. It was named as the Respondent in the matter of Occidental Yemen Sabatain, Inc. ("Occidental") and Saba Yemen Oil Company Ltd. ("Saba") v. Adair Yemen Exploration, Ltd. ("Adair Yemen") in a Request for Arbitration filed with the International Chamber of Commerce in Paris, France on July 10, 2001. The Claimants, Occidental and Saba assert that Adair Yemen breached various agreements to which Occidental, Saba and Adair Yemen are parties and are requesting that Adair Yemen forfeit and reassign its 30% working interest in the project to Occidental and Saba.

Adair Yemen has been notified by the ICC International Court of Arbitration that the Final Award in the matter brought before the Tribunal (ICC Arbitration No. 11663/ESR/MS) by Occidental Yemen Sabatain, Inc. and Saba Yemen Oil Company Limited ("Claimants") v. Adair Yemen Exploration Limited ("Respondent") has been decided in favor of the Claimants.

The Final Award requires AYEL to assign all of it rights concerning it's 30% Working Interest in the Yemen Block 20 Production Sharing Agreement to Occidental Yemen Sabatain, Inc. Additionally the Award directs AYEL to pay Claimants the following amounts:

Category
Amount USD
Unpaid Cash Calls
$2,841,108
Accrued Interest on Unpaid Cash Calls*
$ 78,445
Damages
$ 111,255
Court Costs
$ 250,000
Claimants Legal Expenses
$1,174,845
 
_________
Total
$4,455,653

*Respondent is ordered to pay interest at a rate of 3.338%, compounded monthly, from 16 March 2003 to the date of payment by it to the Claimants.

This unfavorable ruling will result in the Company losing an asset valued in the hundreds of million of dollars and having to pay $4,455,653 in unpaid cash calls, interest, actual damages, Court costs and Claimant's legal expenses. Consequently, as a result of the unfavorable ruling, the Company's managment is currently reviewing its legal options and is continuing its settlement negotiation efforts with Occidental.

9


ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements June 30, 2003

 

NOTE 6. Commitments and Contingencies (cont.)

Adair International Oil & Gas, Inc. vs. John W. Adair, Jalal Alghani and Vivian Quintero vs. Adair International Oil & Gas, Inc., etal - Cause No. 2001-63909, 55th District Court, Harris County, Texas. The Company's claims in the suit against John W. Adair ("Adair"), Jalal Alghani ("Alghani") and Vivian Quintero ("Quintero") involve allegations of fraud, conspiracy and breach of fiduciary duties owed to the Company by Mr. Adair and Mr. Alghani while they were officers and directors of the Company prior to their removal from the AIGI Board of Directors at the Company's annual shareholders meeting on August 5, 2002. The Company's claims in the suit against Ms. Quintero involve allegations of fraud, conspiracy and breach of fiduciary duties while she was the Company's office manager and personal assistant to Adair when he was Chairman of the AIGI Board of Directors.

After the Company's claims were filed in the suit, Mr. Adair, Mr. Alghani and Ms. Quintero filed "counter claims" against the Company alleging standing to sue as shareholders of the Company. Their allegations against the Company and a long list of others include the following counts; "fraud, breaches of fiduciary duties, conspiracy to breach fiduciary duties, defamation, conspiracy to commit defamation, proxy fraud, conspiracy to commit proxy fraud, tortuous interference, usurpation of corporate opportunities, vicarious liability/vice principal, unspecified actual and exemplary damages." These counter claims were filed against the Company on November 9, 2002. The Company has vigorously denied and is defending these allegations.

Mr. Adair, Mr. Alghani and Ms. Quintero have also filed the above described "counter claims" against Richard G. Boyce, Larry Swift, Gene Ackerman, David Crandall, Chris Dittmar, John A. Brush, Charles R. Close, and Shareholders Committed to Restoring Equity Group, Inc. ("SCORE"). The Company's Board of Directors has determined that it is in the best interest of the Company to assume the defense of and to indemnify these individuals and SCORE.

On July 11, 2003, the Court ordered the Company's motion for summary judgment be granted as to all claims in Defendant's / Counter Plaintiff's second amended petition, including the claim of conspiracy to commit defamation, with the exception of the common law defamation claim against the Company and Mr. Boyce. The Company on August 15 filed a motion for clarification, severance and final judgment for the summary judgment that was granted by the Court.

The Company on also filed a motion that the Court sign a final judgment against the additional Defendants Chase Mellon Shareholder Services, Inc., Mellon Investor Services, LLC, U.S. Stock Transfer Corporation, Thomson Kernaghan & Co., Union Securites, Ltd., Merrill Lynch, Hubbard, Inc., Tatiana Roa, Braden, Bennick, Goldstein, Gazaway, & Co., Jack Sisk & Co, Jackson & Rhodes, P.C., John Adair, Jalal Alghani and Vivian Llererna Quintero and their co-conspirators, jointly and severally, and in favor of Adair International Oil & Gas, Inc. for the sum of up to five hundred million dollars ($ 500,000,000) in actual damages and punitive damages against each of said Defendants as assessed by the jury and for such other and further relief to which AIGI may show to be justly entitled.

Although some discovery in this case was secured before the change of control of the Company occurred as a result of the Annual Shareholders Meeting on August 5, 2002, there has been no further formal discovery to date other than the Company and Mr. Boyce's responses to requested discovery. The Company will continue to vigorously pursue this complex case.

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, could have a material adverse impact on the Company's financial position or results of operations.

10


ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements June 30, 2003

 

NOTE 6. Commitments and Contingencies (cont.)

Lease Commitments

Historically the Company has leased property and equipment under various operating leases. Aggregate minimum lease payments under existing non-capitalized long-term leases are estimated to be $220,867, $221,331, $200,031, and $127,075 for the years 2003 - 2006, respectively. During 2002, the Company's new management canceled the leases and the Company continues to pursue negotiated settlements of any claims resulting from these leases.

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 7. Supplemental Oil and Gas Information (Unaudited)

Costs Incurred and Capitalized Costs in Oil and Gas Producing Activities are as follows:

 
Yemen
Geophysical
Colombia
Total
Oil and Gas Properties
$ 1,394,444
--
$ 3,000,000
$ 4,394,444
Geophysical data and other property
3,400,000
$ 1,578,208
--
4,978,208
Capitalized Costs (Cash Calls)
2,321,441
--
--
2,321,441
Less accumulated depletion and depreciation
--
--
--
--
Less impairment loss taken at 12/31/02
(2,747,508)
(1,578,208)
(3,000,000)
(7,325,716)
SubTotal
4,368,377
--
--
4,368,377
Less impariment loss taken at 6/30/03
(4,368,377)
--
--
(4,368,377)
Total
--
--
--
--

Since there is doubt about any future production to be derived from these properties, the normal disclosures included in this note are not being included.

NOTE 8. Going Concern

The Company's financial statements are prepared using generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, the Company does not have significant cash or other material assets, and is in default of its office leases, which raises substantial doubt about its ability to continue as a going concern.

NOTE 9. Notes Payable

The Company is currently in default of several notes payable in the amount of $425,886 as of December 31, 2002. The Company is currently exploring its options to work out a settlement with these debtors.

11


ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
June 30, 2003

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 sections contain information that is pertinent to the following analysis.


GENERAL COMMENTS ON BUSINESS PLAN - EnDevCo, Inc. --- Energy and Development

The Board of Directors have passed a unaminous resolution to change the name of the Corporation to become EnDevCo, Inc. The Company will remain incorporated in Texas with the name change to become official subject to the approval of shareholders at the Annual Meeting to be held on September 12, 2003. Upon approval of the name change by the shareholders, the Corporation will submit a request to the NASDAQ OTC Bulletin Board requesting a new trading symbol to be issued pursuant to their requirements.

EnDevCo, Inc., a shortened version of the Energy and Development Company, establishes an identity that is consistent with the business development activities currently underway to revitalize the Corporation. The Company is involved in several energy related development projects that transcend the traditional business scope of oil and gas exploration and production. These activities include the possible development of an industrial free trade zone in the Republic of Congo that includes aspects of traditional offshore natural gas drilling and production, natural gas storage, oil and condensate production for export, LPG production and bottling, large scale electrical power generation and development and administration of an industrial park that includes a wide variety of possible industrial plants and services. Additionally, the Company is investigating investment in the development of new technologies for the enhancement of oil and gas production, utilizing that technology to gain leverage in the purchase of domestic natural gas production. The Company intends to pursue the development of natural gas fired power plants both in domestic and international venues.

Once established as our new corporate identity, this wide variety of activities is better described to new investors as the Energy and Development Company, EnDevCo, Inc.

Power Development

The Company intends to pursue the development of power projects in both domestic and international venues. As a result of the downturn in the world economy and in the wake of severe financial results of most sectors of the power industry in the United States, the business model for this industry is currently undergoing a transformation. The Company is currently monitoring several new opportunities and has identified qualified individuals that will be hired at an appropriate time to identify and pursue power development projects. The Company continues to believe that the long-term need for new power plants will be significant, particularly as the national economy recovers and older, less efficient generating assets need to be replaced. Currently, the Company does not anticipate any near term positive economic impact from this sector of our business.

Industrial Free Trade Zone (IFTZ), Republic of Congo -

The Company is currently conducting a "Feasibility Study for Gas Utilization for the IFTZ" (NOTE 3 to the Financial Statements). Elements of this feasibility study relate to the development of a large natural gas fired power plant to provide electricity for the development of industrial users in the IFTZ. While this study is not yet complete and the overall scope and economic feasibility of this project is not yet demonstrated, if the project is utimately deemed commercial and is acceptable to the government of the Republic of Congo, the Company will pursue development of this power plant in conjunction with other aspects of the IFTZ project.

Oil and Gas Exploration and Development

The Company's management has been working diligently to identify several oil and gas exploration and development opportunities in the Gulf of Mexico and on shore Texas and Louisiana. These opportunities all require capital to pursue, thereby making it imperative that the Company's shareholders approve increasing the Company's authorized common stock to 500,000,000 million shares at the September 12, 2003 Annual Meeting.

Energy Technology Development

Development and implementation of new energy technologies will become a key area of new business focus for the Company. The identification of and early participation in the implementation of these types of technologies opens several avenues for potential revenue generation and profits. In some instances, the technology can be manufactured and sold to end users once the market accepts the technology. In other instances, the technology might provide a unique competitive advantage which can be succesfully leveraged by the Company in the acquisition and development of existing energy projects. Initially, the Company will limit its scope of investigation to those technologies that directly compliment the oil and gas, and power industries.

12


ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
June 30, 2003

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)

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 sections contain information that is pertinent to the following analysis.

SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002

Revenues -During the period reported, Revenues increased from zero to $40,499.

Costs and Expenses -During the period reported, Expenses increased from $1,102,045 to $6,990,239, an increase of $5,888,194.

Other Income and Expenses - "Interest Income" decreased from $11,059 in 2002 to $3,372 in 2003, a decrease of $7,687.

 

13


 

ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
June 30, 2003

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)

LIQUIDITY AND CAPITAL RESOURCES

The Company currently has nominal cash reserves, no cash flow from operations, and no ability to secure financing through the sale of common stock without further shareholder authorization. Until such time as the financial condition of the Company improves, the Company's Directors and Officers have agreed to manage the Company by receiving payment in "Series A" Preferred stock in lieu of cash consideration.

Proposal to raise the Corporation's Total Authorized Shares of Common Stock

The Board of Directors has unanimously adopted, subject to shareholder approval, an Amended and Restated Certificate of Incorporation of the Corporation that will increase the Corporation's total authorized number of shares of common stock from one hundred fifty million (150,000,000) to five hundred million (500,000,000) shares. This proposal is included in the Proxy Statement (See ITEM 4) distributed to all shareholders and will be the subject of a vote by the shareholders at the Annual Meeting.

Pursuant to shareholder approval of this increase in total authorized shares of common stock, the Board of Directors has authorized the preparation of an S-1 registration statement that when filed with the Securities and Exchange Commission, will provide details regarding those specific proposed projects and investments currently envisioned to be funded by the Corporation through the sale of a portion of these newly authorized shares of common stock. It is anticipated that between fifty million (50,000,000) and one hundred fifty million (150,000,000) shares of common stock will be registered for sale under this S-1 registration statement. While the realized proceeds of the sale of this common stock will be determined by the prevailing fair market price of the stock at the time of sale, if the price was $0.10 per share this initial registration would raise between five million ($5,000,000) to fifteen million ($15,000,000) dollars of new operating capital for the Corporation*. The Corporation desires to have such registered shares available in the immediate future to provide requisite flexibility to use its capital stock for business and financial purposes as will be detailed in the S-1 registration statement and for such other varied uses, without additional shareholder approval, including, but not limited to and without limitation, overhead and operating capital, debt reduction, stock splits, raising capital, providing equity incentives to Directors, Officers and employees.

*Specific details regarding the "Use of Proceeds" from this proposed sale of the Corporation's common stock will be presented in the S-1 registration document. Due to the uncertainty of the fair market price of these securities at the time of sale, no warranty is made or implied as to the ability of the Corporation to successfully achieve the financial goals discussed herein.

The remaining authorized common shares will be reserved for future use by the Corporation through additional S-1 registration statements or through the use of "restricted" security offerings and/or private offerings to establish strategic relationships with other companies and/or expand the Company's business or product lines through the acquisition or possible merger of other businesses or products. It is important to note that at this time the Board of Directors has no specific plan or intent to issue shares beyond the current S-1 registration statement being prepared.

Guidelines for Project Development

In recognition of the status of current financial resources available to the Company, executive management is committed to identifying and implementing projects that can be primarily project financed. This strategy reduces financial risk to the Company, but necessarily adds additional lead time before projects can be secured and announced to the shareholders.

There are no assurances, however, that the Company will be able to identify and implement financing to develop its projects or that it will be able to generate sufficient revenue growth and improvements in working capital.

As no revenue is currently generated from operations, the Company will have to raise additional working capital through the sale of its Common stock. 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.

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ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
June 30, 2003

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)

Notice of Future Dilution of Shareholders

As a direct result of the proposal to increase the total authorized shares of Common stock as described above, future dilution of existing shareholders is very likely. Included in the Proxy Statement sent to all shareholders on August 18, 2003 (see NOTE 4) are proposals that request the shareholders approve the issuance of additional shares of Common Stock (see above).

The Board of Directors passed a Corporate Resolution that reads, "Pursuant to and in accordance with Article 2.13 of the Texas Business Corporation Act of the State of Texas the Company does hereby certify that, pursuant to the authority conferred on the Board of Directors by the Articles of Incorporation of the Corporation, and pursuant and in accordance with Article 2.13 of the Texas Business Corporation Act of the State of Texas, said Board of Directors, pursuant to unanimous written consent dated December 9, 2002, duly adopted a resolution providing for the authorization and issuance of 5,000,000 shares of "Series A" Convertible Preferred Stock, $0.01 par value per share (the "Series A" Preferred Stock).

Each share of "Series A" Preferred Stock which is then outstanding shall at the sole election of the holder be converted into fully paid and non-assessable shares of Common Stock of the Corporation at a conversion rate of 1,000 shares of Common Stock for each share of "Series A" Preferred Stock. The holders of the issued and outstanding shares of Preferred Stock shall have the equivalent of 1,000 Common Stock votes for each share of "Series A" Preferred Stock.

ITEM 3. CONTROLS AND PROCEDURES

As required by Rule 13a-15(b), Company's executive management, including the President and Chief Financial Officer, conducted an evaluation as of the end of the period covered by this report, of the effectiveness of the Company's disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, the President and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report. As required by Rule 13a-15(d), the Company's executive management, including the President and Chief Financial Officer, also conducted an evaluation of the Company's internal control over financial reporting to determine whether any changes occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Based on that evaluation, there has been no such change during the period covered by this report.

15


ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
June 30, 2003

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Legal Proceedings for the Six Months Ended June 30, 2002:

The Company is a party to various claims and litigation. On August 5, 2002 at the Shareholders Meeting, the Company's shareholders elected an entirely new Board of Directors. On August 8, 2002 the new Board of Directors appointed a Litigation Committee who subsequently engaged independent legal counsel to review the merits and allegations of all current and pending litigation. This Litigation Committee was charged with the duty to ascertain what legal actions are in the best interest of the Company and to make recommendations to the Board of Directors for their review and implementation. Due to the circumstances of being named by prior management as a party adverse to the Company in some of this pending litigation, Mr. Boyce recused himself from the Litigation Committee and its deliberations. Although no assurances can be given, the Company believes that resolution of many of the outstanding legal problems can be reached by direct negotiation with the parties involved.

Occidental Yemen Sabtain, Inc. and Saba Yemen Oil CompanyLtd. v. Adair Yemen Exploration, Ltd. - Adair Yemen Exploration, Ltd. is a wholly owned subsidiary of the Company. It was named as the Respondent in the matter of Occidental Yemen Sabatain, Inc. ("Occidental") and Saba Yemen Oil Company Ltd. ("Saba") v. Adair Yemen Exploration, Ltd. ("Adair Yemen") in a Request for Arbitration filed with the International Chamber of Commerce in Paris, France on July 10, 2001. The Claimants, Occidental and Saba assert that Adair Yemen breached various agreements to which Occidental, Saba and Adair Yemen are parties and are requesting that Adair Yemen forfeit and reassign their 30% working interest in the project to Occidental and Saba.

The Company received an unfavorable final judgment and notice of award resulting from the Arbitration (NOTE 6 of financial statements). This unfavorable ruling will result in the Company losing an asset valued in the hundreds of million of dollars and having to pay $4,455,653 in unpaid cash calls, interest, actual damages, Court costs and Claimant's legal expenses. Consequently, as a result of the unfavorable ruling, the Company's managment is currently reviewing its legal options and is continuing its settlement negotiation efforts with Occidental.

Adair International Oil & Gas, Inc. vs. John W. Adair, Jalal Alghani and Vivian Quintero vs. Adair International Oil & Gas, Inc., etal - Cause No. 2001-63909, 55th District Court, Harris County, Texas. The Company's claims in the suit against John W. Adair ("Adair"), Jalal Alghani ("Alghani") and Vivian Quintero ("Quintero") involve allegations of fraud, conspiracy and breach of fiduciary duties owed to the Company by Mr. Adair and Mr. Alghani while they were officers and directors of the Company prior to their removal from the AIGI Board of Directors at the Company's annual shareholders meeting on August 5, 2002. The Company's claims in the suit against Ms. Quintero involve allegations of fraud, conspiracy and breach of fiduciary duties while she was employed by the Company as office manager and personal assistant to Mr.Adair when he was Chairman of the AIGI Board of Directors.

After the Company's claims were filed in the suit, Mr. Adair, Mr. Alghani and Ms. Quintero filed "counter claims" against the Company alleging standing to sue as shareholders of the Company. Their allegations against the Company and a long list of others include the following counts; "fraud, breaches of fiduciary duties, conspiracy to breach fiduciary duties, defamation, conspiracy to commit defamation, proxy fraud, conspiracy to commit proxy fraud, tortuous interference, usurpation of corporate opportunities, vicarious liability/vice principal, unspecified actual and exemplary damages." These counter claims were filed against the Company on November 9, 2002. The Company has vigorously denied and is defending these allegations.

Mr. Adair, Mr. Alghani and Ms. Quintero have also filed the above described "counter claims" against Richard G. Boyce, Larry Swift, Gene Ackerman, David Crandall, Chris Dittmar, John A. Brush, Charles R. Close, and Shareholders Committed to Restoring Equity Group, Inc. ("SCORE"). The Company's Board of Directors have determined that it is in the best interest of the Company to assume the defense of and to indemnify these individuals and SCORE.

On July 11, 2003, the Court ordered the Company's motion for summary judgment be granted as to all claims in Defendant's / Counter Plaintiff's second amended petition, including the claim of conspiracy to commit defamation, with the exception of the common law defamation claim against the Company and Mr. Boyce. The Company on August 15 filed a motion for clarification, severance and final judgment for the summary judgment that was granted by the Court.

The Company on also filed a motion that the Court sign a final judgment against the additional Defendants Chase Mellon Shareholder Services, Inc., Mellon Investor Services, LLC, U.S. Stock Transfer Corporation, Thomson Kernaghan & Co., Union Securites, Ltd., Merrill Lynch, Hubbard, Inc., Tatiana Roa, Braden, Bennick, Goldstein, Gazaway, & Co., Jack Sisk & Co, Jackson & Rhodes, P.C., John Adair, Jalal Alghani and Vivian Llererna Quintero and their co-conspirators, jointly and severally, and in favor of Adair International Oil & Gas, Inc. for the sum of up to five hundred million dollars ($ 500,000,000) in actual damages and punitive damages against each of said Defendants as assessed by the jury and for such other and further relief to which AIGI may show to be justly entitled.

Although some discovery in this case was secured before the change of control of the Company occurred as a result of the Annual Shareholders Meeting on August 5, 2002, there has been no further formal discovery to date other than the Company and Mr. Boyce's responses to requested discovery. The Company will continue to vigorously pursue this complex case.

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, could have a material adverse impact on the Company's financial position or results of operations.

16


ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
June 30, 2003

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS (cont.)

3000 Richmond Limited Partnership v. Superior Geophysical, Inc. - Adair International Oil & Gas, Inc., Superior Geophysical, Inc. ("Superior") John W. Adair, Jalal Alghani, Bill Wiseman, and Gary Tolar, Cause No. 2002-15641, in the 333rd Judicial District Court in Harris County, Texas were sued by Superior's landlord, 3000 Richmond Limited Partnership, as co-tenants for breach of the lease agreement and for back rent owed on Superior's leasehold. Subsequently, the Company signed a Settlement Agreement with 3000 Richmond Limited Partnership on March 10, 2003, which outlines terms of payment acceptable to all parties.

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 the defendant in the matter of Briar Patch Partners, Ltd. v. Adair International Oil & Gas, Inc., Cause No. 01-06351, 95th Judicial District Court, Dallas County, Texas. Briar Patch Partners, the landlord holding the lease on the property in Dallas, Texas where Adair Exploration, Inc., "the lessee", formerly maintained an office, has filed a lawsuit against the Company regarding the failure of the lessee to pay the rent as well as other related claims. On February 10, 2003 an Agreed Judgement was signed by all Parties in the total amount of $235,306.15 against the Defendants. This total amount included the principal amount remaining on the lease, plaintiff's attorney's fees and court costs. Additionally on February 10, 2003, a Settlement Agreement was signed by all Parties which outlines the terms of settlement and payment schedule. These documents have been filed by the Plaintiff with the court.

Declaratory Judgment, Pace Global Energy Services, LLC v. Adair International Oil & Gas, Inc. - On December 26, 2001, John W. Adair signed a confessed promissory note in the amount of $281,458.21 stating that the Company owed that amount to Pace Global Energy Services, LLC ("Pace") in payment for certain consulting services related to the Teawaya Energy project and/or other power projects in the U.S. As a result of non payment by the Company on that promissory note, in February 2002, Pace sued Adair International Oil & Gas, Inc. in Federal District Court in the Eastern District of Virginia (Cause No. 02-133-A) for unpaid consulting service expenses. On September 9, 2002 Pace received a declaratory judgment against the Company in the amount of $281,485.21 payable with interest at nine (9%) per annum until paid plus all attorney's fees and other costs actually incurred for the collection of the judgment. Subsequently, the Company has signed a Settlement Agreement with Pace on January 09, 2003, which outlines terms of payment acceptable to all parties.

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, could have a material adverse impact on the Company's financial position or results of operations.

ITEM 2. CHANGES IN SECURITIES
None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.

17


ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
June 30, 2003

PART II - OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company filed Definitive Proxy Materials with the Securities and Exchange Commission on August 14, 2003. The Notice Date of this Proxy Statement is August 18, 2003. Proxy materials including the Proxy Statement, Proxy Ballot Card and the 2002 Form 10K will be mailed to all shareholders of record on or about August 18.

The Board of Directors of the Company has fixed the close of business on August 1, 2003 as the record date for the determination of shareholders entitled to notice and to vote at the Annual Meeting. As of August 1, 2003, the Corporation had 150,000,000 outstanding shares of Common stock entitled to vote and 1,571,282 shares of "Series A" Preferred stock entitled to vote. In order for shares to be voted, they must be held as of the record date.

Additionally the Board of Directors have fixed Friday, September 12, 2003 as the date for the Annual Meeting of Shareholders, which will be convened at 3000 Richmond Avenue, Third Floor Conference Room, Houston, Texas 77098 at 9:00 A.M. local time.

The Items of Business to be brought before the shareholders for approval are:

  1. Amend the bylaws of the Corporation to expand the Board of Directors to Five (5) Members.
  2. Amend the bylaws of the Corporation to establish staggered terms of office of the Board of Director Members.
  3. Elect five (5) members to the Board of Directors, two (2) for a term of three years, two (2) for a term of two years and one (1) for a term of one year.
  4. Change the name of the Corporation to become EnDevCo, Inc.
  5. Amend the Restated Certificate of Incorporation of the Corporation to raise the total authorized shares of Common Stock to five hundred million (500,000,000) shares with par value of $0.00.
  6. Amend the Restated Certificate of Incorporation of the Corporation to implement a reverse stock split.
  7. Amend the Restated Certificate of Incorporation of the Corporation to expand the purpose for which the Corporation is organized.
  8. Amend the Restated Certificate of Incorporation of the Corporation to change the Corporation's registered address.
  9. Ratification of the appointment of Clyde Bailey, PC as the Corporation's independent accountants for fiscal 2003.
  10. Transact such other business, including consideration of shareholder proposal(s), as may properly come before the meeting and any adjournment thereof.

THE PROXY STATEMENT CONTAINS INFORMATION FOR CONSIDERATION BY THE ADAIR INTERNATIONAL OIL AND GAS, INC. SHAREHOLDERS. PLEASE READ THE PROXY STATEMENT IN ITS ENTIRETY BEFORE TAKING ANY ACTION WITH RESPECT TO THE PROPOSALS PRESENTED THEREIN.

ITEM 5. OTHER INFORMATION

Officer Compensation - At a special called meeting of the Board of Directors held August 13, 2002 the Board approved compensation for several individuals who have assumed roles of management for the Company. As a Board member, Mr. Boyce recused himself from these deliberations to avoid a potential conflict of interest. Compensation was discussed and set for Mr. Richard G. Boyce as President, Mr. Chris A. Dittmar as Chief Financial Officer and Corporate Secretary. The salaries are commensurate with the amounts paid to the previous management. Further, the Board stipulated, again with Mr. Boyce recusing himself in his capacity as a Director, that the Company shall only owe these funds to these individuals in the event that the Corporation either receives funds or regains the ability to issue stock in lieu of cash. Finally, the Board stipulated these individuals will have the option to determine what portion of their compensation they are to receive in cash or stock.

Richard G. Boyce 48 President $240,000
Chris A. Dittmar 56 Chief Financial Officer and Corporate Secretary $240,000

 

18


ADAIR INTERNATIONAL OIIL AND GAS, INC. AND SUBSIDIARIES
June 30, 2003

PART II - OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8 -K

CERTIFICATIONS

I, Richard G. Boyce, certify that:

1. This report fully complies with the requirements of Section 13(a) or 5(d) of the Exchange Act;

and

2. the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the issuer.

/s/ Richard G. Boyce

President and Director

August 14, 2003

 

I, Chris A. Dittmar, certify that:

1. This report fully complies with the requirements of Section 13(a) or 5(d) of the Exchange Act;

and

2. the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the issuer.

/s/ Chris A. Dittmar

Chief Financial Officer

August 14, 2003

 

The following table details the events reported in the first six months of 2003 by the Company on Form 8-K. Each filing is incorporated herein by reference.

Fililing Date
Description
03-31-2003
Change in the Registrant's Certifying Accountant
06-26-2003
Block 20 Arbitration Decision in Favor of Occidental Sabatain, Inc. and Saba Yemen Oil Company Ltd.

19


ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
June 30, 2003


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 14, 2003.

ADAIR INTERNATIONAL OIL AND GAS, INC.

/s/ Richard G. Boyce

------------------------------
Richard G. Boyce
President and Director

/s/ Chris A. Dittmar

-----------------------------

Chris A. Dittmar

Chief Financial Officer and Corporate Secretary

20


ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
June 30, 2003

CERTIFICATIONS

I, Richard G. Boyce, certify that:

1. I have reviewed this quarterly report on Form 10-QSB of Adair international Oil & Gas, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:


a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;


b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and


c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):


a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and


b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: 08/14/03

/s/ Richard G. Boyce

President and Director

21


ADAIR INTERNATIONAL OIL AND GAS, INC. AND SUBSIDIARIES
June 30, 2003

CERTIFICATIONS (con't)

I, Chris A. Dittmar, certify that:

1. I have reviewed this quarterly report on Form 10-QSB of Adair international Oil & Gas, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;


b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and


c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and


b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: 08/14/03

/s/ Chris A. Dittmar

Chief Financial Officer and Corporate Secretary

 

22