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 June 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 August 15, 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>
<CAPTION>
June 30, December 31,
1998 1997
---------- ----------
(Unaudited)
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash ................................................... $ $ 15,230
Accounts receivable - oil and gas revenues ............. 8,877 64,450
Accounts receivable - JIB, net of allowance of $20,500 . 13,326 8,827
Accounts receivable - other net of allowance of $209,337 382,432 367,413
Notes receivable - current ............................. 2,870 3,422
Unearned compensation .................................. 170,000
Prepaid expenses - lease ............................... 60,000 60,000
Prepaid expenses ....................................... 100,866 634,056
---------- ----------
Total current assets ............................... 568,371 1,323,398
---------- ----------
Properties and equipment, at cost ........................... 9,755,990 5,819,895
Less - accumulated depreciation, depletion and amortization . 1,202,278 2,819,190
---------- ----------
Property and equipment, net ........................ 8,553,712 3,000,705
---------- ----------
OTHER ASSETS
Prepaid expenses - non current - lease ................. 92,532 112,049
Prepaid expenses - non current ......................... 470,662
Unearned compensation .................................. 510,000
Note receivable - non current .......................... 192,065 5,433
Deposits on property purchase .......................... 13,315 582,625
Debenture issuance costs net of amortization
of $107,500 and $43,000 in 1998 and 1997 ........... 150,500 215,000
Patents, net of amortization
of $4,118 and $3,127 in 1998 and 1997 .............. 53,882 54,873
Deposits ............................................... 930 930
---------- ----------
Total other assets ........................ 503,224 1,951,572
---------- ----------
TOTAL ASSETS ................................................ $9,625,307 $6,275,675
========== ==========
</TABLE>
<PAGE>
LONE STAR INTERNATIONAL ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
<S> <C> <C>
Cash overdraft ................................... $ 10,587 $
Accounts payable ................................. 1,084,035 833,897
Production payable ............................... 288,007 328,698
Accrued interest payable ......................... 211,693 147,337
Accrued payroll taxes payable .................... 238,305 111,904
Notes payable - related party .................... 75,593 75,593
Current maturities of long-term debt ............. 12,079 12,079
Advances due to officer .......................... 223,284 80,759
Obligation to stockholders ....................... 244,671 250,000
Accounts Payable - interest owners ............... 32,097 32,097
------------ ------------
Total current liabilities .................... 2,420,351 1,872,364
------------ ------------
LONG TERM DEBT
Long term debt ................................... 2,503,690 2,513,255
Accrued compensation - stock option .............. 850,000
Notes payable officers and employees ............. 230,260 908,126
------------ ------------
Total long term debt ......................... 2,733,950 4,271,381
------------ ------------
Total liabilities ............................ 5,154,301 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 ................................. (8,988,144) (7,137,547)
------------ ------------
Total stockholders' equity ................... 4,471,006 131,930
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............ $ 9,625,307 $ 6,275,675
============ ============
</TABLE>
<PAGE>
LONE STAR INTERNATIONAL ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
REVENUES
<S> <C> <C> <C> <C>
Oil and gas production ................. $ 42,409 $ 123,827 $ 154,635 $ 178,974
Operating income ....................... 3,600 16,800 35,700 23,800
Other sales ............................ 2,570 17,283
------------ ------------ ------------ ------------
Total revenues ..................... 48,579 140,627 207,618 202,774
------------ ------------ ------------ ------------
EXPENSES
Production expenses .................... 47,061 118,199 162,348 140,577
Depreciation, depletion and amortization 37,243 35,286 83,224 49,533
Research and development ............... 83,677 185,651
General and administrative expenses .... 591,782 492,911 1,501,850 1,070,322
------------ ------------ ------------ ------------
Total expenses ......................... 759,763 646,396 1,933,073 1,260,432
------------ ------------ ------------ ------------
Operating income (loss) ..................... (711,184) (505,769) (1,725,455) (1,057,658)
------------ ------------ ------------ ------------
Other income (expense)
Other income ........................... 445 5 6,495 16
Interest expense ....................... (59,329) (131,637)
------------ ------------ ------------ ------------
Other income (expense), net ........ (58,884) 5 (125,142) 16
------------ ------------ ------------ ------------
Net income (loss) before income taxes ....... (770,068) (505,764) (1,850,597) (1,057,642)
Provision (benefit) for income taxes
------------ ------------ ------------ ------------
Net income (loss) ........................... $ (770,068) $ (365,137) $ (1,850,597)$ (1,057,642)
============ ============ ============ ============
Basic earnings (loss) per common share ...... $ (0.032) $ (0.025) $ (0.084) $ (0.079)
============ ============ ============ ============
Diluted earnings (loss) per common share .... $ (0.032) $ (0.025) $ (0.084) $ (0.079)
============ ============ ============ ============
Weighted average shares outstanding ......... 23,746,346 14,350,172 21,926,395 13,336,959
============ ============ ============ ============
Adjusted weighted average shares outstanding 23,746,346 14,350,172 21,926,395 13,336,959
============ ============ ============ ============
</TABLE>
<PAGE>
LONE STAR INTERNATIONAL ENERGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(unaudited)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) ........................................... $(1,850,597) $(1,057,642)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation, depletion and amortization ...... 83,224 190,782
Notes payable issued to satisfy accrued payroll 495,291
Write-off of accrued compensation stock option (170,000)
Gain on sale of assets ........................ (3,377)
Changes in operating assets and liabilities:
(Increase) decrease -
Accounts receivable ................... 36,055 (47,698)
Prepaid expense ....................... 332,958
Increase (decrease) in -
Accounts payable and accrued expenses . 440,895 560,782
Revenues payable ...................... (40,691) 120,037
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ......... (676,242) (233,739)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in other assets .................... (326)
(Increase) decrease in due from related parties ........ (87,859)
Collection of note receivable .......................... 836
Decrease in deposit on property acquisition ............ 569,310
Proceeds from sale of assets ........................... 95,240
Purchase of property and equipment ..................... (154,179) (148,511)
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ......... 511,207 (236,696)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of notes payable ............................... (9,565) 19,038
Payment of obligations to stockholders ................. (4,329)
Advances from officer .................................. 142,525
Increase (decrease) in cash overdraft .................. 10,587 (2,497)
Sale of common stock ................................... 450,000
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ......... 139,218 450,000
----------- -----------
NET INCREASE (DECREASE) IN CASH ............................. (25,817) (3,894)
CASH, Beginning of period ................................... 15,230 1,397
----------- -----------
CASH, End of period ......................................... $ (10,587) $ (2,497)
=========== ===========
Non-cash financing and investing activities:
Acquisition of oil and gas properties for stock ........ $ 5,700,000
Supplemental disclosures:
Interest paid .......................................... 131,637
</TABLE>
<PAGE>
LONE STAR INTERNATIONAL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Six Months Ended June 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 June 30, 1998, the results of operations and changes in cash flows
for the six 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 second
quarter ending June 30, 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 employees involved in this plan 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 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.
<PAGE>
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.
The results of operations for the six months ended June 30, 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:
At this time the Company is experiencing a critical financial shortfall that
management is actively seeking to resolve. 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.
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.
<PAGE>
The Company is pursuing actions against Merit Capital for misappropriation of
the account funds, 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 prior
to full scale production.
The Company has commenced plans that if successful will correct the critical
financial situation, and will provide the short and long-term capital necessary
to carry the Company into production, marketing and sales.
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 its oil and gas operations on the development of
its Montana property, as well as the potential acquisition of other non-operated
interests in proven oil and gas reserves. The development of the Montana
property as well as any future acquisitions will require additional capital.
Obtaining funding arranged by the Trust or a sale of these properties is
currently critical to the Company.
<PAGE>
Given the Companies current liquidity problems the failure to obtain such
funding during the third quarter will likely cause the Company to seek
bankruptcy protection. Any such funding will likely result in the issuance or
the contractual obligation to issue stock. 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.
The Company intends to increase production and reserves through development
of existing oil and gas properties, provided it can obtain adequate working
capital.
Specific Oil and Gas Properties: The Company has entered into a Letter of Intent
for the sale of an overall 50% interest in and to the Two Medicine Cut Bank Sand
Unit located in Montana for the purchase price of $7.5 million. Formal contracts
are being prepared, and the Company expects to close the transaction during the
third 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 for the Company's
expense share of the continued development of the Montana property, as well as
working capital to secure final certification of the Fresh Catch and By-Pass
Chiller technologies prior to commencing full scale production.
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.
As part of the sale agreement, The Company will deposit into an operations
escrow account a total of $1.5 million of the sale proceeds. These funds will be
used for operations in the Two Medicine Cut Bank Sand Unit, in particular, the
restoration costs to restore the additional existing wells to daily production,
and the cost to drill and complete two horizontal/radial secondary recovery
wells. By designating this portion of the sale proceeds to the development of
the Montana property, the Company insures the enhanced cash flow from the
property, which will more than offset the use of proceeds over the life of the
production.
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.
<PAGE>
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 during the third quarter of
1998, and once that is completed, a production model will be installed on a
fishing vessel in Louisiana for actual field test operations verification. With
the installation completed, Energy Reclaim will commence the fabrication and
assembly of Fresh Catch Units for commercial sale. Initial sales are expected
during the first quarter of 1999. If the Company is unsuccessful in obtaining
additional working capital, the Company may not be able to obtain the ARI
certification report or be able to produce the production model of the Fresh
Catch unit or produce Fresh Catch units for commercial sale.
Energy Reclaim further plans to complete its By-Pass Chiller production unit
during the third quarter of 1998, and expects to have it certified in accordance
with the same procedure used for the Fresh Catch. Upon independent
certification, Energy Reclaim will engage a pilot project for the installation
of a production model of the By-Pass Chiller for actual field test operations.
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
second quarter of 1999 it will be ready to begin fabrication and assembly of
commercial By-Pass Chiller units for sale. If the Company is unsuccessful in
obtaining additional working capital, the Company may not be able to obtain the
ARI certification report or be able to produce the production model of the By-
Pass Chiller or produce By-Pass Chiller units for commercial sale.
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.
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 have 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 mass produced. 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. If the
Company is unsuccessful in obtaining additional working capital, the Company may
not be able to produce the automotive step rail.
Additional 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.
<PAGE>
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.
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 June 30, 1998 and 1997 -
Oil and gas revenues decreased from $123,827 for the three months ended June 30,
1997 to $42,409 for the three months ended June 30, 1998. Production expenses
decreased from $118,199 for the three months ended June 30, 1997 to $47,061 for
the three months ended June 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.
General and administrative expenses increased from $492,911 for the three months
ended June 30, 1997 to $591,782 for the three months ended June 30, 1998.
Expenses included in general and administrative expenses are $234,000 of
consulting fees, wages of $226,000, legal and professional fees of $52,000.
Research and development expenses for the three months ended June 30, 1998 were
$83,677.
Six months ended June 30, 1998 and 1997 -
Oil and gas revenues decreased from $178,974 for the six months ended June 30,
1997 to $154,635 for the six months ended June 30, 1998. Production expenses
increased from $140,577 for the six months ended June 30, 1997 to $162,348 for
the six months ended June 30, 1998. Revenues changed as a direct result of the
Company selling the interest it owned in the Texas oil and gas properties.
Expenses increased because of the additional work performed in the rework of the
wells in Montana.
General and administrative expenses increased from $1,070,322 for the six months
ended June 30, 1997 to $1,501,850 for the six months ended June 30, 1998.
Expenses included in general and administrative expenses are $415,000 of
consulting fees, wages of $567,000, legal and professional fees of $137,000.
Research and development expenses for the six months ended June 30, 1998 were
$185,651. Depreciation, depletion and amortization increased from $49,533 for
the six months ended June 30, 1997 to $83,224 for the six months ended June 30,
1998, as a result of amortizing the cost of issuing the debenture. Interest
expense for the six months ended June 30, 1998 was $131,637. The majority of
interest expense is attributable to the debentures.
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 tentative 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 tentatively
accepted the settlement proposal, and the documentation necessary to dismiss
this action is being circulated.
On May 22, 1998, Sovereign Partners, LP (Sovereign) filed a civil action against
Lone Star International Energy, Inc., and C. E. Justice in the United States
District Court for the Northern District of Texas. Sovereign is one of the four
debenture holders of the total $2.5 million debentures funded in July 1997.
Sovereign alleges breach of promises by the Company and Mr. Justice, fraud in
making the promises and violation of certain securities regulations in
connection with the debenture offering, common law fraud and breach of contract.
Sovereign seeks rescission of the debenture with the return of the funds plus
interest, or in the alternative a judgment against the Company and Mr. Justice
for actual damages, exemplary damages, fees and costs. The Company has filed its
answer in the pending litigation along with that of Mr. Justice. In the
respective answers the allegations of Sovereign have been denied. The Company
further filed a counter claim against Sovereign alleging common law fraud,
breach of contract, and usury in connection with the debentures. The Company
also filed in the same action a Third Party complaint against the remaining
three debenture holders, Advantage Limited partnership, Dominion Capital Fund,
LTD, Atlantis Capital Fund, LTD, Mr. Steve Hicks, and Mr. Mark Valentine,
alleging common law fraud, breach of contract and usury against all of the Third
Party Defendants. Currently, the Company is awaiting the answer of the Third
Party Defendants and the counter claim of Sovereign. Thereafter, the parties
will commence discovery and proceed with litigation of the issues. The Company
believes based upon information already discovered in other related matters,
that the debenture litigation can be resolved on favorable terms for the
Company.
ITEM 5. OTHER INFORMATION
In June 1998, the Company accepted an offer from a private business Trust 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, the parties have mutually agreed to extend the
time for closing in order to facilitate the purchaser's availability of funds.
Closing of the sale is expected on or before September 30,1998,however, there is
no assurance that closing will be completed. The Company has continued to seek
other interested industry partners for the possible sale of an interest in
Montana in the event closing of the anticipated sale to the Trust should not be
completed.
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. Currently, the
Company is engaged in negotiations with equipment funding group as well as a
local bank to secure the required funding using the Trust guarantee and
insurance bond. Closing of this loan facility is expected before the end of
August 1998, however, there is no assurances that the loan facility will be
finalized. The Company continues to solicit other potential lenders from which
to secure the loan facility in the event the current negotiations are
unsuccessful.
<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 Company's 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.
Justice's 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. These negotiations are continuing, although there is no
assurance that funding will be immediately forthcoming upon completion.
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
10.1 Separation and Settlement Agreement
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,
Secretary (principal accounting officer)
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
10.1 Separation and Settlement Agreement
SEPARATION AND SETTLEMENT AGREEMENT
KNOW ALL MEN BY THESE PRESENTS:
This Separation and Settlement Agreement is entered into by and between
Lone Star International Energy, Inc., a Nevada Corporation, Energy Reclaim and
Refrigeration, Inc., a Texas Corporation, Fabrication and Precision Engineering,
Inc., a Texas Corporation, Cumberland Petroleum, Inc., a Texas Corporation, 528
Grant Road, Mineral Wells, Texas 76067, (hereinafter collectively referred to as
"Lone Star"), and Cecil E. Justice, 103 Meadow Creek, Weatherford, Texas 76086,
(hereinafter referred to as "Justice"), to be effective for all purposes as of
July 23, 1998.
RECITALS
WHEREAS, Lone Star is a public corporation engaged in the development of
oil and gas reserves and the development of alternative energy technologies for
which it owns patents and/or has patents pending, and its stock is traded on the
NASDAQ Bulletin Board under the symbol "LNST"; and,
WHEREAS, Justice is the founder of Cumberland Petroleum, Inc., and the
predecessor corporation to the public corporation now know as Lone Star, and has
been instrumental in the development of Lone Star to date having served as its
Chairman and Chief Executive Officer; and,
WHEREAS, Justice has previously entered into an Employment Contract with
Lone Star effective as of January 1, 1997 and covering a five year term ending
on January 1, 2002, whereby Justice had agreed to serve as Chairman of the Board
and Chief Executive Officer of Lone Star and its subsidiaries, said Employment
Contract is incorporated herein by this reference and is made a part hereof as
Exhibit "A"; and,
WHEREAS, Lone Star and Justice desire that Justice relinquish his positions
as Chairman and Chief Executive Officer of Lone Star and all of its
subsidiaries, and to cancel his Employment Contract to permit the pursuit of
other career opportunities; and,
WHEREAS, Lone Star and Justice desire to settle all matters relating to
said Employment Contract and all other accounts receivable and/or payable
between Justice and Lone Star.
NOW THEREFORE, in consideration of the foregoing and the mutual promises
set forth, the parties hereby agree as follows:
1. Upon execution of this Agreement, Justice will submit his executed
resignation as Chairman and Chief Executive Officer of Lone Star and all of its
subsidiaries to be effective as of 7:00 a.m. local time July 23, 1998.
<PAGE>
2. Lone Star shall enter into a consulting agreement with Justice in the form
Attached hereto as Exhibit B to be effective as of the date hereof.
3. Lone Star agrees that it will, for the twelve month period commencing on the
date hereof, (i) reimburse Justice monthly the cost of medical insurance
coverage for Justice and his family in the amount of such coverage as is
currently being paid under the company's group medical policy; plus (ii) $500
per month as an automobile allowance.
4. Lone Star agrees that it will be responsible for all litigation defense
costs associated with current or future litigation involving either the company
or Justice, insofar as said actions relate to both the business and actions of
the company and Justice in the performance of his duties as an officer and
director of the company. For purposes of this provision, costs shall include but
not limited to reasonable attorney fees, expert witness fees, court costs, and
filing fees. Nothing herein contained should be construed as an agreement by
Lone Star to assume the responsibility for any judgment, fine, or amount in
settlement awarded to Ford and Myrt Fullingim and/or the Ford and Myrt Fullingim
Trust, as such amount pertains to those amounts claimed and/or owed by Justice
personally, and are not part of claims made against Lone Star. This provision
further excludes any litigation either currently being prosecuted or which may
in the future be filed against Justice individually concerning matters and
causes of action not related to Lone Star or the business of Lone Star or the
actions of Justice which were not made in his capacity as an officer or director
of Lone Star. This paragraph is not intended to serve as an agreement for
indemnity or contribution between Lone Star and Justice regarding any matters of
litigation nor shall this Agreement affect the rights and obligations of the
parties pursuant to other indemnification arrangements between them. The parties
specifically agree that to the extent Justice is entitled to rights of indemnity
under his employment agreement for acts and omissions that occurred during his
employment he shall not lose such rights by virtue of the termination of his
employment agreement, and said rights shall remain in full force and effect.
5. Lone Star shall enter into a lease agreement with Justice as
landlord in the form of Exhibit C hereto, which shall replace the
existing lease of certain Lone Star facilities leased from
Justice.
6. Upon execution of this agreement, the Employment Contract
dated as of January 1, 1997, between Justice and Lone Star shall
be deemed canceled. It is specifically stipulated hereby, that
such cancellation does include the cancellation of the options on
five million shares of Lone Star stock at $0.01 each, as
referenced and incorporated in said Employment Agreement.
<PAGE>
7. Lone Star agrees that it will redeem its stock issued to
Justice in the amount of 1,370,254 shares selected by Justice
from among the shares represented by certificate numbers chosen
by Justice. The redemption price shall be the closing bid price
per share of Lone Star stock on July 21, 1998 as quoted on the
Over The Counter Bulletin Board Market of NASDAQ, which was $0.18
per share. The shares will be subject to the grant of a Proxy as
hereinafter provided until redemption. The redemption is to be
subject to, and made to Justice on, the earliest to occur of the
following anticipated fundings, being (a) sale in the approximate
amount of $7,500,000 of Lone Star's 75% interest in the limited
liability company that owns certain Montana oil and gas property,
(b) funding in the approximate amount of $5,000,000 to replace
the current outstanding debentures or (c) other major funding
which may be forthcoming through the guarantee program of the
entity with whom Lone Star is working (this specifically does not
include the equipment loan currently pending in the amount of
approximately $800,000.00). Lone Star acknowledges that the
issuance of 1,370,254 shares to Justice and registered pursuant
to a registration statement on Form S-8 was previously approved
by the Board of Directors as settlement of notes payable to
Justice for deferred compensation, and that said issuance was
exempt from the provisions of Section 16(b) of the Securities
Exchange Act of 1934, as amended. It is the opinion of Lone Star
based upon consultation with the General Counsel's office of the
Securities Exchange Commission at the time of issuance of said
shares, that the redemption by Lone Star will not impose any
liability on Justice with regards to said Section 16(b).
8. Lone Star agrees to purchase and Justice agrees to sell the
iron working machine currently in place at the facilities at 528
Grant Road, Mineral Wells, Texas, for the payment of the
obligation as listed on Exhibit D.
9. Lone Star agrees that it will assume the commission liability
payable to John Malone of Waco, Texas relating to the private
placement of shares owned by Justice in which the proceeds
therefrom were loaned to the Company as operating capital. It is
agreed and understood that the total commission obligation
assumed by Lone Star is $15,300.00. Lone Star will promptly use
its reasonable best efforts to obtain the release of any personal
liability of Justice on said $15,300.00 obligation.
10. Lone Star and Justice agree that they will settle all of
their outstanding accounts listed on and according to the amounts
as set forth in Exhibit D (or as therein provided).
Lone Star shall execute and deliver a promissory note in the
amount of $401,322.46, in the form of Exhibit E as payment of the
net amount due Justice for the amounts listed on Exhibit D as
"AMOUNTS PAID DIRECTLY TO C.E. JUSTICE." It is further understood
that an initial payment of $10,000 on said note shall be made out
of the equipment funding described in paragraph 7, with an
additional payment on such note to Justice of $15,000 being made
out of the next major receipt of funds by Lone Star if such funds
are received by Lone Star prior to any of the fundings as
described in paragraph 7. Thereafter, Lone Star shall pay to
Justice the sum of $25,000.00 per month on or before the 10th of
each month as a further payment on such note, commencing in
September 1998, until such time as the note is paid or matures.
The balance of the note and the amounts listed on Exhibit D under
the headings "AMOUNTS PAYABLE TO FIRST NATIONAL BANK
WEATHERFORD," AND "AMOUNTS PAYABLE TO MAINSTAY FUNDS" shall be
due upon the first of any of the fundings described in paragraph
7 (except the equipment loan funding). It is further stipulated
by the parties that Lone Star will perform its obligations
reflected in Exhibit D as and when due and in any event within
six months from the date of this Agreement. Lone Star shall grant
a security interest in 10% of its ownership interest in the
limited liability company that owns the Montana oil and gas
property to secure its obligations set forth in this Agreement,
including the note described above. Upon Lone Star's payment of
the obligation listed on Exhibit D under the heading "AMOUNTS
PAYABLE TO FIRST NATIONAL BANK WEATHERFORD", Justice shall
immediately transfer any interest he has in such listed items to
Lone Star free and clear of all liens and obligations.
<PAGE>
11. Justice agrees that he will provide Lone Star with adequate
records, including invoices and other necessary documentation so
that the final accounting of reimbursement of business expenses
incurred by Justice and not yet reimbursed to him may be verified
and/or calculated. It being agreed that all such business
expenses shall not exceed $2,500. Lone Star shall reimburse
Justice the amount of capital gain federal income tax incurred by
Justice in respect of sales by him of his shares of stock in Lone
Star during the period from December 1, 1997 through the date
hereof. George, Morgan & Sneed, CPA's, of Weatherford, Texas will
provide a letter to Lone Star and to Justice as to the amount of
capital gains tax that should be paid by Justice. Justice and
Lone Star will provide proper documents to George, Morgan & Sneed
outlining and supporting such stock sales by Justice so such firm
can calculate such capital gain tax amount.
12. Justice hereby grants to Lone Star a first right of refusal
to purchase any or all of his personal shares of the company as
currently evidenced by share certificates numbers 2328, 2329,
2330, 2331, and 2332, excluding the 1,370,254 shares registered
on Form S-8 as previously identified which are subject to the
redemption provisions hereof, for a period of seven (7) years
from the effective date hereof. A schedule of the total Lone Star
share holdings of Justice including certificate numbers will be
attached hereto as Exhibit "F". In the event Justice desires to
sell any or all of his Lone Star stock, he shall provide a
written notice of his intent to Lone Star, including (a) the
number of shares to be sold, (b) the price per share at which the
sale is contemplated and (c) a copy of the offer to purchase said
shares received from a third party purchaser if applicable. Upon
receipt of said notice of intent, Lone Star shall be given five
(5) business days in which to elect to purchase the subject
shares at the price quoted in the notice of intent, or to match
the offer to purchase received from a bona fide third party
purchaser. In the event Lone Star elects to exercise its option,
it shall so notify Justice in writing, stipulating therein the
closing date upon which the purchase will be made. In no event
shall such closing date be extended beyond five (5) business days
from Justice's receipt of Lone Star's notice of intent to
purchase unless agreed in writing by Justice. If Lone Star
declines to purchase Justice's shares, Justice shall have seven
(7) days in which to consummate the sale on the terms so noticed
to Lone Star to his bona fide third party purchaser. In the event
said sale is not completed, the first right of refusal to Lone
Star shall be renewed and continued as to the shares subject to
the prior sale notice. For purposes of this provision, notice
will be deemed received on the date actual receipt is made by the
party to whom the notice is directed.
<PAGE>
13. Justice agrees that he will execute the Voting Rights
Agreement attached hereto as Exhibit "H" and the form of the
proxy attached hereto as Exhibit "G". The proxy shall be deemed
coupled with an interest as set forth in the Voting Rights
Agreement. Upon execution of the Voting Rights Agreement, Justice
agrees that a copy thereof will be furnished to the company's
registrar's office to be noted on the official stock registration
records. Justice further agrees to deliver all of the
certificates in his possession to the registrar's office so that
notation can be made thereon that the shares are subject to the
Voting Rights Agreement. Thereafter the shares will be returned
to Justice within five business days.
14. Lone Star agrees that in the event the company elects in the
future to make available individual state marketing and
distribution rights for the By-Pass Chiller or other technology
being developed, it will provide Justice the opportunity to
obtain those rights for the states of Tennessee, North Carolina,
and Virginia upon terms and conditions at least as favorable as
those offered to any other purchasers. Justice shall have the
same period within which to consummate such purchase as any and
all other purchases are offered, but in no event less than 90
days. It is understood that any prior decision of the company to
grant marketing and distribution agreements covering any state or
states is not to be construed herein as a decision of the company
to make such agreements available on an individual state basis in
the future. It is further noted that the company may elect to
challenge the validity and/or negotiate for the cancellation of
any currently outstanding marketing and distribution agreements.
15. Justice agrees that the Confidentiality Agreement previously
entered into with Lone Star dated June 15, 1998, a copy of which
is attached hereto as Exhibit "I" shall continue and be extended
where and if necessary to protect any and all information
pertaining to the relationship of the parties hereto which are
not part of the public domain.
16. The parties agree that neither party will make any
defamatory, slanderous, or untrue disparaging statements to
any third party concerning any party hereto.
<PAGE>
17. Justice will not affirmatively solicit any current
employee of Lone Star to resign from Lone Star's employment.
This obligation does not extend beyond July 21, 1999.
18. It is understood by and between the parties hereto that
any failure by either party to fully comply with the terms
as hereinabove stipulated shall entitle the other party to
seek any and all damages as may be allowed by law including
attorney's fees, court costs and all other costs awarded by
a court of competent jurisdiction.
19. Justice acknowledges that he has been given the
opportunity to be represented by counsel in the negotiations
and review of this Agreement, and that he has consulted the
advice of said counsel or in the alternative has waived
representation in this matter of his own free will and deed.
20. This Agreement represents the full and complete
Agreement of the parties relating to the subject matter
hereof, and the parties acknowledge that there are no other
agreements either oral or written that relate hereto.
21. This Agreement shall be binding upon the parties, their
heirs, successors and assigns.
22. This Agreement shall be construed in accordance with the
laws of the State of Texas, with venue for all purposes
being designated as Tarrant County, Texas.
23. Any notice, demand or communication required, permitted,
or desired to be given hereunder shall be in writing and
shall be deemed effectively given when personally delivered,
when received by telegraphic or other electronic means
(including telefax and telex) or overnight courier, or five
days after being deposited in the United States mail, with
postage prepaid, certified mail, return receipt requested,
addressed as follows:
Lone Star: Lone Star International Energy, Inc.
528 Grant Road
Mineral Wells, Texas 76067
Attention: Chief Executive Officer
Telephone: 940-325-1700
Fax 940-325-1824
Copy to: Michener, Larimore, Swindle, Whitaker, Flowers,
Sawyer, Reynolds & Chalk, L.L.P.
301 Commerce Street, Suite 3500
Fort Worth, Texas 76102
Attention: Wayne M. Whitaker
Telephone 817-878-0530
Fax: 817-335-6935
<PAGE>
Justice: 103 Meadow Creek Drive
Weatherford, Texas 76086
Telephone: 817-596-7234
Fax: 817-594-1982
Copy to: Canty & Hanger, L.L.P.
801 Cherry, Suite 2100
Fort Worth, Texas 76102
Attention: J. Frank Kinsel, Jr.
Telephone: 817-877-2816
Fax 817-877-2807
or to such other address, and to the attention of such other
person or officer as any party may designate, with copies
thereof to the respective counsel thereof as notified by
such party.
IN WITNESS WHEREOF, the parties above named executed this
agreement to become effective on the date first above
mentioned.
LONE STAR INTERNATIONAL ENERGY, INC.
/s/Richard C. Baker
President
/s/Cecil E. Justice
<PAGE>
STATE OF TEXAS
COUNTY OF TARRANT
This Separation and Settlement was acknowledged before me on
this the 23rd day of July, 1998, by Richard C. Baker,
President of Lone Star International Energy, Inc., a Nevada
Corporation, who acknowledged t me that he executed the
above and foregoing agreement on behalf of and under the
specific authority of the Board of Directors of said
corporation.
My Commission Expires:
/s/Penny J. Brown
Notary Public in and for Tarrant
County, Texas
STATE OF TEXAS
COUNTY OF TARRANT
This Separation and Settlement Agreement was acknowledged before me on
this 23rd day of July, 1998, by Cecil E. Justice, who acknowledged to me
that he executed the above and foregoing agreement of his own free will and
for the within stated purpose.
My Commission Expires:
/s/Penny J. Brown
Notary Public in and for Tarrant
County, Texas
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> (10,587)
<SECURITIES> 0
<RECEIVABLES> 407,505
<ALLOWANCES> 229,837
<INVENTORY> 0
<CURRENT-ASSETS> 568,371
<PP&E> 9,755,990
<DEPRECIATION> 1,202,278
<TOTAL-ASSETS> 9,625,307
<CURRENT-LIABILITIES> 2,420,351
<BONDS> 2,503,690
0
0
<COMMON> 25,296
<OTHER-SE> 4,445,710
<TOTAL-LIABILITY-AND-EQUITY> 9,625,307
<SALES> 171,918
<TOTAL-REVENUES> 207,618
<CGS> 0
<TOTAL-COSTS> 162,348
<OTHER-EXPENSES> 1,770,725
<LOSS-PROVISION> 229,837
<INTEREST-EXPENSE> 131,637
<INCOME-PRETAX> (1,850,597)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,850,597
<EPS-PRIMARY> (0.084)
<EPS-DILUTED> (0.084)
</TABLE>
