<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Year Ended December 31, 1996
Commission File Number 33-55254-07
LONE STAR INTERNATIONAL ENERGY, INC.
(Name of small business issuer in its charter)
NEVADA 87-0434288
(State of incorporation) (IRS Employer Identification Number)
200 PALO PINTO, SUITE 108
WEATHERFORD, TEXAS 76086
(Address of principal executive offices) (Zip code)
(817) 598-0542
Issuer's telephone number
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Check whether the issuer (1) filed all reports required to be filed by section
13 or 15(d) of the Exchange Act during the past 12 months, (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. [ ] Yes [ X ] No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for 1996: $286,860
State the aggregate market value of the voting stock held by non-affiliates
computed using $2.38, the price at which the stock was sold on April 10, 1997:
$25,399,241
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Common Stock, Par Value $.001; 19,005,283 Shares as of April 11, 1997
Transitional Small Business Disclosure Format: Yes [ ] No [ X ]
<PAGE> 2
ITEM 1. DESCRIPTION OF BUSINESS
HISTORICAL INFORMATION
Lone Star International Energy, Inc., a Nevada Corporation (the "Company"), was
incorporated in the state of Utah on April 11, 1986 as Quiescent Corporation.
To reincorporate as a Nevada corporation, on December 1, 1993, the Company's
shareholders approved a merger with a newly formed Nevada corporation with the
same name. A Certificate of Merger of the Utah and Nevada corporations was
executed on December 30, 1993 and following that action the Utah Corporation
filed Articles of Dissolution in Utah on December 30, 1993. In October 1995 the
Company discovered that Articles of Merger had not been recorded in Nevada. The
status of the company resulting from the filing of the Articles of Dissolution
in 1993 and the filing of the Articles of Merger in 1995 is not clear. The
Company believes the merger is effective for all purposes and has and continues
to act accordingly. The Company had no operations until the completion of the
reverse acquisition described below on May 2, 1995.
Reverse Acquisition - The Company entered into an Agreement dated as of April
10, 1995, with Cumberland Petroleum, Inc., a Texas corporation ("Cumberland"),
pursuant to which, on May 2, 1995 the Company acquired from C.E. Justice, 100%
of the capital stock of Cumberland in the exchange for the issuance of
5,000,000 shares of the Company's common stock. Cumberland operates oil and
gas properties. The Company changed its name to Cumberland Holdings, Inc. on
May 3, 1995, and to Cumberland Companies, Inc. On August 17, 1995, and to Lone
Star International Energy, Inc. On January 30, 1997.
CERTAIN STATEMENTS CONTAINED IN THIS DOCUMENT, INCLUDING WITHOUT LIMITATION
STATEMENTS CONTAINING THE WORDS "BELIEVES", "ANTICIPATES", "INTENDS",
"EXPECTS", AND WORDS OF SIMILAR IMPORT, CONSTITUTE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT. SUCH
FORWARD LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
OTHER FACTORS THAAT MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHEIVEMENTS
OF THE COMPANY TO MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR
ACHEIVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS.
GENERAL
The Company is engaged in the production and sale of oil and gas. Principal
products are crude oil and natural gas, which are sold to various purchasers,
including pipeline companies that service the areas in which the producing
wells are located. Until 1997, the Company served as operator for most of the
oil and gas properties in which it owns an interest. The Company may enter into
farm-out, joint venture, drilling participation, limited partnership or any
other suitable arrangement with respect to developing its properties and
acquiring additional properties.
The Company has no operations in foreign countries. The acquisition,
development, production and sale of oil and gas is subject to many factors
which are outside the Company's control, including national and international
economic conditions, the availability of drilling rigs, casing, pipe and other
equipment and supplies, proximity to the pipelines, the supply and price of
other fuels, and the regulation of production, transportation and pricing by
state and federal governmental regulatory agencies.
<PAGE> 3
OTHER BUSINESS MATTERS
Competition for the sale of oil and gas is principally related to pricing as it
is affected by quality, availability of transportation and transportation
costs. The price for the oil is widely followed and is generally subject to
worldwide market factors.
The Company had sales to the following companies that amounted to 10% or more
of oil and gas revenues:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Team Energy Marketing Co. 45% 29%
Geer Tank Trucks, Inc. 26% 32%
Atoka Resources Corp. 17% 29%
Enserch 10% 10%
</TABLE>
Because of the ready market for its oil and gas, the Company does not consider
itself dependent on any single customer or group of customers.
The Company must comply with laws affecting the discharge of materials into the
environment. Compliance with such laws has not been a material factor in the
Company's operations.
No insurance needed. No loss of production coverage has been sought.
Contractors perform many services normally requiring employees. As a result the
Company had only two officers in 1996. The Company had one employee in 1996.
In April 1997, the Company acquired Energy Reclaim Refrigeration, Inc. (Energy)
in exchange for 3,333,333 shares of restricted common stock valued at
$10,000,000. The only assets of Energy are various patents. The sole
stockholder of Energy, Calvin D. Cline, has entered into an employment contract
with the Company per terms of the acquisition.
REGULATORY MATTERS
The Company's exploration, production and marketing operations are regulated at
the federal, state and local levels. Oil and gas exploration, development and
production activities are subject to various laws and regulations governing a
wide variety of matters. For example, there are statutes or regulations
addressing conservation practices and the protection of correlative rights, and
such regulations may affect the Company's operations and limit the quantity of
oil or gas that the Company may produce or sell. Other regulated matters
include marketing, transportation and valuation of royalty payments.
Among other regulatory matters at the federal level, the Federal Energy
Regulatory Commission ("FERC") regulates interstate transportation of natural
gas under the Natural Gas Act and regulates the maximum selling prices of
certain categories of gas sold in "first sales" in interstate commerce under
the Natural Gas Policy Act ("NGPA"). The Company's gas sales are affected by
regulation of intrastate and interstate gas transportation. In an attempt to
promote competition, the FERC has issued a series of orders that have altered
significantly the marketing and transportation of natural gas. To date, the
Company has not experienced any material adverse effect on gas marketing as a
result of these FERC orders. However, the Company cannot predict what effect
these or subsequent regulations may have on its future gas marketing.
<PAGE> 4
As an owner and operator of oil and gas properties, the Company is additionally
subject to various federal, state and local environmental regulations,
including air and water quality control laws. These laws and regulations may,
among other things, impose liability on the lessee under an oil and gas lease
for the cost of pollution clean-up resulting from operations, subject the
lessee to liability for pollution damages, and require suspension or cessation
of operations in affected areas and impose restrictions on the injection of
liquids into subsurface aquifers that may contaminate groundwater. Although the
Company believes that it is in substantial compliance with existing applicable
environmental laws and regulations, there can be no assurance that substantial
costs for compliance will not be incurred in the future. Moreover, it is
possible that other developments, such as stricter environmental laws,
regulations and enforcement policies thereunder, could result in additional,
presently unquantifiable, costs or liabilities to the Company.
ITEM 2. DESCRIPTION OF PROPERTIES
OIL AND GAS PROPERTIES
The principal oil and gas properties of the Company at the end of 1996
consisted of working interests in producing oil and gas leaseholds located in
Texas. The Company owns these leasehold interests in percentages that vary. The
terms of producing oil and gas leaseholds are continuing and such leases remain
in force by virtue of, and for as long as, production from lands under each
lease are maintained. The terms of leases without production or production less
than required by the lease may expire at fixed dates in the future. These
leases may or may not be extended, depending upon the lease in question, by
further exploration and development within varying periods of time.
Effective September 1, 1995 the Company acquired working interests in oil and
gas properties in exchange for 750,000 shares of restricted common stock and
notes payable in the aggregate amount of $500,000. The notes payable are
payable by the Company with all principal now due on September 15, 1997 and
interest payable monthly beginning at the rate of 7% per annum.
The following table sets forth information concerning the Company's leasehold
ownership interests as of December 31, 1996.
<TABLE>
<CAPTION>
TABLE I
LEASEHOLD INTEREST
GROSS (b) NET (c)
--------- --------
<S> <C> <C>
Developed Acreage (a) 1,076 785
Undeveloped Acreage (d) 3,211 2,420
Active Working Interest Wells:
Oil 11.0 8.2
Gas 28.0 21.9
</TABLE>
(a) Developed acreage is acreage spaced for or assignable to productive wells.
(b) A gross well or acre is a well or acre in which a working interest is
owned. The number of gross wells is the total number of wells in which a
working interest is owned. The number of gross acres is the total number of
acres in which a working interest is owned.
(c) A net well or acre is deemed to exist when the sum of fractional ownership
working interests in gross wells or acres equals one. The number of net
wells or acres is the sum of the fractional working interests owned in
gross wells or acres expressed as whole numbers and fractions thereof.
(d) Undeveloped acreage is oil and gas acreage on which wells have not been
drilled or to which no Proved Reserves other than Proved Undeveloped
Reserves have been attributed.
<PAGE> 5
NET PRODUCTION, UNIT SALES AND PRODUCTION COSTS
The following table summarizes the net oil and natural gas production for the
Company, the average sales price per barrel (bbl) of oil and per 1000 cubic
feet (mcf) of natural gas produced and the average production (lifting) cost
per unit of production, for the year ended December 31, 1996.
TABLE II
<TABLE>
<CAPTION>
PRODUCTION, PRICE AND COST DATA
1996
- -----
<S> <C>
Oil (a):
Production (Bbls) 3,823
Revenue $ 78,495
Average Bbls per day 10
Average Sales price per Bbl $ 20.53
Gas:
Production (Mcf) 97,642
Revenue $166,045
Average Mcf per day 268
Average Sales price per Mcf $ 1.70
Production costs:
Production costs $242,745
Equivalent Bbls (b) 20,097
Production cost per equivalent Bbl $ 12.08
Production cost per sales dollar $ .99
Total Revenues $244,540
</TABLE>
(a) Includes condensate and natural gas liquids.
(b) Gas production is converted to equivalent bbls at the rate of six mcf per
bbl, representing the estimated relative energy content of natural gas to
oil.
<PAGE> 6
ESTIMATED FUTURE NET REVENUES FROM PROVED OIL AND GAS RESERVES
A summary projection of the estimated future net revenues and present value of
future net reserve categories, as of December 31, 1996, is as follows:
TABLE III
ESTIMATED FUTURE NET REVENUES FROM PROVED RESERVES (A)
AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
PROVED
---------
<S> <C>
Estimated future net
revenues before income taxes
1997 $ 425,557
1998 519,737
1999 509,447
2000 581,037
2001 543,478
Thereafter 1,749,311
----------
Total before estimated future income taxes $4,328,567
==========
Present value of estimated
future net revenues
before income taxes $2,857,099
==========
</TABLE>
(a) Prepared in accordance with the rules and regulations of the SEC based on
the reserve reports and the Company's financial statement disclosures.
Estimated future net revenues represent estimated future gross revenues
from the production and sale of proved reserves, net of estimated
production costs and future development costs estimated to be required to
achieve estimated future production.
ESTIMATED NET PROVED OIL AND GAS RESERVES
The estimated proved developed oil and gas reserves for the Company are
summarized below:
TABLE IV
PROVED RESERVES
AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
PROVED
---------
<S> <C>
Oil and liquids (bbls):
Proved developed 34,195
Proved undeveloped 81,998
---------
Total 116,193
=========
Natural gas (mcf):
Proved developed 829,498
Proved undeveloped 2,951,656
---------
Total 3,781,154
=========
</TABLE>
<PAGE> 7
The table above should read in connection with the following definitions:
PROVED RESERVES Estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data
demonstrate with reasonable certainty to be economically
producible in future years from known reservoirs under
existing economic and operating conditions, e.g., prices
and costs as of the date the estimate was made, assuming
continuation of current regulatory practices using
conventional production methods and equipment.
PROVED DEVELOPED
RESERVES Proved oil and gas reserves which are expected to be
recovered from existing wells with existing equipment and
operating methods. Developed reserves include both
producing and non-producing reserves. Producing reserves
are those reserves expected to be recovered from existing
completion intervals producing to a market as of the date
of the appropriate reserve report. Non-producing reserves
are reserves that are currently shut-in awaiting a
pipeline connection or in reservoirs behind the casing or
at minor depths above or below the producing zone and are
considered proved by production either from wells in the
field, by successful drill-stem tests, or by core
analyses from the particular zones. Non- producing
reserves require only moderate expense for recovery.
PROVED UNDEVELOPED
RESERVES Proved oil and gas reserves which are expected to be
recoverable from additional wells yet to be drilled or
from existing wells where a relatively major expenditure
is required for completion. For information concerning
costs incurred by the Company for oil and gas operations,
net revenues from oil and gas production, estimated
future revenues attributable to the Company's oil
reserves and present value of future net revenues on a
10% discount rate and changes therein, refer to the
Company's Financial Statements and the related Notes. The
Company emphasizes that reserve estimates are inherently
imprecise and that estimates of new discoveries are more
imprecise than those of producing oil and gas properties.
Accordingly, the estimates are subject to change, as
further information becomes available.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Response is not required.
<PAGE> 8
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded over the counter under the symbol LNST
effective January 1997. Prior to January 1997 the Company's symbol was CUMC. As
of March 25, 1997, there were 811 shareholders of record of the Company's
common stock. The transfer agent for the Company's common stock is National
Stock Transfer, Salt Lake City, Utah.
PRICE RANGE OF COMMON STOCK
<TABLE>
<CAPTION>
HIGH LOW
-------- ------
<S> <C> <C>
1995:
Third Quarter August 31, 1995 through
September 30, 1995 4 1/10
Fourth Quarter 5 1/2 1 1/2
1996:
First Quarter 5/8 1/16
Second Quarter 3/32 3/32
Third Quarter 3/20 3/20
Fourth Quarter 2/5 3/32
1997:
First Quarter 2 3/4 1/16
</TABLE>
The Company has not paid dividends on its Common Stock, and it is the present
policy of the Company not to do so, but to retain earnings for future growth
and business activities.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
CERTAIN STATEMENTS CONTAINED IN THIS DOCUMENT, INCLUDING WITHOUT LIMITATION
STATEMENTS CONTAINING THE WORDS "BELIEVES", "ANTICIPATES", "INTENDS",
"EXPECTS", AND WORDS OF SIMILAR IMPORT, CONSTITUTE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT. SUCH
FORWARD LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
OTHER FACTORS THAT MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHEIVEMENTS OF
THE COMPANY TO MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR
ACHEIVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS.
This discussion should be read in conjunction with the audited financial
statements of Lone Star International Energy, Inc.
PLAN OF OPERATION
Effective May 2, 1995, the Company acquired Cumberland. Until January 1, 1997
Cumberland acted as an operator of oil and gas properties. For accounting
purposes, the transaction has been treated as a recapitalization of Cumberland
with Cumberland as the acquirer (reverse acquisition). For purposes of
discussion the Company's operations will be considered those of Cumberland. The
reverse acquisition was accounted for under the pooling of interest method of
accounting.
The Company intends to increase production and reserves through development of
existing oil and gas properties and future acquisitions. The Company believes
its current revenue is adequate to meet existing needs. Future acquisitions
will require additional capital and the Company believes it can raise such
capital through either public or private financing, or a combination of both.
The Company does not intend to seek bank financing to expand its operations.
<PAGE> 9
The Company periodically evaluates other businesses within what it broadly
describes as the energy industry. The Company does not expect that any
associated costs to evaluate such business projects will impair its liquidity.
RESULTS OF OPERATIONS
Effective September 1, 1995 the Company purchased working interests in several
oil and gas properties in exchange for 750,000 shares of restricted common
stock valued at $1,108,067 and $500,000 in promissory notes due September 15,
1997.
In 1996, cash flows from operations were $14,525 and from financing activities
were $77,437. Cash flows used in investing activities were $95,565. Net cash
provided by operations increased from 1995 by $423,383, reflecting a full year
of oil and gas revenues and a decrease in general and administrative expenses.
Net cash used in investing activities decreased by $36,418, reflecting a
decrease in due from related parties. Net cash provided by financing activities
decreased by $451,856, reflecting a decrease in the sale of the Company's
restricted common stock.
Revenues increased from $173,466 in 1995 to $285,940 in 1996 primarily as a
result of the above described purchase of working interest; therefore, having
the oil and gas revenues for a full year in 1996. Expenses decreased from
$754,010 in 1995 to $526,776 reflecting a decrease in general and
administrative expenses which included consulting fees, professional fees and
salaries.
The following table sets forth a summary of historical financial information
for the Company. These tables should be read in conjunction with the
consolidated financial statements Lone Star international Energy, Inc. and
Subsidiary (and related notes).
<PAGE> 10
SUMMARY BALANCE SHEET DATA
AS OF DECEMBER 31,
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Current assets $ 392,568 $ 328,096
Current liabilities 943,960 743,181
----------- -----------
Working capital (551,392) (415,085)
Oil and gas properties (net) 1,545,753 1,605,082
Other assets 525 225
Total assets 1,938,846 1,933,403
Stockholder's equity 994,886 1,190,222
----------- -----------
Stockholder's equity per common share $ .12 $ .15
=========== ===========
Shares outstanding 8,396,950 7,796,000
=========== ===========
Summary of Operations
Oil and gas sales $ 244,540 $ 69,111
Other 41,400 104,355
----------- -----------
Total operating revenues 285,940 173,466
----------- -----------
Production costs 242,745 147,380
Depreciation, depletion and amortization 66,026 22,415
General and administrative expenses 186,978 567,635
----------- -----------
Total operating expenses 495,749 737,430
----------- -----------
Other income 920 237
Interest expense (31,947) (16,817)
----------- -----------
Net income (loss) $ (240,836) $ (580,544)
=========== ===========
Net income (loss) per common share $ (0.0305) $ (0.0968)
=========== ===========
Weighted average shares outstanding 7,888,000 6,000,000
=========== ===========
</TABLE>
ITEM 7. FINANCIAL STATEMENTS
Financial statements for 1995 and 1996 with the accountant's report are
attached hereto following the signature page.
ITEM 8. CHANGES IN DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
<PAGE> 11
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
CECIL E. JUSTICE (40), President and Chairman of the Board of Directors of the
Company since April 1995, has been employed in the oil and gas industry since
1979. Mr. Justice worked for Pinto Petroleum, Inc. A Dallas, Texas based
production and operating company with properties in Texas and Oklahoma from
1979 through 1982. In 1983, Mr. Justice was founder and President of Cherokee
Oil, Inc. Cherokee's properties and operations were in North Central Texas. In
1987 Cherokee was sold to Genex Resources, Inc. a public company trading on the
Vancouver, BC exchange. From 1987 until present Mr. Justice put together joint
ventures on many oil and gas prospects. Has started and owned many successful
companies including but not limited to furniture, construction, video rental
chains and a vending corporation. After high school, Mr. Justice joined in the
United States Army where he spent 1975 through 1977. Mr. Justice attended The
University of Texas at Arlington where he completed several oil and gas,
logging, compressor and business courses.
WILLIAM D. JOSSERAND JR. (31), Vice President of Field Operations, Secretary
and Director of the Company, joined the Company in November 1995 as Vice
President of Field Operations and was elected director of the company, and
employed as Secretary in February 1997. Mr. Josserand has been employed in the
oil and gas industry since 1994. Mr. Josserand served as President of The Cody
Company, an oil and gas service company, where he managed contract field
services, field operations, and production management. In 1996, Mr. Josserand
formed Trace Management, Inc., a Texas oil and gas production and operating
company, where he acted as Chairman and President. Trace Management, Inc.
primarily involved with field production management and operations in the Fort
Worth Basin area for both public and private oil and gas companies. Mr.
Josserand received a Bachelor of Business Administration in Finance from the
University of North Texas in 1988.
MICHAEL D. HERRINGTON (33), Chief Financial Officer, Treasurer and Director of
the Company, was elected a director in February 1997, was employed as Chief
Financial Officer in February 1997. Mr. Herrington has been engaged in public
and private accounting since 1992. Prior to 1992 Mr. Herrington was employed in
various oil and gas related fields, as well as the manufacturing industry. Mr.
Herrington graduated from Tarleton State University with a Bachelor's degree in
Business Administration in Accounting in 1992.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. The Company does not have a
class of securities under section 12 of the Exchange Act.
ITEM 10. EXECUTIVE COMPENSATION.
For 1996 Cecil E. justice was the Chief executive officer and sole director of
the Company. The Company did not have any paid officers during 1996. The
Company did make payments to Mr. Josserand in 1996, see Item 12. Certain
Relationships and Related Transactions. The Company commenced operations in
1994.
SUMMARY COMPENSATION TABLE
LONG TERM
<TABLE>
<CAPTION>
ANNUAL COMPANSATION (1) COMPENSATION AWARDS (2)
-----------------------------------------------------
NAME AND PRINCIPAL POSITION SECURITIES UNDERLYING ALL OTHER
FISCAL YEAR SALARY ($) OPTION/SARS (#) COMPENSATION ($)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cecil E. Justice 1996 -0- -0- -0-
President, Director 1995 131,718 -0- -0-
</TABLE>
(1) The column for "Bonus and Other Annual Compensation" provided in the
SEC's standard summary compensation table is omitted because no such
benefits or other compensation were provided.
<PAGE> 12
(2) The Company did not award restricted stock or stock appreciation
rights ("SARs") during fiscal years 1995 and 1996, nor did it make any
payouts pursuant to long-term incentive plans during such period.
Accordingly, the columns for such items provided in the SEC's standard
summary compensation table have been omitted.
The Company has no existing or proposed plan for the provisions of annuity,
pension or retirement benefits to its officers and directors.
The Company has no existing or proposed plan involving any incentive
compensation for officers and directors or for stock purchase, profit sharing
or thrift plans for any officer and director.
The Company has no existing or proposed plan or arrangement for any officer or
director to receive remuneration resulting from his resignation, retirement or
termination or from a change in control of the Company or a change individual's
responsibilities after such a change in control. Further, the Company has not
engaged in any transaction with third parties where the primary purpose of such
transaction was to furnish remuneration to any officer or director of the
Company.
ITEM 11. SECURITY OWNERSIP OF CERTAIN BENEFICAL OWNERS AND MANAGEMENT.
The following table sets forth, as of April 1, 1997, certain information
regarding benefical ownership of Common Stock by (a) each person known by the
Company to own more than 5% of its outstanding Common Stock, (b) each director
of the Company, and (c) all directors and officers as a group. Each person
listed below is a director. Each person listed below has sole voting and
dispositive power over the shares indicated.
<TABLE>
<CAPTION>
AMOUNT & NATURE PERCENT OF
NAME AND ADRESS OF BENEFICIAL OUTSTANDING
OF BENEFICIAL OWNER OWNERSHIP SHARES
- ------------------- ------------ ------------
<S> <C> <C>
Cecil E. Justice (1) (2) 5,000,000 26.3
200 Palo Pinto, suite 108
Weatherford, Texas 76086
William D. Josserand Jr (2) -0- -0-
200 Palo Pinto, Suite 108
Weatherford, Texas 76086
Michael D. Herrington (2) -0- -0-
200 Palo Pinto, Suite 108
Weatherford, Texas 76086
All officers and directors as a group 5,000,000 26.3
(3 persons)
</TABLE>
(1) Owns directly.
(2) Director.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On April 10, 1995 the Company entered into an agreement with Cumberland
Petroleum, Inc., a Texas corporation (Cumberland) pursuant to which, on May 2,
1995 the Company acquired from Cecil E. Justice, 100% of the capital stock of
Cumberland in exchange for 5,000,000 shares of Company common stock. In
connection with this transaction Mr. Justice was elected president of the
Company and its sole director. Previous officers and directors resigned at the
time of the transaction. Also at the time of this transaction the Company paid
$100,000 and issued 200,000 shares to Capital General Corporation, the former
<PAGE> 13
controlling shareholder of the Company. As a result of this transaction the
Company assumed an approximate $106,000 account receivable from Mr. Justice
that Cumberland incurred as a result of advances to Mr. Justice. In 1995 this
accounts receivable was reduced to $66,580 as a result of crediting Mr. Justice
for a portion of his salary. During 1996 this accounts receivable increased to
$138,717. During 1996 the Company paid William Josserand $72,139, as
compensation and reimbursed expenses for services he provided as an independent
contractor handling field services. Certain of the payments in 1996 were to
Trace Management, Inc.
ITEM 13. EXIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Agreement dated as of April 10, 1995 between Cumberland Petroleum,
Inc. and Quiescent Corporation, previously filed as Exhibit 2.1 to the
Company's Report on Form 8-K dated May 19, 1995, and incorporated
herein by reference.
2.2 Article of Merger of Cumberland Companies. Inc. and Quiescent
Corporation, a Utah Corporation. (Previously filed as the same exhibit
number with the Company's Annual Report on Form 10-KSB dated December
31, 1995 and incorporated herein by reference.)
3.1 Articles of Incorporation of the Company and amendments filed with the
Secretary of State of Nevada. (Previously filed as the same exhibit
number with the Company's Annual Report on Form 10-KSB dated December
31, 1995 and incorporated herein by reference.)
3.2 Bylaws of the Company. (Previously filed as the same exhibit number
with the Company's Annual Report on Form 10-KSB dated December 31,
1995 and incorporated herein by reference.)
10.1 Oil and Gas Property Purchase Agreement between the Company and Ford
and Myrt Fullingim Trust dated September 18, 1995. (Previously filed
as the same exhibit number with the Company's Annual Report on Form
10-KSB dated December 31, 1995 and incorporated herein by reference.)
10.2 General Promissory Note by the Company to Ford and Myrt Fullingim
Trust dated September 15, 1995 in the original principal amount of
$89,643. (Previously filed as the same exhibit number with the
Company's Annual Report on Form 10-KSB dated December 31, 1995 and
incorporated herein by reference.)
10.3 Oil and Gas Property Purchase Agreement between the Company and O.O.
Thompson and Bea Thompson dated September 18, 1995. (Previously filed
as the same exhibit number with the Company's Annual Report on Form
10-KSB dated December 31, 1995 and incorporated herein by reference.)
10.4 General Promissory Note by the Company to and O.O. Thompson and Bea
Thompson dated September 15, 1995 in the original principal amount of
$104,198. (Previously filed as the same exhibit number with the
Company's Annual Report on Form 10-KSB dated December 31, 1995 and
incorporated herein by reference.)
10.5 Oil and Gas Property Purchase Agreement between the Company Randy J.
Mason dated September 18, 1995. (Previously filed as the same exhibit
number with the Company's Annual Report on Form 10-KSB dated December
31, 1995 and incorporated herein by reference.)
10.6 General Promissory Note by the Company to Randy J. Mason dated
September 15, 1995 in the original principal amount of $210,001.
(Previously filed as the same exhibit number with the Company's Annual
Report on Form 10- KSB dated December 31, 1995 and incorporated herein
by reference.)
10.7 Oil and Gas Property Purchase Agreement between the Company and J. L.
Keas dated September 18, 1995. (Previously filed as the same exhibit
number with the Company's Annual Report on Form 10-KSB dated December
31, 1995 and incorporated herein by reference.)
10.8 General Promissory Note by the Company to J. L. Keas dated September
15, 1995 in the original principal amount of $17,143. (Previously
filed as the same exhibit number with the Company's Annual Report on
Form 10-KSB dated December 31, 1995 and incorporated herein by
reference.)
10.9 Oil and Gas Property Purchase Agreement between the Company and
Charles and Romona Hibbs dated September 18, 1995. (Previously filed
as the same exhibit number with the
<PAGE> 14
Company's Annual Report on Form 10-KSB dated December 31, 1995 and
incorporated herein by reference.)
10.10 General Promissory Note by the Company to and Charles and Romona Hibbs
dated September 15, 1995 in the original principal amount of $55,357.
(Previously filed as the same exhibit number with the Company's Annual
Report on Form 10-KSB dated December 31, 1995 and incorporated herein
by reference.)
10.11 Oil and Gas Property Purchase Agreement between the Company and J. L.
Thompson dated September 18, 1995. (Previously filed as the same
exhibit number with the Company's Annual Report on Form 10-KSB dated
December 31, 1995 and incorporated herein by reference.)
10.12 General Promissory Note by the Company to J. L. Thompson dated
September 15, 1995 in the original principal amount of $22,857.
(Previously filed as the same exhibit number with the Company's Annual
Report on Form 10-KSB dated December 31, 1995 and incorporated herein
by reference.)
16 Letter dated March 10, 1997 from Hollander, Gilbert & Co, Certified
Public Accountants. (Previously filed as the same exhibit number with
the Company's Annual Report on Form 10-KSB dated December 31, 1995
and incorporated herein by reference.)
21 List of Subsidiaries
23 Consent of Experts and Counsel
27 Financial Data Schedule
<PAGE> 15
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
LONE STAR INTERNATIONAL ENERGY, INC.
By: /s/ Cecil E. Justice
President
April 17, 1997
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<S> <C> <C>
/s/ Cecil E. Justice President, Director April 17, 1997
(Principal executive
officer)
/s/ Michael D. Herrington Chief Financial Officer, April 17, 1997
Treasurer, Director
(Principal accounting
officer)
/s/ William D. Josserand Jr. Vice President of Field April 17, 1997
Operations, Secretary
and Director
</TABLE>
<PAGE> 16
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Lone Star International Energy, Inc.
Weatherford, Texas:
We have audited the accompanying consolidated balance sheet of Lone Star
International Energy, Inc. (formerly Cumberland Companies, Inc.) and subsidiary
as of December 31, 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the two years ended December
31, 1996. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Lone Star
International Energy, Inc. and subsidiary as of December 31, 1996, and the
results of its operations and its cash flows for each of the two years ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ DAVIS, KINARD & CO., P.C.
DAVIS, KINARD & CO., P.C.
Abilene, Texas,
April 7, 1997, except for Note 9
as to which the date is April 16, 1997.
1
<PAGE> 17
LONE STAR INTERNATIONAL ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
1996
-----------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash $ 1,397
Accounts receivable - oil and gas revenues 21,263
Accounts receivable - JIB, net of allowance of $20,500 22,319
Accounts receivable - related party 347,589
-----------
Total current assets 392,568
-----------
Properties and equipment, at cost 1,638,403
Less - accumulated depreciation, depletion and amortization (92,650)
-----------
Property and equipment, net 1,545,753
-----------
Other assets 525
-----------
TOTAL ASSETS $ 1,938,846
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 121,063
Production payable 232,272
Accrued interest payable 47,643
Accrued payroll taxes payable 672
Notes payable 467,963
Accounts payable - interest owners 74,347
-----------
Total current liabilities 943,960
-----------
STOCKHOLDERS' EQUITY:
Common stock - par value $.001, 100,000,000 shares
authorized, 8,396,950 shares issued
and outstanding 8,397
Common shares to be issued 21,500
Stock subscriptions receivable (5,000)
Additional paid in capital 1,797,445
Retained deficit (827,456)
-----------
Total stockholders' equity 994,886
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,938,846
===========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
2
<PAGE> 18
LONE STAR INTERNATIONAL ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
REVENUES:
Oil and gas production $ 244,540 $ 69,111
Operating income 41,400 104,355
----------- -----------
Total revenues 285,940 173,466
----------- -----------
EXPENSES:
Production expenses 242,745 111,465
Supervision expenses 35,915
Depreciation, depletion and amortization 66,026 22,415
General and administrative expenses 186,978 567,635
----------- -----------
Total expenses 495,749 737,430
----------- -----------
Operating income (loss) (209,809) (563,964)
OTHER INCOME (EXPENSE)
Other income 920 237
Interest expense (31,947) (16,817)
----------- -----------
Other income (expense), net (31,027) (16,580)
----------- -----------
Net income (loss) before income taxes (240,836) (580,544)
Provision (benefit) for income taxes
----------- -----------
Net income (loss) $ (240,836) $ (580,544)
=========== ===========
Net income (loss) per common share $ (0.$305) (0.0968)
=========== ===========
Weighted average shares outstanding 7,888,000 6,000,000
=========== ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
3
<PAGE> 19
LONE STAR INTERNATIONAL ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Common Stock
-------------------------- Stock to Subscriptions Additional Retained
Shares Par value be Issued Receivable Paid in Capital (Deficit)
---------- ------------- ------------ ------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1994 6,000,000 $ 6,000 $ $ $ $ (6,076)
Issuance of Cumberland
Petroleum, Inc. stock which
was exchanged for
restricted common stock 369,000 369 37,500 184,131
Issuance of restricted common
stock in exchange for oil
and gas properties 750,000 750 1,107,317
Issuance of restricted common
stock, net of commissions 477,000 477 206,323
Issuance of restricted common
stock for consulting
services 200,000 200 (200)
Cash received for restricted
common stock to be issued 233,975
Net loss (580,544)
--------- ----------- --------- --------- ---------- -----------
Balance December 31, 1995 7,796,000 7,796 271,475 0 1,497,571 (586,620)
Issuance of restricted common
stock 499,950 500 (249,975) 249,475
Issuance of restricted common
stock 91,000 91 45,409
Restricted common stock
subscribed 10,000 10 (5,000) 4,990
Net loss (240,836)
--------- ----------- --------- --------- ---------- -----------
Balance December 31, 1996 8,396,950 $ 8,397 $ 21,500 $ (5,000) $1,797,445 $ (827,456)
========= =========== ========= ========= ========== ===========
</TABLE>
The accompanying notes are an integral part of
The consolidated financial statements.
4
<PAGE> 20
LONE STAR INTERNATIONAL ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (240,836) $ (580,544)
Adjustments to reconcile net income (loss) to net cash provided by
by operating activities:
Depreciation, depletion and amortization 66,026 22,415
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 20,493 6,842
Increase (decrease) in unapplied advances (2,672)
Increase (decrease) in accounts payable and accrued expenses 62,601 53,080
Increase (decrease) in revenues payable 106,241 92,021
----------- -----------
Net cash flows provided (used) by operating activities 14,525 (408,858)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in other assets (300) 775
Acquisition of property and equipment (6,699) (4,002)
Increase in notes receivable
Increase in due from related parties (83,566) (123,756)
----------- -----------
Net cash flows (used) by investing activities (90,565) (126,983)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings from interest owners 34,597
Increase (decrease) in cash overdraft (2,660) 2,660
Proceeds from the sale of stock 45,500 662,775
Payment of notes payable (136,142)
----------- -----------
Net cash flows provided by financing activities 77,437 529,293
----------- -----------
Net (decrease) in cash 1,397 (6,548)
Cash - beginning of year 6,548
----------- -----------
Cash - end of year $ 1,397 $
=========== ===========
Non-cash financing and investing activities:
Acquisition of oil & gas properties for stock and notes payable
Properties $ $ 1,608,067
Notes payable (500,000)
Common stock (1,108,067)
Restricted common stock subscribed 5,000
Supplemental disclosures:
Interest paid 1,070
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
5
<PAGE> 21
LONE STAR INTERNATIONAL ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Lone Star International Energy, Inc., a Nevada corporation (the
Company), was incorporated in the state of Utah on April 11, 1986
as Quiescent Corporation. On December 31, 1993, the Company was
reincorporated in the State of Nevada. The Company was in the
development stage from incorporation until completion of the
reverse acquisition described in Note 2 on May 2, 1995. The
Company is engaged in the operation of oil and gas properties, as
well as the acquisition and development of oil and gas properties.
Operations have been located entirely in Texas.
Basis of Presentation
The consolidated financial statements include the accounts of Lone
Star International Energy, Inc. and its wholly owned subsidiary
Cumberland Petroleum, Inc. Significant intercompany accounts and
transactions have been eliminated in the consolidation.
Oil and Gas Properties
The Company uses the full-cost method of accounting for oil and gas
properties. Under this method, all costs associated with property
acquisition, exploration and development activities are capitalized
within one cost center. For each cost center, the capitalized
costs are subject to a limitation so as not to exceed the present
value of future net revenues from estimated production of proved
oil and gas reserves net of income tax effect plus the lower of
cost or estimated fair value of unproved properties included in the
cost center. Capitalized costs within a cost center, together with
estimates of costs for future development, dismantlement and
abandonment, are amortized on a unit-of-production method using
the proved oil and gas reserves. Gain or loss is recognized only
on the sale of oil and gas properties involving significant
reserves. Proceeds from the sale of insignificant reserves and
undeveloped properties are applied to reduce the costs in the cost
center.
Income Taxes
The Company accounts for certain income and expense items
differently for financial reporting and income tax purposes.
Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax basis of assets
and liabilities applying enacted statutory tax rates in effect for
the year in which the differences are expected to reverse.
Cumberland Petroleum, Inc. was taxed as an S corporation prior to
being acquired by the Company.
6
<PAGE> 22
LONE STAR INTERNATIONAL ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results
will differ from those estimates, and such differences may be
material to the financial statements.
Significant estimates inherent in the preparation of the
accompanying consolidated financial statements include the reserve
valuation of the oil and gas properties. It is reasonably possible
that oil and gas prices, future development and production costs
and the quantities produced will change. These changes could
change management's decisions regarding future development and
production of the reserves.
Equipment
Depreciation of other equipment is provided using accelerated
methods over the estimated useful life of the equipment.
Income (Loss) Per Share
Net income (loss) per share is based on 7,888,000 and 6,714,452
weighted average shares outstanding in 1996 and 1995. The shares
issued in the acquisition are reflected as being outstanding for
all of 1995 since the acquisition was treated as a pooling of
interests. In addition, cash received for stock which had not been
issued at December 31, 1996 and 1995 was treated as if the shares
had been issued. During 1996, 45,000 shares of stock were issued
in error. The Company is contacting the individual in order to
have the shares returned. Those shares are not included in the
shares issued.
NOTE 2: REVERSE MERGER ACQUISITION
The Company entered into an Agreement dated April 10, 1995, with
Cumberland Petroleum, Inc., a Texas corporation (Cumberland),
pursuant to which, on May 2, 1995 the Company acquired from C.E.
Justice, 100% of the capital stock of Cumberland in exchange for
the issuance of 5,000,000 shares of the Company's common stock.
The Company changed its name to Cumberland Holdings, Inc. on May 3,
1995, to Cumberland Companies, Inc. on August 17, 1995, and Lone
Star International Energy, Inc. on January 30, 1997.
7
<PAGE> 23
LONE STAR INTERNATIONAL ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2: REVERSE MERGER ACQUISITION - (continued)
For accounting purposes, the transaction has been treated as a
recapitalization of Cumberland with Cumberland as the acquirer
(reverse acquisition). This business combination has been recorded
as a pooling of interests. The financial statements presented have
been restated to include the Company and Cumberland. The
historical financial statements prior to May 2, 1995 are those of
Cumberland. The historical stockholder's equity accounts of
Cumberland at December 31, 1994 were retroactively restated to
reflect the equivalent number of shares of common stock received in
this transaction after giving effect to the difference in par
value.
In conjunction with the reverse acquisition, Cumberland agreed to
issue 200,000 shares of common stock to the former controlling
shareholder and paid consulting fees of $100,000 to the former
controlling shareholder. The shares issued were not assigned any
value.
NOTE 3: NOTES PAYABLE
Notes payable include the following at December 31, 1996:
<TABLE>
<CAPTION>
1996
------
<S> <C>
Unsecured notes payable to two stockholders, due
December 31, 1995, with interest at 8.5% $ 75,593
Notes payable to five stockholders, secured by oil and gas
properties, interest at 7% due monthly beginning November 15, 1995
with the principal due September 15, 1996. At the option of
the stockholders, the maturity date can be extended. 363,857
Unsecured loans, non-interest bearing, payable on demand 28,513
---------
Total $ 467,963
=========
</TABLE>
The notes payable have been extended under the same terms, although
no formal agreements have been drafted. The terms described above
are the terms in the existing note agreements.
8
<PAGE> 24
LONE STAR INTERNATIONAL ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4: INCOME TAXES
Income before taxes and provisions for income tax expense (benefit)
from operations at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
--------- --------
<S> <C> <C>
Current federal income taxes $ - $ -
Deferred federal income taxes - -
-------- --------
Total $ - $ -
======== ========
</TABLE>
The actual income tax expense attributable to operations for the
years ended December 31, 1996 and 1995 differed from the amounts
computed by applying the U.S. federal tax rate of 34 percent to
pretax earnings as a result of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Computed expected tax expense $ (81,884) $ (197,385)
Effect of S Corporation 10,000
Effect of graduated tax rates 21,884 52,385
Valuation allowance related to
deferred portion of tax 60,000 135,000
---------- ----------
Provision (benefit) for income tax $ - $ -
========== ==========
</TABLE>
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss $ 195,000 $ 135,000
Accounts receivable allowance 5,125 5,125
Less valuation allowance (200,125) (140,125)
--------- ---------
Net deferred tax assets $ $
========= =========
</TABLE>
Deferred income taxes reflect the tax consequences on future years
of differences between the tax basis of assets and liabilities and
their basis for financial reporting purposes. In addition,
Statement of Financial Accounting Standards No. 109 (SFAS 109)
requires the recognition of future tax benefits, such as net
operating loss carryforwards (NOLs), to the extent that realization
of such benefits are more likely than not.
9
<PAGE> 25
LONE STAR INTERNATIONAL ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4: INCOME TAXES - (continued)
The Company had NOLs of approximately $780,000 at December 31,
1996. These NOLs expire in 2012 and 2013. A deferred tax asset
was recorded assuming that the benefits will be utilized at an
average rate of 25%. The full amount of the deferred tax asset was
offset by a valuation allowance due to the lack of operating
history for the Company and the need to raise additional funds to
develop the current oil and gas properties.
NOTE 5: RELATED PARTY TRANSACTIONS
During 1995 certain individuals and their companies became related
parties due to them acquiring stock in various transactions. These
individuals previously were investors in oil and gas properties
operated by the Company or they contracted to provide services to
the Company.
At December 31, 1996, there were accounts receivable from officers
and stockholders for amounts advanced to them and for amounts due
on joint interest billings amounting to $345,026. In addition,
there were amounts due to officers and stockholders primarily for
undistributed oil and gas production. Substantially all of the
liability can be offset against the joint interest billing
receivable noted above. As discussed in Note 3, there are notes
payable with stockholders totaling $439,450 and accrued interest
payable of $47,643.
As discussed in Note 2, during 1995 the Company paid consulting
fees of $100,000 and issued 200,000 shares of common stock to
Capital General Corporation, the former controlling shareholder.
NOTE 6: PROPERTIES AND EQUIPMENT
At December 31, 1996, properties and equipment consisted of the
following:
<TABLE>
<CAPTION>
1996
-----------
<S> <C>
Oil and gas properties $ 1,609,739
Office equipment 8,319
Equipment 20,345
-----------
1,638,403
Accumulated depreciation, depletion and amortization (92,650)
-----------
Net properties and equipment $ 1,545,753
===========
</TABLE>
10
<PAGE> 26
LONE STAR INTERNATIONAL ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7: FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has a number of financial instruments, none of which
are held for trading purposes. The following methods and
assumptions were used by the Company in determining its fair value
disclosures for financial instruments:
Accounts receivable, cash and accounts and revenue payable - It is
assumed that the amounts will be settled within the next operating
cycle for the recorded amounts. Consequently, the recorded amounts
approximate fair value.
Accounts receivable related party - Since the amounts are not due
from third parties, the payment terms are subject to change. It is
not practicable to estimate fair value.
Notes payable - Notes payable are primarily due to stockholders.
Since the amounts are not payable to an independent third party, it
is not practicable to determine the fair value of the notes
payable.
NOTE 8: OIL AND GAS PRODUCING ACTIVITIES
Capitalized Costs
Capitalized cost associated with oil and gas producing activities
are as follows at December 31, 1996:
<TABLE>
<CAPTION>
1996
-----------
<S> <C>
Proved properties $ 1,608,455
Unproved properties 1,284
Accumulated depreciation, depletion and amortization (81,444)
-----------
Net capitalized costs $ 1,528,295
===========
</TABLE>
11
<PAGE> 27
LONE STAR INTERNATIONAL ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8: OIL AND GAS PRODUCING ACTIVITIES - (continued)
Costs Incurred
Information relating to the Company's costs incurred in its oil and
gas operations is summarized as follows for the years ended
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
--------- ----------
<S> <C> <C>
Property acquisition $ 1,284 $1,608,067
Development 388
</TABLE>
Acquisition of Oil and Gas Properties
In September 1995 the Company purchased working interests in
several oil and gas properties in exchange for 750,000 shares of
restricted common stock valued at $1,108,067 and $500,000 in notes
payable. A portion of the interests acquired were, in effect,
acquired from the controlling shareholder. The values utilized to
record this transaction were based on a reserve evaluation
performed by an independent petroleum engineer for interests
acquired from third parties and the cost of the properties for the
interests acquired, in effect, from the controlling shareholder.
All of the Company's oil and gas properties were acquired in
September 1995. There were no sales of oil and gas properties in
1996 and no allowance for impairment was deemed necessary. Several
of the properties acquired were plugged during 1996; however, no
loss was recognized for these retirements.
12
<PAGE> 28
LONE STAR INTERNATIONAL ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8: OIL AND GAS PRODUCING ACTIVITIES - (continued)
Results of Operations
Results of operations for oil and gas producing activities are as
follows for the years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Revenues $ 244,540 $ 69,111
Production costs (244,030) (111,465)
Depreciation and depletion (62,206) (19,238)
--------- ---------
(61,696) (61,592)
--------- ---------
Net income tax
Results of operations (excluding
corporate overhead and interest
costs) $ (61,696) $ (61,592)
========= =========
</TABLE>
Unaudited Oil and Gas Reserve Quantities
The following unaudited reserve estimates presented as of December
31, 1996 and 1995 were prepared by Harper & Associates, Inc., an
independent petroleum engineer. There are many uncertainties
inherent in estimating proved reserve quantities and in projecting
future production rates and the timing of development expenditures.
In addition, reserve estimates of new discoveries that have little
production history are more imprecise than those of properties with
more production history. Accordingly, these estimates are expected
to change as future information becomes available.
Proved oil and gas reserves are the estimated quantities of crude
oil, condensate, natural gas and natural gas liquids which
geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
Proved developed oil and gas reserves are those reserves expected
to be recovered through existing wells with existing equipment and
operating methods.
13
<PAGE> 29
LONE STAR INTERNATIONAL ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8: OIL AND GAS PRODUCING ACTIVITIES - (continued)
Unaudited net quantities of proved reserves and proved developed
reserves of crude oil (including condensate) and natural gas (all
of which are located within the state of Texas) are as follows:
<TABLE>
<CAPTION>
Changes in Proved Reserves (Bbls) (MCF)
-------------------------- -------- ---------
<S> <C> <C>
Estimated quantity, December 31, 1994
Purchase of reserves 110,954 3,828,827
Production (879) (32,477)
------- ---------
Estimated quantity, December 31, 1995 110,075 3,796,350
Production (3,823) (97,642)
Revisions of previous estimates 9,941 82,446
------- ---------
Estimated quantity, December 31, 1996 116,193 3,781,154
======= =========
</TABLE>
Unaudited Standardized Measure
The following table presents a standardized measure of the
discounted future net cash flows attributable to the Company's
proved oil and gas reserves. Future cash inflows were computed by
applying year end prices of proved oil and gas reserves. The
future production and development costs represent the estimated
future expenditures (based on current costs) to be incurred in
developing and producing the proved reserves, assuming continuation
of existing economic conditions. Future income tax expenses were
computed by applying statutory income tax rates to the difference
between pre-tax net cash flows relating to the Company's proved oil
and gas reserves and the tax basis of proved oil and gas properties
and available net operating loss carry forwards. Discounting the
future net cash inflows at an arbitrary 10% is a method to measure
the impact of the time value of money.
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(In thousands)
<S> <C> <C>
Future cash inflows $ 8,645 $ 7,900
Future production costs (2,987) (2,797)
Future development costs (1,329) (1,222)
Future income tax expense (1,472) (1,319)
--------- ---------
Future net cash flows 2,857 2,562
10% annual discount for estimated timing of cash flows (971) (875)
--------- ---------
Standardized measure of discounted future net cash flows $ 1,886 $ 1,687
========= =========
</TABLE>
14
<PAGE> 30
LONE STAR INTERNATIONAL ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8: OIL AND GAS PRODUCING ACTIVITIES - (continued)
The following presents the principal sources of the changes in the
standardized measure of discounted future net cash flows for the
years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(In Thousands)
<S> <C> <C>
Standardized measure of discounted future net cash
flows, beginning of year $ 1,687 $
Purchase of reserves in place 2,585
Sales and transfers of oil and gas produced, net of
production costs (2) (20)
Net changes in prices, production and development costs 105
Net change in income taxes (118) (869)
Accretion of discount 169
Revisions of previous quantity estimates 39
Other 6 (9)
--------- ---------
Standardized measure of discounted future net cash
flows, end of year $ 1,886 $ 1,687
========= =========
</TABLE>
15
<PAGE> 31
LONE STAR INTERNATIONAL ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9: SUBSEQUENT EVENTS
On April 2, 1997, the Company entered into an agreement to acquire
all of the outstanding common stock of Energy Reclaim
Refrigeration, Inc. (Energy) in exchange for 3,333,333 shares of
unregistered Rule 144 restricted common stock of the Company. The
only assets of Energy currently are various patents. The Company
also agreed to enter into an employment agreement with Calvin
Cline, the sole shareholder of Energy. The Company is to provide
manufacturing facilities, working capital and marketing services.
In March 1997 the Company filed Form S-8 to register 7,000,000
shares of common stock. The shares were issued to ten individuals
(700,000 each) as compensation for corporate development and
consulting agreements with a term of one year.
The Company signed an agreement dated April 16, 1997 with
Northridge Oil Company to acquire certain assets effective
April 1, 1997 in exchange for restricted common stock of the
Company. The number of shares to be issued to Northridge Oil
Company were 730,489. The Company is also negotiating with certain
oil and gas interest owners, however, no agreements have been
signed. The Company anticipates closing these transactions on
April 23, 1997.
16
<PAGE> 32
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -----------
<S> <C>
2.1 Agreement dated as of April 10, 1995 between Cumberland Petroleum,
Inc. and Quiescent Corporation, previously filed as Exhibit 2.1 to
the Company's Report on Form 8-K dated May 19, 1995, and incorporated
herein by reference.
2.2 Article of Merger of Cumberland Companies. Inc. and Quiescent
Corporation, a Utah Corporation. (Previously filed as the same exhibit
number with the Company's Annual Report on Form 10-KSB dated December
31, 1995 and incorporated herein by reference.)
3.1 Articles of Incorporation of the Company and amendments filed with
the Secretary of State of Nevada. (Previously filed as the same
exhibit number with the Company's Annual Report on Form 10-KSB dated
December 31, 1995 and incorporated herein by reference.)
3.2 Bylaws of the Company. (Previously filed as the same exhibit number
with the Company's Annual Report on Form 10-KSB dated December 31,
1995 and incorporated herein by reference.)
10.1 Oil and Gas Property Purchase Agreement between the Company and Ford
and Myrt Fullingim Trust dated September 18, 1995. (Previously filed
as the same exhibit number with the Company's Annual Report on Form
10-KSB dated December 31, 1995 and incorporated herein by reference.)
10.2 General Promissory Note by the Company to Ford and Myrt Fullingim
Trust dated September 15, 1995 in the original principal amount of
$89,643. (Previously filed as the same exhibit number with the
Company's Annual Report on Form 10-KSB dated December 31, 1995 and
incorporated herein by reference.)
10.3 Oil and Gas Property Purchase Agreement between the Company and O.O.
Thompson and Bea Thompson dated September 18, 1995. (Previously filed
as the same exhibit number with the Company's Annual Report on Form
10-KSB dated December 31, 1995 and incorporated herein by reference.)
10.4 General Promissory Note by the Company to and O.O. Thompson and Bea
Thompson dated September 15, 1995 in the original principal amount of
$104,198. (Previously filed as the same exhibit number with the
Company's Annual Report on Form 10-KSB dated December 31, 1995 and
incorporated herein by reference.)
10.5 Oil and Gas Property Purchase Agreement between the Company Randy J.
Mason dated September 18, 1995. (Previously filed as the same exhibit
number with the Company's Annual Report on Form 10-KSB dated December
31, 1995 and incorporated herein by reference.)
10.6 General Promissory Note by the Company to Randy J. Mason dated
September 15, 1995 in the original principal amount of $210,001.
(Previously filed as the same exhibit number with the Company's Annual
Report on Form 10- KSB dated December 31, 1995 and incorporated herein
by reference.)
10.7 Oil and Gas Property Purchase Agreement between the Company and J. L.
Keas dated September 18, 1995. (Previously filed as the same exhibit
number with the Company's Annual Report on Form 10-KSB dated December
31, 1995 and incorporated herein by reference.)
10.8 General Promissory Note by the Company to J. L. Keas dated September
15, 1995 in the original principal amount of $17,143. (Previously
filed as the same exhibit number with the Company's Annual Report on
Form 10-KSB dated December 31, 1995 and incorporated herein by
reference.)
10.9 Oil and Gas Property Purchase Agreement between the Company and
Charles and Romona Hibbs dated September 18, 1995. (Previously filed
as the same exhibit number with the Company's Annual Report on Form
10-KSB dated December 31, 1995 and incorporated herein by reference.)
10.10 General Promissory Note by the Company to and Charles and Romona
Hibbs dated September 15, 1995 in the original principal amount of
$55,357. (Previously filed as the same exhibit number with the
Company's Annual Report on Form 10-KSB dated December 31, 1995 and
incorporated herein by reference.)
</TABLE>
<PAGE> 33
<TABLE>
<S> <C>
10.11 Oil and Gas Property Purchase Agreement between the Company and J. L.
Thompson dated September 18, 1995. (Previously filed as the same
exhibit number with the Company's Annual Report on Form 10-KSB dated
December 31, 1995 and incorporated herein by reference.)
10.12 General Promissory Note by the Company to J. L. Thompson dated
September 15, 1995 in the original principal amount of $22,857.
(Previously filed as the same exhibit number with the Company's
Annual Report on Form 10-KSB dated December 31, 1995 and incorporated
herein by reference.)
16 Letter dated March 10, 1997 from Hollander, Gilbert & Co, Certified
Public Accountants. (Previously filed as the same exhibit number
with the Company's Annual Report on Form 10-KSB dated December 31,
1995 and incorporated herein by reference.)
21 List of Subsidiaries
23 Consent of Experts and Counsel
27 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 21
List of Subsidiaries
Cumberland Petroleum, Inc. a Texas corporation
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITOR'S
We consent to the incorporation by reference in the Registration Statement
(Form S-8) pertaining to the Corporate Development & Consulting Agreement by
and between John Sloan and Cumberland Companies, Inc., Corporate Development &
Consulting Agreement by and between Barbara Matalon and Cumberland Companies,
Inc., Corporate Development & Consulting Agreement by and between Tony
Sandelier and Cumberland Companies, Inc., Corporate Development & Consulting
Agreement by and between Susan Pittman and Cumberland Companies, Inc.,
Corporate Development & Consulting Agreement by and between Judson Whiting and
Cumberland Companies, Inc., Corporate Development & Consulting Agreement by and
between George Glauser and Cumberland Companies, Inc., Corporate Development &
Consulting Agreement by and between Barbara Pires and Cumberland Companies,
Inc., Corporate Development & Consulting Agreement by and between Peter
Sosnowski and Cumberland Companies, Inc., Corporate Development & Consulting
Agreement by and between Robert Horrigan and Cumberland Companies, Inc., and
Corporate Development & Consulting Agreement by and between Linda Meyers and
Cumberland Companies, Inc., of our report dated April 7, 1997, with respect to
the consolidated financial statements and schedules of Lone Star International
Energy, Inc. included in its Annual Report (Form 10-K) for the year ended
December 31, 1996, filed with the Securities and Exchange Commission.
/s/ DAVIS, KINARD & CO., P.C.
DAVIS, KINARD & CO., P.C.
Abilene, Texas,
April 17, 1997.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,397
<SECURITIES> 0
<RECEIVABLES> 411,671
<ALLOWANCES> 20,500
<INVENTORY> 0
<CURRENT-ASSETS> 392,568
<PP&E> 1,638,403
<DEPRECIATION> 92,650
<TOTAL-ASSETS> 1,938,846
<CURRENT-LIABILITIES> 943,960
<BONDS> 0
0
0
<COMMON> 8,397
<OTHER-SE> 986,489
<TOTAL-LIABILITY-AND-EQUITY> 1,938,846
<SALES> 285,940
<TOTAL-REVENUES> 286,860
<CGS> 242,745
<TOTAL-COSTS> 242,745
<OTHER-EXPENSES> 232,504
<LOSS-PROVISION> 20,500
<INTEREST-EXPENSE> 31,947
<INCOME-PRETAX> (240,836)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (240,836)
<EPS-PRIMARY> (0.031)
<EPS-DILUTED> (0.031)
</TABLE>
