U.S. 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 quarterly period ended September 30, 1998
Commission File Number 0-17244
Lone Star International Energy, Inc.
(Name of small business issuer in its charter)
Nevada 87-0434288
(State of incorporation) (IRS Employer Identification Number)
528 Grant Road
Mineral Wells, Texas 76067
(Address of principal executive offices) (Zip code)
(940) 325-1700
Issuer's telephone number
Check whether the issuer (1) filed all the reports required to be filed by
section 13 or 15(d) of the Exchange Act during the preceding 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. [ X ] Yes
[ ] No
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; 25,295,970 Shares as of November 13, 1998
Transitional Small Business Disclosure Format: Yes [ ] No [x]
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
LONE STAR INTERNATIONAL ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
September 30, December 31,
1998 1997
--------- ----------
(Unaudited)
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash ................................................... $ $ 15,230
Accounts receivable - oil and gas revenues ............. 64,450
Accounts receivable - JIB, net of allowance of $20,500 . 12,692 8,827
Accounts receivable - other net of allowance of $209,337 402,374 367,413
Notes receivable - current ............................. 2,870 3,422
Unearned compensation .................................. 170,000
Prepaid expenses - lease ............................... 60,000 60,000
Prepaid expenses ....................................... 6,103 634,056
---------- ----------
Total current assets ............................... 484,039 1,323,398
---------- ----------
Properties and equipment, at cost ........................... 9,731,280 5,819,895
Less - accumulated depreciation, depletion and amortization . 1,217,540 2,819,190
---------- ----------
Property and equipment, net ........................ 8,513,740 3,000,705
---------- ----------
OTHER ASSETS
Prepaid expenses - non current - lease ................. 80,532 112,049
Prepaid expenses - non current ......................... 470,662
Unearned compensation .................................. 510,000
Note receivable - non current .......................... 183,315 5,433
Deposits on property purchase .......................... 13,107 582,625
Debenture issuance costs net of amortization
of $139,750 and $43,000 in 1998 and 1997 ............... 118,250 215,000
Patents, net of amortization
of $4,971 and $3,127 in 1998 and 1997 .............. 53,029 54,873
Deposits ............................................... 1,130 930
---------- ----------
Total other assets ........................ 449,363 1,951,572
---------- ----------
TOTAL ASSETS ................................................ $9,447,142 $6,275,675
========== ==========
</TABLE>
<PAGE>
LONE STAR INTERNATIONAL ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
September 30, December 31,
1998 1997
------------ ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES
<S> <C> <C>
Cash overdraft ............................................. $ 6,893 $
Accounts payable ........................................... 1,331,378 833,897
Production payable ......................................... 284,646 328,698
Accrued interest payable ................................... 263,313 147,337
Accrued payroll taxes payable .............................. 274,461 111,904
Notes payable - related party .............................. 75,593 75,593
Current maturities of long-term debt ....................... 19,223 12,079
Advances due to officer .................................... 228,929 80,759
Obligation to stockholders ................................. 243,367 250,000
Accounts Payable - interest owners ......................... 32,097 32,097
------------ ------------
Total current liabilities .............................. 2,759,900 1,872,364
------------ ------------
LONG TERM DEBT
Long term debt ............................................. 2,502,817 2,513,255
Accrued compensation - stock option ........................ 850,000
Notes payable officers and employees ....................... 261,510 908,126
------------ ------------
Total long term debt ................................... 2,764,327 4,271,381
------------ ------------
Total liabilities ...................................... 5,524,227 6,143,745
------------ ------------
STOCKHOLDERS' EQUITY
Common stock - par value $.001, 100,000,000 shares
authorized, 25,295,970 and 19,805,283 shares
issued and outstanding in 1998 and 1997 ................ 25,296 19,805
Common shares to be issued ................................. 6,500 6,500
Stock subscriptions receivable ............................. (5,000) (5,000)
Additional paid in capital ................................. 13,432,354 7,248,172
Retained deficit ........................................... (9,536,235) (7,137,547)
------------ ------------
Total stockholders' equity ............................. 3,922,915 131,930
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ...................... $ 9,447,142 $ 6,275,675
============ ============
</TABLE>
<PAGE>
LONE STAR INTERNATIONAL ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------ ------------- ------------ -------------
REVENUES
<S> <C> <C> <C> <C>
Oil and gas production $ 31,510 $ 126,086 $ 186,145 $ 305,060
Operating income 16,800 35,700 40,600
Other sales 756 18,039
------------ ------------- ------------ -------------
Total revenues 32,266 142,886 239,884 345,660
------------ ------------- ------------ -------------
EXPENSES
Production expenses 37,511 114,285 199,859 254,862
Depreciation, depletion and amortization 35,449 32,857 118,673 93,814
Research and development 185,651
General and administrative expenses 457,034 995,879 1,958,884 1,999,247
------------ ------------- ------------ -------------
Total expenses 529,994 1,143,021 2,463,067 2,347,923
------------ ------------- ------------ -------------
Operating income (loss) (497,728) (1,000,135) (2,223,183) (2,002,263)
------------ ------------- ------------ -------------
Other income (expense)
Other income 561 5,461 7,056 5,477
Interest expense (50,924) (23,944) (182,561) (79,475)
------------ ------------- ------------ -------------
Other income (expense), net (50,363) (18,483) (175,505) (73,998)
------------ ------------- ------------ -------------
Net income (loss) before income taxes (548,091) (1,018,618) (2,398,688) (2,076,261)
Provision (benefit) for income taxes
------------ ------------- ------------ -------------
Net income (loss) $ (548,091) $ (1,018,618) $( 2,398,688) $ (2,076,261)
============ ============= ============ =============
Basic earnings (loss) per common share $ (0.022) $ (0.067) $ (0.104) $ (0.137)
============ ============= ============ =============
Diluted earnings (loss) per common share $ (0.022) $ (0.067) $ (0.104) $ (0.137)
============ ============= ============ =============
Weighted average shares outstanding 25,295,970 15,121,552 23,066,104 15,121,552
============ ============= ============ =============
Adjusted weighted average shares outstanding 25,295,970 15,121,552 23,066,104 15,121,552
============ ============= ============ =============
</TABLE>
<PAGE>
LONE STAR INTERNATIONAL ENERGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(unaudited)
<TABLE>
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) ...................................................................... $(2,398,688) $(2,076,261)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation, depletion and amortization ................................. 118,673 513,453
Notes payable issued to satisfy accrued payroll .......................... 495,291
Write-off of accrued compensation stock option ........................... (170,000)
Gain on sale of assets ................................................... 8,455
Changes in operating assets and liabilities:
(Increase) decrease -
Accounts receivable .............................................. 25,624 (45,311)
Prepaid expense .................................................. 502,179
Increase (decrease) in -
Accounts payable and accrued expenses ............................ 767,541 1,058,241
Revenues payable ................................................. (44,052) 43,915
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES .................................... (694,977) (505,963)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in other assets ............................................... (200) (84,614)
(Increase) decrease in due from related parties ................................... 18,905
Collection of note receivable ..................................................... 9,302
Decrease in deposit on property acquisition ....................................... 569,518
Proceeds from sale of assets ...................................................... 120,240
Purchase of property and equipment ................................................ (157,105) (1,196,696)
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES .................................... 541,755 (1,262,405)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (payments) of notes and loans payable, net ............................... (10,438) 2,404,236
Payment of obligations to stockholders ............................................ (6,633)
Advances from officer ............................................................. 148,170
Sale of common stock .............................................................. 450,000
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES .................................... 131,099 2,854,236
----------- -----------
NET INCREASE (DECREASE) IN CASH ........................................................ (22,123) 1,085,868
CASH, Beginning of period .............................................................. 15,230 1,397
----------- -----------
CASH, End of period .................................................................... $ (6,893) $ 1,087,265
=========== ===========
Non-cash financing and investing activities:
Acquisition of oil and gas properties for stock.................................... $ 5,700,000
Supplemental disclosures:
Interest paid ..................................................................... 182,561
</TABLE>
<PAGE>
LONE STAR INTERNATIONAL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Nine Months Ended September 30, 1998 AND 1997
1. ORGANIZATION AND BASIS OF PRESENTATION
Lone Star International Energy, Inc., a Nevada Corporation (the "Company"), was
incorporated in the state of Utah on April 11, 1986 as Quiescent Corporation.
The Company reincorporated as a Nevada corporation on October 12, 1995. 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 privately held 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 million shares of the Company's common stock. Cumberland operated 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.
In April 1997, the Company acquired all of the common stock of Energy Reclaim
Refrigeration, Inc. (Energy Reclaim), a privately held Texas corporation, from
Calvin Cline in exchange for 3,333,333 shares of Common Stock and entered into
an employment contract with Mr. Cline. As a result of this acquisition, the
Company through Energy Reclaim now owns the rights to three energy saving
absorption refrigeration technology processes, one a process referred to as the
"By-Pass Chiller(TM)", and the second a process referred to as the "Fresh
Catch(TM)" for which patents have been issued. In addition, Energy Reclaim has a
patent on a residential version of the By-Pass Chiller(TM), which is known as
the Magnatron(TM) unit.
2. COMMENTS
The accompanying consolidated financial statements are unaudited but, in the
opinion of the management of the company, contain all adjustments, consisting of
only normal recurring accruals, necessary to present fairly the financial
position at September 30, 1998, the results of operations and changes in cash
flows for the nine months then ended. Certain information and footnote
disclosures normally included in financial statements that have been prepared in
accordance with generally accepted accounting principals have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission, although management of the Company believes that the disclosures
contained in these financial statements are adequate to make the information
presented therein not misleading. For further information, refer to the
Company's annual report on Form 10-KSB for the year ended December 31, 1997.
In June 1998, the Company entered into a letter of intent with a private
business trust (Trust) to provide long term funding for operations and
development of the Company's business activities. This letter of intent included
the sale of an undivided interest in the Company's Two Medicine Cut Bank Sand
Unit located in Montana to an entity to be designated by the Trust. As a
condition to the development of the business relationship contemplated between
the Company and the Trust, Mr. C. E. Justice, Chairman and CEO of the Company
was asked to resign. Consequently, effective July 23, 1998, the Company accepted
the resignation of C. E. Justice, which included the termination of his
employment agreement, settlement of all accounts between the Company and Mr.
Justice, and the cancellation of the stock options for 5 million shares that
were part of the employment contract. In a separate letter agreement, Mr.
Justice has agreed to sell a total of over 3.75 million shares of his personal
stock in the Company to a designated entity of the Trust. The proposed sale of
Mr. Justice's remaining shares together with his prior private placements and
sales to provide working capital for the Company will result in his total
liquidation of shares in the Company. Mr. Justice agreed to remain available to
the Company as a consultant for a period of one year to assist in the resolution
of any outstanding litigation involving the Company that resulted from actions
taken during his term as Chairman and CEO.
<PAGE>
A short time after entering into the letter of intent with the private business
trust (Trust), a shareholder with a security interest in the Montana property
filed litigation against Mr. Justice, individually, the Company and its
officers, and also named the Trust as a defendant. The plaintiffs alleged that
the Trust had conspired with the Company and Justice to avoid allowing the
plaintiff to take possession and ownership of the Montana property due to an
alleged default in a loan agreement between the Company and the plaintiff. The
Trust had no contact with these plaintiffs, and had never had any business
dealings of any nature with the parties. Because the plaintiffs refused to amend
their proceedings to dismiss the Trust, the Trust elected to terminate its
letter of intent with the Company.
Over the next month, the Company made diligent efforts to not only secure
another buyer for the Montana interest, it also attempted to restore some form
of negotiation with the Trust. After numerous discussions, the Trust agreed to
make an offer to the Company for its Montana property, but declined to reinstate
any of the other aspects of its original letter of intent. Finally, the Trust
submitted an offer to the Company representing its desire to purchase all of the
Company's interest in Provident Energy Associates of Montana L.L.C., and its
corresponding interest in the Two Medicine Cut Bank Sand Unit. The offer
consisted of net cash payment at closing to the Company of $3.5 Million,
together with the assumption and payment of a $1.5 Million dollar development
obligation and the plugging and restoration liabilities of the Company estimated
to be in excess of $1.5 Million. The offer further provides that the Trust
assumes the carried interest liabilities associated with the Company's interest
deliverable to the four Montana project investors.
The results of operations for the nine months ended September 30, 1998 are not
necessarily indicative of the results of operations to be expected for the full
year ended December 31, 1998.
ITEM 2: MANAGEMENTS 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 achievements of the Company to
materially different from any future results, performance or achievements
expressed or implied by such forward looking statements.
Overview:
The Company continues to experience a critical financial shortfall that
management is actively seeking to resolve through the sale of its Montana oil
and gas properties. The financial shortfall has developed as the result of
several factors, which primarily date back to the third quarter of 1997. In July
1997, the Company entered into debenture funding agreements for a total funding
of $5 million. The initial funding was received in late July in the amount of
$2.5 million, out of which costs and fees were deducted, and the Company
received assurances that the balance of $2.5 million would be available within
just a few weeks. The Company utilized the initial funding to order and made
initial payments on the manufacturing equipment required to establish its
manufacturing facility at Mineral Wells, Texas, and to complete required
upgrades and capital improvements to the facility to accommodate the principal
piece of equipment being the Bystronic Laser. In additional the Company settled
the majority of its outstanding payables relating to its acquisition of oil and
gas assets into the public company. Funds were also set aside to complete the
purchase of the manufacturing equipment upon installation, and $500,000.00 was
deposited in an investment account with Merit Capital, a stock brokerage firm.
<PAGE>
While awaiting the delivery and installation of the manufacturing equipment, the
Company was presented with an excellent opportunity to upgrade its oil and gas
division with the acquisition of the Two Medicine Cut Bank Sand Unit in Montana.
With the understanding that an additional $2.5 million in debenture funding was
forthcoming, the Company elected to submit its offer for the Montana property,
and the offer was accepted. Consequently, the Company paid in excess of
$300,000.00 to close the Montana acquisition, and additional funds in excess of
$100,000.00 to commence the restoration of the initial wells to daily
production. After the Company closed the Montana acquisition, it learned that
the debenture holders would not honor their prior commitment and declined to
fund the balance of the debentures. The Company further discovered that the
funds deposited in an investment account with Merit Capital had, without
approval, been used by Merit Capital to pay for trades in the Company's shares,
and that the funds were not accessible. The Company protested the activities of
Merit Capital, and demanded the immediate return of the funds deposited in the
account; however, Merit Capital has not yet refunded the account proceeds. The
Company is pursuing actions against Merit Capital for misappropriation of the
account funds both through arbitration and the filing of a complaint with the
Texas Securities Commission, but there are no assurances that the Company will
be able to collect all or any of these funds. With the misappropriation of the
$500,000.00 by Merit Capital and the failure of the debenture holders to honor
their funding commitment, the Company was unable to fully pay for the
manufacturing equipment ordered, and currently the Company owes approximately
$400,000.00 on its two major pieces of equipment, being the Bystronic Laser and
the Amada Press Break.
Upon installation of the Bystronic Laser and other equipment, the Company
immediately fabricated a new prototype Fresh Catch unit for testing, and
commenced operations to locate and solicit outsource contract work for the
equipment as an additional source of income. Using its existing staff, the
Company was able to secure a small amount of outsource work, however, without
the proper training and background in that particular industry, the outsource
income was not a material addition to the Company. In the early second quarter
of 1998, the Company retained the services of two outside sales consultants with
specific background in outsource contract sales for the laser equipment. These
consultants appeared to be successful in bringing in a new potential account
each day until the Bystronic Laser suffered a mechanical breakdown. Although the
mechanical problem with the laser is covered under warranty, the manufacturer
has refused to service the unit and restore it to operation until the Company
resolves the outstanding balance due on the initial purchase, which is
approximately $360,000.00. Currently, the Bystronic Laser remains inoperable and
the Company is unable to pursue outsource contract work, and may lose existing
contract opportunities. The Company is seeking funding against the equipment
with a financial guarantee to be issued on its behalf by a private business
Trust. This funding will allow the Company to pay off the equipment and have the
laser serviced and returned to operation. This will allow the Company to pursue
additional outsource work and develop an income source independent of other
operations.
The Company's manufacturing and sales of By-Pass Chiller and Fresh Catch Units
has also been delayed creating additional financial burdens on the Company.
These delays have been caused primarily due to the problems encountered in the
setup of a qualified testing facility. Due to the limited financial resources
available to the Company, the testing facility was outfitted with used and
makeshift equipment and parts. This situation resulted in substantial delays in
being able to secure sustained test runs on the Fresh Catch unit. The short run
tests have all proven positive, and the technology has again been proven to work
as designed, however, without sustained test time, the Company can not be
confident in re-installing a unit on the fishing vessel for field testing. The
Company secured the services of an outside professional engineer to consult with
Mr. Calvin Cline an assist him in resolving any remaining problems in the design
and functioning of the Fresh Catch and By-Pass Chiller. The consultant engineer
expressed an opinion that the Company was very close to having the technology
completed and ready for certification.
<PAGE>
The Company has completed its contract for the sale of its Montana property, and
the successful closing will correct the critical short term financial situation,
including providing the capital necessary to carry the Company into independent
certification of the Fresh Catch and By-Pass Chiller technology. With
independent certification, the Company believes that it will then be able to
secure long term financial assistance through a variety of options, including
sale of production, marketing, and distribution rights, or a possible merger
into a larger company in the refrigeration, and air conditioning industry.
Oil and Gas 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.
During the six months ended June 30, 1998 the Company has liquidated all of its
remaining oil and gas properties located in the State of Texas. This liquidation
included only the existing wells and the acreage attributable to each such well,
while the Company retained the proven reserves underlying the undeveloped
acreage on the Mallory Slemmons leases. The operating overhead for the existing
wells had become excessive in relation to the production income achieved from
the properties, and it became apparent to management that the Company could no
longer operate these Texas properties at any level of profitability.
The Company intends to focus on the liquidation of its remaining oil and gas
operations due in part to the continued decline in the oil prices and the
instability of the industry as a result thereof. In addition, the remaining oil
and gas interests are believed to be the most liquid assets of the Company that
can be utilized to provide the necessary capital for development of the
Technology. Failure to utilize these assets for that purpose could result in the
loss of the Montana property due to the Company's financial inability at this
time to conduct the necessary development operations. Obtaining funding from the
sale of the Montana property to the Trust or some other bona fide buyer is
currently critical to the Company.
Given the Companies current liquidity problems the failure to obtain such
funding will likely cause the Company to seek bankruptcy protection. During the
remainder of 1998 the Company does not expect to devote any attention to
evaluating other business within what it broadly describes as the energy
industry.
Specific Oil and Gas Properties The Company has entered into a contract for the
sale of its entire interest in and to the Two Medicine Cut Bank Sand Unit
located in Montana for the purchase price of $3.5 million net cash to the
Company plus the assumption of $1.5 Million in development obligations and in
excess of $1.5 Million in plugging and restoration liabilities. Formal contracts
were executed in late September, and the Company expects to close the
transaction during the fourth quarter of 1998. The proceeds from the sale will
be used to liquidate outstanding indebtedness of the company, including the
private loan made by a group of shareholders which enabled the Company to close
the Montana acquisition. The proceeds will also provide working capital
necessary to secure final certification of the Fresh Catch and By-Pass Chiller
technologies.
<PAGE>
Due to the circumstances which required the renegotiations of the relationship
between the Company and the Trust, there is no assurance that the sale of the
Two Medicine Cut Bank Sand Unit will be consummated. Failure to consummate this
sale or obtain other funding will likely cause the Company to seek bankruptcy.
Energy Reclaim Plan of Operations
Energy Reclaim has been in the research and development stage of developing
products using its patented technology. With the acquisition of its precision
metal cutting Bystronic Laser and other manufacturing equipment, Energy Reclaim
was believed to be poised to move forward with the development of the production
models of both the Fresh Catch and By-Pass Chiller Units. Based upon the funding
commitments made in connection with the original debenture issues in 1997,
management was confident that working capital would be available not only for
the acquisition of the necessary manufacturing equipment, but also the capital
necessary to fund the development of the technology from prototype to production
models. Although the debenture holders had committed a total of $5 million in
funding, only half of that amount was ever actually funded, and upon request for
the balance, the debenture holders declined to fund the balance. With the belief
that sufficient working capital was available through the debenture funding,
management made optimistic projections regarding the completion of the
development stages for the Fresh Catch and By-Pass Chiller. The absence of the
balance of the debenture funding created a working capital shortfall that was
not foreseen, and placed limitations on the Company's ability to provide
adequate testing facilities needed to facilitate the development of the
technologies. As a result, the Company has fallen behind its projected schedule
for the development of the production models of both the Fresh Catch and the
By-Pass Chiller Units.
Utilizing makeshift testing facilities, Energy Reclaim made significant progress
in the testing of its new production model of the Fresh Catch during the second
quarter of 1998. New management has determined that independent certification of
the technology is an important aspect in the process of production and marketing
of the Energy Reclaim Fresh Catch and By-Pass Chiller Units. With that in mind,
Energy Reclaim has engaged a senior professor of a leading university to consult
on both the Fresh Catch and By-Pass Chiller Units, and to provide an independent
report that the technology operates according to ARI standards. The
certification report for the Fresh Catch is expected sometime during 1999, and
once that is completed, a production model will be installed on a fishing vessel
in Louisiana for actual field test operations verification. If the Company is
unsuccessful in obtaining additional working capital through the sale of its
Montana oil and gas property, the Company mat not be able to obtain the ARI
certification report or be able to complete the production model of the Fresh
Catch unit.
Energy Reclaim further plans to complete its By-Pass Chiller production unit,
and expects to have it certified in accordance with the same procedure used for
the Fresh Catch. Upon independent certification, Energy Reclaim expects to
engage a pilot project for the installation of a production model of the By-Pass
Chiller for actual field test operations. Energy Reclaim plans to enter into
several pilot test projects in different parts of the country, with each such
pilot test project providing valuable beta test data on the performance of the
units. If the Company is unsuccessful in obtaining additional working capital,
the Company mat not be able to obtain the ARI certification report or be able to
complete the production model of the By-Pass Chiller unit.
The Company has been approached and is exploring the possible sale or licensing
of distributorships, manufacturing rights, and other aspects of the national and
worldwide development of markets for its Fresh Catch(TM) and By-Pass Chiller(TM)
technology. The Company believes, however, that certification of the
technologies is a critical prerequisite to developing a plan to pursue these
possible sources of income and revenue. The Company believes that over the next
year an important source of revenue can be created through the development of
marketing, distribution and manufacturing rights not only in the United States
but also around the world.
<PAGE>
Effective September 29, 1998, Calvin Cline resigned from his position with
Energy Reclaim in a dispute over unpaid wages. After careful consideration, the
Board of Directors of the Company accepted the resignation, in large part due to
Mr. Cline's inability to complete the technologies during the past year. The
Company believes that it can successfully implement its stated goals of
independent certification of the technology through the primary utilization of
outside professional engineers engaged under a consulting contract. Any such
arrangement would include a very strict non-circumvention, non-compete, and
confidentiality agreement to protect the Company and the technology. The Board
does intend to negotiate with Mr. Cline for his services as a consultant to the
engineers on an as needed basis.
Fabrication & Precision Engineering Inc.
The Company formed a new wholly owned subsidiary by the name of Fabrication &
Precision Engineering Inc., ("FPE"), as a Texas Corporation on April 6, 1998.
FPE was formed to take advantage of the potential outsource market available for
contract engineering and fabrication work to enable the full utilization of its
machine shop equipment for precision engineering including laser cutting and
specialty welding. The staff at FPE had been actively engaged in the
solicitation of outside contract fabrication work for the equipment. The
facility is set up so that outsource work can be accomplished without hindrance
to the work required to develop and manufacture its own Fresh Catch and By-Pass
Chiller units. In order to enhance the marketing capabilities of FPE, the
subsidiary has retained the services of two full time sales representatives.
Both of these representatives are employed as consultants on a commission basis,
and both have previous verified experience in marketing the type of outsource
work sought by FPE.
FPE acquired an additional piece of equipment known as a Tubing Bender that will
be a beneficial addition to the fabrication of the Energy Reclaim Fresh Catch
and By-Pass Chiller units in that it will eliminate numerous welds along the
various tubing connecting the components of the two units. The addition of this
equipment has also enabled FPE to fabricate a prototype automotive step rail for
trucks. Purchase orders for the product had been expected for the production and
delivery of 500 units per month. Due to the lack of working capital, however,
the Company was unable to complete an initial order for product. The Company
plans to reevaluate this product, and upon receipt of the necessary working
capital, will pursue the market for the product if it can be determined that a
long term market and opportunity is available. If the Company is unsuccessful in
obtaining additional working capital, the Company mat not be able to produce the
automotive step rail.
Upon receipt of the working capital resulting from the sale of the Montana
property, the Company intends to review and reevaluate FPE and its potential as
a significant source of operating revenue for the Company. Should this
evaluation determine that the outsource services should be pursued, additional
outsource contracts will be sought by the FPE sales representatives.
Operating Capital
Throughout its operational history, the Company has principally relied on
funding its operations through the sale of its stock through offerings
structured to be exempt from registration under the Act, and through the sale of
the Debentures. In addition, its former President and Chairman, Mr. C. E.
Justice has funded operations through loans to the Company and through the sale
of his personal shares in certain private placements with some of the proceeds
being loaned to the Company to cover operating expenses. Historically, these
activities have resulted in the Company being under funded at many times. Most
of the key administrative personnel have continued to defer significant portions
of their agreed salary.
The Company is currently experiencing a liquidity crisis. The Companies
historical methods of raising capital do not appear viable. The arranging of
funding by the Trust and the sale of the Montana properties are the only near
term events likely to produce the necessary capital. The failure or significant
delay of these events will likely force the Company to seek bankruptcy
protection.
<PAGE>
Additional capital is required to fund the planned capital needs of the Company
over the next year and the Company has no assurance that sources for accessing
such capital will be available. While it is the desire of the Company to
preserve the equity and minimize dilution to current shareholders whenever
possible its near term capital needs may require the issuance of equity on
unfavorable terms.
Results of Operations:
Three months ended September 30, 1998 and 1997 -
Oil and gas revenues decreased from $126,086 for the three months ended
September 30, 1997 to $31,510 for the three months ended September 30, 1998.
Production expenses decreased from $114,285 for the three months ended September
30, 1997 to $37,511 for the three months ended September 30, 1998. Revenues and
expenses changed as a direct result of the Company selling the interest it owned
in the Texas oil and gas properties and the decrease in oil prices for the
period.
General and administrative expenses decreased from $995,879 for the three months
ended September 30, 1997 to $457,034 for the three months ended September 30,
1998. Expenses included in general and administrative expenses are $158,000 of
consulting fees, wages of $140,000 , legal and professional fees of $47,000.
Nine months ended September 30, 1998 and 1997 -
Oil and gas revenues decreased from $305,060 for the nine months ended September
30, 1997 to $186,145 for the nine months ended September 30, 1998. Production
expenses decreased from $254,862 for the nine months ended September 30, 1997 to
$199,859 for the nine months ended September 30, 1998. Revenues and expenses
changed as a direct result of the Company selling the interest it owned in the
Texas oil and gas properties and the decrease in oil prices for the period.
General and administrative expenses decreased from $1,999,247 for the nine
months ended September 30, 1997 to $1,958,884 for the nine months ended
September 30, 1998. Expenses included in general and administrative expenses are
$573,000 of consulting fees, wages of $351,000, legal and professional fees of
$192,000. Research and development expenses for the nine months ended September
30, 1998 were $185,651. Depreciation, depletion and amortization increased from
$93,814 for the nine months ended September 30, 1997 to $118,673 for the nine
months ended September 30, 1998, as a result of amortizing the cost of issuing
the debenture. Interest expense for the nine months ended September 30, 1998 was
$182,561. The majority of interest expense is attributable to the debentures.
PART IIOTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 15, 1998, Ford and Myrt Fullingim, Individually and as Trustees of The
Ford and Myrt Fullingim Living Trust filed an action against Lone Star
International Energy, Inc., Don Pyles, Richard C. Baker, Michael D. Herrington,
C.E. Justice, Provident Energy Associates of Montana, L.L.C., and Phil Wilson,
as Trustee of the Emerald Pure Trust, in the District Court of Palo Pinto
County, Texas, 29th Judicial District. The Plaintiffs allege in their complaint
that C. E. Justice had breached his fiduciary relationship to them as investors
in the company, that Justice was disloyal, dishonest and disingenuous toward
them. Plaintiffs further allege that the Company and Justice are indebted to
them for certain sums advanced as loans and investments, and that the
consideration for said loans and investments failed. Further the Plaintiffs
allege that Emerald and Provident are tortiously interfering with their
contractual rights under a Mutual Agreement with the Company regarding the
Montana Property. Although filed in mid June, the parties were not served until
late June. The Company has filed its answer, and the case is currently pending
and awaiting discovery.
<PAGE>
In early November Paula Fleming, Randy Mueller and Travel Referral Systems
d/b/a/ Travel Station, as Petitioning Creditors filed an involuntary bankruptcy
petition against the company in the United States Bankruptcy Court for The
Northern District of Texas, Dallas Division. Followed by this filing, the
petitioning creditors filed a motion for a hearing to appoint a trustee to
oversee the management of the company. This matter is currently pending.
ITEM 5. OTHER INFORMATION
In early June 1998, the Company accepted an offer from a private business Trust
in the form of a Letter of Intent, to purchase an undivided 50% interest in and
to Provident Energy Associates of Montana L.L.C., and a corresponding interest
in the Two Medicine Cut Bank Sand Unit for a purchase price of $7.5 million.
Initially, closing was to take place by the end of July 1998, however, in late
June, the Trust discovered that it had been named as a defendant in the
litigation initiated by Ford and Myrt Fullingim. As a direct result of this
litigation, the Trust revoked its offer and all other aspects of its intended
relationship with the Company. The Company continued to seek other interested
industry partners for the possible sale of an interest in Montana, however, due
to the decline in oil prices worldwide, the Company received not offers or
expressions of interest. The Company maintained communication with the Trust in
an effort to reinstate its relationship, and in August 1998, was able to satisfy
the Trust that it could pursue the acquisition of the Montana property without
having other involvement with the Company if it so desired. Accordingly, the
Trust agreed to make an offer to the Company for all of its interest in the
Montana property. The offer so received provided for net cash to the Company in
the amount of $3.5 Million, the assumption of over $1.5 Million in plugging and
restoration liabilities of the Company, and the payment of $1.5 Million in
development obligations of the Company, for a total financial commitment by the
Trust of $6.5 Million. After careful consideration, and in light of the fact
that no other formal offers were received, the Board of Directors of the Company
approved the acceptance of the offer, and a formal contract was entered into in
October, to be effective as of October 1, 1998. The Trust is currently moving
certain of its assets within its banking network for a Letter of Credit to be
issued and funded in order to complete and close the transaction. Closing is
anticipated in November 1998. The Company, although disappointed that the
current state of the oil and gas industry has resulted in a decreased valuation
of the property, are encouraged in the fact that the proceeds will be sufficient
to settle all outstanding debts and provide additional working capital necessary
to compete the certification of the By-Pass Chiller and Fresh Catch
technologies.
In June 1998, the Company negotiated a financial guarantee from a private
business Trust to assist the Company in securing a loan against its
manufacturing equipment. The Trust committed to provide its financial guarantee
together with an insurance bond if necessary in an amount up to $850,000.00, in
order to guarantee a loan in a similar amount to the Company. After the filing
of the litigation by the Fullingims, the Trust revoked its offer to provide the
financial guarantee, and the loan being negotiated has been suspended pending
the location by the Company of other acceptable forms of guarantee.
<PAGE>
In June 1998 the Company began negotiations with a private business Trust for
the purpose of securing a long term funding equity partner to assist the Company
in the development of its Energy Reclaim technologies. The negotiations were
designed to stabilize the Companys current critical financial shortfall as well
as provide sufficient long term capital to insure that financial resources will
be available in the future to meet the needs of the development, manufacturing,
marketing and distribution of the Fresh Catch and By-Pass Chiller technologies.
As a part of the negotiation process, the Trust conducted its review of all
historical business, financial and legal aspects of the Company. After the
review, the Trust directed that as a condition precedent to completing a formal
agreement to assist the Company with its short and long term financial needs,
Mr. C. E. Justice would be required to resign and be removed from all management
and operations of the Company. Based upon these directives by the Trust, the
remaining management, with the approval of a quorum of the Board of Directors,
approached Mr. Justice and negotiated a separation and settlement agreement with
him on behalf of the Company. In summary, the separation and settlement was to
be effective as of July 23, 1998, and provided that the employment contract of
Mr. Justice would be terminated on that date. Mr. Justice would further resign
as a director, chairman and chief executive officer of the Company, and all
accounts relating to salary and expenses payable to Mr. Justice as well as any
amounts due the Company from Mr. Justice would be settled. The Company further
secured a lease of the manufacturing facility owned by Mr. Justice, located in
Mineral Wells, Texas, with lease payments being offset by the prepaid credits
due the Company for capital improvements made to the facility in 1997. Other
important aspects of the separation and settlement agreement are the
cancellation of the stock options for 5 million shares, which was a part of Mr.
Justices employment contract, and the delivery of a proxy to Mr. Richard C.
Baker, President or the newly elected chairman should Mr. Baker no longer serve
on the Board of Directors, covering in excess of 3.75 million shares of stock
registered to Mr. Justice. The 3.75 million shares subject to the proxy are
further subject to a purchase agreement with the Trust at existing market prices
which when completed will effectively remove Mr. Justice as a shareholder of the
Company. Due to the current and ongoing litigation involving activities of the
Company during the term of management control under Mr. Justice, the Company
further secured a consulting commitment from Mr. Justice for a period of one
year to assist in the defense and/or prosecution of these matters. With the
departure of Mr. Justice, the Company was able to continue negotiations with the
Trust to complete a long-term relationship to assist in meeting its short and
long term funding needs. Again, and as a direct result of the Fullingim
litigation, the Trust terminated its letter of intent to provide additional
working capital funding to the Company. The Board of Directors, however, agreed
to remain in force the resignation of Mr. Justice. The Company intends to
continue to restore its relationship with the Trust in hopes of reinstating some
form of additional funding in the future.
As a result of the Company's investigation of possible misuse of S-8 stock
issued to consultants in 1997, notice was given to Scott MacCaughern that his
consulting agreement of August 1997 was terminated, and demand was made for the
return of all S-8 stock in his possession and/or his control. In addition to the
demand to Mr. MacCaughern, demand was made to Barbara Matalon and Robert
Horrigan for the return of all S-8 stock in their possession or control. As of
the date of this report, none of the parties have delivered the shares in
accordance with the formal demands, and the Company is reviewing its legal
options for the recovery of this stock, which may include an amendment to third
party complaint in the Bonacci case in which the parties were already named as
defendants.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereto duly
authorized.
LONE STAR INTERNATIONAL ENERGY, INC.
(Registrant)
Date: August 19, 1998 /s/ Richard C. Baker
Chief Executive Officer
(principal executive officer)
Date: August 19, 1998 /s/ Michael D. Herrington
Chief Financial Officer, Treasurer,
(principal accounting officer)
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
27 Financial Data Schedule
<PAGE>
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