<PAGE> 1
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 March 31, 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; 24,202,533 Shares as of May 8, 1998
Transitional Small Business Disclosure Format: Yes [ ] No [x]
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
LONE STAR INTERNATIONAL ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash $ $ 15,230
Accounts receivable - oil and gas revenues 28,997 64,450
Accounts receivable - JIB, net of allowance of $20,500 20,251 8,827
Accounts receivable - other net of allowance of $209,337 703,552 367,413
Notes receivable - current 3,422 3,422
Unearned compensation 170,000 170,000
Prepaid expenses - lease 60,000 60,000
Prepaid expenses 634,056 634,056
----------- -----------
Total current assets 1,620,278 1,323,398
----------- -----------
Properties and equipment, at cost 10,021,427 5,819,895
Less - accumulated depreciation, depletion and amortization 1,289,892 2,819,190
----------- -----------
Property and equipment, net 8,731,535 3,000,705
----------- -----------
OTHER ASSETS:
Prepaid expenses - non current - lease 100,957 112,049
Prepaid expenses - non current 335,572 470,662
Unearned compensation 467,500 510,000
Note receivable - non current 4,597 5,433
Deposits on property purchase 59,060 582,625
Debenture issuance costs net of amortization
of $75,250 and $43,000 in 1998 and 1997 182,750 215,000
Patents, net of amortization
of $3,980 and $3,127 in 1998 and 1997 54,020 54,873
Deposits 930 930
----------- -----------
Total other assets 1,205,386 1,951,572
----------- -----------
TOTAL ASSETS $11,557,199 $ 6,275,675
=========== ===========
</TABLE>
<PAGE> 3
LONE STAR INTERNATIONAL ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ ------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Cash overdraft $ 13,591 $
Accounts payable 1,064,525 833,897
Production payable 287,130 328,698
Accrued interest payable 158,030 147,337
Accrued payroll taxes payable 171,984 111,904
Notes payable - related party 75,593 75,593
Current maturities of long-term debt 12,079 12,079
Advances due to officer 207,009 80,759
Obligation to stockholders 248,270 250,000
Accounts Payable - interest owners 32,097 32,097
------------ ------------
Total current liabilities 2,270,308 1,872,364
------------ ------------
LONG TERM DEBT:
Long term debt 2,505,575 2,513,255
Accrued compensation - stock option 850,000 850,000
Notes payable officers and employees 908,126
------------ ------------
Total long term debt 3,355,575 4,271,381
------------ ------------
Total liabilities 5,625,883 6,143,745
------------ ------------
STOCKHOLDERS' EQUITY
Common stock - par value $.001, 100,000,000 shares
authorized, 21,433,854 and 19,805,283 shares
issued and outstanding in 1998 and 1997 21,434 19,805
Common shares to be issued 1,186,584 6,500
Stock subscriptions receivable (5,000) (5,000)
Additional paid in capital 12,946,374 7,248,172
Retained deficit (8,218,076) (7,137,547)
------------ ------------
Total stockholders' equity 5,931,316 131,930
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,557,199 $ 6,275,675
============ ============
</TABLE>
<PAGE> 4
LONE STAR INTERNATIONAL ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
------------ ------------
<S> <C> <C>
REVENUES
Oil and gas production $ 112,226 $ 55,147
Operating income 32,100 7,000
Other sales 14,713
------------ ------------
Total revenues 159,039 62,147
------------ ------------
EXPENSES
Production expenses 115,287 22,377
Depreciation, depletion and amortization 75,981 14,147
Research and development 101,974
General and administrative expenses 880,068 525,823
------------ ------------
Total expenses 1,173,310 562,347
------------ ------------
Operating income (loss) (1,014,271) (500,200)
------------ ------------
Other income (expense)
Other income 6,050 11
Interest expense (72,308) (8,890)
------------ ------------
Other income (expense), net (66,258) (8,879)
------------ ------------
Net income (loss) before income taxes (1,080,529) (509,079)
Provision (benefit) for income taxes
------------ ------------
Net income (loss) $ (1,080,529) $ (509,079)
============ ============
Basic Earnings (loss) per common share $ (0.0538) $ (0.0494)
============ ============
Diluted Earnings (loss) per common share $ (0.0538) $ (0.0494)
============ ============
Weighted average shares outstanding 20,098,063 10,309,375
============ ============
Adjusted weighted average shares outstanding 20,098,063 10,309,375
============ ============
</TABLE>
<PAGE> 5
LONE STAR INTERNATIONAL ENERGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(1,080,529) $ (509,079)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation, depletion and amortization 75,981 136,811
Notes payable issued to satisfy accrued payroll 211,010
Stock to be issued to satisfy notes payable employees 60,948
Gain on sale of assets (3,377)
Changes in operating assets and liabilities:
(Increase) decrease -
Accounts receivable (312,110) (1,826)
Prepaid expense 146,182
Increase (decrease) in -
Accounts payable and accrued expenses 301,401 251,199
Revenues payable (41,568) 63,170
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (642,062) (59,725)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in due from related parties (140,178)
Collection of note receivable 836
Decrease in deposit on property acquisition 523,565
Proceeds from sale of assets 95,240
Purchase of property and equipment (136,831) (12,484)
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 482,810 (152,662)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of notes payable (7,680)
Payment of obligations to stockholders (1,730)
Advances from officer 126,250
Increase (decrease) in cash overdraft 13,591
Sale of common stock 411,000
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 130,431 411,000
----------- -----------
NET INCREASE (DECREASE) IN CASH (28,821) 198,613
CASH, Beginning of period 15,230 1,397
----------- -----------
CASH, End of period $ (13,591) $ 200,010
=========== ===========
</TABLE>
<PAGE> 6
LONE STAR INTERNATIONAL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 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
5,000,000 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, 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 two energy saving absorption refrigeration technology processes, one a
process referred to as the "By-Pass Chiller(TM)" for which a patent application
is pending, and the second a process referred to as the "Fresh Catch(TM)" for
which a patent has been issued. In addition, Energy Reclaim has a patent on a
residential version of the By-Pass Chiller(TM).
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 March 31, 1998, the results of operations and changes in cash flows
for the three 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.
At the end of its fiscal year ended December 31, 1997, the Company carried
approximately $908,000 in Notes Payable to its contract employees for deferred
compensation. With accrued interest that number through the end of the first
quarter ending March 31, 1998 was projected to be in excess of $1,180,000.
Consequently, during the first quarter, the Board elected to offer stock to its
contract employees who had agreed upon commencing employment with the Company to
receive a reduced cash salary and defer the balance of their contract salary
until such time as the Company would fully satisfy the contract obligations.
This stock offer was made in exchange for the cancellation of the notes payable
for deferred compensation. The stock offer was made using the average closing
share price of the stock for the five business days prior to the offer, and
resulted in a share price of $0.33 per share. The contract employees accepted
the offer of the Company, and as a result a total of 3,576,012 shares were
issued to a group of seven employees. These shares were registered in accordance
with an S-8 Registration, although the receiving employees entered into lock-up
agreements with the Company which limits and restricts the holder in trading the
shares over a one year period. These restrictions are in addition to any insider
<PAGE> 7
trading restrictions imposed by applicable securities regulations. The effect of
this action by the Board was to eliminate in excess of $1.1 million in payables
from the Company accounts.
The results of operations for the three months ended March 31, 1998 are not
necessarily indicative of the results of operations to be expected for the full
year ended December 31, 1998.
ITEM 2: 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 ACHIEVEMENTS OF THE COMPANY TO
MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS
EXPRESSED OR IMPLIED BY SUCH FORWARD LOOKING STATEMENTS.
OVERVIEW:
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.
The Company intends to increase production and reserves through development of
existing oil and gas properties and future acquisitions. 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 and
including the issuance of Common Stock. 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.
During the three months ended March 31, 1998 the Company has liquidated several
of its oil and gas properties located in the State of Texas. These properties
have historically been marginal producers and the expense of operations has
generally exceeded the revenue. The liquidation resulted in the reduction of
overhead and operating expenses attributable to the oil and gas operations, and
provided needed capital for other Company operations.
Specific Oil and Gas Properties During the next year the Company plans to
continue the development of its newly acquired Two Medicine Cut Bank Sand Unit
in Montana in which it has a 59.7% net revenue interest. Various options are
available to the Company with regard to this development, and the option
selected will be determined in large part by the availability of operating
capital. In order to complete the acquisition and to begin the restoration of
the properties several of the Company's stockholders loaned the Company the
necessary funds. As consideration the Company gave the stockholders liens
against the Texas properties, assignment of 40% of the Company's net production
revenue from the Montana property until the Stockholders have been repaid their
investment plus 25%, and an assignment of a carried working interest of 2.65% in
the Montana property. The conservative option is to continue the gradual
restoration program of the existing 82 wells located in the unit. This approach
can be achieved on a well by well basis with the use of revenue from production
to finance the ongoing program. The restoration program has proved successful as
shown by the increase from approximately 23 barrels per day to over 100 barrels
per day with the restoration of eight wells. Once the extreme winter conditions
in the area have passed, the Company expects to increase daily production to
approximately 150 barrels per day by the middle of the second quarter 1998. By
reinvesting the production income into the conservative restoration program
through the spring and summer, it is expected that daily production can be
increased to between 200 and 300 barrels per day by the third quarter.
<PAGE> 8
A more aggressive plan for restoration of the existing wells is available
through the process of using the property as collateral to secure a loan for
operating capital. The Company believes that a loan can be obtained on
reasonable terms that would allow the escrowing of the funds necessary to
complete the entire restoration program, plus provide additional capital for
other Company operations. This would allow the Company to take a more aggressive
restoration approach and employ multiple workover rigs during the Spring and
Summer. Doing so, the Company believes that daily production could be increased
to closer to 500 barrels per day by winter of 1998.
The final and most aggressive option currently under review by the Company is
the initiation of the horizontal secondary recovery program for the unit. The
Company's partner in this project has entered into discussions with an industry
partner specializing in horizontal technology who expressed a desire to
participate in the Montana project. The Company believes that an agreement can
be reached that would provide in part that secondary recovery operations would
be commenced during the second quarter of 1998, with the industry partner
bearing 100% of the cost of drilling and completion of the development wells.
The partner would receive a disproportional share of the revenue from production
on a well by well basis until the cost has been recovered, and would thereafter
earn an equity interest in the well. While the secondary development is being
conducted on parts of the unit, the Company would be able to continue its
conservative restoration program on other parts of the unit thus increasing
daily production and monthly revenue. This most aggressive approach if
implemented the Company believes would increase daily production from the unit
to over 1,000 barrels per day by winter of 1998.
The Company has also explored the possibility of simply selling a minority
interest in the Montana property, and has received some inquiry into that
possibility. Establishing a market value for such an interest is being discussed
and evaluated by the Company at this time. The Company believes that it can sell
a partial interest in the property and receive sufficient capital to finance
operations of the Company through the end of 1998, while continuing the
restoration and secondary recovery program in Montana. It is not expected that
the Company will invest more of its own capital into the development of the
property, but rather that the Company will utilize this asset to generate
capital needed for its overall operations. As revenues increase and capital is
made available, the Company intends to look at the possible acquisition of other
oil and gas properties that can add to the asset base, cash flow, and provide
similar upside potential to the Company.
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
is poised to move forward with the development of the production models of its
Fresh Catch(TM) and By-Pass Chiller(TM) Units. During the second quarter of
1998, Energy Reclaim expects to complete the testing of its production model of
the Fresh Catch(TM), and will have it installed on a fishing vessel in Louisiana
for actual field test operation. Once the installation is completed, Energy
Reclaim will commence fabrication of the Fresh Catch(TM) units for sale and
delivery, and expect the first of such units to be available for existing
purchase orders during the third quarter of 1998. Energy Reclaim further plans
to complete its pilot test project with a utility company with the installation
of its production model By-Pass Chiller(TM) unit on a selected utility building
during the third quarter. Energy Reclaim expects 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.
Energy Reclaim believes that by the late third quarter it will be ready to
fabricate the production model By-Pass Chiller(TM) unit for sale and delivery,
with the first units going to supply existing purchase orders.
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 is developing a plan to pursue these possible sources of
income and revenue, and will continue to investigate these possibilities. 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 around the world.
<PAGE> 9
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 Energy Reclaim has 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 that are currently being evaluated by a potential outsource client for
mass production. Upon approval by the potential client, purchase orders for the
product are expected for the production and delivery of 500 units per month.
This purchase order is expected to provide gross revenue to FPE of over
$60,000.00 per month. The client has further indicated that the purchase orders
are expected to increase to 500 units per week by the fourth quarter of 1998.
Addition outsource contracts are being pursued by the FPE sales representatives,
and the Company projects that this subsidiary will provide a valuable source of
revenue while Energy Reclaim is entering the production phase of the Fresh Catch
units.
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 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 the proceeds going directly
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 deferred portions of their agreed salary; in
addition, Mr. Justice has not received his salary for over two years in order to
help the Company achieve its goals.
Additional capital will be required to fund the planned capital needs of the
Company over the next year and the Company believes that sources for accessing
capital will be available. These sources include a possible renegotiations of
the terms of the Debentures and/or their redemption by the Company or a
refinancing by a third party, possible debt financing through typical financial
sources, equity financing through the sale of interests in current oil and gas
assets, additional private sales of Common Stock or other securities, and a line
of credit which utilizes stock of the Company to access the line. It is the
desire of the Company to preserve the equity and minimize dilution to current
shareholders whenever possible. Consequently, the Company will focus on building
the income stream from operations of both the oil and gas division and Energy
Reclaim, with the objective to become totally self-sufficient in its capital
requirements within two years. The Company will also continue to explore the
possible advantages of selling marketing, distribution and other rights
pertaining to the Energy Reclaim products throughout the world.
The Company believes that its interest in the Montana property is an additional
vehicle for raising capital for operations. Currently, the company has entered
into discussions with several groups, including oil and gas industry partners,
for the possible sale of an undivided interest in the Montana reserves. Although
reducing the overall interest in the property, the Company would have necessary
operating
<PAGE> 10
capital to fully develop the Montana reserves into daily production and
resulting cash flow. Although production income from Montana has to date been
minimal due in part to the limited number of wells on line for daily production
and the recently depressed oil prices, the projections of future cash flow with
development of the property are significant. The sale of a portion of the
Montana property will also provide an infusion of capital that will allow the
Company to orderly move the Fresh Catch and By-Pass Chiller units into
commercial production and sales, thus generating other cash flow from
operations.
RESULTS OF OPERATIONS:
Three months ended March 31, 1998 and 1997 -
Revenues increased to $159,039 for the three months ended March 31, 1998 from
$62,147 for the three months ended March 31, 1997. Revenues for the three months
ended March 31, 1997 reflect oil sales of $64,582 and gas sales of $47,644 while
the revenue for the three months ended March 31, 1997 reflect oil sales of
$14,937 and gas sales of $40,210.
Expenses increased to $1,173,310 for the three months ended March 31, 1998 from
$562,347 for the three months ended March 31, 1997. Production expenses
increased to $115,287 for the three months ended March 31, 1998 from $22,377 for
the three months ended March 31, 1997. General and administrative expenses
increased to $880,068 for the three months ended March 31, 1998 from $525,823
for the three months ended March 31, 1997. Included in general and
administrative expenses for the three months ended March 31, 1998 are $180,896
of consulting fees, $340,852 of wages, and $85,339 of legal and professional
fees. Included in general and administrative expenses for the three months ended
March 31, 1997 are $43,248 of consulting fees, $395,474 of wages and $39,228 of
legal and professional fees.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 21, 1997, Judson L. Whiting III, filed a Complaint alleging breach of
contract against the Company in the Supreme Court of the State of New York,
County of New York. Mr. Whiting was one of ten consultants hired as independent
contractors by the Company and was to receive 700,000 shares of the company's
Common Stock to be registered on Form S-8. In April 1998, a settlement of the
Judson L. Whiting, III v. Lone Star reached. In accordance with the settlement,
Lone Star released its stop order on 20,000 shares previously issued to Mr.
Whiting as full and complete settlement of all claims and causes of action
asserted by Mr. Whiting against the Company.
On January 29, 1998, Eugene L. Bonacci, Donna Conley, Penelope Gallo, Robert
Gallo, Robert Maher, Sal Rausa, Randy Rufrano, Charles Stein, individually and
on behalf of Anthony Stein, J. Ralph Stein & Co. Pension Trust, Roni L. Stein,
Musser Enterprises Pension Trust and Renee Feitelberg, Louis Vaccaro and Judith
Vaccaro filed a complaint in the United States District Court, Southern District
of New York against the Company, C. E. Justice, Brian T. McKee, Scott
MacCaughern, Barbara Matalon, Robert Horrigan and Merit Capital Associates, Inc.
alleging securities fraud and common law fraud in connection with certain
activities relating to the sale of the Company's stock. A settlement has been
reached in the Bonacci, et al. v. Lone Star et al. litigation. Although
continuing to assert no liability to the plaintiffs, the Company, in exchange
for Promissory Notes payable to the Company from other of the Defendants as well
as the Third Party Defendants, is proposing to offer certain stock consideration
to the plaintiffs to release their claims against the Company. Any such stock
would be issued in accordance with a binding lock-up agreement that would limit
the trading of such shares in the open market. All parties have accepted the
settlement proposal, and the documentation necessary to dismiss this action is
being prepared.
<PAGE> 11
ITEM 2. CHANGES IN SECURITIES
Effective January 1, 1998 the Company issued 1,628,571 shares of its common
stock valued at $5,700,000 ($3.50 per share) to Prism Corp. and others in
exchange for a 75% net revenue interest in the Two Medicine Cut Bank Sand Unit
located in Glacier and Pondera Counties, Montana. This interest is held in the
form of 75% membership interest of Provident Energy Associates of Montana, LLC,
a limited liability company formed for the purpose of holding these Montana
interests. The Company relied on Section 4(2) under the Securities Act of 1933
for an exemption from registering the stock based upon the non-public nature of
the transaction and the sophistication of the investors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) REPORTS ON FORM 8-K
FORM 8-K, DATED JANUARY 21, 1998
ITEM 2. ACQUISITION OF ASSETS
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of business acquired.
(1) Independent Auditor's Report
(2) Statements of Revenues and Direct Operating Expenses
(3) Notes to Statements of Revenues and Direct Operating
Expenses
(b) Proforma Financial Information
(1) Proforma Combined Condensed Statement of Operations
(2) Proforma Combined Condensed Balance Sheet
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: May 11, 1998 /s/ C. E. Justice
Chief Executive Officer
(principal executive officer)
Date: May 11, 1998 /s/ Michael D. Herrington
Chief Financial Officer, Treasurer
(principal accounting officer)
<PAGE> 12
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 0
<SECURITIES> 0
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0
0
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</TABLE>
